PBC WORKPACK PART 1
AGL-Autonomous Group Learning
IND-Individual
SG-Small Group
CGS-Combined Small Group
MG-Main Group
ASS -Accounting Step by Step
BC-Budgetary Control Text
PL-Programme Learning
L-Lecture
D-Discussion
CH-Chapter
STOP! DO NOT TURN THE PAGE UNTIL SPECIFICALLY
INSTRUCTED
AssignmentSheet
/ Activity /Group
/ Time1 / Introduction / SG (New) / 8.30 – 9.00am
2 / Quiz / IND / 9.00 – 9.45am
3 / PL –
Basics of Budgeting / IND
SG / 9.45 – 10.30am
Coffee
4 / Lecture –Basics of Budgeting / MG
SG / 10.45 – 11.15am
5 / Case –
John Marais / SG
CSG / 11.15 – 12.10pm
12.10 – 12.40pm
6 / Lecture –
John Marais / MG
CSG / 12.40 – 1.00pm
Lunch
7 / PL –
Budget Preparation / IND
SG (New) / 2.00 – 3.00pm
8 / Lecture –
Budget Preparation / MG / 3.00 – 3.30pm
9 / Case –
Giltim Company (A) / SG / 3.30 – 4.15pm
Tea
- / Case –Giltim Company (A) / CSG / 4.30 – 5.15pm
10 / Lecture –
Giltim Company (A) / MG
CSG / 5.15 – 5.45pm
11 / Summary Lecture / MG
SG / 5.45 – 6.30pm
(a)Understand the language and concepts of business planning and budgetary control.
(b)Prepare budgets and interpret budget reports.
(c)Develop confidence in dealing with practical budget problems both human and technical.
(d)Appreciate the need for a total business planning system.
(e)Motivate further study in the future.
The AGL method is designed to achieve rapid individual learning using special materials and the stimulus of group activity without a formal instructor. The groups use the materials to find the answers to all problems and questions.
The work will be done:
(a)IND – Individually, or
(b)SG – Small Group (in small groups of four members which will change daily), or
(c)CSG – Combined Small Groups (two small groups together, with one group acting as “dealer” to lead the discussion and record key points on the “flipcharts” provided),
(d)MG – Main Group (for short taped lectures on key learning points with visual aids).
Initial group names provided. Note the name of your SG and names of the other members. Groups change three times during the course.
(a)Retained by members:-
Textbook
Notebook – for recording every key point
Course Diary
(b)Used but not retained by members:-
Work Packs for Part I and II including:
Introductions, cases, key learning points to be noted.
Try to complete fully every task in the time allowed.
Work as quickly and effectively as possible.
A pattern of learning methods will be used including:
(a)Programme learning
(b)Case analysis
(c)Lectures
(d)Quizzes
(e)Learning patterns
(f)Homework reading
1.7aObjectives
1.7bGroups
1.7cMethod
(a)Assemble in SG’s to introduce yourself, indicate your past experience in budgetary control and what you hope to contribute to and gain from the course. (10 minutes)
(b)Complete page one of the Course Diary. (5 minutes)
(c)Reassemble in MG when the bell rings.
(a)Assemble in SG.
(b)Answer the quiz of 100 questions; mark your answers a, b, c, or d with a clear X on the special form provided in the Course Diary. (45 minutes)
(c)Work as quickly as possible but don’t guess – leave blanks.
(d)The organiser will mark your answers and give you a quantitative measure of your budgetary control knowledge at the start of the course.
(a)Assemble in SG.
(b)Read ASS pages 7 and 8 “How to use the Programme (3 minutes) and reach Ch. 1. (5 minutes)
(c)Do quickly in writing ASS:
Set 1 (17 minutes)Pages 7/16
Set 8 (20 minutes)Pages 81/92
(d)Record key points in your notebook.
NOTE:Read the questions out loud, around the group, after discussion record your consensus answer in the space provided in the ASS book
Budgets are financial plans of future action.
Budgetary control uses budgets to measure performance and control behaviour.
Both involve technical and human problems.
(a)Plan future operations to balance objectives, resources and environment.
(b)Communicate targets and plans to the organisation – must be understood to be effective.
(c)Motivate managers to achieve company objectives.
(d)Compare actual performance with budget target and locate trouble spots for management action.
(e)Influence the behaviour of managers.
Budgetary control may involve both project planning and period planning.
Project planning – targets for each specific project over time, from beginning to end.
Period planning – targets by time periods (months, quarters, years) including all activities in the period planning.
Flexible to meet needs – USEFUL is the key!
Factors shaping a budget system:
(a)Industry – profit-making characteristics.
(b)Top Management objectives – system to promote specific objectives.
(c)Other considerations – organisational structure, information technology, incentives and staff available.
NOTE:System initially affected by Top Management attitudes towards financial planning and control.
(a)Assumptions – Budgets are future forecasts based upon assumptions. Sales forecast is usually the key assumption.
(b)Sponsorship – Top Management must convince the Organisation that the budget system is important. Top Management attitude revealed mainly not by words but by action and involvement in budget process.
(c)Responsibility centres – Organisation centres provide for control and responsibility. Centre Manager involved in setting budget targets. Building block approach to total budget process.
(d)Participation – by both manager and “managed” in setting targets.
(e)Education – Continuous education to understand the system, what is expected, and how performance is judged.
(f)Time – Control period is shortest time for Management to intervene and change performance. Varies by responsibility centres and activity.
(g)Controllable Costs – Emphasise costs over which manager can influence (actually and/or psychologically). Use to measure performance.
(h)Management by Exception – Focus attention, not on all items but those where actual performance differs significantly from target. Conserve management time and provide starting point for performance analysis. Report signals of exceptions only!
(i)Appraisal – Budget as a standard to evaluate performance – both measured in same terms.
Operations, cash, capital, funds flow, and overall financial position.
(a)Plans and targets – covers all operating statistics for future period.
(b)Key assumption is Sales related to:
- market potential
- management guidelines
- productive capacity
- cash resources
(c)Includes sales, cost of sales, overhead expense and profit. Distinguishes fixed and variable cost. Shows “Contribution” (sales less variable cost) to fixed cost and profit.
(d)Normal period – one year – six months in detail and six months in total.
(e)Budget set from: past performance, ratios, managers’ reasonable estimates and good common sense!!
NOTE:Negotiating budget is a MANAGEMENT GAME calling for skill, strategy, shrewdness… and quiet manipulation….
Budget of overall financial position.
Assets and how they are financed from liabilities and owners equity.
Plan balance sheet at end of budget period. Forecasts:
-current assets and current liabilities from sales target in operating budget,
-or alternatively, each item of current assets and current liabilities separately:
(a)debtors as % of sales
(b)stock as % of cost of sales
(c)creditors as % of cost of sales
(d)tax as actual liability
-fixed asset requirements in a special “capital” budget,
-loans by specific management policies,
-owner’s equity (balance plus profit less dividends).
Difference between required assets and finance available (liabilities and owner’s equity) represents cash surplus or deficiency for the budgeted level of activity.
Evaluate a budgetary control system in terms of:
OObjectives – Define specific objectives which management seeks to achieve with the budget system, within the specific company organisation.
TTargets – Analyse how the system provides guidance and interaction in setting the key budget targets.
RReporting – Analyse the frequency, content, design and effectiveness of the reporting system. Compare actual against budget (target) performance.
AAction – Evaluate the effectiveness of the system in terms of action taken and behaviour patterns of managers in achieving overall company objectives.
4.10aObjectives
4.10b Budget Systems
4.10c Budget Concepts
4.10dOperating Budget
4.10e Balance Sheet
4.10f OTRA
(a)Reassemble in SG now.
(b)Study this note and learning patterns very carefully and record each key point in your notebook. (10 minutes)
(c)Discuss key points in SG. (5 minutes)
(d)When the bell rings, carry on with the case study which follows.
(a)General
John Marais is a case study in your Work Pack (Exhibits 1 to 5). It is the story of a business in words and figures; the questions are to help you to analyse the problems.
(b)SG Work (55 minutes)
Work as a group but keep notes individually. You need not all agree but you must decide!
(c)Combined Small Group Work (30 minutes)
Groups will be combined as follows:
Groups A, B and C will act as ‘Dealers’ i.e. they
A with Dmake a short presentation giving the answers to the
B with Equestions, lead the discussion, record key points
C with Fcontinually on the ‘flipchart’ and lead the CSG to a
definite range of decisions.
NOTE: Don’t look at the solution until after the lecture on the case!
No ‘checking’ here please.
EXHIBIT 1
Assignment 5.1
John Marais Company
This case challenges you to develop budgets for operations and the overall financial position of a company and to use those budgets to control operations (see previous lecture points 3, 7 and 3.8).
Read the case carefully (Exhibits 2, 3, 4, 5).
Then as a SG work together on each of the following questions, one at a time, in the order given. Work quickly to cover every question in the time allowed. Keep individual notes.
- Prepare budgets for next year based on the data available in the case, and any reasonable assumptions. Use copies of Exhibits 4 and 5 in your Course Diary:
(a)Accept the sales target of 2,500,000.
(b)Forecast selling and administrative expense using a common sense approach.
(c)Complete the Operating Budget using a gross profit percentage of 33.3%.
(d)Finally, compute the budgeted balance sheet showing the required assets for operations and how they are financed.
- Comment on the key factors of next years budget. What specific items must be carefully controlled if the company is to achieve budget targets?
- How well did the company perform this year? List all possible explanations of the fall in gross profit percentage (creative thinking here to find nine possible causes).
EXHIBIT 2
Assignment 5.1
John Marais Company
Useful Ratios
Last yrActual / This yr
Budget
/ This yrActual / Next yr
Budget
(a) / Activity:
Stock
% of cost of sales
times turned over / 26.3%
3.8 / 25.0%
4.0 / 30.0%
3.3 / 33.3%
3.0 times
Debtors
% of sales
days of sales / 6.5%
24 / 8.2%
30 / 7.0%
29 / 8.2%
30 days
Creditors
% of cost of sales
days of cost of sales / 3.8%
14 / 2.4%
9 / 13.2%
48 / 16.6%
60 days
(b) / Profitability
Gross Profit
Sales x100% / 35.0% / 37.0% / 33.5% / 33.3%
Net Profit
Owner’s equity x100% / 18.0% / 25.0% / 26.0% / ?
EXHIBIT 3
Assignment 5.1
John Marais Company
The John Marais Company was formed 8 years ago as a distributor of electrical supplies. In January last the year the Standard Bank granted loan (overdraft) facilities of up to 75,000 to finance a new building (40,000) and working capital (35,000). The loan was established on a three year basis calling for a reduction of 25,000 each year beginning on January 31, this year.
With encouragement from the bank on January 15, this year John Marais prepared the comparative financial report (Exhibit 3) as a first step towards developing a budget for this year using the following assumptions:
(a)Operations – sales 2,500,000; gross profit percentage 33.3%; sales and administrative costs following trends, dividend unchanged
(b)Capital – No substantial capital expenditure
(c)Financial Position – debtors – 8.2% of sales (30 days), creditors 16.6% of cost of sales (60 days), income tax unpaid at year end, overdraft reduced to 50,000, stock (inventory) at year end equal to 33.3% of cost of sales
and to develop a plan of action for the company to achieve its budget targets.
EXHIBIT 4
Assignment 5.1
John Marais Company
Selling and Administrative Expense: Actual and Budget
ActualYr – 2 / Budget
Yr – 1 / Actual
Yr – 1 / Budget
This Yr
000* / 000* / 000* / 000*
Selling Expense:
Sales salaries / 20 / 25 / 25 / ?
Office salaries / 15 / 15 / 15 / 20
Office expenses / 10 / 10 / 16 / 20
Sales commission / 45 / 50 / 70 / ?
Travel expense / 10 / 15 / 25 / 45
Advertising / 50 / 55 / 60 / 70
General promotion / 10 / 15 / 35 / ?
Sales discounts allowed / 40 / 47 / 80 / ?
200 / 232 / 326
Administrative Expense:
Salaries / 20 / 25 / 25 / 25
Office expense / 39 / 35 / 29 / 35
Legal expense / 4 / 10 / 6 / ?
General expense, interest
and Depreciation / 3 / 15 / 26 / ?
69 / 90 / 90
Total (see below) / 269 / 322 / 416 / ?
Operating Statements and Budgets
Actual
Yr – 2 / Budget
Yr – 1 / Actual
Yr – 1 / Budget
This Yr
000* / 000* / 000* / 000*
Net Sales
Cost of Sales / 969
630 / 1,163
733 / 1,583
1,053 / 2,500
1,667
Gross profit
Selling and administrative
Expense (see above) / 339
269 / 430
322 / 530
416 / 833
?
Operating profit
Income tax (40%) / 70
28 / 108
43 / 114
45 / ?
?
Net profit after tax / 42 / 65 / 69 / ?
Dividend paid / 28 / 43 / 43 / ?
*All figures in thousands (000) SEE COPY IN COURSE DIARY
EXHIBIT 5
Assignment 5.1
John Marais Company
Balance Sheets – Actual and Budget
ActualYr – 2 / Budget
Yr – 1 / Actual
Yr – 1 / Budget
This Yr
000* / 000* / 000* / 000*
Current Assets:
Cash / 27 / 45 / - / note A
Debtors (Receivables) / 63 / 96 / 127 / 208
Stock (Inventory) / 166 / 183 / 314 / ?
Current assets / 256 / 324 / 441
Fixed Assets:
Cost / 39 / 80 / 92 / 92
Less: Accumulated
depreciation / 7 / 10 / 12 / 30
32 / 70 / 80 / 62
Total assets / 288 / 394 / 521 / ?
Current Liabilities:
Creditors (Payables) / 24 / 18 / 139 / 288
Current tax liability / 28 / 43 / 45 / ?
Bank (loan) / - / 75 / 75 / 50
Current Liabilities / 52 / 136 / 259 / ?
Owner’s Equity:
Capital / 100 / 100 / 100 / 100
Accumulated profit / 136 / 158 / 162 / ?
288 / 394 / 521 / ?
Note A: All figures in thousands (000). Cash is the difference between the estimates total assets and total liabilities & Owners Equity, which may be positive (a balance) or negative (a. cash shortage). SEE COPY IN COURSE DIARY
(a)Assemble in (new) SG.
(b)Do quickly in writing ASS:
Pages
Set 9 (frames 1-11 only) (10 minutes)93-97Chapter 4
Set 2 (20 minutes) 17 - 2917/29Chapter 2
Set 6 (15 minutes) 65 - 7265/72Chapter 3
Set 4 (15 minutes) 41 - 5141/51Chapter 3
(c)Record key points in your notebook.
Plan cash to finance immediate operations and avoid shortages.
Translate sales, costs, and expenses into weekly and monthly cash receipts and payments based on assumption of credit terms.
Determine future cash needs – timing and duration of peak cash requirements.
Revise forecast monthly for twelve months ahead.
Cash availability is ABSOLUTELY VITAL!!
(a)Key to long term profitability. Invest now for benefits in the future.
(b)Plan future requirements for fixed assets, research and development, investments and other major expenditures.
(c)Key decisions which affect the long term “shape”, “direction”, financial strength of the company.
(d)Create the environment for future business operations.
(e)Need long term (five year) capital budget to make annual capital budgets meaningful.
(f)Plan both new “investment” and new “disinvestments” (sale of fixed assets, etc.).
Forecasts future sources and uses of funds.
Sources of funds are: profit before depreciation, new capital, new long term loans, sale of fixed assets, reduction of working capital.
Uses of funds are: dividends paid, fixed assets, investments, repayment of loans, increase in working capital, etc.
Sources always equal uses – difference simply changes working capital.
If “required working capital” is computed – then the difference between sources and uses of funds represents: fund surplus or deficient to requirements.
Management provides funds by (a) increasing sources, or (b) reducing uses!
Funds flow shows key management decisions in allocating company resources.
NOTE:Profit is computed after charging depreciation but since depreciation is a non-cash expense, the cash flow from operations is always:
(a)profit after charging depreciation, plus
(b)depreciation expense
which is the same as “profit before depreciation” or “profit plus depreciation”.
Budgets are based on assumptions.
Usefulness of the budget depends on the validity of the assumptions.
Broad assumptions only justify broad figures.
Detailed “pseudo accurate” figures are neither justified nor useful to Management.
There is no “true” cost – only “useful” cost to Management.
Cost may be:
(a)Variable cost – varies in total with volume (e.g. direct materials).
(b)Fixed cost – constant in total with volume (e.g. rent, office salaries, audit fees).
(c)Allocated cost – charged to centres on “fair” basis; never “true” cost, but may well motivate managers (psychologically) (e.g. selling and administrative overhead “allocated” to departments).
(d)Engineered cost – directly related to production, e.g. direct labour, materials, etc.
(e)Managed cost – spent as management judges; no “right” level; performance is never minimum cost (e.g. advertising must be spent!).
(f)Standard cost – target cost levels based on engineering standards; variances between actual and standard analysed by: price, efficiency and volume (e.g. direct labour and materials).
(g)Committed cost – fixed over the short term regardless of activity level (e.g. depreciation).
(h)Direct cost – clearly associated with a product (e.g. direct material). Conversely – indirect cost.
NOTE: Any one cost may be classified in several ways!
Fixed budget assumes unchanging sales targets when sales target is not achieved.
No automatic adjustment for cost and profit targets when sales target is not achieved.
Changed only as a specific budget revision – which involves technical and human problems.
Not a fixed budget.
Series of alternative budgets according to different forecasted sales levels (i.e. 60%, 80%, 100%, 120% of target sales).
Costs and profit targets change in relation to sales targets.
Shows behaviour of cost with sales volume.
Distinguishes fixed from variable costs.
Computes “contribution” (sales less variable cost equals contribution).
Adds flexibility and complication to budget system.
May not motivate managers as effectively as fixed budget.
(a)Useful tool for understanding the effect on profit of volume, costs and prices. Sales and costs computed at different sales volumes. Distinguish fixed and variable costs. Break even point – sales equals total cost – no profit and no loss.
(b)Break even analysis aids understanding of budget.
(i)Shows profit (loss) at different sales volumes.
(ii)For any volume indicates what must be changed to achieve profit target, i.e. managed costs, engineering costs, allocated costs, sales prices, product elimination, etc.
(c)Not accurate. An estimate for a limited known range of volumes.
(d)Conceals real difficulty of changing assumptions, i.e. it may be much more difficult to reduce cost by 2% than to increase sale price by 4%.