Management Accounting, ICMAP

Teacher:
1. Naveed ur Rehman, FCMA, DAIBP, ACISP
2. Mobile and whatsapp: 03335233915
3. Google drive link of class resources:
https://drive.google.com/drive/folders/
1iHM1JcMFXz7W-yFS1npuRuY6t_Hl_v7W?

usp=drive_open

4. Recommended website: www.investopedia.com

Books:
1. CIMA P1
2. CAF-8, ICAP
1st Chapter: Budgeting:

Outcome:
You would be able to prepare budget for any
entity including individual, organization,
governments.

Definition of budget:

1.Quantitative plan (No of cars produced)

2.Expressed in financial terms (PKR, US$)

3.For a specified period of time (Annually)

Prerequisites:

Understanding of operations of entity-flows

● All Revenue streams

● All Expenses streams

 ● All cash inflows

● All cash outflows

● All Assets

● All liabilities

● All equity

A. Government Budget

1.First step list down all expenses

2.Second list all revenues streams

Government budgets can be:

a) Surplus: Revenues > Expenses

 b) Balanced: Revenues = Expenses

c) Deficit: Expenses > Revenue

B. Commercial Budget
1.Operational/ Functional budget

a)First step lists all revenues (Sales Budget)

b)Second step list all expenses

Resultantly Profit / loss statement

i.e. Projected Profit and loss

2.Capital expenditure budget

Cash Budget: Life blood of business
Page 29 CIMA

Name of the entity

Covering period from -------to------

1. Receipts Rs.100
Cash sales……
Credit sales recoveries…..

2. Payments Rs. 80
Cash purchases
Credit purchases payments
Wages
Taxes

3. [1-2] Surplus / Deficit Rs. 20

4. Add: Opening Balance Rs. 10

5. Borrowing/ Return Rs. 20

6. Closing balance Rs. 30

Example 1: CAF-8 Study Text 2019 page 215

Example 2: CIMA Page 31

Sale = Cost + Profit [markup1 or margin2]

1. Markup or “Cost Plus” belongs to cost

Sale = Cost + Markup [on cost]

1331/3 = 100 + 331/3

2. Margin belongs to Sale

Sale = Cost + Margin [ on sale]

100 = 75 + 25
Sales in February are Rs. 60,000

Use equation Sale = Cost + Margin

100 = 75 + 25
60,000 = ? + ?
100 Sales is equal to 60,000,

then 75 cost is equal to [60,000 / 100 X 75] = 45,000

and 25 margin is equal to [60,000 / 100 X 25] = 15,000

Hence Sale = Cost + Margin

100 = 75 + 25
60,000 = 45,000 + 15,000
Sales in February are Rs. 60,000

Use equation Sale = Cost + Markup [cost plus]

1331/3 = 100 + 331/3

60,000 = ? + ?
1331/3 Sales is equal to 60,000,

then 100 cost is equal to [60,000 / 1331/3 X 100] = 45,000

and 331/3 markup is equal to [60,000 / 1331/3 X 331/3] = 15,000

Hence Sale = Cost + Markup

1331/3 = 100 + 331/3

60,000 = 45,000 + 15,000
Markup is dependent on cost, then cost will
be 100, markup 331/3 and sale will be 1331/3

In fact, 331/3 / 1331/3 = 25%

Margin is dependent on sale price, then sale

will be 100, margin 25, cost 75

Likewise, 100 / 1331/3 = 75%

 Dec Jan Feb Mar April

Opening stock 15,000 22,500 60,000 45,000

+Purchases 37,500 82,500 105,000

=Available for sale 52,500 105,000 165,000

(-)Closing stock 15,000 22,500 60,000 45,000

(1/2 of next month’s

sale)

Cost of goods sold 30,000 45,000 120,000 90,000

Profit [25% of sales] 10,000 15,000 40,000 30,000

Sales [100%] 40,000 60,000 160,000 120,000

Sales Jan 40,000 ====cost Jan 30,000====

50% last month Dec closing stock 15,000

=====next month Jan opening stock 15,000

Jan Cost 30,000+ Jan closing stock 22,500 (arrived as 50% of February Cost)=

Cost of goods available for sale Jan 52,500

– opening stock Jan 15,000=== Purchases 37,500

4) Purchases ???= 1) Cost of goods sold (Usage)

+ 2) closing inventory

– 3) opening inventory

4) Purchases ???= 1) Cost of goods sold (Usage)

+ 2) closing inventory

Cost of goods available for sale

– 3) opening inventory

opening inventory

+ Purchases

Cost of goods available for sale

– closing inventory

= Cost of goods sold (Usage)

Learning from cash budget:

IN CASE OF DEFICIT

How much cash will be required?

1.
When it will be required?
2.
How long it will be required?
3.
Whether it will be available? Bank overdraft, loan
4.
Refer Q.4, if not available then what to do?
5.
a.sell assets
b. or borrow at higher rate of return
c. or close down business

What we do if negative balance is expected in February????

Options: -

Defer purchase of equipment till March or pay 50% in February

1.
and 50% in March

Take loan or bank overdraft facility

2.
Delay payment of purchases till March or mail cheques
3.
Do more cash sales, presently 75%, which may be 100%, or get
4.
online fund receipt (expedite)

Issue of share capital, bonds

5.
Sale of assets
6.
IN CASE OF SURPLUS

How much cash will be available?

1.
When it will be available?
2.
How long it will be available?
3.
Whether it will be available for investment short-term or long term?
4.

Use of cash budget: Rolling budget

A cash budget divided into monthly or quarterly periods

1.
A statement comparing actual cash flows against the monthly or
2.
quarterly cash budget

A revised cash forecast (remedial measures)

3.
A statement comparing actual cash flows against a revised forecast
4.

CALENDER VARIATION

Days-in-the-month-effect [ first 5 days ]

Days-in-the-week-effect [ Monday, Tuesday]

 Mark-up,
1.
Margin,
2.
Missing figures, purchases, cash receipts from debtors, cash
3.
payment to creditors, Example CIMA P1 Page 34

Homework 18 April 2020:

4.
Till next class, you have to study Chapter 2 of CIMA P1, word to
5.
word and ask me if anything is not understandable.

Practice material Q. 2.1, 2.3 and 2.4 of CIMA P1

6.
ICMAP Past papers September 2017 Q.6. February 2016, Q.6
7.
ICAP Question Bank Q. 8.10 and 8.7
8.
Second week

Terms we learn today

1. Budget committee
2. Budgetary slack
3. Accounts receivable to know cash receipts
4. Accounts payable to know cash payments
5. Operational Budgets

Budgetary slack
Sales Manager TARGET LESS
2019 Target 100 units
2020 Target 110 units
2020 BUDGET 120 UNITS

ADMN MANAGER TARGET HIGH

2019 ADMN EXPENSES RS. 200
2020 RS. 250
2020 BUDGET RS. 220
Practice Material 23-Apr-2020:
Hilton 9th Edition [placed at Google Drive]
1. Review problem page 377
2. Exercise 9-25, page 381
3. Exercise 9-27, page 382
4. Exercise 9-29, page 382
5. Exercise 9-30, page 382
6. CAF 8 Question Bank 8.10 and 8.7
Page 350 and 355; Hilton 9th Edition
Page 366
1. Budgeted cost of goods manufactured
and sold statement
2. Administrative Expenses Budget
3. Payroll Budget
4. Rent Budget
5. Marketing Expenses Budget
6. Selling Expenses Budget
7. Distribution Expenses Budget
8. General Expenses Budget
9. Financial Budget
A plan of acquiring financial resources, such as through the issuance of stock or
incurrence or debt.

10.Projected Income Statement

11.Projected Balance Sheet
How the organization’s financial statements will appear at a specified time if operations
proceed according to plan.

12.Capital Expenditure Budget (CAPEX)

A plan for the acquisition of fixed assets, such as buildings and equipment.
 BASIS FOR
BUDGET FORECAST
COMPARISON

Meaning A budget is a financial plan Forecast means

expressed in quantitative estimation of future
terms, prepared by the trends and outcomes,
management in advance for based on the past and
forthcoming period. present data.

What is it? It is the financial expression It is the prediction of

of a business plan or target. upcoming events or
trends in business, on the
basis of present business
conditions.

Target Budget sets target. There are no targets.

Updation Annual basis At regular intervals

Estimates What business wants to What business will

achieve achieve

Variance Analysis Yes No

[CIMA Page-356]
Fixed Budget

Flexible budget

Preparation of flexible budget

[Page 359, CIMA]

Budget period

Budget Manual

Responsibility of preparing budgets

Master/corporate budget [CAF-8 page 203]
Budgeting is a collective process in which various departments / divisions of the
organization prepare their plans for the upcoming periods, which in turn are aggregated
into a master budget.

Master budgets are in the form of Projected Financial Statements and they help an
entity plan in advance about its targets for the upcoming periods.

Budget Committee
Representatives of all department head
Budget suggestion.
Head of budget committee, suggestions
complied, avoid conflicts.
Various meetings to formularize budget

[Page 360, CIMA]

Principal / key / limiting budget factor

[Page 361, CIMA]

Steps in preparation of Budget
Approaches to budgeting
[Page 373, CIMA]
Incremental budgeting

[Page 375, CIMA]

Zero based budgeting

[Page 379, CIMA]

Activity based budgeting

[Page 380, CIMA]

Imposed style of budgeting/ Top-down / Authoritative

[Page 381, CIMA]

Participative style of budgeting/ Bottom-up /
Participative

[Page 27, CIMA]

Rolling budget/ Forecast
Practice Material [Page 363, CIMA]
Production Budget and direct labor budget example

[Page 364, CIMA]

Direct Labor Budget

[Page 366, CIMA]

Material purchase budget

[Page 367, CIMA]

Question 13.2

[Page 372, CIMA]

Question 13.3