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Learning Objectives?
o Have an overview of the module
o Review basic concepts relating to performance
o Understand how budgeting is used as an instrument of performance management
3
Defining Performance
“Performance is the record of outcomes achieved in carrying out a specified job aspect during a specified period” Kane (1996: 125)
outcomes
specified job aspect
specified period
(Management by Results, MBR) 6
Results & Behaviour Framework
Behaviour
Results
AchievedDid not Achieve
Positive PositiveSuccess
Positive Failure
Negative NegativeSuccess
NegativeFailure
Two dimensional typology of success and failure to view the notion of performance. Performance can be a ‘positive success’ if both results and behaviour were positive. It will be a ‘negative failure’ if both behaviour and results are negative. Performance can be a ‘negative success’ if results are positive but behaviour was negative.
(Brumbach, 1988: p 388)
7
Strategic Planning and Budgeting
B u d g etsS tan d ard s
Targ e ts
P lan s
G oa ls
S tra teg yF orm u la tion
Measure
Outcomes
Fitzgerald et al, 1991Fitzgerald et al, 199110
Definition
“The budget for an organization is essentially a model of the expected physical, financial and (to a limited extent) non-financial consequences of all its activities for a certain period in the future.” (Wilson & Chua 1993)
“A Budget is a quantitative statement, for a defined period of time, prepared and agreed in advance, showing planned revenues, costs, assets, liabilities and cash flows”. (CIMA)
11
Planning and Control
Identify Objectives Search for alternative
Courses of action Gather information about
alternatives Select alternative courses
of action
Implement decision
planning
Control Compare actual and planned outcome Respond to divergences
Long termPlanning process
Short termBudgeting process
12
Functions -1
Quantification of plans Ensuring plans are financed Controlling resources and
performance
Otley (1996): p 290
14
Forecasting Planning Communication Co-ordination Authorisation Motivation Evaluation
Functions - 2
Few People can carry a male elephant EQL (UMA)
15
Budget Terminology
Establishment of objectives, and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve them.
CIMA Official terminology
Planning
16
The Budget period
A segment of time for which budget is prepared and used
Can be sub-divided into 12 or 13 control periods.
17
Budget manual
Instruction manual governing the creation of the budgets within an enterprise.
Contents: Objectives of process explained Organisational structures Principal budgets Administrative details Procedural issues
18
Budget committee
Functions of: Co-ordination Issuing of timetables Allocation of responsibilities Provision of information Communication of final budgets Continuous assessment
Assisted by a budget officer; reps from all parts of business
19
The budget – where do we start?
The principal budget factor – that which limits the activities of the organisation.
Potential ones are:-
20
The budget process
The process will differ from one organisation to another
Preparation may take weeks or months
Budget committee may meet several times
21
Steps in preparation
1. Identify limiting budget factor2. Preparation on sales budget3. Preparation of finished goods
budget4. Preparation of production budget5. Preparation of budgets for
production processes6. Prepare raw materials inventory
budget
22
Steps in preparation
7. Prepare raw materials purchases budget
8. Prepare overhead cost budgets9. Prepare overhead absorption rates10. Prepare Cash budget11. Prepare Master budget
23