Budget preparation and Evaluation in

discretionary expense center.

By

Mr.Brijesh Sawant. (F2911)

1
 Budget preparation
• Selection of the budget period: Can be prepared for 3 to 5 years,
indicating monthly figures for the first year and annual figures for
the first year and annual figures for next 2 to 4 years. generally
coincides with accounting year .

• Identifying the type of budget to be prepared : operating budgets

incorporates all the functional budgets, when it is called as master
budget or summary budget. Includes detail related to production,
sale , purchase,stock,creditor,debtor,assets,liabilities .

• Consideration of the limited factors : Limiting factor is the key

factor which at a particular time or over a period will limit the
activities of an undertaking. Whichever limits the activity-
production or sales will be considered as the principal budget factor
or key factor, and the other budgets will be prepared thereafter. 2
 Evaluation of Discretionary Expense Center
Definition of Discretionary Expense Center

“ Staff units, including general and administrative (G&A)

departments, such as finance, human resources, and legal;
research and development (R&D) departments; and marketing
units such as those performing advertising and promotion, are
usually treated as discretionary expense centers ”.

3
 Continued……..
• Some functions for which output is not easily measurable
or where the outputs are not causally and deterministically
related to the inputs expended cannot be controlled by the
use of traditional techniques such as standard costs or
budgets.
• These functions are usually organized as discretionary
expense centers in which the level of expenditure and the
number of personnel are determined by negotiation with
central management to determine appropriate levels of
quality and service.
4
 Continued……..

• The output from these units is not easily measured in

financial terms, and the relationship between the resources
they expend (inputs) and the outcomes they produce is weak.
• Companies control these discretionary expense centers by
negotiating and eventually authorizing an annual budget and
then monitoring whether their actual spending remains
within the budgeted amounts.

5
Evaluation by Balance score card and Activity based costing
The Balanced Scorecard

• Traditional financial performance metrics provide information

about a firm's past results, but are not well-suited for predicting
future performance or for implementing and controlling the firm's
strategic plan.
• By analyzing perspectives other than the financial one, managers
can better translate the organization's strategy into actionable
objectives and better measure how well the strategic plan is
executing.
• The Balanced Scorecard is a management system that maps an
organization's strategic objectives into performance metrics in
four perspectives: financial, internal processes, customers, and
learning and growth.
6
 Balanced Scorecard Evaluation

• Customer: Who are our customers? What do our customers

expect or demand from us? What is our value proposition in
serving them?
• Internal Process: What must we excel at in order to continue
to add value for our customers? What are the processes we
have/need to best execute our strategies?
• Employee Learning: What is the level/content of employee
skills needed to meet our mission/value? What information
systems needs to support these processes? What
organizational climate (culture) supports this success?
• Financial: What are the financial perspectives that would
help us understand the effectiveness and efficiency of our
financial processes?
7
 Balanced Scorecard Perspectives
Balanced Scorecard Current Departments
Customer/Client Quality Operations
External Relations
Employee Learning Staff Human Resources
Internal Process Growth Development
PQI
Education
Facilities Services
Admissions
Financial Financial Treasury/Risk Mgt
Accounting

8
 The Balanced Scorecard Tells the Story of the Strategy
Illustrative Example: Southwest Airlines
Strategic Theme:
Operating Efficiency

Financial
Profitability What will drive operating efficiency?”
• More customers on fewer planes
More
Fewer planes
customers

Customer
How will we do that?
• Attract targeted customer segments who
Flight Lowest
Is on time prices value price and on time arrivals
What must the internal focus be?
• Fast turnaround
Internal

Fast ground
turnaround Will our people do that?
• Educate and compensate ground crew
Learning regarding how they contribute to the firm’
Ground crew
success
alignment • Employee stockholder program 9
 Activity based costing

• ABC is framed on the premise that activities consume

overhead resources. hence activities cause cost, in turn
products consume activities. therefore to arrive at correct
product cost , the cost of each activity has to be computed, thus
activities should be costed, not products.
• products 'cost should be derived from the activities consumed
by relevant products. The chief advantage of using ABC is it’s
ability to measure consumption of overheads by batch and
products sustaining activities and allocate them accurately to
products.
• it is most suitable for modern firms which produce
heterogeneous products using complex process, automatic
machines, and so on.

10
 Evaluation by Activity based costing

Step 1 : develop the activity dictionary

Step 2 : Reconstruct the general ledger

Step 3 : Create activity centers.

Step 4 : Define resources or cost drivers.

Step 5 : Determines attributes.

Step 6 : Select activity cost drivers.

11
 Activity based costing

• The real power of the two dimensional ABC is that the

judgment can be based on the combination of cost and non-
financial information .
• It directs products and customers strategy towards profit
opportunities , and guides the improvement of the company’s
ability to design and build products and serve customers in their
chosen markets.

12