3. Cash budgets – a proforma
Opening balance
Cash Receipts:
(a)
Month 1
£
Month 2
£
(b)
x
x
Sales
Other
x
x
x
x
x
x
Cash Payments
Purchases
Other
x
(c)
Net cashflow (b-c)
Closing balance
(a+b-c)
x
x
x
x
x
X
X
X
X
X
X
3
4. Example: Shuxing designer sportswear
Sales
(all cash)
Jan
£2,000
Purchases
(2 month
credit)
£1000
Expenses
1 month
credit
£300
Feb
£3,200
£1600
£500
Mar
£4,320
£2,160
£600
4
5. Shuxing designer sportswear
• Quarterly rent and rates of £4,000, starting
on 1st March.
• She receives an interest free loan from her
parents in February for £1,000
• She buys a computer (£2,000) in January
• Equipment(£5,000) is to be paid for in on 1st
January
• Opening cash balance is £1,000
REQUIRED
Using the pro forma, prepare a cash budget
for Shuxing for the first three months of trading.
Interpret her cash position, explaining her
5
options.
6. Control and Controls
Finish
Control is the ability to stay on the path which
leads to the desired end.
Controls are the devices with which you are
able to exercise control. e.g brake, clutch, gear,
mirrors etc
7. Budgetary control
The comparison of actual results
with those budgeted.
The variances between these
elements are calculated and
reported to management so that
appropriate action can be taken
8. Budgetary control
Budgets can be viewed either as:
Fixed :
◦
do not change with the level of activity ( A
major limitation for control purposes)
or
Flexed
◦
are the opposite they are constructed such
that they can be altered to reflect the actual
activity achieved. So excludes any volume
variance from the total variance.
9. Impact of Volume
A Flexed budget excludes any
volume variance from the total
variance.
£10
£8
£11
10. Example:
UH
sports café sold 156
mars bars in a week for
£62.40.
It had a budget of 150
bars at £67.50.
This gives a variance of
£5.10. What caused this
variance?
11. Answer UH sports cafe
Actual
=
Budget =
Qty
156
Price
0.40
Total
62.40
150
0.45
67.50
Variance
5.10 U
Causes
Volume =
Price =
Total variance
6
156
0.45
0.05
2.70 F
7.80 U
5.10 U
A Flexible budget would eliminate the volume variance
12. Cost behaviour
If budgets are being adjusted to reflect
changes in activity levels then:
1.
2.
3.
We need to know how the planned
costs/revenue react to output
The fundamentals of variable costing
apply.
So for each we ask what type of cost
is it? – Variable?, Fixed? Stepped?....
13. Importance of flexible budgets
At the planning stage
If output is uncertain then a number of
flexible budgets may be constructed and then
the outcomes can be assessed prior to the
acceptance of one as the fixed. (‘What if?’
analysis)
At the control stage
Businesses are dynamic, so its improbable
that actual activity will match that what was
planned
Management need to know what elements
have caused a variance in order to exert
control and react
14. Flexible budget – the steps
Revise the budget to reflect the
volume that actually or now expected
to occur
Identify what costs are related to the
level of output (variable costs)
Identify the fixed costs
Can now make more valid
comparison between this budget and
the actual one
This is known as the volume variance
The other variances can now be
investigated
15. Example: Baxter Ltd
(Solution in Tutorial 3)
Original
Budget
Actual
1100
1150
£
£
Sales
110,000
113,500
Raw Materials
(44,000)
(44,000m)
(46,300)
(46,300m)
Labour
(22,000)
(5,500hrs)
(23,200)
(5,920
hrs)
Fixed OHs
(20,000)
(19,300)
Profit
24,000
24,700
Output
Production &
sales (units)
Requirement: Produce a report that illustrates all potential variances
Editor's Notes
SO when would we construct a Fixed?
When would we construct a Flexed?
Question for students:
When would we set a fixed budget?
When would we set a flexed budget?
Flexi = is an adjusted plan for control purposes only – its not a target to be achieved.
Now lets look at the effect of a volume variance = UH café exercise
Volume 6
Price 5p
A sales variance between actual and flexed will therefore Id price variance
But if we were looking at material cost we would be looking at two variances which are price and usage
