Tài chính kế toán - Chapter 9: Budgeting systems

Chapter 9Budgeting systems9-1Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutlineStrategic planning and budgeting systemsPurposes of budgetingResponsibility accountingThe annual budget: a planning toolStrategic planning and budgeting assumptionsThe operating budgetsThe financial budgetsBudgets in not-for-profit organisations and government agenciesBudget administrationBehavioural consequences of budgetingZero-based budgeting and program budgeting9-2Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithStrategic planning and budgeting systemsA budgetA detailed plan summarising the financial consequences of an organisation’s operating activities for a specific future time periodA core component of an organisation’s planning and control systemA critical way of providing information to managers to help them manage resources and create valueOften has a time horizon of a year9-3(cont.)Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithStrategic planning and budgeting systems (cont.)Strategic planning is long-term planning usually undertaken by senior managersDecisions about corporate strategy The type of businesses and markets that the organisation operates inHow those businesses and activities will be financedDecisions about business strategyHow each business competes within its chosen marketA time horizon of three or more yearsFormulated in broad terms in far less detail than budgetsDirectly influences the formation of budgets9-4Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithPurposes of budgetingPlanningTo quantify a plan of actionFacilitating communication and coordinationProvides a formal mechanism to enable communication and coordinationAllocating resourcesProvides a forum for evaluating alternative uses for resources among competing users9-5Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Purposes of budgeting (cont.)Controlling profits and operationsThe budget can serve as a benchmark to allow comparison with actual resultsEvaluating performance and providing incentivesComparing actual results with a budget provides a basis for evaluation of the performance of individuals, departments or the entire companyThis can be linked to formal incentives, such as cash rewards or profit sharing9-6Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithResponsibility accountingBudgets are prepared along responsibility accounting linesResponsibility accountingThe practice of holding managers responsible for the activities and performance of their area of the businessManagers of various departments Develop their own budget estimates for cost, revenue or profits of their area of responsibilityThey are then held responsible for meeting those budget targets9-7Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Responsibility accounting (cont.)Responsibility centresA unit of the organisation whose manager is held accountable for the unit’s activities and performanceCost centre, revenue centre, profit centre and investment centreThe type of responsibility centre determines the types of financial results for which a manager is held accountable9-8Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe annual budget: a planning toolThe annual budget (or master budget) is a comprehensive set of budgets that covers all aspects of a firm’s activitiesConsists of several interdependent budgetsFinancial budgetsOperating budgetsIn large organisations: a comprehensive process, formal budgeting procedures taking several monthsIn smaller organisations: less formal process9-9Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)The annual budget: a planning tool (cont.)Operating budgets Sales budget Various cost budgetsThe financial budgets Budgeted income statementBudgeted balance sheetCash budgetsCapital expenditure budget9-10Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)9-11Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe annual budget: a planning tool (cont.)Budgets are developed for specific time periodsRolling budgets (or continuous budgets) are continually updated by periodically adding a new time period, such as a quarter, and dropping the period just completedBudgets will vary in their level of detail, often dependent on the size and complexity of the organisation9-12Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithStrategic plans and budget assumptionsBudgets commence with an understanding of the strategy of the organisation The budget should support the strategic plansThe budget is based on various assumptions about the competitive environment and the economic environment for the coming year9-13Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe operating budgetsThe sales budgetA detailed summary of the estimated sales units and revenues from the organisation's products for the budget yearBased on the sales forecast, which involves estimating which products will be sold and in what quantitiesSales forecasting is a critical step in the budgeting processMarket research may be used9-14Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)The operating budgets (cont.)The sales budgetFactors to consider when forecasting sales depend on the industry and nature of the firmsInternal factors: past sales levels, new products planned, intended pricing policy, and planned advertising and promotionExternal factors: general economic trends, specific industry trends, political and legal events, expected activities of competitors and customers9-15Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)The operating budgets (cont.)The cost budgetsManufacturing firmsA production budget, which has cost budgets for direct materials, direct labour and overheadsBudgets for selling and administrative expensesRetailers and wholesalers A purchasing budget will be used to determine the quantity and cost of goods purchased for resale Service firmsA set of budgets that show how demand for services will be met9-16Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe financial budgetsThe cash budgetExpected cash receipts and planned cash payments for the budget periodTiming of all cash movements is important to identify cash shortages and cash surplusesCapital expenditure budgetA plan for the acquisition of long-term assets, such as building, plant and equipment9-17Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)The financial budgets (cont.)Budgeted income statementShows expected revenues and planned expenses for the budget periodBudgeted balance sheetShows expected assets and liabilities at the end of the budget periodBoth statements may be broken down by quarter or month of the year9-18Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithBudgets in not-for-profit organisations and government agenciesThe annual budget contains many of the same components as for a profit-seeking organisationIn some cases there is no sales budget, as services may be provided for no chargeService levels are still considered as these may drive the resources that are needed and hence, the cost budgetsOther revenue budgets may be estimatedGovernment grants, donations, sponsorships9-19Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithBudget administrationIn large organisations, formal processes are often used to collect data and prepare the budgetBudget administration is often the responsibility of the senior accounting managersA budget manual may be used to communicate who is responsible for providing various types of information, when the information is required and what form it will takeA budget committee may be appointed to advise the accountants during the preparation of the budget9-20Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithBehavioural consequences of budgetingA budget affects virtually all staff in an organisationthose who prepare the budgetthose who use the budget for decision makingthose whose performance is evaluated using the budgetThree main behavioural issuesParticipative budgetingBudgetary slack Budget difficulty9-21Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Behavioural consequences of budgeting (cont.)Participative budgetingAllows managers at all levels of the firm to develop their own initial estimates for budgeted sales, costs, etc.Top-down budgeting is where senior managers impose budget targets on more junior managersBottom-up budgeting is where people at the lower managerial and operations levels play an active part in setting their own budgets9-22Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Behavioural consequences of budgeting (cont.)Participative budgeting may Encourage coordination and communication between managers and a greater understanding and appreciation of the wider organisationLead to more accurate budget estimates as those close to the operations have the best knowledge of the likely sales or costs in their areaLead to individuals identifying more closely with the budget targets9-23Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Behavioural consequences of budgeting (cont.)Participative budgetingCan be expensive and time-consumingCan lead to delayMay aggravate differences and disagreementsProvides opportunities for padding the budgetsEmployee empowerment is a wider concept than budgetary participationEmployees at all levels are given authority to develop their own budgets and targets, and manage their own work areas9-24Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Behavioural consequences of budgeting (cont.)Budgetary slack—padding the budgetUnderestimating revenue or overestimating costsThe difference between the estimated revenue or cost projection and a realistic estimate of the revenue or costReasons for budgetary slackPerformance can look better if you can ‘beat the budget’A way of coping with uncertaintyTo insulate against initial budget requests being cut back by management9-25Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Behavioural consequences of budgeting (cont.)Budget difficultyBudget acceptance is more likely whenTargets are developed with employee participationTargets are considered achievableThere is frequent feedback on performanceEmployees are held responsible for activities that are within their controlAchievement of targets is accompanied by rewards that are valuedBudgets must be set at a level that provides challenge and stretch, but is not too difficult to achieve9-26Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithZero-base budgetingManagers must justify each activity in terms of its continued usefulness to the business in order to receive an allocation of resources This forces managers to rethink each phase of operations before requesting resourcesTime-consuming and expensive to implementNot useful in identifying areas of waste, redundant activities or ways to improve performanceCan be too introspective as managers can overlook interactions of other departments and relevance of their operations to the wider business9-27Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithProgram budgetingInvolves identifying the various programs of the enterprise, developing objectives for each program and preparing budgets for each programControl is achieved through quantitative and qualitative performance measures that derive from the program objectivesAssociated with government departmentsUnlike line-item budgeting, the focus is on outputs not inputs9-28Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSummaryBudgeting systems can be used for planning, communication and coordination, allocating resources, controlling profit and operations, and evaluating performance and providing incentivesBudgets are developed along responsibility linesFormal budgeting systems involving many interdependent budgets may be used in large organisationsBudgeting can have behavioural implicationsParticipation in setting budgets can improve commitment, but can encourage budgetary slack Budgets that are too difficult can be demotivating9-29Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith