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Chap 13: Budgetary Systems - Coggle Diagram
Chap 13: Budgetary Systems
Long-term strategic plans are broken down into short-term plans and targets.
-> This is generally done in the form of a budget or forecast.
Budget:
is a quantified plan of action for a forthcoming accounting period.
Note that a budget is a plan of what the organisation is aiming to achieve and what it has set as a target, whereas a forecast is an estimate of what is likely to occur in the future.
Planning and control occurs at all levels of the performance hierarchy to different degrees, The performance hierarchy refers to the system by which performance is measured and controlled at different levels of management within the organisation,
Plan set the targets
Control involves two main processes:
measure actual results against plan
Take action to adjust actual performance to achieve the plan or to change the plan altogether
Feedback:
It occurs when the results of a system are used to control it, by adjusting the input or behaviour of the system.
Feedback is information produced as output from operations; it is used to compare actual results with planned results for control purposes.
Negative Feedback: indicates that results or activities must be brought back on course, as they are deviating from the plan.
Positive Feedback: results in control action continuing the current course. You would normally assume that positive feedback means that results are going according to plant and that no corrective action is necessary: but it is best to be sure that the control system itself is it picking up the wrong information.
Feedforward control is control based on forecast results: in other words, if the forecast is bad, control action taken well in advance of actual results.
Single loop feedback: is control, like a thermostat, which regulates the output of a system.
Double loop feedback: is of a different order. It is information used to changed the plan itself.
Controls at different levels:
Strategic performance reports
Management control performance reports
Operational level
Top-down budgeting:
is when budget targets are set at senior management level for the organisation as a whole and for each major department or activity within the organisation.
With top-down budgeting, the departmental budget targets are given to the departmental managers, who are required to prepare a budget that confirms to the targets that have been imposed on them from above.
Similarly, when budgets have been set at departmental level, targets are then given to managers lower down the organisation hierarchy; these managers are then required to prepare budgets that meet the targets that have been imposed on them for their area of operations.
Bottom-up budgeting is when the budgeting process starts at a relatively low level of management.
With bottom-up budgeting, managers are required to draft a budget for their area of operations. These are submitted to their supervisor, who combines the lower-level budgets into a combined budget for the department as a whole.
Top-down budgeting takes much less time and planning effort than bottom-up budgeting and senior management can use top-down to impose their views.
Bottom-up budgeting is much more time consuming, and draft budgets may have to be revised many times until they are properly co-ordinated.
Advantages:
It reflects the views and expectations or managers who are closer to operations and who may therefore have a better understanding of what is and not achievable.
Bottom-up budgeting is a form of participative budgeting process, which can have behavioural and motivational advantages.
Control is therefore impossible without planning
The essence of control is the measurement of results and comparing them with the original plan. Ani deviation from the plan indicates that control action is required to make the results confirm more closely with the plan.
Budget Systems
Fixed Budgets
Is a budget which remains unchanged throughput the budget period, regardless of differences between the actual and the original planned volume of output or sales.
Is the master budget prepared before the beginning of the budget period.
Major purpose is for planning.
Flexible Budget
Is a budget which, by recognising different cost behaviour patterns, is changed as the volume of output and sales changes. It recognises cost behaviour patterns such as changes in sales revenue and variable costs as sales volume change, and step changes in fixed costs as activity levels rise or fall by more than a certain amount.
Is a revised budget that reflects the actual activity levels achieved in the budget period.
Flexed Budget
Used at the control stage, budgets need to be flexed to reflect the actual activity level achieved in a given period before the budget can meaningfully be compared with actual results and variance analysis performed.
Is designed at the planning stage to vary with activity leels.
Designed to cope with different activity levels to keep the budget meaningful and hence preserve the relevance of variances for effective control
Useful at planning stage to show different results from possible activity levels.
Necessary as control device because we can meaningfully compare actual results with relevant flexible budget, ie budgetary control.
Incremental budgeting:
Based on current year
Builds in slack & inefficiencies