Accounting Business Reporting for Decision Making

398 Accounting: Business Reporting for Decision Making

9.6 Budgets: planning and control

LEARNING OBJECTIVE 9.6 Explain the use of budgeting in planning and control.

The preparation of the cash budget is an important part of the planning process. Once prepared, the cash

budget can be used for monitoring cash performance, which is sometimes referred to as being part of the

control process. A cash budget prepared on a month-by-month basis is much more useful for this pur-

pose than one prepared on a quarterly or yearly basis.

As each month passes, the actual cash numbers can be compared to the budget numbers. The difference

between the two is called a variance. A variance report for Coconut Plantations Pty Ltd is shown in illus-

trative example 9.12, with ‘u’ representing unfavourable and ‘f’ favourable variances. This example indi-

cates that there are problems with the entity’s estimate of its operating expenses with the majority of the

actual expenses resulting in an unfavourable variance compared to budgeted amounts. The other concern

for the entity is the significantly lower value of actual cash received from its customers. The current budget

estimates will need to be revised in the light of these changed conditions. It will also impact upon possible

investment options as the ‘surplus’ cash identified in the original budget may not now eventuate.

ILLUSTRATIVE EXAMPLE 9.12

Variance report

Step 5: Compare actual performance against the budget.

Cash budget variance report for month ending 31 January 2019

January budget January actual Variance

Cash receipts

Receipts from accounts receivable $ 285 300 $ 208 200 $ 77 100 (u)

Total cash receipts 285 300 208 200 77 100 (u)

Cash payments

Payments to suppliers

Direct labour

Manufacturing overhead

Warehouse and distribution expenses

Sales and marketing expenses

Administrative expenses

$ 120 000

20 000

6 500

4 000

5 600

3 250

$ 114 500

22 550

7 800

4 400

5 100

3 500

$ 5 500 (f)

2 550 (u)

1 300 (u)

400 (u)

500 (f)

250 (u)

Total cash payments 159 350 157 850 1 500 (f)

Net cash flow 125 950 50 350 75 600 (u)

Bank balance at start of month 59 310 59 310

Bank balance at end of month $ 185 260 $ 109 660 $75 600 (u)

Actual receipts from accounts receivable is a reflection of the fees, which must be lower than expected unless there has

been a change in the collections pattern.

Step 6: Make any adjustments to budget in light of any variances identified.

This might result in a reconsideration of the budget numbers for the remaining budget period.

Remember that the variance report is an example of the control process, the results of which may assist

with further planning.

Improving cash flow

The cash budget identifies periods of expected cash shortages. In such situations, corrective action can

restore the cash position.