Available NOW at your campus bookstore! This is the prescribed textbook for your course. Available NOW at your campus bookstore! Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Chapter 1 Budgeting fundamentals Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Budgeting fundamentals Budgeting is the process used to develop: A formal written statement Of managements plans for the future Expressed in financial terms Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Types of plans Long term: 5 to 10 years Medium term: 1 to 5 years Short term: up to 1 year Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

The planning cycle Plan Action Results Budgets are the mechanism by which management control of an organisation becomes possible. Budgets Performance Plan Action Results Comparison of actual results to budget gives variance Revise Remedy Comparison of actual results to budget variance Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Benefits of budgets Forces managers to do planning. Realistic performance targets. Basis for controlling what happens within the organisation. Helps coordinate the activities of the various centres that make up the business. Communication – managers exchange information on ideas, etc. Motivating tool – if the process involves staff. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Limitations of budgets Only estimates, not statements of facts. No substitute for sound management practices. Need to be amended if circumstances change. Preparation does not guarantee success. Aspects of people’s behaviour may undermine the value of the process. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Budget classification Static (fixed) budgets: prepared for one level of activity, usually around the forecasts made for sales. Flexible budgets: a series of fixed budgets set to different levels of sales activity within which the organisation may operate. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Cost/volume relationships Fixed costs: in total remain the same for a period of time and over a particular range of activity. Variable costs: in total tend to change as the level of activity changes. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Budget processes Zero-based budgeting: sets the initial figures for each activity to zero. Period budgets: developed for a specific period of time, e.g. a month. Rolling (continuous) budgets: are continually updated by periodically adding a new incremental time period and dropping the period just completed. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Types of budgets Revenue budgets: estimates of the income of an organisation from the sale of goods and/or provision of services for a specific period. Operating budgets: estimate activities that will affect profit. Budgeted financial statements: show the estimated results and projected financial position of a business. That is budgeted revenue, balance sheet and statement of cash flows. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Master budget A combination of all the budgets of an organisation. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Master budget Merchandising firm Professional services Manufacturing firm Sales budget Fees or fees & sales budget Purchases budget Professional & support labour budget Cost of production budget Cost of goods sold budget Cost of supplies used Other operating expense budgets Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

Master budget Irrespective of the type of organisation, the following budgets will be part of the master budget: Statement of financial performance [revenue budget] Statement of financial position [balance sheet] Statement of cash flow Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld