Chapter 8 - Budgeting, Planning Control

8/18/2019 Chapter 8 - Budgeting, Planning Control

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BUDGETING, PLANNINGBUDGETING, PLANNING

& CONTROL& CONTROL(Chapter 8)(Chapter 8)


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A A budget is a plan and budgeting isbudget is a plan and budgeting is

one part of the strategic planningone part of the strategic planning

process, which is concerned withprocess, which is concerned with

planning and controlplanning and control Planning budgets are management’sPlanning budgets are management’s

belief of what the business’s costs andbelief of what the business’s costs and

revenues will be over a speciedrevenues will be over a speciedfuture time period, the budget periodfuture time period, the budget period

CControl budgets are used forontrol budgets are used formana ement motivational ur osesmana ement motivational ur oses

Budgeting, Planning And Control

Budgeting, Planning And Control


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The trategic PlanningProcess

The trategic PlanningProcess


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The trategic Planning!elationship "ith

Budgeting

The trategic Planning!elationship "ith

Budgeting


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f f orecasts are not plans but predictions oforecasts are not plans but predictions ofthe future,the future,

which are re#uired as an important which are re#uired as an important

prere#uisite to the budget processprere#uisite to the budget process

decisions must also be made and policiesdecisions must also be made and policies

formulated regarding stoc$ days andformulated regarding stoc$ days and

purchasing, debtor and creditor days,purchasing, debtor and creditor days,

sta% costs, capital e&penditure, andsta% costs, capital e&penditure, and

standard costsstandard costs

types of forecastingtypes of forecasting

#ualitative#ualitative

#uantitative#uantitative

'orecasting AndPlanning

'orecasting AndPlanning


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Budget Preparation 'low(iagram

Budget Preparation 'low(iagram


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The master prot and loss budget is preparedThe master prot and loss budget is prepared

from each of the elements of the operatingfrom each of the elements of the operating

budget)budget)

salessales

productionproduction

distribution and administrationdistribution and administration

nancialnancial

the master budget is comprised of thethe master budget is comprised of the

prot and loss budgetprot and loss budget

cash budgetcash budgetbalance sheet bud etbalance sheet bud et

Performance *valuation And Control +-

Performance *valuation And Control +-


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! ! is$ assessment and ris$ analysis shouldis$ assessment and ris$ analysis shouldbe applied to the master budgetbe applied to the master budget

!is$ assessment and ris$ analysis must be!is$ assessment and ris$ analysis must be

closely reviewed in terms of additionalclosely reviewed in terms of additional

funding re#uirementsfunding re#uirements

CControl budgets are usually e&ed toontrol budgets are usually e&ed to

reect actual activity levels, andreect actual activity levels, and

performance against budget providedperformance against budget provided

from e&ception reporting evaluated sofrom e&ception reporting evaluated so

that corrective actions may bethat corrective actions may be

Performance *valuation And Control +.-

Performance *valuation And Control +.-


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A A s part of the control functions part of the control function

of the budget, the system ofof the budget, the system of

responsibility accounting isresponsibility accounting isused to measure actual resultsused to measure actual results

against budget for each ofagainst budget for each of

various types of responsibility various types of responsibility

centrecentre

A responsibility centre is a A responsibility centre is a

department or organisationaldepartment or organisational

!esponsibility Centres!esponsibility Centres


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Types of Respons!"ty Centre Types of Respons!"ty Centre

There are three !as# types of There are three !as# types of

respons!"ty #entersrespons!"ty #entersCost CenterCost Center

In#$r #ost !$t not ne#essar"y %enerateIn#$r #ost !$t not ne#essar"y %enerate

reen$e ,e pro'$#ton 'epartentreen$e ,e pro'$#ton 'epartent

Prot CenterProt Center

In#$r #ost & reen$e, e* Bran#h o+#esIn#$r #ost & reen$e, e* Bran#h o+#es

of !ansof !ans


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Types of Respons!"ty Types of Respons!"ty

CentersCenters

Inestent CenterInestent Center

In#$r #ost, %enerate reen$es &In#$r #ost, %enerate reen$es &

has #ontro" oer nestenthas #ontro" oer nestent

f$n's aa"a!"e for $se*f$n's aa"a!"e for $se*

Asso#ate' -th s$!s'aryAsso#ate' -th s$!s'ary

#opanes#opanes

E% ./C 0o"'n% 1s respons!"tyE% ./C 0o"'n% 1s respons!"ty

#enter s P22a 0$t*#enter s P22a 0$t*


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(ivisional Performance(ivisional Performance

The performance of managers ofresponsibility centres may beconsidered using the divisionalperformance measures of return

on investment +!/0-

!/0 focuses only on theperformance for the particularcontrol period1!/0 represents singlesummary measures ofperformance1


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standard costing can be used to calculatestandard costing can be used to calculate

costs of unitscosts of units

or processes that may be used inor processes that may be used in

budgeted costsbudgeted costs

nnot all budgeted amounts are standardot all budgeted amounts are standard

amounts,amounts, as the latter will be precise byas the latter will be precise by

nature, unlike budgeted amountsnature, unlike budgeted amounts

standard costing provides the basis forstandard costing provides the basis for

performance evaluation and control fromperformance evaluation and control from

comparison of actual performance againstcomparison of actual performance against

budget through the setting ofbudget through the setting of

tandard Costingtandard Costing


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A e&ed budget A e&ed budget2 reects the costs or revenues e&pected2 reects the costs or revenues e&pected

as result ofas result of

changes in activity levels from thosechanges in activity levels from those

planned in theplanned in themaster budget master budget

2 provides a more realistic basis for2 provides a more realistic basis for

comparison of actualcomparison of actualperformance performance

22 enables comparison of actual costs andenables comparison of actual costs and

revenuesrevenuesthrough the calculation of di%erences, orthrough the calculation of di%erences, or

'le&ed Budgets'le&ed Budgets


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3ariances 3ariances

are the di%erence between planned,are the di%erence between planned,

budgeted or budgeted or

standard costs +or revenues- and actualstandard costs +or revenues- and actualcosts incurredcosts incurred

may be summarised in an operatingmay be summarised in an operating

statement tostatement toreconcile budget with actual performancereconcile budget with actual performance

3ariance Analysis +- 3ariance Analysis +-


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3 3 ariance between actual andariance between actual andstandard performance may bestandard performance may be

investigated to e&plain the reasonsinvestigated to e&plain the reasons

for the di%erences,for the di%erences,

through completion of a completethrough completion of a complete

analysis of all variances, oranalysis of all variances, or

alternatively alternatively

through the use of e&ceptionthrough the use of e&ception

reporting that highlights onlyreporting that highlights only

signicant variancessignicant variances

3ariance Analysis +.- 3ariance Analysis +.-

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Chapter 8 - Budgeting, Planning Control