Budget+Summary


 * Types of planning**

• Strategic plan • Budgetary plan • Operational plan


 * The process involves:**

• A budget manual • A budget committee • A budget officer • A master budget

Purpose of budgets P Planning R Resource utilisation or responsibility accounting I Integration or coordination M Motivation E Evaluation


 * A cash-flow forecast** is an estimate of when and how much money will be received and paid out of a business. Cash flow reporting is normally on a month-by-month basis, typically for one financial year.

Note: Cash budgets do not include non-cash items such as bad debts, discounts, and depreciation or head office apportioned overhead.


 * Functional or operating budgets**

The process of producing operating budgets involves:

• Determining the principle budget factor or limiting factor and starting with this budget first.

• Then producing the production budget.

• Production budget will drive all the other budgets


 * Zero based budgeting (ZBB)** is a method of budgeting, which requires each cost element within the budget to be specifically justified as though it was being under taken for the very first time, without approval, the budget allowance would be zero.

16 P2 revision summaries


 * Incremental budgeting** is the process of using current and past budgets as a guide and adding or subtracting from these budgets to arrive at income and expenditure for a future financial period.


 * Activity based budgeting (ABB)** uses cost ‘drivers’ in the budgetary planning and control stages, for the budgeting of overhead and would show how different types of overhead are affected by the different resources consumed by an activity.


 * Rolling or continuous budgeting** is when the budget is updated on a regular and frequent basis. The method is to add a further period immediately to the budget when an earlier period has expired.


 * Periodic or fixed budgets** are those budgets, which are not updated until the period of that budget has expired.


 * A flexed budget** is a budget that has been revised or adjusted using the actual level of sales or output achieved as its activity level.


 * The behavioural aspects of budgeting** are concerned with how budgets or standards affect people within an organisation. Poor performance could be attributable to the method of implementing budgets e.g. ignoring the ‘human side’ of participation or the introduction of a standard that is either unrealistic or unobtainable can de-motivate staff. This could cause a decline in productivity or efficiency.


 * The controllability principle** is concerned with assessing performance based upon measures that can be controlled only by a manager and omitting any items which are uncontrollable.


 * Responsibility accounting** is about separating revenues and/or costs into areas of personal responsibility to assess the individual performance of a manager. A head office or holding company must ensure that it evaluates a manager on what they can influence.


 * Beyond budgeting** is a philosophy that traditional budgeting methods are of little use to management, ZBB and ABB are more modern methods, in order to alleviate the traditional problems of budgeting, however beyond budgeting believes that budgeting within organisations should be banned altogether.


 * The balanced scorecard** suggests that we view the organisation from four perspectives, and to develop metrics, collect data and analyse it relative to each of these perspectives:

• **Customer** e.g. what must we do right for our customers and what do they value? • **Internal** e.g. what must we excel at or improve internally to satisfy shareholders and customers? • **Innovation and learning** e.g. how can we innovate and improve value? • **Financial** e.g. how do we __satisfy shareholders__ and create value for them?

The budget committee is responsible for the following task(s):


 * Co-ordinating the preparation of budgets
 * Issuing the budget manual
 * Allocating responsibility for the budget preparation
 * Monitoring the budgetary planning process
 * The preparation of the functional budgets is undertaken by the individual budget holders, not by the budget committee.
 * The preparation of the functional budgets is undertaken by the individual budget holders, not by the budget committee.

Which of the following is/are functional budgets? Answer: A functional budget is a budget of income and/or expenditure for a particular department or process. A cash budget and an income statement budget do not relate to a specific function.
 * Purchasing budget
 * Cash budget
 * Sales budget
 * Income statement budget
 * Marketing cost budget
 * Purchasing budget
 * Sales budget
 * Marketing cost budget.

Absorbed Fixed Overheads



Actual Output x FOAR*

//* Fixed Overhead Absorption Rate//

Example
Motors PLC is a manufacturing company involved in the production of automobiles. Information from its last budget period is as follows:


 * Actual Production || 275,000 units ||
 * Budgeted Production || 250,000 units ||
 * Actual Fixed Production Overheads || $526,000,000 ||
 * Budgeted Fixed Production Overheads || $500,000,000 ||
 * Calculate the fixed overhead total variance.**

In order to calculate the required variance, we first need to find out the standard absorption rate: Now we can apply the formula to calculate the fixed overhead total variance as follows: //The variance is favorable because the actual expense is lower than the fixed overheads absorbed during the period.//
 * Fixed Overhead Absorption Rate || = || __budgeted fixed overheads__ ||
 * ||  || budgeted output ||
 * ||  || __$50,000,000__ ||   || $2,000 per unit ||
 * ||^  || 250,000 units ||
 * = || **Actual Fixed Overheads** || **-** || **Absorbed Fixed Overheads** ||
 * || [[image:http://accounting-simplified.com/images/down-arrow-example.png]] ||  || [[image:http://accounting-simplified.com/images/down-arrow-example.png]] ||
 * = || $526,000,000 || - || 275,000 x $2,000 ||
 * = || $526,000,000 || - || $550,000,000 ||
 * **=** || **$24,000,000 Favorable** ||

Volume variance = fixed budget $3,400 – flexible budget $4,200 = $800 (A)

Expenditure variance = flexible budget $4,200 – actual results $4,050 = $150 (F)

Fixed budget --- Flexib le budget -- Actual results  1111111111111111111 1 ++++ 2222222222222222222 Volume variance +++++ Expenditure variance --Fixed Overhead Total Variance- The principal budget factor is the factor which limits the activities of the organisation and is often the starting point in budget preparation

A functional budget is a budget of income and/or expenditure for a particular department or process. A cash budget does not relate to a function.