Welcome to: FNSACC503A Manage Budgets and Forecasts Week 1 - - PowerPoint PPT Presentation

Welcome to:

FNSACC503A Manage Budgets and Forecasts

Week 1 – Chapter 1

BUDGETING BASICS

FNSACC503A Manage Budgets and Forecasts

By the end of this lesson, you will be able to…

• 1. Define and discuss some key budgeting terms
• 2. Discuss the benefits & limitations of budgeting
• 3. Prepare a simple budget

Overview

• 1. What is a budget?
• 2. What is a budget used for?
• 3. Organisational planning  The planning cycle
• 4. Budgets  their Benefits + Limitations
• 5. Budget preparation
• 6. Approaches to budgeting
• 7. Types of budgets
• 8. Budget classification
• 9. Master budgets

10.Example: Simple budget preparation

Quick BRAINSTORMING Activity What do you already know about budgeting?

What is a budget?

A BUDGET is:

• a written statement
• of management’s strategic plans for

achieving the organisation's key

• bjectives
• expressed in financial terms

What is a budget?

Put simply, a BUDGET is an itemised forecast of money coming in and money going out for a specified period of time for either a specific activity, department, product or the organisation as a whole.

What is a budget used for?

Budgets help the leadership team of an

• rganisation to CO-ORDINATE and CONTROL

key activities across the organisation, enabling the goals of the organisation to be reached. Specifically, they help management with the:

• 1. Planning
• 2. Organising
• 3. Motivating
• 4. Controlling

aspects of their role.

Organisational planning

PLANNING is defined as:

• - the set of actions taken
• - to formulate the scope and direction
• - of future activities and operations.

Organisational planning

 Long term plans:

span 5 to 10 years

(more strategic in nature)

 Medium term plans:

span 1 to 5 years

e.g. new product releases, equipment upgrades etc.

 Short term plans:

span up to 1 year

(quite detailed; deal with day-to-day operations of the business)

Budgeting is:

 an integral part of the planning process.  used to support management decision

making in relation to allocation of scarce resources to facilitate goal achievement.

Organisational planning

Example : Airline Company

In the short-term, the allocation of plane size and crew numbers requires a detailed analysis of destinations and expected activity to ensure that resources are utilised efficiently. In the medium-term, the company will have to consider adding some new destinations to their current offering and discontinue

• perations to low volume (low profit) destinations to grow

business operations and remain competitive. In the long-term, the company will have to plan for major capital expenditures in relation to replacing and adding airplanes to the fleet. The increase / decrease in capacity will be based on expectations and forecasts of market trends and market share as it relates to the company.

The planning cycle

PERFORMANCE REPORT PERFORMANCE REPORT BUDGET BUDGET Comparison of ACTUAL results to BUDGET  VARIANCE Comparison of ACTUAL results to BUDGET  VARIANCE

The planning cycle

(ref. diagram on previous slide)

• 1. Plans, including budgets are prepared.
• 2. Action is taken to implement these plans.
• 3. Performance is measured by comparing actual

results to the budget.

• 4. Differences or variances are analysed so that

corrective action can be taken.

• 5. If necessary, plans are reviewed and assessed.

Benefits of budgets

1.

Forces management to do some planning.

2.

Provides realistic performance targets (if done properly involving the appropriate personnel).

3.

Basis for controlling what happens within the

• rganisation.

4.

Helps co-ordinate the activities of the various departments that make up the business.

5.

Promotes communication – managers exchange information on ideas, business goals etc.

6.

Motivational tool – if appropriate staff are involved in the budget-setting process

Limitations of budgets

1.

Only estimates, not statements of facts.

2.

Costly and time-consuming.

3.

No substitute for sound management practices.

4.

Need to be amended if circumstances change.

5.

Preparation does not guarantee success.

6.

Aspects of people’s behaviour may undermine the value of the process (CHAPTER 11).

Budget preparation

The organisation’s leadership team has to work

• ut:

1.Where are we now? (i.e. analyse the organisation’s

internal environment as well as the external & remote environment within which the organisation

• perates)

2.Where do we want to go? (decide upon the

• rganisation’s short-, medium- and long-term goals)

3.How are we going to get there? (put together a

workable strategic planning; budgeting is an integral part of this planning process)

Budget preparation

Relevant factors must be considered when preparing a budget, for example:

Past sales levels and trends Economic trends

(e.g. changes in interest rates, exchange rates & tax rates; ‘boom’ & ‘bust’ business cycles)

The likely action of competitors Market research studies Possible government actions (e.g. child care rebate)

Budget preparation

 Allow enough time to

prepare the budget.

 Involve appropriate staff.

Approaches to budgeting

Approach used depends on the SIZE and STRUCTURE of the firm and the type of ENVIRONMENT in which it operates.

e.g. organisations planning a change of focus or strategy cannot rely on established budgeting processes & procedures – they may need to be a bit more creative.

Approaches to budgeting

Standard approach:

historical figures (actual or budget) are used and adjusted for any likely future events – not recommended as past inefficiencies may be perpetuated and funds may not be allocated to activities designed to meet the organisation’s

• bjectives.

Zero-based budgeting:

the initial figures for each activity are set to zero. To receive funding, each activity must be justified in terms of how it meets the organisation’s objectives. The dollar figure attached to that activity is then based on the resources needed to make that activity happen.

Types of budgets

 Revenue budgets: (LESSON 2)

Provide estimates of the income of an organisation from the sale of goods and/or provision of services for a specific period of time.

 Operating budgets: (LESSON 3)

Provide an estimate of the activities that will affect net profit including purchases, COGS and operating expenses

 Budgeted financial statements: (LESSON 5)

Show the estimated results and projected financial position of a business and include the budgeted income statement, balance sheet and cash flow statement.

Budget classification

• 1. PERIOD budget:

developed for a specific period of time e.g. a quarter.

• 2. ROLLING (CONTINUOUS) budget:

continually updated so that it always reflect plans for the same length of time e.g. 12 months. This is done by periodically adding a new time period to the forecast and dropping off the equivalent period just completed.

Budget classification

• 3. STATIC (fixed) budget:

prepared for one level of planned activity e.g. a particular level of sales, say, $75,000.

• 4. FLEXIBLE budget:

a series of budgets that show how costs vary at different levels of activity within which the organisation may operate (CHAPTER 10). See example on next slide - The Simms Card Co.

Flexible budgets

e.g. The Simms Card Company

The Simms Card Company manufactures inexpensive greeting cards, which are sold in packs of ten (10) at discount stores. The Simms Card Company has prepared its budgets on the assumption that it will sell 200,000 packs

• f cards during the year.

How could the company’s performance be accurately assessed if 190,000 packs of cards were sold instead?

Flexible budgets

e.g. The Simms Card Company (STATIC)

BUDGET ACTUAL VAR. F / U Sales 200,000 190,000 10,000 U Less: Variable costs* 20,000 18,000 2,000 F Contribution margin 180,000 172,000 8,000 U Less: Fixed costs 10,000 10,000

• Net profit

170,000 162,000 8,000 U * Budgeted for at 10c per sales dollar

Flexible budgets

e.g. The Simms Card Company (FLEXIBLE)

BUDGET (level 1) BUDGET (level 2) BUDGET (level 3) Sales 190,000 200,000 210,000 Less: Variable costs* 19,000 20,000 21,000 Contribution margin 171,000 180,000 189,000 Less: Fixed costs 10,000 10,000 10,000 Net profit 161,000 170,000 179,000 * Budgeted for at 10c per sales dollar

Cost Classification

(FIXED vs. VARIABLE costs)

FIXED COSTS do not vary (in the short run) with changing levels of activity.

The cost per unit decreases as activity increases. This relationship is constant within the relevant range

• f activity.

e.g. factory rent

Fixed Costs

Cost Classification

(FIXED vs. VARIABLE costs)

VARIABLE COSTS in total vary (in the short run) with changing levels of activity.

Remain the same per unit over the relevant range. e.g. labour costs

Variable Costs

Flexible budgets

e.g. The Simms Card Company (FLEXIBLE)

BUDGET ACTUAL VAR. F / U Sales 190,000 190,000

• Less: Variable costs*

19,000 18,000 1,000 F Contribution margin 171,000 172,000 1,000 F Less: Fixed costs 10,000 10,000

• Net profit

161,000 162,000 1,000 F * Budgeted for at 10c per sales dollar

Master budgets

 a combination of all the budgets of an organisation.

 reflects the integrated plans and expected financial

results of all operations and departments of the

• rganisation.

* Starting point  sales / revenue budget * Other budgets are then prepared in line with the required level of sales.

MASTER BUDGETS ( chapter 1 : budgeting fundam entals)

Budget income statement MERCHANDI SI NG PROFESSI ONAL SERVI CES* Sales Fees income Sales Purchases > > COGS Professional and support labour costs e.g. dentist + dental assistant * direct labour > > COGS Marketing expenses Marketing expenses

• Admin. expenses
• Admin. expenses
• Admin. expenses

Financial expenses Financial expenses Cash budget Capital expenditure budget Budgeted balance sheet * sells expertise and knowledge MANUFACTURI NG Budget incom e statem ent Marketing expenses Financial expenses Production + Ending Inventories * direct materials (usage + purchases) * factory overhead

Example 1 : Simple budget

Turner Home Building Products manufactures bricks and tiles. Their Brisbane branch has to prepare its budgets for the coming year and they will be presented to head office for approval. The Admin. department’s actual figures for last financial year ended June 30 were as follows: Item $ Salaries 323,400 Stationery 14,000 Telephone 15,120 Electricity 15,850 Rates 7,780 Depreciation 12,600 Total 388,750

After carefully considering all relevant factors, it was estimated that the following changes are likely to occur for the next financial year:

 Salaries are expected to increase by 5%  Due to a new online facility installed by Turner, stationery is

expected to decrease by 10%

 Tarrif increases will mean that electricity will increase by 6%  Rates will increase by 8%  Telephone and depreciation should remain the same

Required: Prepare next year’s budget for the Admin. department of Turner’s Brisbane branch.

Solution : Example 1

Turner Home Building Products : Brisbane Branch : Admin. Dept Budget for year ended 30 June 2013

Item Last year actuals Budget workings Budget for next year Salaries $323,400 X 1.05 $339,570 Stationery $14,000 X 0.9 $12,600 Telephone $15,120 $15,120 Electricity $15,850 X 1.06 $16,801 Rates $7,780 X 1.08 $8,402 Depreciation $12,600 $12,600 Total $388,750 $405,093

Example 2 : Simple budget

The personnel department of Avnet Industries had the following actual results for last year: Required: Prepare next year’s budget for the personnel dept.

• f Avnet Industries.

Item Actuals 30 June X0 Salaries $215,600 Stationery $4,930 Telephone $9,800 Electricity $10,750 Office rent $25,200 Depreciation $8,400 Total $274,680 It is estimated that next year’s budget will reflect the following changes: * Salaries will increase by 5% * Stationery costs will increase by 3% * Telephone usage is expected to decline by 4% * Electricity costs are expected to rise by 1.5% * A change of location means that office rent should decrease by 5% * Depreciation – it is anticipated that furniture costing $5,600 will be disposed of at the beginning of the financial year and immediately replaced with new furniture costing $7,000. The rate of depreciation is 10% p.a. on cost.

Solution : Example 2

Avnet Industries : Personnel Dept. Budget for year ended 30 June 20X1

Item Actuals 30 June X0 Budget workings Budget 30 June X1 Salaries $215,600 X 1.05 $226,380 Stationery $4,930 X 1.03 $5,078 Telephone $9,800 X 0.96 $9,408 Electricity $10,750 X 1.015 $10,911 Office rent $25,200 X 0.95 $23,940 Depreciation $8,400

• $560 + $700

$8,540 Total $274,680 $284,257

How to work out the depreciation amount of $8,540

Information provided: Depreciation: It is anticipated that furniture costing $5,600 will be disposed of at the beginning of the financial year and immediately replaced with new furniture costing $7,000. The rate of depreciation is 10% per annum on cost. Depreciation method: Straight-line depreciation. We are not told what the opening balance for ACCUMULATED DEPRECIATION is.

How to work out the depreciation amount of $8,540

This week’s homework

 Get a copy of the textbook  Read chapter 1  Budgeting Basics  Complete homework questions (chapter 1)

(ref. STUDENT ONLINE STUDY GUIDE)

You are now ready to start the next lesson on:

Chapter 3

Sales and Revenue Budgets