This is the prescribed textbook for your course.
Available NOW at your campus bookstore!
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-1
Chapter 1
Budgeting fundamentals
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-2
Budgeting fundamentals
 Budgeting is the process used to develop:
 A formal written statement
 Of managements plans for the future
 Expressed in financial terms
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-3
Types of plans
 Long term:
5 to 10 years
 Medium term:
1 to 5 years
 Short term:
up to 1 year
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-4
The planning cycle
Budgets are the mechanism by which
management control of an organisation
becomes possible.
Budgets
Plan
Revise
Performance
Action
Results
Remedy
Comparison of actual results to budget
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
variance
1-5
Benefits of budgets
1.
2.
3.
4.
5.
6.
Forces managers to do planning.
Realistic performance targets.
Basis for controlling what happens within the
organisation.
Helps coordinate the activities of the various
centres that make up the business.
Communication – managers exchange
information on ideas, etc.
Motivating tool – if the process involves
staff.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-6
Limitations of budgets





Only estimates, not statements of facts.
No substitute for sound management
practices.
Need to be amended if circumstances
change.
Preparation does not guarantee success.
Aspects of people’s behaviour may
undermine the value of the process.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-7
Budget classification
 Static (fixed) budgets: prepared for one
level of activity, usually around the
forecasts made for sales.
 Flexible budgets: a series of fixed budgets
set to different levels of sales activity within
which the organisation may operate.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-8
Cost/volume relationships
 Fixed costs: in total remain the same
for a period of time and over a particular
range of activity.
 Variable costs: in total tend to change
as the level of activity changes.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-9
Budget processes
 Zero-based budgeting: sets the initial
figures for each activity to zero.
 Period budgets: developed for a specific
period of time, e.g. a month.
 Rolling (continuous) budgets: are
continually updated by periodically adding a
new incremental time period and dropping
the period just completed.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-10
Types of budgets
 Revenue budgets: estimates of the income
of an organisation from the sale of goods
and/or provision of services for a specific
period.
 Operating budgets: estimate activities that
will affect profit.
 Budgeted financial statements: show the
estimated results and projected financial
position of a business. That is budgeted
revenue, balance sheet and statement of
cash flows.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-11
Master budget
A combination of all the budgets of an
organisation.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-12
Master budget
Merchandising
firm
Professional
services
Manufacturing
firm
Sales budget
Fees or fees &
sales budget
Sales budget
Purchases
budget
Professional &
support labour
budget
Cost of
production
budget
Cost of goods
sold budget
Cost of supplies
used
Cost of goods
sold budget
Other operating Other operating Other operating
expense budgets expense budgets expense budgets
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-13
Master budget
 Irrespective of the type of organisation, the
following budgets will be part of the master
budget:
 Statement of financial performance
[revenue budget]
 Statement of financial position [balance
sheet]
 Statement of cash flow
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
1-14