Module 3 quick reference: planning, budgeting and forecasting

Accounting Ahead | Original study resource | accountingahead.com.au

Module 3 quick reference: planning,

budgeting and forecasting

SMA EXAM REFERENCE PACK | MODULE 3 | PRINT AND KEEP WITH YOUR NOTES

Exam technique: budgets - work in order from sales to the balance sheet and show every working. Variances - flex

the budget to actual output first, label F or U, look for linked pairs, name who explains each, and never treat one

variance alone as proof of performance.

Plans, budgets and responsibility

Topic Remember

Strategic vs operational plan Strategic: long term (three to five years or more), broad. Operational: usually one year,

detailed

Master budget Operating budget (prepared first) + financial budget (budgeted income statement, balance

sheet, cash budget, capital expenditure budget)

Limiting factor The constraint that caps activity - demand (what can be sold) or capacity and supply (what

can be made)

Rolling (continuous) budget Add a month or quarter as each one ends so the plan always covers twelve months ahead

Jobs of a budget Plan and allocate scarce resources; coordinate and communicate; motivate and evaluate;

learn and warn

Responsibility centres Cost (costs), revenue (revenue), profit (revenue and costs), investment (profit and assets,

e.g. return on investment)

Controllability Judge a manager only on revenues and costs they control; allocated (indirect) costs are

information, not a test

Control loop Plan; compare actual with budget; investigate material variances; act, learn and update

Alternative approaches to budgeting

Approach Key points

Incremental Last year plus an adjustment: quick, but ignores change; 'use it or lose it'

Zero-based Every activity justified from zero. Fresh look; slow, costly; can starve long-term investment

Activity-based Demand, then activities, then capacity, then the financial budget: feasible plans

Beyond Budgeting No fixed annual targets; decentralised leadership; adaptive processes; rolling forecasts;

relative performance judged with hindsight

Rolling budget vs rolling

forecast

A rolling budget extends the budget itself; a rolling forecast predicts key values (budget

lines or not) without resetting targets

STRATEGIC MANAGEMENT ACCOUNTING | EXAM REFERENCE | MODULE 3

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Accounting Ahead | Original study resource | accountingahead.com.au

Budget formulas

Budget Formula

Sales Budgeted units sold x budgeted selling price

Production (units) Budgeted sales + desired closing finished goods - opening finished goods

Direct materials used Production units x standard quantity per unit (x price for dollars)

Direct materials purchases Materials used + desired closing materials - opening materials; x price per unit for dollars

Direct labour Production units x hours per unit x rate per hour

Overhead rate

(predetermined)

Budgeted cost pool / budgeted quantity of the cost driver

Manufacturing overhead Variable rate x budgeted driver quantity + fixed overhead (a lump sum)

Standard cost per unit Materials + labour + variable overhead + fixed overhead per unit

Cost of goods manufactured Direct materials used + direct labour + manufacturing overhead (+ opening WIP - closing

WIP)

Cost of goods sold Opening finished goods + cost of goods manufactured - closing finished goods

Budgeted income statement Sales - cost of goods sold = gross margin; - period (non-manufacturing) costs = operating

profit

Cash budget Opening cash + receipts - payments = closing cash before financing; borrow or invest to

hold the minimum balance. Use collection and payment patterns; leave out non-cash items

such as depreciation

Flexible budget Fixed costs + (budgeted variable cost per unit of activity x actual activity)

Three-column framework for cost variances

Actual results

Actual quantity of input

x actual price

AQ x AP

Flexed budget

Actual quantity of input

x budgeted price

AQ x BP

Flexible budget

Quantity allowed for actual

output x budgeted price

BQ allowed x BP

Price (spending) variance

(AQ x AP) - (AQ x BP)

Efficiency variance

(AQ x BP) - (BQ allowed x BP)

Price + efficiency = flexible budget variance for that cost

STRATEGIC MANAGEMENT ACCOUNTING | EXAM REFERENCE | MODULE 3

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Accounting Ahead | Original study resource | accountingahead.com.au

Variance formulas

Costs: actual above budget = unfavourable (U). Revenue and profit: actual above budget = favourable (F). AQ =

actual quantity, AP = actual price, BP = budgeted price, BQ allowed = budgeted quantity allowed for actual

output.

Variance Formula Usually explained by

Static budget variance Actual result - static budget Analyse further: too broad on its

own

Flexible budget variance Actual result - flexible budget (budget at actual output) Split into price and efficiency

Sales-volume (Actual units sold - budgeted units sold) x budgeted

contribution margin per unit

Profit / investment centre manager,

with sales

Selling-price (Actual price - budgeted price) x actual units sold Sales (revenue centre) manager

Direct material price (AQ x AP) - (AQ x BP) Purchasing manager

Direct material efficiency (AQ x BP) - (BQ allowed for actual output x BP) Production manager

Direct labour price (rate) (Actual hours x actual rate) - (actual hours x budgeted

rate)

Production manager

Direct labour efficiency (Actual hours - hours allowed for actual output) x

budgeted rate

Production manager

Variable overhead

spending

(Actual driver quantity x actual rate) - (actual driver

quantity x budgeted rate)

Shared

Variable overhead

efficiency

(Actual driver quantity - quantity allowed for actual output)

x budgeted rate

Shared

Fixed overhead rate Budgeted fixed overhead / budgeted driver quantity -

Fixed overhead

spending

Actual fixed overhead - budgeted (static) fixed overhead Profit / investment centre manager

Production volume Budgeted fixed overhead - (driver quantity allowed for

actual output x fixed rate). U = under-allocated

Profit / investment centre manager

(a capacity signal)

Reconciling budgeted and actual profit

Step Remember

Start Static budget operating profit

Sales +/- sales-volume variance (contribution margin), then +/- selling-price variance

Variable costs +/- price and efficiency variances for materials, labour and variable overhead

Fixed costs +/- fixed overhead spending variance

Finish = actual operating profit. When fixed overhead is a lump sum in both budgets, the production

volume variance is an allocation and capacity signal, not a line in this bridge

STRATEGIC MANAGEMENT ACCOUNTING | EXAM REFERENCE | MODULE 3

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Accounting Ahead | Original study resource | accountingahead.com.au

Interpreting variances

Pattern Possible causes and links

Favourable price or spending Skilful negotiation, bulk or early-payment discounts, oversupply, cheaper supplier or

substitute, lower-graded (cheaper) staff

Unfavourable price or

spending

Shortages, price rises, overtime premiums, more experienced (higher-paid) staff, pay rises

Favourable efficiency Skilled workers, good scheduling, better materials, well-maintained machines

Unfavourable efficiency Less skilled workers, poor scheduling, breakdowns, poorer materials

Linked pairs to look for Price up / volume down; cheap material / more usage; cheaper staff / more hours; hours

drive overhead

Any variance May simply be a wrong budget: acceptable once, a warning sign if it recurs

Capacity questions Production volume variance U: falling demand? quality? prices too high? new or aggressive

rivals? Plan capacity up or down to match

Behavioural aspects

Idea Remember

Goal congruence Individual goals line up with organisational goals; poorly managed budgets cause

dysfunctional behaviour

Top-down Quick and cheap; less local knowledge; weak commitment; over-stretched targets

discourage people

Bottom-up (participative) Commitment, coordination, creativity; slow and costly; politics; risk of pseudo participation

and slack

Budgetary slack Revenue understated or costs overstated to make the target easy. Test against history,

forecasts and independent evidence; reward accurate estimates

Myopia Short-term results bought at long-term cost (e.g. cutting maintenance or training)

Incentives Combine monetary and non-monetary; judge how results came about, how stretching the

targets were, the risks taken and whether results can last

STRATEGIC MANAGEMENT ACCOUNTING | EXAM REFERENCE | MODULE 3

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