Budget Process Assignment
Added on 2020-11-02
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Module 9- BudgetingReview Question Page 492 Question 1Discuss the stages and parties typically involved in the budget process.Budgets serve two primary purposes: as a form of feedforward control (or planning) and in providing feedback control (or performance monitoring, evaluation and corrective action). Thus, most organisations engage in some form of budgetary process. Senior and middle-level managers typically have some form of budget responsibility whether it be over cost, revenues, profits and/orassets.Whilst the extent and complexity of a budget process is largely influenced by the type and size of the organisation, there are stages that are common to most. The following stages areencountered in most budget processes:•Setting of budget-period goals consistent with the organisation’sstrategy.As the budget is the short-term expression of an organisation’s strategies, the budget must be congruent with those strategies. Thus, assumptions about the organisation’s business environment and organisational capabilities used in the preparation of past budgets must be reviewed and updated where required.Organisational stakeholders involved: Senior management•Evaluate past organisational performance for the purposes of identifying areasfor improvement and/or futuregrowthThe identification and evaluation of gaps between planned and actual performance, provides opportunities for taking action in a new budget period. Attention may focus on addressing and resolving operational bottlenecks that inhibit the growth in organisational revenue, ensuring that the drivers of organisational costs are well understood and managed and/or that sufficient funding is secured so as to capitalise on future growth opportunities as they emerge and are developed.Organisational stakeholders involved: Senior and middle-level management•Translation of budgetary aspirations into operationaltermsFor budgetary aspirations to be realised, they must be translated into an operational form and have functional responsibilities assigned and interrelationships between functions identified and described. Proposed operational decisions carry with them implications about the allocation of resources among organisational functions and define the nature and extent of functional relationships.Organisational stakeholders involved: Senior and middle-level management•Develop thebudgetBased on the assumption that the organisation has previously used a budget package, budget instructions will need to be refreshed along with an updating of current year-to-date budget numbers, such as income and costs. Where past performance issues have been identified (e.g. operational bottlenecks, ineffective cost management or funding constraints), the budget package will indicate how they are to be addressed in the coming budget period(s).As the generation of revenue is the trigger for most organisational activities, a forecast of revenue needs to be developed, vetted and confirmed as a feasible target. Once a sales forecast is agreed upon, it is then possible for managers to develop their own budgets.
Apart from developing operational (or annual budget) numbers relevant to their area of responsibility, managers may also need to bid for funds to use for capital-related purposes (e.g. acquisition of plant and equipment).Once departmental budgets have been submitted, they will be checked for errors and theirconsistency with organisational goals and strategic intentions confirmed. Where required, further revisions to individual departmental budgets may be necessary before they are incorporated into the master budget.Once the master budget has been prepared, it will need to be reviewed by seniormanagement and eventually approved. However, there may be a series of budgetiterations as senior and middle-level managers negotiate over the contents of the masterand individual departmental budgets before they are approved.Organisational stakeholders involved: Senior and middle-level managers of functionalareas such as sales and marketing, procurement and warehousing, production,accounting and finance and so on.•Executing the approved budgetOnce the budget has been finalised, its contents need to be communicated to those managers who possess some form of budget responsibility. Furthermore, the budget willneed to be uploaded to the accounting information system (AIS). This facilitates the comparison of actual to budget performance and will generate reports for the attention and action of managers who hold budget responsibilities.Organisational stakeholders involved: Senior and middle-level managers of functional areas such as sales and marketing, procurement and warehousing, production, accounting and finance and so on.Question 2Explain how budgets mean different things to different people within an organisation, giving reasons.Often budgets will mean different things to different people in an organisation. For example,management may introduce budgets primarily for the purpose of enhancing organisational planning. However, the introduction of the budget may be viewed by negatively by lower-level managers who fear that the budgetary controls imposed on them will limit their autonomy and subject them to greater levels of scrutiny and accountability.Question 4Discuss the interrelationships between the sales budget and the production budget in a manufacturing organisation.In a manufacturing firm, it is extremely important that the linkages between the sales and theproduction functions are well coordinated. The main reason for this is that the production cycle, being the time taken to produce goods for sale, can be relatively long. For example, if a manufacturing firm was to amend its sales budget halfway through a budget period, production personnel need to know this so they can plan and take such actions as to ensure the products are available for sale as per the amended sales plan. This may involve ordering additional raw materials inventories, amending production schedules and possibly introducing overtime or shift working, all of which may take time to plan for and then actuallyimplement.
Problem 10The owner of a business that sells fitness equipment for use in homes has requested a forecastof sales from her two salespeople for the next three months. She is trying to prepare a cash budget for the first quarter of next financial year. The two sales representatives provide the following sales forecasts:Joe’s estimates $Debbie’s estimates $July10000090000August150000200000September170000300000October160000400000The following details are available:Inventory costs average 70% of sales. Purchases are enough to cover the next month’ssales and all purchases are paid in the month of purchase.All sales are on account. Most customers pay the total within one month of the sale. Accounts receivable as at 30 June are forecast to be $80000.Fixed expenses are $30000 per month and variable expenses are 1% of sales. All operating expenses are paid in the month in which they are incurred. ASSUME BOTHJOE AND DEBBIE HAVE THESE EXPENSES EACH MONTH.The company is expected to have cash in bank of $5000 as at 1 July. The owner wantsa minimum balance of cash on hand of $5000 at the end of every month commencing from 1 July.1Joe and Debbie’s cashbudgets.aCashbudgetsCash budget for Julyto SeptemberJoe’s estimatesJulyAugustSeptemberCash inflowsReceivables collectionsJune credit sales$80 000July credit sales$100 000August credit sales$150 000Cash outflowsCost of inventory purchasedPurchases for August’s sales:$150 000 x 70%($105 000)Purchases for September’s sales:
$170 000 x 70%($119 000)Purchases for October’s sales:$160 000 x 70%($112 000)Operating expensesFixed operating expenses($30 000)($30 000)($30 000)Variable operating expenses:July variable expenses$100 000 x 1%($1 000)August variable expenses$150 000 x 1%($1 500)September variable expenses$170 000 x 1%($1 700)Total cash outflows($136 000)($150 500)($143 700)Net cash flow($56 000)($50 500)$6 300Cash balance brought forward$5 000$5000 5000borrowing5600050500 0Cash balance carried forward 5000 5000 5000Cash budget for July to SeptemberDebbie’s estimatesJulyAugustSeptemberCash inflowsReceivables collectionsJune credit sales$80 000July credit sales$90 000August credit sales$200 000Cash outflowsCost of inventory purchasedPurchases for August’s sales:$200 000 x 70%($140 000)Purchases for September’s sales:$300 000 x 70%($210 000)
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