2.

Management Accounting and Budgeting

What is Budget??
 A quantitative expression of a proposed plan by
management for a specified period in the future.
 An aid to coordinate what needs to be done to
implement that plan.
 May include both financial and nonfinancial data.

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 Advantages of Budgets
 Putting business strategy into operation.
 Provides a framework for judging performance.
 Promotes coordination and communication among
subunits within the company.
 Enables control.
 Motivates managers and other employees.

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 Types of Budgets
 Operating budgets.
 Financial budgets.

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 Basic Financial Budgets
1. The cash budget.
2. The Capital expenditures budget.
3. The budgeted statement of cash flows.

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 Budgets and Feedback
Budgets offer feedback in the form of variances
between actual results and budgeted targets. These
variances provide managers with:

 A basis for performance evaluation.

 A basis for strategy evaluation.
 An early warning of problems.

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 1. The Cash Budget
 The cash budget includes period cash receipts and
cash payments only.

 The cash budget aims to determine the cash position

(if there is excess cash or there is a cash shortage)
in order to take in advance actions to invest excess cash
or overcome cash shortage.

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 Cash budget
First Second Third Fourth Total
quarter quarter quarter quarter
Beginning cash balance (1)
Cash receipts only as:
Cash sales
Receipts from accounts
receivables (customers)
Cash receipts from sale of
fixed assets
Other cash receipts
Total cash receipts (2)
Available cash (3) = (1 + 2)

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 First Second Third Fourth total
quarter quarter quarter quarter
Cash payments:
Cash purchases
cash payments to accounts
payable (suppliers)
Direct labor cost
Overhead cash expenses
(without depreciation)
Selling and administrative
expenses
Cash payments (expenditures)
to buy fixed assets
Other cash payments
Total cash payments (4)
Ending cash balance (3 – 4)

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 Example (1)
Prepare the cash budget for Ceramica Cleopatra Group
for the first quarter of 2016 using the following data:
December January February March
2015 2016 2016 2016
Ending cash balance 10,000
Sales volume (units) 5,000 6,000 7,000 8,000
Unit selling price in cash $10 $11 $12 $12
Other cash receipts 80,000 60,000 180,000
Cash purchases 20,000 30,000 40,000 40,000
Direct labor cost 20,000 20,000 30,000
Overhead expenses 10,000 15,000 20,000
(including 2,000 depreciation
expense)
Selling and administrative expenses 14,000 18,000 12,000
Other cash payments 10,000
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 Cash budget
Jan. Feb. March Total
2016 2016 2016
Beginning cash balance (1) 10,000 84,000 127,000 10,000

Cash receipts only as:

Cash sales 6,000 × 11 7,000 × 12 8,000 × 12 246,000
66,000 84,000 96,000
Receipts from accounts - - - -
receivables (customers)
Cash receipts from sale of - - - -
fixed assets
Other cash receipts 80,000 60,000 180,000 320,000

Total cash receipts (2) 146,000 144,000 276,000 566,000

Available cash (3) = (1 + 2) 156,000 228,000 403,000 576,000

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 Jan. Feb. March total
2016 2016 2016
Cash payments:
Cash purchases 30,000 40,000 40,000 110,000

cash payments to accounts - - - -

payable (suppliers)
Direct labor cost 20,000 20,000 30,000 70,000

Overhead cash expenses (without 8,000 13,000 18,000 39,000

depreciation)
Selling expenses and 14,000 18,000 12,000 44,000
Administrative expenses
Cash payments (expenditures) to - - - -
buy fixed assets
Other cash payments - 10,000 - 10,000

Total cash payments (4) 72,000 101,000 100,000 273,000

Ending cash balance (3 – 4) 84,000 127,000 303,000 303,000
Beginning of Beginning of
Feb. March
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Remarks:
 Ending cash balance for Dec. 2015 = beginning cash
balance for Jan. 2016 = 10,000 = beginning cash
balance for total.
 Ending cash balance for Jan. 2016 = beginning cash
balance for Feb. 2016 = 84,000
 Ending cash balance for Feb. 2016 = beginning cash
balance for March 2016 = 127,000
 Ending cash balance for March 2016 = ending cash
balance for total = 303,000

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