1. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.1 Budgeting OBJECTIVES You should be able to: Explain the interlinking of the various budgets within the business Define a budget and show how budgets, corporate objectives and long-term plans are related Use a budget to provide a means of exercising control over the business Indicate the uses of budgeting, and construct various budgets, including the cash budget, from relevant data

2. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.2 Identify business objectives Consider options Evaluate options and make a selection Prepare short-term plans (budgets) The planning process

3. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.3 The interrelationship of various budgets Finished stock budget Production budget Raw materials stock budget Overheads budget Trade debtors budget Trade creditors budget Capital expenditure budget Raw materials purchases budget Sales budget Direct labour budget Cash budget

4. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.4 Budgets are seen as having five main benefits to the business Provide a system of authorisation Budgets Promote forward- thinking and identification of short-term problems Provide a basis for a system of control Able to motivate managers to better performance Help co-ordinate the various sections of the business

5. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.5 Budgeted balance sheet Sales budget Budgeted profit and loss Overheads budget Cash budget Purchases budget Production budget Frequency of preparation (%) 2080 6040 1000 21 35 46 63 73 76 78 Preparation of budgets in SMEs Source: Reproduced from Figure 16 on p. 22 from Financial Management and Working Capital Practices in UK SMEs, Business Development Centre, Manchester Business School (Chittenden, F., Poutziouris, P. and Michaelas, N.,1998), reprinted by kind permission of the authors

6. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.6 An example of a budget – the cash budget Jan Feb Mar Apr May June £000 £000 £000 £000 £000 £000 Receipts Debtors 60 52 55 55 60 55 Payments Creditors 30 30 31 26 35 31 Salaries and wages 10 10 10 10 10 10 Electricity 14 9 Other overheads 2 2 2 2 2 2 Van purchase 11 Total payments 42 42 68 38 47 52 Cash surplus 18 10 (13) 17 13 3 Cash balance 30 40 27 44 57 60

7. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.7 The planning and control process Identify business objectives Consider options Evaluate options and make a selection Prepare budgets Perform and collect information on actual performance Respond to variances and exercise control Revise plans (and budgets) if necessary

8. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.8 Sales variances The difference between the profit as shown in the original budget and the profit as shown in the fixed budget for the period Sales volume variance Sales price variance The difference between the actual sales figure for the period and the sales figure as shown in the flexed budget

9. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.9 Materials variances The difference between the actual direct material cost and the direct material cost according to the flexed budget (standard usage for the actual output) Total direct material variance Direct material usage variance The difference between the actual quantity of direct materials used and the quantity of direct material according to the flexed budget (standard usage for actual output). This quantity is multiplied by the standard direct material cost per unit Direct material price variance The difference between the actual cost of the direct material used and the direct material cost allowed (actual quantity of material used at the standard direct material cost)

10. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.10 Direct materials usage variance Direct materials price variance Total direct materials variance Relationship between the total, usage and price variances of direct materials

11. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.11 Labour variances Total direct labour variance Direct labour efficiency variance Direct labour rate variance The difference between the actual direct labour cost and the direct labour cost according to the flexed budget (standard direct labour hours for the actual output) The difference between the actual direct labour hours worked and the number of direct labour hours according to the flexed budget (standard direct labour hours for the actual output). This figure is multiplied by the standard direct labour rate per hour The difference between the actual cost of the direct labour hours worked and the direct labour cost allowed (actual direct labour hours worked at the standard labour rate)

12. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.12 Fixed overheads spending variance The difference between the actual fixed overhead cost and the fixed overhead cost according to the flexed (and the original) budget Fixed overhead variance

13. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.13 Relationship between the budgeted and actual profit equals minus Actual profit plus All adverse variances All favourable variances Budgeted profit

14. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.14 Making budgetary control effective Clear demarcation between areas of managerial responsibility Budget targets being reasonable A serious attitude taken to the system by all levels of management Reports aimed at individual managers Fairly short reporting periods Established data collection, analysis and dissemination routines Variance reports being produced shortly after the end of the reporting period Action being taken to get operations back under control

15. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 9.15 Behavioural aspects of budgetary control Demanding, yet achievable, budget targets tend to motivate better than less demanding targets Unrealistically demanding targets tend to have the adverse effect on managers’ performance The existence of budgets generally tends to improve performance The participation of managers in setting their targets tends to improve motivation and performance