week 6 : lecture 6 1 lecturer: chara charalambous

Lecturer: Chara Charalambous

1

MANAGERIAL ACCOUNTING & COSTING

Week 6 : Lecture 6


2

LERNING GOALS

To understand the role of basic framework for planning.

To understand the role of budgeting difference between planning and control.

To be able to prepare the master budget.


3

WHAT IS A BUDGET?

A Budget is: A detailed plan for the

future expressed in numerical terms .

It is a list of all planned expenses & revenues.

A plan for spending and saving money.

Estimates of the income and expenditure of a business or a part of a business over a time period

The act of preparing a budget is called

budgeting.


4

PERSONAL BUDGETS Almost everyone is doing budget in there life even

though some people do not realize that they are actually budgeting. For e.g. most people estimate their income and plan expenditures for food, clothing , housing, financing college education , setting aside funds for retirement and so on. As a result of this planning, people restrict their spending to some predetermined amount. These budgets may exist only in the mind of the individual but they are budgets nevertheless.

The budgets of a business serve approximately the same purposes as the budgets prepared informally by the individuals but they tend to be more detailed and to involve more work.


5

DIFFERENCE BETWEEN PLANNING AND CONTROL

Budgets are used for two different purposes –

planning and control. Planning involves developing goals and

preparing various budgets to achieve these goals.

Control involves the steps taken by management to increase the possibility that the objectives set down at the planning stage are achieved and that all parts of the organization are working together to achieve these goals set.

A good budget must provide both planning and control. Good planning without effective control is

time wasted.


6

TYPES OF BUDGETS

Sale’s budget Cost of goods sold Expenses Ending balances: cash, inventory e.t.c Complete set of financial statements


ADVANTAGES OF BUDGETING

1. Budgets provide a mean of communicating management’s plans throughout the organization.

2. Budgets force managers to think about and plan for the future. If there is no budget managers would spend all of there time dealing with daily emergencies.

3. The budgeting process provides a mean of allocating resources to those sectors of the organization where they can be used most effectively.

4. Budgets coordinate the activities of the entire organization by integrating (put together and combine) the plans of its various sectors.

7


8

ADVANTAGES OF BUDGETING

5. Budgets define goals and objectives that can serve as benchmarks for evaluating succeeding performance. (Benchmark is a standard or point of reference against which things may be compared or assessed)

6. Help monitor cash flow and identify departures from plans

7. Maintains a focus and discipline for those involved


9

WHY BUDGETS MAKE SENSE

Budgets help you: Set priorities

(main concerns) Achieve what’s

important to you

A good budget is: Realistic Ongoing Clear and easy to

use


10

WHY BUDGETS MAKE SENSE

Is like a model of how business might perform financially speaking

To asses performance by comparing actual operating results against the forecast-budget (model vs. actual)

Simply put: A budget is a practical mean of telling the money where to go, rather than simply wondering where it went.


RESPONSIBILITY ACCOUNTING

The basic idea underlying responsibility accounting is that a manager should be held responsible for those items – and only those items – that the manager can actually control to a significant extent.

Each item – revenue or cost - in the budget is the responsibility of a manager who is held responsible for differences between budgeted goals and actual results.

11



In effect, responsibility accounting, personalizes accounting information by holding individuals responsible for costs.

This concept is central to any effective profit planning and control system.

Someone must be held responsible for each cost or otherwise no one will be responsible and the cost will certainly grow out of control.

12


13


Being responsible for costs does not mean that the manager is penalized if the actual results do not measure up to the budgeted goals. The point of this responsibility is to make sure that *the manager understands the source of significant favorable and unfavorable fluctuations/differences *the organization reacts quickly and appropriately to differences from its plans *the organization learns from the feedback it gets by comparing budgeted goals and actual results. The point is not to penalize individuals for missing targets but to ensure that everything falls inside the limits.

CHOOSING A BUDGET PERIOD

Operating budgets ordinarily cover a one – year period corresponding to the company’s fiscal year.

Many companies divide their budget year into four quarters.

The first quarter is then subdivided into months, and monthly budgets are developed.


14


15

CHOOSING THE BUDGET PERIOD

Operating Budget

2012 2013 2014 2015

The annual operating budget may be divided into quarterly

or monthly budgets.


16

THE SELF-IMPOSED BUDGET In the most successful budget programs, managers with cost

control responsibilities energetically participate in preparing their own budget. This action is in contrast to the approach in which budgets are imposed from above. If a budget is imposed to a manager from above it will probably generate dislike and unwillingness instead of cooperation and commitment.

The budgeting approach in which managers prepare their own budget estimations is called self imposed budget and is generally considered to be the most effective method of budget preparation.

A Self – Imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels.


17

PARTICIPATIVE BUDGET SYSTEM

Flow of Budget Data

S u p ervisor S u p ervisor

M id d leM an ag em en t

S u p ervisor S u p ervisor

M id d leM an ag em en t

Top M an ag em en t

The initial flow is from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare his/her own budget estimations and submit them to the next higher level of management to be reviewed and consolidated as they move upward in the organization.


18

ADVANTAGES OF SELF – IMPOSED BUDGET

1. Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued by top management.

2. Budget estimates prepared by front – line managers are often more accurate and reliable than estimates prepared by top managers who are more remote from day to day activities and operations.

3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed.

4. A manager who is not able to meet a budget that has been imposed can always say that the budget was unrealistic and impossible to meet.


19

LIMITATION OF THE SELF – IMPOSED BUDGET

Lower – level managers may allow too much budgetary. Since the manager who creates the budget will be held accountable for actual results that deviate from the budget, the manager will have a natural tendency to submit a budget that is easy to attain.


20

HUMAN FACTORS IN BUDGETING

The success of a budget program also depends on: (1) the degree to which top management

accepts the budget program as a vital part of the company’s activities and (2) the way in which top management used budgeted data.

If a budget program is to be successful, it must have the complete acceptance and support of the persons who have key management positions. If lower or middle management personnel feel that the top management is unenthusiastic about budgeting or just tolerates it as a necessary evil then there own attitude will reflect a similar luck of enthusiasm.


21

HUMAN FACTORS IN BUDGETING

Also the budget is too often used as a pressure devise and great emphasis is placed on ‘meeting the budget’ under all circumstances – inflexible . This causes tensions and mistrust rather than cooperation and productivity.

So instead of using budget as a weapon they should use it in measuring results and in isolating areas that need extra effort or attention.Managers must keep in mind that the human aspect of budgeting is very important and therefore budgets must be designed in positive approach embracing flexibility so as to motivate employees and aid the general company goals.


22

THE BUDGET COMMITTEEA budget committee is usually responsible for the overall policy relating to the budget program and for coordinating the preparation of the budget itself.This committee may consist of the president, vice presidents in charge of various functions such as sales, production and purchasing and the controller.Difficulties and disagreements between

segments of the organization relating to the budget are resolved by the committee. In addition, the budget committee approves the final budget.


23

THE MASTER BUDGET

The Master Budget consists of a number of separate but mutually dependent and mutually supporting budgets that formally lay out the company’s sales, production and financial goals.

The master budget is an essential management tool that communicates management’s plans throughout the organization ,allocated resources and coordinates activities.

THE MASTER BUDGET

ProductionBudget

Selling andAdministrative

Budget

DirectMaterialsBudget

ManufacturingOverhead

Budget

DirectLabor

Budget

CashBudget

SalesBudget

Budgeted Financial Statements


25

ELEMENTS OF MASTER BUDGET

The Sales Budget Detailed schedule

showing expected sales for the coming periods expressed in units and dollars

The Production Budget

Production must be adequate to meet budgeted sales and provide for satisfactory ending inventory. This budget is the number of units that must be produced.

Complete

d


26

The Direct Material budget

Details the raw materials that must be purchased to satisfy the production budget and to provide for enough inventories.

The Direct Labor Budget

Is also developed from the production budget. Direct labor . requirements must be calculated so that the company will know whether sufficient labor time is available to meet production needs,



27

Manufacturing Overhead

Budget Provides a schedule

of all costs of production other than direct materials and direct labor.

Selling and administrative expense Budget Makes a list of the budgeted

expenses of areas other than manufacturing. In large organizations this budget is a collection of many smaller budgets submitted by department heads and other persons responsible for selling and administrative expenses. For e.g. the marketing manager will submit a budget detailing the advertising expenses for each budget period.



28


The Cash Budget Once the operating budgets (sales,

production and so on) have been completed the cash budget can be prepared. A cash budget is a detailed plan showing how cash resources will be acquired and used over some specified time period.

BUDGETING EXAMPLE

Royal Company is preparing budgets for the quarter ending June 30.

Budgeted sales for the next five months are: April 20,000 units May 50,000 units June 30,000 units July 25,000 units August 15,000 units.

The selling price is $10 per unit.

THE SALES BUDGET

April May June QuarterBudgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unit 10$ 10$ 10$ 10$ Total sales 200,000$ 500,000$ 300,000$ 1,000,000$


31

QUESTIONS?

week 6 : lecture 6 1 lecturer: chara charalambous

Documents

chara charalambous8why

good planning

various budgets

budget managers

chara charalambousto

chara charalambous4difference

planning stage

master budget