budgetary control and unit 4

8/7/2019 Budgetary control and unit 4

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Budgetary ControlBudgetary Control



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..



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



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..



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..



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



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



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..



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..



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..



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



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.



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



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



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



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..



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..



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..



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..



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..



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..



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..



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..



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



RESPONSIBILITYRESPONSIBILITY

ACCOUNTINGACCOUNTING



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..



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 ..



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´..



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´..



CLASSIFICATION OF CLASSIFICATION OF

RESPONSIBILITY CERTRESRESPONSIBILITY CERTRES

Expense CentreExpense Centre

Profit Centre andProfit Centre and Investment CentreInvestment Centre



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..



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..



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 ..



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..



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 ..



Process of ResponsibilityProcess of Responsibility

AccountingS

ystemAccountingS

ystem

IdentifyingIdentifying differentdifferent responsibilityresponsibility centrecentre

andand definingdefining thethe variousvarious responsibilityresponsibilitymanager manager



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..



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 ..



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 ..



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



Balanced Scorecard Balanced Scorecard



� 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?



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..



� 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 . . .



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..



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..



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..



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..



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



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..



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



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..



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



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..



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)..



Activity Based CostingActivity Based Costing

What?What?

Why?Why?How?How?



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.



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



0

100

1 2 3 4

omposition of Cost

Direct Material Labour Overheads



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.



Conventional

Costing

Expenses

Cost Objects

AB Costing

Resources

Activities

Cost Objects

Economic

Element

Work

Performed

Product

or service



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..



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)..



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..



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



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



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



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?



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



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



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



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.



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



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



Thank UThank U

budgetary control and unit 4

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