Budgetary Control

Concept of Budget
Budget

refers to a plan relating to a definite future period of time expressed in monetary and/or quantitative terms. In relation to business, a budget is a formal expression of the expected incomes and expenditures for a definite future period.

Characteristics of Budget
* A budget is primarily a planning device but it also serves as a basis for performance evaluation and control. A budget is prepared either in money or in quantitative terms or in both. A budget is prepared for a definite future period. Purpose of a budget is to implement the policies formulated by management for attaining the given objectives

BUDGETING The act and entire process of preparing budget is called budgeting. BUDGETARY CONTROL- it is a system of controlling costs through preparation of budget, which includes the preparation of budgets, coordinating its departments and establishing responsibility, comparing actual performance with the budgeted and the acting upon results to achieve maximum profitability.

Process of Budgetary control

Establishing budgets of each function, departments of the organization. Comparison of actual performance with the budgeted figures in a continuous basis. Analysis of variance that is, comparison of actual performance with the budgeted performance to know the results there of. Taking suitable remedial where necessary. Revisions of budget time to time in view of changes in conditions.

Essential of effective Budgeting

Support of top management Participation by responsible executives Reasonable goals Clearly defined responsibility centre Continuous budget education Adequate accounting systems Maximum profits costs of the system

Advantages of Budgetary Control

Budgeting compels managers to think ahead to anticipate and prepare for changing conditions. Budgeting co ordinates the activities of various departments and functions of the business. It increases production efficiency, eliminates waste and controls the costs. It pinpoints efficiency or lack of it.

Budgetary control aims at maximization of profits through careful planning and control. It provides a yardstick against which actual results can be compared. It ensures that working capital is available for the efficient operation of the business. It directs capital expenditure in the most profitable directions. It instills into all levels of management a timely, careful and adequate consideration of all factors before reaching important decisions.

Budgeting also aids in obtaining bank credit. A budgetary control system assists in delegation of authority and assignment of responsibility. Budgeting creates cost consciousness

Limitations of Budgetary Control

Budget plan is based on estimates. Danger of rigidity.. Opposition from staff. Expensive technique.

Classification of budgets
Classification on the basis of Function and Scope Functional Budget, (ii) Master Budget Classification on the basis of flexibility Fixed Budget, (ii) Flexible Budget

Functional Budget

It is the one, which relates to particular functions of the business or organization. The types of functional budgets are Sales budget Production budget Raw materials budget Labour budget etc Cash budget Capital expenditure budget Purchase budget

Master Budget

Master or final budget is a summary budget which incorporates all functional budgets in a capsule form. It sets out the plan of operations for all departments in considerable detail for the budget period. Master budget require the approval of the Budget Committee before it is put into operation. It may happen, sometimes, that a number of master budget have to be prepared before the final one is agreed upon. The budget generally contains details regarding sales (net), production costs, cash position, and key account balances (e.g. debtors, fixed assets, bills payable, etc). It also shows the gross and net profits, and the important accounting ratios

Fixed Budgets
A fixed budget is designed to remain unchanged irrespective of the level of activity. This budget is prepared on the basis of a standard of fixed level of activity. Since the budget does not change with the change of level of activity, it becomes an unrealistic yardstick in case the level of activity (volume of production or sales) actually attained does not conform to the one assumed for budgeting purposes.

Fixed Budgets

The management will not be in a position to assess the performance of different heads on the basis of budgets prepared by them, because they can serve as yardsticks only when the actual level of activity corresponds to the budgeted level of activity. On account of the limitation of fixed budget and its inability to provide for automatic adjustments when the volume changes, firms whose sales and production cannot be accurately estimated have given up the practice of fixed budget.

Flexible Budgets
It is designed to change in accordance with the level of activity attained. Thus, when a budget is prepared in such a manner that the budgeted cost for any level of activity is variable, it is termed as flexible budget. Such a budget is prepared after considering the fixed and variable elements of cost and the changes that may be expected for each item at various levels of operations.

Zero Base Budgeting

It is an alternative of traditional budgeting. The traditional budgeting is based on incremental and previous year figure use to take into consideration. But in Zero Base Budgeting figures are developed with zero as the base which means a budget will be prepared as if it is being prepared as a new for the first time. It is a method of budgeting where all activities are revalued each time a budget is set.

Main Features of Zero Base Budgeting

All budget items, both old and newly proposed, are considered totally afresh. Amount to be spent on each budget item is to be totally justified. A detailed cost benefit analysis of each budget programme is undertaken and each programme has to compete for scarce resources. Departmental objectives are linked to corporate goals. The main stress in not on how much a department will spend but on why it needs to spend.

Advantages

In ZBB, all activities included in the budget are justified on cost benefit considerations, which promote more effective allocation of resources. ZBB discards the attitude of accepting the current position. In the course of ZBB process, inefficient and loss making operations are identified and may be removed. It adds psychological push to employees to avoid wasteful expenditure.

CONTINUED.. It is an educational process and can promote a management team of talented and skillful people who tend to promptly respond to changes in the business environments. Cost behaviour patterns are more closely examined. Deliberately inflated budget requests get automatically rejected in the ZBB process.

Disadvantage

ZBB leads to an enormous increase in paper work and results in high cost of preparing budgets every year. Managers may oppose new ideas and changes. They may feel threatened by ZBB because all expenditures are questioned and need to be justified. In ZBB, there is danger of emphasizing short-term gains at he expense of longterm benefits.

It has a tendency to regard any activity not foreseen and sanctioned in the most recent ZBB as illegitimate. For introducing ZBB managers need to be given proper training and education regarding this new concept, its pros and cons and implementation. It may not always be easy to properly rank decision packages and this may give rise to conflicts

RESPONSIBILITY ACCOUNTING

INTRODUCTION

Responsibility accounting is the accounting system of control through which the responsibilities are assigned towards the control of costs. It is an accounting system to monitor the performance, the individuals in the respective departments should be given adequate authority to track them then and there.

This system does make the individuals personally responsible only at the moment of registering the deviations between the actual performance and predetermined standards. The entire system of accounting postulates the responsibility for the control of costs which only rests upon the men not with the system .

DEFINITIONS

Responsibility accounting is a system of accounting that recognizes various responsibility centres throughout the organization and reflects the plans and actions of each of these centres by assigning particular revenues and costs to the person having the pertinent responsibility.

Responsibility accounting is a method of accounting in which costs are identified with persons assumed to be capable of controlling them, rather than with products or functions.

CLASSIFICATION OF RESPONSIBILITY CERTRES

Expense Centre Profit Centre and Investment Centre

Expense Centre

The responsibility centre which incurs only expenses, and measures them, is know as expenses centre. The expense centres of the organization are mostly the service centres which only usually incur expenses.

The contribution of service department and office & administration department to the company cannot be denominated in monetary terms, but instead in terms of quality of services to assist the entire organization. The output of the sales/production departments are denominated in monetary terms unlike others.

Profit Centre

The responsibility centre which is measured in terms of both the expenses incurred as well as revenue earned is known as profit centre . The resultant of a profit centre is revenue realization, which is made either through the internal sales or to the external consumers . The revenue can be realized either through the external sale to outsiders or through the internal consumption , which is an outcome of internal transfer from one department to another department ; if such transfer is at profit .

For Example the most ideal illustration is the industry with process, which transfers the output from one process to another with profit margin by considering the sale price.

Investment Centre

Is the responsibility centre at which the manager is responsible for the effective utility assets in order to earn the best rate of return out of the investments or assets employed . The exact volume of assets employed cannot be easily assessed for single department responsibility centre. The difficulty in the assessment on the volume of assets is only there to the utility of the assets, which is not only in one responsibility centre but also in more than one .

Process of Responsibility Accounting System

Identifying different responsibility centre and defining the various responsibility manager

Setting up of Targets

The second step in the process of establishing the responsibility accounting system is to setting the targets of the responsibility centre only through the advisory role of responsibility manager.

Evaluating of Performance

The third step involved in the establishment of responsibility accounting is the comparison the performance with the predetermined standards. If any deviation occurs between above mentioned, the observed/identified deviations will be reported to the top level management .

Correction of Deviated Course of Action

deviated course of action is corrected through the directions from the top level management to the responsibility manager, to maintain the uninterrupted flow of work in future. The above enlisted steps are not only involved in the process of assigning the responsibilities, but also in enhancing the level of performance through the controlling of costs .

Advantages of Responsibility Accounting

Responsibility accounting is used as a monitoring and controlling device to achieve the targets and objectives of the organization . Responsibilities are Assigned It is an elevator of performance Delegation of Control Planning is Facilitated

Balanced Scorecard

Why the Balanced Scorecard?

The Organization will become more strategically focused over the next ten 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.

Need more balanced approach to looking at performance, both tactical and strategic. Only 5% of a workforce tends to understand their companys strategy. 86% of executive teams spend less than one hour per month discussing strategy.

A Major Driver is . . .
The Organizations 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 framework around the Balanced Scorecard

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.

Definition of Balanced Scorecard

The Balanced Scorecard is a tool that translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system. The Balanced Scorecard is an approach for driving organizational improvement toward preselected goals which keeps track of progress through carefully selected measures.

The Balanced Scorecard is also an integrated management system consisting of three components: 1) strategic management system, 2) communication tool, and 3) measurement system.

It results in a carefully selected set of measures derived from and linked to an organizations core strategies. The measures selected for the scorecard represent a tool for leaders to use in communicating to employees and external stakeholders the outcomes and performance drivers by which the organization will achieve its mission and strategic objectives.

Companies are using the scorecard to:

clarify and update strategy; communicate strategy throughout the company; align unit and individual goals with strategy; link strategic objectives to long term targets and annual budgets; identify and align strategic initiatives; and to conduct periodic performance reviews to learn about and improve strategy.

Traditional Perspectives

There are a number of balances in the BSC, among which are the balance or equilibrium between four historical domains or perspectives considered to be mutually linked in terms of strategy and performance: 1. Learning and Growth Perspective 2. Internal Process Perspective 3. Customer Perspective 4. Financial Perspectives

Paul Nivens analogy of the Balanced Scorecard is that of a tree The Learning and Growth perspective are the roots, the trunk is the Internal Process perspective, Customers are the branches, and the leaves are the Financial perspective. Each perspective is interdependent on those below as well as those above. It is a continuous cycle of renewal and growth.

Leaves (finances) fall to fertilize the ground and root system, which stimulates growth throughout the organization. In this analogy, learning and growth is the foundation on which all other perspectives are built

For example, if a hospital assesses patient satisfaction and discovers patients arent satisfied (Customer Perspective), one of the strategies might be the implementation of employee training in the area of customer service (Learning & Growth Perspective). Improved customer service through a reduction of wait time in the emergency room (Internal Process Perspective) can ultimately improve utilization (Financial Perspective). There are definite cause and effects between and among each of the four perspectives. The key is to identify the right strategies.

Balances
One of the reasons the Balanced Scorecard has been so successful is that it is a balanced approach. This balance includes: 1.Balance between financial and nonfinancial indicators of success 2.Balance between internal and external constituents of the organization 3.Balance between lag and lead indicators of performance

Internal constituents might include employees whereas external constituents might include physician groups or insurers. Lag indicators generally represent past performance and might include customer satisfaction or revenue. Although these measures are objective and accessible, they lack any predictive power. Lead indicators are the performance drivers that lead to the achievement of lag indicators and often include the measurement of processes and activities. For example, ER wait time might represent a leading indicator of patient satisfaction. A Balanced Scorecard should contain a variety of different measures.

An approach to performance measurement that also focuses on what managers are doing today to create future shareholder value. A balanced scorecard is a set of performance measures constructed for four dimensions of performance. The dimensions are financial, customer, internal processes, and learning and growth. Having financial measures is critical even if they are backward looking. After all, they have a great effect on the evaluation of the company by shareholders and creditors. Customer measures examine the company's success in meeting customer expectations. Internal process measures examine the company's success in improving critical business processes. And learning and growth measures examine the company's success in improving its ability to adapt, innovate, and grow. The customer, internal processes, and learning and growth measures are generally thought to be predictive of future success (i.e., they are not backward looking). After reviewing these measures, note how "balance" is achieved: (1) performance is assessed across a balanced set of dimensions (financial, customer, internal processes, and innovation); (2) quantitative measures (e.g., number of defects) are balanced with qualitative measures (e.g., ratings of customer satisfaction); and (3) there is a balance of backward-looking measures (e.g., financial measures like growth in sales) and forward-looking measures (e.g., number of new patents as an innovation measure).

Government Performance Results Act

Required to develop long-term Strategic Plans ("SP") Specify general Goals and Objectives Develop Annual Performance Plans ("APP")

Specify measurable performance goals

Annual Performance Report ("APR") Demonstrate actual results APP goals should show the expected progress toward meeting the long-term goals of the SP

Where it started . . .
Introduced in 1992, by Robert Kaplan and David Norton, the Balanced Scorecard is the most commonly used framework for ensuring that agencies execute their strategies. Today, about 70% of the Fortune 1,000 companies utilize the Balanced Scorecard to help manage performance.

Balanced Scorecards are used as the roadmap for creating the Strategic Management System or our IRPS. And this will drive overall organizational performance for our entire agency!

Some Basic Principles

Quantifies the Agency Strategy in measurable terms Strategy is summarized on a Strategy Map over four views of performance (perspectives). Must capture a cause-effect relationship between strategic objectives over the four perspectives on the Strategy Map. Critical Components include: - Measurements - Targets - Initiatives Everything must be linked: Goals to Objectives, Objectives to Measurements, Measurements to Targets.

Four Views of Performance

Strategic Objectives

Strategy can be described as a series of cause and effect relationships. Provides a line of sight from strategic to operational activity

Stakeholders
If we succeed, how will we look to our stakeholders?

Internal Processes
To satisfy our customers, at which processes must we excel?

working on the right things.

Learning & Growth

"To execute our processes, how must our organization learn and improve?"

Agency Investments
In order to succeed, what investments in people and infrastructure must we make?

The Importance of Alignment

Complete Framework for IRPS
Strategy
Agency Department Team/ Individual

Objectives

Measures

Alignment all the Way Through

Goal: Improve environmental health Performance Gap: Less than Organization watershed water quality Initiative: Data Mining Resource
Innovation
Improved "Cause and Effect" Knowledge

Investment Management Business Processes

Improved Environmental Assessment Reports Justified Initiatives to Improve Water Quality Investments Available to be Allocated to Other Critical Areas

Financial Management
Decreased Litigation Costs

Relationship Management
Enhanced Public Confidence Increased Investment Accountability

Environmental Health
Improved Water Quality

In order to be successful, the Agencys IRPS should . . .

Be comprised of a balanced set of a limited vital few measures; Produce timely and useful reports at a reasonable cost; Display and make readily available information that is shared, understood, and used by the Agency; and Supports the organizations values and the

Before we can map your strategy . . .

Get down to a set of quantifiable strategic objectives: Too vague

More precise
Improve Customer Service

Reduce average customer wait times by 30% by year end

Make sure your objectives have a direct relationship to your goals and your goals have a direct relationship to your mission

Thank U