Analysis of Management

FIND A SOLUTION AT Academic Writers Bay

Analysis of Management
Accounting Information
Lecture: 03
Dr Anup Chowdhury
a.chowdhury@leedsbeckett.ac.uk
“Choose a job you love, and you will never have to work a day in your life.”
– Confucius
Objectives:
• Define a budget
• Advantages
• Approaches to budgeting
• How to prepare Budgets
• Fixed and flexible budgets
What is a Budget?
A budget is a financial
plan of action prepared
and approved prior to the
period to which it relates.
Budgets are seen as having five main
benefits to the business
Provide a
system of
authorisation
Budgets
Promote forwardthinking and
identification of
short-term
problems
Provide a basis
for a system of
control
Motivate
managers
to better
performance
Help co-ordinate
the various
sections of the
business
EFFECT OF BUDGET ON MOTIVATION
Level of Staff
Performance
Budget becoming
increasingly tight
Slack Tight
Staff performance in the absence of any budget
Actual staff performance
(Adapted from Hofstede)
The interrelationship of various budgets
Finished
inventories
budget
Production
budget
Raw materials
inventories
budget
Overheads
budget
Trade
receivables
budget
Trade
payables
budget
Capital
expenditure
budget
Raw
materials
purchases
budget
Sales
budget
Direct
labour
budget
Cash
budget
• Standard costing – based
on historic information –
what you would expect
the cost to be
• Ideal standard –
optimum efficiency
• Attainable standard –
more achievable
recognises limitations
and operational
conditions
Budget Preparations
Budgeting Process
Implementation
Formulate Corporate Objectives
Identify Limiting Factor
Formulate Secondary Objectives
Construct Resource Budgets
Calculate Budget Cost at Unit level
Submit for Review by Corporate Mgt
Consolidate into Master Budget
Approved by Corporate Mgt
Modify
Objectives
Corp Mgt may
modify any of
the inputs to the
Master Budget
An example of a budget – the cash budget
Jan
£000
Feb
£000
Mar
£000
Apr
£000
May
£000
June
£000
Receipts
Receivables
60
52
55
55
60
55
Payments
Payables
Salaries and wages
30 30 31 26 35 31
10 10 10 10 10 10
Electricity
14
9
Other overheads
2 2 2 2 2 2
Van purchase
11
Total payments
42
42
68
38
47
52
Cash surplus
18
10 (13) 17 13 3
Cash balance 30 40 27 44 57 60
Opening balance 12 30 40 27 44 57
An example of the inventories budget
Jan
£000
Feb
£000
Mar
£000
Apr
£000
May
£000
June
£000
Opening balance
30
30
30
25
25
25
Purchases
30
31
26
35
31
32
Inventories used
(30)
(31)
(31)
(35)
(31)
(32)
Closing balance
30
30
25
25
25
25
FLEXIBLE BUDGETING
• The process of adjusting the budget to various sales
levels is known as Flexible Budgeting
• Flexible Budgeting may also be used to calculate
budget profits at different sales volumes
• Using the figure from the original budget, we could
“flex” the budget for 80%, 90%, 110% and 120%.
• Helps to compare actual performance with budgeted
figures.
Calculate Flexed Budget
Original Per Flexed
Budget Unit Budget
Sales volume (units) 1,000 (std) 1,100
£ £
Sales Revenue 12,000 12 13,200 (1,100 x £12)
Variable Costs
Direct Materials 4,000 4
4,400
(1,100 x £4)
3,300
(1,100 x £3)
2,200
(1,100 x £2)
9,900
3,300
1,400
Direct Labour 3,000 3 Variable O/heads 2,000 2 Total Var Costs 9,000 Contribution 3,000 Fixed Overhead 1,400 Net Profit 1,600 1,900
Compare Flexed Budget To Actual Profit & Loss:
Original
Flexed
Budget
1,000
£
12,000
Budget Actual
1,100 1,100
£ £
13,200 13,200
Sales volume (units)
Sales Revenue
Variable Costs
Direct Materials
Direct Labour
Variable O/heads
Total Var Costs
4,000
3,000
2,000
4,400
3,300
2,200
4,500
3,600
2,200
9,000
9,900 10,300
Contribution
3,000
3,300
2,900
Fixed Overhead
1,400
1,400
1,200
Net Profit
1,600
1,900
1,700
Budget
Cost
Standard
Cost
Actual
Cost
VARIANCE ANALYSIS
• As part of controlling the business, it is necessary to identify why
the variances have occurred
• In the previous example, actual sales volume has deviated from
budget
• Therefore, Variances have occurred:
– Because actual sales volume is different from budget
– Due to some other unspecified reason
• As a starting point , it is necessary to identify how much of the
variance is due to volume changes
• This will be achieved by “flexing” the budget: that is recalculating
the budget by placing volume on an actual basis
Compare Flexed Budget To Actual Profit & Loss:
Original
Flexed
Budget
Budget Actual
1,100 1,100
£ £
Sales volume (units) 1,000
£
Sales Revenue
12,000 13,200 13,200
Variable Costs
Direct Materials
4,000 4,400
4,500
Direct Labour
Variable O/heads
Total Var Costs
3,000
3,300
3,600
2,000 2,200
2,200
9,000 9,900 10,300
Contribution
Fixed Overhead
3,000 3,300
1,400 1,400
2,900
1,200
Net Profit
1,600
1,900
1,700
Var
No
No
Nv
Nv
No
Nv
Nv
Pv
Nv
Budget
Cost
Standard
Cost
Actual
Cost
Zero-Based Budgeting
• Zero-based budgeting starts from a “zero base” and every
function within an organization is analysed for its needs
and costs.
• Budgets are then built around what is needed for the
upcoming period, regardless of whether the budget is
higher or lower than the previous one.
• In this method of budgeting all expenses must be justified
for each new period.
Summary
• A budget is a financial plan of action prepared and approved prior
to the period to which it relates
• Budgets are normally prepared using predetermined standard
costs and revenues
• Budgeting compels planning and is useful for control and
performance evaluation
• Cash budgets highlights periods of cash deficits or surplus so that
appropriate action can be taken
• Flexible Budgeting may also be used to calculate budget profits at
different sales volumes and enable us to calculate meaningful
variances
Thank you
And
Best of Luck with your Assignment

READ ALSO...   Business ethic | Accounting homework help
Order from Academic Writers Bay
Best Custom Essay Writing Services

QUALITY: 100% ORIGINAL PAPERNO PLAGIARISM – CUSTOM PAPER