1. Year 13 Accounting Management Decision Making Budgeting

2. Discussion What is a budget? Why do a business needs to have a budget?

3. What is a budget? A budget is a formal written summary of management’s plans for a specified time period, expressed in financial terms. A budget is a way of expressing what management expects to achieve in the future. Budgeting illustrates Responsibility Accounting – as managers is responsible for preparing budget for their own department.

4. Budgeting Budget is being prepared at the end of each year. Management needs to adapt the budget once it has been finalised otherwise the budget would become useless. For example: If the IT Manager of Telecom decided to spend $1.5 million on upgrading its internet system, then the department needs to achieve this goal by keeping the spending around $1.5 million.

5. Purposes of Budgeting To motivate staff – example: a positive and reasonable sales target (stated in the sales budget) could motivate salesperson to achieve the targets. To provide an early warning system – a budget can point out any potential problem and solve the problems well in advance. To coordinate activities among departments – A central budget could help different departments to set departmental budgets to align with the central budget. Thus, communications among departments may occur.

6. Types of Budget Sales Budget Production Budget Capital Expenditure Budget Cash Budget Budgeted Financial Statements

7. Sales Budget A Sales Budget is a forecast of sales and could be broken down into:  Type of goods  Geographical Areas (such as how much sales from Auckland Store and Wellington Store)

8. Production Budget Production budget is a forecast production levels to meet the budgeted sales.

9. Production Budget It shows estimated Expected Unit of Sales It also shows forecast number of stock on hand at the end of the period.

10. Capital Expenditure Budget It shows the forecast purchase of property, plant and equipment for the period for business’s expansion.

11. Cash Budget It shows anticipated (estimated) cash flows (i.e. cash __________ less cash __________)and is prepared on: A. Monthly Basis B. Yearly Basis  It also shows how much cash is available at the end of each month.

12. Cash Budget It shows estimated CASH RECEIPTS It shows estimated CASH PAYMENTS

13. Budgeted Financial Statements Budgeted Financial Statements include:  Budgeted Income Statement  Budgeted Balance Sheet Question: What does each budgeted financial statement show?

14. Budgeted Income Statement Budgeted Income Statement shows the profitability (i.e. ___________ less _____________) of the business for the next period.

15. Budgeted Income Statement It shows estimated Profit

16. Budgeted Balance Sheet It shows the estimated ____________ and ___________. Hence, it helps the business to evaluate the liquidity (i.e. to calculate the budgeted current and liquid ratio) and financial stability (i.e. to calculate the budgeted equity ratio) for the budget period.

17. Budgeted Balance Sheet It shows estimated ASSETS It shows estimated LIABILITIES and EQUITY

18. Exercise Complete the exercise sheet.

19. Discussion How does a business know they have achieved their budget goals?

20. Budgetary Control Managers will compare the actual result with the budgeted figures to see has the organisation meet the objectives/goals. This helps the management to make corrections on any inefficient area after the management analysed the differences between the actual and planned results.

21. Budgetary Control Source: Kimmel et al (2006), Accounting: Building Business Skills (2e), page 824