Planning and Budgeting
Session Summary (1)
learning objectives
budgeting, planning and control
the strategic planning process
the strategic planning relationship with budgeting
forecasting and planning
Session Summary (2)
budget preparation flow diagram
performance evaluation and control
responsibility centres
divisional performance
motivation and the behavioural aspects of budgeting
problems in budgeting
Learning Objectives (1)
identify budgeting as one part of the strategic
management process
define a budget, its purpose and uses
recognise the importance of forecasting within the
budget process
outline how a business may apply the budgeting process
in practice
explain the preparation of budgets for planning purposes
prepare the elements of an operating budget and a
financial budget to derive the master budget
Learning Objectives (2)
describe the system of responsibility accounting and
identify the four different types of responsibility centre
outline the advantages and disadvantages of ways in which
divisional performance may be measured
appreciate the motivational and behavioural aspects
of budgeting
explain the preparation of budgets for control purposes
and how performance against budget may be evaluated
identify the potential problems that may be encountered
during budget preparation
Budgeting, Planning and
Control
a budget is a plan and budgeting is one part of the
strategic planning process, which is concerned with
planning and control
planning budgets are management’s belief of what the
business’s costs and revenues will be over a specified
future time period, the budget period
control budgets are used for management motivational
purposes and in this way influence improved departmental
performance
The Strategic Planning Process
The Strategic Planning
Relationship with Budgeting
Forecasting and Planning
forecasts are not plans but predictions of the future,
which are required as an important prerequisite to the
budget process
prior to budget preparation, in addition to forecasting,
decisions must be made and policies formulated regarding
stock days and purchasing, debtor and creditor days, staff
costs, capital expenditure, and standard costs
types of forecasting
qualitative
quantitative
Budget Preparation Flow Diagram
Performance Evaluation and
Control (1)
The master profit and loss budget is prepared from each
of the elements of the operating budget:
sales
production
distribution and administration
financial
the master budget is comprised of the
profit and loss budget
cash budget
balance sheet budget
Performance Evaluation and
Control (2)
risk assessment and risk analysis should be applied to the
master budget
risk assessment and risk analysis must be closely reviewed
in terms of additional funding requirements
control budgets are usually flexed to reflect actual activity
levels, and performance against budget provided from
exception reporting evaluated so that corrective actions
may be implemented as appropriate
Responsibility Centres
as part of the control function of the budget, the system
of responsibility accounting is used to measure actual
results against budget for each of various types of
responsibility centre
a responsibility centre is a department or organisational
function whose performance is the direct responsibility
of a specific manager
Divisional Performance
the performance of managers of responsibility
centres may be considered using the
divisional performance measures of return on
investment (ROI) and residual income (RI)
both ROI and RI focus only on the performance for
a particular control period
both ROI and RI represent single summary
measures of performance
Motivation and the Behavioural
Aspects of Budgeting
the preparation of budgets for planning and control
purposes needs the involvement of people to provide
realistic plans and the motivation for performance targets
to be achieved
managers who have been given the responsibility for each
of the elements of their budgets have a very good chance
of achieving their objectives
Problems in Budgeting
there are usually many conflicts and problems associated
with the budget preparation process in most organisations
the majority of conflicts and problems are concerned with
the ‘softer’ human resources issues of managers’
behaviour