second year management accounting lecture 1 budgets and control
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1. Introduction and the Concept of Control
CONTROL as defined by Webster's dictionary
"Application of policies and procedures
for directing, regulating, and co-ordinating,
production, administration and other business activities
in a manner to achieve the objectives of the enterprise.”
FOUR NECESSARY CONDITIONS FOR CONTROL
• OBJECTIVES must exist• OUTPUT must be MEASURABLE• PREDICTIVE MODEL of the process is
required• TAKING ACTION must be possible
Systems Approach to Control:Boulding’s hierarchy of systems
1. Static structures, e.g. a bridge or table
2. Simple mechanical systems, e.g. a clock
3. Cybernetic or closed loop systems, e.g. a themostat
4. Open, self-maintaining systems, e.g. a cell
5. Plant or society of cells
6. Animal, characterised by brain
7. Human, characterised by language and conciousness
8. Social systems
9. Trancendental systems
Decisions and Control
PROGRAMMED DECISIONS,
"where the decision situation is sufficiently well understood for a reliable prediction of the outcome to be made"
NON-PROGRAMMED DECISIONS
"where the judgement of the managers involved is most important because there is no formal method of predicting likely outcomes”
TWO IMPORTANT FEATURES OF ORGANISATIONAL CONTROL
1.Organisational control is a process, not a single event
2.Organisational control is only defined in terms of objectives
THREE TYPES OF ORGANISATIONS
1.Normative Organisations
2.Coercive Organisations
3.Utilitarian Organisations
Control and Controls
Adminis-trative
Controls
Social Controls
Self Controls
Control of the
Organisa-tion
AN ALTERNATIVE DEFINITION OF CONTROL
"Control is the directing or influencing of behaviour, so that an individual is working towards the objectives of the organisation"
Key implications of the definition
· Objectives
· Implication of size
· Formal control systems
BUDGETARY CONTROL
1. A PLAN What ought to happen
2. EVENTS OCCUR What actually happens
3. COMPARISON What differences are
OF 1. AND 2. there
4. EXPLANATION Why are there
OF 3. differences
5. APPROPRIATE ACTION TO BE TAKEN
BUDGETARY CONTROL MODEL
BUDGET
ACTIVITY
BUDGETREVISION
EXPLAN-ATION
EITHER/OR
CORRECTIVEACTION
COMPARISON
RESPONSIBILITY CENTRE
"A part, segment or sub-unit of an organisation whose manager is accountable
for a specified set of activities"
RESPONSIBILITY ACCOUNTING:
"A system that measures the plans (by budgets) and actions (by actual results) of each responsibility centre”
RESPONSIBILITY CENTRES
Type of Centre Focus of Attention
Investment Centre Profits and level of capital employed in division
Profit Centre Profits i.e. revenue and costs
Cost Centre Costs only
Budgets
• Definition:– A comprehensive quantitative plan for utilising the
resources of an organisation for a given time period.
• More simply:– A budget is the financial expression of a plan.
Planning
• Corporate and Strategic Planning– time-scale: 3 - 5 years
• Budgets– usually for one year– first year of budget should be congruent with the
corporate plan
• Budget “phasing”– usually month by month– what factors would be considered in “calendarising” the
budget?
Preparation of the Budget
• Responsibility centres– Managers have clearly designated areas of
responsibility
– All costs can be assigned as responsibilities of specific managers
• “Bottom-up” Budgeting– Allow managers to develop individual budgets
– Aggregate into a company budget
• “Top-down” Budgeting– Set out top-level results
– Break down to individual responsibility centres
Co-ordinating the Budget
• Where do we start?• The role of forecasting• Importance of limiting factors• The usual sequence:
– Sales budget– Production budget– Purchases budget– Overhead budgets
Budgets for Motivation
• Budgets and behaviour:– Encourage participation or not?– Tight or realistic budgets?
• Hopwood’s analysis of management styles:– Budget constrained– Profit-conscious– Non-accounting
Budgeting for Expenses
Types of Expense:• committed expense• discretionary expense• variable expense• service expense
Committed Expense
Some costs cannot be avoided:• rent, rates on buildings• contracted lease charges• salary costs for executives under
contract
These are easy to budget• make sure they are right!• remember that renegotiation may be
possible
Discretionary Expenses
Not related to short-run activity but may be necessary, for example:• to build staff skills for the future• to ensure up-to-date systems• to maintain infrastructure
No easy way to say what these expenses “should” be:• external benchmarks?• importance of the activities supported?
Variable Expense
• Vary with activity• Identify inputs and outputs• Establish relationship between
inputs and outputs• Look for improvements and savings• Establish budget output• Establish budget resources
Service Expenses
• Provided by other departments
• Sometimes treated as uncontrollable
• But this is not very sensible:the user department should control the use of the service even if it cannot control the price paid for the service
‘Strategies’ for Budgeting
When people try to influence or manipulate the budget to their own ends
The Gardener The Duck Hunter
The Entrepreneur The Gambler
The Surgeon The Good Soldier
The Saviour The Honest Guy
The Drowning Man
Negotiating Budgets: Games People Play, INC., September 1981, pp89-91. Reproduced in Management Accounting, 2nd ed., (1996), Atkinson, Banker, Kaplan, and Young
The Gardener
• ‘Waters’ the budget growing many new shoots
• By budget time the garden has grown into a jungle
• Slick presentation makes cutting the budget difficult and exhausting
The Duck Hunter
• Knows how to use decoys• Peppers her budget with
complex presentations of expensive decoys
• Aims to focus attention on the details of her decoy and hide her real project
The Entrepreneur
• Flamboyant, Gutsy and innovative• Needs ‘the right kind of investment and
support’ for his new idea• Uses graphs and charts to illustrate how
he will make the company a fortune• But the ideas are untested and
implementation is a high risk strategy
$
The Gambler
• Has a perfect ‘poker face’• Needs his budget to achieve a
‘big score’• Willing to take enormous risks to
win• Threatens to resign if his budget
is cut
The Surgeon
• Has just performed a major ‘operation’ on her budget
• Claims the ‘patient’ cannot take any more
The Good Soldier
• A true company person, believes in all company objectives
• Claims to have adhered strictly to company policy and produced a ‘bare bones’ budget
• Unusually adept at successfully padding her budget
The Saviour
• Offers his department as the firms salvation
• Requires a great deal of money to carry the entire company
• Implies that failure to fund him places the firm in doubt
The Drowning Man
• Makes his budget presentation as if it were his last
• Requests more money to keep his department above water
• Claims to have been under funded in the past
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