What is the purpose of a budget system?
Long range planning
Strategy
Budget preparation
Forecast as leading to planning
What is long-range planning?
- Senior managers set a vision statement
- prepare a list of objectives
What is an example of long-range planning?
Vision: be a market leader
Objective: take 10% market share from competitors
What is strategy?
Describes the courses of action to be taken in achieving stated objectives
What is a budget?
- Detailed plan that sets out (in money terms) plans for income and expenditure in a future period
- prepared in advance based on agreed objectives and strategy
What are forecasts?
Involved making predictions
- could be in words or in figures
What is the budget committee’s role?
- senior managers who are responsible for designing strategy
- receives initial budgets from functional managers
- suggest changes if needed to meet strategy
- have regard to motivation
What is the accounting department’s role?
- work with operations mangers to begin budget preparation
- advise and assist in budget preparation
- accounting staff must understand business operation
What is the sequence of the budgetary process?
- Communicate objectives and strategy
- Communicate procedures
- Determine the limiting factor
- Prepare an initial set of budgets
- Negotiate budgets with line managers
- Coordinate and review budgets
- Accept budgets in final form
- Ongoing review
What is bottom-up budget started by?
By inviting those who will implement the budget to be involved in setting the budget
What is top-down budget set by?
By setting by management and imposed on those who will implement the budget
What are the benefits of budgeting?
Planning
Control
Communication and co-ordination
Basis for performance evaluation
What are the 3 questions one should consider when preparing a performance report?
- To whom should the report be addressed?
- What should be reported?
- How frequently should the report be presented?
Preparing performance reports - who should the report be addressed to?
- The manager in charge of the responsibility centre
- the level of detail will be influenced by the manger tail position of the person to whom it is addressed
Preparing performance reports - what should be reported?
Those items that are controlled by the manager of the particular responsibility centre
Preparing performance reports - how frequently should the report be presented?
Should be related to management’s info needs
What is performance evaluation?
Measurement of short term performance against the budget
What are the key issues to consider when considering performance evaluation?
- What to measure
- How to measure
- What are the possible behavioural aspects?
Performance evaluation - what to measure? (Provide examples)
Items which are capable of being regulated by a manager within a defined boundary of responsibility
E.g.
controllable costs
Faulty products
Delays in providing a service etc.
What is a controllable cost?
A cost which is capable of being regulated by a manager within a defined boundary of responsibility
What is a non-controllable cost?
One which is not capable of being regulated by a manager within a defined boundary of responsibility
What is an avoidable cost?
One which may be eliminated by not taking a particular action
What is an unavoidable cost?
A cost which will not be eliminated by taking a particular action
What are the two types of non-financial performance measures?
Quantity measures
Quality measures
