Download to read offline
BUDGETING AND BUDGETARY CONTROL.presntation
- 1. BUDGETING AND BUDGETARY CONTROL BY:REGINALD LAMPTEY CONTACT:0244095138/0575429647
- 2. 2 PURPOSE OF BUDGETING(PECCCMAD) A budget is a quantitative plan prepared for a specific time period. It is normally expressed in financial terms and prepared for one year. Budgeting serves a number of purposes: Planning Evaluation Control Communication Co-ordination Motivation Authorization Delegation
- 3. 3 BUDGETING AND PERFORMANCEMANAGEMENT Budgeting contributes to performance management by providing benchmarks against which to compare actual results and develop corrective measures. Budgets give managers pre-approval for execution of spending plans and allow them to provide forward looking guidance to investors and creditors. Individuals react to the demands of budgeting and budgetary control in different ways and their behaviour can damage the budgeting process.
- 4. 4 APPROACHES TO BUDGETING There are a number of budgetary systems: Incremental budgeting Zero-based budgeting Rolling budgets Activity-based budgeting Top-down budgeting Bottom-up budgeting
- 5. 5 FLEXIBLE BUDGETING Fixedbudget - It is prepared before the beginning of a budget period for a single level of activity. Flexible budget – it is prepared for a number of levels of activity and requires the analysis of costs between fixed and variable elements. It is prepared at the end of the budget period. It provides a more meaningful estimate of costs and revenues and is based on the actual level of output. Budgetary control compares actual results against expected results to determine the variance which may be favourable or adverse. A cost is controllable if a manger is responsible for it being incurred or is able to authorize the expenditure. Managers should only be evaluated on costs over which they have control. A notional cost is outside the control of a manager and should not be included in performance appraised.
- 6.
- 7. 7 BEHAVIOURAL ASPECTS OFBUDGETING Individuals react to the demands of budgeting and budgetary control in different ways and their behavior can damage the budgeting process. Behavioural problems are often linked to management style and include dysfunctional behaviour and budget slacks. Budgetary targets will assist motivation and appraisal if they are at the right level. Expectations Budget- It is a budget set at current achievable level. Aspirations Budgets- It is a budget set at a level which exceeds the level currently achieved
- 8. 8 BUDGETING AND PARTICIPATION •There are basically two ways in which a budget can be set: from the top down (imposed budget) or from the bottom up (participatory budget).
- 9. 9 TOP-DOWN (IMPOSED) BUDGETING It is a budget set without permitting the ultimate budget user the opportunity to participate in the budgeting process. Advantages of Top-Down (Imposed Style): Involving managers in the setting of budgets is time consuming. Managers may not have the skills or motivation to participate. Senior managers have the better overall view of the company and its resources. Senior managers are also aware of the long-term strategy of the company and can prepare budgets which are in line with that.
- 10. 10 TOP-DOWN (IMPOSED) BUDGETINGCONT. Managers may build budgetary slack or bias into the budget in order to make it easier for them to achieve it. Managers cannot use budgets to play games which disadvantage other budget users/holders. It enhances objectivity. It discourages pseudo-participation.
- 11. 11 BOTTOM-UP (PARTICIPATIVE) BUDGETING It is a budgeting system in which all budget holders/users are given the opportunity to participate in setting the budget. Advantages of participative budgets: The morale of management is boosted. Managers are more likely to accept the plans contained in the budget and strive to achieve them. Lower level managers have detained knowledge of their departments than senior managers.
- 12. 12 INCREMENTAL BUDGETS Itstarts with the previous year’s budget or actual results and adds or subtracts an incremental amount to cover inflation and other known changes. It is suitable for stable business, where costs are not expected to change significantly. Advantages of Incremental Budgets Disadvantages of Incremental Budgets Quickest and easiest method Builds in previous problems and inefficiencies Suitable if the company is stable and historic figures are acceptable since only the increments needs to be justified Uneconomic activities may be continued managers may spend unnecessarily in order to use up their budget.
- 13. 13 ZERO-BASED BUDGETING (ZBB) It is a method of budgeting that required each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero. It is suitable for allocating resources in areas where spending is discretionary, and public sector organisations. There are four distinct stages in the implementation of ZBB. Managers should specify, for their responsibility centres, those activities that can be individually evaluated. Each of the individual activities is then described in a decision package. Each decision package is evaluated and ranked usually using cost/benefit analysis. The resources are then allocated to the various packages
- 14. 14 ZERO-BASED BUDGETING (ZBB)CONT. Advantages of ZBB Disadvantages of ZBB Inefficient or obsolete operations can be identified and discontinued. it emphasizes short-term benefits to the detriment of long-term goals. ZBB leads to increased staff involvement at all levels. the budgeting process may become too rigid. it responds to changes in the business environment. the management skills required may not be present. knowledge and understanding of cost behavior patterns of the organization will be enhanced. managers may feel demotivated due to the large amount of time spent on the budgeting process. resources should be allocated efficiently and economically. ranking can be difficult for different types of activities.
- 15. 15 ROLLING BUDGET Itis a budget (usually annual) kept continuously up to date by adding another accounting period. It is suitable if accurate forecasts cannot be made or for any areas of business that needs tight control. Advantages of Rolling Budget Disadvantages of Rolling Budget Planning and control will be based on a more accurate budget. More costly and time consuming. It reduces the element of uncertainty in budgeting May demotivate employees if they feel they spend too much time budgeting. There is always a budget that extends into the future. There is the danger that the budget may become the last year’s budget “plus or minus a bit”. It forces management to reassess the budget regularly. An increase in budgeting work may lead to less control of the actual results. Issues with version control, as each month the full year numbers will change
- 16.
- 17. 17 ACTIVITY BASED BUDGETING(ABB) It is a method of budgeting based on an activity framework and utilizing cost driver data in the budget-setting and variance feedback processes. It is the preparing of budgets, using overhead costs from activity- based costing methodology. Advantages of ABB Disadvantages of ABB It draws attention to the costs of ‘overhead activities” which can be a large proportion of total operating costs. A considerable amount of time and effort might be needed to establish the key activities and their cost drivers. It recognized that if is activities which drive costs. It may be difficult to identify clear individual responsibilities for activities. It can provide useful information in TQM environment. It could be argued that in the short-term many overhead costs are not controllable and do not vary directly with activity levels.
- 18. 18 BUDGET MANUAL There shouldbe a budget manual or budget handbook to guide everyone involved in the budgeting process. This should set out: The key objectives of the budget. Budget planning procedures and budget timetables. The budget details that must be included in the functional budgets. Responsibilities for preparing the functional budgets. Details of the budget approval process. The budget must be approved by the budget committee and then by the board of directors.
- 19. 19 THE MASTER BUDGET The“master budget” is the final approved budget. It is usually presented in the form of financial statements (a budgeted statement of profit or loss and a budgeted statement of financial position). It is the result of a large number of detailed plans, many of them prepared at a departmental or functional level.
- 20. 20 FUNCTIONAL BUDGETS A functionalbudget is a budget for a particular aspect of the entity’s operations. It varies with the type of business and industry. In a manufacturing company, functional budgets should include: A sales budget. A production budget A budget for production resources and resource costs (such as a materials cost budget and a labour cost budget). A material purchasing budget An expenditure budget for every overhead cost centre and general overhead costs.
- 21. 21 PRINCIPAL BUDGET FACTOR Thebudgeting process begins with the preparation of functional budgets, which must be coordinated and consistent. The first functional budget that should be prepared is the budget for the principal budget factor. Normally, the principal budget factor (or key budget factor) is the expected sales demand.
- 22. 22 PROFILED BUDGETS Most budgetsare prepared to cover a 12-month period and broken down into months. Budgetary control involves comparing actual results to a budget and taking corrective action where needed. Thus, a budgetary control system will usually compare actual performance for the month to the budget for the month and actual performance for the year to the budget for the year. A profile budget reflects the expected pattern of expenses and income across the year. This is important, as some parts of a budget do not occur evenly each month of the year.
- 23. 23 BEHAVIOURAL FACTORS Unfortunately, inpractice human behaviour in the budgeting process often has a negative effect. There are several possible reasons why behavioural factors can be harmful: Misunderstanding and worries about cost-cutting. Opposition to unfair targets set by senior management. Blame culture. Sub-optimisation (dysfunctional behaviour). Budget slack or budget bias,
- 24. 24 CASH BUDGETS A cashbudget is a detailed plan of cash receipts and cash payments during a planning period. The cash budget might be prepared on a monthly basis as part of the annual master budget. Cash flow forecasts, like cash budgets, are used to predict future cash requirements, or future cash surpluses. However, unlike cash budgets they are prepared throughout the financial year, and they are not part of the formal budget plan. The main focus of cash flow forecasting is likely to be operating cash flows, although some investing and financing cash flows might also be significant.
- 25. 25 MAIN USES OFCASH BUDGET To forecast how much cash receipts and payments are expected to be over the planning period. To learn whether there will be a shortage of cash at any time during the period, or possibly a cash surplus. If there is a forecast shortage of cash, to consider measures in advance for dealing with the problem. To monitor actual cash flows during the planning period, by comparing actual cash flows with the budget.
- 26. 26 FORMAT OF ACASH BUDGET Cash receipts: January GH¢ February GH¢ March GH¢ Cash sales 500 600 500 Cash from credit sales 7200 6400 6400 Other cash receipts 400 200 200 Total cash receipts 8100 7200 7100 Cash payments: Cash purchases 600 660 620 Payments for credit purchases 840 900 990 Rental payments - 3000 - Wages and salaries 2300 2300 2300 Dividend payments - - 400 Other payments 300 7300 1300 Total cash payments (4040) (14160) (9210) Net cash flow 4060 (6960) (2110) Cash balance at the beginning 4500 8560 1600 Cash balance at the end 8560 1600 (510)
- 27. 27 FORMAT OF SALESBUDGET Product Budgeted sales quantity Units Budgeted sales price GH¢ Budgeted sales revenue GH¢ A 200 40 8,000 B 300 50 15,000 Total 23,000
- 28. 28 FORMAT OF PRODUCTIONBUDGET Units Sales budget in units xx Add: Budget closing inventory of F.G xx Less: Opening inventory of F.G xx Production budget xx
- 29. 29 FORMAT OF MATERIALPURCHASES BUDGET Kg Budgeted materials usage xx Add: Budgeted closing inventory of R.M xx Less: Opening inventory of R.M xx Purchases budget xx
- 30. 30 FORMAT OF BUDGETEDPROFIT OR LOSS ACCOUNT GH¢ GH¢ Sales budget 23,000 Cost of sales: Opening inventory 1405 Purchases 8760 Labour usage 4190 14355 Closing inventory (1,555) (12,800) Budgeted gross profit 10,200
- 31. 31 MATERIALS USAGE BUDGETFORMAT Total production quantity x materials required per unit. You may need to gross up the material required per unit so pay attention to the examiner.
- 32.
- 33.