Participant #1:

Let me go back up to the dashboard slide now. So we started as we did yesterday. So

we are technically in week number ten. In the middle of week number ten, just some
last bit about something about console pricing. Once a month. We have hit into
budgeting very shortly. So before the hour, I think we'll be in the budgeting
material. Now. One of the first things I really want to talk about then is the
friendly assignment I gave you guys yesterday to check things out. Right. Is
everybody comfortable with this whole idea of double Irish sandwich in particular,
as you all fill out your tax returns and so on? Keep in mind, at the corporate
level, the filing of a tax return is not just a compliance function that it is
following the rules, but it is as good as somebody doing R and D, build up a new
product, finding a new market, getting sales and then having costs and then
generating a profit. The way the tax code is kind of adhere to itself as a profit
driver in many companies, that is a more substantial lesson. And it is not just
something that is restricted to business. It also because it has something to do
with tax base of the societies. It also has implications as to how a society or
economy is run in a modern context. Okay. So it's a very important idea and I hope
that is the reason why it took probably three, four minute read. But at least you
have an idea about the extent of the importance of this transfer pricing,
importance of how the tax code is being managed by corporate sector and so on. So
later on, as some of you go into more accounting and finance, the concept of what
is the tax havens, all those kinds of what the tax shelter. These are very
substantive ideas. And it is not just for guys who are going to do accounting and
finance, even guys who have been marketing other things, really, these are so long
as they have had aspirations of being a CEO. These are all some very important
ideas that you have to really understand so that you can be on top of these things.
Okay. That's the context in which I gave that friendly assignment for you guys to
read up any questions on that. Like as often happens, sometimes people read and
then it takes them to something else and so on. So anything that popped up in that
context is fair game and now is the time to ask those questions. Any questions?
Okay. If not, let's try to keep moving on in the interest of time. So very quick.
So we just talked about the time and material prices and then we talked about the
transfer price and in particular the idea of a general approach. Right. So what is
the general approach? The general approach basically is that the transfer price is
nothing but the variable cost per unit plus the operating cost per unit. Right.
That's the key thing to note. And then keep an idea. If there is no excess
capacity,

Participant #1:
operating cost is a non zero number, whereas if there is excess capacity, operating
cost equals zero. Okay. So it's basically the variable cost. So that's really the
key thing that we need to understand in this time. And then the idea of a
negotiated prices. So that's the whole idea. It's like an internal market and
that's constantly the most superior method. But in the normal practice, business
practice, there's lots of friction and lack of information, other social kinds of
issues and so on. And that is why most of the time in the corporate sector very
much people are using cost based transfer prices as we talked about. Right. And in
that context, you have to be very careful. Okay. That if you are trying to see
certain things, even if you use variable costs, keep in mind the variable costs
that you might be currently be experiencing when you're dealing with the external
customers. That may not be the same amount when you're doing an internal transfer
because some of those variable costs will be related to selling costs. So you have
to take those things out. So when we talk about variable costs per unit in this
particular context here, so we are talking about our manufacturing cost. So
sometimes when you're selling to external customers, not only the variable cost of
the manufacturing, it might also include some selling costs which needs to be taken
out when you're doing an internal transfer. So many of those selling costs that are
kind of relevant when you're dealing with an external customer is irrelevant when
you're dealing internally, for example. So you have to make sure it's not the same
number you're using. It's a very common mistake that happens in a first class like
this. So people understand that it's only variable costs, but they forget to take
out the variable selling costs that are involved when you're dealing with an
external customer. But internally when you transfer, those costs are really not
operational anymore. And then of course, is the tax issues for transfer price. And
it is in this context, I've given you the friendly assignment. So let me just write
it for double measure. So double Irish Dutch sandwich. So again, particularly those
of you in the business school, you should all know how to incorporate a business.
But essentially the idea here is there are two Irish companies and one company in
Holland or Netherlands which enable these companies to avoid paying taxes. And so,
okay, that's what we have done. And then moving on today, then we'll continue that.
Okay. If you swipe and then do the problem 965 D and get into budget and then we'll
talk about what exactly is a budget. Right. So essentially just let me write it
out. What exactly is the budget? As you will see, many slides are coming up
explaining some of these terms and so on. But brief report. A budget is nothing but
a plan of action expressed in dollar terms. That's what a budget is. Nothing
complicated about it, so long as you intend to do something and you can attach
dollar amounts to it automatically. The budget, whether you call it a budget or
not, that's basically a budget at that point. Then we talk about the budgeting
process as to how to arrive at that budget. And then we talk about what is really a
master budget. It has an operational budget and cash budget and budget and income
statements and so on and so forth. Okay. And so anytime we talk about budget. So
not only is the plan of action. So that's the first attribute. The second major
characteristic in the world of budget is you're looking to the future. Okay. So
that's the reason why at the bottom he talked about budgeted income statement.
Right. So in one, A, three class, all you had was simply an income statement. Why?
Because this was what we call backward looking or retrospective. It was telling us
what happened in the past, the fiscal period that just ended. What was the
performance that's the regular income statement that you did in one, A, three. What
we are proposing here to do in two, A, B three is these are managers thinking about
doing something in the future. And so that is why you have a prefix, a budgeted
income statement between two, A, B, three, we talk about a budgeted income
statement. This has something to do with the future.

Participant #1:
Or sometimes it's also called as forecasted statements. Okay. So another term for
this is forecasted. Another term for that, as some of you doing accounting and
finance, you'll pick up, this is what is called as a pro forma. So three kind of
nicknames budgeted income statement, Profounda income statement or essentially
forecasted income statement. If you just say income statement, looking to the past,
any of these other three terms, you're looking to the future. Okay. Any questions
at this point? Okay. With that, let's talk about the transfer prices. So at this
point in time, the key thing to recognize is when you talk about international
trade, almost about roughly 60% or thereabouts. Okay. Is really transferred within
companies. That is why the concept of transfer pricing becomes a very critical
issue. At what number, what value are these goods going from one part of the world
to another part of the world. Okay. And then the key thing is to understand
different tax rates and particularly the little guys in finance, you can probably
switch to water. This is the whole idea about arbitrage. So the moment anything or
differences automatically there's an opportunity for some people to trade, try to
make money, other charge ideas. That's really the context here. Okay. So as an
example, again, we're doing things at a very surface level. Okay. So there is the
same idea that boot company. So the boot division is in the country with 10% tax
rate. Okay. So for the sake of argument, let's say this is very close to it. Okay.
Let's say this is Singapore, for example, 30% tax rate, very close to what we have
here in Canada. And then instead of the thing or instead of Singapore, for example,
you can put it us, and then Canada is still at 30%. So anything some country has a
higher tax rate, somebody has a lower tax rate and then the before tax contribution
margin is $44. So is it just a summary number of what you've seen in the slide
that's falling, just a kind of summary of findings or some things that you need to
be aware of. So before tax, the contribution margin is always the same, right. But
after tax in both those countries, the next time the after income, after tax income
will be different. And that's why firms have an incentive to follow all these kind
of track strategies that we just talked about, like double IV status and things of
that nature. So after tax total. So if you use a transfer price of $18. Right. So
you have after tax income of $38.0.20. But if you use a transfer price of $11, you
have a higher income. Okay. It might look very marginal, but remember, when you're
talking about billions of dollars, it all adds up to lots of millions of Bucks.
Okay. Millions of Bucks for the companies or for individual principal shareholders.
And that is that much money left from the standpoint of the tax authorities and
from the general standpoint of the society to for provision of public services. So
it's a very important public policy issue here. Okay. And so the key thing is when
you talk about $18 transfer price and $11 transfer price, essentially what is being
involved here is what we are talking about. The contribution margin or income is
being shifted from the high tax country to a low tax country. So that means often
we say as if somebody pick up in higher level economic classes, often the higher
income countries are countries with a higher standard of living, higher provision
of public services and so on, which means you need a tax base to provide for some
of these things. So that's the reason why you have a higher tax rate. So if
increasingly those societies are deprived of the tax base, then essentially some of
the services cannot be provided anymore. And that is the reason why in the last
year or so, you see now there is a minimum amount of heart rate hacks across all
the major jurisdictions. So people can't play with some of these track strategies,
like what I just talked about, Irish double Irish sandwich track strategies going
forward. So some of these things are coming to an end, but at least you still the
idea is the transfer pricing is a very big issue. So in terms of the numbers
itself, that's what you see in this particular slide. So you can see at the top,
the numbers are pretty much identical, right. So $90, okay. $35 to the cost, $18.
And so the key thing here is when they have $11 transfer price, since of 18, now
you have eleven. And so that the contribution margin in this case, in both cases,
$44. But you can see on an aftertax basis, it's 39. 60 here where it was 30 years.
Right. Whereas in this sole division, which is presumably the one at a higher tax
rate, initially it was $4.90. Okay. That was the aftertax contribution margin.
Whereas here after tax contribution margin becomes zero. So literally this very
simple artifact and artificial type of a case, what they have done is they have
moved out and declared zero income in the high tax jurisdiction and moved all that
income to low tax jurisdiction. Okay. So thereby the country where the sole
division is located is now the loser because there's no tax dollars going to come
because income is effectively zero carpet taxes. That is why sometimes you see in a
public press, there are companies, for example, in the US, there might be billion
dollar companies, lots of money floating around, but they basically pay no
corporate tax. I say no corporate tax, zero corporate tax. These are the kind of
things that happens or other loopholes, other things. They are using the TaxPORT
whereby they actually do not see any tax. And all this happens because of the
instrument is the transfer price. So then the question becomes it's like a button,
who gets to press that button? Who gets to use that instrument? The transfer price?
Senior managers within the company. And that is the reason why when tax statements
are kind of filed with the tax authorities, the tax authorities kind of go through
with toast and Combs to see whether these transfer prices are accurate or are they
just being used in order to move income from high tax jurisdiction, which is this
column, to a low tax jurisdiction? Any questions at this point?

Participant #1:
Okay. So from the standpoint of this particular class, the real big issue focus is
whether you have the facility to arrive at a transfer price, variable cost plus
opportunity cost. All this stuff that I just talked about is a general interest and
something that some of you might kind of get into more detail and operate. Any
questions or anything? If not, then let's take the first question of the day,
Participant #1:
the last 10 seconds.

Participant #1:
Okay. So let's check out get a very good right answer for this thing. Right. So
it's basically an income shifting strategy here. It's going from one country to
another country in one double a tree sometimes have an incentive to shift income
from one period to another period. Here you're talking about geography, not time.
Okay. That's really the only difference. Okay. So with that. Let me close this and
move on to this problem. 965 days. I'm looking at the clock. It's 48 on the clock.
So I'll give you a couple of minutes to read, and then we'll work this solution out
and then move on to budgeting. Two minutes requested, and then

Participant #1:
let's continue on. So in this question here, this is a company making ties, big
slots and shirts, whatever these ties are. And there are two divisions, Division A
and Division B. Right. And where are the ties? What is the direction of the flow of
tight is going from B to A. So let's try to do that. So anytime you see questions
like this again, please try to visualize the kind of what's happening in the
corporate sector. So things are going from B to A. Right. And how many ties are
they talking about? They're talking about is 100 ties. Right. So that's really the
transfer. You're talking about 10,000 ties. That's the first thing. Right. And once
you have that, then the idea is to C, B is where the ties are being manufactured.
Their capacity is to manufacture 50,000 ties. But currently the sales are only at
40,000. That means this is a situation where they have excess capacity. Right. So
if you have excess capacity, what does it mean in the context of transfer pricing?
That means something is not present. What is not present? Opportunity cost is not
present. So when you think about the transfer price, the transfer price is just
going to be the variable cost, right. So that's the key thing. And what is the
variable cost? They tell us the variable cost is $29 for the tie, but this $29
includes $2 variable sales cost. So that means externally, say this cost is
incurred. But if you're going to transfer internally, then this cost will not be
there. Right. So which means what is going to be the manufacturing variable cost
for internal transfers, what would be the number? It'll be 29 minus that's? $2,
which is $27. Right. So since in this particular case there is excess capacity, the
transfer price, the minimum transfer price that B would probably accept in this
case is going to be what? 29 minus two is going to be 27. That's the minimum
transfer price. And then the question is asking what is the maximum transfer price?
And Division A would be willing to pay. Based on your reading of the question, what
do you think if you are the manager of Division A, how much price would you be
willing? Yes, go ahead. $30, because that's what currently you're paying to the
outside vendor. So the minimum transfer price is set by the selling or the
transferring division, which is Division B here. And that's $27.29 minus two. Okay.
This is what I was talking about earlier on. You have to be very careful that you
don't use the same variable cost, a common mistake in a class like this. You know
there is excess capacity. So, you know, operating cost is zero. Then you say hot
transfer price is variable cost. And people immediately save $29 not realizing that
$29 includes some of the variable selling costs which needs to be extracted out.
Okay. So be careful when questions like this are asked. Okay. And that's what you
see in this particular first part, 29 minus 227 Bucks, and the maximum price is
$30. Okay. So let's then work out the second one. And then, of course, you can see
the solution is there in the next slide, but it's always good to work things out.
Then the question says, suppose Division B could use excess capacity to produce and
sell externally 200 units of a new product. Right. So there is an excess capacity.
So now they're talking about a new product, not the same type, but something else,
which they can sell at a price of $18. Right. And the variable cost for this is
$15. And then the question is what should be the minimum transfer price that we
access for the 10,000 tights and the maximum transfer price that these guys would
do? So now in this particular case, for example, so all you're going to say is
20,000 units, right? So of a new product and the price of this. So the excess
capacity is being used. So keep in mind right now the 10,000 ties, what are the
options that the Division B has either to make those 10,000 ties or a new product?
Okay. Where they can make 30,000 units selling at $18, the cost for that is only
$15 for the contribution margin is $3 per unit. For every one of those 20,000 units
in a total. Then what is the contribution margin? It will be 20,000 multiplied by
$3, right? 18 -15 $3. So 60,000 units. And then you basically say, okay, so that is
one option, $60,000 of contribution margin, and the other option is internally, the
610 thousand of these ties are going to be transferred. So what is the opportunity
cost? If they're going to do the 10,000 units of price, they have to lose those
$60,000 in contribution Mark as a new product. So essentially what you have to do
on a per unit basis, you have to then divide the $60,000 of the new product
contribution margin by 10,000 units of ties. So that gives you $6 per tight. So the
opportunity cost per unit in this case would be what will be the variable cost of
$27 plus the $6 of operating cost per unit, which works out at $33. So the minimum
transfer price that you as a manager of Division B will now look for in this
situation, B will be $33. If you are the person in Division A, will you accept the
$33? No, because the external lender is giving you $30. So the maximum transfer
price that you will accept as manager of Division Eight still remains at 30. And
that's what you see in this particular case, it's worked out and everything. Any
questions on this? And then the last one, say the Division A needs 15,000 ties
instead of 10,000 ties during the next year, what should be the minimum transfer
price that division we would accept? So again, in some of the practice questions
that are fair, on average, you will see sometimes the excess capacity is only a
partial. So if you have an order, some of it can be absorbed by the current excess
capacity, but some kind of will be displacing existing customers. So when you say
15,000 ties, 10,000 ties will be picked up by the excess capacity. So that means
the opportunity cost for 10,000 ties is zero. But for 5000 ties, there is going to
be an opportunity cost that needs to be taken into account. And what is an
opportunity cost? It's basically the difference, $35 minus the $29. That's $6 per
unit. Right. And so $6 per unit multiplied by $5,000, that takes you over and about
the existing capacity. So that 5000 multiplied by six gives you $30,000. Right. So
5000 times six is $30,000 and then divided by 15,000 high. That means on a per unit
basis, it's $2. Right. So in this particular case, the minimum transfer price
you're looking for is the $27 is the variable cost, plus your operating cost per
unit is basically the $2. $29 would be the minimum transfer price that you as the
manager of Division B, will be looking for. And once again, the maximum transfer
price remains the same, which is the $30 from the outside vendor. And that's what
you see right here in this particular thing. Any questions at this point? Any
questions? Okay, so once again, as I leave this, always remember the minimum
transfer price is set by the division that is transferring, and the maximum
transfer price is set by the division that is accepting the transfer. Any
questions? Okay. Well, good. Then let's kind of keep moving and move on to budget.
So now formally, we are in the chapter of Chapter Ten material. And the question
is, what is a budget? Right. As I said, as pambole preparatory remarks earlier on
today, his budget is nothing but a plan of action tagged with dollar counts. Right.
So if you say, for example, on the weekend I'm going to go to Toronto, spend about
a day before the exams come in, I'm going to chill out and I'm going to spend a day
in downtown Toronto. That's a plan of action. The moment you say I'm going to go to
Toronto on the weekend, I'm going to go fast or go to go train, I'm going to eat in
this restaurant or passport, whatever. I'm going to do this a bit of shopping
something. The moment you attach dollar numbers, it automatically becomes a budget.
What is your budget for visiting Toronto on the weekend? That's a budget. So
anytime you have any plan of action with dollar terms. That's a budget. That's
really the basic idea of a budget. So that's really what you see is a formal
statement of management plans of action. Not many people do, but there are some
people who might actually do, okay, I'm going to go on the weekend, delay out all
their steps and things like that. Essentially, that becomes a budget. Whether you
laid out you've written statements or a statement in your mind, a budget is always
a budget. And then this is often the primary way to communicate, because if you are
talking about a bunch of you, let's say some of you are living in a giant house and
things like that and you're planning on a weekend, essentially, this is how you can
communicate with your buddy. Somebody might say, oh, you hold it, I can't go and
eat in that restaurant. That's way above my budget. They remember you sometimes use
these terms the same idea. Why? Because that's the way to communicate what is
intended to be done, whether it is feasible or not. Right. It promotes efficiency.
In what way? While some people do not want to land up in downtown Toronto on a
mistaken notion that you can just spend $3 and you'll have a great time. Okay. So
you're wasting time, wasting other people's time and so on and so forth. So it's
better to communicate all these things upfront so somebody makes the right decision
to go or not to go. There's a control device, right. So once you actually have a
plan with some dollar number attached to it, then you can look back and see, that
was our intention. What really happened? Was it good or bad? So you have something
as a benchmark to look at. That's what we talk about as a control device. And by
the way, this is really what is going to be done in the chapter number twelve when
we talk about variances. Right. So the control device is think of this as a
benchmark against which for a reference point against which you can compare
and then basically lessons for the next time around, you can plan better. That's
the key idea. Should we go by go or should we kind of hitchhike or something like
that? Or rent a car with enough number of people, maybe you'll actually save money
that way. So these are the ways in which you can think about doing certain things.
Right. What is the role of accounting here? Accounting data is really something
that makes all these things stick. It kind of helps. And so sometimes you say, are
accountants responsible for the budget? Not really. They're responsible only for
the goals in financial terms, whether the numbers used or. Right, whether the cost
estimates are right, whether somebody did and said, okay, this is what really bus
ticket costs and so on. You can hold the accountant responsible for that. But
accountants are not responsible for the plan of action itself. That responsibility
rests to the senior managers. So the budget is the management responsibility. Keep
in mind, accountants are not responsible for the budget. They might help in
preparing the budget. Ultimately, this is a management responsibility. That is why
you would have seen in financial statements, okay. You had that thing looked at in
your one Doublea Street fast, showed you the auditors kind of report. But also
there is a statement of management's responsibility. It is a management that takes
responsibility. And under the new guidelines, the CEO and the CEO have to sign off.
Right. Which is why we say for the last 18 years, ever since stocks came into
place, so long as you want to be a CEO, you have to know accounting, okay. Because
you're going to be signing off saying that the statements are fine. So at least you
should know what you're signing for. Okay. So it's not like before I'm a music
major, I don't care what the numbers look like. And the CEO life was good. Not
anymore. Okay. Even if the accountants are preparing these numbers, you should have
a gut feel whether those numbers are right or wrong, which means you need to
understand some of the rudimentary concepts of how numbers add up. What are these
numbers representing and things like that. Okay. Any questions on this? Some broad
ideas, very important ideas about the budget. So that's really thinking about what
are the budgets. So that was a big question about what our budgets. Now the
question is the question of why do we need to do these things? Is because it
enables people to plan ahead. Because the moment you start to think like that, you
think about the future automatically. You're looking to the future such something
good. Okay. And then the idea gives you definite objects for evaluating performance
because it's a benchmark. So the first point is about it makes you think
differently. The second thing point, bullet point is it gives you a benchmark.
Right. The third point is it gives you kind of create alerts. For example, because
it's a benchmark. If you're going far away from certain things, it gives you an
alert. Like some of the newer cars now, they have all these fancy buttons. They
start beating if you're changing lanesing properly or something, or all the side
mirrors are kind of flashing if some car is coming close to you. These are alerts
to make sure that this accident doesn't really happen, changing lanes and so on. It
also facilitates coordination. Right. So in a sense, it tells you who should be
doing what, because some plan has been laid out. Just like if you all work in a
group project, it's always good to actually have things written up. So there is
actually no scope for misunderstanding. Everybody knows who should be doing what
and when should they be doing that, right? So only if it's written up, then it kind
of removes many elements of misunderstanding and so on. It creates greater
management awareness for the management whole idea like a dashboard. So think of
the budget as the ultimate dashboard for operating a firm. And finally it kind of
motivates personnel, right? So it is just like for example, when you're downloading
some software, you see this kind of on the calendar, things are starting to fill
up, then you feel kind of related old. It's almost the program is almost loaded up
and things like that. It's like a motivation. So if you have a budget and this is
the amount of sales you had to reach, and if you're already reaching a good portion
of it, people feel motivated, right? So in that sense, it motivates personnel. So
this slide is about the question why budget? So let me write that out. So benefits
answers the question, why? This one was the question, what, what is a budget? Okay,
this is the question about why a budget? And then talking about how do we do it.
Okay, so this is a question about how those three big questions, what, why and how,
how do we go about making a budget? That's really where. So in the initial few
slides now our general ideas, then we get into the actual nittygritty stuff about
these things. So budget, keep in mind, is only an eight to the management. It's not
substitute.

Participant #1:
Okay. So you can't automate or just because your budget by all the managers. We
know what to do. That doesn't happen like that. It's just an aid. It's not the
stuff to do for managers and for a budget to be very effective, all these other
things have to happen. When you're learning in HR, you must have sound managers.
You must have a very well designed or chart. For example, people should have a
culture of making informed decisions that are looking for data and things like
that. And the most important thing is it has to be accepted by all levels of
management. It has to be biased. Okay. So people can't say, oh, there's a budget,
but nobody is following the budget and that is no good. So which is why it's very
important that whatever budget is arrived at, everybody's parts are taken into
account as we see in the next couple of slides. And so the question then becomes
what is the budget period? Now think about it. The budget period is equivalent to
this is what we say in two, A, B, three, in one, A three.

Participant #1:
What do you think that was called as somebody wants to tell me that

Participant #1:
two, A, B, three, the budget period in one, A three. The same idea would call what
is the term? Probably in the very first couple of weeks you guys talked about it.
It starts with the letter S.

Participant #1:
Yes. Physical period. Very good. Okay, so fiscal period one. Normally we think
about backward looking stuff. Okay, fiscal period to forward looking. We talked
about the budget period. Okay. So most common, as we say in the fiscal period is
one year, but you can always have budget for a month. It could be for a day in some
kind of a high performing financial firm. It could even be for half a day and so
on, of course. Okay. So whatever is the unit just as you did in one double. Okay.
So long enough to given a goal. Okay. But at the same time to minimize the seasonal
fluctuations as well. Right. So you don't want to be too long, not too short.
Right. So that's the key idea here. You want to have a balance. Short means you
might have more reliability long enough means you can minimize the seasonal
fluctuations and so on. And sometimes you have what we call continuous budgets.
These are what we're often called as rolling budgets. So if you have a twelve month
rolling budget, what it means is constantly sold, a twelve month budget, one month
drops off and another month gets added up and so on. That's sometimes, often these
things often might be done in public sector units and so on. But most corporate,
private sector entities are on regular budgets, not public budgets. Okay. Then the
process is itself. How are you going to go doing some of these things is the key
idea is to take into look for different things about the culture, the data again,
if you have to collect all kinds of stuff and everything starts with a sales
forecast. So think about a sales forecast is like an engine on a train, that's the
sales forecast is what leaves everything, pulls everything. And then what we're
talking about a sales forecast here is you're talking about it's not any kind of
forecast. It's not any number. But this is really the best sales estimate. And
that's a very important thing to note in this context because often people use
sales estimate and sales forecast a synonyms. It is not true. It's a huge fate of
conceptual error. Okay. I can have many sales estimates. Every sales manager might
be giving me a number, but then as a senior manager, I will decide the best sales
estimate. That becomes the sales forecast. And that's what is going to lean the
budget forward. Okay. So keep in mind many sales estimates and then we extract one
of them. One sales estimate becomes the sales forecast. So what does it mean?

Participant #1:
All sales forecasts are sales estimates, but not all sales estimates are sales
forecasts. That's something to keep in mind. Okay. And then in large companies
there's something called a budget committee. Right. Because you're talking about a
plan of action for the entire firm. You need to have like a crossfunctional team,
as we saw or a week ago, when you're trying to meet their target costs. You need to
have people coming from different parts of the organization to contribute to what
the firm should be doing. Going forward and then the numbers will come
automatically. So that's why they often have a budget committee. It's not just a
budgeting manager. You actually need a bunch of people to arrive at what should be
the appropriate budget. Any questions at this point? Again, the critical point here
on this slide is this idea of what exactly is a sales forecast. So I have many
sales estimates. Out of that, I pick the best number that becomes my sales
forecast, which means every sales forecast is a sales estimate. But not all sales
estimates is the sales forecast. Right. Because they didn't make it. Any questions
at this point? Okay. Then comes the idea of human behavior. Right. Because you have
to deal with people. So you have to know when you make the budget, you need to kind
of see whether people are going to implement these budgets. So in this context,
there are these different types of processes that you might follow in order to make
a budget. So in the top down budget, everything is coming down from the top. Okay.
So let me just do a little chart here.

Participant #1:
Management team in a top down budgeting, the direction is coming in this direction
here. So everybody has to do what the guys at the top are telling them to do.
That's top down budgeting. It literally depends. Top down budget, bottom up
budgeting is exactly the opposite. Everything is going from the bottom up. Each of
the people at the bottom, they are telling what they're intending to do, and then
somebody collapse everything, and that becomes the budget at the top. Okay. As you
can see, that might have lots of information, but some of it might be cost purposes
and so on. So that is why we often say some of the top down budget might be very
kind of efficient, but it might not be very effective because people may not like
what is being asked. They are asking to do the bottom of budget might turn out to
be effective, but it might not be very efficient. Okay. So there are some sometimes
you have these cross purposes that you have to kind of deal with. And then there's
something called participative budgeting, which goes both in deposit goes up and
down. So the senior managers will make a decision, but they actually collect all
the information from all the individual managers as well. So basically the flow of
information is going on top and down. And that's supposed to be often seen as the
best way forward. And then there is something else called zero based budgeting as a
process. And sometimes this can be seen as really very bad news.

Participant #1:
Okay. So oftentimes in many companies when they're trying to cut costs, they're not
immediately going to fire people, but they'll immediately say, hey, we are in a
kind of a stressful period. So we're going to be on a zero based budget. So zero
based budget literally means for the upcoming period, your budget is zero. That
means you have to justify why you need to be employed, why you need to be doing
what is being done in the Department and so on. That's basically zero based
budgeting. Whereas in a regular budget you automatically basically whatever the
money you had last time around, last period, then you will have the same amount
plus some inflation adjustment. That's often how most of the budgets work. But in
the zero based budget, literally zero means you have to justify your existence. And
that is often a prelude to before as division gets shut off, people get fired and
so on. So if you are working someplace and somebody says, oh we're going to go on
zero based budgeting, you should make plans of moving out of that organization.
You're just about six or about a year away from everything being closed down and so
on. This is kind of an advanced signal that something negative is coming your way.
But that's really idea what zero based budgeting. These are just the different
types of how budgets could actually be made. Okay. So then the participated
budgeting, as I said is probably the most ideal thing and most companies are
following that where they use the information on the bottom up. But for efficiency
sake they tell people what to do. Okay, okay. And then the disadvantages again of
participative just like anything else, you're going to collect information. It
takes time. All kinds of things are there. Plus there is something called gaming
that you have to be careful about. Managers play games, right? As the slide talks
about, they might understate the revenues and they might overstate the cost in the
budget so that to make it life simpler for themselves. So that when the time comes
from evaluation they don't look that bad if the revenues are not that high, because
anyway, the revenues were kept at a very low number. So which means they can easily
surprise that and collect the bonus. Likewise, the costs are often kept very high
so that if the costs are lower than that, then they look again very good and
collective bonus as well. Okay. And these are some things that we'll talk about.
And then the difference between budgeting and long range planning. Long range
planning is less detailed but looking more to the future. Budgets are often short
term to medium term, but they're more detailed as a slight talk about, again, it's
all to do something in the future. And then comes the idea of a master budget.
Okay. A master budget is nothing but a set of interrelated budget. So you'll have a
sales budget, a production budget, materials budget and all those kinds of things
and all that are basically operational budget or operating budgets. And then
anything to do with finance contractor would be called as basically the financial
budget. In this particular part, the finance budget that we'll talk about would be
the cash budget. Okay, so with that I think I'll just put up this graphic here and
this is where we pick up on Thursday class and try to go through the different
budget. Okay. So have a good rest of the day.

Participant #1:
Sorry. Sorry.