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Chapter 08 - Budgetary system - Coggle Diagram
Chapter 08 - Budgetary system
Planning and control
A budget is a quantified plan of action for the forthcoming period
Planning and control cycle:
Step 1: Identify objectives
Step 2: Identify courses of action (strategy) which might contribute towards achieving the objectives
Step 3: Evaluate each strategy
Step 4: Choose alternative course of action
Step 5: Implement the long term plan in the form of annual budget
Step 6: Measure actual result and compare to plan
Step 7: Respond to divergences from plan
Planning and control in performance hierarchy
Planning level:
Corporate plan / Strategic plan
Tactical plan
Operational plan
Control: (a) Plans set the target
(b) Control involves 2 process:
Measure actual results against the plan
Take action to adjust actual performance or change plans
=> Control is impossible without planning
Feedback
Negative feedback
Positive feedback
Feedforward control: action on forecast instead of waiting for actual results
Two types of feedback: Single loop (try to reach the plan) or double loop (try to change the plan)
Other aspects
Long-term plan
Limiting factors
Budget manual
Sales budget (prepared first)
Discretionary cost: eg R&D costs
Consolidation and coordination
Functional budget
Cash budget
Master budget
Behavioral problems in budgeting
Misunderstanding and worries about cost-cutting
Opposition to unfair targets set by senior management
Sub-optimization: setting target that is not in best interest of corporation as a whole
Lack of goal congruence
Budget slack or budget bias
Setting difficult level for budget
Ideal
Target
Currently attainable
Basic standard
Causes of uncertainty
Customers
Product/Service
Inflation and movements in interest and exchange rates
Volatility in the costs of materials
Competitors
Employees
Machines
Political unrest, social unrest, and/or natural disaster
Difficulties in changing budgeting system
Resistance by employees
Loss of control: Senior management may have to take time to adapt
Cost of implementation
Training
Lack of accounting info
Participation and Budget
Top-down (imposed) style
Times when this kind is effective:
Newly formed organization
In very small business
During economic hardship
Operational manager lack of budget skill
Org unit require precise coordination
Advantages:
Strategic plans may be incorporated into planning activities
Enhance the coordination between plans and objectives of divisions
Use senior awareness of total resources availability
Time-saving
Decrease input from non-experience employees
Disadvantages:
Dissatisfaction, defensiveness, and low moral of employees
Team spirit disappear
Acceptance of org goals could be limited
Feeling budget as a punitive devices
Unachievable budgets could result
Low level management initiative may be ignored
Bottom-up (participative) style
Effective when:
In well-established org
In very large business
During economic affluence
Operational manager has strong budget skills
Org's different unit act autonomously
Advantages:
Based on info employees who familiar with the dept
Knowledge is pulled together
Moral and motivation improved
More realistic
Coordination improved
Specific resource requirement included
Senior overview is mixed with operational details
Disadvantages:
Time-consuming
May lead to budgetary slack
Changes implemented by senior management may cause dissatisfaction
Budget may be unachievable
Earlier start is required
May lead to empire building by subordinates