Budgeting Unit 4 Further aspects of management accounting Mr. BarryA-level Accounting Year 13

Learning outcomes Explain the benefits of budgetary control Explain the limitations of budgetary control Evaluate budgetary control Prepare a range of different budgets Evaluate the performance of a business based on budgeted information and make recommendations Mr. BarryA-level Accounting Year 13

What is a Budget? Simply put, a budget is an itemized summary of likely income and expenses for a given period. It’s an invaluable tool to help you prioritize your spending and manage your money—no matter how much or how little you have. Planning and monitoring your budget will help you identify wasteful expenditures, adapt quickly as your financial situation changes, and achieve your financial goals. Mr. BarryA-level Accounting Year 13

The chartered institute of management accountants, england, defines a budget as: Mr. BarryA-level Accounting Year 13 “A plan quantified in monetary terms prepared and approved prior to a defined period of time usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective.”

Essentials of a Budget Plan expressed in monetary terms Prepared prior to a defined period of time Related to a definite future period Mr. BarryA-level Accounting Year 13

What is Budgetary Control All functional budgets are used to prepare the master budget (Budgeted SOCI & SOFP) Budgetary control is implementing budgets and making managers responsible for implementing it Each budget centre has responsibility to: Justifiably use resources Control costs Achieve the activities set by the budget Mr. BarryA-level Accounting Year 13

Essentials of budgetary control Establishment of budgets for each function and section of the organization. Continuous comparison of the actual performance with that of the budget so as to know the variations from budget and placing the responsibility of executives for failure to achieve the desires results as given in the budget. Taking suitable remedial action to achieve the desires objective if there is a variation of the actual of the actual performance from the budgeted performance. Revision of budgets in the light of changed circumstances. Mr. BarryA-level Accounting Year 13

Benefits of budgeting 1.Control 2.Planning 3.Communication and coordination 4.Motivation 5.Performance evaluation and monitoring Mr. BarryA-level Accounting Year 13

Control Control is necessary to ensure that plans and objectives as laid down in the budgets are being achieved. Control, as applied to budgeting, is a, systematized effort to keep the management informed of whether planned performance is being achieved or not. For this purpose, a comparison is made between plans and actual performance. Mr. BarryA-level Accounting Year 13

Planning A budget provides a detailed plan of action for a business over a definite period of time. Detailed plans relating to production, sales, raw material requirements, labor needs, advertising and sales promotion performance, research and development activities, capital additions etc. are drawn up. Mr. BarryA-level Accounting Year 13

Communication and co-ordination A budget is actually a communication device. The accepted budget copies are distributed to every management personnel which gives not only adequate understanding and knowledge of the policies and programs to be followed Mr. BarryA-level Accounting Year 13

Communication and co-ordination Budgeting aids managers in co-coordinating their efforts so that objectives of the organization as a whole harmonize with the objectives of its divisions. Effective planning and organization contributes a lot in achieving coordination Mr. BarryA-level Accounting Year 13

Motivation A budget is a helpful device for encouraging managers to carry out in line with the organization objectives. If employees have actively participated in the planning of budgets, it acts like a strong motivating force in order to achieve the targets Mr. BarryA-level Accounting Year 13

Performance evaluation and monitoring A budget offers a useful means of telling managers how nicely they are performing in conference targets they have formerly helped to set In numerous companies there is an exercise of rewarding workers on the basis of their reaching the budget targets or promotion of a manager might be linked to his budget accomplishment record Mr. BarryA-level Accounting Year 13

Limitations of budgetary control The major problem occurs when budgets are applied mechanically and rigidly which restricts activity Budgets can demotivate employees because of lack of participation. If the budgets are arbitrarily imposed top down, employees will not understand the reason for budgeted expenditures, and will not be committed to them. Budgets can cause perceptions of unfairness. Budgets can create competition for resources and politics. A rigid budget structure reduces initiative and innovation at lower levels, making it impossible to obtain money for new ideas. Mr. BarryA-level Accounting Year 13

Types of functional budget 1.Sales (revenue) budget 2.Production budget 3.Purchases budget 4.Labour budget 5.Trade receivables budget 6.Trade payables budget 7.Cash budget (covered in unit 2) Mr. BarryA-level Accounting Year 13

1. Sales (revenue) budget Records the amount of units expected to be sold as well as the expected revenue value per period Mr. BarryA-level Accounting Year 13

2. Production budget The production budget shows levels of units with regards to revenue, opening and closing inventory Mr. BarryA-level Accounting Year 13

3. Purchases budget Provides information about the costs of materials (units x cost per unit) Mr. BarryA-level Accounting Year 13 Period 1Period 2Period 3 Production unitsXXX Material costXXX

4. Labour budget Identifies the amount of labour hours required to produce the levels of production stated in the production budget Mr. BarryA-level Accounting Year 13

5. Trade receivables budget Mr. BarryA-level Accounting Year 13

6. Trade payables budget Mr. BarryA-level Accounting Year 13

Master budget Information is taken from all of the functional budgets and a set of forecast financial statements is produced. This is know as a master budget If asked to prepare just simply use all information provided to produce financial statements as usual Mr. BarryA-level Accounting Year 13

Practice questions Mr. BarryA-level Accounting Year 13 Can you complete all the questions in the question pack now?