ACC200 term 2 2019 Assignment
yorker
Lecture8Chapter11.pptChapter 11
Budgeting, management control and responsibility
accounting
PowerPoint to accompany:
Horngren’s Cost Accounting, 3rd Edition
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Learning objectives
- Describe the master budget and explain its benefits.
- Describe the advantages of budgets.
- Prepare the operating budget and its supporting schedules.
- Use computer-based financial planning models in sensitivity analysis.
- Describe responsibility centres and responsibility accounting.
- Recognise the human aspects of budgeting.
- Identify the special challenges of budgeting in multinational companies.
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Benefits of budgeting
- Budgets help managers to:
- communicate directions and goals to different departments of a company to help them coordinate the actions they must pursue to satisfy customers and succeed in the marketplace
- judge performance by measuring financial results against planned objectives, activities and timelines, and learn about potential problems
- motivate employees to achieve their goals.
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Budgets and the budgeting cycle
- A budget is:
- the quantitative expression of a proposed plan of action by management for a specified period
- an aid to coordinate what needs to be done to implement that plan.
- It generally includes both financial and non-financial aspects of the plan.
- It serves as a blueprint for the company to follow in an upcoming period.
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Budgets and the budgeting cycle (cont’d)
Strategic plans and operating plans
- Strategy specifies how an organisation matches its own capabilities with the opportunities in the marketplace to accomplish its objectives.
- Strategic plans are long-run plans.
- Operating plans are short-run plans.
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Budgets and the budgeting cycle (cont’d)
Strategic plans and operating plans (cont’d)
- Managers must consider:
- organisational objectives
- how to create value for customers
- how to differentiate from competitors
- scope and trends of markets
- optimal organisational and financial structures
- risks and opportunities
- contingency plans in case of failure.
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Budgets and the budgeting cycle (cont’d)
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Budgets and the budgeting cycle – web link
- ‘Budgeting and the Planning and Control Process’ explains
process, advantages and relationship to strategic planning.
It can be found at: http://www.flexstudy.com/catalog/schpdf.cfm?coursenum=9531a
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Budgets and the budgeting cycle (cont’d)
Budgeting cycle and master budget
- At the beginning of the financial year:
- Managers at all levels take into account the company’s past performance, market feedback and anticipated future changes.
- Senior managers give subordinate managers a set of specific expectations against which actual results will be compared.
- During the course of the year:
- Accountants help managers investigate variations from plans. Corrective action occurs at this point if necessary.
- At the end of the financial year:
- Managers and accountants take into account market feedback, changed conditions and their own experiences, as they begin to make plans for the next period.
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Budgets and the budgeting cycle (cont’d)
- The master budget:
- expresses management’s operating and financial plans for a specified period (usually a financial year), and it includes a set of budgeted financial statements (sometimes called pro-forma statements)
- is the initial plan of what the company intends to accomplish in the budget period
- evolves from both operating and financing decisions made by managers:
- operating decisions deal with how best to use the limited resources of an organisation
- financing decisions deal with how to obtain the funds to acquire those resources.
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Budgets and the budgeting cycle – web links
- ‘Budgeting – What is a Master Budget?’ explanation, with links to related articles, can be found at: http://bizfinance.about.com/od/businessbudgeting/qt/budget-planning-what-is-a-master-budget.htm
- ‘What Is the Budget Cycle?’, explanation of the steps involved, can be found at:
http://yourbusiness.azcentral.com/budget-cycle-2165.html
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Advantages of budgets
Budgets:
- promote coordination and communication among subunits within the company
- provide a framework for judging performance and facilitating learning
- motivate managers and other employees.
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Advantages of budgets (cont’d)
Coordination and communication
- Coordination is meshing and balancing all aspects of production or service and all departments in a company in the best way for the company to meet its goals.
- Communication is making sure those goals are understood by all employees.
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Advantages of budgets (cont’d)
Framework for judging performance and facilitating learning
- Budgets enable a company’s managers to measure actual performance against predicted performance.
- Budgets can overcome two limitations of using past performance as a basis for judging actual results, which are:
- that past results often incorporate past miscues and substandard performance
- that future conditions can be expected to differ from the past.
Motivating managers and other employees
- Challenging budgets improve employee performance
- budgets should not be administered rigidly, as changing situations often call for changes in plans.
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Advantages of budgets – web link
- A detailed list of the ‘Advantages of Budgeting’ can be found at: http://accountlearning.blogspot.co.nz/2011/02/advantages-of-budgeting.html
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Developing an operating budget
- Operating budget – that part of the master budget comprising the financial projections of all the individual budgets for a specified period, usually a financial year. This leads to the creation of the budgeted income statement and its supporting budget schedules.
- Financial budget – that part of the master budget made up of the capital expenditures budget, the cash budget, the budgeted balance sheet and the budgeted statement of cash flows.
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Developing an operating budget (cont’d)
Time coverage of budgets
- The motive for creating a budget should guide a manager in choosing the period for the budget.
- The most frequently used budget period is one year, which is often subdivided into months and quarters.
- The budgeted data for a year are frequently revised as the year goes on.
- A rolling budget (or continuous budget), is created by continually adding a month, quarter or year to the period that just ended.
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Steps in developing an operating budget
- Prepare the revenues (sales) budget.
- Prepare the production budget (in units).
- Prepare the direct materials usage budget and the direct materials purchases budget.
- Prepare the direct manufacturing labour costs budget.
- Prepare the manufacturing overhead costs budget.
- Prepare the ending inventories budget.
- Prepare the cost of goods sold budget.
- Prepare the non-manufacturing costs budget.
- Prepare the budgeted income statement.
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Steps in developing an operating budget (cont’d)
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Steps in developing an operating budget (cont’d)
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Steps in developing an operating budget (cont’d)
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Steps in developing an operating budget (cont’d)
Complete the financial budget
- Based on the operating budget:
- prepare the capital expenditures budget
- prepare the cash budget
- prepare the budgeted balance sheet
- prepare the budgeted statement of cash flows.
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Steps in developing an operating budget – web link
- ‘How do I create an Operating Budget?’ and related articles can be found at:
http://smallbusiness.chron.com/create-operating-budget-3762.html
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Financial planning models and sensitivity analysis
- Financial planning models are mathematical representations of the relationships between operating activities, financing activities and other factors that affect the master budget.
- Financial-planning software may be employed to conduct sensitivity analysis – a ‘what-if’ technique that can assist in the budgetary process by examining how a result will change if the original predicted data are not achieved or if an underlying assumption changes.
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Budgeting and responsibility accounting
Organisation structure and responsibility
- Organisation structure – an arrangement of lines of responsibility within the organisation.
- Responsibility centre – a part, segment or subunit of an organisation whose manager is accountable for a specified set of activities.
- Responsibility accounting – a system that measures the plans, budgets, actions and actual results of each responsibility centre.
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Budgeting and responsibility accounting (cont’d)
Types of responsibility centres
- Cost centre – the manager is accountable for costs only.
- Revenue centre – the manager is accountable for revenues only.
- Profit centre – the manager is accountable for revenues and costs.
- Investment centre – the manager is accountable for investments, revenues and costs.
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Budgeting and responsibility accounting (cont’d)
Feedback
- Budgets coupled with responsibility accounting offer feedback to top management about differences between actual results and budgeted amounts, called variances.
- Variances provide managers with:
- early warning of problems
- a basis for performance evaluation
- a basis for strategy evaluation.
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Budgeting and responsibility accounting (cont’d)
Responsibility and controllability
- Controllability is the degree of influence that a manager has over costs, revenues, or related items for which he or she is responsible.
- A controllable cost is any cost that is primarily subject to the influence of a given responsibility centre manager for a given period.
- Responsibility accounting focuses on gaining information and knowledge, not only on control.
- Responsibility accounting helps managers to first focus on whom they should ask to obtain information and not on whom they should blame.
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Budgeting and responsibility accounting – web links
- YouTube lecture ‘Responsibility Accounting: Master Budget’ over view can be found at: http://www.youtube.com/watch?v=e83vfYTd34U
- YouTube lecture ‘Master Budget and Responsibility Accounting’ detailed with examples can be found at: http://www.youtube.com/watch?v=B58sYKhhSbA
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Human aspects of budgeting
Budgetary slack
- The budgeting process may be abused both by superiors and subordinates, leading to negative outcomes.
- Superiors may dominate the budget process, or hold subordinates accountable for events over which they have no control.
- Subordinates may build ‘budgetary slack’ ‒ the practice of underestimating budgeted revenues, or overestimating budgeted costs, to make budgeted targets more easily achievable ‒ into their budgets.
- Budgetary slack provides managers with a hedge against unexpected adverse circumstances, but also misleads top management about the true profit potential of the company.
- Rolling budgets reduce the opportunity to create budgetary slack relative to when budgeting is done only annually.
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Human aspects of budgeting – web link
- YouTube lecture ‘The Budget Process and the Impact of Human Behavior’ can be found at: http://www.youtube.com/watch?v=dmWFb34WZxU
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Kaizen budgeting
Kaizen budgeting:
- explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers
- strategic focus is to use kaizen budgeting to continuously reduce costs through many small improvements rather than ‘quantum leaps’.
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Kaizen budgeting – web link
- ‘Kaizen Budgeting’ explanation and related articles can be found at: http://work.chron.com/kaizen-budgeting-3857.html
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Budgeting for reducing carbon emissions
- Many companies proactively manage and report on environmental performance.
- Science-based targets are stretched to spur innovation, prompt the development of new technologies and business models, and prepare companies for future regulatory and policy changes.
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Budgeting in multinational companies
- Multinational companies have operations in many countries.
- In addition to budgeting in different currencies, management accountants in multinational companies also need to budget for constantly fluctuating foreign exchange rates.
- Multinational companies need to understand the political, legal and economic environments of the different countries in which they operate.
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Appendix 11.1: The cash budget
Preparation of budgets
- The cash budget is a schedule of expected cash receipts and disbursements.
- It predicts the effects on the cash position at the given level of operations.
- Cash budgets are critical for cash planning and control.
- Cash budgets help avoid unnecessary idle cash and unexpected cash deficiencies.
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Appendix 11.1: The cash budget (cont’d)
- The cash budget has these main sections:
- cash available for needs (before any financing)
- the beginning cash balance, plus
- cash receipts
- cash disbursements
- direct material purchases
- direct labour and other wage and salary outlays
- other costs
- other disbursements
- income tax payments.
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Appendix 11.1: The cash budget (cont’d)
- The cash budget has these main sections (cont’d):
- financing effects
- depends on the relationship between total cash available for needs and total cash needed
- ending cash balance.
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Appendix 11.1: The cash budget (cont’d)
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Appendix 11.1: The cash budget (cont’d)
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Appendix 11.1: The cash budget (cont’d)
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Appendix 11.1: The cash budget (cont’d)
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Appendix 11.1: The cash budget (cont’d)
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Appendix 11.1: The cash budget (cont’d)
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Appendix 11.1: The cash budget – web links
- Process and reasons for ‘How to prepare a cash budget’ can be found at:
https://www.zionsbank.com/pdfs/biz_resources_book-5.pdf
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Conclusions
- The master budget summarises the financial projections of all the company’s budgets.
- Budgets should be prepared when their expected benefits exceed their expected costs.
- The operating budget is the budgeted income statement and its supporting budget schedules.
- Managers can use financial planning models to conduce what-if (sensitivity) analyses.
- A responsibility centre is a part, segment, or subunit of an organisation whose manager is accountable for a specific set of activities.
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Conclusions (cont’d)
- Responsibility accounting systems are useful because they measure the plans, budgets, actions and actual results of each responsibility centre.
- Controllable costs are those primarily subject to the influence of a given responsibility centre manager for a given time period.
- The administration of budgets requires education, participation, persuasion and intelligent interpretation.
- Budgeting is a valuable tool for multinational companies but is made difficult by the enormous uncertainties inherent in operating in multiple countries.
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