Accounting Business Reporting for Decision Making

CHAPTER 9 Budgeting 403

Summary of learning objectives

9.1 Understand the importance of planning and budgeting.

Planning is needed to ensure what that happens today supports the future direction of the entity.

Strategic planning relates to long-term planning while budgeting focuses on the short term (usually

one year). The planning process evaluates whether the strategy leads to profits, thereby creating

value.

9.2 Explain what a budget is and describe the key steps in the budgeting process.

A budget is a set of short-term goals and targets in financial terms. The key steps in the budgeting

process are a consideration of past performance, an assessment of the expected trading and oper-

ating conditions, preparation of initial budget estimates, adjustments to estimates based on com-

munication with and feedback from managers, preparation of the budgeted financial statements and

any sub-budgets, monitoring of actual performance against the budget over the budget period, and,

where necessary, adjusting the budget during the budget period.

9.3 Explain the different types of budgets.

Commonly prepared budgets include the sales or fees budget, the operating expenses budget, the

production and inventory budgets, the purchases budget, the budgeted statement of profit or loss, the

cash budget, the budgeted balance sheet and the capital budget.

9.4 Outline the components of a master budget and prepare a master budget.

A master budget may be viewed as a set of interrelated budgets for a future period. The master

budget is commonly classified into a set of operating budgets and financial budgets.

9.5 Prepare a schedule of receipts from accounts receivable and a cash budget.

A schedule of receipts from accounts receivable is often necessary when an entity provides goods or

services on credit. The schedule helps to calculate the cash expected to be received from accounts

receivable in the future, based on the credit sales or fees and the normal pattern of receipts. This

schedule is an important component of the cash budget, which focuses on expected future cash

receipts and payments, and the expected cash levels at the end of each month, quarter or year.

9.6 Explain the use of budgeting in planning and control.

The planning aspect relates to operationalising plans and developing budget estimates and targets.

The control aspect is evident in the comparison of budget with actual performance.

9.7 Discuss the issues associated with the behavioural aspects of budgeting.

The behavioural aspects of budgeting relate to the human involvement in decision making. They

include the style of budgeting process used, such as authoritarian or participative; attempts by senior

management to set targets that are too difficult to achieve; and attempts by unit managers to set

targets that are too low.

Key terms

Authoritarian style of budgeting Senior management decides on targets and budgets for unit

managers without their input or participation.

Budget Quantitative expression of an entity’s plans.

Budgetary slack Budget targets that could be more easily achievable than otherwise might be the case.

Budgeting Budgeting is a process that focuses on the short term, commonly one year, and results in

the production of budgets that set the financial framework for that period.

Budgeting process Process involving evaluating past performance, assessing and incorporating

expectations, preparing estimates, and monitoring and adjusting budgets as required by changing

circumstances.