Budgetary planning I Budget is: OHP 220 Budgetary planning I Budget is: quantified plan aimed at achieving some objective(s) Strategic budgets Tactical budgets (annual budgets) Operational budgets (standard costs)

Provide performance benchmark Provide financial control mechanism OHP 221 Objectives of budgets Compel planning Provide performance benchmark Provide financial control mechanism Provide motivational impetus Medium of communication Promote goal congruence Instil financial awareness Enable delegation

Budgets: potential problems Producing credible estimates OHP 222 Budgets: potential problems Producing credible estimates Bureaucratic ‘overkill’ Encouraging excessive caution by management Behavioural implications

OHP 223 Budget committee Exists in larger organisations to oversee/co-ordinate budgetary preparation and monitoring Typical functions - conversion of strategic to tactical and operational budgets - negotiation of functional budgets - approval of functional budgets and master budget - investigation of variances - resolution of disputes

Master budget typically comprises: - cash budget OHP 224 Master budget Summarises budgets of individual functions/departments within the organisation (‘functional budgets’) Master budget typically comprises: - cash budget - budgeted profit & loss account - budgeted balance sheet

Pre-determined unit costs/selling prices OHP 225 Standard costs Pre-determined unit costs/selling prices Require estimates of: - resource inputs per unit of output - cost of resource inputs - selling price per unit

Assumes maximum efficiency Currently attainable standard OHP 226 Types of standard Ideal standard Assumes maximum efficiency Currently attainable standard Based on efficient operation under current conditions (typically specified in annual budget) Basic standard Medium-term standard based on efficient performance over, say, 3–5 years

Objectives of standard costing Improve accuracy of budgets OHP 227 Objectives of standard costing Improve accuracy of budgets Instil cost consciousness Encourage search for improved methods Permit detailed analysis of financial control data Provide superior costing/pricing basis to that of actual figures

Standard costing: potential problems OHP 228 Standard costing: potential problems Incorporating inflation Setting acceptable labour efficiency standard Possibly difficult to apply to heterogeneous output Cost of introducing and maintaining system Danger of over-emphasising operational considerations

P&L, cash budget, balance sheet OHP 229 Budget preparation Sales budget Principal budget factor Functional budgets production material usage material purchases labour Master budget P&L, cash budget, balance sheet

Production (purchases) required for sales (production) X OHP 230 Production (purchases) budgets should be adjusted to allow for impact of stock: Production (purchases) required for sales (production) X Add Desired closing stock X X Less Opening stock X Production (purchases) X

Labour budgets should be adjusted to allow for expected idle time OHP 231 Labour budgets should be adjusted to allow for expected idle time Cost of expected idle time normally included in standard labour cost/unit Material usage budgets should be adjusted to allow for expected (‘normal’) losses Cost of expected losses normally included in standard material cost/unit