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Budgets and budgetary control

Budgets and budgetary control. Lecture 3. Dr. Haider Shah. Semester B. Learning outcomes. Continue understanding budget process Understand preparation of cash budget Understand use of flexed budget. Cash budgets – a proforma. Month 1 Month 2

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Budgets and budgetary control

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  1. Budgets and budgetary control Lecture 3 Dr. Haider Shah Semester B

  2. Learning outcomes • Continue understanding budget process • Understand preparation of cash budget • Understand use of flexed budget

  3. Cash budgets – a proforma Month 1 Month 2 £ £ Opening balance (a) x x Cash Receipts: Sales x x Other x x (b) x x Cash Payments Purchases x x Other x x (c) x x Net cashflow (b-c) X X X X Closing balance (a+b-c) X X

  4. Example: Shuxing designer sportswear

  5. Shuxing designer sportswear • Quarterly rent and rates of £4,000, starting on 1st March. • She receives an interest free loan from her parents in February for £1,000 • She buys a computer (£2,000) in January • Equipment(£5,000) is to be paid for in on 1st January • Opening cash balance is £1,000 • REQUIRED • Using the pro forma, prepare a cash budget for Shuxing for the first three months of trading. Interpret her cash position, explaining her options.

  6. Control and Controls Finish Control is the ability to stay on the path which leads to the desired end. Controls are the devices with which you are able to exercise control. e.g brake, clutch, gear, mirrors etc

  7. Budgetary control • The comparison of actual results with those budgeted. • The variances between these elements are calculated and reported to management so that appropriate action can be taken

  8. Budgetary control Budgets can be viewed either as: • Fixed: • do not change with the level of activity ( A major limitation for control purposes) • or • Flexed • are the opposite they are constructed such that they can be altered to reflect the actual activity achieved. So excludes any volume variance from the total variance.

  9. Impact of Volume A Flexed budget excludes any volume variance from the total variance. • £10 • £8 • £11

  10. Example: • UH sports café sold 156 mars bars in a weekfor £62.40. • It had a budget of 150 bars at £67.50. • This gives a variance of £5.10. What caused this variance?

  11. Answer UH sports cafe Qty Price Total Actual = 156 0.40 62.40 Budget = 150 0.45 67.50 Variance 5.10 U Causes Volume = 6 0.45 2.70 F Price = 156 0.05 7.80 U Total variance 5.10 U A Flexible budget would eliminate the volume variance

  12. Cost behaviour • If budgets are being adjusted to reflect changes in activity levels then: We need to know how the planned costs/revenue react to output The fundamentals of variable costing apply. So for each we ask what type of cost is it? – Variable?, Fixed? Stepped?....

  13. Importance of flexible budgets • At the planning stage If output is uncertain then a number of flexible budgets may be constructed and then the outcomes can be assessed prior to the acceptance of one as the fixed. (‘What if?’ analysis) • At the control stage Businesses are dynamic, so its improbable that actual activity will match that what was planned Management need to know what elements have caused a variance in order to exert control and react

  14. Flexible budget – the steps • Revise the budget to reflect the volume that actually or now expected to occur • Identify what costs are related to the level of output (variable costs) • Identify the fixed costs • Can now make more valid comparison between this budget and the actual one • This is known as the volume variance • The other variances can now be investigated

  15. Example: Baxter Ltd (Solution in Tutorial 3) Requirement: Produce a report that illustrates all potential variances

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