Budget Preparation

Management Control System

Nature of a Budget
Budget are an important tool for effective short-term planning and control in organization. An operative budget usually covers one year and states the revenues and expenses planed for that year.

Characteristics: A budget estimates the profit potential of the business unit It is stated in monetary terms, although the monetary amount may be backed up by nonmonetary amount. (E.g. units sold or produced) It generally covers a period of one year It is a management commitment; managers agree to accept responsibility for attaining the budgeted objectives The budget proposal is reviewed and approved by an authority higher than the budgetee Once approved, the budget can be changed only under specified conditions Periodically, actual financial budget should be distinguished from strategic planning and forecasting

Relation to strategic planning

The budgeting process focuses on a single year, whereas strategic planning focuses on activities that extend over a period of several years. Strategic plan structured by product lines or other programs, while a budget is structured by responsibility centers. This rearrangement of the program so it corresponds to the responsibility centers charged with executing it is necessary, because the budget will be used to influence a managers performance before the fact and to appraise performance after the fact.

Contrast with forecasting

Budget is a management plan, with the implicit assumption that positive steps will be taken by the budgetee the manager who prepares the budget to make actual events correspond to the plan. A forecast is merely a prediction of what will most likely happen, carrying no implication that the forecaster will attempt to so sharpe events that the forecast will be realised.

Use of a Budget
Preparation of an operating budget has four principal purposes:

1.Fine Tuning The Strategic Plan 2.Coordination 3.Assigning Responsibility 4.Basis For Performance Evaluation

Types of plans and their contents

Strategic plan -Revenues and expense for each major program -- Not necessarily by responsibility centers -- not as much detail as operating budget -- More expenses are variable -- for several years -- Total reconciles to operating budget Operating Budget
- For organization as a whole and for each business unit - classified by responsibility centers -Typically includes: -Revenues -Prod cost and cost of sales -Marketing expense -Logistic expense -General and administrative -R&D -Income taxes -Net Income -Expenses may be: -Flexible -Discretionary -Committed -For one year divided into months or quarters -Total reconciles to strategic plan ( unless revised)

Cash forecast budgeted balance sheet

Capital Budget -Each major capital project listed separately

-Total project expenditures by quarters

Operating Budget Categories

Revenue Budgets

Budgeted production cost and cost of sales

Marketing expenses

General and administrative expenses

Research and development expenses Income Taxes

Other Budgets
Capital Budget Budgeted balance sheet Budgeted cash flow statement Management by objectives

Budget Preparation Process

Organisation Issuance of guidelines Initial budget proposal
Changes in external forces Changes in Internal policies and practices

Negotiation Review and Approval Budget Revision Contingency Budgets

Organisation
Budget Department functions: 1.Publishes procedures and forms for the preparation of the budget 2.Coordinates and publishes each year the basic corporate wide assumptions that are to be the basis for the budget 3.Makes sure that information is properly communicated between interrelated organisation units 4.Provides assistance to budgetee in the preparation of their budgets 5.Analyse proposed budgets and makes recommendations, first to the budgetee and subsequently to senior management 6. administers the process of making budget revisions during the year 7.Coordinates the work of budget department in lower echelons 8.Analyses reported performance against budget, interprets the results and prepares summary reports for senior management.

Behavioral Aspects
One of the purposes of a MCS is to encourage the manager to be effective and efficient in attaining the goals of the organization. Some motivational considerations in the preparation of operating budgets are Participation in budgetary process

Positive effects on managerial motivation for two reasons: 1. There is likely to be greater acceptance of budget goals if they are perceived as being under managers personal control, rather than being imposed externally. This leads to higher personal commitment to achieve goals. 2. Participative budgeting results in effective information exchanges.

Degree of budget target difficulty

If budgeted target is too difficult, managers are motivated to take short-term actions that may not be I the long-term interests of the company Achievable budget targets reduced motivation for managers to engage in data manipulation A profit budget is very difficult to attain usually implies an overly optimistic sales target. When business unit managers are able to meet and exceed their targets, there is 'winning atmosphere and positive attitude within the company.

Senior management involvement The budget department

Quantitative Techniques
Simulation

Probability Estimates