Week 7 - Business planning + budgeting Flashcards
what is strategic management accounting
The provision and analysis of management accounting data relating to business strategy, particularly the relative levels and trends in real costs and prices, volumes, market share, cash flows and the demand on a firm’s total resources.
Strategic Management Accounting (SMA) looks beyond the Financial Year to the longer term.
SMA looks beyond the boundary of the organisation from raw material supplier to consumer.
SMA makes comparisons with competitors to continually seek competitive advantage.
define target costing
Target costing is concerned with managing whole-of-life costs during the design phase of the product life cycle and involves FOUR stages.
explain target costing and 4 stages
Target costing is concerned with managing whole-of-life costs during the design phase of the product life cycle and involves FOUR stages.
Determine the target price that customers will be prepared to pay for the product service
Deducting a target profit margin to determine the target cost, which becomes the cost to which the product/service should be engineered
Estimating the actual cost of the product/service based on the current design
Investigating ways of reducing the estimated cost to the target cost.
EG
Suppose we are gourmet cupcake shop.
Target Price: Based on a market survey we’ve determined that customers are willing to purchase cupcakes for $10 each.
Target Cost: We would like to make a 80% profit margin so that means the target cost should be $2
Estimating the actual cost of the ingredients shows that each cupcake will cost $3 to produce.
We could try to negotiate with suppliers to get a reduced cost or reduce wastage in the process.
define a budget
A budget is first and foremost a plan!!!
More specifically it’s a comprehensive, formal plan expressed in monetary terms, covers a future time period and is based on a defined level of activity.
benefits of budgets
Almost all important activities are planned – weddings, tours, sporting events, parties etc.
It requires all levels of management to plan ahead and to formalise their goals
It creates an early warning system for potential problems.
It facilitates the coordination of activities within the business.
It results in greater management awareness of the entity’s overall operations and the impact on operations of external factors.
It motivates personnel throughout the organisation to meet planned objectives.
essentials of an effective budget
Effective budgeting depends on a sound organisational structure where responsibility and authority for all phases of operations are clearly defined.
Budgets based on research and analysis should result in realistic goals that will contribute to the growth of and profitability of a company.
The effectiveness of a budget program is directly related to its acceptance by all levels of management.
Once adopted it should be an important tool for evaluating performance.
Variations should be systematically and periodically reviewed.
Individuals should not be held responsible for variations that are beyond their control.
explain the length of a budget period
The budget period can cover any period of time.The most frequently used time period is a year (12 months).
Ideally the budget period should be long enough to take into account the impact of seasonal/cyclical fluctuations but should not be so long that reliable estimates are impossible.
Businesses are increasingly using ‘rolling’ (or continuous) budgets – as each period is completed it is dropped and a new period is added on at the end.
explain the budgeting process
The budgeting process usually begins with the collection of data from each part of the company.
Past performance is often the starting point from which future budgeted goals are formulated.
The budget is developed within the framework of a sales forecast which shows the potential sales for the industry and the company’s expected share of sales.
Sales forecasting involves a consideration of various factors
explain the master budget
A master budget is a comprehensive set of budgets that cover all aspects of a firm’s activities.
It contains:
Operating budgets
Financial budgets
Sequential nature of sub-budgets, budgets are “linked together” and impact on each other!
It’s important for your assignment that the figures in a budget flow from one to the next.
what is a budgeted income statement
The Budgeted Income Statement shows the expected revenues and planned expenses of the firm.
Intuitively, we want to forecast/predict how much profit/loss we intend to make within the budgeted period.
The data for this should flow on from the sales budget, cost of sales budget and expense budgets.
Estimated sales in units and dollars from the organisation’s products (based on the sales forecasts)
To estimate the number of units of inventory will be sold each month, or number of services provided, various types of information is gathered e.g. historical sales data, industry trends, economic forecasts etc
explain purchases budget
Intuitively, we are interested in planning out how many products need to be purchased and how much this will cost.
It’s insufficient for us to simply buy what we expect to sell.
Imagine you were planning on selling 400 chairs in Jan, would you only purchase 400 chairs in Jan? Why/Why not?
explain a cash budget
Perhaps the most practical budget
Cash Budget helps the entrepreneur anticipate
cash shortages; and make the necessary arrangements; or cash surpluses; that could be used to
launch profitable projects or investments; or
repay debt; or returned to the business owner.
The cash budget shows expected:
cash receipts
cash payments; to
identify impact on the business’ cash balance
Components of Cash Budget: Cash balance at start add Cash Inflows less Cash Payments = Estimated cash balance at end
components of cash budget
Components of Cash Budget: Cash balance at start add Cash Inflows less Cash Payments = Estimated cash balance at end
explain schedule pf expected cash collections
Frequently a business does not collect the cash at the point of sale.
e.g. consider Harvey Norman
“24 Months Interest Free
No Deposit, No Interest,
with MonthlyPayments”
When this occurs there is a mismatch in timing between sales revenue and cash collections.
A Schedule of Cash Collection simply lays out when each dollar of sales revenue will be “collected”.
explain schedule of cash payments
Cash budget (schedule of cash payments)
Frequently a business does not pay the cash at the point of purchasing goods or services.
e.g. a supplier may deliver goods 2-3 times per week but you may have negotiated paying them once a month.
There is a resulting mismatch between the timing of purchases of goods and services and cash outflow
Schedule of Cash Payments lays out when each dollar of purchases will be “paid”.
similar to a Schedule of Cash Collections
