budgetary control and unit 4
TRANSCRIPT
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Budgetary ControlBudgetary Control
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Concept of BudgetConcept of Budget
BudgetBudget refersrefers toto aa planplan relatingrelating toto aa
definitedefinite futurefuture periodperiod of of timetime expressedexpressed
inin monetarymonetary and/or and/or quantitativequantitative termsterms..InIn relationrelation toto business,business, aa budgetbudget isis aa
formalformal expressionexpression of of thethe expectedexpected
incomesincomes andand expendituresexpenditures for for aa definitedefinite
futurefuture periodperiod..
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Characteristics of budgetCharacteristics of budget
AA budgetbudget isis primarilyprimarily aa planningplanning devicedevice butbutitit alsoalso servesserves asas aa basisbasis for for performanceperformanceevaluationevaluation andand controlcontrol..
AA budgetbudget isis preparedprepared either either inin moneymoney or or ininquantitativequantitative termsterms or or inin bothboth..
AA budgetbudget isis preparedprepared for for aa definitedefinite futurefuture
periodperiod.. PurposePurpose of of aa budgetbudget isis toto implementimplement thethe
policiespolicies formulatedformulated byby managementmanagement for for attainingattaining thethe givengiven objectivesobjectives
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Budgeting
Budgeting ±± TheThe actact andand entireentire processprocess of of preparingpreparing budgetbudget isis calledcalled budgetingbudgeting..
BudgetaryBudgetary controlcontrol-- itit isis aa systemsystem of of controllingcontrolling
costscosts throughthrough preparationpreparation of of budgetbudget..
BudgetingBudgeting isis thethe onlyonly partpart of of thethe budgetarybudgetarycontrolcontrol.. ItIt isis aa systemsystem of of controllingcontrolling costs,costs,
whichwhich includesincludes thethe preparationpreparation of of budgetsbudgets
coordinatingcoordinating itsits departmentsdepartments andand establishingestablishing
responsibility,responsibility, comparingcomparing actualactual performanceperformance
withwith thethe budgetedbudgeted andand thethe actingacting uponupon resultsresults
toto achieveachieve maximummaximum profitabilityprofitability..
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Process of Budgetary controlProcess of Budgetary control
EstablishingEstablishing budgetsbudgets of of eacheach function,function,
departmentsdepartments of of thethe organizationorganization..
ComparisonComparison of of actualactual performanceperformance withwith thethe
budgetedbudgeted figuresfigures inin aa continuouscontinuous basisbasis..
AnalysisAnalysis of of variancevariance thatthat is,is, comparisioncomparision of of
actualactual performanceperformance withwith thethe budgetedbudgeted
performanceperformance toto knowknow thethe resultsresults therethere of of.. TakingTaking suitablesuitable remedialremedial wherewhere necessarynecessary..
RevisionsRevisions of of budgetbudget timetime toto timetime inin viewview of of
changeschanges inin conditionsconditions..
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Essential of effectiveEssential of effective
BudgetingBudgeting Support of top managementSupport of top management
Participation by responsible executivesParticipation by responsible executives
Reasonable goalsReasonable goals Clearly defined responsibility centreClearly defined responsibility centre
Continuous budget educationContinuous budget education
Adequate accounting systemsAdequate accounting systems Maximum profitsMaximum profits
costs of the systemcosts of the system
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Steps or preliminaries in theSteps or preliminaries in the
installation of budgetary systeminstallation of budgetary system Creation of budget centresCreation of budget centres
Introduction of adequate accountingIntroduction of adequate accountingrecordsrecords
Preparation of an organisation chartPreparation of an organisation chart
Establishment of budget committeeEstablishment of budget committee
Preparation of budget manualPreparation of budget manual
Budget periodBudget period
Determination of key factorsDetermination of key factors
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Advantages of BudgetaryAdvantages of Budgetary
ControlControl BudgetingBudgeting compelscompels managersmanagers toto thinkthink
aheadahead ±± toto anticipateanticipate andand prepareprepare for for changingchanging conditionsconditions..
BudgetingBudgeting coco ±± ordinatesordinates thethe activitiesactivitiesof of variousvarious departmentsdepartments andand functionsfunctionsof of thethe businessbusiness..
ItIt increasesincreases productionproduction efficiency,efficiency,eliminateseliminates wastewaste andand controlscontrols thethecostscosts..
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ItIt pinpointspinpoints efficiencyefficiency or or lacklack of of itit..
BudgetaryBudgetary controlcontrol aimsaims atat maximizationmaximization of of
profitsprofits throughthrough carefulcareful planningplanning andand
controlcontrol.. ItIt providesprovides aa yardstickyardstick againstagainst whichwhich actualactual
resultsresults cancan bebe comparedcompared..
ItIt ensuresensures thatthat workingworking capitalcapital isis availableavailablefor for thethe efficientefficient operationoperation of of thethe businessbusiness..
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ItIt directsdirects capitalcapital expenditureexpenditure inin thethe mostmost
profitableprofitable directionsdirections..
ItIt instillsinstills intointo allall levelslevels of of managementmanagement aatimely,timely, carefulcareful andand adequateadequate
considerationconsideration of of allall factorsfactors beforebefore
reachingreaching importantimportant decisionsdecisions..
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BudgetingBudgeting alsoalso aidsaids inin obtainingobtaining bankbank
creditcredit..
AA budgetarybudgetary controlcontrol systemsystem assistsassists inindelegationdelegation of of authorityauthority andand assignmentassignment of of
responsibilityresponsibility..
BudgetingBudgeting createscreates costcost consciousnessconsciousness
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Limitations of BudgetaryLimitations of Budgetary
ControlControl Budget plan is based on estimates.Budget plan is based on estimates.
Danger of rigidity.Danger of rigidity...
Opposition from staff.Opposition from staff. Expensive technique.Expensive technique.
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Classification of budgetsClassification of budgets
Classification on the basis of FunctionClassification on the basis of Function
and Scopeand Scope
Functional Budget,Functional Budget, Master BudgetMaster Budget
Classification on the basis of flexibilityClassification on the basis of flexibility
Fixed Budget,Fixed Budget, Flexible BudgetFlexible Budget
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Functional BudgetFunctional Budget
ItIt isis thethe one,one, whichwhich relatesrelates toto particular particular functionsfunctions of of thethe businessbusiness or or organizationorganization..TheThe typestypes of of functionalfunctional budgetsbudgets areare
SalesSales budgetbudget ProductionProduction budgetbudget
RawRaw materialsmaterials budgetbudget
Labour Labour budgetbudget etcetc
CashCash budgetbudget
CapitalCapital expenditureexpenditure budgetbudget
PurchasePurchase budgetbudget
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Master BudgetMaster Budget Master Master or or finalfinal budgetbudget isis aa summarysummary budgetbudget
whichwhich incorporatesincorporates allall functionalfunctional budgetsbudgets ininaa capsulecapsule formform.. ItIt setssets outout thethe planplan of of operationsoperations for for allall departmentsdepartments ininconsiderableconsiderable detaildetail for for thethe budgetbudget periodperiod..
Master Master budgetbudget requirerequire thethe approvalapproval of of thetheBudgetBudget CommitteeCommittee beforebefore itit isis putput intointooperationoperation.. ItIt maymay happen,happen, sometimes,sometimes, thatthat aanumber number of of master master budgetbudget havehave toto bebepreparedprepared beforebefore thethe finalfinal oneone isis agreedagreed uponupon..TheThe budgetbudget generallygenerally containscontains detailsdetailsregardingregarding salessales (net),(net), productionproduction costs,costs, cashcashposition,position, andand keykey accountaccount balancesbalances (e(e..gg..debtors,debtors, fixedfixed assets,assets, billsbills payable,payable, etc)etc).. ItItalsoalso showsshows thethe grossgross andand netnet profits,profits, andand thethe
importantimportant accountingaccounting ratiosratios
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Fixed and Flexible BudgetsFixed and Flexible Budgets FixedFixed BudgetBudget:: AA fixedfixed budgetbudget isis designeddesigned toto remainremain
unchangedunchanged irrespectiveirrespective of of thethe levellevel of of activityactivity.. ThisThisbudgetbudget isis preparedprepared onon thethe basisbasis of of aa standardstandard of of fixedfixedlevellevel of of activityactivity.. SinceSince thethe budgetbudget doesdoes notnot changechange withwiththethe changechange of of levellevel of of activity,activity, itit becomesbecomes anan unrealisticunrealisticyardstickyardstick inin casecase thethe levellevel of of activityactivity (volume(volume of of
productionproduction or or sales)sales) actuallyactually attainedattained doesdoes notnot conformconformtoto thethe oneone assumedassumed for for budgetingbudgeting purposespurposes..
TheThe managementmanagement willwill notnot bebe inin aa positionposition toto assessassess thetheperformanceperformance of of differentdifferent headsheads onon thethe basisbasis of of budgetsbudgetspreparedprepared byby them,them, becausebecause theythey cancan serveserve asas yardsticksyardsticks
onlyonly whenwhen thethe actualactual levellevel of of activityactivity correspondscorresponds toto thethebudgetedbudgeted levellevel of of activityactivity.. OnOn accountaccount of of thethe limitationlimitation of of fixedfixed budgetbudget andand itsits inabilityinability toto provideprovide for for automaticautomaticadjustmentsadjustments whenwhen thethe volumevolume changes,changes, firmsfirms whosewhosesalessales andand productionproduction cannotcannot bebe accuratelyaccurately estimatedestimated
havehave givengiven upup thethe practicepractice of of fixedfixed budgetbudget..
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FlexibleFlexible BudgetBudget:: ItIt isis designeddesigned toto changechangeinin accordanceaccordance withwith thethe levellevel of of activityactivityattainedattained.. Thus,Thus, whenwhen aa budgetbudget isis preparedprepared
inin suchsuch aa manner manner thatthat thethe budgetedbudgeted costcostfor for anyany levellevel of of activityactivity isis variable,variable, itit isistermedtermed asas flexibleflexible budgetbudget.. SuchSuch aa budgetbudgetisis preparedprepared after after consideringconsidering thethe fixedfixed andandvariablevariable elementselements of of costcost andand thethe changeschangesthatthat maymay bebe expectedexpected for for eacheach itemitem atatvariousvarious levelslevels of of operationsoperations..
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ZERO BASE BUDGETINGZERO BASE BUDGETING
ItIt isis anan alternativealternative of of traditionaltraditional budgetingbudgeting..TheThe traditionaltraditional budgetingbudgeting isis basedbased ononincrementalincremental andand previousprevious year year figurefigure useuse
toto taketake intointo considerationconsideration.. ButBut inin ZeroZeroBaseBase BudgetingBudgeting figuresfigures areare developeddevelopedwithwith zerozero asas thethe basebase whichwhich meansmeans aabudgetbudget willwill bebe preparedprepared asas if if itit isis beingbeingpreparedprepared asas aa newnew for for thethe firstfirst timetime.. ItIt isis aamethodmethod of of budgetingbudgeting wherewhere allall activitiesactivitiesareare revaluedrevalued eacheach timetime aa budgetbudget isis setset..
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Main Features of Zero BaseMain Features of Zero Base
Budgeting (Z
BB)Budgeting (Z
BB) AllAll budgetbudget items,items, bothboth oldold andand
newlynewly proposed,proposed, areare consideredconsideredtotallytotally afreshafresh..
AmountAmount toto bebe spentspent onon eacheachbudgetbudget itemitem isis toto bebe totallytotallyjustifiedjustified..
AA detaileddetailed costcost benefitbenefit analysisanalysis of of eacheach budgetbudget programmeprogramme isisundertakenundertaken andand eacheach programmeprogrammehashas toto competecompete for for scarcescarce
resourcesresources..
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DepartmentalDepartmental objectivesobjectives areare linkedlinked
toto corporatecorporate goalsgoals..
TheThe mainmain stressstress inin notnot onon µhowµhowmuch¶much¶ aa departmentdepartment willwill spendspend butbut
onon µwhy¶µwhy¶ itit needsneeds toto spendspend..
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AdvantagesAdvantages
InIn ZBB,ZBB, allall activitiesactivities includedincluded inin thethebudgetbudget areare justifiedjustified onon costcost benefitbenefit
considerations,considerations, whichwhich promotepromote moremore
effectiveeffective allocationallocation of of resourcesresources..
ZBBZBB discardsdiscards thethe attitudeattitude of of acceptingaccepting
thethe currentcurrent positionposition..
InIn thethe coursecourse of of ZBBZBB process,process,
inefficientinefficient andand lossloss makingmaking operationsoperations
areare identifiedidentified andand maymay bebe removedremoved..
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ItIt addsadds psychologicalpsychological pushpush totoemployeesemployees toto avoidavoid wastefulwasteful
expenditureexpenditure.. ItIt isis anan educationaleducational processprocess andand cancan
promotepromote aa managementmanagement teamteam of of talentedtalented andand skillfulskillful peoplepeople whowho tendtend totopromptlypromptly respondrespond toto changeschanges inin thethebusinessbusiness environmentsenvironments..
CostCost behaviour behaviour patternspatterns areare moremore
closelyclosely examinedexamined.. DeliberatelyDeliberately inflatedinflated budgetbudget requestsrequests
getget automaticallyautomatically rejectedrejected inin thethe ZBBZBBprocessprocess..
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Disadvantage:Disadvantage:
ZBBZBB leadsleads toto anan enormousenormous increaseincrease ininpaper paper workwork andand resultsresults inin highhigh costcost of of preparingpreparing budgetsbudgets everyevery year year..
ManagersManagers maymay resistresist newnew ideasideas andand
changeschanges.. TheyThey maymay feelfeel threatenedthreatened bybyZBBZBB becausebecause allall expendituresexpenditures arearequestionedquestioned andand needneed toto bebe justifiedjustified..
InIn ZBB,ZBB, therethere isis danger danger of of emphasizingemphasizing shortshort--termterm gainsgains atat heheexpenseexpense of of longlong--termterm benefitsbenefits..
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ItIt hashas aa tendencytendency toto regardregard anyany activityactivitynotnot foreseenforeseen andand sanctionedsanctioned inin thethemostmost recentrecent ZBBZBB asas illegitimateillegitimate..
For For introducingintroducing ZBBZBB managersmanagers needneed totobebe givengiven proper proper trainingtraining andand educationeducationregardingregarding thisthis newnew concept,concept, itsits prosprosandand conscons andand implementationimplementation..
ItIt maymay notnot alwaysalways bebe easyeasy toto properlyproperlyrankrank decisiondecision packagespackages andand thisthis maymaygivegive riserise toto conflictsconflicts
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RESPONSIBILITYRESPONSIBILITY
ACCOUNTINGACCOUNTING
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INTRODUCTIONINTRODUCTION
ResponsibilityResponsibility accountingaccounting isis thethe
accountingaccounting systemsystem of of controlcontrol throughthrough
whichwhich thethe responsibilitiesresponsibilities areare
assignedassigned towardstowards thethe controlcontrol of of costscosts..
ItIt isis anan accountingaccounting systemsystem toto monitor monitor
thethe performance,performance, thethe individualsindividuals inin thethe
respectiverespective departmentsdepartments shouldshould bebegivengiven adequateadequate authorityauthority toto tracktrack themthem
thenthen andand therethere..
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ThisThis systemsystem doesdoes makemake thethe individualsindividualspersonallypersonally responsibleresponsible onlyonly atat thethe momentmomentof of registeringregistering thethe deviationsdeviations betweenbetween thethe
actualactual performanceperformance andand predeterminedpredeterminedstandardsstandards.. TheThe entireentire systemsystem of of accountingaccounting postulatespostulates thethe responsibilityresponsibility for for thethe controlcontrol of of costscosts whichwhich onlyonly restsrests uponupon
thethe menmen notnot withwith thethe systemsystem ..
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DEFINITIONSDEFINITIONS
³Responsibility³Responsibility accountingaccounting isis aa systemsystem of of
accountingaccounting thatthat recognizesrecognizes variousvarious
responsibilityresponsibility centrescentres throughoutthroughout thethe
organizationorganization andand reflectsreflects thethe plansplans andand
actionsactions of of eacheach of of thesethese centrescentres byby
assigningassigning particular particular revenuesrevenues andand costscosts toto
thethe personperson havinghaving thethe pertinentpertinentresponsibility´responsibility´..
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³Responsibility³Responsibility accountingaccounting isis aa methodmethod of of
accountingaccounting inin whichwhich costscosts areare identifiedidentified
withwith personspersons assumedassumed toto bebe capablecapable of of
controllingcontrolling them,them, rather rather thanthan withwith productsproducts
or or functions´functions´..
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CLASSIFICATION OF CLASSIFICATION OF
RESPONSIBILITY CERTRESRESPONSIBILITY CERTRES
Expense CentreExpense Centre
Profit Centre andProfit Centre and Investment CentreInvestment Centre
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Expense CentreExpense Centre
TheThe responsibilityresponsibility centrecentre whichwhich incursincurs onlyonly
expenses,expenses, andand measuresmeasures them,them, isis knowknow asas
expensesexpenses centrecentre.. TheThe expenseexpense centrescentres of of
thethe organizationorganization areare mostlymostly thethe serviceservice
centrescentres whichwhich onlyonly usuallyusually incur incur
expensesexpenses..
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TheThe contributioncontribution of of serviceservice departmentdepartment
andand officeoffice && administrationadministration departmentdepartment
toto thethe companycompany cannotcannot bebe
denominateddenominated inin monetarymonetary terms,terms, butbut
insteadinstead inin termsterms of of qualityquality of of servicesservices
toto assistassist thethe entireentire organizationorganization..
TheThe outputoutput of of thethe sales/productionsales/productiondepartmentsdepartments areare denominateddenominated inin
monetarymonetary termsterms unlikeunlike othersothers..
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Profit CentreProfit Centre
TheThe responsibilityresponsibility centrecentre whichwhich isismeasuredmeasured inin termsterms of of bothboth thethe expensesexpensesincurredincurred asas wellwell asas revenuerevenue earnedearned isisknownknown asas profitprofit centrecentre .. TheThe resultantresultant of of
aa profitprofit centrecentre isis revenuerevenue realization,realization,whichwhich isis mademade either either throughthrough thethe internalinternalsalessales or or toto thethe externalexternal consumersconsumers .. TheTherevenuerevenue cancan bebe realizedrealized either either throughthroughthethe externalexternal salesale toto outsidersoutsiders or or throughthrough
thethe internalinternal consumptionconsumption ,, whichwhich isis ananoutcomeoutcome of of internalinternal transfer transfer fromfrom oneonedepartmentdepartment toto another another departmentdepartment ;; if if suchsuch transfer transfer isis atat profitprofit ..
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For For ExampleExample ±± thethe mostmost idealideal illustrationillustration isis
thethe industryindustry withwith process,process, whichwhich transferstransfers
thethe outputoutput fromfrom oneone processprocess toto another another
withwith profitprofit marginmargin byby consideringconsidering thethe salesale
priceprice..
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Investment CentreInvestment Centre
IsIs thethe responsibilityresponsibility centrecentre atat whichwhich thethemanager manager isis responsibleresponsible for for thethe effectiveeffectiveutilityutility assetsassets inin order order toto earnearn thethe bestbest
raterate of of returnreturn outout of of thethe investmentsinvestments or or assetsassets employedemployed .. TheThe exactexact volumevolume of of assetsassets employedemployed cannotcannot bebe easilyeasilyassessedassessed for for singlesingle departmentdepartmentresponsibilityresponsibility centrecentre.. TheThe difficultydifficulty inin thethe
assessmentassessment onon thethe volumevolume of of assetsassets isisonlyonly therethere toto thethe utilityutility of of thethe assets,assets,whichwhich isis notnot onlyonly inin oneone responsibilityresponsibilitycentrecentre butbut alsoalso inin moremore thanthan oneone ..
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Process of ResponsibilityProcess of Responsibility
AccountingS
ystemAccountingS
ystem
IdentifyingIdentifying differentdifferent responsibilityresponsibility centrecentre
andand definingdefining thethe variousvarious responsibilityresponsibilitymanager manager
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Setting up of TargetsSetting up of Targets
TheThe secondsecond stepstep inin thethe processprocess of of
establishingestablishing thethe responsibilityresponsibility accountingaccounting
systemsystem isis toto settingsetting thethe targetstargets of of thethe
responsibilityresponsibility centrecentre onlyonly throughthrough thethe
advisoryadvisory rolerole of of responsibilityresponsibility manager manager..
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Evaluating of PerformanceEvaluating of Performance
TheThe thirdthird stepstep involvedinvolved inin thetheestablishmentestablishment of of responsibilityresponsibility accountingaccountingisis thethe comparisoncomparison thethe performanceperformance withwith
thethe predeterminedpredetermined standardsstandards.. If If anyanydeviationdeviation occursoccurs betweenbetween aboveabovementioned,mentioned, thethe observed/identifiedobserved/identifieddeviationsdeviations willwill bebe reportedreported toto thethe toptop levellevel
managementmanagement ..
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Correction of DeviatedCorrection of Deviated
Course of ActionCourse of Action deviateddeviated coursecourse of of actionaction isis
correctedcorrected throughthrough thethe directionsdirectionsfromfrom thethe toptop levellevel managementmanagement toto thethe
responsibilityresponsibility manager,manager, toto maintainmaintainthethe uninterrupteduninterrupted flowflow of of workwork ininfuturefuture.. TheThe aboveabove enlistedenlisted stepssteps arearenotnot onlyonly involvedinvolved inin thethe processprocess of of
assigningassigning thethe responsibilities,responsibilities, butbutalsoalso inin enhancingenhancing thethe levellevel of of performanceperformance throughthrough thethe controllingcontrollingof of costscosts ..
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Advantages of ResponsibilityAdvantages of Responsibility
AccountingAccountingResponsibilityResponsibility accountingaccounting isis usedused asas aamonitoringmonitoring andand controllingcontrolling devicedevice totoachieveachieve thethe targetstargets andand objectivesobjectives of of thethe
organizationorganization .. ResponsibilitiesResponsibilities areare AssignedAssigned
ItIt isis anan elevator elevator of of performanceperformance
DelegationDelegation of of ControlControl PlanningPlanning isis FacilitatedFacilitated
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Balanced Scorecard Balanced Scorecard
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� The Organization will become more
³strategically focused´ over the nextten years given the recent policy
directive issued by BSP (Budget &
Strategic Planning).
� People at all levels have relied heavily
on tactical performance
measurements, such as number of maps submitted, number of land
structures in flow, and % of supply
vendor contracts in place.
Why the Balanced Scorecard?Why the Balanced Scorecard?
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NeedNeed moremore balancedbalanced approachapproach toto
lookinglooking atat performance,performance, bothboth tacticaltactical
andand strategicstrategic..
OnlyOnly 55%% of of aa workforceworkforce tendstends toto
understandunderstand their their company¶scompany¶s strategystrategy..
8686%% of of executiveexecutive teamsteams spendspend lessless
thanthan oneone hour hour per per monthmonth discussingdiscussing
strategystrategy..
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� The Organization¶s Information Resource Planning
System (IRPS):
- Enterprise wide system for how we will evaluate
success ± division read outs, data turnarounds,
global partnerships, etc.
- Must be integrated into all agency components
(such as region and global outlet offices)
- Designed around the Balanced Scorecard
framework� The Balanced Scorecard will be the strategic view of
performance for the agency, balancing out our current
tactical view of performance which is already in place.
A Major Driver is . . .A Major Driver is . . .
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Definition of BalancedDefinition of Balanced
Scorecard
Scorecard TheThe BalancedBalanced ScorecardScorecard isis aa t ool t ool that that
t ranslat est ranslat es anan organizat ion'sorganizat ion's missionmission and and
st rat egy st rat egy int oint o aa comprehensivecomprehensive set set of of
performanceperformance measuresmeasures that that providesprovides thetheframework framework for for aa st rat egic st rat egic measurement measurement and and
management management syst emsyst em.. TheThe BalancedBalanced
ScorecardScorecard isis anan approachapproach for for drivingdriving
organizationalorganizational improvementimprovement towardtoward prepre--selectedselected goalsgoals whichwhich keepskeeps tracktrack of of progressprogress
throughthrough carefullycarefully selectedselected measuresmeasures..
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TheThe BalancedBalanced ScorecardScorecard isis alsoalso ananintegratedintegrated managementmanagement systemsystem
consistingconsisting of of threethree componentscomponents::
11)) strategicstrategic managementmanagement system,system, 22)) communicationcommunication tool,tool, andand
33)) measurementmeasurement systemsystem..
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ItIt resultsresults inin aa carefullycarefully selectedselected setset of of measuresmeasures derivedderived fromfrom andand linkedlinked toto ananorganization¶sorganization¶s corecore strategiesstrategies.. TheThe
measuresmeasures selectedselected for for thethe scorecardscorecardrepresentrepresent aa tooltool for for leadersleaders toto useuse inincommunicatingcommunicating toto employeesemployees andandexternalexternal stakeholdersstakeholders thethe outcomesoutcomes
andand performanceperformance driversdrivers byby whichwhich thetheorganizationorganization willwill achieveachieve itsits missionmissionandand strategicstrategic objectivesobjectives..
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Companies are using the scorecard to:Companies are using the scorecard to:
clarifyclarify andand updateupdate strategystrategy communicatecommunicate strategystrategy throughoutthroughout thethe
companycompany
alignalign unitunit andand individualindividual goalsgoals withwith
strategystrategy
linklink strategicstrategic objectivesobjectives toto longlong termterm
targetstargets andand annualannual budgetsbudgets
identifyidentify andand alignalign strategicstrategic initiativesinitiatives
conductconduct periodicperiodic performanceperformance reviewsreviews
toto learnlearn aboutabout andand improveimprove strategystrategy..
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Traditional PerspectivesTraditional Perspectives
ThereThere areare aa number number of of ³balances´³balances´ inin thethe
BSC,BSC, amongamong whichwhich areare thethe balancebalance or or
equilibriumequilibrium betweenbetween four four historicalhistorical domainsdomains
or or perspectivesperspectives consideredconsidered toto bebe mutuallymutuallylinkedlinked inin termsterms of of strategystrategy andand performanceperformance::
11.. LearningLearning andand GrowthGrowth PerspectivePerspective
22.. InternalInternal ProcessProcess PerspectivePerspective
33.. Customer Customer PerspectivePerspective
44.. FinancialFinancial PerspectivesPerspectives
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PaulPaul Niven¶sNiven¶s analogyanalogy of of thethe BalancedBalanced
ScorecardScorecard isis thatthat of of aa treetree TheThe LearningLearning
andand GrowthGrowth perspectiveperspective areare thethe roots,roots, thethe
trunktrunk isis thethe InternalInternal ProcessProcess perspective,perspective,
CustomersCustomers areare thethe branches,branches, andand thethe
leavesleaves areare thethe FinancialFinancial perspectiveperspective..
EachEach perspectiveperspective isis interdependentinterdependent ononthosethose belowbelow asas wellwell asas thosethose aboveabove.. ItIt isis aa
continuouscontinuous cyclecycle of of renewalrenewal andand growthgrowth..
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LeavesLeaves (finances)(finances) fallfall toto fertilizefertilize thethe
groundground andand rootroot system,system, whichwhich stimulatesstimulates
growthgrowth throughoutthroughout thethe organizationorganization.. InIn thisthis
analogy,analogy, learninglearning andand growthgrowth isis thethe
foundationfoundation onon whichwhich allall other other perspectivesperspectives
areare builtbuilt
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For For example,example, if if aa hospitalhospital assessesassessespatientpatient satisfactionsatisfaction andand discoversdiscovers
patientspatients aren¶taren¶t satisfiedsatisfied (Customer (Customer Perspective),Perspective), oneone of of thethe strategiesstrategiesmightmight bebe thethe implementationimplementation of of employeeemployee trainingtraining inin thethe areaarea of of
customer customer serviceservice (Learning(Learning && GrowthGrowthPerspective)Perspective).. ImprovedImproved customer customer serviceservice throughthrough aa reductionreduction of of waitwait timetimeinin thethe emergencyemergency roomroom (Internal(InternalProcessProcess Perspective)Perspective) cancan ultimatelyultimatelyimproveimprove utilizationutilization (Financial(FinancialPerspective)Perspective).. ThereThere areare definitedefinite causecauseandand effectseffects betweenbetween andand amongamong eacheach of of thethe four four perspectivesperspectives.. TheThe keykey isis toto
identifyidentify thethe rightright strategiesstrategies..
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BalancesBalances
OneOne of of thethe reasonsreasons thethe BalancedBalancedScorecardScorecard hashas beenbeen soso successfulsuccessful isisthatthat itit isis aa balancedbalanced approachapproach.. ThisThisbalancebalance includesincludes::
11..BalanceBalance betweenbetween financialfinancial andand nonnon--financialfinancial indicatorsindicators of of successsuccess
22..BalanceBalance betweenbetween internalinternal andand
externalexternal constituentsconstituents of of thetheorganizationorganization
33..BalanceBalance betweenbetween laglag andand leadleadindicatorsindicators of of performanceperformance
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InternalInternal constituentsconstituents mightmight includeincludeemployeesemployees whereaswhereas externalexternal constituentsconstituentsmightmight includeinclude physicianphysician groupsgroups or or insurersinsurers..
LagLag indicatorsindicators generallygenerally representrepresent pastpastperformanceperformance andand mightmight includeinclude customer customer satisfactionsatisfaction or or revenuerevenue.. AlthoughAlthough thesethesemeasuresmeasures areare objectiveobjective andand accessible,accessible, theythey
lacklack anyany predictivepredictive power power.. LeadLead indicatorsindicators areare thethe performanceperformance driversdrivers
thatthat leadlead toto thethe achievementachievement of of laglag indicatorsindicatorsandand oftenoften includeinclude thethe measurementmeasurement of of
processesprocesses andand activitiesactivities.. For For example,example, ERERwaitwait timetime mightmight representrepresent aa leadingleading indicator indicator of of patientpatient satisfactionsatisfaction.. AA BalancedBalanced ScorecardScorecardshouldshould containcontain aa varietyvariety of of differentdifferent
measuresmeasures..
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AnAn approachapproach toto performanceperformance measurementmeasurement thatthat alsoalso focusesfocuses ononwhatwhat managersmanagers areare doingdoing todaytoday toto createcreate futurefuture shareholder shareholder valuevalue..
AA balancedbalanced scorecardscorecard isis aa setset of of performanceperformance measuresmeasures constructedconstructedfor for four four dimensionsdimensions of of performanceperformance.. TheThe dimensionsdimensions areare financial,financial,customer,customer, internalinternal processes,processes, andand learninglearning andand growthgrowth.. HavingHavingfinancialfinancial measuresmeasures isis criticalcritical eveneven if if theythey areare backwardbackward lookinglooking.. After After all,all, theythey havehave aa greatgreat effecteffect onon thethe evaluationevaluation of of thethe companycompany bybyshareholdersshareholders andand creditorscreditors.. Customer Customer measuresmeasures examineexamine thethecompany'scompany's successsuccess inin meetingmeeting customer customer expectationsexpectations.. InternalInternalprocessprocess measuresmeasures examineexamine thethe company'scompany's successsuccess inin improvingimprovingcriticalcritical businessbusiness processesprocesses.. AndAnd learninglearning andand growthgrowth measuresmeasuresexamineexamine thethe company'scompany's successsuccess inin improvingimproving itsits abilityability toto adapt,adapt,innovate,innovate, andand growgrow.. TheThe customer,customer, internalinternal processes,processes, andand learninglearningandand growthgrowth measuresmeasures areare generallygenerally thoughtthought toto bebe predictivepredictive of of futurefuturesuccesssuccess (i(i..ee..,, theythey areare notnot backwardbackward looking)looking).. After After reviewingreviewing thesethesemeasures,measures, notenote howhow "balance""balance" isis achievedachieved:: ((11)) performanceperformance isisassessedassessed acrossacross aa balanced balanced set set of of dimensionsdimensions (financial,(financial, customer,customer,internalinternal processes,processes, andand innovation)innovation);; ((22)) quantitativequantitative measuresmeasures (e(e..gg..,,number number of of defects)defects) areare balancedbalanced withwith qualitativequalitative measuresmeasures (e(e..gg..,,ratingsratings of of customer customer satisfaction)satisfaction);; andand ((33)) therethere isis aa balancebalance of of backward backward--looking looking measuresmeasures (e(e..gg..,, financialfinancial measuresmeasures likelike growthgrowth ininsales)sales) andand forward forward--looking looking measuresmeasures (e(e..gg..,, number number of of newnew patentspatentsasas anan innovationinnovation measure)measure)..
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Activity Based CostingActivity Based Costing
What?What?
Why?Why?How?How?
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Requirement of Cost Systems
� Valuation of inventory and measurement
of the cost of goods sold for financial
reporting.
�Estimation of the costs of activities,products, services, and customers.
�Providing economic feedback to
managers and operators about
process efficiency.
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Today¶s businesses are working in an
increasingly complex environment.
Use of Advanced Technology
Product Life Cycle
Product Complexity
Channels of Distribution
Quality Requirements
Product Diversity
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0
100
1 2 3 4
omposition of Cost
Direct Material Labour Overheads
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Conventional Costing
�T
otal Cost = Material + Labour+Overheads
� Overheads are allocated to the products
on volume based measures e.g. labour
hours, machine hours, units produced
Will this not distort the costing in the
new environment?
ABC provides an Alternative.
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Conventional
Costing
Expenses
Cost Objects
AB Costing
Resources
Activities
Cost Objects
Economic
Element
Work
Performed
Product
or service
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ACTIVITY BASED COSTINGACTIVITY BASED COSTING
ABCABC preparedprepared for for eacheach activityactivity.. TheseTheseindividualindividual costcost estimatesestimates willwill containcontainallall labor,labor, materials,materials, equipment,equipment, andandsubcontractingsubcontracting costs,costs, includingincluding
overhead,overhead, for for eacheach activityactivity.. EachEachcompletecomplete individualindividual estimateestimate isis addedaddedtoto thethe othersothers toto obtainobtain anan overalloverallestimateestimate.. ContingencyContingency andand escalationescalation
cancan bebe calculatedcalculated for for eacheach activityactivity or or after after allall thethe activitiesactivities havehave beenbeensummedsummed..
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ABCABC isis aa powerfulpowerful tool,tool, butbut itit isis notnotappropriateappropriate for for allall costcost estimatesestimates..
ActivityActivity BasedBased CostingCosting (ABC)(ABC) isis aa
methodmethod for for developingdeveloping costcost estimatesestimatesinin whichwhich thethe projectproject isis subdividedsubdivided intointo
discrete,discrete, quantifiablequantifiable activitiesactivities or or aa
workwork unitunit.. TheThe activityactivity mustmust bebe
definabledefinable wherewhere productivityproductivity cancan bebemeasuredmeasured inin unitsunits (e(e..gg..,, number number of of
samplessamples versusversus manman--hours)hours)..
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After After thethe projectproject isis brokenbroken intointo itsitsactivities,activities, aa costcost estimateestimate isis aa costcost
estimateestimate isis preparedprepared for for eacheach activityactivity..
TheseThese individualindividual costcost estimatesestimates willwillcontaincontain allall labor,labor, materials,materials, equipment,equipment,
andand subcontractingsubcontracting costs,costs, includingincluding
overhead,overhead, for for eacheach activityactivity.. EachEach
completecomplete individualindividual estimateestimate isis addedaddedtoto thethe othersothers toto obtainobtain anan overalloverall
estimateestimate..
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Basics of A B C
� Cost of a product is the sum of thecosts of all activities required to
manufacture and deliver the
product.� Products do not consume costs
directly
� Money is spent on activities
� Activities are consumed by
product/services
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Basics of A B C (contd.)
� ABC assigns Costs to Products by tracingexpenses to ³activities´. Each Product is
charged based on the extent to which it
used an activity
� The primary objective of ABC is to assign
costs that reflect/mirror the physical
dynamics of the business
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Basics of A B C (contd.)
� It Provides ways of assigning thecosts of indirect support resources to
activities, business processes,
customers, products.� It recognises that many
organisational resources are
required not for physical productionof units of product but to provide a
broad array of support activities.
ABC systems addresses theABC systems addresses the
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ABC systems addresses theABC systems addresses the
following Questionsfollowing Questions
What activities are being performedWhat activities are being performedby the organisational resources?by the organisational resources?
How much does it cost to performHow much does it cost to perform
activities?activities?
Why does the oranisation need toWhy does the oranisation need to
perform those activities?perform those activities?
How much of each activity is requiredHow much of each activity is required
for the organisation¶s products,for the organisation¶s products,
services, and customers?services, and customers?
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Basics of A B C : How?
Steps:
1. Form cost pools
2. Identify activities
3. Map resource costs to activities
4. Define activity cost drivers
5. Calculate cost
Cost pools are
groups or categories
of individual
expense items
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Identify ActivitiesIdentify Activities
In developing an ABC system, theIn developing an ABC system, the
organisation identifies the activitiesorganisation identifies the activities
being performed:being performed:
�Move material
�Schedule
production�Purchase material
�Inspect items
�Respond to customers
�Improve products
�Introduce new products
�Explore new markets
Activity Dictionary
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Activities: Types� Unit level: Performed each time a unit is
produced
� Batch level: Performed each time a batch
is produced
� Product level: Performed to support
production of different type of product
� Customer Level: Performed to support
servicing customers� Facility level:Residuary head
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Define activity driversDefine activity drivers
The linkage between activities and costThe linkage between activities and costobjects, such as products, customers,,objects, such as products, customers,,is accomplished by using activityis accomplished by using activity
drivers.drivers. An activity driver is a quantitativeAn activity driver is a quantitative
measure of the output of an activity.measure of the output of an activity.
The selection of an activity driver The selection of an activity driver reflects a subjective tradereflects a subjective trade--off betweenoff betweenaccuracy and cost of measurement.accuracy and cost of measurement.
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Building an ABC Model
Identify
Resources
Identify
Activities
Identify
Cost Objects
Define
Resource
Drivers
Define
Activity
Drivers
Enter
Resource
Costs
Enter
Resource
Driver Qty.
Enter
Activity
Driver Qty.
Calculate
Costs
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ABC: Where to Use?ABC: Where to Use?
High OverheadsHigh Overheads
Product Diversity or Multiple ProductsProduct Diversity or Multiple Products
Customer DiversityCustomer Diversity Service DiversityService Diversity
Stiff CompetitionStiff Competition
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Thank UThank U