Budgeting Budgeting process

1. Budgeting

2. Learning Objectives
. Understand what is a Budget
. Understand the budgeting process
. Understand the types of budgets
. Understand the roles of accountants in budgeting
, Understand the criticism of budgeting

3. What is a budget ?
Definition A plan for future activities
Aim Help management decide which activities
it will undertake and how the company's
resources will be used.
On Operational Budgets (Sales, Production,
Cost Centers, R & D etc)
Cash Flow Budgets
Financial Budgets
Capital Expenditure Budgets
Master Budget
Concern with the long term plan

4. Purpose of budgets
1. Planning annual operations
bearing in mind long term goals
2. Coordinating activities
ensure harmony (sales/production)
(finance/capital investment)
3. Communicating plans / results
to managers for fine tuning/revision
4. Motivating managers
to achieve realistic goals
5. Controlling activities
6. Evaluating performances
PCCmce

5. Administration of the budgeting process
1. Budget manual
roles and responsibilities, procedures, datelines, forms
2. Staff and support for managers to prepare realistic budgets
3. Budget committee set up to approve budgets
Operational budgets – local management
Financial, Master budgets – top management
4. Review committee set up for regular monitoring
5. Accounting staff
1. to coordinate budget setting
2. to collect actual and report variances

6. The Budgeting Process
Corporate Strategy
Corporate MissionCorporate Vision
Market strategy
(penetration/development)
Production Strategy
(place/suppliers)
Product Strategy
(new/extension)
Budgets for MAN, MONEY, MACHINERIES
(present, resubmit, approved)
Budget Income, Budgeted Balance Sheet, Budget cash Flow

7. A Mission Statement defines the company's business,
its objectives and its approach to reach those objectives.
The reason for its existence (ME)
Example from Walmart :- We save people money so
they can live better.
Example from Sony :- a company that provides customers
with kando (to move them emotionally)
and inspires and fulfills their curiosity.
A Vision Statement describes the desired future position
of the company.
What are its expectations for the future (VB)
Example from Walmart :- To be the best retailer in the
hearts and minds of consumers and employees.
Example from Sony :- Our vision is to use our passion for
technology, content and services to deliver kando,
ways that only Sony can

8. Examples

9. Examples

10. Examples

13. Accounting Dept Jobs
Nbr Job Remarks
1 Set time table for :-
budget forms distribution
budget forms return
Internal local management buy off meeting
Eternal HQ buy off meeting
2 Budget forms can be blank or with past data as
a reference
3 Confirm with MD next year salary increase ,
new type of allowance, bonus rate etc
Base on HR
recommendation
4 Coordinate all internal local management buy
off meeting
Listen to explanations and
verify appropriateness
5 Calculate Budgeted Profit/Loss , Balance/Sheet,
Cash Flow
Present to local mgmt
6 Present budget to HQ Together with local mgmt
7 Prepare variance reports To local mgmt for
decision makings

14. Sources of Calculation
Type Source Method
Sales Sales Budget B. Qty x B. Sales Price
Materials Production Budget B. Qty x B. Material Price
Labor Head Count Budget B. Qty * B. Cost at each level
(need to calculate for social security
worker insurance etc)
Depreciation Capital Budget Less old fixed asset depreciation which
will be fully depreciated in the budget
time frame
Overhead Overhead Budget
Cash flows Capital Budget
P/L after tax
See below
Current Asset
Current Liabilities.
Cash
Dividends
Management
decisions
(gearing,
stakeholders)

15. Monthly Report s to Management

16. Monthly Report s to Managers

17. Monthly Report s to Managers
With year to date is better

18. Tips for the accounting dept
Time - Allocate enough time to prepare the blank budgeting forms
- Allocate enough time for the managers to fill their forms
- Schedule local buy off meeting considering personnel
availability
Cordial During budget buy off time
During monthly P/L meeting
When submitting variances report
Flexible Real life is ever changing
Over reliance on following the budget is unrealistic or reasonable
Psychology Monthly big spender award
BIG
SPENDER
$$$

19. Criticisms on budgeting
1. Encourage incremental/decremented thinking
2. Time consuming
3. Focus too much attention to short term goals
4. A yearly rigid ritual
5. Based on uncertain forecast
6. Lacking ambitions meeting targets mentality
7. Spending what is given in the budget even if it is unnecessary
8. Achieving the budget even though results is undesirable

20. Rolling Budgets
Definition :-
continually updated to add a new budget period
as the most recent budget period is completed.
Example :-
Company has a 12-month planning horizon, and its initial
budget is from January 2016 to December 2016.
After January 2016 period is complete, it now added a new
month budget for January 2017.
So that it still has a 12-month planning horizon that now
extends from February 2016 to January 2017.
Criticism :-
Time consuming
Assume the earlier periods are still valid

21. Flexible Budgets
Definition :-
a budget that adjusts or flexes for changes in the
volume of activity. The flexible budget is more
sophisticated and useful than a static budget, which
remains at one amount regardless of the volume
Example :-
Cost of electricity for a factory are approximately $10 per machine
hour (MH) and its fixed costs is $40,000 per month. Typically, the
production equipment operates between 4,000 and 7,000 hours
per month.
The flexible budget for each month would be $40,000 + $10 /MH.
Advantage:-
More sophisticated and useful than a static budget, which remains
at one amount regardless of the volume

22. Zero base budgeting (ZBB)
Definition :-
a rigorous budgeting process that requires every
dollar of every expense to be justified even if the
expense has been occurring for many years.
Example :-
A company in last 5 years spent $10,000 per year for office rental.
Under ZBB assumes that nothing was spent previously.
As a result, the office activities must be reviewed and justified
before any amount can be included in the budget.
Advantage:-
1) result in significant cost savings
2) reduce unnecessary expenses.