Chapter 6:

BUDGETING
 Function Detail
Forces management to set out detailed plans for achieving the
Compel planning targets
To ensure that each person affected by the plans is aware of
Communicate ideas and plans what he or she is supposed to be doing
To ensure everyone in an organisation is working towards the
Coordinate activities same goals
1. WHY DO Use to decide how many resources are needed and how many
Means of allocating resources should be given to each area of the organisation's activities
ORGANISATI A formal budget delegates authority to budget holders to take
ONS Authorisation
action and, within specified control limits, to incur expenditure
on the organisation's behaft
PREPARE Budgts require that managers are made responsible for the
BUDGETS? Provide a framework for
responsibility accounting
achievement of budget targets for the operations under their
personal control
Depend on the difference between budgeted and actual
results, departures can investigate the controllable and
Establish a system of control uncontrollable fators
Provide a mean of performance
evaluation Provide targets
This reflects how well or badly their performance is =>
Motivate employees Managers provide an incentive for improving future
 Linear relationship:
y = a + bx
=> y: total costs
2. PREPARING x: level of activity
FORECASTS
a: fixed cost
b: variable cost per unit
2. PREPARING FORECASTS
The high-low method:
Note: using highest and lowest volume of activity

Ex: The costs of operating the maintenance department of a computer manufacturer, Bread and Butter Ltd,
for the last four months have been as follows
Month Cost Production volume
$ Units
1 110,000 7,000
2 115,000 8,000
3 111,000 7,700
4 97,000 6,000
Requirement: Calculate the costs that should be expected in month 5 when outout is expected to be 7,500 units.

We have 115,000 = a + 8,000b

97,000 = a + 6,000b
=> a = 43,000 fixed cost
b=9 variable cost per unit

If output is 7,500 units => Total cost = 43,000 + 9*7,500 = 110,500

2. PREPARING FORECASTS -
CORRELATION
Possitve and negative correlation:
Degrees of correlation:
- Perfectly correlated - Positive correlation: low values of one variable are associated with low values of the other,
- Partly correlated
- Uncorrelated
and high values of one variable are associated with high values of the other
- Non-linear correlation - Negative correlation: low values of one variable are associated with high values of the other,
and high values of one variable are associated with low values of the other

Measure of correlation:
- The coefficient of correlation, r:
If: + r = -1 => perfect negative correlation
+ r = 1 => perfect positive correlation
+ r=0 => uncorrelated
- The coefficient of determination, r2: the measurement of the proportion of the change in one varible
that can be explained by variations in the value of the other variable
Ex: The coefficient of correlation, r, between vehicle maintemance costs and vehicle running hours
has been calculated to be 0.96
=> The coeffective of determination is 0.962 = 0.92
2. BIG DATA, DATA ANALYSIS AND DATA
MINING

Glossary of terms Definition

Datasets whose size is beyond the ability of typical database
Big data software to capture, store, manage and analyse
The process of collecting, organising and analysing large sets
Data analytics of data to discover patterns and other information
The process of sorting through data to identify patterns and
Data mining relationships between different items
Structured data Data that is contained within a field in a data record or file
Data is not easily contained within structured data fileds, such
Unstructured data as pictures, videos, webpages, PDF files, emails or blogs
2. BIG DATA, DATA ANALYSIS AND DATA
MINING
BIG DATA

Characteristics Description
Volume The scale of information
Velocity Timeliness
Variety
Veracity Clean and free from so-called noise or bias

=> Benefits:
- Forecasting demand: For instance, analysing uses data correlations alongside other known demand
trends to predict customer demand repsonses to new products
- Identifying customer preferences: customers are increasingly happy to share information about
themselves with a business => finding what they want and more promotion can be created

=> Problems:
-Lack of forecasting tools
- Privacy
- Security
- Incorrect data
- Lack of skilled data anlysts
3. ALTERNATIVE APPROACHES TO
BUDGETING
1. Incremental budgeting: basing this year's butget on last year's budget with adjustments

2. Zero-based budgeting: involves preparing a budgeting for each cost centre from a zero base. Every item of
expenditure has to be justified in its entirely in order to be included in the next year's budget

3. Rolling budget: a budget continually updated to add a new budget period as the most recent one has finished

4. Product based budgets: prepare separate budgets for each product.

=> appropriate when the cost and revenue responsibilities differ for each product, or when a single manager is
responsible for all aspects of one product

5. Responsibility based budgets: segregate budgeted revenues and costs into areas of personal responsibility

6. Activity based budgeted: based on a framework of activities