BBA MCIS Control Process Responsibility Budgeting

Management Control and
Information Systems
Chapter 10:
Control Process-Responsibility Budgeting and Management
by Objectives (MBO)
Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

1
School (IBS) Hyderabad
Control process
Control is the process of measuring and correcting actual performance

and ensuring implementation of a course of action planned in advance
for attaining certain objectives.
Budget or budgetary control system is the most effective tool for short
term planning and control in an organization
An operational budget is usually prepared for one year and states the
revenues and expenses planned for that year

2
Budgeting : Formal Control Process
Other
Goals and Rules Information
Strategies Reward (Feedback)
Yes
Responsibility
Center Report Was
Strategic
Planning
Budgeting Performance actual
versus
Performance
Satisfactory?
Plan
No
Revise Revise Corrective
Measurement Feedback
action
Communication
3
Budget
Budget is defined as a plan, quantified in monetary terms,

prepared and approved prior to a defined period of time,
usually showing planned income to be generated and/or
expenditure to be incurred during that period and the capital
to be employed to attain a given objective

4
Budget and Strategic Planning
Strategic planning focuses on activities that extend over a
period of several years, whereas the budget is normally
prepared for one year
A budget can be viewed as one year slice of the organization’s

strategic plan
Strategic plan is structured by product lines whereas budget is

classified by responsibility centers

5
Budget and Strategic Planning
SI No Budget Strategic Planning
1 One Year Several Years
Classified by Structured by product

2
responsibility centers lines

6
Budgetary Control – System and Purpose
System:
Budgetary Control is the system of planning and accounting through

the use of budget. It involves the following five steps:
• Setting up of plans and budgets for each functional area like

production, sales, purchase, personnel etc
• Measuring and recording actual performance of each functional
area
• Comparing actual performance with planned performance and
measuring the deviations or variance
7
System:
Five steps (Continued):
• Analysing and investigating into the cause of the deviations and

identifying the person/function responsible
• Taking corrective action and ensuring that such deviation do not
arise in future. Sometimes, the comparison of actual performance
with the plans may indicate the need to change the policies.

8
System:
Budgetary control implies a constant and continuous monitoring on

all the phases of business activities:
• Daily
• Weekly
• Monthly
• Quarterly and
• Yearly

9
Purpose:
The purpose of budgetary control can be summarized in the

following four heads:
I. Planning
II. Coordination
III. Responsibility
IV. Performance Evaluation

10
Purpose:
I. Planning:
Budget is prepared within the framework of the strategic plan,
which is designed by the top few executives

11
Purpose:
II. Coordination:
Master Budget
Inconsistencies or anomalies

12
Purpose:
III. Responsibility:
Which manager is responsible for what?

13
Purpose:
IV. Performance Evaluation:

Commitment to the manager
Benchmark

14
Preparation of Operation Budget
Establishing a budgetary control system involves the
following prerequisites:
a) Selection of the budget period

b) Identifying the type of budget to be prepared
c) Consideration of the limiting factor

15
Selection of the budget period:
Budgeting period, in most of the organizations, coincides with the

accounting year. This is convenient and helpful.
There could be shorter/longer budget period for seasonal industries.

A budget may be prepared for three to five years, indicating
monthly figures for first year and annual figures for the next two to
four years

16
Identifying the type of budget to be prepared:
An operational budget incorporates all the functional budgets

when it is called “master budget” or “Summary budget”. It is
a summary plan of all of the activities of the organization for a
definite future period.
It includes details related to production, sale, purchase, stock,

debtor, creditor, assets, liabilities, etc.

17
Identifying the type of budget to be prepared:
Each functional or departmental manager prepares revenue or

expense budget, and all these functional budgets are then
integrated into the master budget

18
Consideration of the limiting factor:
“Limiting factor” is the key factor which at a particular time or over

a period will limit the activities of an undertaking
For example, due to shortage of a particular imported material,

production has to be restricted, or sales demand may be there but
due to shortage of production capacity a firm has to restrict its sales
to the extent of units produced

19
Consideration of the limiting factor:
In order to ensure that functional budgets are reasonably capable to

fulfil demand and supply for products, the extent of influence of
this factor has to be assured first.
Principal Budget factor or key factor

20
Fixed and Flexible Budget
Fixed Budget:
A fixed budget is designed to remain unchanged

irrespective of the volume of the output or turnover
attained
Variation in the levels of activity does not have any

effect during a short period

21
Fixed and Flexible Budget
Flexible Budget:
A flexible budget recognizes the difference in behaviour between

fixed and variable expenses in relation to fluctuation in production
or sales, and changes according to the change in the levels of
activity.
When flexible budget is used, the budgeted expenses are adjusted

to the actual activity level before comparing with actual expenses
incurred

22
Organization for Budgetary Control
For effective budgetary control, a sound and efficient organization is
essential.
A well defined Organization Chart
Other requirements:
a) Budget Department
b) Budget Committee
c) Budget Manual
d) Budget Programme
23
Budget Department:
Reporting to Finance Director or Comptroller of

Accounts
Functions:
• Publishes procedure and forms for the preparation of
the budget
• Coordinates and publishes basic assumptions for the
preparation of the budget
24
Budget Committee:
• The responsibility for the preparation, review and

revision of budget generally rests with the budget
committee

25
Budget Committee:
• CEO – Chairman of the committee

• Budget Controller or Management Accountant –
Secretary to the committee
• Budget committee reviews and either approves or
adjusts each of the budget
• Diversified companies, the Budget Committee might
meet only with the senior executives
26
Budget Committee:
• Alternative way to have a budget Committee at unit

level and a Central Budget Committee at the
corporate level
• Unit Level Committee

27
Budget Manual:
• It is a document containing the guidelines for the

preparation of various budgets
• Objective and procedure involved in the budgeting
process
• Sets out responsibilities of various persons
• Contains all formats and records

28
Budget Programme:
• Outlines the entire programme of the budget

• Dates

29
Functional Budgets
• Sales
• Production
• Materials

30
Variance Analysis
Variance analysis is the basis of cost control under standard

costing system. Variances are analysed and reasons are
established for taking corrective action. Such action leads to
cost reduction as well as revision of standards. It further helps
to pinpoint responsibilities to the managers, who can exercise
the technique of management by exception(MBE).
They only focus on the expenses where variances are significant,

leaving other expense areas which conform to standards
31
Variance Analysis
Favourable Variance:
When the actual cost is less than the standard cost, the
difference is called favourable variance.
Adverse or unfavourable Variance:

Adverse or unfavourable Variance occurs when the actual cost
exceeds the standard cost.

32
Variance Analysis
Direct Material and Labour Cost Variance:
An analysis of variance mainly reflects two types of variances.

• Price (P)
• Quantity (Q)
• Why? Cost = P*Q

33
Variance Analysis
• Material Price Variance
• Material Usage Variance
Material Yield Variance
Material Mix Variance
• Wage Rate Variance

• Efficiency Variance
Labour Mix Variance

34
Variance Analysis
1) Material Cost Variance :
Material Price Variance
Material Usage Variance
Formulas for calculation:
Material Price Variance:

= (Standard Price Per Unit ̶ Actual Price Per Unit) x ( Actual Quantity)
Material Usage Variance:

= (Standard quantity of material consumed ̶ Actual Quantity) x
(Standard Price Per Unit)

35
Variance Analysis
2) Labour Cost Variance
Labour Rate Variance
Labour Efficiency Variance
Formulas:
Labour Rate Variance

= (Standard Price Per Hour ̶ Actual Price Per Hour) x
(Actual Number of labour hours)
Labour Efficiency Variance
=(Standard Hours ̶ Actual Hours) x (Standard Rate Per Hour)

36
Variance Analysis
3.Revenue(Sales) Variance
Sales Price Variance
Sales Volume Variance
Formulas:
Sales Price Variance

= (Standard Price Per unit ̶ Actual Price Per Unit) x (Actual quantity Sold)
Sales Volume Variance

= (Standard Quantity ̶ Actual Quantity) x (Standard Price Per unit)

37
Control Process-Responsibility Budgeting
Thank You

38

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Management Control and

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Control is the process of measuring and correcting actual performance

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Budget is defined as a plan, quantified in monetary terms,

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

A budget can be viewed as one year slice of the organization’s

Strategic plan is structured by product lines whereas budget is

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

1 One Year Several Years

Classified by Structured by product

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Budgetary Control is the system of planning and accounting through

• Setting up of plans and budgets for each functional area like

• Analysing and investigating into the cause of the deviations and

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Budgetary control implies a constant and continuous monitoring on

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

The purpose of budgetary control can be summarized in the

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

IV. Performance Evaluation:

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

a) Selection of the budget period

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Budgeting period, in most of the organizations, coincides with the

There could be shorter/longer budget period for seasonal industries.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

An operational budget incorporates all the functional budgets

It includes details related to production, sale, purchase, stock,

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Each functional or departmental manager prepares revenue or

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

“Limiting factor” is the key factor which at a particular time or over

For example, due to shortage of a particular imported material,

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

In order to ensure that functional budgets are reasonably capable to

Principal Budget factor or key factor

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

A fixed budget is designed to remain unchanged

Variation in the levels of activity does not have any

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

A flexible budget recognizes the difference in behaviour between

When flexible budget is used, the budgeted expenses are adjusted

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

A well defined Organization Chart

Reporting to Finance Director or Comptroller of

• The responsibility for the preparation, review and

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

• CEO – Chairman of the committee

• Alternative way to have a budget Committee at unit

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

• It is a document containing the guidelines for the

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

• Outlines the entire programme of the budget

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

Variance analysis is the basis of cost control under standard

They only focus on the expenses where variances are significant,

Adverse or unfavourable Variance:

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

An analysis of variance mainly reflects two types of variances.