BUDGETING, PLANNING

& CONTROL
(Chapter 8)

Budgeting,
Budgeting, Planning
Planning
And
And Control
Control
A budget is a plan and budgeting is

one part of the strategic planning

process, which is concerned with
planning and control

Planning budgets are managements

belief of what the businesss costs and
revenues will be over a specified
future time period, the budget period
Control budgets are used for
management motivational purposes

The
The Strategic
Strategic Planning
Planning
Process
Process

The
The Strategic
Strategic Planning
Planning
Relationship
Relationship With
With
Budgeting
Budgeting

Forecasting
Forecasting And
And
Planning
Planning

forecasts are not plans but predictions of

the future,
which are required as an important
prerequisite to the budget process
decisions must also be made and policies
formulated regarding stock days and
purchasing, debtor and creditor days,
staff costs, capital expenditure, and
standard costs
types of forecasting
qualitative
quantitative

Budget
Budget Preparation
Preparation Flow
Flow
Diagram
Diagram

Performance
Performance Evaluation
Evaluation
And
And Control
Control (1)
(1)
The master profit and loss budget is prepared
from each of the elements of the operating
budget:
sales
production
distribution and administration
financial
the master budget is comprised of the
profit and loss budget
cash budget
balance sheet budget

Performance
Performance Evaluation
Evaluation
And
And Control
Control (2)
(2)
Risk assessment and risk analysis should
be applied to the master budget

Risk assessment and risk analysis must be

closely reviewed in terms of additional
funding requirements
Control budgets are usually flexed to
reflect actual activity levels, and
performance against budget provided
from exception reporting evaluated so
that corrective actions may be

Responsibility
Responsibility Centres
Centres
As part of the control function
of the budget, the system of
responsibility accounting is
used to measure actual results
against budget for each of
various types of responsibility
centre

A responsibility centre is a
department or organisational

Types of Responsibility Centre

There

are three basic types of

responsibility centers
Cost

Center
Incur cost but not necessarily generate
revenue ,ie production department

Profit

Center
Incur cost & revenue, ie. Branch offices
of banks

Types of Responsibility
Centers
Investment

Center
Incur cost, generate revenues &
has control over investment
funds available for use.
Associated with subsidiary
companies
Eg KFC Holding s responsibility
center is Pizza Hut.

Divisional
Divisional Performance
Performance
The performance of managers of
responsibility centres may be
considered using the divisional
performance measures of return
on investment (ROI)
ROI focuses only on the
performance for the particular
control period.
ROI represents single
summary measures of
performance.

Standard
Standard Costing
Costing
standard costing can be used to calculate
costs of units
or processes that may be used in
budgeted costs
not all budgeted amounts are standard
amounts, as the latter will be precise by
nature, unlike budgeted amounts
standard costing provides the basis for
performance evaluation and control from
comparison of actual performance against
budget through the setting of

Flexed
Flexed Budgets
Budgets
A flexed budget

- reflects the costs or revenues expected

as result of
changes in activity levels from those
planned in the
master budget
- provides a more realistic basis for
comparison of actual
performance
- enables comparison of actual costs and
revenues
through the calculation of differences, or

Variance
Variance Analysis
Analysis (1)
(1)
Variances
are the difference between planned,
budgeted or
standard costs (or revenues) and actual
costs incurred
may be summarised in an operating
statement to
reconcile budget with actual performance

Variance
Variance Analysis
Analysis (2)
(2)
Variance between actual and
standard performance may be
investigated to explain the reasons
for the differences,
through completion of a complete
analysis of all variances, or
alternatively
through the use of exception
reporting that highlights only
significant variances