Chapter 9 Budgeting systems Copyright ª 2006 McGraw­Hill Australia Pty Ltd 9­ 1 Strategic planning and budgeting systems • A budget – Adetailed plan summarising the financial consequences of an organisation’s operating activities for a future time period – Afinancial model that summarises future operations – Acore component of an organisation’s planning and control system – Acritical way of providing information to managers to help them manage resources and create value – Often has a time horizon of a year continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-2 Strategic planning and budgeting systems • Strategic planning is long-term planning usually undertaken by senior managers – Decisions about corporate strategy the type of businesses and markets that the organisation operates in how those businesses and activities will be financed – Decisions about business strategy How each of the businesses within the larger organisation competes within its chosen market – Atime horizon of three or more years – Formulated in broad terms in far less detail than budgets – Has implications for the formulation of budgets Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-3 Purposes of budgeting • Planning – To quantify a plan of action • Facilitating communication and coordination – Provides a formal mechanism to enable communication and coordination • Allocating resources – Provides a forum for evaluating alternative uses for resources among competing users continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-4 Purposes of budgeting • Controlling profit and operations – The budget can serve as a benchmark to allow comparison with actual results • Evaluating performance and providing incentives – Comparing actual result with budget provides a basis for evaluation of the performance of individuals, departments or the entire company – This can be linked to formal incentives, such as cash rewards or profit sharing Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-5 Responsibility accounting • Budgets are prepared along responsibility accounting lines • Responsibility accounting – The practice of holding managers responsible for the activities and performance of their area of the business • Managers of various departments – Develop their own budget estimates for cost, revenue or profits of their area of responsibility – They are then held responsible for meeting those budget targets continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-6 Responsibility accounting • Responsibility centres – A sub-unit of the organisation whose manager is held accountable for the sub-unit’s activities and performance – Cost centres, revenue centres, profit centre and investment centre – The type of responsibility centre determines the types of financial results for which a manager is held accountable Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-7 The annual budget: a planning tool • The annual budget (or master budget) is a comprehensive set of budgets that covers all aspects of a firm’s activities – Consists of several interdependent budgets – Financial budgets – Operating budgets – In large organisations, comprehensive process and formal budgeting procedures may be used, taking several months – In smaller organisations, less formal and detailed processes are in place continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-8 The annual budget: a planning tool • Operating budgets – sales budget – various cost budgets • The financial budgets – budgeted income statement – the budgeted balance sheet – cash budgets – capital expenditure budget continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-9 The annual budget: a planning tool continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-10 The annual budget: a planning tool • Budgets are developed for specific time periods • Rolling budgets (or continuous budgets) are continually updated by periodically adding a new time period, such as a quarter, and dropping the period just completed • Budgets will vary in their level of detail, often dependent on the size and complexity of the organisation Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 9-11 Strategic plans and budget assumptions • Budgets must commence with an understanding of the strategy of the organisation • The budget must be formulated in light of the strategic plans • The budget is based on various assumptions about the competitive environment and the economic environment for the coming year