Managerial Accounting 30.11.20
Budgets and activity-based budgeting
Budgeting
o A financial planning and analysis system (FP&A system) that helps managers to assess
the company’s future and know if they are reaching their performance goals
o A complete FP&A system includes:
- Planning
- Measuring and recording results
- Evaluating performance
o The planning component of the FP&A system is called the master budget
- It is intended to help ensure that plans are consistent and yield a result that makes
sense for the organisation
- Should maximise the value of the firm
Budgets
o Budget: a detailed plan, expressed in quantitative terms, that specifies how resources will
be acquired and used during a given period of time
o It is management’s forecast of revenues, expenses or profits in a future time period
o Should be able to quantify the budget
Types of budget
o Master budget: covering all phases of a company’s operations
- Sales budget
- Production budget
- Direct material budget
- Direct labour budget
- Manufacturing overhead budget
- Selling, general and administrative budget
- Cash budgets (budgeted cash receipts)
- Budgeted financial statements
o Detail budget: about sales, production, materials etc…
Why are budgets important?
o Budget functions:
- Planning
- Facilitating communication and coordination across departments and teams
- Allocating limited resources to different functions
, Managerial Accounting 30.11.20
- Controlling operations by serving as a standard against which actual results can be
compared
- Evaluating performance
- Long range strategic plans outline what needs to be done to achieve goals and
objectives
Budget preparation
o Budgets are prepared for:
- Production, material acquisitions, labour use
- Overhead incurrence, selling & administrative expenses
- Cash flows and projected financial statements
o Financial planning models assist in the budgeting process
- They are a set of mathematical relationships that express interactions amount a firm’s
operational, financial and environmental events
o Computerised models can be run many times to explore carious what-if scenarios by
changing various assumptions to explore potential outcomes
Budgets and activity-based budgeting
Budgeting
o A financial planning and analysis system (FP&A system) that helps managers to assess
the company’s future and know if they are reaching their performance goals
o A complete FP&A system includes:
- Planning
- Measuring and recording results
- Evaluating performance
o The planning component of the FP&A system is called the master budget
- It is intended to help ensure that plans are consistent and yield a result that makes
sense for the organisation
- Should maximise the value of the firm
Budgets
o Budget: a detailed plan, expressed in quantitative terms, that specifies how resources will
be acquired and used during a given period of time
o It is management’s forecast of revenues, expenses or profits in a future time period
o Should be able to quantify the budget
Types of budget
o Master budget: covering all phases of a company’s operations
- Sales budget
- Production budget
- Direct material budget
- Direct labour budget
- Manufacturing overhead budget
- Selling, general and administrative budget
- Cash budgets (budgeted cash receipts)
- Budgeted financial statements
o Detail budget: about sales, production, materials etc…
Why are budgets important?
o Budget functions:
- Planning
- Facilitating communication and coordination across departments and teams
- Allocating limited resources to different functions
, Managerial Accounting 30.11.20
- Controlling operations by serving as a standard against which actual results can be
compared
- Evaluating performance
- Long range strategic plans outline what needs to be done to achieve goals and
objectives
Budget preparation
o Budgets are prepared for:
- Production, material acquisitions, labour use
- Overhead incurrence, selling & administrative expenses
- Cash flows and projected financial statements
o Financial planning models assist in the budgeting process
- They are a set of mathematical relationships that express interactions amount a firm’s
operational, financial and environmental events
o Computerised models can be run many times to explore carious what-if scenarios by
changing various assumptions to explore potential outcomes
