Professional Documents
Culture Documents
Performance Management & Control
Performance Management & Control
MANAGEMENT &
CONTROL
PM & Control 1
BUDGETING
2
PM & Control
FLEXIBLE BUDGET
BUDGET PREPARED AT A NUMBER OF ACTIVITY LEVELS & CAN BE ‘FLEXED’ OR CHANGED TO THE
ACTUAL LEVEL OF ACTIVITY FOR BUDGETARY CONTROL PURPOSES EFFICIENTLY
PM & Control 3
2. Flexible budget
Strengths
i. Dynamic in nature – helps managers to analyse actual performance by comparing it
with budgeted performance
ii. Allows planning for alternative use of idle capacity if it is envisaged that actual
production according to the plan will be less than capacity level
Weaknesses
iii. Difficult to analyse costs according to their variability
iv. In the long run, FC do not remain fixed & VC do not remain proportionate to
production/sales volume
PM & Control
3. INCREMENTAL BUDGETING
Weaknesses
i. No attempt is made to justify each item of expenditure
ii. Encourages slack & wasteful spending
iii. Is sufficient if current operations are effective, efficient &
economical
iv. Makes expenditure cuts/increases more dependent on
persuasive powers of managers than on the genuine needs of
organisation
v. Assessing amount of increment can be difficult
vi. Not appropriate in a rapidly changing business
vii. Can ignore the true (activity based) drivers of a cost leading to
poor budgeting
PM & Control 5
3. INCREMENTAL BUDGETING
Strengths
i. Simple to prepare
ii. Can be flexed to provide more meaningful information for
control
PM & Control 6
ABB
PM & Control 7
5. ABB (CONT)
Strengths
iii. More focus on efficiency and effectiveness & alternative methods
by which they may be achieved -
iv. ABB avoids arbitrary cuts in specific budget areas to meet the
overall financial targets. Non-value added activities may be
identified and eliminated.
v. ABB can increase management commitment to the budget process
as the activity analysis enables management to focus on the
objectives of each activity. Identification of primary & secondary
activities & non-value added activities help in motivating
management in activity planning and control.
Weaknesses
i. Suitable only for organisations which have adopted ABC
ii. Time consuming
PM & Control 8
6. Zero-based budgeting
• A method of budgeting that requires each cost element to be specifically justified as
though the activities to which the budget relates were being undertaken for the first
time
• Justification of any cost should consider how the expenditure helps to meet
organisation’s objectives
Strengths
i. Aims to curtail unnecessary costs
ii. Helps to decide most appropriate way of performing activity
best suited to service industries & NPO
iii. Can be applied to discretionary costs & support activities
iv. For activities where there is no clear relationship between input & output
v. Helps to curtail activities by creating questioning attitude 9
PM & Control 10
PLANNING AND OPERATIONAL
VARIANCE
PM & Control 11
PLANNING VS OPERATIONAL
PLANNING VARIANCE
• VARIANCES CAUSED BY ERRORS or problems IN ORIGINAL BUDGET
• DIFFERENCES BETWEEN ORIGINAL BUDGET AND REVISED BUDGET
• NOT CONTROLLABLE BY OPERATIONAL MANAGERS
• MANAGERS ARE NOT RESPONSIBLE FOR PLANNING VAR.
OPERATIONAL VARIANCE
• VARIANCES CAUSED BY differences in ACTUAL PERFORMANCE AND the REVISED BUDGET OR STANDARD
• WITHIN OPERATIONAL MANAGERS CONTROL
PM & Control 12
BUDGET REVISION
PM & Control 13