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Tutorial 9: Budgeting: ACCT10001 Accounting Reports and Analysis

The document provides an agenda and tasks for a tutorial on budgeting. Task 1 discusses the implications of cutting staff training expenditure, including short-term cost reductions but long-term risks to service quality. Task 2 identifies businesses that may review budgets in response to airlines cutting routes, and those that may benefit. Task 3 outlines problems with an authoritarian budgeting style that doesn't allow manager input or consider external factors. Task 4 involves preparing a cash budget for a car repair business considering sales, expenses, inventory purchases and equipment payments.

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70 views

Tutorial 9: Budgeting: ACCT10001 Accounting Reports and Analysis

The document provides an agenda and tasks for a tutorial on budgeting. Task 1 discusses the implications of cutting staff training expenditure, including short-term cost reductions but long-term risks to service quality. Task 2 identifies businesses that may review budgets in response to airlines cutting routes, and those that may benefit. Task 3 outlines problems with an authoritarian budgeting style that doesn't allow manager input or consider external factors. Task 4 involves preparing a cash budget for a car repair business considering sales, expenses, inventory purchases and equipment payments.

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© © All Rights Reserved
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ACCT10001

Accounting Reports and Analysis

Tutorial 9: Budgeting
Agenda
Task 1: Impact of cost cutting on performance
Task 2: Impact of external factors on budgets
Task 3: Impact of budget style on performance
Task 4: Preparation and analysis of a cash budget
Task 1: Adapted from Ex 9.40 Birt et al 6e
Ron Howard is the operational manager for Tours R Us.
Ron’s bonus is dependent upon the reduction of his
department’s operating expense budget by 10 per cent in the
coming year.
One initiative he has taken is to cut staff training expenditure.

Required
Discuss the implications of this decision for Tours R Us.

Short-term: Will successfully ↓ costs


Long-term: reduced training risks reduced quality of service
=> could impact on future earnings
Task 2: Adapted from Ex 9.46 Birt et al 6e
In the aftermath of the global financial crisis many airlines
announced their decision to cut back services to various
locations around Australia.
Required
Identify businesses that may have reviewed their budget targets
as a result of this announcement by the airlines.
Travel agents
Tour operators
Local businesses operating in these destinations e.g. hotels,
restaurants, shops, tourist attractions

Would any businesses benefit from the airlines’ decision?


Task 3: Ex 9.49 Birt et al 6e
‘Nobody ever seems to be able to hit our sales targets. Why is
that?’ (John Lyons, Chief Accountant of Clocktower Fashions).
John Lyons was showing his frustration at the failure of the
company’s store managers to meet their specific targets for
sales and expenses. He went on to say, ‘we do everything for
them; we don’t ask them to contribute at all; our formula for
target setting is well known.’
Required
Briefly outline what might be wrong with Clocktower Fashions’
budget process with respect to target setting.
What improvements would you suggest?
Task 3 continued
Possible problems with target setting process:
• The targets are too difficult
– Store managers may be frustrated and unmotivated.
– Targets should be challenging but attainable.
• Store managers don’t have a sense of ‘ownership’ of targets
– The style of budgeting suggested is ‘authoritarian’.
– A ‘participative’ style may address this, as well as providing an
opportunity for managers to discuss the issues.
• Sales may be impacted on by factors beyond their control
– Do they control purchasing decisions for their stores?
– Do they control resourcing decisions (e.g. staff recruitment)?
– Are expense budgets too restrictive to allow sales targets to be met?
– Do shopping centres impose trading hour restrictions?
Task 4: Adapted from Ex 9.53 Birt et al 6e
Ken Martin, manager of Lonnie Car Repairers, has requested that you
prepare a cash budget for the months of December and January. He has
provided the following information to assist in this task.
• Actual revenue for October and November and projected revenue for
December and January are as follows:
October November December January
Cash sales 33 000 31 000 42 000 30 000
Credit sales 60 000 80 000 100 000 50 000
Total sales 93 000 111 000 142 000 80 000
• Analysis of past records has shown that credit sales are collected over a
three-month period, with 50 per cent being collected in the month of the
sale, 40 per cent in the next month, and the remainder in the following
month.
Task 4 continued
• Projected expenditure during December and January is as follows:
– Selling and administrative expenses will be $58 000 each month.
– In anticipation of increased demand for vehicle servicing prior to
Christmas, the workshop placed an order for $45 000 of
consumables inventory. These supplies arrive in late November
and is required to be paid in December.
– A new car hoist will be purchased for $100 000, with a $20 000
cash payment in December and the balance to be paid in March.
• The cash balance at the end of November is $30 000 and Ken’s desire
is to maintain this as a minimum balance each month.
Required
a) Prepare a cash budget for the months of December and January.
b) Advise Ken of any financing requirements or investment
opportunities.
Task 4 continued
• Schedule of receipts from customers

Month of Credit sales


December January
credit sale $
October 60 000 6 000
November 80 000 32 000 8 000
December 100 000 50 000 40 000
January 50 000 25 000
Cash sales 42 000 30 000
Total receipts 130 000 103 000

Pattern of collection: M0 50%, M1 40%, M2 10%


Task 4 continued
LONNIE CAR REPAIRERS
Cash budget for the 2 months ending 31 January 20xx

December January
Receipts from customers 130 000 103 000
Payments
Selling & administration (58 000) (58 000)
Consumables (45 000)
Car hoist (20 000)
Total payments (123 000) (58 000)
Surplus / (deficit) 7 000 45 000
Cash at start 30 000 37 000
Cash at end 37 000 82 000
Task 4 continued
Advise for Ken regarding funding requirements or
investment opportunities
• Requirement to maintain $30k in cash
• Budget suggests no financing requirements
• Investment opportunities exist in December and January
– Invest $7k in December and a further $45k in January
• Considerations:
– Assumes budget is achieved, but what if sales variance is 10% U?
– March requires a payment of $80,000 => will need access to funds
– What if February cash flows are negative? May be better to
extend current budget to include February
Next Week
• Assignment Two Part A submission deadline – Friday, 17 May
4:00PM (this Friday)

• Part B of Assignment Two – due: Friday, 24 May 4:00PM

• Review Lecture notes / readings

• Attempt non-assessable preparation quiz prior to tutorial

NEXT TOPIC
• CVP Analysis

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