1. Budgeting: profit planning and control
Chapter 9
Budgeting: profit planning and control

2. Strategic planning and budgeting systems
Budget - a detailed financial plan summarising the consequences of an organisation’s operating activities for a specified period of time
Strategic planning - the long-term planning usually undertaken by senior managers
Cont.

3. Strategic planning and budgeting systems
Corporate strategy - decisions about the types of businesses to operate in, which businesses to acquire and divest, and how best to structure and finance the organisation
Business (or competitive) strategy - the way a business competes within its chosen market

4. Purposes of budgeting Planning
Facilitating communication and co-ordination
Allocating resources
Controlling profit and operations
Evaluating performance and providing incentives

5. Responsibility accounting
Holding mangers responsible for the activities and performance of their area of the business
Responsibility centre - a subunit in an organisation where the manager is held accountable for the subunit’s activities

6. The annual budget: a planning tool
Annual financial budget - a comprehensive set of budgets that cover all aspects of a firm’s activities
operating budget
financial budget
Rolling (or continuous) budget - budgets that are continually updated by adding a new time period (such as a quarter) and dropping the period just completed

7. Operating budgets
Sales budget - estimated sales units and revenues from the organisation’s products
Cost budgets - detail the cost of operations needed to support forecast sales demand
Production budget - number of production units to be manufactured to meet sales and satisfy inventory requirements
Cont.

8. Operating budgets In retail and wholesale businesses In service firms
purchases budget - used to determine the quantity and cost of goods that need to be purchased during the budget year
In service firms
develop a set of budgets that show how the demand for those services will be met

9. Financial budgets
Cash budget - details the expected cash receipts and planned cash payments for the budget period
Budgeted profit and loss statement - shows the expected revenues and planned expenses of the firm during the budget period
Budgeted balance sheet - outlines the expected financial position of the firm at the end of the budget period

10. Budget administration
Responsibility of a senior accounting manager who gathers and collates the budget data and prepares the budget
Budget manual
Budget committee has responsibility for
determining budget policy
reviewing and approving budgets

11. Behavioural consequences of budgeting
Human reactions to the budgeting process
participative budgeting
budgetary slack
budget difficulty

12. Participative budgeting
Managers who are held accountable for budget performance help develop their own budget estimates
Top-down budgeting vs bottom-up budgeting
Employee empowerment
giving employees authority to develop their own budgets and targets, and manage their own work

13. Budgetary slack: padding the budget
Padding the budget - underestimating revenues or overestimating costs so that budget targets are easier to achieve
Budgetary slack - the difference between the revenue or cost projection that a person provides and a realistic estimate of that revenue or cost
Cont.

14. Budgetary slack: padding the budget
Why?
performance will look better if you can ‘beat the budget’
cope with uncertainty
compete for limited resources
How to minimise problems?
avoid relying on the budget as a negative evaluative tool
provide incentives to achieve budget and provide accurate projections

15. Budget difficulty
Optimum performance budget is where the budget provides sufficient challenge and stretch, but is not too difficult
Optimum performance budgets may not be suitable for accurate forecasting

16. Zero base budgeting
All activities in the organisation are initially set to zero.
Managers must justify each activity in terms of continued usefulness to the business

17. Program budgeting
Requires various programs undertaken by the enterprise
be identified
objectives for each program
budgets for each program
Control through quantitative and qualitative performance measures that derive from the program

18. Financial planning models
Use mathematical relationships to allow managers to examine interactions between the various operational, financial and environmental events
Allows ‘what if’ questions
Availability of personal computers and spreadsheet software has made financial planning models more easily accessible

19. Exhibit 9.1

20. Exhibit 9.11