Week 8 Flashcards
Define the benefits of planning in terms of budgeting
To achieve goals and objectives an organisation must plan a long-term course of action.
These goals and objectives are set out in the company’s strategy
Strategy
- Decide what objectives need to be met to achieve the company’s long-term goals
- What are the best ways of achieving these objectives?
- What resources are needed?
The budgeting process quantifies the strategy
Identify the steps of a basic planning process
- Identify the business objectives
- Consider options
- Evaluate options and make a selection
- Prepare Business plans (long-term budgets)
- Prepare budgets (short term)
Identify the steps of a detailed planning process and what two stages they occur in.
Stage 1: Long-term planning process
- Identify objectives
- Identify potential courses of actions (i.e. strategies)
- Evaluate alternative strategic options
- Select alternative courses of action
Stage 2: Annual budgeting process
- Implement long-term plan in the form of the annual budget
- Monitor actual results
- Respond to divergencies from plan
Why are plans divided into long and short term?
To achieve goals and objectives an organisation must plan a long-term course of action.
In the short-term, goals and objectives are often operationalised by the setting of targets and so the organisation must plan a course of action to meet those targets.
Why should a firm budget?
To determine income & expenditure
To assist in policy making and planning
To authorise the future expenditure
To provide the basis for controlling income and expenditure
To set a standard for evaluating the performance
To motivate managers and employees
To co-ordinate the activities of multi-purpose organisations
Identify and explain the stages of a budgeting process
- Communication of objectives: Budgets should be prepared in line with overall organisational objectives
- Identification of the principal budget factor: - A limiting factor on the whole organisation - e.g. materials, sales, machine time (usually sales volume). - Whatever the limiting factor, the budget must be geared to that
- Preparation of functional budgets: Budgets prepared within each department or function within the business (e.g. sales, production, advertising)
- Challenge and coordination of budgets: - Prepared by subordinates for approval by superiors who may challenge targets or assumptions in budgets - Will also help ensure various functions are coordinated
- Preparation of master budget: - A statement of the plans of an organisation in the form of projected financial statements - Functional budgets feed into the master budget
- On-going review of budgets: Ongoing comparison of actual performance against budgeted
Define a sales budget
Usually, the first budget to be prepared as it tends to determine the overall level of activity for the forthcoming period
Details the expected sales for the budget period
Depending on the organisation, sales can be managed on a geographical basis, on a product type basis, on a location by product basis or some other basis.
Can be displayed for the year as a whole or can be analysed by quarter/month
Define a marketing budget
Estimate of costs needed to promote the business:
Advertising costs
Website development
Public relations
Staffing
Utilisation of office space
Define an Administrative budget
Details cost estimates for the cost of running a company that is not tied to producing a product or service
Payroll
Consulting
Legal fees
Depreciation
Rent
Insurance
Define a Production budget
Once the sales budget is known, production can then be planned. To link sales and production:
Production =sales + closing inventory – opening inventory
Example: If sales are budgeted to be 147,000 units, opening inventory 10,000 units and closing inventory 4,500 units, the budgeted production in units is as follows:
- Production = sales + closing inv – opening inv
- Production = 147,000 + 4,500 – 10,000
- Production = 141,500
Fill in the blanks for a budgeting chart with the different types of budget.
- Sales budget
- Marketing budget
- Admin budget
- Production budget
- Direct labour budget
- Cash budget
- manufacturing overhead budget
- Ending inventory budget
- Direct materials budget
Define a direct materials budget
Once you have identified the budgeted production level, you can determine the amount of materials you are going to use:
Example: Suppose budgeted production is 100 units
Each unit requires 3kg of raw materials
Thus 3 x 10 = 300kg = materials to be used
Once estimated materials usage has been calculated, the business can decide what raw materials it will have to purchase.
Thus, the number of materials needed to be purchased can be calculated
material to be purchased = material to be used + units in closing inventory – units in opening inventory
Example: If material usage is budgeted to be 71,000 units, opening inventory 1,000 units and closing inventory 10,500 units, the budgeted purchases in units is:
- Purchases = usage + closing inventory – opening inventory
- Purchases = 71,000 + 10,500 – 1,000
- Purchases = 80,500
Define a direct labour budget
The direct labor budget is used to calculate the number of labor hours that will be needed to produce the units itemized in the production budget. A more complex direct labor budget will calculate not only the total number of hours needed, but will also break down this information by labor category. The direct labor budget is useful for anticipating the number of employees who will be needed to staff the manufacturing area throughout the budget period. This allows management to anticipate hiring needs, as well as when to schedule overtime, and when layoffs are likely. The budget provides information at an aggregate level, and so is not typically used for specific hiring and lay off requirements. Details the expected hours of labour required Example: Suppose for Jan, Feb and March 2015, a firm estimated that it will produce 140, 180 and 210 units, respectively. 2 hours of labour is required for each unit at a cost of €10 per hour
Define the Manufacturing overhead budget
Budget for all other manufacturing costs e.g. factory heating & lighting, supervisors salary, factory rent
Define Cash budgets
May be drawn up on a quarterly, monthly, weekly or daily basis
To be useful, cash budgets should be regularly updated as a result of comparing actual estimated figures with actual results
Significant variances or deviations from estimated figures must always be investigated
It is essential for the firm to plan its cash flows carefully. Detailed cash planning can see exactly how cash levels will vary from one time period to the next
The principle behind cash budgets:
Take the cash balance at the start of a period and add the receipts and deduct the payments you expect for that period. The result is the estimated balance as at the end of that period.
The general rule when drawing up a cash budget is as follows: See attached image
When drawing up cash budgets, pay careful attention to when cash inflows and outflows occur as most transactions tend to take place on credit terms and there may be a time difference between when the transaction occurs and when the cash is received or paid
