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Managing Finance and Budgets. Lecture 11 Budgetary Control. Session 11 – Budgetary Control. Objectives By the end of this week, you will: Be able to discuss how a budget is constructed. Be able to state different budgeting principles, and how these might be used in different situations.

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Managing Finance and Budgets

Lecture 11

Budgetary Control


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Session 11 – Budgetary Control

Objectives

By the end of this week, you will:

  • Be able to discuss how a budget is constructed.

  • Be able to state different budgeting principles, and how these might be used in different situations.

  • Know how budgetary targets might be used as controls.

  • Be able to discuss some of the ways in which managers react to budgetary targets

  • Know some of the non-financial measures used in budgeting.


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Menu

  • A : The Budget-Setting Process

  • B : Approaches to Budgeting

  • C : Monitoring & Controlling Performance

  • D : Behavioural Issues

  • E : Using Non-Financial Measures

  • F : Follow-up work


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Section A:

The Budget-Setting process


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The Budgetary Context

  • Last week, we saw that the creation of a budget is simply one element in the Planning & Control Process.

  • This process sees a budget as both a planning tool and a means of control.

  • We looked at planning in the last presentation; in this presentation we will concentrate mainly on the control element.

  • Before we do this, this section will look in a bit more detail as to how precisely budgets are created.


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The Planning & Control Process – a summary

Mission, Aims, Objectives

Market, Products, Services

Sales, Costs, Profits, Returns

1. Identify key objectives

Limiting factors: External & internal

Environment - market size, production

capability, competition

2. Identify available options

3. Evaluate and select options

Markets, products, financing,

physical resources, human resources

4. Prepare detailed plans or budgets

Short-term plans: Sales, Cash, Stock,

Labour, Production à Master budget

5.Collect information and control

Identify variances and respond

as appropriate


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Steps in the budget setting and control process

Click on each box for an explanation

2. Communicate budget guidelines to relevant managers

1. Establish responsibility for the budget-setting process

4. Prepare the budget for the area of the limiting factor

3. Identify the key or limiting factor

6. Review and co-ordinate budgets

5. Prepare draft budgets for all other areas

8. Communicate the budgets to all interested parties

7. Prepare the master budgets

9. Monitor actual performance relative to the budget

10. Act to ensure performance conforms to the budget


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Step 1: Establish Responsibility

  • Normally, this is the work of a Budget Committee, consisting of a senior representative of each of the important areas (Sales, Production etc.)

  • Often a Budget Officer is appointed to carry out tasks required by the committee.

  • This person is often an accountant.


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Step 2: Communicate Guidelines

  • At this stage, all previous work (e.g. strategic planning, overall business objectives for the year) are communicated to the heads of the various departments.

  • This will normally be an interactive process, and heads of departments will often have played an important part in drawing up the planning documents.

  • At this stage, it may be the case that each departmental or section head will be asked to prepare a draft budget for the following year for their area, as a ‘bid’ for funding, within the guidelines set. (This may also occur later – at step 5)


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Step 3: Identify the Limiting Factor

  • The Key or Limiting Factor is the aspect of business that is crucial to it achieving the objectives set.

  • For many businesses this is sales; however in some circumstances it may be labour, or even the ability to maintain supplies of raw materials. It may even be, a cash flow issue, where an overdraft needs to be carefully managed.

  • Clearly this will need to be as a result of detailed analysis of the current position.

  • It should also be noted that the Limiting Factor may change from year to year.


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Step 4: Prepare the Budget for the Limiting Factor

  • Often, this is simply preparing the Sales budget. If so, it would be based on market research and on evidence from sales in past years*.

  • If the Limiting Factor is another area, clearly, the capacity of the business to operate in that area would need very careful analysis of the available evidence to ensure that the information is as accurate as possible.

  • This factor will now define the overall activity level of the business for the next 12 months.

    *N.B. In research by Dury et. al, 1993, 85% of all businesses based such targets on opinions of sales staff. (see M & A. p 368)


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Step 5: Prepare draft budgets for all areas

  • Once the details of the Limiting Factor Budget are known, other budgets can then be prepared.

  • Two methodologies can be employed:

    1. A Top-Down approach: Senior management of each area originates the targets, then filters then down, requiring managers lower down to prepare budgets which conform to these targets.

    2. A Bottom-Up approach: Targets are fed upwards from the lowest levels, then negotiate with the manager higher up in order to achieve a budget which conforms to the constraints set by the limiting factor.

  • The Bottom-Up approach clearly involves more effort, and may result in several rounds of negotiation at different levels before agreement is reached. It does however hold the promise of achieving greater consensus.


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Step 6: Review & Co-ordinate

  • All budgets are submitted to the Budget Committee for scrutiny, to ensure that they are complementary, and dovetail together well.

  • Where discrepancies occur, the budget committee will exert its authority and budgets will be returned for amendment.


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Step 7: Prepare Master Budgets

  • The Master Budgets are normally:

    • The budgeted Profit & Loss account

    • The budgeted Balance Sheet

    • Possibly a Budgeted Cash Flow

  • This work is undertaken by the budget committee.


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Step 8: Communicate Budgets

  • The budgets agreed by the committee are now passed to individual managers.

  • Normally this is filtered down through senior, middle and junior management layers, to the budget holder.


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Step 9: Monitor Performance

  • Monitoring of performance may be carried out weekly, monthly or quarterly.

  • Examination of actual performance against targets will be done by the budget holder – the person responsible for the budget, and the target.

  • Where there is significant variation from the budgeted value, managers would be expected to act.


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Step 10: Ensure Performance matches the Target

  • This is the process of control.

  • There are two ways in which we may match performance with target:

    Modifying behaviour: it may be clear that an ‘overspend’ is occurring, or that predicted sales are not being achieved. If so, curbs to spending must be put in place, and sales campaigns re-energised.

    Modifying the target: it may become clear that targets were unrealistic. If so, new targets must be negotiated, and a new budget issues with amended targets. This would undoubtedly have repercussions elsewhere in the business.

  • The latter part of this presentation concerns itself with the details of this process.


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SAQ 10.1

Why do you think the process for budget setting so complex? Why, for example could not one person (for example, the finance director) decide on the budget then just tell everyone?

Solution


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SAQ 10.1

There are two main reasons:

  • Firstly, whoever is in charge of the budget needs to have as full a picture as possible before setting it. That requires consultation and lots of discussion.

  • Secondly, individual budget holders have to believe in the budget, and understand their relationship with the whole. This can only be done through a process of discussion & negotiation.

    NB In fact, in many SMEs, ‘one person deciding on the budget and then telling everyone else’ is good description of what happens. This may not be the best way, however!


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Section B:

Methods of Budget-Setting


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Methods of budget-setting

  • In the previous section, we looked at the process by which a budget comes into being.

  • Here we look at the different budgeting methods and principles.

  • These methods may be used across the whole of a company, or particular parts of it, and the methods used may vary from year to year, depending upon the circumstances.


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Budgets – Time horizons

Periodic budget

  • This is a one-off budget set for a year (e.g.)

  • It is normally broken down into monthly or weekly amounts

    Continual Budget

  • This will be updated continually (still for one year, but a new month will be added to replace the one which has passed.)


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Methods used in budget-setting

Incremental Budgeting:

- same as last year with a bit added

Zero Base Budgeting

- budget holders required to justify why any money is needed

Activity Based Budgeting

- those responsible for activities which incur costs hold the budgets

Standard costing

- standard quantities & costs used to generate targets.

Sensitivity Analysis

- computer software used to answer ‘what-if’ questions.


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Different Forms of Budgeting

Click on each box for a fuller explanation

Incremental Budgets

Zero-Base Budgets

Activity-Based Budgets

Standard Costs

SAQ 10.2

Sensitivity Analysis


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Incremental Budgeting

  • Traditional form of budgeting, common in local & central government

  • Costs and allocations of monies tend to be on a ‘historical’ basis, i.e. what happened in previous years

  • Adjustment (increments) are made on the basis of changes (e.g. inflation, increases in productivity, workforce etc.) that happen from year to year.

  • Often used for ‘discretionary’ budgets (i.e. where budget holder is responsible for allocating a sum of money within a department)

  • No clear relationship between the input or output (e.g the raw materials required or the level of sales produced)


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Zero-Base Budgeting (ZBB)

  • Draws on the philosophy that ALL spending needs to be justified.

  • All budgets are allocated a zero base, and will be increased from this only if a good case can be made out for the money

  • Senior management will be using the criterion of ‘value for money’ to allocate scarce resources.

  • ZBB encourages managers to adopt a questioning approach; this leads to more strategic thinking and allocation of resources to enable this strategy to happen

  • Clear links required between input/output and the resourcing


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Activity-Based Budgeting (ABB)

  • Derives from the philosophy of Activity-Based Costing, that it is activities which drive costs. This is applied to the the Budget process.

  • If ‘cost-driving’ activities can be identified, then the cost of the output can be achieved more accurately)

  • Central feature: budget holders (those who are responsible for meeting a particular budget) have control over the events that affect performance in their area.

  • ABB tries to generate budgets in such a way that the manager who has control over these cost drivers is accountable for the costs.

  • Typical problems: increased levels of activity generated from outside the manager’s control, e.g. Manufacturing Budget thrown into disarray by a new sales contract


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Standard Costing

  • Embodies the idea that standard quantities and costs can be planned for individual units such as sales items, labour rates, raw materials etc.

  • The standards are targets, and become benchmarks by which actual performance s measured.

  • The targets may be derived from experience, market assessments, current rates (e.g. labour, fees etc.), but should be realistic.

  • Variances (differences between the budgeted amounts and the actual amounts) are always based on standards.


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Sensitivity Analysis

This is a tool used in setting technically complex budgets:

  • It investigates changes to profit due to adjustments in key variables

  • It identifies key areas for managers to focus onfor maximum effect

    In order to use it, managers need to:

  • Identify key questions to be answered – e.g. what is the effect on profits of 10% decrease in sales? Or a 10% increase in cost of sales?

  • Use of spreadsheets or other types of computer software in order to create ‘what-if’ analyses, perform goal-seeking or other complex tasks.


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SAQ 10.2

1. What do you think might be the advantages and disadvantages of zero-based budgeting?

2. How might any disadvantages be overcome?

Solution


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Advantages

Little Wastage of Resources

Strategic use of resources, enable plans to be fulfilled more easily

Disadvantages

Time Consuming

Managers can often feel threatened by ZBB

SAQ 10.2 Solution

The disadvantages might be countered by using the approach selectively, for example only every third year, or on particular budgets which tend to require strategic input, e.g. training, advertising, research & development.


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Section C:

Monitoring & Controlling Performance


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Budgetary Control Structures

Budgets provide a useful mechanism for control.

  • This starts with the detailed planning within the budget, which forms the basis for exercising control

  • In addition we need a basis for measuring actual performance against planned performance

  • Finally in exercising control, we need a means of finding out where and why events deviated from the plan, and ways of rectifying these.


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The budgetary control process

Click on each box for a fuller explanation

Prepare budgets

Perform and collect information on actual performance

Respond to variances between planned and actual performance and exercise control

SAQ 10.3


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Steps in the budget setting and control process

Click on each box for an explanation

2. Communicate budget guidelines to relevant managers

1. Establish responsibility for the budget-setting process

4. Prepare the budget for the area of the limiting factor

3. Identify the key or limiting factor

6. Review and co-ordinate budgets

5. Prepare draft budgets for all other areas

8. Communicate the budgets to all interested parties

7. Prepare the master budgets

9. Monitor actual performance relative to the budget

10. Act to ensure performance conforms to the budget


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Performance Monitoring Techniques

The figures within a budget serve as a basis for measuring the performance of a team or department. The following interrelated techniques can be used:

  • Simple Performance Comparison

  • Flexible Budgeting

  • Variance Analysis


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This Budget is part of the Profit and Loss budget for a manufacturing company

The amounts shown represent targets to be achieved for a particular product line during the next 12 months.

This allows us to compare our prediction with what actually happens.

Budget Sales (Units): 1000

£ 000 Budget

Value of Sales100

Direct Costs

Materials 40

Labour 20

Total Direct Costs 60

Gross Profit 40

Overheads

Admin Salaries 20

Travel 5

Other costs 20

Total Overheads 45

Net Profit (5)

Simple Performance Comparison


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Comparison of Actual Performance (1) manufacturing company

Original Budget Actual Figures

Sales 1000 Units Sales 1040 Units

Original Actual

£ 000 Budget Figures

Value of Sales100 104

Direct Costs

Materials 30 37

Labour 25 24

Total Direct Costs 55 61

Gross Profit 45 43

Overheads

Admin Salaries 20 19

Travel 5 8

Other costs 17 17

Total Overheads 42 44

Net Profit 3 (1)

Here we can see what has happened at the end of the period:

Although we have produced and sold slightly over target,

the sharp rise in the cost of materials

means that we have made an overall loss.


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Comparison of Actual Performance (2) manufacturing company

Original Budget Sales (Units): 1000 Actual Sales (Units): 1500

Original Actual

£ 000 Budget Figures

Value of Sales100 150

Direct Costs

Materials 30 47

Labour 25 25

Total Direct Costs 55 72

Gross Profit 45 78

Overheads

Admin Salaries 20 27

Travel 5 10

Other costs 17 23

Total Overheads 42 60

Net Profit 3 18

Here the original sales targets have been well exceeded, and we have increased our profits considerably

However all is not as well as it seems!


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Flexible Budgeting manufacturing company

  • If it becomes apparent before the end of the year that there is a huge discrepancy between the actual performance and the budget, it may be necessary to revise targets.

  • This might happen if there are unexpected surges or slumps in demand, or the economic situation changes.

  • This does not mean that we dispense with the budget altogether, and write a new one.

  • Flexible budgeting allows selected targets to be revised.

  • The revised budget is said to be ‘flexed’.


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Comparison with Flexed Budget manufacturing company

Original Budget Sales (Units): 1000 Actual Sales (Units): 1500

Original Flexed Actual

£ 000 Budget BudgetFigures

Value of Sales100 150 150

Direct Costs

Materials 30 4547

Labour 25 3025

Total Direct Costs 55 7572

Gross Profit 45 7578

Overheads

Admin Salaries 20 2027

Travel 5 810

Other costs 17 1723

Total Overheads 42 4560

Net Profit 3 3018

Here we have written in new targets on the basis of the new sales figures. We can now see that despite the fact that we have increased our profits, this is well below what we should have achieved.


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Variance Analysis manufacturing company

  • Used to analyse performance and promote management action

  • Variance - the difference between the budgeted amount and the actual amount; this can be

    adverse : the difference will ultimately lead to a reduction in the budgeted profit

    favourable: the difference will ultimately lead to an increase in the budgeted profit.

  • Variances might cover: Sales Volume, Pricing, Direct Materials Usage, Direct Materials Price, Direct Labour Efficiency, Direct Labour rate, Fixed Overheads


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Budgeted profit manufacturing company

plus

All favourable variances

minus

All adverse variances

equals

Actual profit

Relationship between the budgeted and actual profit


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Sample Variance Analyses manufacturing company

Sales Volume Variance

The difference between the profit as shown in the flexed budget and the actual profit

Flexed Budget: Profit : £30,000

Actual Figures Profit: £12,000

Sales Volume Variance: £18,000 Adverse


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Typical Variance Analyses carried out manufacturing company

Direct Material PRICE variance

(Actual material purchased x standard price) less Actual cost of material purchased

Direct Material USAGE variance

(Standard quantity of material required for actual production x standard price) less (Actual material x standard price

Total Direct Material variance

Standard direct material cost less Actual direct material cost


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Total direct materials variance manufacturing company

Direct materials usage variance

Direct materials price variance

Relationship between the total, usage and price variances of direct materials


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Types of Control manufacturing company

There are essentially two types of control used in budget management:

  • Feedback Control: where the information from actual performance is used to cause actions to be taken to rectify an unfavourable situation.

  • Feedforward control: where action is taken in advance to anticipate what might occur, and therefore avoid an unfavourable outcome.


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Key elements for budgetary control manufacturing company

  • Achievable yet rigorous targets

  • Accurate, relevant, customised and timely reporting

  • Short reporting periods (e.g. one month)

  • Clear lines of responsibility

  • Accountability of the budget holder

  • Records of action taken to control operations

  • Flexibility provided where appropriate

  • Serious attitude from higher management towards importance, relevance and accuracy of budgets


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The use of Targets for Control manufacturing company

  • Targets in themselves are a useful means of control. These are devolved down to junior managers who are able to monitor & self-correct.

  • Regular upwards reporting of performance to targets means that problems which occur will be relatively minor and easier to deal with.

  • It is only when large variances occur between targets and actual performance that further investigation & intervention is required.


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Investigating Variances manufacturing company

  • This can be expensive in terms of time and money.

  • Knowing the reason for a variance is only useful if an investigation into its cause can yield a method for rectifying it.

  • To decide whether this should be done, we can use the statistical notion of significance. In this case, we would regard variance to be significant if it was greater than 5%. In this case:

    Significant adverse variances will need to be acted upon.

    Significant favourable variances should be investigated.

    Insignificant variances should simply be kept under review.

  • We can only act on variances if the cause of them is known, and there are clear courses of action to be taken


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Acting on Variances 1 manufacturing company

This is an example of a feedback control, as the unfavourable situation has already occurred.

Example 1:

In a large retailing company, variance in budgeted Profit & Loss half way through the year shows a projected shortfall in budgeted profit of 15% at year end. This is traced back to a reduction in turnover; sales targets are not being met in the being met in stores in the South West of England.

Action Taken

Area Sales Manager to meet withMarketing Team; members of the team to focus on particular stores, examining sales records; team to visit & advise, and devise a strategy unique to that store. Targets to be kept under weekly review, Area Sales Managerreporting directly to Financial Director.


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Acting on Variances 2 manufacturing company

This is an example of a feedforward control, as the unfavourable situation has not yet occurred.

Example 2:

In a small engineering company, variance in budgeted Cash Flow predicts a potential cash-flow crisis in two week’s time, on further investigation this appears to be due to late payment by a valued customer.

Action Taken

Credit control to contact customer and negotiate payment; however, the payment will arrive too late to avert the cash flow crisis. Bank contacted and alerted to potential problem,. Temporary overdraft facility negotiated.


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Management by Exception manufacturing company

  • The use of budgetary targets is an important way in which decision-making and responsibility can be delegated to junior management.

  • Control is retained by senior management, since they can use the variances to determine which junior managers are meeting or exceeding their targets.

  • This means that energy can be concentrated on those areas which are under-performing – the exceptions.

  • This process is called Management by Exception.


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SAQ 10.3 manufacturing company

Comment on the following:

(a) The main function of calculating variances is to provide feedback to managers on performance.

(b) All variances should be investigated to find their cause.

(c) It is highly valuable to calculate variances because they will tell you what has gone wrong.

Solution (a)

Solution (b)

Solution (c)


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SAQ 10.3a Solution manufacturing company

  • The main function of calculating variances is to provide feedback to managers on performance.

    Solution

    This misunderstands the term ‘feedback’, viewing it simply as “information”. Variances are used dynamically as either feedback or feedforward control mechanisms, so that managers can act either compensate for an already-existing unfavourable situation (feedback), or to prevent one occurring (feedforward). The variances identify what needs to be modified, and can help to suggest courses of action.


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SAQ 10.3b Solution manufacturing company

  • All variances should be investigated to find their cause.

    Solution

  • It is extremely unlikely that any budget target will be hit exactly; that is simply a fact of life. To that extent, variances will occur on all targets, even if this is only by a few pounds or pence. If we were to investigate all variances, we would waste a lot of effort and a lot of time.

  • Investigating variances can be expensive. Significant variances only (greater than 5%), should be investigated, and only then if this appears to promise a course of action.


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SAQ 10.3c Solution manufacturing company

(c) It is highly valuable to calculate variances because they will tell you what has gone wrong.

Solution

  • Calculating variances identifies a discrepancy between a predicted amount and an actual amount.

  • If that difference is significant, then it might tell you that something has gone wrong, but the cause might be somewhere else.

  • Investigating variances might (or might not) identify the ‘root cause’ of the problem, but it might not tell you how to rectify it; for example, the discrepancy could be caused by an over-ambitious budget target.


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Section D: manufacturing company

Behavioural Issues


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Budgets – Behavioural issues manufacturing company

This section looks briefly at how managers react when confronted by budgets.

We examine

  • Reaction - Positives and the Negatives

  • How Managers react to Targets

  • Keys to Successful Budgeting

SAQ 10.4


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Positive Reactions to Budgets manufacturing company

Budgets can be:

  • Motivating - Targets become clear, and if the goals are attainable, this provides a sense of fulfilment in achieving them.

  • Empowering - budgets set boundaries within which to work; each manager knows their resources, and is able to work autonomously within the limits set to achieve their targets.

  • Inclusive - where the budget-setting process is dynamic, iterative and based on true negotiation, this can help form a sense of community in which all managers feel that they have a contribution to make, and understand their role within the organisation more fully.


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Negative Reactions to Budgets manufacturing company

Budgets are often seen as:

  • Restrictive - it becomes more difficult to take advantage of opportunities since the expenditure has already been allocated.

  • Inflexible - money often needs to be spent within a particular time-frame. It discourages managers from thinking strategically.

  • Limiting: targets are seen as a maximum instead of a threshold.

  • Self-defeating: prone to end-of-year expenditure ‘binges’

  • Confrontational: - they become catalysts for organisational conflict


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Budgets as performance evaluation manufacturing company

Where evaluation of performance is based on the ability of the manager to meet the budget a range of factors occurs:

  • Rigidity – the manager feels straitjacketed by the budget, and restrained from taking risks, as this might create adverse variances.

  • Fixation- There is a focus on budget at expense of other criteria

  • Manipulation: Figures are often ‘massaged’ or distorted in order to present the department in the best light.

  • Exaggeration: Introduction of slack during budget-setting processes


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Management Styles manufacturing company

When confronted by budgets, managers appear to adopt one of three styles:

  • Budget-constrained style

    Managers focus only on the targets, and on performance of subordinates in that context; all other issues are deemed irrelevant.

  • Profit-conscious style

    Managers use budget information in a flexible way, and in conjunction with other data. Emphasis is on overall improvement; budget data is just one piece in the jigsaw.

  • Non-accounting style

    Managers ignore the budget & targets are not seen as relevant.


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Keys to Successful Budgeting (1) manufacturing company

Information is the key:

  • Aims of budgets must be understood. This means communicating as much of the background ( corporate strategy, short-term objectives, limiting factors) as possible.

  • Budgets must be seen as attainable. Highest performance is achieved by setting the most difficult specific goals which are acceptable to manager

  • Control information must be understood, as well as the consequences of targets not being met.


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Keys to Successful Budgeting (2) manufacturing company

Participation is the key:

  • It is crucial in the budget-setting process to acceptance, job satisfaction and motivation

  • It is also likely to increase accuracy

  • It should decrease distortion and manipulation...

    However:

  • Managers may deliberately introduce ‘slack’ (I.e. deliberately over-or under estimate items during the budget-setting negotiations)


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SAQ 10.4 manufacturing company

A Sales Manager believes that she could reach her overall sales budget target by reducing prices and selling a higher volume of units.

  • Why might it not be sensible for her to do so?

  • What overall issues does this raise about budget monitoring and control?

Solution

Solution


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SAQ 10. 4 Solution (1) manufacturing company

A Sales Manager reaches her overall sales budget target by reducing prices and selling a higher volume.

This is not sensible because:

  • Production targets will have been set in the production budget; this will involve budgeting for raw materials and labour etc. Suddenly selling more will cause problems elsewhere; this will mean that higher stock levels will be required, and may cause problems with debtors.

  • Similarly, reducing prices will reduce profitability. This will have an effect on the company’s balance sheet, and may ultimately reduce dividends to shareholders.


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SAQ 10. 4 Solution (2) manufacturing company

What overall issues does this raise about budget monitoring and control?

  • Budgets are interrelated, and targets are set to dovetail; individual managers need to know how their targets match with those of others. One way to do this is through a budgetary committee, and participation in the budgetary process.

  • Managers not only need targets, they need to know to what extent under ‘normal conditions’ those targets can be flexed, that is, by how much can we exceed or fall short without a new budget needing to be set?


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Section E: manufacturing company

Non-Financial Measures in Budgets


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Non financial measures in budgeting manufacturing company

  • The budget itself tends to be a document which apportions money according to a strategic plan

  • In manufacturing, the money sets numerical targets for input, throughput and output.

  • However, in service industries and in other areas such as Education and the National Health Service it is difficult to measure ‘output’ using conventional financial means.

  • It is increasingly the case that other, non-financial measures are used as a basis for reporting.

  • Where these relate to ‘hard data’, based on measurable objectives, targets can be incorporated into the budgeting process


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Examples of Non Financial measures manufacturing company

General examples of these include:

  • Product quality

  • Delivery efficiency

  • Supplier quality

  • Supplier delivery

  • Set-up times

  • Throughput times

  • Wastage

  • Customer satisfaction

  • Employee satisfaction


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Specific Non financial measures manufacturing company

There are two specific examples :

  • Patient Waiting Times in the NHS

  • Pupil Performance Indicators for Schools

    In both cases:

  • These are non-financial Measures which appear as targets for specific institutions.

  • These are treated in the same way as other budgetary measures, i.e. institutions are compared with one another (league tables) and their past performance (looking for year-on-year improvement)

  • These are elements of control; resources follow the successful achievement of targets.


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SAQ 10.5 manufacturing company

What particular problems might be caused in a hospital by the incorporation of non-financial targets such as “Average patient waiting time” in an A & E Department as part of their budgetary considerations?

Solution


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SAQ 10.5– Solution (1) manufacturing company

The problems are exactly the same as those outlined for financial targets:

  • Rigidity – managers may feel straitjacketed by the targets and manage purely to meet rather than exceed them; this means that ‘natural grass-roots development’ tends to be stifled. (e.g. new types of procedure which might ultimately lead (in the long run) to improved patient care will not be implemented, as in the short run this might result in failure to meet targets.)

  • Fixation- There is a focus on the target at expense of other criteria.In the example given, it could lead to undifferentiated patient care (e.g. a patient with a cut finger becomes as important as road traffic accident victim)


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SAQ 10.5– Solution (2) manufacturing company

  • Manipulation: The department is reorganised in such a way as to present figures which meet the target, but do not necessarily result in improvements. (e.g. All patients are met at the door by a doctor, and then asked to wait – this technically reduces the waiting time to zero, but does not improve the service)

  • Exaggeration: Accounting procedures are put in place which locally redefine what the target means. (e.g. Average patient waiting time redefined as: the time before first treatment divided by the total number of separate visits by a doctor or nurse subsequently.)


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Follow-up to Lecture 10 - Activities manufacturing company

Reading

  • All of chapters 12 and 13 of M & A, except the details of material on variances pp pp 395-404.

    Activity.

  • Attempted the test material on budgets on the M & A website, sections 12 & 13. There will be no questions in the examination which ask you to calculate budgets, so any of these questions which require calculation (e.g. calculation of specific variances) can be omitted.

  • The seminar this week will focus purely on the examination.


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