Chapter 9

1. Chapter 9 Budgeting: profit planning and control

2. Strategic planning and budgeting systems • Budget - a detailed financial plan summarising the consequences of an organisation’s operating activities for a specified period of time • Strategic planning - the long-term planning usually undertaken by senior managers Cont.

3. Strategic planning and budgeting systems • Corporate strategy - decisions about the types of businesses to operate in, which businesses to acquire and divest, and how best to structure and finance the organisation • Business (or competitive) strategy - the way a business competes within its chosen market

4. Purposes of budgeting • Planning • Facilitating communication and co-ordination • Allocating resources • Controlling profit and operations • Evaluating performance and providing incentives

5. Responsibility accounting • Holding mangers responsible for the activities and performance of their area of the business • Responsibility centre - a subunit in an organisation where the manager is held accountable for the subunit’s activities

6. The annual budget: a planning tool • Annual financial budget - a comprehensive set of budgets that cover all aspects of a firm’s activities • operating budget • financial budget • Rolling (or continuous) budget - budgets that are continually updated by adding a new time period (such as a quarter) and dropping the period just completed

7. Operating budgets • Sales budget - estimated sales units and revenues from the organisation’s products • Cost budgets - detail the cost of operations needed to support forecast sales demand • Production budget - number of production units to be manufactured to meet sales and satisfy inventory requirements Cont.

8. Operating budgets • In retail and wholesale businesses • purchases budget - used to determine the quantity and cost of goods that need to be purchased during the budget year • In service firms • develop a set of budgets that show how the demand for those services will be met

9. Financial budgets • Cash budget - details the expected cash receipts and planned cash payments for the budget period • Budgeted profit and loss statement - shows the expected revenues and planned expenses of the firm during the budget period • Budgeted balance sheet - outlines the expected financial position of the firm at the end of the budget period

10. Budget administration • Responsibility of a senior accounting manager who gathers and collates the budget data and prepares the budget • Budget manual • Budget committee has responsibility for • determining budget policy • reviewing and approving budgets

11. Behavioural consequences of budgeting • Human reactions to the budgeting process • participative budgeting • budgetary slack • budget difficulty

12. Participative budgeting • Managers who are held accountable for budget performance help develop their own budget estimates • Top-down budgeting vs bottom-up budgeting • Employee empowerment • giving employees authority to develop their own budgets and targets, and manage their own work

13. Budgetary slack: padding the budget • Padding the budget - underestimating revenues or overestimating costs so that budget targets are easier to achieve • Budgetary slack - the difference between the revenue or cost projection that a person provides and a realistic estimate of that revenue or cost Cont.

14. Budgetary slack: padding the budget • Why? • performance will look better if you can ‘beat the budget’ • cope with uncertainty • compete for limited resources • How to minimise problems? • avoid relying on the budget as a negative evaluative tool • provide incentives to achieve budget and provide accurate projections

15. Budget difficulty • Optimum performance budget is where the budget provides sufficient challenge and stretch, but is not too difficult • Optimum performance budgets may not be suitable for accurate forecasting

16. Zero base budgeting • All activities in the organisation are initially set to zero. • Managers must justify each activity in terms of continued usefulness to the business

17. Program budgeting • Requires various programs undertaken by the enterprise • be identified • objectives for each program • budgets for each program • Control through quantitative and qualitative performance measures that derive from the program

18. Financial planning models • Use mathematical relationships to allow managers to examine interactions between the various operational, financial and environmental events • Allows ‘what if’ questions • Availability of personal computers and spreadsheet software has made financial planning models more easily accessible

19. Exhibit 9.1

20. Exhibit 9.11