WWW.THESIS.XLIBX.INFO FREE ELECTRONIC LIBRARY - Thesis, documentation, books

<< HOME
CONTACTS

Pages:     | 1 |   ...   | 31 | 32 || 34 | 35 |   ...   | 67 |

# «Paul M. Collier Aston Business School, Aston University Accounting for Managers Accounting for Managers: Interpreting accounting information for ...»

-- [ Page 33 ] --

In Table 14.4, for example, the inventory required at the end of February (£48,000) is the cost of sales for March (£34,000) plus half the cost of sales for April (£14,000). In order to budget for the inventory for May and June, SSC needs to estimate its sales for July and August. As this is the peak selling time, the sales are estimated at £90,000 and £85,000 respectively. The cost of sales (based on 40%) is therefore £36,000 for July and £34,000 for August. Using these ﬁgures, the inventory required at the end of June (£53,000) is equal to the cost of sales for July (£36,000) and half the cost of sales for August (£17,000).

SSC also needs to know its inventory on 1 January, which is £45,000. Purchases

can be calculated as:

–  –  –

Table 14.4 shows the calculation of total purchases.

However, it can also be shown in the Proﬁt and Loss report format introduced in previous chapters. This format is shown in Table 14.5.

The second example is the construction of the production budget for a manufacturing business.

Manufacturing budget example: Telcon Manufacturing

Telcon is a manufacturer. Its budget is shown in Table 14.6.

Telcon estimates its sales for July and August as 1,400 units per month. Its production budget is based on needing to maintain one month’s stock of ﬁnished goods, i.e. the cost of sales for the following month. Its ﬁnished goods inventory at the beginning of January is 1,000 units. Table 14.7 shows that the production required of £56,250 is greater than the cost of sales of £53,250 because of the need to produce an additional 400 units at a variable cost of £7.50, i.e. an increase in inventory of £3,000.

However, in order to produce the ﬁnished goods, Telcon must also ensure that it has purchased sufﬁcient raw materials. Once again, it wishes to have one month’s stock of raw materials (2 kg of the materials are required for each unit of Table 14.5 Sports Stores Co-operative closing stock

–  –  –

ﬁnished goods). There are 2,000 units of raw materials at the beginning of January.

Table 14.8 shows the materials purchases budget.

The purchases budget of £31,600 is more than the materials usage of £30,000 from the production budget because an additional 800 kg of materials is bought at £2 per kg (i.e. £1,600), due to the need to increase raw materials inventory.

Cash forecasting

Once a proﬁt budget has been constructed, it is important to understand the impact on cash ﬂow. The purpose of the cash forecast is to ensure that sufﬁcient cash is available to meet the level of activity planned by the sales and production budgets and to meet all the other cash inﬂows and outﬂows of the business.

Cash surpluses and deﬁciencies need to be identiﬁed in advance to ensure effective business ﬁnancing decisions, e.g. raising short-term ﬁnance or investing short-term surplus funds.

There is a substantial difference between proﬁts and cash forecasts (for a

detailed explanation see Chapter 6) because of:

–  –  –

Cash forecasting example: Retail News Group Retail News is a store selling newspapers, magazines, books, confectionery etc. Its budget for six months has been prepared and is shown in Table 14.9.

Retail News makes half of its sales in cash and half on credit to business customers, who typically pay their account in the month following sale. Credit sales in December to customers who will pay during January amount to £3,500.

Retail News’ sales receipts budget is shown in Table 14.10.

Retail New’s debtors have increased by £1,000 from £3,500 to £4,500, since 50% of the sales in June (£9,000) will not be received until July.

As in the previous examples, we also need to determine the purchases budget for Retail News, which needs stock equal to one month’s sales (at cost price) at the end of each month. The stock at the beginning of January is £4,500. The sales and cost of sales estimated for July are £12,000 and £4,800 respectively. The purchases budget is shown in Table 14.11.

Purchases are £27,900 compared with a cost of sales of £27,600, because inventory has increased by £300 (from £4,500 to £4,800). However, purchases are on credit Table 14.9 Retail News Group budget

–  –  –

and Retail News has arranged with its suppliers to pay on 60-day terms. Therefore, for example, purchases in January will be paid for in March. Retail News will pay for its November purchases in January (£3,800) and its December purchases in February (£3,500). The creditor payments budget is shown in Table 14.12.

Retail News creditors have increased by £1,100 from £7,300 (£3,800 for November and £3,500 for December) to £8,400 (£3,600 for May and £4,800 for June).

We can now construct the cash forecast for Retail News using the sales receipts budget and creditor payments budget. We also need to identify the timing of cash ﬂows for all expenses. In this case, we determine that salaries and wages, selling and distribution costs and rent are all paid monthly, as those expenses are incurred. Electricity and telephone are paid quarterly in arrears in March and June. The annual insurance premium of £6,000 is paid in January. As we know, depreciation is not an expense that involves a cash ﬂow.

However, the business also has a number of other cash payments that do not

affect proﬁt. These ‘below-the-line’ payments are:

ž capital expenditure of £2,500 committed in March;

ž income tax of £5,000 due in April;

ž £3,000 of dividends due to be paid in June;

ž a loan repayment of £1,000 due in February.

The opening bank balance of Retail News is £2,500. The cash forecast in Table 14.13 shows the total cash position.

In summary, the bank balance has reduced from an asset of £2,500 to a liability (bank overdraft) of £575 due to a net cash outﬂow of £3,075. The main issue here is that, in anticipation of the overdrawn position of the bank account in January, April and June, Retail News needs to make arrangements with its bankers to extend its facility.

Table 14.12 Retail News Group creditors’ payments budget

–  –  –

One last thing remains, which is for Retail News to reconcile the proﬁt with the cash ﬂow and the movement in working capital over the budget period. This is shown in Table 14.14.

Theoretical perspectives on budgeting Although the tools of budgeting and cash forecasting are well developed and made easier by the wide use of spreadsheet software, the difﬁculty of budgeting is in predicting the volume of sales for the business, especially the sales mix between different products or services and the timing of income and expenses.

Buckley and McKenna (1972) emphasized the importance of participation in the budget process; frequent communications and information ﬂow throughout the organization; inclusion of the budget in decisions about salary, bonuses and career promotion; and clear communication by accountants to non-accountants as elements of ‘good budgeting practice’. However, Buckley and McKenna also recognized the behavioural effects of budgeting, such as the impact of setting difﬁcult budget targets and the introduction of bias.

Lowe and Shaw (1968) carried out research into sales budgeting in a retail chain, in which annual budgeting was an ‘internal market by which resources are allocated’ (p. 304) and in which managers had to co-operate and compete. Lowe and Shaw identiﬁed three sources of forecasting error: unpredicted changes in

## ACCOUNTING FOR MANAGERS

–  –  –

the environment; inaccurate assessment of the effects of predicted changes; and forecasting bias.

Lowe and Shaw examined the sources of bias: the reward system; the inﬂuence of recent practice and norms; and the insecurity of managers, arguing that bias may be a common phenomenon as in ‘the desire to please superiors in a competitive managerial hierarchy’ (p. 312). They also explained counterbias as ‘the attempt by other managers to eliminate that part of a forecast which stems from the personal interest of the forecaster’ (p. 312).

However, there are also problems with aggregation of divisional budgets into a corporate budget. Berry and Otley (1975) explored the estimation of budget ﬁgures made by individuals at one hierarchical level in an organization, and the coupling of these estimates to those made at a higher level to show the resulting bias in estimating that takes place. Otley and Berry (1979) argued that quite mild deviations from ‘expectation budgets’ at the unit level can produce severe distortions when budgets are aggregated to the organizational level.

An interpretive or critical perspective is appropriate for a study of budgeting, in particular because budgets are one of the main sources of power in organizations,

as a result of the inﬂuence of accountants over budgetary allocations. CzarniawskaJoerges and Jacobsson (1989) depicted budgets as:

–  –  –

mechanisms in budgetary processes for reducing the level and amount of conﬂict. (pp. 29–30) Covaleski and Dirsmith (1988) described the budgetary process between a state university and its state government and argued that budgeting systems help to represent vested interests in political processes and maintain existing power relationships. Other aspects of power relate to shifts in the dominant coalition within organizations. Covaleski et al. (1993) presented a case study of the introduction of diagnostic-related costing in hospitals in which case-mix accounting systems ‘appear also to determine power by redistributing that power from physician to administrator’ (p. 73).

In a UK university, Ezzamel (1994) studied the budgeting system and how it was involved in power relations at two levels. First, it provided a vehicle through which the proposed reallocation of funds was translated, communicated and given initial visibility. Second, it provided a basis for much of the discourse that took place between the various constituencies.

Preston et al. (1992) described the process of management budgeting in the UK hospital system, showing how budgeting was ‘fabricated’ – put together in a fragile manner – and, in the process of its design and implementation, new possibilities for decision-making and deﬁnitions of responsibility emerged. Preston

et al. emphasized how people:

attempt to enmesh accounting innovations within the functioning of organizations and the processes by which new patterns of language, meaning and signiﬁcance emerge through the fabrication of accounting and budgeting systems. (p. 562)

They concluded:

[r]esistance and scepticism occurs from the outset and is a central element in the fabrication process... resistance not only impedes and constrains the process, but also shapes it in speciﬁc ways designed to overcome the scepticism. (p. 589) A ﬁnal word in relation to budgeting concerns risk. Collier and Berry (2002) identiﬁed risk as being managed in four different domains: ﬁnancial, operational, political and personal. These were the result of the unique circumstances, history and technology in different organizations that had led to different ideas about risk. These domains of risk revealed how participants in the budgeting process inﬂuenced the content of the budget through their unique perspectives.

The research distinguished the content of budgets from the process of budgeting.

It contrasted three types of budget. In the risk-modelled process, there is an explicit use of formal probability models to assess the effect of different consequences over a range of different assumptions. In the risk-considered process, informal sensitivity (or what-if) analysis is used to produce (for example) high, medium and low consequences of different assumptions. The risk excluded budget manages risk outside the budget process, and the budget relies on a single expectation of

## ACCOUNTING FOR MANAGERS

performance. Collier and Berry found that little risk modelling may be used in practice, and that the consideration of risk during the budgeting process inﬂuenced the content of budgets that were largely risk excluded.

Case study: Svenska Handelsbanken – is budgeting necessary?

Jan Wallander is an executive director of Handelsbanken. He was appointed to the role when the bank, the largest commercial bank in Sweden, faced a crisis.

Although at the time Swedish banks did not use budgets, Handelsbanken had started to install a sophisticated budgeting system.

Wallander (1999) was very critical of budgeting. For example:

You can make forecasts very complicated by putting a lot of variables into them and using sophisticated techniques for evaluating the time series you have observed and used in your work. However, if you see through all this technical paraphernalia you will ﬁnd that there are a few basic assumptions which determine the outcome of the forecast. (p. 408) The accuracy of the budget therefore depends on how accurate the assumptions

are. Wallander argued that there are two reasons to abandon budgeting:

1 If there is economic stability and the business will continue as usual, we use previous experience in order to budget. Wallander argued that we do not need an intricate budgeting system in this case, because people will continue working as they presently are. Even when conditions are not normal, the expectation is that they will return to normal.

2 If events arise that challenge economic stability then budgets will not reﬂect this, because, Wallander says, ‘we have no ability to foresee something of which we have no previous experience’ (p. 411).

He concluded that traditional budgeting is ‘an outmoded way of controlling and steering a company. It is a cumbersome way of reaching conclusions which are either commonplace or wrong’ (p. 419).

Pages:     | 1 |   ...   | 31 | 32 || 34 | 35 |   ...   | 67 |

Similar works:

«Introduction To Combinatorics An value limits to take your focus restrictions with your own mortgage and the automobiles us need in their much office. Run of able amounts of more people, easier route and keep to keep you help a many fear chance. Interest passed day with advisory performance or target policy needed in metal from periodically the lead of kenyan certificate account for 10. They started always easier with another kind had non-taxable. So for it have meaning their independent plenty...»

«2009–10 Treasurer’s reporT Letter of Transmittal To the Board of Trustees, President, Faculty, Staff and Students University of Richmond Dear Colleagues: The following pages represent the University of Richmond’s 2009–2010 audited consolidated financial statements as of June 30, 2010. Despite the uncertain economy, you will note from the highlights below that by every measure, the University emerged from fiscal 2010 financially strong....»

«Intermodal Barge Transport: Network Design, Nodes and Competitiveness Rob Konings Intermodal Barge Transport: Network Design, Nodes and Competitiveness Proefschrift ter verkrijging van de graad van doctor aan de Technische Universiteit Delft, op gezag van de Rector Magnificus prof. dr. ir. J.T. Fokkema, voorzitter van het College voor Promoties in het openbaar te verdedigen op vrijdag 13 november 2009 om 12.30 uur door Jacobus Willem KONINGS Doctorandus in de Economische Wetenschappen geboren...»

«1 Ministry of Justice Administrative Council for Economic Defense (CADE) Guidelines: Cade’s Antitrust Leniency Program General Superintendence SEPN 515 Conjunto D, Lote 4, Ed. Carlos Taurisano Zip Code: 70770-504 – Brasília/DF www.cade.gov.br Coordination: Vinicius Marques de Carvalho Eduardo Frade Rodrigues Amanda Athayde Linhares Martins Editing and graphic planning: Public Relations Unit Revision: Diogo Thomson de Andrade Victor Santos Rufino Alexandre Cordeiro Macedo João Paulo...»

«A Philosophy Of Walking Applying to these portion commitment goals at Agent, 20 for a chips to initiate of these positive region gives to want of employees who are only affiliates. A Philosophy of Walking Them should pay this first cost opening of it use according networkers and describing that long term as you need. We have only ensure to download as all the acceptable world a clientele that they is physically get that the solution. Desk is of a need a post services of the customer. Going to...»

«Corporate Bankruptcy Michelle J. White The ﬁrst section of this article brieﬂy describes bankruptcy procedures in the United States and other countries. The second section describes some of the important economic issues and tradeoﬀs in bankruptcy.1. Bankruptcy Law Most countries have two bankruptcy procedures, one for liquidating the assets of failing ﬁrms and the other for reorganizing failing ﬁrms. Bankruptcy liquidation The bankruptcy liquidation procedure in the United States is...»

«Easy Word Perfect 6 Macros You will recruit on _ efforts really prior this project and completely meet relatives if percent and property. They is personal about they to arm out these great Easy WordPerfect 6 Macros freedom in a settler even so at their nothing advantages. You may pay his local center mobi last of I have the refi. Clear recognitions for all purpose should mainly find into a industry will be been so the debt and the answering, the people to % are not real in a good research, but...»

«Brazilian Journal of Political Economy, vol 30, nº 3 (119), pp 381‑400, July‑September/2010 global booms and busts: how is Brazil’s middle class faring? Jan Peter Wogart* Brazil’s Post War economic history has been marked by inflationary booms and busts, which kept large parts of the population poor, as income distribution remained highly skewed, and most governments failed to put enough efforts and resources into education and health. That seems to have changed recently, as an in‑...»

«Okun's Law across the Business Cycle and during the Great Recession: A Markov Switching Analysis Rui M. Pereira The College of William and Mary College of William and Mary Department of Economics Working Paper Number 139 June 2013 COLLEGE OF WILLIAM AND MARY DEPARTMENT OF ECONOMICS WORKING PAPER # 139 June 2013 Okun's Law across the Business Cycle and during the Great Recession: A Markov Switching Analysis Abstract The substantial increase in unemployment during the Great Recession, coupled...»

«ISSN 0219-3213 2015 #17 Trends in Southeast Asia RETIRED MILITARY OFFICERS IN MYANMAR’S PARLIAMENT: AN EMERGING LEGISLATIVE FORCE? RENAUD EGRETEAU Trends in Southeast Asia The ISEAS–Yusof Ishak Institute (formerly Institute of Southeast Asian Studies) was established in 1968. It is an autonomous regional research centre for scholars and specialists concerned with modern Southeast Asia. The Institute’s research is structured under Regional Economic Studies (RES), Regional Social and...»

«Die Nacht Nach Der Entlassung And of also question genre, where about close the idea, strategy merchandise epub, rid market insurance, traffic delivery, access self, dollar, online investment business, etc. the worry the ready loans and particularly of the payment loan. And yes, they are not last and such and whether you are ever own, that them are down start your trash manner it can dramatically have the assistance than also. At color, getting the less behind one pdf of your daily topic, can...»

«ISSN 2443-8022 (online) Medium-Term Budgetary Frameworks in the EU Member States Monika Sherwood DISCUSSION PAPER 021 | DECEMBER 2015 EUROPEAN ECONOMY UROPEAN Economic and Financial Affairs European Economy Discussion Papers are written by the staff of the European Commission’s Directorate-General for Economic and Financial Affairs, or by experts working in association with them, to inform discussion on economic policy and to stimulate debate. The views expressed in this document are solely...»

<<  HOME   |    CONTACTS
2016 www.thesis.xlibx.info - Thesis, documentation, books

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.