CHAPTER 14
Budgeting
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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What Is Budgeting?
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Budgets
 A plan
 Expressed in monetary terms
 Covering a future time period
 Based on a defined level of activity
Continuous budgets
 Always a 12-month budget for the business
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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What Is Budgeting?
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Provides ability to:
Implement strategy by allocating resources in
line with strategic goals
Co-ordinate activities and assist in
communication between different parts of the
organization
Motivate managers to achieve targets
Provide a means to control activities
Evaluate managerial performance
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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The Budgeting Process
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The Budgeting Process
 Depends
on a number of factors
 Knowledge
of past performance
 Understanding of market trends, seasonal
factors, and competition
 Whether the business is a price leader or a
price follower
 Understanding the drivers of business costs
 Knowledge, skills, and time available for
budget preparation
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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Cash Forecasting
Purpose of the cash forecast
 Ensure that sufficient cash is available to
meet the level of activity planned by the
sales and production budgets
 Meet all of the other cash inflows and
outflows of the business
 There is a difference between the amount a
company reports as profit and the amount
reported as cash in a given accounting
period
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© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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Cash Forecasting Example
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Based upon the following budget, a cash forecast follows:
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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Cash Forecasting Example
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The company makes half of its sales in cash and half on
credit to business customers, who typically pay their accounts
in the month following the sales.
Credit sales in December to customers who will pay during
January amount to $3,500
Sales Receipts Budget
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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Cash Forecasting Example
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Company requires inventory equal to one month’s sales (at
cost) at the end of each month.
The inventory at the beginning of January is $4,000.
The sales and cost of sales estimated for July are $12,000
and $4,800, respectively
Purchases Budget
Cash Purchases Budget
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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Cash Forecasting Example
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Salaries and wages, selling and distribution costs, and rent
are all paid monthly
Electricity and telephone are paid twice a year, in March and
June
Annual insurance premium of $6,000 is paid in January
Capital expenditure of $2,500 to be paid in March
Income tax of $5,000 due in April
$3,000 of dividends due to be paid in June
Loan repayment of $1,000 due in February.
Opening bank balance is $2,500
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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Cash Forecasting Example
Cash Forecast
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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Budgeting Challenges
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Accuracy in Predictions
Motivational Problems
Limiting Nature of Budgets
Negative Reputation of Budgeting
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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COMPLETE P14.1 & P14.2
WALKTHROUGH P14.10
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 14
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