PLANNING AND

CONTROL OF
UTILITIES

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 CONTENT

1. THE PROCESS OF PLANNING AND CONTROL OF UTILITIES.................................2

Management by objectives (APO)...................................................................................2
Administrative control systems (SAC)..............................................................................2
The profit planning and control process..........................................................................2
Common parts of the profit planning and control process:..............................................4
2. DEVELOPMENT OF SPECIFIC GOALS FOR THE COMPANY......................................7
3. DEVELOPMENT AND EVALUATION OF THE COMPANY'S STRATEGIES................8
4. INSTRUCTIONS FROM EXECUTIVE ADMINISTRATION FOR PLANNING...............9
5. PREPARATION AND EVALUATION OF PROJECT PLANS......................................9
6. DEVELOPMENT AND APPROVAL OF STRATEGIC AND TACTICAL PROFIT PLANS
10
Long and short term planning at burroughs (unisys)......................................................12
9. IMPLEMENTATION OF PROFIT PLANS.............................................................14
10. USE OF PERIODIC PERFORMANCE REPORTS................................................15
Implementation of monitoring......................................................................................17
11. TIMES OF THE PLANNING PROCESS-CONTINUOUS PROFIT PLANNING........18
12. LINE AND COUNSEL STAFF RESPONSIBILITIES RELATED TO THE PCU............20
13. PCU POLICY MANUAL.................................................................................23
14. PLANNING PERSPECTIVES...........................................................................23
15. BEHAVIORAL CONSEQUENCES DERIVED FROM A CPU PROGRAM...............24
16. PARTICIPATORY BUDGETING......................................................................28
17. BUDGETS AND MOTIVATION: A PERSPECTIVE OF THE EXPECTATIONS
THEORY 32

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 1. THE PROCESS OF PLANNING AND CONTROL OF
UTILITIES.

The management functions of planning and controlling constitute the primary focus of
a PCU program.

This process takes two basic points of view:

Management by objectives (APO)

It is an administrative point of view that emphasizes the function of planning. The
specifications of the company's objectives, goals and plans are viewed as the driving
phase that integrates financial resources, productive activities and people's
performance. It leads to the function of controlling.

Administrative control systems (SAC)

They are a point of view of management that emphasizes the function of controlling.
This view specifies, first, the need for different kinds of control and the purpose of
control. They are considered the imperatives that lead to planning, productive
efficiency and people's performance.

The profit planning and control process.

FUNCTION OF SEQUENTIAL PHASES OF THE PRIMARY
ADMINISTRATION PCU PROCESS LIABILITY

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 1. Relevant external variables-
identify and evaluate.
2. General business objectives-
develop or modify.
3. Specific goals of the company - EXECUTIVE
develop in congruence with point 2 ADMINISTRATION
above.
4. Company strategies- specify the
main drives to achieve objectives
TO PLAN and goals.
5. Executive management instructions
for planning - specify planning
guidelines for managers.
6. Project plans- develop and evaluate
each project.
7. Strategic (long-term) profit plan - MIDDLE LEVEL
develop for 3.5 or 10 years. ADMINISTRATION
8. Tactical (short-term) profit plan -
execute throughout the budget year.
9. Structuring of profit plans - execute ALL LEVELS OF
LEAD throughout the budget year. ADMINISTRATION
10. Performance reports - prepare
CHECK monthly reports by areas of
responsibility. ALL LEVELS OF
11. Follow-up - provide feedback, take ADMINISTRATION.
corrective action and replan.

The box provides an overview of a typical PCU process. It integrates the management
functions of planning, directing and controlling.

A PCU program includes more than the traditional idea of a periodic or master budget,
as it encompasses the application of several related administrative concepts through a variety
of methods, techniques, and sequential steps.

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 The term integral means:

 The application of the general concept of profit planning and control to all phases of a
company's operations.
 Applying a total systems approach.

Common parts of the profit planning and control process:

1. THE SUBSTANTIAL PLAN; It is represented by the general objectives, strategies,

specific plans and programs of the organization, as well as by the coincident
commitment of general management to the long-term achievement of these objectives
and plans. The substantive plan can be characterized as the narrative part of the plan
rather than the numerical part of it. It forms the basis for the financial plan.
2. THE FINANCIAL PLAN; quantifies the financial results of implementing the
objectives, planned strategies, plans and policies of senior management. The financial
plan thus represents a translation, into financial terms, of the objectives, goals and
strategies for specific periods of time.

With respect to these two basic plans, it is generally recognized that the substantive
plan often does not receive adequate attention. On the contrary, some companies may pay
disproportionate attention to the financial plan.

DIAGRAM OF THE PARTS OF A CHARACTERISTIC PCU PROGRAM (one

year).

A. The substantive plan:

1. General objectives of the company.
2. Specific company goals.
3. Company strategies.
4. Instructions from executive administration for planning.
B. The financial plan:
1. Long-range strategic profit plan.
a. Sales, cost and profit projections.
b. Major projections and capital asset additions.
c. Cash flow and financing.
d. Personnel needs.

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 2. Short-term (annual) tactical profit plan.
a. Operation plan
Planned income statement:
1. Sales plan
2. Production or purchase plan for merchandise.
3. Administration expenses budget.
4. Distribution Expense Budget
5. Budgets such as allocations, research and development, promotion,
advertising.
b. Financial situation plan
Planned Balance Sheet
1. Asset
2. Passive
3. Capital or participation of the owners.
C. Variable expense budget:
Formulas for production expenses.
D. Supplementary data:
Analysis of the cost-volume-profit relationship, analysis by reasons.
E. Performance reports
F. Monitoring, corrective action and replanning reports.

THE ELEVEN STEPS OF THE PCU PROCESS.

1. Identification and evaluation of external variables.

These variables exert very important influences on a company. The variable
identification phase of the PCU process focuses on IDENTIFYING AND
EVALUATING the effects of external variables. Identification also involves
considering separately the variables that are not controllable from those that are.
This means that management planning must focus on how to manipulate
controllable variables. Furthermore, there must be management planning for how
to work with non-controllable variables. That is, for both types of variables, how
can management take advantage of the favorable impacts and minimize the
unfavorable impacts on the organization? By relevant variables, we mean those
that have a direct and important impact on the company. For a large business with
a national market, the relevant variables would be general in scope, whereas a

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 small business would be primarily concerned with regional and local variables
operating within the company's narrow environment. The analysis and evaluation
of environmental variables must be a constant concern of senior management. This
activity should involve all executive managers, who in turn should expect the
various advisory groups to provide data and make recommendations.
An especially significant phase of this analysis has to do with the
evaluation of the company's current strength and weakness. Planning must
necessarily begin with an objective and a realistic understanding of the current
state of products, services, profits and returns on investments, cash flow, capital
availability, productive skills and the suitability of personnel both administrative as
well as other areas. This aspect of the planning process is often difficult for most
administrations because deficiencies and inefficiencies are often difficult to
identify and objectively evaluate by those directly involved. The comprehensive
PCU approach is based on the expectation that these important effects of
operations will be critically analyzed and evaluated in a periodic and orderly
manner. In many companies, external and independent help is almost essential for
such appreciation. In this appreciation and evaluation, current strengths and
weaknesses must be classified into short-term and long-term potential.
Well-organized companies have discovered that a periodic assessment of
strengths and weaknesses is a much more effective policy than one that declares:
We will assess our strengths and weaknesses on a daily basis as relevant events
occur.
2. Development of the general objectives of the company.
The development of the company's general objectives is the responsibility
of executive management. Based on a realistic assessment of relevant variables and
an appreciation of the organization's strengths and weaknesses, executive
management can specify or restate this phase of the PCU process.
The statement of general objectives should express the mission, vision and
ethical character of the company. Its purpose is to create the identity, the continuity
of the object and the definition of the company. In a research study, the purposes
of this statement were listed basically in the following terms:
2.1. Define the purpose of the company.
2.2. Clarify the philosophical character of the company.
2.3. Create a particular climate within the business

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 2.4. Establish a guide for managers so that the decisions they make reflect the best
interests of the business, with reasonableness and fairness, to those who are
interested in it.

The statement of general objectives should be a narrative expression of the

purpose, objectives and philosophical character of the business. It must also represent
the basic foundation or cornerstone on which the development and positive
reinforcement of the company's pride is supported through management, other
employees, owners, clients and other companies that have contacts. commercial with
that one. It must be designed in a way that encourages its wide dissemination and must
also be credible, which means that, in the long run, the company's actions will have to
be in harmony with the statement in question.

The statement of general objectives is the first part of an organization's

substantive plan.

2. DEVELOPMENT OF SPECIFIC GOALS FOR THE COMPANY

The “goals phase” in the UCP process is intended to more precisely define the statement
of general objectives and move from the realm of general information to that of more specific
planning information. Provides both narrative and quantitative goals that are precise and
measurable.

These are specific goals related to the company as a single unit and to the main areas of
responsibility. Executive management should develop these goals as the second element of
the substantive plan for the next budget year. Executive management must provide leadership
in this phase of planning so that there is a realistic and clearly articulated framework within
which operations are conducted toward common goals. Furthermore, specific goals form a
basis for measuring performance.

These global, but specific, goals must be developed for both the long-term and short-term
strategic and tactical plans, respectively. This company-specific goal statement should define
operational goals such as expansion or contraction of product or service lines, geographic
areas, market share by major product or service lines, growth trends, production goals, profit
margin, return on investment and cash flow.

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 These specific goals are, to a large extent, quantified and specified for the major
subdivisions of the company. They are measurable for areas of operation that are critical to
the long-term success of the company and should represent realistic goals, as opposed to
simple expectations or guesses.

3. DEVELOPMENT AND EVALUATION OF THE COMPANY'S

STRATEGIES

Company strategies are the fundamental impulses, paths and tactics that will be used
to meet planned objectives and goals. A given strategy can be short-term or long-term. Here
are some real examples of basic strategies.

1. Increase long-term market penetration using technology to develop new products

and improve current ones.
2. Emphasize product quality and price to reach the “top” of the market.
3. Expand marketing activity to all states in the USA The company will not enter the
foreign market in the foreseeable future.
4. Market the products, with low prices, to increase volume (units).
5. Use both institutional and local advertising programs to develop market
participation.
6. Improve employee morale and productivity by implementing a behavioral
admiration program.

The purpose of developing and disseminating company strategies is to find the best
alternatives to achieve general objectives and specific goals. Strategies focus on the “how”;
Therefore, they outline an action plan for the company. Executive management must be
creative and directly involved in the development of new strategies and the adaptation of
those currently in force, in harmony with the relevant variables that management must face.

In developing basic strategies for the company, executive management must focus its
attention on identifying the critical areas that influence the long-term success of the company.
Critical areas must be pinpointed precisely through the evaluation of relevant variables.

Although strategy formulation is of continuing interest to executive management, the

best managed companies have found that the periodic reappearance of strategies is essential in
light of a careful analysis of all relevant variables and their likely future impact on the

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company. . The overall case at the end of the chapter shows a statement of the company's
strategies for a particular year.

4. INSTRUCTIONS FROM EXECUTIVE ADMINISTRATION FOR

PLANNING

This phase involves communicating the substantive plan to the middle and lower
levels of management. Explains the company's overall objectives, goals, and strategies, as
well as any other instructions needed to develop strategic and tactical profit plans . It is also
often called the statement of planning assumptions or the statement of planning guidelines.

Executive planning instructions, issued by senior management, communicate the

planning basis that is necessary for all levels of management to participate in the development
of strategic and tactical profit plans for the upcoming budget year. Executive leadership is
critical to developing and articulating this planning foundation, including the formulation of
relevant strategies. Consequently, at this point in the planning process, the basis has already
been established to articulate the general and specific objectives of the company, as well as
the strategies that facilitate their achievement.

For example, both the executive in charge of the sales department and the plant
manager receive the planning premises and the corresponding procedural instructions for
formulating, say, five-year to one-year sales plans, in one case, and sales plans. useful for the
plant, in the other.

5. PREPARATION AND EVALUATION OF PROJECT PLANS

Project plans include variable time horizons since each project has a particular time
dimension. Project plans include concepts such as plans to improve current products, new and
expanded physical facilities, entry into new industries, abandonment of products and
industries, new technology, and other large-scale activities that may be separately identified
for the purposes of the project. planning.

The nature of the products is such that they must be planned as different units. When
planning a project, the time frame to consider should normally be the expected life span of the

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project. Projects that are approved must then be allocated time (or scheduled) in the strategic
and tactical profit plans. In addition to any project that is in the process of approval or
completion, executive management must promote the formulation of project proposals from
any source within the company, as an ongoing policy.

Consistent with this approach, during the formal planning cycle, management must
evaluate and decide on the plan status of each project in process and select any new projects
to be initiated during the time dimensions covered by the strategic and tactical plans. of
utilities.

6. DEVELOPMENT AND APPROVAL OF STRATEGIC AND

TACTICAL PROFIT PLANS

When the managers of the different centers or areas of responsibility in the company
receive the planning instructions from the executive administration and the project plans, they
can begin intensive activities to develop their respective strategic and tactical profit plans, the
long-term strategic plan. Scope and short-term tactical plan are usually developed together. It
is possible (although not uncommon) for the executive administration or the main finance
official to develop the strategic and tactical profit plans. This practice is not recommended as
it denies the flat participation of middle-level managers in the planning process. This lack of
participation can cause unfavorable effects on behavior.

In the event that a participatory budget exists and has already received instructions
from the executive administration, the manager of each area of responsibility will
immediately begin activities within it to develop a long-range strategic plan (say five years).
and in harmony with said five-year plan, a short-term tactical profit plan (one year). A
centralized source will normally be required by the finance function to provide certain
information relating to applicable formats or procedures in order to establish the general
format, level of detail and other relevant procedural and format requirements that are essential
for the incorporation of all financial plans. the areas or centers of responsibility in the
company's overall profit plans as a single unit. All this activity must be coordinated between
the different centers in accordance with the organizational structure.

As the two profit plans are formulated and completed, the approval process must
begin, which involves approval, non-approval, or modification based on either a) executive

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management action or b) presentation of justification by the managers of the areas of
responsibility to the immediately higher level of authority. In this latter approval process it is
frequently used due to the numerous benefits it brings. This approval process at its climax will
require that the manager of each area of responsibility be scheduled to present to the executive
administration his plans for the different centers in order to study them before the final
presentation. The manager of each area of responsibility has the opportunity to make a
complete presentation of the plans allowing members of your advisory or line staff to assist in
your presentation after the meeting there should be in-depth practice on a fifth-and-first basis
in which the members of the responsibility center manager's executive group full opportunity
to sell their plans to executive management give executive committee employees the
opportunity to discuss among themselves and with the responsible manager all relevant
implications and assumptions implicit in the plans 3 and develop the best possible plan that
the combined talents of the entire group including the manager of the area involved can devise
from these talks, some modification of the plans may emerge or the plans may be considered
suitable in all their important aspects. It is notable how this approach invigorates the
Communication, coordination, and positive reinforcement are through this process as the
basis for full coordination of operational plans and efforts can be developed.

Once the participatory approval process for each area of responsibility has been
completed and all relevant differences have been resolved, the different plans and programs
submitted by the main responsibility centers are combined with the company's strategic and
tactical profit plans as a whole, the approval process is combined. Combining different plans,
each of which is supposedly in harmony with the planning premises previously communicated
by executive management, is normally carried out as a centralized advisory (staff) function
under the supervision of the chief financial officer. Some companies designate a staff
member, the director of planning and control or the director of budget, to coordinate these
PCU activities.

When both global profit plans have been completed for the company as a whole,
executive management must subject the entire planning package to a thorough analysis and
evaluation to determine whether the global plans represent the most realistic combination that
can be developed under the conditions. prevailing circumstances at this point both profit plans
must be formally approved by the highest level executive and distributed to the managers of
the areas involved. In particular we can observe that for security reasons only the highest level
executives of Management receives a complete copy of the profit plans.

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 The use of long-range strategic planning and short-term tactical planning by
Burroughs Corporation (now called UNISYS) is described in the following excerpt from an
article in Management Accounting. example

Long and short term planning at burroughs (unisys)

At Burroughs Corporation we develop a forecast for the manufacturing plant in order
to give our managers a complete but consolidated picture of the future operations of the plant.
It is a model as well as an instrument for management decisions as a model for managers.
They can use it to change create delete data and assumptions as a tool allows our managers to
consolidate and integrate into the corporate strategic planning process key facts such as cash
flow and investment personnel planning.

The manufacturing plant forecast used at Burroughs has improved management's

ability to determine not only what impact changes in unit shipments, workforce mix and
training decisions will have on future plant operations. but also how changes in the cost of
products will affect the net cost of operations, capital projects of the type of cost reduction
and improvement in operational performance at Burroghs. A consistent and standardized
disciplined forecast for the plant is of priority importance. Due to the company's costly
investment in product and development expenses, every dollar of corporate income is
allocated forty-five cents for this area of operation.

The long range forecast, the annual plan and the quarterly and monthly outlook
forecasts are prepared at different times of the year so that they can be reviewed with every
opportunity by senior management. Each plan has its purpose and objective. The following
departments provide information for the different forecasts

 Development and support engineering expense levels expense reductions capital

equipment cost reductions.
 Industrial engineering productivity standards capital equipment for production and
facilities.
 Acquisitions prices of materials delivery time contracts.
 Manufactures inventories production programs.
 Product warranty and support qualification reception inspection delay reprocessing
field support.
 Human resources salary and salary administration benefits

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 Burroughs' basic philosophy is that you are going to measure the performance of a
department and the people responsible must provide the necessary input to develop a good
plan. As a result, management not only has as complete a financial forecast as possible.
Rather, it presents a clear picture of the operational plans and controls that are currently being
developed or carried out.

The purpose of the forecast for the long range plan is to evaluate and determine what
the future financial needs will be for an individual product or for an entire program over the
next 3 or 5 years based on information provided by product management. The forecast
projects The expected financial performance of the product and the impact it will have on
current corporate resources. To be successful in a long-term plan, the following objectives
must be met:

1. Incorporate engineering department development and support expenses for new

products, relevant features, and cost reduction plans.
2. Review plant capacity and personnel needs in light of the startup and capitalization
products of the existing plant.
3. Identify future capital needs for development departments, the manufacturing process
and support departments (such as management information systems), and the building
structure.
4. Reflect changes in cash needs for salaries, materials, capital, etc.
5. Consider what impact inflation, worker compensation, product costs (in international
operations) and the projected impact of exchange rates will have on the plant's long-
term profitability.

The annual forecast plan covers a 2-year period and focuses on reviewing dynamic
operational issues and marketing forecasts for current and soon-to-be launched products.
The objectives of the plan are:

1. Establish predetermined manufacturing overhead quotas based on the fixed and

variable costs that will be applied to different types of labor and material
categories.
2. Determine transfer prices for equipment and services within the portfolio to the
company organization's books. The equipment is transferred to the books of the
organization responsible for marketing the product.
3. Issue budgets to operational departments.

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4. Identify specific variances from standard costs by price of materials, use of
materials, efficiency and utilization of labor, and changes in time standards.
5. Detail labor needs by activity.
6. Calculate inventory levels and objectives.
7. Identify specific capital needs and associated expenses.
8. Prepare detailed plans for product introductions, cost profiles, and phase-out of
replaced products.

Quarterly forecasts and monthly outlooks are plans to monitor performance

against the annual plan and operational forecast commitments previously prepared. In
these forecasts, the primary analysis is on cash flow to determine if product cost
improvements have been made. and the forecasted shipments of products, the control
of expenses, the productivity of labor and the recovery and improvement plans have
been met. The goal is to keep management abreast of current events in case corrective
action becomes necessary.

9. IMPLEMENTATION OF PROFIT PLANS.

The implementation of the management plans that have been developed and
approved in the planning process entails the administrative function of leading the
main subordinates towards the achievement of the objectives and goals of the
company, consequently, effective administration at all levels. It requires that the
company's levels, objectives, goals, strategies and policies be communicated to
subordinates and clearly understood by them. Management leadership offers many
facets. However, a comprehensive planning and control program for utilities can help
a lot in the performance of this function. Plans, strategies and policies that are
developed through considerable participation establish the basis for effective
communication. The preceding comments highlight the fact that objectives and goals
must be realistic and achievable; However, it must present a real challenge to the
company as a whole and to each area or center of responsibility. The plans must have
been developed with the conviction of senior management that they will be met or
even exceeded in all major aspects. By observing these principles in the development
process, individual executives and supervisors will clearly understand their
responsibilities as well as the level of performance expected of them.

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 The distribution of profit plans within the company was mentioned in a
previous paragraph. It is advisable that the distribution of the profit plan include a
“statement of planning premises” made by the highest-level executive emphasizing
development, challenge and positive motivation. After the profit plans, a series of
talks on the profit plan must be scheduled in accordance with said plan, the highest
executive must initially meet with the other executives of the senior administration to
discuss the implementation and the action to be undertaken in accordance with the
objectives. and specific goals in profit plans.

Similar discussions should be held until all major responsibility centers are
reached. These meetings aim to develop awareness towards usefulness, performance
orientation and tenacious, yet flexible, implementation of plans to achieve objectives.
These talks should also cover the broader aspect of the management process, including
positive reinforcement and other behavioral problems. Likewise, emphasis must be
placed on the need for persistent action and flexibility when implementing the plans
and the control process. Particular emphasis should be placed on how anticipated
events and problems will be handled at different levels of management. Profit plans
cannot manipulate business and therefore should not limit management in taking
advantage of profits, even those that are not complemented in profit plans. The
application of the principle of management by exception and the principle of
flexibility, both with respect to unforeseen events and opportunities in the control
process, must be highlighted.

10.USE OF PERIODIC PERFORMANCE REPORTS

As profit plans are implemented during the time period specified in the tactical
plan, periodic performance reports will be needed, which are prepared by the
accounting department on a monthly basis. Special performance reports are also
formulated on a more frequent basis on an “as needed” basis.

a. compare actual performance with planned performance show

b. each difference as a favorable or unfavorable variation in performance.

On the other hand, a clear distinction must be made between financial reports
for external use and those issued for internal use. The latter can be classified as:

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a. Statistical reports that specifically provide basic quantitative internal statistics
about the company's operations.
b. Special reports for senior management on non-recurring and special problems.
c. Periodic performance reports. The latter focus on dynamic and continuous
control specifically for the responsibilities assigned to management at its
different levels. Such reports are primarily repetitive, that is, short-term reports
that for each of the areas (or centers) of responsibility, the issuance of short-
term performance reports are essential to achieve effective control, for
example, an important focus of the Sales control compares actual sales with
planned sales by areas of responsibility, such a comparison until the end of the
year would have little or no value because, by then, it would be too late to take
corrective action. Instead the availability of sales reports on a daily, weekly or
even monthly basis can serve as a basis for effective and timely action. Actual
performance statistics alone do not indicate whether performance is good or
bad. Performance must be compared to realistic goals or performance
standards in order to evaluate it. For example, the concept of flexible
budgeting is used to establish realistic spending standards.

USE OF FLEXIBLE BUDGETS.

Flexible cat budget is also known as variable budget, sliding scale budget.
Budget control of expenses and budget by formulas. The flexible budget concept is
applied exclusively to expenses. It is something completely different from the
profit plan, but it is used to complement it.

Many companies do not employ flexible budgeting procedures. However,

others integrate profit planning and flexible budget procedures.

Flexible budgets provide realistic information about expenses that allows

you to calculate budgetable figures for different production volumes or activity
rates in each area of responsibility. To do this, the flexible budget uses a formula
for each expense in each responsibility center. The formula for the relationship of
each expense with the production (volume of work) in the area in question. Each
formula includes a constant expense factor and a variable rate for it or expense.

In the case of a fixed expense, the variable rate is zero; In the case of a
variable expense, the constant factor is zero; And since it is a semi-variable

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 expense, there is a value for both the constant factor and the variable rate.
Therefore, to apply this concept in a department, each expense must be classified
into one of these three categories:

 Fixed costs. Those that remain essentially constant in the short term,
regardless of changes in production or the volume of activity.
 Variable expenses, those that vary directly (in proportion) with changes in
production.
 Semi-variable expenses. Those that are neither fixed nor variable but have
a component that is both fixed and variable.

We can illustrate each of these categories by assuming that there are

three types of expenses in department 1, as shown below. Supervisory salaries
of s/10,000 per month are a fixed expense because they do not change with
different levels of production. The indirect material used in the manufacturing
process constitutes a variable expense, at a variable rate of s/1.50 per 100
direct labor hours of activity (that is, the measure of production). Indirect labor
is a semi-variable expense because both components of fixed expenses are
s/450 per month (the constant) plus s/5.50 (variable rate) per 100 hours of
direct labor. We will also assume that production (the work performed by the
activity) in department 1 can best be measured in terms of direct labor hours
worked.

Implementation of monitoring

Monitoring is an important part of effective control. Since performance reports are

based on assigned responsibilities, they support the monitoring activity.
It is important to distinguish between cause and effect. Variations in performance are
effects (the results); Management must determine the underlying causes . Identifying
the causes is primarily the responsibility of line management . Immediate priority should be
given to the analysis to determine the causes that originated the variations in performance,
both favorable and unfavorable. In the case of unfavorable variations in performance, after
identifying the basic causes, and not the results, an alternative for corrective action must be
chosen and implemented immediately.

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 If these are favorable performance variations, the underlying causes must also be
identified. This case rarely requires corrective action and, rather, the root causes of the
variations often provide valuable information for managing efficiency and for developing
positive reinforcements in operations and employees who are not proving to be very
successful. It is called “transfer of success.”
Finally, there must be a “particular follow-up of past follow-up actions.”
This step should be aimed at:
1) determine the effectiveness of previous corrective actions
2) provide a basis for improving future planning and control procedures.
The main objective of these brief comments on the six most important components of
the PCU was to present a “broad-brush picture” of a comprehensive utility planning and
control program. It is very convenient that we have a general perspective here so that the
discussion, in subsequent chapters, on the application of the PCU can be understood in proper
relation to the overall process. We are convinced that the full potential of the various
techniques, procedures and approaches involved can only be realized if they are integrated
into a coordinated, practical and understandable system. All concepts, techniques and
approaches described as component parts of the system are discussed to the extent required in
the existing management and accounting literature. However, few attempts have been made to
compile them into a “package” so that their interrelationships can be more clearly understood
and their full potential can be realized within an enterprise. In this work, these elements are
brought together in a package that reflects how they are applied in well-managed companies.

11.TIMES OF THE PLANNING PROCESS-CONTINUOUS PROFIT

PLANNING

Profit planning involves selecting defined time periods for strategic and tactical plans
(often five years and one year, respectively). The annual planning phase for these budgets is
prior to the budget year. Re-planning, to take into account the information that is fed back,
takes place when it is needed during the budget year. This timing pattern is appropriate for
those companies that can realistically plan a year in advance.
In contrast, some organizations experience conditions that make it inconvenient for
them to plan too far into the future. Such organizations may resort to continuous profit
planning. This approach requires frequent planning and re-planning because of the dynamics
of the environment or technology.

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 The procedure normally followed for tactical planning, when continuous profit
planning is used, is to prepare an annual (or semi-annual) profit plan, which is modified and
redone each month (or quarter) by successively removing the month (or quarter) that just
ended and adding a similar period in the future. To illustrate the continuous planning method,
suppose that a tactical profit plan is prepared before January that covers, say, June.
At the end of January, the semiannual profit plan is remade, removing January and
adding July, at the same time modifying the projections for the period from February to June,
if deemed appropriate. Therefore, this method results in a continuous semi-annual profit plan
for the business.
Factors such as sales seasons, length of processing or manufacturing time (or
merchandise turnover), seasonal cycles, natural business cycles for the industry in question,
financial considerations, and other operational conditions may influence in the duration of the
period covered by profit planning.
With respect to the frequency of profit plan preparation and modification, well-
managed companies, which already have many years of experience with profit planning and
control programs, have found that replanning should be undertaken formally, and widely.
scale, at least on an annual basis . Using the continuous method explicitly establishes the
times and frequency of the replanning process. Now, as far as the long-range strategic profit
plan is concerned, some companies do not follow a pattern of annual review and modification,
but rather the policy of “review and modify when circumstances have changed significantly.”
In our opinion, such a policy is not entirely advisable. On the contrary, it is illogical,
from the point of view of the administration concept, to adopt the rule of periodic
modification of the long-range plan that, in general, should be congruent with the formal
planning activity for the short-term tactical plan.
From time to time, all companies experience major unforeseen events, such as strikes
or casualty losses (e.g., fires, floods, earthquakes, etc.), with subsequent replanning. When
important events occur during the period covered by the short-term profit plan, the problem
arises as to whether or not the plan should be modified for the remaining months of the
budget period to take into account the effect of the related event. In the event that this occurs
(unless it occurs towards the end of the year) it is evident that the complete modification of
the tactical plan for the remainder of the year will proceed.
On the contrary, if they are minor events, they generally do not cause a change in the
basic profit plan. The continuous modification of plans to take into account minor events and

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emergencies tends to destroy the credibility of the plan and damage the seriousness with
which managers treat the plans during their development and implementation.

12.LINE AND COUNSEL STAFF RESPONSIBILITIES RELATED

TO THE PCU

The highest-level executive in management ultimately has responsibility for profit

planning and control. However, there must be a concomitant assignment of responsibilities to
line and advisory executives. Each line executive must be assigned an area (or center) of
responsibility:
1) so that operational decisions are included in the plan
2) for implementation and
3) for control.
The profit planning and control program must be established on a firm foundation of
line responsibility and a commitment to develop, implement and fulfill the role of each
center in achieving the company's objectives and goals. We cannot exaggerate the importance
that a profit planning and control program must be seen as an approach that assists line
positions in the fulfillment of their basic responsibilities, which must view the plans as if they
were their own and assume, therefore, , full responsibility for its realization.
In contrast, the staff responsibilities of a PCU program include:
1) Design and improve the system,
2) supervise and coordinate the operation of the system,
3) provide expert technical assistance, analysis and advice to line managers, and
finally,
4) develop and distribute performance reports.
The chief financial officer should be assigned full staff responsibility for the profit
planning and control program. Typically, the finance function includes a budget director, or
planning and control director, who should be assigned supervisory advisory responsibility. In
view of the importance of effective profit planning and control, the position, in the staff
group, of the person responsible for the program must be such that he instills command and
respect throughout the company. It is advisable that the person responsible for the profit
planning and control function report directly to the main finance officer or, failing that, to the
highest-level executive.

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 If there is a budget director as well as a chief financial officer, it is preferable that the
former report to the latter, who, in turn, should report to the highest-level executive. The
suggested positions for the chief financial officer and the budget director do not imply that
these officers should have line authority with respect to information inputs for planning and
control (except within their own areas of responsibility). Staff executives should not be given
the responsibility of “enforcing the budget.”
The characteristic tasks of the budget director in a PCU program are the following:
1. Advise the most senior executive, appropriate senior management
committees, and others on all aspects of the earnings planning and control
program.
2. Recommend planning and control procedures, as well as the technical
requirements of each component of the program.
3. Assume responsibility for the organization of the program and the
calendars necessary to make it operational.
4. Provide general technical supervision over the utility planning and control
program.
5. Design and recommend the essential forms, schedules and reports relevant
to the profit planning and control program.
6. Supervise the preparation and modification of the profit planning and
control manual, as well as other related materials, for approval by the
company's main executive.
7. Provide an analysis of past and future costs, revenues, etc. as requested by
managers who need them.
8. Translate certain preliminary policy decisions into their probable, or
alternative, financial effect on future operations.
9. Prepare performance reports by areas of responsibility and by other
relevant classifications.
10. Help analyze and interpret variations between actual and planned goals (on
an advisory basis only).
11. Perform specific office work related to the profit planning and control
program.
12. Supervise the modification of both the profit plans and the planning and
control program.

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 13. Carry out various statistical analyzes (at the request of the interested area)
that are related to the profit planning and control program.
14. Receive the tentative plans that are presented and forward them to the
appropriate executives for review and modification, if applicable.
15. Organize, coordinate and conduct appropriate training sessions and
conferences related to the profit planning and control program.
16. Reproduce and distribute, in accordance with the instructions of the
highest-ranking executive, the various
17. components of profit plans.
The best managed companies have an executive committee, or something similar, in
the profit planning and control process. This committee, made up of high-level management
members, should include the president and vice presidents (without missing, of course, the
chief financial executive). The highest-level executive often serves as chairman of this
committee for planning and control purposes. Basically, this committee should have the
responsibility of developing the substantive plan to ensure that all aspects of the profit plan
for the subunits are sound and in order and, when combined with the company's
comprehensive profit plan, to ensure that they represent the best plans that can be developed
under the given circumstances.
The direct responsibilities of this committee, made up of members of senior
management, are the following:
1. Develop the substantive plan.
2. Receive and review the profit plans of the most important responsibility
centers and make appropriate recommendations for their improvement.
3. Recommend decisions on important items that are incorporated into profit
plans and that may give rise to conflicts or lack of coordination between the
functional subdivisions of the company.
4. Recommend changes to improve planning and control processes related to
the profit planning and control program.
5. Receive and analyze periodic performance reports of the areas of
responsibility.
6. Consider the various alternatives and make recommendations and decisions
for corrective action.
7. Make appropriate recommendations to modify profit plans, if conditions
justify it.

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 8. Make recommendations for changes in the policies and procedures of the
utility planning and control program, for greater effectiveness.

13.PCU POLICY MANUAL

Normally, it is advisable to have a utility planning and control manual in order to

intensify communication, specify procedures and allow reasonable stability in the operation of
the system. A profit (or budget) planning and control manual must include the following:

1. A statement of the objectives of the PCU program.

2. The procedures to be followed in the development of profit plans:
A) Instructions and formats to be used
B) Procedures for making planning decisions:
—Operational executives.
—Advisory executives (“staff”).
—Budget committee made up of members of senior administration.

3. A profit planning and control calendar that specifies the dates for completion
of each part of the profit plan and for reporting.
4. Instructions for distribution of profit plan certificates.
5. Instructions and procedures regarding performance reports.
A) Responsibility and procedures for preparing reports:
—Real results.
—Budgeted data and variations.
—Analysis of variations.
B) Form, content and procedures for performance reports.
C) Instructions for distributing performance reports.
6. Procedures for taking corrective action on variations:
A) Unfavorable variations.
B) Favorable variations.
7. Monitoring and replanning procedures.

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 14. PLANNING PERSPECTIVES

Profit Planning and Control is perceived as a process whose purpose is to help

management effectively carry out the important phases of the functions of planning, directing
and controlling.

This concerns most companies, commercial, industrial.

It is important to know how organizations consider the profit planning and control
process.

One of the problems in long-range planning, in our opinion, has been the confusion
about its real nature and the inclination to carry out long-range planning on an informal and
very particular basis.

Another problem is not being able to distinguish between long-term strategic planning
and forecasting. The second is a dynamic activity that is normally entrusted to technically
trained staff specialists. Its purpose is to predict a probable outcome of a given set of
circumstances for a specified period in the future. A forecast rests on specified assumptions
that the forecaster makes. Often, some of the data that is useful in the planning process is
obtained from forecasts. On the other hand, planning is an essentially managerial activity (as
opposed to a technical “staff” activity) that involves specific decisions regarding the
objectives, goals and strategies of the company. It also requires the preparation of strategic
and tactical profit plans.

Another problem that commonly arises is partial planning.

For example, some companies limit their long-range planning to a single key area,
such as capital additions. There is no focus on developing comprehensive plans that cover all
facets of planned future operations. Concern with strategic planning in only one or a few key
areas has tended to narrow the scope of planning activity by management. The third type of
problem has to do with the definition of the term long range (or long term). Some companies
refer to their annual profit plan as long-range planning. In these cases, the substantive plan
often receives inadequate attention.

On the other hand, many other companies pay attention only to the financial plan. The
discussions in the first four chapters of this book place the substantive and financial plans in
proper perspective.

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 15.BEHAVIORAL CONSEQUENCES DERIVED FROM A CPU
PROGRAM

Carrying out a behavior management program aims to influence behavior, or

relationships, with positive reinforcement (motivations) with the purpose of achieving
congruence between the company's individual goals and the company's goals.

Employee and company goals can often be conflicting. The burden of achieving
congruence or making them less conflictive is the primary responsibility of the company.

Such repercussions exist in all organizations.

A profit planning and control (PCU) program can accentuate or reduce behavioral
problems in a company. In fact, PCU programs are effective in some companies, not in
others; on the contrary, they can be controversial.

The key to effectiveness is how management employs the PCU program. It often
happens that a PCU program uncovers a series of acute behavioral problems that already
existed in a company. This is because many behavioral problems are related to factors such as
inadequate communication, job expectations, performance evaluations, financial and other
rewards, and relationships between supervisors and other employees at the same level.

One author emphasizes the vast range of factors listed in Figure 1

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 Illustration1 : Motivation

Planning is not involved, the secrecy of how standards are set, authoritarian control
procedures, excessive tension, inequitable reward systems and exaggerated emphasis on
profits will increase negative motivation within the entire scope of a company. When such
conditions prevail, employees (including middle- and lower-level managers) will adopt
protective or defensive behavioral tactics. Such tactics include cushioning budgets, clever
attempts to “break the system,” declines in product and service quality, absenteeism, attitudes
of downright indolence, diminished initiative, and leaks of furtive information.

There is no need to exaggerate the importance of human relations in profit planning

and control. Many of the inconveniences attributed to budgeting programs can be directly
related to negative management attitudes or other behavioral problems.

In the case of weak or conservative administration, techniques such as the PCU are
often used as a pressure instrument. Obviously, the technique, by itself, can do nothing – the
managers who use it determine its value.

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 It is the manager, personally, who makes behavioral errors, exerts excessive pressure,
sets unrealistic standards and is inflexible. A key role of the manager is to positively motivate
people through documented leadership.

The repercussions that a profit planning and control program has on behavior offer
opportunities and problems alike. When designing and delivering a PCU program, emphasis
should be placed on maximizing positive empowerment at all organizational levels.

When considering behavioral impacts, it may be useful to make a distinction from

time to time between the individual managers' point of view and that of the company. Each
one has its own peculiarities, motivations, goals and impacts. A common attitude is always to
blame someone else for problems. Self-assessment can solve many of the problems. Likewise,
in certain situations it would be useful to consider managers separately from non-managers,
since they play essentially different roles in the company.

Management constitutes a leadership or directive effort that sets objectives and goals
and evaluates performance. The PCU is a system intended to assist management in fulfilling
these responsibilities.

Individual managers and other employees quickly identify the management approach
being used with the company. The system, as they perceive it, will affect them positively or
negatively. With highly negative motivations, they will become frustrated, quit or break the
system, and may even help others sabotage it.

On the other hand, if the system gains their sympathy, they will show enthusiasm,
creativity and productivity. Therefore, the areas of contact between the system and managers,
at all levels, are fraught with behavioral repercussions. The important thing would be to apply
informed behavioral judgments when developing, delivering and improving the management
system or process.

Behavioral conflicts between line and staff managers can be acute. The comptroller
and the budget director are advisory personnel and are primarily in charge of the service. Staff
personnel should not usurp line authority or give that impression.

Nor should he be instructed to exercise any authority over line operational personnel.

The comptroller and budget director should not submit decision inputs for the profit
plan, because this is strictly a line function; Nor should the controller or budget director
reprimand operational staff for unfavorable results reflected in performance reports.
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 The budget director must design and direct the Program, but must not provide decision
input or assume responsibility for enforcing the budget.

It is important that we make a clear distinction between:

1) enforce the budget and

2) report on actual results compared to budget goals.

The comptroller and budget director are responsible for reporting results to all levels
of management. Actual operations, comparing them with the budget goals.

Corrective action resulting from actual results, whether favorable or unfavorable, is

strictly a line function, so neither the controller nor the budget director should be placed in the
position of approving budgets or taking corrective action. line with respect to operational
results, efficient or inefficient, outside the budget department.

The controller and budget director should also not be responsible for cost control. If
they can, however, be assigned to develop an effective cost control system.

Ultimately, line executives and supervisors will be responsible for implementing cost
control. For good administration, a careful distinction between line personnel and advisory
personnel (staff) is essential, but it is not enough for senior management to establish this
distinction, but there must be assurance that it will be observed throughout. the company.

Thus, responsibilities for planning and control must be carefully specified in written
instructions that must be distributed to all managers. It is important for the company to have a
budget manual so that general budget policies and responsibilities are widely disseminated.

16.PARTICIPATORY BUDGETING

The participation of middle and lower level managers in the budget process can have
beneficial effects in at least two ways.

First, the participation process reduces information asymmetry in the organization,

thus allowing top management to gain insight into the environmental and technological
problems about which managers at lower levels have specialized knowledge.

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 Second, the participation process can lead to greater commitment by lower-level
managers to carry out the budget plan and "meet their goals." Extensive studies have been
done in recent years on the process and impact of participatory budgeting.

For Brownell there are classes of variables that moderate the impact of budget
participation: cultural, organizational, interpersonal and individual.

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 VARIABLES THAT MODERN THE IMPACT OF BUDGET PARTICIPATION

Variables

Efectos

ORGANIZACIO INTERPERSON INDIVIDUALE

CULTURALES
NALES ALES S

Tension por las Personalidad

Nacionalidad Medio Ambiente
tareas (autocontrol)

Tamaño del Personalidad

Nacionalidad Tecnologia
grupo (autoritarismo)

Congruencia
Raciales, Estructura
entre la tarea y el
Religiosas Organizacional
individuo

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 Chendall investigated the impact of personality combinations on the effectiveness of
participatory budgeting and discovered that the effects on subordinates' satisfaction with
their jobs and budgets are due to the authoritarian configuration between the subordinate
and the superior.

It is observed that positive attitudes towards participation are more vigorous in pairs
made up of subordinates and superiors who have the same levels of authoritarianism
(whether high or low). In a heterogeneous couple, in which the superior is authoritarian and
the subordinate is not, the superior prefers personal interactions based on power and
authority.

. Likewise, the superior is likely to be more autocratic and less concerned with
group approval. Low-authoritarian subordinates, who do not share these attitudes, often
find that the personal exchanges that participation requires end in frustration and
antagonism.

On the contrary, when the subordinate is highly authoritarian, he expects guidance

in assigning responsibilities and is likely to respond aggressively to a low-authoritarian
superior who does not meet these expectations.

On the other hand, when both actors in the budget exchange are not very
authoritarian, it is likely that participation will contribute to creating cooperation and
mutual trust, with the possibility, in addition, of intensified satisfaction of the subordinate.

Merchant" studied the relationships of the business environment with the types of
budget processes as well as with the consequences of budgets, such as management
motivation, attitudes, and performance. He discovered that budgets, as part of the business
control strategy, are related to the context of the business world.

Companies of some size tend to make relatively high use of more formal
administrative controls, as opposed to interpersonal controls. In all the organizations
studied, more formal and complicated budgeting processes are generally well received by
managers and, in even larger corporations, appear to be more positively linked to
performance.

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 Milani found a significant positive association between the degree of budget
participation and supervisors' attitudes toward their jobs and the company.

Young's investigated the effects of risk aversion and budget participation on budget
cushioning. He discovered that a subordinate who participates in the budget process tends
to create slack in the budget; Furthermore, such slack is attributed, in part, to the
subordinate's risk aversion.

Brownell reports on the results of an empirical investigation in which the marketing

and research and development units of a major company were compared with each other in
terms of both the environmental conditions they faced and the effects of their choice of
control system. on managerial performance, within both functional areas. Limited support
is provided for the predicted environmental differences.

In summary, the extensive research on budget participation and the variables that
moderate its effectiveness suggest that the effectiveness of participation depends primarily
on the organization, its environment and technology, as well as the people who manage it.

17.BUDGETS AND MOTIVATION: A PERSPECTIVE OF THE

EXPECTATIONS THEORY

Today, one of the most widely accepted explanations of motivation is Victor

Vroom's expectancy theory. Although it has its critics, most of the research evidence
supports this theory.

Expectancy theory states that the strength of a tendency to act in a certain way
depends on the strength of the expectation that the act will be followed by a certain
outcome and the attractiveness of that outcome to the individual. In more practical terms,
expectancy theory says that an employee is motivated to exert a high level of effort when
he or she believes that effort will lead to a good evaluation of his or her performance; A
good evaluation will lead to organizational rewards, such as bonuses, salary increases, or a
promotion; and the rewards will satisfy the employee's personal goals. Therefore, the
theory focuses on three relationships:

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 1. Effort-performance relationship: the individual's perceived probability that
exerting a given amount of effort will lead to performance.

2. Performance-reward relationship: the degree to which the individual believes that

performing at a given level will lead to the achievement of a desired outcome.

3. Rewards-personal goals relationship: the degree to which organizational rewards

satisfy an individual's personal goals or needs and how attractive those possibilities are.

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 CONCLUSIONS

The PCU process emphasizes the phases of this technique related to the functions of
planning, directing and controlling.

The parts of a typical PCU program for a given year.

The basic parts are:

a) the substantive plan,

b) the financial plan,

c) variable expense budgets,

d) complementary data,

e) performance reports and

f) monitoring

A “complete package” of PCUs, and not just selected parts, is vitally important. In
the organization it is essential to take into account line and advisory responsibilities and
conflicts (“staff”). Budget preparation and control as primarily line responsibilities.

The development and administrative operation of a PCU program are essentially

staff responsibilities.

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