Assignment 2, Step 5

KCQ’s - Chapter 7

I have to say that since our restated financial statements, my confidence has taken a hit however, reading chapter seven has helped to restore some of my confidence as it is in relation to budgeting for the short term. This is taking the subject of accounting back to topics that I can comprehend somewhat easily and feel at ease with – what do managers do and how they can use accounting to accomplish it. I love reading the chapters, how they describe an overall business perspective, and this chapter again did not disappoint.

The key concepts I have identified from this chapter include:

· Budgets set out the short-term future of a firm.

· Managers communicate their plans and objectives for their firm through short-term budgets (which are made annually) and used on a month-to-month basis, which implement managers short term strategic plans (through financial terms – reflecting goals and objectives).

· Budgeting can assist managers to create co-operation, motivation, co-ordination and communication between different business units or groups of a firm by delegating responsibility to the people tasked with ensuring that each specific plans are achieved, they are motivating and empowering their team to be involved.

· Co-ordinating efforts ensure different teams or individuals work together to achieve vision of managers.

· Good communication between these teams ensures that give and take is happening for the overall good of the firm with a coordinated effort to such activities.

· Delegating guidelines for responsibility actually motivates people to have an input and feel as if they are being heard.

· Managers need to carefully consider, plan and link between people’s behaviour relating to incentives and target measures so that effort is spread across all areas of effort required to achieve targets rather than manipulating the system for rewards.

· Martin made a point, which I noted down as a key concept that “not to tie individuals bonus payments to performance compared to budgets” as it was not an ideal situation.

Participating budgeting is when preparing a budget – getting the lower level managers involved in the process so they feel as if they have a valued input.

Sales budgets are prepared by sales managers (would set out sales targets for individual items based on forecasts for each product) and production budgets are prepared by production managers (would state how much of each product can be produced in a particular period) with any issues being discussed to achieve an overall acceptable outcome/balance for both business units of the firm.

A Master Budget would consolidate all budgets from various departments/ business units of the firm to form the Master Budget. A Master Budget would usually contain a Cash Budget, a Budgeted Income Statement and a Budgeted Balance Sheet and ensures all business units all line up with each other.

Time lags do happen and are important to remember in relation to budgets. Managers need to be prepared and able to react to potential situations quickly before they occur.

Sales and Production budgets

Production + Opening Inventory = Sales + Closing Inventory

This expresses the important formula to remember.

- Opening Inventory is how much product/s is held at the of the budgeted or specific period.

- Production is how much of the product/s will be made in that period

- Production and Opening Inventory is the total amount of the product available to be sold in that period adding opening inventory with the production amount

- Sales and Closing Inventory is how much of a product will be left over at the end of that period.

Unmet profit targets = if we run out of product in that period

Budgeting for Cash and Income

Interestingly, there is no set format or rules for a budget (again, not something I would have thought). However, coming back to management accounting, where most budgets for all types of firms follow a similar format to be ensuring realities of firm can be understood.

Cash outflows include such things as:

Period costs – electricity, building maintenance

Direct material – individual materials purchased to make product

Direct labour – is included when they are expected to be paid not when they are incurred.

Cash inflows can also have time lags for on credit timeframes.

Net Cash Flow = all cash inflow – all cash outflow

- Net Cash Flow is added to the opening balance of each month.

Budgeting Income Statement

Brings together all functional budgets into a budgeted income statement.

The Cash budget and the budgeted income statement may not add up completely for a period because expenses can be incurred and paid for at different times as well as cash received may not be directly when a sale is made.

Revenue, Cash, Costs, Profits to be monitored for movement and what changes are expected and which are not.

Budgeted Balance Sheet – items are assets, liabilities and equity.

Responsibility accounting – each business unit is measured for performance against financial results. It involves tracking results back to individual people or small group.

1. Responsibility is assigned for a particular performance task to manager or small group.

2. Performance measures are then established for the accomplishment of those goals.

3. Evaluation happens at set periods against assigned performance tasks.

Budgeting constantly compares budgeted performance with actual results (month to month).

Measuring performance can assist with individual’s achieving performance in line with firm goals by rewarding achievements but it can also make individuals act in ways that are not in line with overall values of the firm if they are not carefully planned out.

Balanced Score Card - managers use to measure financial performance – from a financial perspective, customer perspective, internal process perspective or even a learning and growth perspective to turn short-term measure of performance to longer term goals.

After reading this chapter, my enjoyment of the subject is back as I may struggle with confidence when things don’t line up straight away but when it is taken back to the fundamental question of what do managers do and how do they use this aspect of accounting to assist them, I find myself connecting with the thoughts and ideas better then when I am looking at it from a purely number understanding perspective.