Learning objectives
Chapter 5 After studying this presentation you should be able to:
Planning — budgeting
and behaviour
Learning objectives
After studying this presentation you should be able to:
5.5 reflect on the behavioural implications of
budgeting
5.6 critique the Beyond Budgeting approach to
management control.
Impact of likely actions on profit, assets and
cash flow management
• Non-financial considerations need to be converted or
evaluated in terms of the final financial impact.
• For each alternative course of action, the impact of key
variables on the financial position of the organisation
needs to be considered.
• The link between the key variables in each of the
budgeted financial statements are critical.
5.1 communicate the role of planning and budgeting
for improved profit performance and value creation
5.2 apply the planning and budgeting process to
consider the impact of alternative courses of action
on profit, assets and cash flow
5.3 identify the various planning and budgeting
approaches used in cost centres
5.4 compare traditional and contemporary approaches
to budgeting
The role of planning and budgeting for
improved performance and value creation
• Testing alternative actions:
• Resource allocation decisions have significant
financial impacts.
• Where choices are available, an understanding of the
implications of planning and budgeting processes are
required.
• Financial and non-financial impacts of decisions must
be considered.
• Impacts must also be considered strategically in
relation to competitor and market-based responses.
Strategic budgeting cycle

Strategic budgeting framework
Impact of likely actions on profit, assets and
cash flow management
• How sales/revenue is estimated varies, but will involve a
mixture of:
• existing and past history of sales/revenue and
product/service mix
• nature of sales initiatives and impacts
• consideration of external market through competitive
analysis
• review of macroeconomic conditions.
Impact of likely actions on profit, assets and
cash flow management
• New investment:
• longer term assets will be funded by capital budget
• may be regulatory in nature
• may be to maintain existing operations
• could be strategic.
• Each type of investment will:
• directly influence cash flow projections and asset
levels
• indirectly influence the statement of profit or loss.
Impact of likely actions on profit, assets and
cash flow management
• Sales/revenue estimation:
• key planning variable
• sets the level of activity
• is linked to other key variables.
Impact of likely actions on profit, assets and
cash flow management
• Operating expenses:
• will be impacted by new decision alternatives.
• Impact will be influenced by:
• nature of the expense item
• the expected change in sales level
• planned changes to discretionary cost items.
Impact of likely actions on profit, assets and
cash flow management
• The operating cycle:
• relates to relationship between inventory, sales,
accounts receivable and collection of cash
• speed of conversion determines liquidity of the
organisation
• coherent inventory and accounts receivable policies
help to maximise liquidity.
 Planning in cost centres
• Cost centres are organisational units where ‘cost’ is the
focus.
• Managers of cost centres are responsible for and
evaluated on the management of cost.
• Ease of measuring outputs determine whether cost
centres are referred to as:
• engineered cost centres
• discretionary cost centres.
Planning in cost centres
• Discretionary cost centres:
• planning is more difficult as relationship between
inputs and outputs are difficult to identify.
Contemporary approaches to budgeting
• Program budgeting:
• expenditure planned around programs and projects
• requires justification for expenditure, hence enhances
accountability.
Planning in cost centres
• Engineered cost centres:
• relationship between inputs and outputs are readily
measured
• variances are identified and managed
• more suitable for environments where either
standard products are produced or services are
repetitive.
Planning in cost centres
• Incremental budgeting attempts to assist the planning
process and involves making an alteration to expenditure
budget for cost centre from previous year.
• Does little to enhance accountability.
• Increasing last year’s budget discourages managers
from looking for improvements in efficiency and
effectiveness.
• Alternative method is to receive lower funds for
unspent budget.
• Likely to result in wastage and dysfunctional practices.
Contemporary approaches to budgeting
• Zero-based budgeting:
• justification for budgetary expenditure as if no prior
information available
• focus is on outcomes, often resulting in reduced
wastage, better performance of value-adding activities
and quality improvements
• however, it is time-consuming. But becoming the new
norm due to economic/financial downturn.
 Contemporary approaches to budgeting
• Rolling budgeting:
• prepared monthly or quarterly to reflect planning
changes through the next 12 to 18 months
• incorporates current information including significant
changes in business strategy, operating plans and the
economy
• allows for quicker management response.
Contemporary approaches to budgeting
• Kaizen budgeting:
• sets targeted cost reductions across time, anticipating
market price reductions across the life of a product
• cost reductions and quality improvements are
explicitly embedded in the budget.
Key budgeting issues
Contemporary approaches to budgeting
• Activity-based budgeting:
• uses activity cost pools and related cost drivers to
anticipate costs
• identify key product cost drivers and budget would be
structured around these activities
• allows for the identification of resource consumption
for each activity.
The behavioural implications of budgeting
• Managers and employees compete for scarce resources.
• Issues of power struggles, blame shifting and game
playing frequently occur.
• When power = resources under control, then allocation
becomes primary concern.
• How should allocations be done?
• Setting priorities becomes a political activity.
The behavioural implications of budgeting
• Overcoming issues:
• focus on achievement of outcomes
• foster cooperation
• organisation-wide participation
• joint determination of budget allocation formula
• use of multiple budgets
• move away from budgets?
 The 12 principles of the Beyond-Budgeting
Beyond Budgeting
model (1/2)

• Beyond Budgeting offers a contemporary management

model based on principles that encourage employee
empowerment.
• Core focus includes:
– extreme decentralisation
– relative performance evaluation
– rolling forecasts.

Source: Beyond Codex Network 2008, ‘Putting an end to “command and control”: 12 principles to defining the 21st century organization’,
www.betacodex.org.

The 12 principles of the Beyond-Budgeting Beyond Budgeting in practice: managing

model (2/2) without budgets

• The key to managing successfully without budgets:

• radical decentralisation and accountability without
influence from central
• transparent accounting and reward systems
• relative performance evaluation
• high levels of trust
• strong commitment to customer focus.

Source: Beyond Codex Network 2008, ‘Putting an end to “command and control”: 12 principles to defining the 21st century organization’,
www.betacodex.org.

Beyond Budgeting Beyond Budgeting

• Radical decentralisation and accountability: • Accounting and reward systems:

• authority needs to be devolved • develop and use performance indicators that are
• allows for quick customer response widely accepted and trusted
• contribution to strategic operational planning • bonuses not required, salary commensurate to role
• have profit responsibility
• individuals held strictly responsible for their • accounting systems must provide consistent and
performance in executing team plan reliable information quickly and easily accessible.
• individuals held accountable for items and cost under
direct/indirect influence.
 Beyond Budgeting
• There must be:
• timely reporting of information
• performance reports that only measure what
people can influence
• information reflecting critical performance
variables linked to strategy
• reporting of trends
• information about charges from services utilised.
Summary
• Communicate the role of planning and budgeting for
improved profit performance and value creation.
• Apply the planning and budgeting process to consider
the impact of alternative courses of action on profit,
assets and cash flow.
• Identify the varying planning and budgeting approaches
used in cost centres.
• Compare traditional and contemporary approaches to
budgeting.
Beyond Budgeting
• Relative performance evaluation:
• direct comparison with peers
• employee evaluation based on commitment towards
customers
• ability of employee to ‘fit’ is important
• employees encouraged to be actively involved in:
– setting their own targets or goals
– continuously improving.
Summary
• Reflect on the behavioural implications of budgeting.
• critique the Beyond Budgeting approach to management
control.