LECTURE 2 and 3 MBA FINANCIAL MANAGEMENT 1 Lecturer: Chara Charalambous.
Week 6 : Lecture 6 1 Lecturer: Chara Charalambous.
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Transcript of Week 6 : Lecture 6 1 Lecturer: Chara Charalambous.
Lecturer: Chara Charalambous
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MANAGERIAL ACCOUNTING & COSTING
Week 6 : Lecture 6
Lecturer: Chara Charalambous
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LERNING GOALS
To understand the role of basic framework for planning.
To understand the role of budgeting difference between planning and control.
To be able to prepare the master budget.
Lecturer: Chara Charalambous
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WHAT IS A BUDGET?
A Budget is: A detailed plan for the
future expressed in numerical terms .
It is a list of all planned expenses & revenues.
A plan for spending and saving money.
Estimates of the income and expenditure of a business or a part of a business over a time period
The act of preparing a budget is called
budgeting.
Lecturer: Chara Charalambous
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PERSONAL BUDGETS Almost everyone is doing budget in there life even
though some people do not realize that they are actually budgeting. For e.g. most people estimate their income and plan expenditures for food, clothing , housing, financing college education , setting aside funds for retirement and so on. As a result of this planning, people restrict their spending to some predetermined amount. These budgets may exist only in the mind of the individual but they are budgets nevertheless.
The budgets of a business serve approximately the same purposes as the budgets prepared informally by the individuals but they tend to be more detailed and to involve more work.
Lecturer: Chara Charalambous
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DIFFERENCE BETWEEN PLANNING AND CONTROL
Budgets are used for two different purposes –
planning and control. Planning involves developing goals and
preparing various budgets to achieve these goals.
Control involves the steps taken by management to increase the possibility that the objectives set down at the planning stage are achieved and that all parts of the organization are working together to achieve these goals set.
A good budget must provide both planning and control. Good planning without effective control is
time wasted.
Lecturer: Chara Charalambous
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TYPES OF BUDGETS
Sale’s budget Cost of goods sold Expenses Ending balances: cash, inventory e.t.c Complete set of financial statements
Lecturer: Chara Charalambous
ADVANTAGES OF BUDGETING
1. Budgets provide a mean of communicating management’s plans throughout the organization.
2. Budgets force managers to think about and plan for the future. If there is no budget managers would spend all of there time dealing with daily emergencies.
3. The budgeting process provides a mean of allocating resources to those sectors of the organization where they can be used most effectively.
4. Budgets coordinate the activities of the entire organization by integrating (put together and combine) the plans of its various sectors.
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ADVANTAGES OF BUDGETING
5. Budgets define goals and objectives that can serve as benchmarks for evaluating succeeding performance. (Benchmark is a standard or point of reference against which things may be compared or assessed)
6. Help monitor cash flow and identify departures from plans
7. Maintains a focus and discipline for those involved
Lecturer: Chara Charalambous
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WHY BUDGETS MAKE SENSE
Budgets help you: Set priorities
(main concerns) Achieve what’s
important to you
A good budget is: Realistic Ongoing Clear and easy to
use
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WHY BUDGETS MAKE SENSE
Is like a model of how business might perform financially speaking
To asses performance by comparing actual operating results against the forecast-budget (model vs. actual)
Simply put: A budget is a practical mean of telling the money where to go, rather than simply wondering where it went.
Lecturer: Chara Charalambous
RESPONSIBILITY ACCOUNTING
The basic idea underlying responsibility accounting is that a manager should be held responsible for those items – and only those items – that the manager can actually control to a significant extent.
Each item – revenue or cost - in the budget is the responsibility of a manager who is held responsible for differences between budgeted goals and actual results.
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Lecturer: Chara Charalambous
RESPONSIBILITY ACCOUNTING
In effect, responsibility accounting, personalizes accounting information by holding individuals responsible for costs.
This concept is central to any effective profit planning and control system.
Someone must be held responsible for each cost or otherwise no one will be responsible and the cost will certainly grow out of control.
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RESPONSIBILITY ACCOUNTING
Being responsible for costs does not mean that the manager is penalized if the actual results do not measure up to the budgeted goals. The point of this responsibility is to make sure that *the manager understands the source of significant favorable and unfavorable fluctuations/differences *the organization reacts quickly and appropriately to differences from its plans *the organization learns from the feedback it gets by comparing budgeted goals and actual results. The point is not to penalize individuals for missing targets but to ensure that everything falls inside the limits.
CHOOSING A BUDGET PERIOD
Operating budgets ordinarily cover a one – year period corresponding to the company’s fiscal year.
Many companies divide their budget year into four quarters.
The first quarter is then subdivided into months, and monthly budgets are developed.
Lecturer: Chara Charalambous
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Lecturer: Chara Charalambous
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CHOOSING THE BUDGET PERIOD
Operating Budget
2012 2013 2014 2015
The annual operating budget may be divided into quarterly
or monthly budgets.
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THE SELF-IMPOSED BUDGET In the most successful budget programs, managers with cost
control responsibilities energetically participate in preparing their own budget. This action is in contrast to the approach in which budgets are imposed from above. If a budget is imposed to a manager from above it will probably generate dislike and unwillingness instead of cooperation and commitment.
The budgeting approach in which managers prepare their own budget estimations is called self imposed budget and is generally considered to be the most effective method of budget preparation.
A Self – Imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels.
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PARTICIPATIVE BUDGET SYSTEM
Flow of Budget Data
S u p ervisor S u p ervisor
M id d leM an ag em en t
S u p ervisor S u p ervisor
M id d leM an ag em en t
Top M an ag em en t
The initial flow is from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare his/her own budget estimations and submit them to the next higher level of management to be reviewed and consolidated as they move upward in the organization.
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ADVANTAGES OF SELF – IMPOSED BUDGET
1. Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued by top management.
2. Budget estimates prepared by front – line managers are often more accurate and reliable than estimates prepared by top managers who are more remote from day to day activities and operations.
3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed.
4. A manager who is not able to meet a budget that has been imposed can always say that the budget was unrealistic and impossible to meet.
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LIMITATION OF THE SELF – IMPOSED BUDGET
Lower – level managers may allow too much budgetary. Since the manager who creates the budget will be held accountable for actual results that deviate from the budget, the manager will have a natural tendency to submit a budget that is easy to attain.
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HUMAN FACTORS IN BUDGETING
The success of a budget program also depends on: (1) the degree to which top management
accepts the budget program as a vital part of the company’s activities and (2) the way in which top management used budgeted data.
If a budget program is to be successful, it must have the complete acceptance and support of the persons who have key management positions. If lower or middle management personnel feel that the top management is unenthusiastic about budgeting or just tolerates it as a necessary evil then there own attitude will reflect a similar luck of enthusiasm.
Lecturer: Chara Charalambous
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HUMAN FACTORS IN BUDGETING
Also the budget is too often used as a pressure devise and great emphasis is placed on ‘meeting the budget’ under all circumstances – inflexible . This causes tensions and mistrust rather than cooperation and productivity.
So instead of using budget as a weapon they should use it in measuring results and in isolating areas that need extra effort or attention.Managers must keep in mind that the human aspect of budgeting is very important and therefore budgets must be designed in positive approach embracing flexibility so as to motivate employees and aid the general company goals.
Lecturer: Chara Charalambous
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THE BUDGET COMMITTEEA budget committee is usually responsible for the overall policy relating to the budget program and for coordinating the preparation of the budget itself.This committee may consist of the president, vice presidents in charge of various functions such as sales, production and purchasing and the controller.Difficulties and disagreements between
segments of the organization relating to the budget are resolved by the committee. In addition, the budget committee approves the final budget.
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THE MASTER BUDGET
The Master Budget consists of a number of separate but mutually dependent and mutually supporting budgets that formally lay out the company’s sales, production and financial goals.
The master budget is an essential management tool that communicates management’s plans throughout the organization ,allocated resources and coordinates activities.
THE MASTER BUDGET
ProductionBudget
Selling andAdministrative
Budget
DirectMaterialsBudget
ManufacturingOverhead
Budget
DirectLabor
Budget
CashBudget
SalesBudget
Budgeted Financial Statements
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ELEMENTS OF MASTER BUDGET
The Sales Budget Detailed schedule
showing expected sales for the coming periods expressed in units and dollars
The Production Budget
Production must be adequate to meet budgeted sales and provide for satisfactory ending inventory. This budget is the number of units that must be produced.
Complete
d
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The Direct Material budget
Details the raw materials that must be purchased to satisfy the production budget and to provide for enough inventories.
The Direct Labor Budget
Is also developed from the production budget. Direct labor . requirements must be calculated so that the company will know whether sufficient labor time is available to meet production needs,
ELEMENTS OF MASTER BUDGET
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Manufacturing Overhead
Budget Provides a schedule
of all costs of production other than direct materials and direct labor.
Selling and administrative expense Budget Makes a list of the budgeted
expenses of areas other than manufacturing. In large organizations this budget is a collection of many smaller budgets submitted by department heads and other persons responsible for selling and administrative expenses. For e.g. the marketing manager will submit a budget detailing the advertising expenses for each budget period.
ELEMENTS OF MASTER BUDGET
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ELEMENTS OF MASTER BUDGET
The Cash Budget Once the operating budgets (sales,
production and so on) have been completed the cash budget can be prepared. A cash budget is a detailed plan showing how cash resources will be acquired and used over some specified time period.
BUDGETING EXAMPLE
Royal Company is preparing budgets for the quarter ending June 30.
Budgeted sales for the next five months are: April 20,000 units May 50,000 units June 30,000 units July 25,000 units August 15,000 units.
The selling price is $10 per unit.
THE SALES BUDGET
April May June QuarterBudgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unit 10$ 10$ 10$ 10$ Total sales 200,000$ 500,000$ 300,000$ 1,000,000$
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QUESTIONS?