Week 8 & 9

Martin Turner
ACCT11059 USING ACCOUNTING FOR DECISION MAKING

BUDGETING
It was my favourite
chapter so far.
I struggled to read this chapter I found it boring,
long-winded and some parts hard to understand. I
found it difficult to look for meaning and to be insightful
when I wasnt interested in what I was reading.
Agenda
Purple Chocolates
Why Budget?
Balanced Scorecard
Minute Paper
Cash Budgets
The two most beautiful words in the
English language are cheque enclosed.
Dorothy Parker
Figure 7.1: Purple Chocolates
Cash Budget
for the six months ending 30 June 2015
.

Jan Feb March April May June Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000
Cash Inflows
New Share Capital 1,500 0 0 0 0 0 1,500
Cash Receipts from Sales* 100 200 300 400 1,000 1,000 3,000
Total Cash Inflow 1,600 200 300 400 1,000 1,000 4,500
Cash Outflows
Direct Materials 0 300 300 300 300 300 1,500
Direct Labour 75 150 150 150 150 150 825
Overheads 0 300 300 300 300 300 1,500
Purchase of Equipment 1,000 0 0 0 0 0 1,000
Total Cash Outflow 1,075 750 750 750 750 750 4,825
Net Cash Flow 525 (550) (450) (350) 250 250 (325)
Opening Cash Balance 0 525 (25) (475) (825) (575) 0
Closing Cash Balance 525 (25) (475) (825) (575) (325) (325)
* Cash sales that month plus credit sales from two months previously

Sales Budget ($000)

Jan Feb Mar Apr May June
Cash Sales 100 200 200 200 200 200 1,100
Credit Sales (60 days) 100 200 800 800 1,000 1,000 3,900
Total Sales 200 400 1,000 1,000 1,200 1,200 5,000

Figure 7.2: Purple Chocolates
Budgeted Income Statement
for the six months ending 30 June 2015
$'000
Sales
Cash
Credit (60 days)
1,100
3,900
Total Sales
5,000
Less: Cost of Sales
Direct Materials
Direct Labour



1,650
825

2,475
Gross Profit
2,525
Less: Dep'n of
Machinery
Less: Overheads
50
1,650
Net Profit
825
Q: How could we have negative cash flow
of $325,000 and make a profit of
$825,000?

What gives? Which one is right?



Figure 7.3: Purple Chocolates
Budgeted Balance Sheet
as at 30 June 2015
$'000
Assets
Current Assets
Inventory 375
Debtors 2,000
Total Current Assets 2,375
Non Current Assets
Equipment 1,000
Less: Accum. Dep'n (50)
Total Non-Current
Assets 950
Total Assets 3,325
Liabilities
Current Liabilities
Bank Overdraft 325
Creditors** 675
Total Current Liabilities 1,000
Equity
Share Capital 1,500
Retained Earnings 825
Total Equity 2,325
Equity + Liabilties 3,325
Figure 7.3: Purple Chocolates
Budgeted Balance Sheet
as at 30 June 2015
$'000
Assets
Current Assets
Inventory 375
Debtors 2,000
Total Current Assets 2,375
Non Current Assets
Equipment 1,000
Less: Accum. Dep'n (50)
Total Non-Current
Assets 950
Total Assets 3,325
Liabilities
Current Liabilities
Bank Overdraft 325
Creditors** 675
Total Current Liabilities 1,000
Equity
Share Capital 1,500
Retained Earnings 825
Total Equity 2,325
Equity + Liabilties 3,325
Credit sales in
May & June
* Cash sales that month plus credit sales from two months previously

Sales Budget ($000)

Jan Feb Mar Apr May June
Cash Sales 100 200 200 200 200 200 1,100
Credit Sales (60 days) 100 200 800 800 1,000 1,000 3,900
Total Sales 200 400 1,000 1,000 1,200 1,200 5,000

Credit sales in
May & June: $2m
Figure 7.3: Purple Chocolates
Budgeted Balance Sheet
as at 30 June 2015
$'000
Assets
Current Assets
Inventory 375
Debtors 2,000
Total Current Assets 2,375
Non Current Assets
Equipment 1,000
Less: Accum. Dep'n (50)
Total Non-Current
Assets 950
Total Assets 3,325
Liabilities
Current Liabilities
Bank Overdraft 325
Creditors** 675
Total Current Liabilities 1,000
Equity
Share Capital 1,500
Retained Earnings 825
Total Equity 2,325
Equity + Liabilties 3,325
Why Budget?
Short-term Planning
Co-ordinate
Communicate
Delegate
Motivate
Why Budget?
I didnt know that budgets could be used to co-
ordinate different parts of firms, communicate
objectives and strategies, delegate activities or
motivate people, though Im still not convinced it
can do all these things.
Previous Student
Short-Term Planning
build a fence at the top of the
cliff rather than have an ambulance
at the bottom.
Previous Student
Co-ordinate
I dont understand how budgets can help
different parts of a firm co-ordinate their
activities. The reading states that budgets can
make clear what is expected of different parts
in an organisation and how they need to talk
and work together, but I still do not understand
how a bunch of numbers can do this.
Previous Student
Co-ordinate
Sometimes it is difficult to work together
because people are individuals with different
ideas and beliefs, and also different backgrounds.
Managers need to be open-minded.
Previous Student
Communicate
When I think of a budget, it appears to me it is
just a lot of numbers. So, how can budgets
(numbers) help managers to communicate their
dreams with staff?
Previous Student
Communicate
In one of my previous roles in a web company we traded
online, but held absolutely no stock. Essentially what we
did was order the stock as the orders came through our
website. At first I thought it was madness having this
type of set-up. As far as I was concerned it would make
more sense to have the stock ready so that we could ship
it out as soon as the order came through thus making
the process much quicker.
Previous Student
Motivate
in my experience most people I know who go
to work do it to pay the bills and in order to live
the life they desire.
Previous Student
Motivate
I still cannot quite understand
how a budget can motivate people to
do things.
Previous Student
Motivate
I disagree with what the author said
about motivation, that budgets can help
motivate us in the short-term by making it
clear what we have to do. Personally I
think people are motivated mostly
through money.
Previous Student
Motivate
The conventional definition of management
is getting work done through people, but real
management is developing people through
work.
Agha Hasan Abedi
Motivate
[This quote] had me stumped for awhile.
What are we developing people for? Are we
developing them to work better? After
reading the rest of the chapter I came to the
conclusion that we must be developing
people to want the same objectives as the
firm.
Previous Student
Motivate
I remember when I used to be youth leader for our church at a
very young age. I was so excited about the position, but at the
same time, I had to admit I didnt know everything about our
church doctrines and all that. So I got the old folks from our
church to help me and our youth to run our programs. I may
have some talents in leading our young people, but there are
core values that I lacked and needed help with.
Previous Student
Motivate
Budgets dont motivate staff to act in ways consistent
with managers plans and objectives. Rather than
motivating staff to take the first steps they usually act
as a disincentive to take any steps at all.
Previous Student
Emerging Insights
[I] realise that the effectiveness of
accounting and whether accounting
hinders or helps managers depends a lot
on the managers themselves and the
people within the firm, and less so on the
actual accounting practices, which is what
I previously believed.
Previous Student
Emerging Insights
For Budgets to be meaningful, quality
communication must be present in their
preparation, in their use and in their post-
analysis.
Previous Student
Emerging Insights
other words ending in ate that could
relate to budgets are hate, late and
extenuate.
Previous Student
Personally Untouched & Unchanged
I have the uneasy feeling that I havent learnt much
at all, considering the time spent. The amount Ive
learnt would be roughly equivalent to an hours
lecture in a subject where the whole time is filled with
content (I know, I know, learning isnt content but
thats the primary way I learn when I have
problems with understanding, I just ask a question).
Previous Student
Balanced Scorecard
Perspectives:
1. Financial
2. Customer
3. Internal business process
4. Learning & growth
Grades Achieved
Formal Student Evaluation
Attendance: Lectures/Tuts
Students completing SPAs
Minute Paper
QI: What was the most important
thing you learned today?

Q2: What questions still remain
unanswered?
Summary
Purple Chocolates
Why Budget?
Balanced Scorecard
Minute Paper