Topic 12 - Budgeting

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This article is a topic within the subject Accounting 1B.

Contents

Required Reading

Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning, pp. Management Accounting, Supplementary Text, Trotman.

Budgeting

Budgets are formal documents that quantify an organisation’s plan for achieving its goals & are expressed physical units or financial terms. Budgets translate goals & strategies into operational terms. Benefits include; improved decision making.

  • Planning – setting targets & goals (vital)
  • Communication & Coordination – a tangible means of communication & coordination across different divisions
    • Formally communicate plans of the firm to each employee + their roles & responsibilities
  • Control – evaluate performance against a benchmark, so corrective action can be taken, motivate & encourage

A Master Budget is a set of interrelated budgets (operating - cash - financial statement budgets) combining all divisions & activities (sales, production). A continuous budget is a rolling 12 month plan (each month a new month is added). A Static budget is a budget for a particular level of activity. A Flexible budget computes expected costs for a range of activity.

Operating Budgets

Operating Budgets involve sales, production & finished goods inventories.

[1]

ACCT1511121.jpg

Behavioural Aspects Budgeting

Budget preparation beneficially promotes goal congruence (between managers & employees - incentives) & should be participative (total corporate effort & to provide a sense of responsibility – individuals setting their own standards will work harder to achieve them – but may lead to slack + over/underestimation in standard setting + pseudo participation), achievable, flexible, provide feedback & have incentives.

Budgets should define responsibilities & accountability which should be dependent on controllability (what the person can/has the power to control).

Positive behaviour occurs when the individual manager goals are aligned with the corporation & has drive to achieve them.

Retail Organisation - Budgeting

Sales Budget, Purchases Budget (similar to production budget), COGS budget & Other Expenses Budget

Manufacturing Organisation - Power-Pooch Case Study

[2]

  1. Forecasted Sales – 115/Jan, 140/Feb, 150/Mar, 110/Apr - Selling Price $1,100
  2. Closing Inventory = Budgeted Sales Amount for Next Month
    • Currently have 75 units in FG
    • Each FG unit requires $368 of RM & 5 hours of DL = 5*35 = $175
    • Monthly ending balance of $100 RM & No Ending WIP
  3. Overhead
    • Estimated Variable Overhead = $55/unit
    • Fixed Overhead = $38,000
    • Direct Labour Hours is the Cost Driver
  4. Sales Commission is 2% of sales & fixed SG&A = $2500/month

ACCT1511122.jpg

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End

This is the end of this topic. Click Accounting 1B to go back to the main subject page for Accounting 1B

References

Textbook refers to Trotman, K. and Gibbins, M. (2009) Financial Accounting: An Integrated Approach, 4th edition, Nelson Thomson Learning

  1. ASB, UNSW
  2. ASB, UNSW
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