09 - budget preparation.ppt

8/13/2019 09 - Budget Preparation.ppt

1/17


2/17

Formal Control Process

Goals

and strategies

(Chp 2 & 13)

Strategic

Planning

(Chp 8)

Budgeting

(Chp 9)

Responsibilitycenter

Performance(Chp 10 & 11)

Report

actual vs plan

Wasperformancesatisfactory?

(Chp 11 & 12)

Rules

(Chp 3)

Other

information

Reward (feedback)

Revise Revise Correctiveaction

Measurement

Feedback

Communication

Yes

No


3/17

Nature of a Budget

An operating budget usually covers oneyear & states the revenues & expensesplanned for that year.

Budget are important tool for effective short-term

planning & control in organization.


4/17


5/17

Continued

The process of preparing a budgetshould be distinguished from:

a.Strategic planning

b.Forecasting


6/17

Contrast with Forecasting

A budgetis a management plan, with thepositive assumption that positive stepswill be taken by the budgetee to make

actual events correspond to the plan.A forecastis merely a prediction of whatwill most likely happen, carrying noimplication that the forecaster will

attempt to so shape events that theforecast will be realized.


7/17


8/17

Content ofan Operating Budget

Strategic Plan

Revenue & expense for each majorprogram

Not necessarily by responsibilitycenters

More expenses are variable

For several years

Total reconciles to operatingbudget

Operating Budget

For organization as a whole & for eachbusiness unit

Classified by responsibility centers

Typically includes:RevenuesProduction cost & cost of salesMarketing expenseLogistic expense (sometimes)General & administrativeR & DIncome taxes (sometimes)Net Income

Expenses may be:Flexible

DiscretionaryCommitted

Total reconciles to operating budget

Total reconciles to strategic plan (unlessrevised)

Capital Budget

Each major capital project listedseparately

Total project expenditures byquarters


9/17

Other Budgets

Capital Budget The approved capital projects, plus a lump-sum amount for

small projects that do not require high-level approval.

Part of strategic planning process.

Budgeted Balance Sheet Showing the balance sheet implications of decisions included in

the operating budget & the capital budget

Budgeted Cash Flow Statement Showing how much of the cash needs during the year will be

supplied by retained earnings.

Management by Objectives The process of putting specific objectives to managers.


10/17

Budget Preparation Process

Organization Budget Department

Normally reports to the corporate controller,

administers the information flow of the budgetarycontrol system.

The Budget Committee Consist of members of senior management (CEO,

COO, CFO).

Reviewing & either approving or adjusting each ofthe budgets.


11/17

Issuance of Guidelines Based on strategic planning

To govern the preparation of the budget, fordissemination to all managers.

Ex: assumed inflation, corporate policies,compensation & benefit.

Initial Budget Proposal Responsibility center manager & their staffs

develop a budget request. Based on the existing levels, which are then

modified in accordance with the guidelines.

Continued


12/17

Continued

Negotiation The budgetee discusses the proposed budget with

his or her superior.

The heart of budget preparation process.

Slack: the different between the budget amount &the best estimate.

Review & Approval Analyst put the pieces together & examine the

total. Final approval is recommended by the budget

committee to the CEO, CEO to the Board ofDirectors.


13/17


14/17

Behavioral Aspects

Participation in the Budgetary Process Top-down & bottom-up budgeting.

Research: the budget participation has

positive effects on managerial motivation forbecause:1. There is likely to be greater acceptance of budget

goals if they are perceived a being under managerspersonal control, rather than being imposed

externally.2. Participative budgeting results an effective

information exchange.


15/17

Continued

Degree of Budget Target Difficulty

The ideal challenging but attainable.

Why attainable???

If budget too difficult, managers are motivated to takeshort-term action that may not be in the long-term interestof the company.

Reduce the motivation for managers to engage in datamanipulation to meet the budget.

Difficult to attain budget may lead to over commitment ofresources.

If managers able to meet & exceed their target, there is awinning atmosphere.


16/17

Continued

Senior Management Involvement

To motivate budgetee.

There should be active participation in the

approval process. Follow up on budget results.

The budget department

It has difficult behavioral problem, they must walk

the fine line between helping the line manager &ensuring the integrity of the system.


17/17

Quantitative Techniques

Simulation

A method that constructs a model of a realsituation & then manipulates this model in

such a way as to draw some conclusion tothe real situation.

Probability Estimates

Point estimates Probability distribution

09 - budget preparation.ppt

Documents