PowerPoint to accompany

Unit 9
Budgeting
 Learning Objectives
Define a budget
Explain how budgets, corporate objectives
and long-term plans are related
Set out the main components of the budget-
setting process and explain how the various
budgets interlink
Identify the main uses of budgeting
Construct budgets from relevant data

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

 Learning Objectives (continued)
Use a budget to provide a means of
exercising control over the business
Identify the limitations and the
behavioural implications of the
traditional approach to control through
budgets and standards

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Budgets, Long-term Plans and
Corporate Objectives
Corporate objectives - identify broader
goals of the business
Long-term plan - defines the general
direction of the business over next (e.g.)
five years
Budget - essentially a financial plan for a
future time

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Objectives
Corporate objectives - identify broader goals of
the business
Business objectives may include:
Increased profitability

Sustainability

Diversification

Geographic spread

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Long Term plans
Define the general direction of the business
over next (e.g.) five years
Long Term Plans may include:
Expansion of markets

Changes in services and goods supplied

Personnel requirements

Financial requirements

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Defining a budget
Essentially a financial plan for a future time
(typically 12 months)
Budgets are built to support long term plans and
may include:
Sales & expenses
Cash flows
Short term credit given and taken
Inventory requirements
Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia
The Planning Process
Identify business objectives

Consider options

Evaluate options and make a selection

Prepare long-term plans (long-term budgets)

Prepare budgets (short-term)

Figure 9.1

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

 Time Horizons of Plans and Budgets
Long-term plans - typically 5 years
Budgets - typically 12 months
Management discretion
Depends on industry
Budgets may also be done on a rolling
monthly basis
Limiting factors

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

 Budgets and Forecasts
Budgets and forecasts are distinctly different:

A budget = a plan for a future time, expressed

mainly in financial terms

Forecasts tend to be predictions of the future state

of the environment
Forecasts are useful to the planner / budget setter

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

 The Interrelationship of Various
Budgets
In a business
there are several budgets
should be a separate budget for each
person in a managerial position (ideally!)

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

The Interrelationship of Various
Budgets
Trade Cash Trade
receivables budget payables
budget budget

Capital Direct Raw

Sales Overheads labour materials
budget expenditure purchases
budget budget budget
budget

Finished Production Raw materials

inventories budget inventories
budget budget

Figure 9.2
Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia
 The Master Budget

Sales Budget

Production Budget

Direct materials usage

and purchases budgets
Direct labour budget
Manufacturing
overhead budget

Operating Expenses
Budget

Capital budget

Adapted from Jackling, Raar, Budgeted Income Statement

Williams & Wines, 2007, Budgeted Balance Sheet
Accounting a Framework for
Decision Making, McGraw-Hill Cash Budget
p.718 Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia
 The Budget Setting Process
1.
Establish who will take 6. 7.
responsibility for the Review and co-ordinate Prepare the
budget-setting the budgets master budgets
process

2. 5.
Communicate budget 8.
Prepare draft budgets Review and co-ordinate
guidelines to relevant for all other areas
managers the budgets

4. 9.
3. Monitor performance
Identify the key or Prepare the budget for
the area of the relative to the
limiting factor budgets
limiting factor

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

The Uses of Budgets
There are five main uses of budgets:
1. Promote forward thinking
2. Co-ordination of business sections;
3. Motivate managers;
4. Basis for a system of control;
5. System of authorisation for managers to
spend up to a limit

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

The Uses of Budgets (continued)

Promote forward Help co-ordinate

thinking and Budgets the various sections
identification of of the business
short-term problems

Motivate managers Provide a basis Provide a system

to achieve better for a system of authorisation
performance of control

Figure 9.3

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Preparing the Cash Budget

The cash budget is a key budget

all aspects of a business are eventually
reflected in cash

The cash budget reflects the whole

business

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Preparing the Cash Budget
(continued)
Most cash budgets feature the following:
- Broken down into sub-periods, usually months
- In columnar form, one month per column
- Cash receipts and payments identified under
headings and a total for each month is shown
- The surplus or deficit of cash is identified for each
month
- The running cash balance is identified

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Preparing Other Budgets
Other budgets are mostly prepared in the
same format as the cash budget and may
include:
The debtors budget
The creditors budget
The inventories budget

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

 Using Budgets for Control
Control = making events conform to a plan
Budgets represent the plan
Budgets provide the basis for exercising control
over the business
The planning and control process usually
follows a sequence (shown on the next slide)

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

The Planning and Control Process
Evaluate options
Identify objectives Consider options and make a
selection

Perform and collect Prepare long-term

information on Prepare budgets plans (long-term
actual performance (short term) budgets)

Identify and analyse

differences between Respond to Revise plans
plans and actuals variances and (and budgets)
(variations) exercise control if necessary

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Behavioural Aspects of Budgetary
Control
Research indicates that:
Existence of budgets tends to improve
performance
Demanding but achievable targets seem to
motivate more than easy targets
Unrealistic targets adversely affect performance
Allowing managers to set their own targets
improves motivation, commitment and
performance

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Limitations of control through
budgets and standards
Not all expenses are linked to output activity

Standards can quickly become out of date

Factors may manifest that are outside of the

managers control

Creating clear lines of responsibility may be difficult

Participation of those charged with achieving the

budget is required in order that the budget is
accepted

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

 Criticisms of Budgetary Control
Budgets are out of touch Different budgets needed
with the needs of for planning, control
modern business and motivation

Behavioural aspects are Budgets can be seen

Budgets dealing with
often misunderstood, as a bureaucratic
Increases in technology
leading to perverse exercise in cost-
may lead to more
behaviour cutting
centralisation at the cost
of greater involvement

A system of accountability
may create a counter-
Budgets may make people
productive atmosphere
feel under-valued
of blame and mistrust

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia

Criticisms of Budgetary Control
Time consuming and Budgets are rarely
costly to put together strategically focused

When managers are in a Budgets can stifle the

entrepreneurial spirit
position to influence budget
needed to create value
figures, the danger of
Often associated with bias exists
an overly inward focus

Budgets can stifle projects Budgets may lead to

because resources are department centeredness
already allocated
Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia
Review
Any budgetary control system set up must ensure
that:
The environment the business operates in is fully
understood;
The business develops an appropriate culture;
The role of the budget in terms of its fit with the
strategic plan is clearly understood;
A culture of value-adding is developed

Atrill, McLaney, Harvey, Jenner: Accounting 4e 2008 Pearson Education Australia