Week 7 Flashcards
What is budgeting?
A financial plan of action relating to a given period, typically one year or less, the identifies how much a business would earn, spend or save, based on how much funds are available.
What are the most common types of budgets ?
- Master budget
- Cash budget
- Capital budget
- Operating budget
What is the point of budgeting?
Planning ( goal setting)
Control ( ensure we are moving towards our goals)
So why is budgeting useful?
Allocating resources to a number of departments
forcing managers to think long term
What is a master budget?
It is at the top of the cascade, and appear very similar to the published financial accounts.
It has components of a operating budget ( like income statements, expenses etc)
Also has a compoment of financial budget ( like balance sheet budget )
What are the componments of a master budget will we look at?
Sales budget ( also includes SGA)
Production budget
Direct materials budget
Direct labour budget
We will also look at cash budget
All of these are interelated, how can we do in production budgetm without knowing the direct materials budget etc.
So what are the steps that we will look at in this course in terms getting an operating budget?
1) Start with sales budget
2) Work out production budget = budgeted sales (units) + target closing stock (units) – opening stock (units)
3) Work out direct materials purchases budget for units to be produced
4) Work out direct labour budget
5) Work out overheads budget
6) Compute unit costs of finished goods; compute closing inventory budget (in monetary terms)
How do we work out the sales budget?
We are given a forcasted sales, then we times by the selling price to give us total sales.
What is the total sales budget?
Lets say 70% is scales made in that quarter and the rest is the sales in the next quarter, find out, this for all the 4 quarters?
In the last quarter we write 280000 and the remaining goes to the next quarter,.
How do we work out a production budget?
Bugeted sales( units) + (target)closing inventory stock(units)= Total needs - opening stock( units) = required production.
Budgeted sales of RED for December are 18,000 units. At the end of the production process for RED, 10% of production units are scrapped as defective. Opening inventories of RED for December are budgeted to be 15,000 units and closing inventories will be 11,400 units. All inventories of finished goods must have successfully passed the quality control check. What is the budgeted number of units to produce for RED for December?
What is the production budget for this?
How do we calculate raw material budget?
Required production in the production budget ( X raw materials needed) = Raw materials needed to meet production or usage
+
Desired ending raw materials inventory
= Total raw material needs
-
Beginning raw materials inventory
=
Raw materials to be purchased ( we might be given cost per pound so you times with raw mateirals to be purchased to give us a total answer)
LETS SAY we the required production in cases is 14000 ( period 1) 32000( period 2) 36000( period 3) 19000 (period 4)
Raw material requiried per pound is £15
Desired closing inventroy is 10% of raw mateirals needded to meet production of next period ( for period 4 its assumed its 22500)
and cost of raw materials to be purchased per pound is 0.20 $
what is the cost of raw mateirals to be purchased
Remember opening inventory is closing inventory from last year. ( year 1 is assumed its 21000)
How do we calculate direct labour budget?
multiply the number of units to be produced (from the production budget) by the direct labor time needed to make each unit.
Production budget X direct labour hours for the period
What is the cash budget?
A cash budget is a company’s estimation of cash inflows and outflows over a specific period of time.
All the prior budgets must be made before this.
We have cash budgets to aviod any idle unnecessary cash sitting there.
Give examples on why profit is diffrerent to cash?
provisions, e.g. for bad debts • receivables vs sales • purchases vs payables • inventory vs purchases • accruals and prepayments
How do we calculate cash budget?
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What is a top down budgget approach?
Adv and Disadv
Senior management make budget and transfer it down
Adv Pace and control
Disadv Inaccurate, underperformance and staff morale
What is bottom up approac budgeting and ADV AND DISADV?
he process starts in the individual departments where managers create a budget and then send it upwards for approval.
ADV better staff morale
DISADV - budgetary slack ( easy income targets or higher spending targets.
What type of budgetary systems will we look at today?
Incuremental budgets
Zero based budgets
Rolling budgets
Flexible budgets
Activity based budgets
What is a incuremental budget?
Incremental budgeting is a method of budgeting in which next year’s budget is prepared by using the current’s year’s actual results as a starting point, and making adjustments for expected inflation, sales growth or decline and other known changes.
What is flexible budget?
A flexible budget is a budget that adjusts or flexes with changes in volume or activity.
Can a incurmental budget be used for adversiting?
Advertising expenditure, not so easily quantifiable and is more discretionary in nature. Could lead to slack and wasteful spending to creep into the budget.
What is a rolling budget and disadv?
Continuously updated by adding a further accounting period (month/quarter) when the earliest accounting period has expired. Its use is particularly beneficial where future costs and/or activities cannot be forecast accurately.
Budgets are made more continously
DISADV
You need to get data all the time for rolling to work
Calculate this rolling budget?
What is zero based budgeting and disadv?
You convince management that you need that much money for your department
Disadv
Be more costly to implement
What are 2 advantage ofs of Zero based budgeting?
It forces employees to avoid wasteful expenditure.
It can increase motivation of staff by promoting a culture of efficiency
It also challenges the status quo.
What is also a massive disadvantage of zero based budgeting?
It might give the impression that all decisions have to be made in the budget.
What is activity based budgeting
and advantage?
More accurate budgeets
Closer links between costs and management responsibilities.
So to summarise what is an advantage and disadvantage of budgeting?
Promote forward thinking and identification of short-term problems
Make people feel undervalued
What academic studies have we learnt about in budgeting?
Argyris ( 1953 Human problems with budgets)
What was Argyis main argument in his paper?
Believed that managers who treat people positively and as responsible adults will achieve productivity.
He wanted to see how finance people and factory people actually work with budgets
What was the reaction to budgets by factory people if it was met and if it was not met?
– If met: sense of personal success
– If missed: Sense of personal failure and embarrassment
Do budgets increase efficiency for Argyris?
Budgets ultimately fail to increase human efficiency
How did workers see budgets?
They saw it as a pressure mechanism, and became suspicious that management was against them.
How did formen and superivisors react to budgets in aygris paper 1953?
of different departments tried to blame each other for shortfalls against budget. They became frustrated and de-motivated, because they had no say in budgeting process. ‘He cannot join a group against management, as his workforce does. For one thing, he probably has at least partially identified him with management. For another, he may be trying to advance in the hierarchy.’
How did Budget suprerivisors react to budgets?
became defensive; people perceive their role as being “the watchdog of the company.” Budgets promoted self-interested behaviour of departmental heads.
In the paper, the factory workers were given a chance to do some particptative budgeting but utimately what happened?
Didnt really have a difference, because utimately they didnt have the power to make final position.
So according to agryis if budgets are too tight then what?
If too tight, can be used as a pressure device: better to be tight but attainable.
• If used as a pressure device, intra-organisational conflict can result
It can lead to blame culture too
‘The princple of a cash budget is to see how much cash there would be in business bank account at the end of the year? do you agree explain?
The main purpose is to match the receipts and payments and to have a desired supply at the end of each month. If it is seen that the payments of a particular month could not be met with the possible recepits, budget tells you sufficiently in advance.
