AF6010

PLANNING, BUDGETING &CONTROL

 Lecture Objectives
• Knowledge of budgetary control will enable you to:
o Understand how budgets, strategic objectives and strategic plans are
related.
o Appreciate the budgeting process and the interlinking of various
budgets within business
o Discuss types of budget and their characteristics
Recommended Reading
• Atrill P. and McLaney E. (2011) “Accounting and Finance for
Non-Specialists, 7th -edition, FT Prentice Hall. Pages 318.
IKEA – A SUCCESSFUL BUSINESS
NOTE: SUCCESS DEPENDS ON EFFECTIVE PLANNING
 Strategic Planning – 5 Key Steps
1. Establish mission and objectives i.e. the purpose of the business + strategic
objectives i.e. quantifiable goals.
2. Undertake position analysis – where is the business currently compared to where it
should be based on mission + strategic objectives?
3. Identify and assess strategic options – explore ways to accomplish strategic
objectives.
4. Select strategic option – the best course of action/strategies + formulate long-term
strategic plan.
o Break down into short-term plans for each element of the business.
o These short-term plans are the budgets.
5. Execute, review and control – compare performance with budget + control actions.
 Sets overall
BUDGET AND THE STRATEGIC direction
PLANNING STAGES
Mission
& Vision Strategic
Objectives
ORGANISATION
Sets out how
mission can be
Strategic achieved
Plans

get
Identifies how

Bud
objectives are
pursued

Sets out in detail, short-term plans &

targets to deliver strategic objectives
 What is a BUDGET?
A financial plan, expressed in money, prepared and
approved prior to the budget period, showing
income, expenditure and capital to be employed.
(CIMA)
.
 BUDGET - Purpose
• Planning
o Quantifying plans in financial terms and linking planned activities to
financial resources
• Coordination
o Ensuring that all parts of the organisation are working in harmony.
• Communication
o Inform employees of agreed income, expenditure and profit targets
to be achieved.

.
 BUDGET - Purpose
• Motivation
o Direct efforts and encourage good performance.
• Control
o Review activities and performance
o Take corrective action ( if necessary)
• Performance Evaluation
o How well has the organisation, department or individual performed.
o Administer reward / punishment…

)
DEVELOPING
A BUDGET
 Developing the Budget
1. Budgets are prepare for every level
a. Departments
b. Divisions
c. The organisation as a whole
2. Budget Committee approves budgets – comprising senior
managers, directors, controllers, etc.
3. Budgets can be months or years.
 Developing the Budget
1. Budgets are prepared for every level
a. Departments
b. Divisions
c. The organisation as a whole
2. Budget Committee approves budgets – Senior managers,
directors, controllers, etc.
3. Budgets can be for months or years.
 The Master Budget
1. Sales budget.
FUCNTIONAL BUDGETS 2. Production budget.
3. Direct materials budget.
4. Direct labour budget.
5. Manufacturing overhead budget
6. Selling and administrative budget
7. Capital Expenditure budget
8. Cash budget
9. Projected income statement & Statement of Financial
Position
 Master Budget Diagram

Source: Managerial Accounting

by James Jiambalvo
Master Budget Diagram for Service Industry
e.g. Supermarkets
 TYPES OF
BUDGETING
 INCREAMENTAL BUDGETING
1. The Traditional Approach to Budgeting is known as Incremental Budgeting
2. Direct costs calculated, Indirect costs allocated
3. Last years results + / - extra for inflation & adjusted for known changes
4. Incremental budgeting is concerned with incremental costs and revenues
 INCREAMENTAL BUDGETING
- THE LIMITATIONS
1. Padding/Slack
2. All Budget is spent – or it will be lost next year!
3. No cost saving motivation
4. Inefficiencies of previous year – carried forward
5. Lack of valuable information e.g. variances
 ZERO BASED BUDGET
• Zero based budgeting is an attempt to overcome the failings of incremental
budgeting, and an approach to budgeting requiring justification of each
cost element, as though the activities driving the cost are being undertaken
for the first time
• … a method of budgeting whereby all activities are re-evaluated each time
a budget is formulated…
(CIMA Official Terminology
 ZERO BASED BUDGET
- Application
• ZBB focus on activities and programmes rather than functional departments,
where traditional budgeting focuses on departments
(Drury, 2015)
• Not suggested for direct production costs
• Emphasis is on overheads/services
o Discretionary cost
o Support Activities
(BPP, 2006; Drury, 2015)
• Adopted by many public sector organisations such as local councils and the NHS
 ZERO BASED BUDGET
- Focus/Approach

• The general approach is to consider the cost/benefit of expenditure:

o Is Benefit > Cost? (B > C)
• With limited resources for overheads and a clear opportunity cost, the
focus is on getting value for money (VFM)
o Where is the value – spending £50k on Maintenance, or
£50k on Dispatching Goods?
 ZERO BASED BUDGET (ZBB)
- The Strengths

• ZBB develops of a questioning attitude in organisations: e.g.

o Does the activity need to be carried out?
o What would be the consequences if the activity was not carried
out?
o Is the current level sufficient?
o Are there alternative ways of doing the activity?
o How much should the activity cost?
o Is the expenditure worth the benefits achieved
 ZERO BASED BUDGET (ZBB)
- The Strengths

• Obsolete and inefficient activities and processes are identified and

eliminated.
• Knowledge and understanding of costs and their behaviour within the
organisation is greatly enhanced
• Resources are allocated more efficiently and economically.
 ZERO BASED BUDGET (ZBB)
- Limitations

• ZBB process can be rigid, time consuming and expensive

• Requires technical expertise and which might be lacking in an
organisation
• Ranking projects for decision might be difficult when confronted with
certain activities or where benefits and costs are qualitatitve.
 ZERO BASED BUDGET (ZBB)
- Implementation
Requires four steps.
1. Specification of responsibility centres, and activities that are to be individually
evaluated.
2. Each activities is documented or described in a decision package. Stating the costs
and revenues expected and in a way that the package can be evaluated and ranked
against others.
3. Using cost/benefit analysis, each decision package is evaluated and ranked for
decision.
4. Resources allocation follows for various selected packages.
 ZERO BASED BUDGET (ZBB)
- DECISION PACKAGES
• Decision Packages - This is a document that analyses the cost of an activity (decion
unit), states the purpose of the activity, and identifies alternative methods of achieving the
same purpose.
• It identifies and describes decision units such that top management is able to:
i. evaluate and rank them against others competing for limited resources.
ii. take a decision as to approval or rejection.
• Decision Unit (DU)– separate groups of activities undertaken by the organisation, usually
with one manger per unit. For each DU, a decision package is documented.
 ZERO BASED BUDGET (ZBB)
- TYPES OF DECISION PACKAGES
• CORE / BASE Package – Getting basics covered, the minimum we need to
do. Describes the minimum effort and cost needed to carry out the activity.
• Incremental packages – Divides activities into different levels of effort.
Describes the incremental costs and benefits when added to the base.
• Mutually exclusive – Alternative ways of getting same job done. Contains
different methods of obtaining the same objective.
 ZERO BASED BUDGET (ZBB)
- DECISION PACKAGES - example
Example … A Local Council Manager is preparing a budget for domestic refuse
collection. She may first of all consider 2 mutually exclusive packages, then
decide on the incremental packages:
o Package A – 2 ‘in-house’ teams with a truck each collecting bins bi-
weekly, cost: £110k
o Package B – Outside contractor. Cost £90k
• A Cost Benefit Analysis showed that the flexibility from Package A was
preferred to B, so A is preferred.
 ZERO BASED BUDGET (ZBB)
- DECISION PACKAGES - example

• Base Package – minimum required: 1 Team, 1 Truck, Collection once

per month. Cost: £55k
• Incremental Package (1) – 2 Teams, 2 Trucks, 2 collections per
month, Cost: £110k
• Incremental Package (2) – 3 Teams, 3 Trucks, Collections 4 times per
month. Cost: £165k
 ZERO BASED BUDGET (ZBB)
- EVALUATE AND RANK PACKAGES
For example, consider an R&D department of a Camera
Manufacturer – Evaluate and Rank Packages On the benefits to the
organisations
 ZERO BASED BUDGET (ZBB)
- ALLOCATE RESOURCES

• Packages are chosen and opted for

• Make funds available from budget to cover chosen plan.
• Final decision made by senior management