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BUDGETING
BUS106
ACCOUNTING FOR BUSINESS
DR ANDRONIKI TRIANTAFYLLI
QUEEN MARY UNIVERSITY OF LONDON
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LEARNING OUTCOMES
You should be able to:
Define a budget and show how budgets, strategic
objectives and strategic plans are related
Explain the budgeting process and the interlinking of the
various budgets within the business
Indicate the uses of budgeting and construct various budgets,
including the cash budget, from relevant data
Discuss the criticisms that are made of budgeting
McLaney and Atrill,
Accounting: An Introduction,
9th edition, Pearson Ed.
Readings
Chapter 12 (EXCLUDING:
ACTIVITY BASED
BUDGETING)
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4
The planning
and control
process
Establish mission and objectives
Undertake a position analysis
Identify and assess strategic options
Select strategic options and formulate long-term
(strategic) plans
Prepare budgets
Perform and collect information on actual
performance
Identify variances between planned (budgeted) and
actual performance
Respond to variances and exercise control
Revise plans (and budgets) if necessary
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Budgets are seen as having five main benefits to the
business
Promote forwardthinking and
identification of
short-term problems
Motivate
managers
to better
performance
Budgets
Help co-ordinate the
various sections of
the business
Provide a basis for
a system of control
Provide a system
of authorisation
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Steps in the budget-setting process
Step 1
Establish responsibility for the budget-setting process
Step 2
Communicate budget guidelines to relevant managers
Step 3
Identify the key or limiting factor
Step 4
Prepare the budget for the area of the limiting factor
Step 5
Prepare draft budgets for all other areas
Step 6
Review and coordinate budgets
Step 7
Prepare the master budgets
Step 8
Communicate the budgets to all interested parties
Step 9
Monitor actual performance relative to the budget
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Accuracy of revenue budgets
>50% over plan
2%
26–50% over plan
2%
12%
11–25% over plan
27%
1–10% over plan
11%
Came in on plan
28%
1–10% under plan
10%
11–25% under plan
3%
>25% under plan
5%
Don’t know
0
5
10
15
20
25
(%) 30
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An example of a budget – the cash budget
Jan
Feb
Mar
Apr
May
June
£000
£000
£000
£000
£000
£000
60
52
55
55
60
55
Payables
(30)
(30)
(31)
(26)
(35)
(31)
Salaries and wages
(10)
(10)
(10)
(10)
(10)
Receipts
Receivables
Payments
Electricity
(10)
(14)
Other overheads
(2)
(2)
Van purchase
(9)
(2)
(2)
(2)
(2)
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Total payments
(42)
(42)
(68)
(38)
(47)
(52)
Cash surplus
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10
(13)
17
13
3
Opening balance
12
30
40
27
44
57
Cash balance
30
27
44
57
60
40
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An example of the inventories budget
Jan £ Feb £ Mar £ Apr £ May June
000
000
000
000 £000 £000
Opening balance
30
30
30
25
25
25
Purchases
30
31
26
35
31
32
Inventories used
(30)
(31)
(31)
(35)
(31)
(32)
Closing balance
30
30
25
25
25
25
1
0
Zero-base budgeting (ZBB)
Encourages a more questioning
approach
But may
Be costly to implement
Make employees feel
threatened
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1
The use of incremental budgeting
%
Small
Medium
Large
Very large
< 50
employees
50–250
employees
251–10,000
employees
> 10,000
employees
60
45
30
15
0
Source: ‘Management accounting tools for today and tomorrow’, CIMA, 2017, p.15.
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2
The use of zero-base budgeting
%
Small
Medium
Large
Very large
< 50
employees
50–250
employees
251–10,000
employees
> 10,000
employees
50
35
20
5
0
Source: ‘Management accounting tools for today and tomorrow’, CIMA, 2017 p.15.
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3
Criticisms of budgeting
Cannot deal with the fast-changing environment
Focuses on short-term financial targets
Concentrates power in hands of senior managers
Takes up too much management time
Based around business functions rather than business
processes
Encourages incremental thinking
Protects costs rather than lower costs
Promotes sharp practices among managers
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4
Traditional versus ‘beyond budgeting’ planning model
‘Adaptive’
‘Fixed’
Strategy
Goals
Annual budget
‘Keeping
on track’
Control
(Versus budget)
Adaptive processes
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5
Traditional versus ‘beyond budgeting’ planning model (continued)
‘Centralised’
Source: Beyond budgeting, www.bbrt.org.
‘Devolved’
1
6
The use of the ‘beyond budgeting’ philosophy
%
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Small
Medium
Large
Very large
< 50
employees
50–250
employees
251–10,000
employees
> 10,000
employees
5
4
3
2
1
0
Source: ‘Management accounting tools for today and tomorrow’, CIMA, 2017, p. 15.
The role of budgeting
SUMMARY
Preparation of budgets:
Cash budgets/ Production
budgets
Developments in budgeting
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• Do you have any questions?
• Please e-mail me at: a.triantafylli@qmul.ac.uk
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