Unit 1BUDGETARY CONTROL

WHAT IS A BUDGET

A PLAN OF INCOME AND EXPENDITURE OVER A PERIOD OF TIME

ACTIVITY 1 TILL 2

A BUDGET IS USED TO

MEASURE,

MONITOR,

CONTROL

A C

T I V

I T

Y

ACTIVITY 1

COMMUNICATIONS

Take considerations of factors/elements that have impact on the company financial situation

ACTIVITY 2

ANTICIPATE PROBLEM

Facilitate the managers to make agreement

on assumptions in carrying out respective activity

ACTIVITY 3 TILL 7

The role of budget are to

• Plan and Control Activity

• Motivate people

• Set standard to evaluate performance

ACTIVITY 3

TRADITIONAL APPROACH

TO APPLY BUDGETARY CONTROL

–The Manager Process : Henri Fayol–Scientific management : Taylor

MAY DEMOTIVATE PEOPLE

ACTIVITY 4

for effective budgetary control

A BUDGET SHOULD HAVE

–Clear Objective in quantified terms

–Clear Communications

Specific

Measurable

Attainable

Realistics

Time-bound

ACTIVITY 5

A budget has

a set standard

to measure performance

V A R I A N C E A N A L Y S I S

ACTIVITY 6

V A R I A N C E A N A L Y S I S

pinpoints possible causes of

poor performance

or

deviation from the budget

ACTIVITY 7

4 POSSIBLE CRITERIA TO SET BUDGET

•Use a previous figure

•Set standard using work study method

•Make estimate just to suit firm’s objectives

•Use other people standards

EACH CRITERIA USED

HAVE ITS INHERENT SETBACK

ACTIVITY 8 and 9

Two key characteristics of a Effective budgetary control system

• Prepared before the activities start

•Consider the Limiting Factors

ACTIVITY 8

For budgetary control system

to be effective,

It shall be prepared

before the activities start.

ACTIVITY 9

In making a budget,

one important factor to consider is the organisation’s LIMITING FACTOR

Commercial Organisation:

Sales

Government, Non-Profiting Org: available fund

ACTIVITY 10-11

How to prepare a specific budget

ACTIVITY 101.Prepare budget using quantitative

expression • Money Value • Quantity count • Period or time duration • Rates

2.Prepare a format to input your information relevant for the specific budget

3.Start with the limiting factor first and progressively work until the Master Budget

ACTIVITY 10-1

A Traditional Flow in preparing budget

1. Sales Budget

2. Operation budget

• Material budget

• Direct Labour budget

• Machinery budget

3. Supporting Schedules

4. Cash Budget

5. Master Budget

ACTIVITY 11

Prepare a format to input your information relevant for the specific budget ( see Excel File)

Example: To budget the total value of purchases of an item within a specific period ( duration of the budget ) = A X B money value

A= that is what is the quantity that purchasing must buy (PIECES) =HOW MANY IS NEEDED – WHAT YOU HAVE IN THE STORE AT THE START + HOW MANY MUST BE IN THE STORE AFTER THE PRODUCTION STOPS

B= PURCHASE PRICE per UNIT

ACTIVITY 12

The format of a purchase of raw material budget

• Unit used:

• LESS opening stock:

• ADD required closing stock:

• Unit purchased:

• Purchase Value:

ACTIVITY 13The format of a cash budget

1.Cash Receipt

2.Cash Payment

3.Surplus/Deficit

4.Opening Balance

5.Loan

6.Repayment

7. Interest

8.Closing Balance ( stipulate a minimum sum)

ACTIVITY 14The format of a cash flow forecast ( how much

cash you can have on hand a specific future time.)

1.Cash Receipt

2.Cash Payment

3.Surplus/Deficit

4.Opening Balance

5.Closing Balance

ACTIVITY 15

a budget and a forecast are NOT the same

• A forecast is merely an information about the future

• A budget is a management tool for planning and control .

ACTIVITY 16

Illustrate how budget

measure, monitor and control

using VARIANCE

ACTIVITY 17 TILL 23

Illustrate the types of budgets and their relationship

17Format budget for the Limiting Factor( Purchases)

18Cash Flow Forecast

19Format Depreciating Value

20Format P/L Account

21Compare cash budget and P/L account

22Format Budgeted Balance Sheet

23Format Budgeted Cash Flow Statement

ACTIVITY 24

Format of a Flexible Budget

A flexible budget is created by

adjusting a fixed budget

to allow for the behaviour of costs

at different level of activity

ACTIVITY 25-26

Applications of

Flexible Budget

Variance Analysis

ACTIVITY 27 - 28

SUBJECTIVE FACTORS IN BUDGETARY CONTROL

27 SUBJECTED TO INHERENT PROBLEMS:

• Future is predominantly uncetain

• Budget depends on people who can be unpredictable ( contrary to traditional management theory )

28 THE BUDGET ITSELF

ACTIVITY 29

Characteristics of organisation that has a traditional or scientific management view

1. Clear objectives and activity that can be planned and controlled

2. Performance can be measured

3. Problem can be solved with the “ best” solution

4. People are seen as “labour factor” organised hierarchically

Such companies are inappropriate for fast moving industries or those subjected to influences of variations like fashion or taste. But are appropriate where changes take place gradually and can be stably projected.

ACTIVITY 30-32

Explore the effectiveness of

contingency theory to budgetary control.

ACTIVITY 30

Characteristics of organisation whose management view is based on contingency theory

1. Response to environment feedback and at the sametime influences the environment

2. Strive in situations of either uncertain objectives or uncertain outcome

3. Budgeting system may not seem to work. Rather budget are based on employee’s judgement of circumstances.

ACTIVITY 31

Challenges of budgeting in Contingency theory companies

If results can be certain, budgeting can be use for personal purposes

If results and objectives are uncertain, budget can be misused to justify certain courses of actions

Where traditional budgetary concept is inappropriate, its information can be use for many other non budgetary-related reasons.

ACTIVITY 32

For budgetary control to be effective,

it must set to be appropriately people oriented (according to theory of equity, expectancy, goal setting)

That is: Achievable, Specific, Acceptable

Individual will be demotivated and non committed IF

• Goal is easy: They take it easy. Performance above budget but not as good as when there is no budget set.

• Goal is difficult: They give up. Performance is worse than when there is no budget set

ACTIVITY 33

For Budgetary control to be effective,

it depend on the organisation culture as reflected by manager’s assumption about his subordinates.

Theory X:

Budgets are imposed

and a tool

to put sanction on

subordinates.

Theory Y:

Budget result

from

subordinate’s participation

ACTIVITY 34

3 BROAD CONSIDERTIONS

when implementing Budgetary Control

Organisational culture

Nature of the task

Personality of the worker