Planning and Budgeting

Planning and Budgeting

learning objectives

budgeting, planning and control

the strategic planning process

the strategic planning relationship with budgeting

forecasting and planning

Session Summary (1) Session Summary (1)

budget preparation flow diagram

performance evaluation and control

responsibility centres

divisional performance

motivation and the behavioural aspects of budgeting

problems in budgeting

Session Summary (2) Session Summary (2)

identify budgeting as one part of the strategicmanagement process

define a budget, its purpose and uses

recognise the importance of forecasting within thebudget process

outline how a business may apply the budgeting processin practice

explain the preparation of budgets for planning purposes

prepare the elements of an operating budget and a financial budget to derive the master budget

Learning Objectives (1) Learning Objectives (1)

describe the system of responsibility accounting and identify the four different types of responsibility centre

outline the advantages and disadvantages of ways in which divisional performance may be measured

appreciate the motivational and behavioural aspectsof budgeting

explain the preparation of budgets for control purposesand how performance against budget may be evaluated

identify the potential problems that may be encountered during budget preparation

Learning Objectives (2) Learning Objectives (2)

a budget is a plan and budgeting is one part of the strategic planning process, which is concerned with planning and control planning budgets are management’s belief of what the business’s costs and revenues will be over a specified future time period, the budget period

control budgets are used for management motivational purposes and in this way influence improved departmental performance

Budgeting, Planning and Control

Budgeting, Planning and Control

The Strategic Planning Process

The Strategic Planning Process

The Strategic Planning Relationship with

Budgeting

The Strategic Planning Relationship with

Budgeting

forecasts are not plans but predictions of the future,which are required as an important prerequisite to the budget process

prior to budget preparation, in addition to forecasting, decisions must be made and policies formulated regarding stock days and purchasing, debtor and creditor days, staff costs, capital expenditure, and standard costs

types of forecasting

qualitative

quantitative

Forecasting and Planning

Forecasting and Planning

Budget Preparation Flow Diagram

Budget Preparation Flow Diagram

The master profit and loss budget is prepared from each of the elements of the operating budget:salesproductiondistribution and administrationfinancial the master budget is comprised of theprofit and loss budgetcash budgetbalance sheet budget

Performance Evaluation and Control (1)

Performance Evaluation and Control (1)

risk assessment and risk analysis should be applied to the master budget

risk assessment and risk analysis must be closely reviewed in terms of additional funding requirements control budgets are usually flexed to reflect actual activity levels, and performance against budget provided from exception reporting evaluated so that corrective actions may be implemented as appropriate

Performance Evaluation and Control (2)

Performance Evaluation and Control (2)

as part of the control function of the budget, the systemof responsibility accounting is used to measure actual results against budget for each of various types of responsibility centre

a responsibility centre is a department or organisational function whose performance is the direct responsibilityof a specific manager

Responsibility Centres Responsibility Centres

Divisional PerformanceDivisional Performance

the performance of managers of responsibility centres may be considered using the divisional performance measures of return on investment (ROI) and residual income (RI)

both ROI and RI focus only on the performance for a particular control period

both ROI and RI represent single summary measures of performance

the preparation of budgets for planning and control purposes needs the involvement of people to provide realistic plans and the motivation for performance targets to be achieved

managers who have been given the responsibility for each of the elements of their budgets have a very good chance of achieving their objectives

Motivation and the Behavioural Aspects of

Budgeting

Motivation and the Behavioural Aspects of

Budgeting

there are usually many conflicts and problems associated with the budget preparation process in most organisations

the majority of conflicts and problems are concerned with the ‘softer’ human resources issues of managers’ behaviour

Problems in Budgeting Problems in Budgeting