Chapter 8: Budgetary Control Learning Objectives: • • • • • Be aware of the ways budgets are used in controlling companies; Be able to explain the difference between an imposed budget and a participatory one; Be able to explain how responsibility can only be exercised where there is a high level of control; Be able to execute budgetary control in revenue centres, cost centres and profit centres; Be aware of the behavioural aspects of budgeting. Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Budgetary Control: The budget will be used to control operations. Once the budget is “agreed” it represents a social contract between the parties: • The budget is accepted by the operatives as being achievable; • The budget is accepted by management as meeting their needs. Comparison of budget with the actual results will reveal the extent to which it has, or has not, been achieved. Deviations from budget should be investigated: • To reveal the responsibility area where the problem arose; • To initiate any corrective action Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Exhibit 8.1: Management by Exception — Budgetary Control Establish organizational objectives. Create an operating budget. Carry out business activities. Provide explanations. Implement necessary corrective actions Measure actual outcomes. Calculate an actual operating statement for the unit. Compare actual outcomes with objectives. Compare actual profit (or cost) with budgeted profit (or cost). If outcomes do not meet objectives, investigate and act as necessary. Is actual profit less than budgeted profit, or is actual cost greater than budgeted cost? If outcomes meet objectives, continue to next control period. Is actual profit equal to or greater than budgeted profit, or is actual cost less than budgeted cost? Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Participation in Budgeting: An imposed budget is handed down from above without negotiation: it is typical of an authoritarian management style. A participative budget is one that has been negotiated and agreed by the parties involved: it is likely to have a higher level of commitment from users. Which budget is appropriate depends on situational factors. Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Responsibility & Control: A manager can be held RESPONSIBLE for those factors that she/he can CONTROL or STRONGLY INFLUENCE. A manager should not be held responsible for other factors. Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Control in Revenue Centres: Appropriate dimensions of control: Was the sales budget met? may be measured in units, sales $ or contribution margin; Additionally (but far less important): Was the actual expense within budget? Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Control in Cost Centres: Service Departments: Appropriate dimensions of control: Was the service objective executed? (quantity of service; quality of service). Was the actual expense within budget? Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Control in Cost Centres: Production Departments: Appropriate dimensions of control: Was the production output in line with budget? Was the actual cost per unit within budget? Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Control in Profit Centres: Appropriate dimensions of control: Was the actual profit at least as much as the budgeted profit? Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Control in Investment Centres: Appropriate dimensions of control: Was the actual return on assets at least as much as the budgeted return on assets? Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved The Balanced Scorecard: Budgetary control focuses on the financial results of the organization. If the organizational strategy can be expressed solely in financial terms, then that is acceptable. Most organizations have strategies that are wider in scope, so a more comprehensive approach to planning and control is necessary. The balanced scorecard is a way of envisioning strategy and measuring progress towards its achievement. The four sections commonly used are: financial perspective; customer perspective; internal business perspective; learning & growth perspective. This articulates and communicates a balanced approach to strategic management. Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Carberry Hotels: Balanced Scorecard for September 2002 Objective Measure Target Actual Financial perspective: Shareholder value Return on investment 15.0% 15.6% Share price growth 5.0% 6.0% Customer perspective: Quantity Occupancy rates 90.0% 93.2% Quality Room rack-rate growth 4.0% 0.0% Customer satisfaction 9/10 9.3/10 Written complaints nil nil Internal business perspective: Cleanliness Random checks 10/10 10/10 Restaurant Menu changes 5 6 Accessibility Wheelchair access 98.0% 98.0% Learning & growth perspective: Staff training Training hours 100 75 Market segments New segments targeted 2 1 Product development New facilities 1 0 Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Carberry Hotels: Balanced Scorecard for September 2002 They have met or exceeded their targets in respect of: Financial perspective: Customer perspective: Internal business perspective: But, it has failed to meet its targets for learning & growth. Have they compromised their future to achieve immediate success? Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved Behavioural aspects of Budgeting: Budgets feed into managers expectations and motivations through: • Budget setting: (participative vs. imposed, optimistic vs. realistic); • Budgetary control: (tight control vs. loose control); • Goal congruence; • Integration with the reward system. Accounting for Non-Financial Managers, 2nd Ed. © Captus Press Inc. All Rights Reserved