Welcome to:

FNSACC402
Prepare Operational Budgets

Lisa Genna
lisa.genna2@tafensw.edu.au

Monday – Room H.G.11 – 6:00 pm to 9:00 pm

 AMEG  House  Rules  
—  Be punctual (teacher included!)
—  Come to every class (if possible) (especially if the
Tigers are playing)
—  Come to class prepared (students & teacher)
—  Bring textbook (might help a bit)
—  Create and maintain a safe and supportive learning
environment (there is no such thing as a silly
question!)
—  Eating and drinking in class totally permitted J
Lesson 1 – Chapter 1

FNSACC402
Prepare Operational Budgets
 Overview
1.  What is a budget?
2.  What is a budget used for?
3.  The pros and cons of budgets
4.  Approaches to budgeting
5.  Budget classification
6.  Types of budgets à MASTER BUDGETS
7.  The budget development process
8.  The behavioural and ethical aspects of
budgeting (to be covered in lesson 2)
 What is a budget?
A BUDGET is:
—  a written statement
—  of management’s strategic plans for
achieving the organisation's key
objectives
—  expressed in financial terms
 What is a budget?
Put very simply, a BUDGET is …
- an itemised forecast
- of money coming in and money going
out
- for a specified period of time
- for either a specific activity, department,
product or the organisation as a whole.
What is a budget used for?
Budgets help the leadership team of an organisation to
COORDINATE and CONTROL key activities across the
organisation, enabling the goals of the organisation to be
reached.

Budgeting is:
— an integral part of the organisation’s planning process.
— Involves the allocation of resources across the
organisation
— used to support management decision making in
relation to the allocation of scarce resources to facilitate
goal achievement.
Specifically, budgets are used by management
as a tool for:
1.  Planning
2.  Organising
3.  Controlling
4.  Motivating
1. PLANNING:
>> is defined as:
the set of actions taken to formulate the scope and direction of future
activities and operations.

>> requires goals to be set and decisions to be made as to what action

needs to be taken to reach those goals
(i.e. where are we going and how are we going to get there?)

>> forces all involved to plan ahead and set their KPIs and targets in
line with the organisation’s overarching goals and strategies.

>> The planning process may include doing a

SWOT analysis as well as a risk assessment.
2. ORGANISING:
>> The finance team is responsible for coordinating the
budget between different departments and work
groups.
>> Doing so enhances the consultative process and
promotes cooperation between these groups.
>> It also helps ensure that the budget accurately
reflects the goals of the organisation and that certain
milestones are met along the way.
3. CONTROLLING: is the process of:
— setting standards (e.g. budget)
— measuring current performance
(comparing actuals versus budget à variance)
— taking remedial action if required.
(i.e. monitor progress & make adjustments if necessary).

>> Budgets provide estimates of expected performance.

>> They serve as a control tool when compared to actual
performance and any variations from the plan are identified and
any necessary corrective action is taken.
The planning cycle (budgetary control)

BUDGET   PERFORMANCE  REPORT  

Comparison  of  ACTUAL  results  to  BUDGET  à  VARIANCE  

 The planning cycle (budgetary control)
(ref. diagram on previous slide)

1.  Plans, including budgets are prepared.

2.  Action is taken to implement these plans.
3.  Performance is measured by comparing actual
results to the budget.
4.  Differences or variances are analysed so that
corrective action can be taken.
5.  If necessary, plans are reviewed and assessed.
4. MOTIVATING:
>> The budget can be used as a motivational tool for
managers and their staff.
>> The employees of an organisation can be motivated
to work towards achieving the goals set out in a budget
if these goals are effectively tied to some sort of
reward e.g. bonus or stock options.
>> It is important to allow key staff members to
participate in and contribute to the budget setting
process and then hold them accountable for budget
outcomes on a periodic basis.
 Benefits of budgets
1.  Forces management to do some planning.
2.  Provides realistic performance targets (if done properly
involving the appropriate personnel).
3.  Basis for controlling what happens within the
organisation.
4.  Helps co-ordinate the activities of the various
departments that make up the business.
5.  Promotes communication – managers exchange
information on ideas, business goals etc.
6.  Motivational tool – if appropriate staff are involved
in the budget-setting process
 Limitations of budgets
1.  Only estimates, not statements of facts.
2.  Costly and time-consuming to prepare, implement
and monitor.
3.  No substitute for sound management practices.
4.  Need to be amended if circumstances change.
5.  Preparation does not guarantee success.
6.  Aspects of people’s behaviour may undermine the
value of the process.
Approaches to budgeting
Approach used depends on the SIZE and
STRUCTURE of the firm and the type of
ENVIRONMENT in which it operates.
e.g. organisations planning a change of focus or
strategy cannot rely on established budgeting
processes & procedures.
 Approaches to budgeting
— Standard approach:
—  Historical figures (actual or budget) are used and adjusted for any
likely future events.
—  Not recommended as past inefficiencies may be perpetuated and
funds may not be allocated to activities designed to meet the
organisation’s objectives.

— Zero-based approach:
—  The initial figures for each activity are set to zero.
—  To receive funding, each activity must be justified in terms of how
it meets the organisation’s objectives.
—  The dollar figure attached to that activity is then based on the
resources needed to make that activity happen.
 Budget classification
ClassificaBon  by   Types  
Period   Period  budget  
Form   Rolling  or  con8nuous  budget  
Ac8vity  level   Sta8c  budget  
Flexible  budget  
 Budget classification
Classification by PERIOD:

1. PERIOD budget:
à developed for a specific (and generally shorter) period of
time e.g. a quarter.
— Short term budgets: span up to 1 year
(detailed; represent current operations of the business; may be broken down
into smaller periods e.g. months)
— Medium term budgets: span 6 months to 5 years
(represent current operations + impending changes e.g. new products,
equipment upgrades etc.)
— Long term budgets: span 3 to 10 years
(more strategic in nature)
 Budget classification
Classification by FORM:

2. ROLLING (CONTINUOUS) budget:

à continually updated so that it always reflect plans for the
same length of time e.g. 12 months. This is done by
periodically adding a new time period to the forecast and
dropping off the equivalent period just completed.
 Budget classification
Classification by ACTIVITY LEVEL:

3. STATIC (fixed) budget:

à prepared for one level of planned activity e.g. a
particular level of sales, say, $75,000.

4. FLEXIBLE budget:
à a series of budgets that show how costs vary at different
levels of activity within which the organisation may operate.
 Types of budgets
—  Revenue budgets: (LESSON 3)
Provide estimates of the income of an organisation from the
sale of goods and/or provision of services for a specific period
of time.

—  Operating budgets: (LESSON 4)

Provide an estimate of the activities that will affect net profit
including purchases, COGS and operating expenses.

—  Budgeted financial statements: (FNSACC503)

Show the estimated results and projected financial position of
a business and include the budgeted
income statement, balance sheet and cash
flow statement.
 Master budgets
Ø a combination of all the budgets of an organisation
Ø reflects the integrated plans and expected financial
results of all operations and departments of the
organisation
* Starting point à sales / revenue budget
* Other budgets are then prepared in line with the budgeted
level of sales.
Master budgets  
The budget development process
The organisation’s leadership team has to work out:

1.  Where are we now?

2.  Where do we want to go?
3.  How are we going to get there?
The budget development process

—  Allow enough time to

prepare the budget.

—  Involve appropriate staff.

The budget development process
1.  Set and communicate process guidelines
2.  Prepare budget
3.  Approve budget
4.  Communicate final budget
5.  Monitor actual performance versus budget
The budget development process
 Continuous improvement
—  Effective feedback system required so continuous
improvement initiatives can be shared and
implemented.
—  Needs everyone across the organisation to
participate fully.
 Budget milestones
Why break budget period up into several manageable
chunks e.g. months or quarters?
—  Makes it easier to:
—  monitor and measure actual performance
—  spot issues or problems early on so that countermeasure
plans can be made (before it’s too late!)
Time to get practical
Activity instruction:
Have a go at preparing this simple budget for Turner
Home Building Products by using some of their
historical data that is simply adjusted in line with
some anticipated changes for the upcoming period.

A solution has been provided so that you can check

your answer…
 Example : Simple budget
Turner Home Building Products manufactures bricks and tiles. Their
Brisbane branch has to prepare its budgets for the coming year and they will
be presented to head office for approval. The Admin. department’s actual
figures for last financial year ended June 30 were as follows:

Item $
Salaries 323,400
Stationery 14,000
Telephone 15,120
Electricity 15,850
Rates 7,780
Depreciation 12,600
Total 388,750
After carefully considering all relevant factors, it was estimated
that the following changes are likely to occur for the next
financial year:
—  Salaries are expected to increase by 5%
—  Due to a new online facility installed by Turner, stationery is
expected to decrease by 10%
—  Tarrif increases will mean that electricity will increase by 6%
—  Rates will increase by 8%
—  Telephone and depreciation should remain the same

Required:
Prepare next year’s budget for the Admin.
department of Turner’s Brisbane branch.
 Solution : Example
Turner Home Building Products : Brisbane Branch : Admin. Dept
Budget for year ending 30 June 2017

Item Last year Budget Budget for

actuals workings next year
Salaries $323,400 X 1.05 $339,570
Stationery $14,000 X 0.9 $12,600
Telephone $15,120 $15,120
Electricity $15,850 X 1.06 $16,801
Rates $7,780 X 1.08 $8,402
Depreciation $12,600 $12,600
Total $388,750 $405,093
Other Important Concepts
For this unit, it is important that you are able to
identify and explain the key principle and
practice of
DOUBLE-ENTRY BOOKKEEPING
Double-entry Bookkeeping
—  The double-entry system:
>> used to process the information from SOURCE
DOCUMENTS to the stage of FINANCIAL REPORTS.

FOR EACH TRANSACTION:

Value of DEBITS = Value of CREDITS
This week’s homework
—  Get a copy of the recommended text
—  Checkout
—  Download and read a copy of the DELIVERY AND
ASSESSMENT GUIDE for this unit
—  Work through all lesson materials and only the relevant
bits in CHAPTER 1 à summarise the main points
—  Complete the Australian Federal Budget online activity
(ref. next slide) à bring what you found to class next
week
 This week’s homework
Copy and paste the following link into your Internet browser.
Here you will find information on Australia’s 2016-2017
Federal Budget:
http://budget.gov.au/2016-17/content/glossies/overview/
html/

Watch the short video clip and then read the information
presented just below the video clip before answering the
following questions:
 This week’s homework
Question 1: The Federal Budget provides us with
information on how the Australian public’s tax dollars will
be spent throughout the year. Choosing just one area of
the economy, summarise how our tax dollars will be/
have been spent.

Question 2: Identify at least two (2) stakeholders who

have a vested interested in the Federal Budget
 You are now ready to start the
next lesson on:
Forecasting
Sales and revenue Budgets