UNIVERSITY OF PRETORIA BUDGETING PROCESS DRURY 15

Transcription

1 UNIVERSITY OF PRETORIA BUDGETING PROCESS DRURY 15 1

2 STUDY OUTCOME You should be able to prepare a master budget as well as a variable budget. You should have knowledge of zero-based budgeting. 2

3 LEARNING OBJECTIVES In order to achieve the specific outcome you should be able to: explain the objectives of budgets as a management tool; discuss the considerations applicable when preparing the sales budget and apply these when preparing such a budget; prepare a cash budget and render advice on the cash flow situation of the organisation; prepare all the accompanying subsidiary budgets to the master budget; prepare a variable budget; and explain the principles of zero-based budgeting, incremental budgeting and activity-based budgeting. 3

4 INTRODUCTION 4

5 WHY ARE BUDGETS PREPARED? To aid the planning of actual operations: by forcing managers to consider how conditions might change and what steps should be taken now. by encouraging managers to consider problems before they arise. To co-ordinate the activities of the organization: by compelling managers to examine relationships between their own operation and those of other departments 5

6 WHY ARE BUDGETS PREPARED? To communicate plans to various responsibility centre managers: everyone in the organization should have a clear understanding of the part they are expected to play in achieving the annual budget. by ensuring appropriate individuals are made accountable for implementing the budget. To motivate managers to strive to achieve the budget goals: by focusing on participation by providing a challenge/target. 6

7 WHY ARE BUDGETS PREPARED? To control activities: by comparison of actual with budget (attention directing/management by exception). To evaluate the performance of managers: by providing a means of informing managers of how well they are performing in meeting targets they have previously set. 7

8 STAGES IN THE BUDGETING PROCESS 1.Communicate details of budget policy and guidelines to those people responsible for preparing the budget. 2. Determine the factor that restricts output. 3. Preparation of the sales budget. 4. Initial preparation of budgets. 5. Negotiation of budgets with higher management. 6. Co-ordination and review of budgets. 7. Final acceptance of budgets. 8. Ongoing review of the budgets. 8

9 BUDGETING PROCESS 9

10 TYPES OF BUDGETS Sales Budget Planned sales units at an intended price. Provides total revenue from which cash receipts from customers will be received. Foundation of all other budgets. Production Budget Expressed in quantities only Ensure that production meets sales demand Ensures that economic stock levels are maintained (EOQ- NME) Production Manager s responsibility 10

11 TYPES OF BUDGETS Direct Materials Usage Budget Department supervisors will prepare material requirements to meet the production budget. Learning Curve? Direct Materials Purchase budget Purchasing Manager s responsibility. Purchasing material at the right time at a planned purchase price. Stock Levels (EOQ, MRP, JIT, etc) 11

12 TYPES OF BUDGETS Direct Labour Budget Department managers responsibility. Estimated labour hours required to meet planned production. Labour grade levels and rates Learning Curve? Factory Overhead Budget Department managers responsibility. Cost behaviour of individual overhead items irt anticipated level of production. Controllable vs Uncontrollable for cost control purposes. 12

13 TYPES OF BUDGETS Selling and Admin Budget Selling and admin costs Responsibility? Departmental Budgets DM, DL and OH combined into departmental budgets Monthly Analysis of actual vs budgeted prepared. Why? 13

14 TYPES OF BUDGETS Master Budget Income Statement Statement of Financial Position Cash Budget Difference between Cash Budget and Master Budget? Why prepared? How much cash should be kept? 14

15 MANAGEMENT ACTION ON CASH BUDGET Cash Position Management Action Benefit of Action Short-term deficit Long-term deficit Obtain additional cash through: Creditor and Debtor settlements Bank Overdraft Reduce inventory levels Postpone CAPEX Postpone dividends Obtain additional cash through: Raise LT finance Asset disposal Issue Equity Short-term surplus Creditors and Debtors? Invest in Interest-bearing instruments Long-term surplus Invest in CAPEX Expand business operations Diversify business Settlement discounts Increase sales Interest Income Increase production Increase earning potential Decrease risk Source: Cairney, C et al 15

16 CLASS EXAMPLE 16

17 ACTIVITY-BASED BUDGETING Conventional budgeting is inappropriate for those activities where the consumption of resources does not vary proportionately with the volume of the final output of products or services. For support activities conventional incremental budgets merely serve as authorization levels for certain levels of spending. Incremental budgeting results in the cost of non-unit level activities becoming fixed. ABB aims to authorize only the supply of those resources that are needed to perform activities required to meet budgeted production and sales volumes. 17

18 ABB The ABB process is the reverse of the ABC process: Budgeted output of cost objects Determine the necessary activities Determine the resources required for the budget period 18

19 ZERO-BASED BUDGETING Priority-based budgeting Activities are justified and prioritised before decisions are taken. 19