Management Accounting: Cost planning and control, budget and budgetary

control, Development planning process.

Cost planning: Cost planning is a key due diligence step in preparing for a construction
project. Cost planning tells a property owner how much a proposed project will cost.
Additionally, cost planning will tell when the expected expenses will most likely occur.

Cost control:The process of monitoring and regulating the expenditure of funds by an

agency or institution. Budgets, reports, and cost-accounting procedures are performed to
achieve cost control.

Cost control typically includes

1. Investigative procedures to detect variance of actual costs.
2. Diagnostic to ascertain the cause(s) variance, and
3. Corrective procedures to effect realignment between actual and budgeted costs.

Benefits of Cost Planning

 Greater satisfaction with end results
 Better value for money
 Improved building quality and performance
 Budget and value accountability
 Improved relationships between all project participants
 Design problems identified and solved earlier
 Early identification of high-cost elements

Factors in Successful Cost Planning

 Confirm that all project team members are speaking, and understand, a common language
 Manage expectations. Acknowledge change is inevitable and establish contingencies and
escalation in cost planning
 Establish and document a solid base of prioritized needs
 Study as many feasible site and building alternatives as possible
 Establish well defined, manageable project schedules
 Insure the budget has the confidence and acceptance of all project team members

Main elements of a “Cost control Process”

1. The preparation of a plan that will achieve the objectives of the work
2. The recording of the plan in terms of the inputs to or the outputs from the system
3. The definition of the quantities and organization of the resources that will be
necessary for the conversion of inputs to outputs
4. The use of feedback in order to compare what is happening in practice with that
which was planned
5. The evaluation of variances arising from the comparison, leading to decisions as to
whether corrective action is required and whether a change in resources allocation is
necessary
Aims of Cost Control / Cost Planning

 Best use of resources to gain the good value for money during the design and
construction processes
 Controlling measures exercising in the design and construction processes to
ensure the total construction cost / final sum does not exceed the client’s
approved budget
 Cost as an element of design during the design and construction processes to
achieve a suitably balanced costs throughout all parts of the building

Implementation of Cost Control

In order to achieve the cost control function, there are three elements need to be executed:

1. Cost Planning – to formulate the realistic cost plan for the project
2. Cost Monitoring – continuous process to compare the actual cost with the
planned cost
3. Action – the effective cost rectification or cost reconciliation action to review the
overall construction cost against the client’s approved budget

Elemental Cost Planning

 Sketch plans are prepared and the total cost of work is obtained by
approximate method, such as cost per place or per square meter of gross floor
area.
 The building is then broken down into various elements, e.g. internal walls,
floors, internal finishes, roof, etc.
 Each element is allowed a cost based on cost analysis of similar projects
 The sum of the cost targets set against each element must not exceed the total
estimated cost
 That is : designing to a cost (agreed cost limit)
Budget and budgetary control

Budget
A budget is a financial plan for a defined period of time, usually a year. It may also include
planned sales volumes and revenues, resource quantities, costs and expenses, assets,
liabilities and cash flows.

Budgetary control
A system of management control in which actual income and spending are compared with
planned income and spending, so that you can see if plans are being followed and if those
plans need to be changed in order to make a profit.

Types of Budgets in Managerial Accounting

Master Budget
A master budget is a comprehensive projection of how management expects to conduct all
aspects of business over the budget period, usually a fiscal year. The master budget
summarizes projected activity by way of a cash budget, budgeted income statement and
budgeted balance sheet. Most master budgets include interrelated budgets from the various
departments. Managers typically use these subset budgets to plan and set performance
objectives. Master budgets are generally used in larger businesses to keep many managers on
the same page.

Operational Budgets
The operational budget covers revenues and expenses surrounding the day-to-day core
business of a company. Revenues represent sales of products and services; expenses define
the costs of goods sold as well as overhead and administrative costs directly related to
producing goods and services. While budgeted annually, operating budgets are usually
broken down into smaller reporting periods, such as weekly or monthly. Managers compare
ongoing results to budget throughout the year, planning and adjusting for variations in
revenue.

Cash Flow Budget

A cash flow budget examines the inflows and outflows of cash in a business on a day-to-day
basis. It predicts a company's ability to take in more money than it pays out. Managers
monitor cash flow budgets to pinpoint shortfalls between expenses and sales -- times when
financing may be needed to cover overheads. Cash flow budgets also suggest production
cycles and inventory levels so that a company's resources are available for activity, not sitting
idle on warehouse shelves.
Financial Budget
A financial budget outlines how a business receives and spends money on a corporate scale,
including revenues from core business plus income and costs from capital expenditures.
Managing assets such as property, buildings, investments and major equipment may have a
significant effect on the financial health of a company, particularly through the peaks and
troughs of daily business. Executive managers use financial budgets to leverage financing
and value the company for mergers and public offerings of stock.

Static Budget
A static budget contains elements where expenditures remain unchanged with variations to
sales levels. Overhead costs represent one type of static budget, but these budgets aren't
confined to traditional overhead expenses. Some departments may have a fixed amount of
money set in budget to spend, and it is up to managers to make sure such amounts are spent
without going over-budget. This condition occurs routinely in public and nonprofit sectors,
where organizations or departments are funded largely by grants.

Purpose of Budgeting

In the context of business management, the purpose of budgeting includes the following three
aspects:

 A forecast of income and expenditure (and thereby profitability)

 A tool for decision making
 A means to monitor business performance

Forecast of income and expenditure

Budgeting is a critically important part

of the business planning process.
Business owners and managers need to
be able to predict whether a business will
make a profit or not. The purpose of
budgeting is basically to provide a model
of how the business might perform, financially speaking, if certain strategies, events, plans
are carried out. In constructing a Business Plan, the manager attempts to forecast Income and
Expenditure, and thereby profitability.

Tool for decision making

The purpose of budgeting is to provide a
financial framework for the decision
making process i.e. is the proposed
course action something we have
planned for or not.

In managing a business responsibly, expenditure must be tightly controlled. When the budget
for advertising has been fully expended, the decision on "can we spend money on
advertising" is likely to be "no".

Monitoring business performance

The purpose of budgeting is

to enable the actual business
performance to be measured
against the forecast business
performance i.e. is the
business living up to our
expectations.

In the figure opposite,

"variance" is the difference
between budgeted
expenditure and actual expenditure.

Essentials of Budgetary Control:

There are certain steps which are necessary for the successful implementation budgetary
control system.
These are as follows:
1. Organization for Budgetary Control
2. Budget Centers
3. Budget Mammal
4. Budget Officer
5. Budget Committee
6. Budget Period
7. Determination of Key Factor.

1. Organization for Budgetary Control:

The proper organization is essential for the successful preparation, maintenance and
administration of budgets. A Budgetary Committee is formed, which comprises the
departmental heads of various departments. All the functional heads are entrusted with the
responsibility of ensuring proper implementation of their respective departmental budgets.
The Chief Executive is the overall in-charge of budgetary system. He constitutes a budget
committee for preparing realistic budgets A budget officer is the convener of the budget
committee who co-ordinates the budgets of different departments. The managers of different
departments are made responsible for their departmental budgets.

2. Budget Centers:
A budget centre is that part of the organization for which the budget is prepared. A budget
centre may be a department, section of a department or any other part of the department. The
establishment of budget centers is essential for covering all parts of the organization. The
budget centers are also necessary for cost control purposes. The appraisal performance of
different parts of the organization becomes easy when different centers are established.

3. Budget Manual:
A budget manual is a document which spells out the duties and also the responsibilities of
various executives concerned with the budgets. It specifies the relations amongst various
functionaries.

4. Budget Officer:
The Chief Executive, who is at the top of the organization, appoints some person as Budget
Officer. The budget officer is empowered to scrutinize the budgets prepared by different
functional heads and to make changes in them, if the situations so demand. The actual
performance of different departments is communicated to the Budget Officer. He determines
the deviations in the budgets and the actual performance and takes necessary steps to rectify
the deficiencies, if any.
He works as a coordinator among different departments and monitors the relevant
information. He also informs the top management about the performance of different
departments. The budget officer will be able to carry out his work fully well only if he is
conversant with the working of all the departments.
5. Budget Committee:
In small-scale concerns the accountant is made responsible for preparation and
implementation of budgets. In large-scale concerns a committee known as Budget Committee
is formed. The heads of all the important departments are made members of this committee.
The Committee is responsible for preparation and execution of budgets. The members of this
committee put up the case of their respective departments and help the committee to take
collective decisions if necessary. The Budget Officer acts as convener of this committee.

6. Budget Period:
A budget period is the length of time for which a budget is prepared and employed. The
budget period depends upon a number of factors. It may be different for different industries
or even it may be different in the same industry or business.

The budget period depends upon the following considerations:

(a) The type of budget i.e., sales budget, production budget, raw materials purchase budget,
capital expenditure budget. A capital expenditure budget may be for a longer period i.e. 3 to 5
year’s purchase, sale budgets may be for one year.
(b) The nature of demand for the products.
(c) The timings for the availability of the finances.
(d) The economic situation of the country.
(e) The length of trade cycles.
All the above-mentioned factors are taken into account while fixing period of budgets
7. Determination of Key Factor:
The budgets are prepared for all functional areas. These budgets are interdependent and inter-
related. A proper co-ordination among different budgets is necessary for making the
budgetary control a success. The constraints on some budgets may have an effect on other
budgets too. A factor which influences all other budgets is known as Key Factor or Principal
Factor.
There may be a limitation on the quantity of goods a concern may sell. In this case, sales will
be a key factor and all other budgets will be prepared by keeping in view the amount of goods
the concern will be able to sell. The raw material supply may be limited, so production, sales
and cash budgets will be decided according to raw materials budget. Similarly, plant capacity
may be a key factor if the supply of other factors is easily available.
The key factor may not necessarily remain the same. The raw materials supply may be
limited at one time but it may be easily available at another time. The sales may be increased
by adding more sales staff, etc. Similarly, other factors may also improve at different times.
The key factor also highlights the limitations of the enterprise. This will enable the
management to improve the working of those departments where scope for improvement
exists.

Advantages of Budgetary Control:

1. Maximization of Profits:
The budgetary control aims at the maximization of profits of the enterprise. To achieve this
aim, a proper planning and co ordination of different functions is undertaken. There is a
proper control over various capital and revenue expenditures. The resources are put to the
best possible use.
2. Co-ordination:
The working of different departments and sectors is properly coordinated. The budgets of
different departments have a bearing on one another. The co-ordination of various executives
and subordinates is necessary for achieving budgeted targets.
3. Specific Aims:
The plans, policies and goals are decided by the top management. All efforts are put together
to reach the common goal, of the organization. Every department is given a target to be
achieved. The efforts are directed towards achieving some specific aims. If there is no
definite aim then the efforts will be wasted in pursuing different aims.
4. Tool for Measuring Performance:
By providing targets to various departments, budgetary control provides a tool for measuring
managerial performance. The budgeted targets are compared to actual results and deviations
are determined. The performance of each department is reported to the top management. This
system enables the introduction of management by exception.
5. Economy:
The planning of expenditure will be systematic and there will be economy in spending. The
finances will be put to optimum use. The benefits derived for the concern will ultimately
extend to industry and then to national economy. The national resources will be used
economically and wastage will be eliminated.
6. Determining Weaknesses:
The deviations in budgeted and actual performance will enable the determination of weak
spots. Efforts are concentrated on those aspects where performance is less than the stipulated.
7. Corrective Action:
The management will be able to take corrective measures whenever there is a discrepancy in
performance. The deviations will be regularly reported so that necessary action is taken at the
earliest. In the absence of a budgetary control system the deviations can be determined only
at the end of the financial period.
8. Consciousness:
It creates budget consciousness among the employees. By fixing targets for the employees,
they are made conscious of their responsibility. Everybody knows what he is expected to do
and he continues with his work uninterrupted.
9. Reduces Costs:
In the present day competitive world budgetary control has a significant role to play. Every
businessman tries to reduce the cost of production for increasing sales. He tries to have those
combinations of products where profitability is more.
10. Introduction of Incentive Schemes:
Budgetary control system also enables the introduction of incentive schemes of remuneration.
The comparison of budgeted and actual performance will enable the use of such schemes.

Limitations of Budgetary Control:

Despite of many good points of budgetary control there are some limitations of this system.

Some of the limitations are discussed as follows:

1. Uncertain Future:
The budgets are prepared for the future period. Despite best estimates made for the future, the
predictions may not always come true. The future is always uncertain and the situation which
is presumed to prevail in future may change. The change in future conditions upsets the
budgets which have to be prepared on the basis of certain assumptions. The future
uncertainties reduce the utility of budgetary control system.
2. Budgetary Revision Required:
Budgets arc prepared on the assumptions that certain conditions will prevail. Because of
future uncertainties, assumed conditions may not prevail necessitating the revision of
budgetary targets. The frequent revision of targets will reduce the value of budgets and
revisions involve huge expenditures too.
3. Discourage Efficient Persons:
Under budgetary control system the targets are given to every person in the organization. The
common tendency of people is to achieve the targets only. There may be some efficient
persons who can exceed the targets but they will also feel contented by reaching the targets.
So budgets may serve as constraints on managerial initiatives.
4. Problem of Co-ordination:
The success of budgetary control depends upon the co-ordination among different
departments. The performance of one department affects the results of other departments. To
overcome the problem of coordination a Budgetary Officer is needed. Every concern cannot
afford to appoint a Budgetary Officer. The lack of co-ordination among different departments
results in poor performance.
5. Conflict among Different Departments:
Budgetary control may lead to conflicts among functional departments. Every departmental
head worries for his department goals without thinking of business goal. Every department
tries to get maximum allocation of funds and this raises a conflict among different
departments.
6. Depends Upon Support of Top Management:
Budgetary control system depends upon the support of top management. The management
should be enthusiastic for the success of this system and should give full support for it. If at
any time there is a lack of support from top management then this system will collapse.

Budget preparation
Firstly, determine the principal budget factor. This is also known as the key budget factor or
limiting budget factor and is the factor which will limit the activities of an undertaking. This
limits output, e.g. sales, material or labor.

 Sales budget: this involves a realistic sales forecast. This is prepared in units of
each product and also in sales value. Methods of sales forecasting include:

 Sales force opinions

 Market research
 Statistical methods (correlation analysis and examination of trends)
 Mathematical models.
In using these techniques consider:

 Company's pricing policy

 General economic and political conditions
 Changes in the population
 Competition
 Consumers' income and tastes
 Advertising and other sales promotion techniques
 After sales service
 Credit terms offered.

 Production budget: expressed in quantitative terms only and is geared to the sales
budget. The production manager's duties include:

 Analysis of plant utilization

 Work-in-progress budgets.

If requirements exceed capacity he may:

 Subcontract
 Plan for overtime
 Introduce shift work
 Hire or buy additional machinery
 The materials purchases budget's both quantitative and financial.

 Raw materials and purchasing budget:

 The materials usage budget is in quantities.

 The materials purchases budget is both quantitative and financial.

 Labour budget: is both quantitative and financial. This is influenced by:

 Production requirements
 Man-hours available
 Grades of labour required
 Wage rates (union agreements)
 The need for incentives.

 Cash budget: A cash plan for a defined period of time. It summaries monthly
receipts and payments. Hence, it highlights monthly surpluses and deficits of actual
cash. Its main uses are:

 To maintain control over a firm's cash requirements, e.g. stock and debtors
 To enable a firm to take precautionary measures and arrange in advance for
investment and loan facilities whenever cash surpluses or deficits arises
 To show the feasibility of management's plans in cash terms
 To illustrate the financial impact of changes in management policy, e.g. change of
credit terms offered to customers.
Receipts of cash may come from one of the following:

 Cash sales
 Payments by debtors
 The sale of fixed assets
 The issue of new shares
 The receipt of interest and dividends from investments.

Payments of cash may be for one or more of the following:

 Purchase of stocks
 Payments of wages or other expenses
 Purchase of capital items
 Payment of interest, dividends or taxation.
Development planning process
Development planning:Development Planning is the creation of measurable goals to support
an employee's career. This includes defining how to achieve a goal and the time frame within
which this should be done. Managers work with employees to document both their career
goals and their personal goals.

Essential Elements of an Development Planning process

 Use an intentional change framework.
 Understand what it means to build capacity.
 Commitment to ongoing daily reflection.
 Building in perspective taking and seeking.
 Build intentionality into your schedule.
 Choosing two or at most three things to work on.
 Being led by your values.
 Willingness to be uncomfortable and patient, with lots of self-compassion.
 Learning to be more mindful.
 Deepening self-awareness.
 Committing to building resilience.
 Paying attention to the context.
 Make a public declaration.
 Find creative ways to measure change.

Create a personal development process

Self-Assessment- Employees must identify their individual strengths and weaknesses. This
will help them find areas of improvement and discover what motivate them.
Setting Goals- Employees set smart goals.These are Specific, Measurable, Achievable,
Relevant and Time-Bound. They allow you to track progress and motivate employees to
improve their work performance.
Identifying Strategies-Employees should experiment between experiential learning on the
job, learning from others through mentoring or shadowing subject experts and attending
webinars or obtaining additional certificate.
Building Timelines-It is important employees commit to making improvements by setting
deadlines.

Important of Development Planning Process

The Development Planning Process plays a crucial role for both staff members and the
organizations they work for. We have identified the following 6 main benefits:
1. Upskills Workforce
2. Increases Productivity
3. Improves Employee Satisfaction
4. Increases Employee Retention
5. Enriches Company Culture
6. Strengthens feedback Culture
1. Upskills Workforce: Development Planning helps upskill a workforce because it
encourages employees to identify their strengths and build upon their weaknesses.
This informs decisions concerning training and development and can increase your
employee's knowledge and improve their skill set
Supporting employee's career development will further improve your allocation of
resources and help you manage the team budget.

2. Increases Productivity: Individual Development Planning upskills a workforce

which further increases productivity. This is because employees are given new
deadlines to adhere to and can better manage their time to achieve what is asked of
them.

Studies have found that planning preserves 10 times more time in the future. This is
beneficial to your organization and will maximize efficiency.

3. Improves Employee Satisfaction: Employees are likely to feel better supported

having made a development plan with their manager. There will be greater
motivation for an employee to succeed and reach their goals. This is especially
 crucial for employees who lack direction and are uncertain about their future
careers.
Employee engagement is important for your organization as a happy workforce will feel
more compelled to work hard and achieve results.

4. Increases Employee Retention: When employees are more satisfied with their role,
they are more likely to maintain their post within an organization. This is beneficial
to retain top talent.
Employee retention is important for an organization as it reduces the cost of recruiting
and on boarding processes. It is an unnecessary expense to constantly be training new
employees. It is more efficient to retain existing employees and upskill them
throughout their time with your organization

5. Enriches Company Culture: Personal Development Planning helps build a company

culture which is inclusive and collaborative. Building a strategic plan with employees
helps them feel that they are supported. Employee engagement with a firm is crucial
to drive an employee's self-confidence and motivation to succeed.

Company Culture is incredibly important. Glass door conducted a study that revealed
that 77% of workers will consider company culture before applying for a job.

6. Strengthens feedback Culture: Organizations should embrace feedback culture.

Employees benefit from managers commenting on their performance as their value to
a team is recognized. It further helps them to improve in areas where they are under-
performing.

Managers benefit from 360 feedbacks as they learn where their leadership have been
effective and where people feel they could improve. This will boost project
management and ensuing team performance and productivity.