Lecture Budgeting - Chapter 1: Budgeting fundamentals. In this chapter, you will learn: Describe budgeting and its potential benefits, define the master budget and discuss its components, illustrate the development of the operating budget, demonstrate the creation of the cash flow and capital use budgets, discuss the preparation of pro forma financial statements. | Available NOW at your campus bookstore! This is the prescribed textbook for your course. 1- Chapter 1 Budgeting fundamentals 1- Budgeting fundamentals Budgeting is the process used to develop: A formal written statement Of managements plans for the future Expressed in financial terms 1- Types of plans Long term: 5 to 10 years Medium term: 1 to 5 years Short term: up to 1 year 1- The planning cycle Comparison of actual results to budget variance Budgets Performance Budgets are the mechanism by which management control of an organisation becomes possible. Revise Plan Action Results Remedy 1- Comparison of actual results to budget gives variance Benefits of budgets 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 . | Available NOW at your campus bookstore! This is the prescribed textbook for your course. 1- Chapter 1 Budgeting fundamentals 1- Budgeting fundamentals Budgeting is the process used to develop: A formal written statement Of managements plans for the future Expressed in financial terms 1- Types of plans Long term: 5 to 10 years Medium term: 1 to 5 years Short term: up to 1 year 1- The planning cycle Comparison of actual results to budget variance Budgets Performance Budgets are the mechanism by which management control of an organisation becomes possible. Revise Plan Action Results Remedy 1- Comparison of actual results to budget gives variance Benefits of budgets 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. 1- 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. 1- 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. 1- 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. 1- Budget processes Zero-based budgeting: sets the initial figures for each activity to zero. Period budgets: developed for a specific period of time, . a month. Rolling (continuous) budgets: are continually updated by periodically .
