PLANNING AND PERFORMANCE MANAGEMENT

BUSINESS PERFORMANCE MANAGEMENT (BPM):

To manage the corporate transformation process (Porter’s value chain) to develop and provide information (the
framework) to run the business and achieve the organisation’s goals.

Key elements of effective BPM: Alexander 2018, p. 3

1. Projecting future (financial) performance

2. Monitoring performance on key value drivers

3. Increasing visibility into critical areas of business performance

4. Providing a framework, allowing management to understand the impact of actions and activities on financial
performance

5. Providing early detection of unfavourable events and trends

6. Identifying monitoring and mitigating risks

BPM Process: Alexander 2018, p. 139. (È un ciclo, dopo l’assesment si ricomincia da capo.)

1. Goal setting

2. Execution Planning

3. Execution

4. Monitoring

5. Accountability

6. Assessment

Navigate By Key Performance Indicators:

To navigate an enterprise we need to identify, analyse, and actively manage its performance drivers. The status of
the performance drivers is reflected by the (key) performance indicators (KPIs).

More specifically, to navigate the enterprise means: (È un ciclo, dopo taking action si ricomincia da capo.)

1. Setting the targets (planning):

a. Identify company goals

b. Set specific objectives

c. Develop plans

2. Executing the planned activities (implementation)

a. Implement a plan and control system

3. Measuring and analysing KPIs (valuation)

a. Evaluate performance

4. Taking action (re-planning or re-executing)

a. Modify Plans

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Performance Metrics:

To measure and manage performance we need more than financial data -> Balance Scorecard.

Balanced Scorecard: strategic management tool that helps organizations monitor and measure their performance
from multiple perspectives. It goes beyond traditional financial metrics to include non-financial aspects that are
critical for achieving long-term success.

Four different types of metrics that collectively contribute to the balanced scorecard:

• Process Metrics: These are measures that focus on the efficiency, effectiveness, and adaptability of business
processes within an organization.

• People Performance Metrics: These metrics evaluate the performance, skills, and productivity of
employees within an organization.

• (Traditional) Financial Metrics: Derived from financial accounting (profit, revenue, profitability), these
metrics provide insights into the financial health and performance of a company.

• Value Metrics: Focused on shareholder value and corporate value to assess the overall worth created by
the organization.

The balanced scorecard is a strategic management performance metric that measures and improves various internal
business functions and their external outcomes. It involves four main aspects: learning and growth, business
processes, customers, and finance. The balanced scorecard is used to identify and improve internal functions and
their resulting external outcomes.

Key Topics of Planning and Performance Management:

1. Planning/Budgeting

2. Better budgeting

3. Beyond Budgeting

4. Balanced Scorecard

Tasks of Planning:

steps and considerations necessary for effective planning, including:

1. Orientation/Decision: involves setting targets, criteria, and alternatives for problem mitigation

2. Incentive/Motivation: involves motivating employees to achieve the organisation's goals by making them
identify with those goals and granting them more decision-making discretion.

3. Coordination/Integration: involves allocating resources effectively and efficiently to ensure that all
departments and teams are working together towards the same goals.

4. Information/Documentation: collecting and analysing data to make informed decisions and document the
planning process.

5. Controlling/Monitoring: comparing actual performance against plans, forecasting future performance, and
taking corrective action when necessary.

By following these tasks of planning, organizations can ensure that they are effectively managing their performance
and achieving their goals.

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Layers of Planning (piramide): stages or levels of planning within an organization, each with distinct timeframes,
focuses, and roles. These layers are crucial for aligning individual and team goals with the overall strategic objectives
of the organization and ensuring that all levels of the organization work cohesively to achieve success (> p.14 for
more).

Three layers of planning:

1. Strategic Planning:

o Timeframe: Mid-term to long-term (3-10 years)

➢ looks ahead into the future, typically over a span of 3 to 10 years. This allows top-level
management to set comprehensive, overarching goals and strategies that will guide the
organization's direction and growth over an extended period.

o Focus: Top-level management is involved in strategic planning, which concentrates on defining

overall enterprise goals, strategic targets, and actions. It also includes environmental analysis,
considering risks, opportunities, and strengths.

o Roles Involved: Entrepreneurs, presidents, partners, directors, and other high-level executives.

o Why and When: Strategic planning is essential for setting the long-term direction of the
organization, making it more comprehensive and forward-looking.

2. Tactical Planning:

o Timeframe: Medium-term

➢ covers a timeframe that is shorter than strategic planning but longer than operational planning.
It serves as a bridge between the high-level strategy set in strategic planning and the day-to-
day activities outlined in operational planning. This timeframe often ranges from one to a few
years.

o Focus: Administrators or managers are responsible for tactical planning, which involves planning
and coordinating activities to align with the strategic goals set in the strategic planning phase.

o Roles Involved: Managers, coordinators, and other mid-level management personnel.

o Where and How: Tactical planning serves as a link between the strategic and operational levels,
determining operational targets and the course of action needed to achieve them.

3. Operational Planning:

o Timeframe: Short-term (usually less than 1 year)

➢ is focused on the short term, typically covering periods of less than one year. It involves detailed
planning for specific tasks and activities, ensuring that day-to-day operations are aligned with
the broader strategic and tactical objectives.

o Focus: Technical executors, such as frontline employees, are involved in operational planning. This
phase focuses on specific tasks and activities that align with both the strategic and tactical plans.

o Roles Involved: Technical executors and those responsible for implementing day-to-day activities.

o What: Operational planning is concerned with the details of tasks, including monetary planning,
and is highly specific and actionable in the short term.

These layers ensure that there is a clear alignment between the long-term strategic vision of the organization and
the day-to-day tasks and activities of its employees. This alignment helps in monitoring progress, evaluating
performance, and making necessary adjustments to ensure that the organization as a whole is moving towards its
goals effectively.
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Objects of Planning:

Planning of Operations: the foundational layer of the planning process, emphasizing the tangible aspects of an
organization's activities and resources. This form of planning delves into the real objects and activities that drive the
day-to-day functioning of the organization.

Key aspects encompassed in the planning of operations include:

1. Planning of manufacturing and purchasing volumes: Determining the optimal quantities for production
and procurement to meet demand and minimize costs.

2. Market and sales volumes: Strategically planning market penetration and sales targets to ensure market
competitiveness and sustained growth.

3. Introduction of new products and product quality: Planning for the development and launch of new
products, coupled with a focus on maintaining and enhancing product quality.

4. Marketing, merchandising, and distribution channels: Coordinating marketing strategies, merchandising

approaches, and optimizing distribution channels to enhance product reach and visibility.

5. Capacity planning: Assessing and planning for the organization's capacity to meet production and
operational demands effectively.

6. Staff productivity, impact on the environment, etc.: Monitoring and planning for factors such as employee
productivity, environmental sustainability, and other operational considerations.

These operational plans are activity-oriented and are measured in terms of quantity, time, and quality.

Planning of Values: involves translating the operational plans into a monetary perspective, providing a financial lens
through which organizational performance can be assessed. This layer focuses on the monetary presentation of
operational activities and includes key financial metrics for evaluation, such as:

1. Profitability: Assessing the organization's ability to generate profits relative to its costs and investments.

2. Profit: Evaluating the overall financial gains or losses incurred by the organization.

3. Revenue: Measuring the total income generated through sales and other revenue streams.

4. Cost: Analysing the expenses incurred in the course of operations and identifying areas for cost
optimization.

5. Investments: Assessing the strategic allocation of resources and capital to support organizational growth.

These are value-oriented metrics that provide a financial perspective to performance management.

➢ In essence, these two dimensions of planning work in tandem, with the planning of operations providing the
groundwork for day-to-day activities, and the planning of values offering a financial framework to evaluate the
overall success and sustainability of the organization. Together, they form a cohesive planning strategy that
guides organizational endeavours toward strategic objectives and effective performance management.

Reports Image Reality:

Gap between reports and reality: limitation of traditional reporting mechanisms in fully capturing the complexity
of actual organizational processes and activities. To address this gap, it is crucial to integrate comprehensive data
and real-time insights for a more accurate understanding. This approach allows organizations to make informed
decisions and improve performance management by considering specific details often overlooked by standard
reports, adapting to changing circumstances, and gaining a nuanced perspective of their dynamic operational reality.

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 - Attributes of Reports: key attributes that should be considered when creating and evaluating reports.

o What?: refers to the content and level of detail in the report, ensuring it is informative.

o Wherefore?: focuses on the purpose of the report, aligning it with organizational goals.

o When?: involves scheduling and frequency to maintain relevance and timeliness.

o How?: concerns presentation and layout for readability and engagement.

o Who?: Identifies the target audience to tailor content effectively.

Reports should contain detailed data about specific elements or operations within an organization, which
is often not captured by traditional reporting mechanisms. By integrating comprehensive data and real-time
insights, organizations can make informed decisions and improve their performance management.

- Report Frequency:

o Standard Reports are regularly prepared and cover a broad scope, providing insights into various
aspects like cost centres, sales, products, projects etc., aiding in ongoing planning. They are
automated and have determined reporting schemes per addressee group.

o Deviation Reports are automated and triggered when certain thresholds are breached, assisting in
real-time performance management by identifying anomalies.

[si attivano quando vengono superate determinate soglie, contribuendo alla gestione delle
prestazioni in tempo reale attraverso l'identificazione delle anomalie].

o Ad hoc Reports are generated upon request for specific analyses like investments, M&A or market
trends, supporting informed decision-making.

Drivers of Business Performance:

Focusing on improvements in multiple areas will lead to an increase in gain and yields (rendimenti) ensuring the
success of the company. These improvements consist of spending time, energy, and resources the right way.

What are the Performance Drivers to enhance Shareholder Value?

1. Strategy: Have a plan and know it intimately. Simply drafting one and filing it away isn’t going to cut it. Many
businesses may have a strategy, but it is not effective if management is not regularly coming back to the
strategy, to update it and see what tactical and operational actions have to be aligned with it.

2. Customers: It needs to be understood who existing and ideal customers are. Customers need to be
addressed and serviced in a way that they are satisfied and kept loyal.

3. Finance: Appropriate Key financial ratios have to be determined and have to be updated continuously.
Management needs to understand the components and meaning of financial metrics and statements.

4. Distribution Systems: Products have to be provided to the required quality and quantity and when and
where needed.

5. Marketing: Information about the company and products has to be provided for informational and
motivational purposes.

6. Products and Services: must be aligned with customers’ expectations. Customer expectations need to be
understood and monitored continuously and products and services to be adjusted.

7. Pricing Strategies: There needs to be awareness about the costs of products and services and the market
environment for the offer. That includes an objective evaluation of the characteristics and quality of
products and services to come up with the best price and selling strategy.
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 8. People: Human resources are among the most valuable success factors. It is important to have the people,
who have the best possible skills and mindset for the tasks in the specific company. Alignment with the
organization’s values is critical and the mission has to be understood.

9. Personal Development

10. Sales

11. Technology

How can it be ensured to effectively manage Performance Drivers?

Effective performance management needs:

1. Executive Support
2. Embedment into organization
3. Integration into other processes
4. Adequate reporting (on goals and progress)
5. Broad involvement in goal setting (planning)
6. Integrated feedback cycle (to understand and consider all relevant aspects)

A Management Control System is an integrated technique for collecting and using information to evaluate
performance and motivate employee behaviour.

It involves setting goals, planning and execution, monitoring and reporting, feedback and learning, and evaluation
and reward.

The process of MCS is cyclical and involves the following five steps:

1. Set Goals, Measures, and Targets: Set goals and targets that align with the organization’s objectives.

2. Plan and Execute: planning and executing the activities required to achieve the set goals.

3. Monitor, and Report: monitoring and reporting the progress of the activities.

4. Feedback and Learning: providing feedback to employees and learning from the results.

5. Evaluate, Reward: evaluating the performance of employees and rewarding them based on their
performance.

The MCS process is an effective tool for planning and performance management as it helps organizations align their
goals with their objectives and evaluate the performance of their employees

Management Control Systems consist of formal and informal control systems:

1. Formal:

o include explicit rules, procedures, performance measures and incentive plans that guide the
behaviour of its managers and other employees.

o Typical components of Formal Management Control Systems:

o Management Accounting Systems (provide information about the organization’s costs, revenues,
and income),

o Human Resources Systems (provide information about the recruiting and training of employees,
absenteeism, and accidents),

o Quality Systems (provide information about yields, defective products, and late deliveries to
customers).

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 2. Informal, includes:

o shared values, loyalties, and mutual commitments among members of the organization

o the company’s culture

o unwritten norms about acceptable behaviour for managers and other employees.

Autonomy: Degree of freedom to make decisions.

Subunit: any part of an organization. It may be a large

division or a small group.

Decentralization: Organizational structure that gives managers at lower levels the freedom to make decisions.

1. Benefits:

o Creates greater responsiveness to the needs of a subunit’s customers, suppliers, and employees.

o Leads to gains from faster decision-making by subunit managers.

o Sharpens the focus of subunit managers and broadens the reach of top management.

o Assists management development and learning.

2. Costs:

o Leads to suboptimal decision-making, which arises when a decision’s benefit to one subunit is more
than offset by the costs or loss of benefits to the organization as a whole.

▪ Also called incongruent decision-making or dysfunctional decision-making.

o Leads to unhealthy competition.

o Results in duplication of output.

o Results in duplication of activities.

The decision to decentralize involves a careful consideration of the benefits and costs, often on a function-by-
function basis. While decentralization can enhance responsiveness and decision-making speed, it requires a
strategic approach to mitigate potential drawbacks and ensure alignment with overall organizational objectives. The
examples provided illustrate the nuanced nature of decentralization, where certain decisions are more effectively
made at specific levels within the organizational hierarchy.

Examples:

- decisions made often at the decentralized level are related to product mix and advertising because allow
for flexibility and adaptation to local market conditions.

- decisions related to long-term financing are made often at the centralized level, to ensure consistency and
optimization across subunits.

- income tax strategies are regularly made centrally to optimize financial outcomes by offsetting income in
one subunit with losses in others, ensuring a holistic approach to tax management.
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Decentralization in Multinational Companies:

Companies that operate in multiple countries are often decentralized because centralizing the control of their
subunits around the world can be physically and practically impossible.

- Decentralization enables managers in different countries to:

o make decisions that exploit their knowledge of local business and political conditions

o deal with uncertainties in their specific environment

- Biggest drawback to international decentralization:

o loss or lack of control and the resulting risks

Multinational corporations that implement decentralized decision-making usually design their management control
systems to measure and monitor the performance of subunits (or divisions).

Responsibility centre: segment or subunit of the organization whose manager is accountable for a specified set of
activities.

To measure the performance of subunits in centralized or decentralized companies, the management control
system uses one or a mix of the four types of responsibility centres:

1. Cost center

2. Profit center

3. Revenue center

4. Investment center

Balanced Scorecard (BSC): (> pp. 10-11 for more)

It’s a strategic planning and management system used to align business activities with the vision and strategy of the
organization, improve internal and external communications, and monitor organizational performance against
strategic goals.

The Balanced Scorecard model is used to track various aspects of company performance. It consists of four
perspectives: Financials, Customer, Internal Business Process, and Learning and Growth. Each perspective has its
objectives, measures, targets, and initiatives.

Key steps to a Balanced Scorecard:

1. Determine the company mission, vision, and strategic objectives

2. Analyse and understand stakeholder’s expectations

3. Identify critical success factors

4. Translate strategic objectives into goals

5. Set up key performance indicators to measure against the objectives

6. Determine the values for the objectives

7. Translate the objectives into operational activities

* The BSC theory was developed several times over the years. Not everything was proposed at the beginning for
the original authors but there were contributions from other people, and when those contributions were finally
consolidated in the BSC it was considered a new generation

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Finance Transformation, the future of planning:

Finance organizations have, on average, decreased their cost by 29% over the past ten years. The most efficient
cohort of finance departments (“finance leaders”) achieved similar cost improvement to the level shown by average
performers.

Finance leaders spent 19% more time on value-added activities (such as financial planning and analysis, strategic
planning, treasury, operational-risk management, and policy setting) than a typical finance department did. This
prioritization enables finance leaders to build deeper capabilities in value-additive areas, creating a positive
feedback loop that could result in even greater advantages in the future.

The future of planning is expected to be more agile, and data driven. McKinsey suggests that companies should
focus on developing a more flexible planning process that can adapt to changing business conditions. This includes
using advanced analytics and machine learning to generate more accurate forecasts, as well as leveraging scenario
planning to prepare for a range of possible outcomes.

The future of planning:

- Provide enhanced real-time insights

- Minimize errors

- Accelerate workflows

- Improve the quality of decisions

Finance transformation: the process of reimagining the finance function to create a more effective and efficient
organization that can better support the business. It involves a fundamental shift in the way finance operates, with
a focus on automation, data analytics, and other technologies that can help finance teams work more efficiently
and effectively.

- Finance transformation encompasses the evolution of the corporate finance function to maximize business
profitability.

Finance transformation includes:

1. Beyond transactional activities: use computing power, analytical talents, value-adding activities, etc.

o Shift focus from low-end to high-end automation: e.g., application of “second wave” automation
technologies (like AI for budget allocations)

o Focus staff time on value-adding activities: e.g., rather than performing reactive analysis of
explaining past performance, focus the majority of time and effort on assessing future courses of
action

o Ensure staff in critical roles has the necessary skills, experience, knowledge, mindset, and authority,
even if it incurs higher costs

o Align with the wider enterprise on AI machine-learning technologies

2. Effective and efficient use of data: consistent master data management strategy, optimising data volumes,
etc.

o Prioritize data quality and consistency: e.g., setting high enterprise-wide standards on data
structure, entry, aggregation, storage, and protection.

o Ensure consistent data standards across all units of the organization.

o Invest in agile, tech-enabled data backbone

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 ▪ implement a layered data structure, with a common data layer that is flexible enough to
accommodate changing business needs while preserving a single source of truth

o Allocate capacity to clean and validate data

o Deploy technology for best-quality data (machine-learning algorithms can cross-reference and
validate data)

3. High-quality decision-making: combining complex data by applying enhanced analytics

o Clearer insights: focus on the analysis and reporting of underlying factors and context of shortfalls
against expected outcomes.

o Faster insights

o Richer insights: Based on robust data sets from a wide range of sources and contextualized
projections.

4. Use new capabilities: reduce effort on standard operations, while increasing capabilities by using
technologies, and new data management practices.

o Organization based on a network of teams (instead of traditional hierarchies): e.g., a shared pool of
analysts, being assigned to tasks in accordance with business priorities.

o Mobilization of temporary teams to deliver deeper insights into business issues

o Embedded digital skills across the organization: e.g., using analytics software, programming of
algorithms, …

o Implementation of a rigorous, transparent competency matrix

o Provision of incentives for skill development

PLANNING AND BUDGETING:

Balanced Scorecard (BSC):

It’s a strategic planning and management system used to align business activities with the vision and strategy of the
organization, improve internal and external communications, and monitor organizational performance against
strategic goals.

➢ Definition from slides: A Balanced Scorecard (BSC) is a business framework used for managing and tracking an
organization‘s strategy to make sure the company's efforts are aligned with overall strategy and vision.

BSC supports businesses by:

1. Communicating what they are trying to accomplish

2. Aligning the day-to-day work that everyone is doing with strategy
3. Prioritizing projects, products, and services
4. Measuring and monitoring progress towards strategic targets

Dimensions of BSC:

The Balanced Scorecard model is used to track various aspects of company performance. It consists of four
perspectives (dimensions): Financial, Customer, Internal Business Process, and Learning and Growth. Each
perspective has its objectives, measures, targets, and initiatives.

- Financial: Often renamed Stewardship or other more appropriate name in the public sector, this perspective
views organizational financial performance and the (effective) use of financial resources.

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 To succeed financially, how should we appear to our shareholders?:

o Broaden revenue mix

o Improve operating efficiency

o Improve enterprise financial health

- Customer/Stakeholder: this perspective views organizational performance from the point of view of the
customer or other key stakeholders that the organisation is designed to serve.

To achieve our vision, how should we appear to our customers?

o Service Excellence

o Trusted business partner

- Internal Business Process: views organizational performance through the lenses of the quality and
efficiency related to products or services or other key business processes.

To satisfy our shareholders and customers, what business processes must be excel at?

o Develop new products

o Understanding customer segments

o Reduce cycle time

o Provide rapid response

o Cross-sell the product line

o Shift to the appropriate channel

- Organizational Capacity (originally called Learning and Growth): views organizational performance
through the lenses of human capital, infrastructure, technology, culture, and other capacities that are key
to breakthrough performance

To achieve our vision, how will we sustain our ability to change and improve?

o Hire key technical talent

o Implement cross-training

o Provide access to transaction information

o Align personal goals

o Increase employee productivity

Key steps to a Balanced Scorecard:

2. Determine the company mission, vision, and strategic objectives

3. Analyse and understand stakeholder’s expectations

4. Identify critical success factors

5. Translate strategic objectives into goals

6. Set up key performance indicators to measure against the objectives

7. Determine the values for the objectives

8. Translate the objectives into operational activities.

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Strategy Map: diagram showing an organization‘s primary strategic objectives and the dependencies in accordance
with the dimensions of the BSC.

Looking at the strategy map everybody in an organization can understand the overall strategy:

- Understand where they fit in.

- See how their actions affect the company’s strategic objectives.

The strategy map reflects the cause-and-effect chain among the strategic objectives

The strategy map shows how the organization is performing (each of the bubbles show the actual performance vs.
planned performance)

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Strategy Map: objectives, KPIs, targets, initiatives:

The BSC is a balanced system, which is distributed into four perspectives: financial, customer, internal business
processes, and learning and growth. Each of the perspectives addresses key issues to enable the organization to
achieve its vision of the future, comprising strategic goals and indicators linked by cause-and-effect relationships.
This is known as a strategy map. After the objectives and related indicators are defined, goals aimed at the desired
growth must be defined, showing the size of the organization's challenges. Henceforth, strategic initiatives that
contribute to the achievement of the goals must be identified.

A strategy map is a simple graphic that shows a logical, cause-and-effect connection between strategic objectives
(shown as ovals on the map). It is one of the most powerful elements in the balanced scorecard methodology, as it
is used to quickly communicate how value is created by the organization. The strategy map is a visual tool that helps
with the organization’s strategy in different stages: strategy discussion, description, execution, and learning loop. By
following the path of the arrows, you can see how the objectives in the lower perspectives drive the success of the
higher ones. These causal relationships are central to the idea of strategic planning and management with a
balanced scorecard.

Once the strategy map is created, goals aimed at the desired growth must be defined, showing the size of the
organization's challenges. Henceforth, strategic initiatives that contribute to the achievement of the goals must be
identified. The strategic initiatives should be aligned with the organization’s vision and mission and should be
designed to address the key issues identified in each of the four perspectives. The strategic initiatives should be
prioritized based on their potential impact on the organization’s performance and the resources required to
implement them.

➢ 2^ Generation BSCs combine dimensions, objectives, dependencies, KPIs, targets and initiatives.

Destination Statement: A destination statement describes what strategic success is and shows where an
organisation wishes to be in a specific time horizon.

• Articulates the vision of the organisation in 3^ Generation BSCs.

• Is a statement of intention only and does not indicate how one needs to achieve the destination.
• Includes descriptive statements about what the organisation wants, based on things that are in its control.

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 For Example:

o reduce our debt/equity gearing ratio to x%,

o reach revenue targets of y million dollars,

o own 6 major brands at any given time,

o have a single manufacturing plant,

o own distribution outlets in 10 cities,

o become the employer of choice.

• Destination statements are used at each level to link the high-level strategic objectives of the organisation.

Vision: An organization‘s vision describes its direction -> WHAT is intended to be achieved.

• Vision statements are inspirational statements of the optimal desired future of an organization.

Examples:

o “To make people happy” (Disney)

o “To create a better everyday life for […] people.” (Ikea)

o “To be the most creative organisation in the world.” (BBC)

Mission: An organization‘s mission describes its purpose -> WHY does an organization exist.

• Typical elements of mission statements:

o Key market (target audience)

o Contribution (range of products and services)

o Distinction (what makes the offerings unique)

Examples:

o “Be one of the world’s leading producers and providers of entertainment and information” (Disney)

o “Offer a Wide Range of Well-designed, Functional Home Furnishings” (Ikea)

o “To enrich people’s lives with programmes and services that inform, educate and entertain.” (BBC)

The Link of Budgets with Strategic Plans:

Layers of Planning (> p.3): stages or levels of planning within an organization, each with distinct timeframes, focuses,
and roles. These layers are crucial for aligning individual and team goals with the overall strategic objectives of the
organization and ensuring that all levels of the organization work cohesively to achieve success.

The steps from mission to budgets:

1. Establish mission: Confirm the essence of the business; indicate quantifiable goals to achieve

2. Undertake position analysis: Identify the placement of the business

3. Identify and assess strategic options: how to move from 2. to 1.

4. Select strategic options: The best course of action to be realized

5. Operationalize selected strategic option by developing plans for the future: create budgets (typically one
year)

6. Perform, review and control: Compare actuals against plans

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Planning and Control Process:

Select strategic options and determine strategic plans:

Strategic Plan:

• Translates the desired vision and mission into broadly defined objectives and a sequence of steps to achieve
them.

• Establishes the basic organisational framework for central corporate decisions. It defines objectives and
measures and determines important elements in all major areas.

• Secure and develop existing value potentials.

• Identify and create new success potentials.

• Objective: to support the management in safeguarding the company's existence and increasing its value on
a long-term basis.

- Typically has a timeframe: Mid-term to long-term (3-10 years)

- Includes at least:

o definition of the markets the company will serve

o determination of products and services to be offered
o required input factors and sources
o capital requirements
o personnel requirements

Strategic plan vs. long-term plan:

Strategic planning: begins with the desired end (mission) and works backwards to the current status.

Long-term planning: begins with the current status and lays down a path to meet estimated future needs.

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Create operating plans and budgets:

Operating Plan:

• translates the Strategic Plan into tactical goals and describes the key activities and targets an organization
will undertake during a period of time.

• Objective: to promote the active and systematic examination of objectives and measures in the
organisational units.

• Creates an orientation framework for activities and decisions in the short and medium run based on
strategic objectives.

• Targets and measures are determined, resources are allocated and, both for the overall company and its
individual units, financial parameters are quantified.

- Typically covers a period of 1 year

- Includes:
o What: tasks to be undertaken
o Who: persons / organizational units responsible
o When: timeline for tasks and activities
o How much: amount of resources required to perform
tasks (financial resources are part of the budget)

Budget: expression of the operating plan in financial terms. It is usually

prepared at:

- various organizational levels (e.g. departmental budget, divisional budget, country budget
- various functions (e.g. sales budget, production budget
- various perspectives (e.g., cash budget, capital budget, income budget

Budgeting: different from budget, it’s the process of creating, approving, implementing, monitoring, analysing and
controlling of budgets.

Time horizon: Usually prepared for a period of 1 year.

- Long enough time for the budget preparation exercise to be worthwhile

o Preparing budgets is time-consuming and complex (costly in itself)

o Using economies of scale, considering the principle that formulating an annual budget is not twice
as time-consuming as preparing a semi-annual budget.
- Short enough into the future to be in the position to create meaningful plans
- Matches the 1-year accounting period -> consistency with external reporting and forecasting

Incremental budgeting: Zero bade budgeting:

• Based on past experiences and values (mostly • Values are planned from scratch
prior year) • Increased accuracy and currentness
• Provides plausible values (easy to justify) • Disadvantages:
• Risks: o Time consuming
o Changed assumptions and o Effort to check consistency of data
parameters are easily overlooked
o Specious

In summary, incremental budgeting builds on existing budgets, offering ease of justification but risking oversight of
changes. On the other hand, zero-based budgeting starts fresh, providing increased accuracy but demanding more
time and effort for a comprehensive review and consistency check. The choice between these approaches depends
on the organization's priorities, the need for accuracy, and the available resources for the budgeting process.
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Interrelationship of Specific Budgets: ensures that resources are allocated efficiently, costs are managed
effectively, and organizational goals are met.

Planning process example:

The process is structured to span 8 weeks and involves several phases, including high-level planning, detailed
planning, consolidation, and approval & publishing. Each phase includes specific tasks such as sales planning,
variable sales expenses planning, variable costs planning, fixed costs planning, and investment/depreciation
planning to ensure comprehensive performance management. The timeline shows when the different phases of the
planning process will be implemented.

17
Advantages: Bottom-up vs. top down

Bottom-Up Planning: Top-Down Planning :

- Process initiated by those closer to the detail - Fast

- Team-driven process - Focus on critical tasks
- High level of team motivation - Cohesion
- Higher accuracy - Long-term vision considered
- Flexibility - Targets set at an early stage

Forecast: provides information early on deviations and variances expected in the future, to develop focused
measures to close gaps in targets.

[fornisce informazioni tempestive sulle deviazioni e sugli scostamenti previsti in futuro, per sviluppare misure mirate
a colmare le lacune negli obiettivi]

➢ In the forecast, the future economic development and the effects on targets, plans and budgets are estimated,
always taking into consideration countermeasures and resource adaptations.

➢ Via a forecast, it is thus possible to utilize the improved state of knowledge during the year for controlling the
company without changing the original plan.

Budget: Financial plan expressed in quantitative Forecast: estimation of future trends and outcomes,
terms in advance for the forthcoming period. based on the past and present data.

- Financial expression of a business plan or - Prediction of upcoming events or trends

target
- Typically created once a year
- Includes all details and aspects
- Quantified expectations for what a business
wants to achieve
based on present business conditions
- Updated regularly (monthly, quarterly)
- Usually limited to selected aspects or items
(sales, products etc.)
- Estimate of what will actually be achieved

In summary, a budget is a forward-looking financial plan for a specific period, typically created annually and covering
all aspects of the business. In contrast, a forecast is an ongoing estimation of future trends, regularly updated based
on current data and often focused on specific aspects or items. Both tools play crucial roles in financial planning and
management, with budgets providing a structured plan and forecasts offering adaptability and insights into evolving
business conditions.

Year-End Forecast: Rolling Forecast:

When: For the ongoing business year. When: Continuous and ongoing.

What it Covers: Provides an outlook for the remaining
months of the current year.
Characteristics: The forecasting focus narrows down
(si restringe) continuously as time passes. It's
specifically geared (orientato) toward short-term
planning and adapting strategies based on the latest
information for the remainder of the year.
What it Covers: Maintains a fixed number of outlook
periods, for example, the next 12 to 18 months or 4 to
6 quarters.
Characteristics: Dynamic and regularly updated to
reflect changing circumstances and market
conditions. Provides a continuous and forward-
looking perspective, allowing organizations to adapt
to uncertainties and changes as they occur.

In summary, the Year-End Forecast focuses on the remaining months of the current business year and is continually
refined as the year progresses. In contrast, the Rolling Forecast maintains a fixed number of outlook periods,
allowing for ongoing updates and adjustments to reflect changing circumstances and market conditions.

18
The evolution of budgeting:

Traditional Budgeting > Better Budgeting > Advanced Budgeting > Beyond Budgeting

Complexity Agility

Better Budgeting: aims to ensure market orientation and reduction of complexity in the budgeting process.

➢ Reduce time and effort

➢ Increase flexibility

Characteristics:

o Shortened budgeting process

o Focusing on processes and objects crucial for the organization‘s performance

▪ Reduction of the number of specific budgets

▪ Reduction of level of detail

o Zero base budgeting rather than incremental budgeting

o Flexible (benchmark/market-oriented) objectives rather than fixed objectives

o Linking budgets with the strategic plan by applying instruments like Balanced Scorecards, etc

o Decentralization of budgeting processes (based on top-down guidelines)

o Technical integration

Advanced Budgeting: aims to further increase the quality of budgeting (in terms of processes and outcome),
efficiency, and effectiveness and to reduce effort.

➢ Increase the quality of the outcome

➢ Reduce planning resources

Beyond Budgeting: flexible planning and controlling approach without traditional “budgets“ by embedding
budgeting into management and leadership processes.

➢ Adaptive market-orientation
➢ Flexible management concept

Characteristics:

o Market orientation → continuous alignment with customer and market requirements

o Processes and “prices“ coordinated by internal markets (“internal prices“)

▪ advantage: internal competition

▪ disadvantage: economies of scope have limited effect

o Setting of relative targets (related to markets)

▪ use of external benchmarks to avoid to be stuck on average

o Zero base budgeting rather than incremental budgeting

o Applying the 12 principles of leadership and performance management

o Decentralized decision making

o Typical instruments: balanced scorecard, value-based management, rolling forecasts, etc.

19
Beyond Budgeting Principles:

1. Values: Bind people to a common cause; not a central plan

Governance 2. Governance: Govern through shared values and sound judgement; not detailed
and rules and regulations
Leadership Principles

transparency 3. Transparency: Make information open and transparent; don't restrict and control it
4. Teams: Organize around a seamless network of accountable teams; not centralized
functions

Accountable 5. Trust: Trust teams to regulate their performance; don't micro-manage them
teams 6. Accountability: Base accountability on holistic criteria and peer reviews; not on
hierarchical relationships

Goals and 7. Goals: Set ambitious medium-term goals, not short-term fixed targets
Performance Management

rewards 8. Rewards: Base rewards on relative performance; not on meeting fixed targets

9. Planning: Make planning a continuous and inclusive process; not a top-down annual
Planning and event
controls 10. Coordination: Coordinate interactions dynamically; not through annual budgets
11. Resources: Make resources available just in time; not just in case
12. Controls: Base controls on fast, frequent feedback; not budget variance

Enhancements in Planning

Better Budgeting Advanced Budgeting Beyond Budgeting

Goal Optimization of Planning Optimization of the planning Optimization of the

Elements system management system

Key Focus Mitigation of weaknesses Application of new ▪ Elimination of fixed budgets

in planning instruments to increase the ▪ Implementation of an
quality of planning employee-focused
management approach
Planning ▪ Reduction of complexity ▪ Reduction of complexity ▪ Continuous planning
▪ Increased consideration ▪ Increased consideration of ▪ Increased consideration of
of strategic aspects in nonmonetary planning nonmonetary planning
operating planning ▪ Integration of strategic and ▪ Integration of strategic and
operating planning operating planning
▪ Decentralization
Motivation Market focused goals Self-adjusting market ▪ Self-adjusting benchmark
focused goals focused goals
Control Controlled by Controlled by management Mainly self-controlled
management with elements of self-
monitoring
Coordination Plans are centrally Partially decentralized Coordination of plans based on
coordinated coordination of plans market principles and
supported by central units
Transformation Evolutionary Evolutionary Revolutionary
20
BUDGETING PROCESS & SPECIFIC PLANS:

Budget dimensions: Interrelationship of specific budgets (p.18):

Income statement: calculation of net income from total sales. Provides insights into a company’s operations,
efficiency, and performance relative to industry peers.

Total sales
- Cost of Sales
= Gross profit
- Selling, general, and administrative
expenses Operating expenses
- Research and development Simplified income statement for
- Depreciation and amortization operational planning:
Revenue
= Operating income - Cost of goods sold
+ Other income - Operating Expenses
Other expenses = Profit / Loss
= Earnings before interest and taxes (EBIT) /other income
+ Interest income (expense)
= Pretax income
- Taxes

= Net Income

• Sales Revenues and the majority of Operating Expenses are usually planned by operating units (country
organizations, divisions, etc.)
• most of the other components are often planned by specialized (central/global/regional) teams (tax
department, treasury, …)

21
Deriving cash budget from income statement: Example of budgeted income statement from P&L Budget

• In December of the prior year Revenue was $ 240,000.

• Customers have one month’s credit (1 month to pay -> i.e. cash for March
sales will be received in April).

• Until February inventory is replaced in the same month when goods are sold
(every time you sell an item, you need to buy a new one to replace it on
inventory). Assumption: stable prices for replenished (riforniti) goods =
inventory purchases are identical with cost of goods sold (COGS).

• Inventory to be sold in March will not be totally replaced, that saves $

20,000. The lower level of inventory is kept indefinitely.

• At the start of January, inventory on stock amounts to $ 120,000.

• Purchases of inventory are made on one month’s credit -> whenever you buy new items to fill the inventory, you
get one month to pay for them.

• In December of the prior year $ 120,000 of inventory was purchased.

• G&A expenses (general & administrative) are paid in March and June.

• Marketing expenses and other expenses ($ 40 +$ 8) are paid in the month concerned.

• It is planned to replace a truck in March. An existing truck will be sold for $ 16,000, while the cost of the new
truck is expected to be $ 60,000.

• Cash at the beginning of January is $ 48,000 = (208 +20 – 120 – 40 – 8 – 12).

Deriving cash budget from income budget: Example of budgeted income statement from P&L (Profit & Loss)
Budget

22
• It will be continued to allow a one-month credit to all customers.

• It is expected that that inventories will not only be replaced when used for sales, but inventory levels will be
increased from the June 30th level by $ 4,000 each month, until and including September.

• From October inventory levels will be decreased by $ 4,000 each month.

• Marketing expenses and other expenses will continue to be paid in the month concerned.

• G&A expenses are paid in September and December.

• Inventory purchases (which are made on one month credit until the June payment), will be made on two month’s
credit starting with the purchases made in June.

• It is intended to pay off some of the existing borrowings in December. The amount of borrowings to be paid off
is as such that a cash balance of $ 20,000 remains at then end of the year.

23
•

• Opening and Closing Balances are the amounts that are expected to be owed by debtors at the beginning and
the end of a month resp.

• Sales Revenue corresponds with sales from Income Budget.

• Cash Receipts correspond with Cash Budget.

24
Budgeting Process:

It is unique for an organization and is tailored to the specifics of the business and the organization. However the
following elements have to be considered in any budgeting process:

Process Responsibility, Identification of Key (or Limiting) Factor(s), Communication of Guidelines, Specifications
and Targets, Preparation of Draft Budgets, Review and Coordination of Budgets, Preparation of Master Budgets,
Communication to Stakeholders, Performance Monitoring.

1. Process Responsibility

• Overall coordination and supervision (typical: “budget committee”, senior executive, assigned

• manager/team)

• Budgeting responsibility for organizational units (senior representatives of functional areas and

• business units)

• Execution of the budgeting process

- functionally

- technically

(larger organizations: have often permanent organizational units assigned to planning and forecasting
processes (sometimes combined with reporting processes))

(smaller organizations: budgeting is usually assigned to specific individuals/teams withtechnical and/or

functional/finance knowledge)

25
 2. Identification of Key (or Limiting) Factor(s)

• Each business is facing limiting or key factors, which are a restriction to unlimited success and
achievement of objectives to the maximum extent.

• To plan for these factors first supports the optimized focus on success targets and alignment of all other
factors to these factors.

• Elements of the plans for key/limiting factors can be included in the budgeting guidelines for all other
areas.

3. Communication of Guidelines, Specifications and Targets

• Individuals and teams to be involved in the budgeting process need to be well aware of
strategic/operational targets, planning parameters, process requirements (technically, functionally),
prior performance data, available market information, and any other relevant information

• Overall coordinators (e.g., “budget committee”) is responsible to ensure all necessary information is
available to individuals/teams performing budgeting.

4. Preparation of Draft Budgets for (Key (Limiting) Factor(s) and for all other areas

• Step 1: Preparation of Budget for Key/Limiting Factor(s)the limiting/key factor(s) determine the overall
capability of the business often sales budgets represent the limiting/key factor(s) and are the starting
point in the budgeting process.

• Step 2: Preparation of Budgets for all other areasusually starting with top-down approach, followed by
bottom-up/top-down cycles

5. Review and Coordination and Preparation of Master Budgets

• The various sub-budgets must be reviewed by the teams/individuals responsible for the budgeting
process to ensure consistency (sub-budgets need to complement one another) and alignment with
guidelines.

• Review by the “budget committee” and or executives.

• Preparation of master budget.

➢ Go again to pp. 19-20

ANALYSIS & VALUE DRIVERS:

26
 Dealing with deviations:

Variances: differences between actual performance and plans (budgets, operating plans, forecasts, strategic plans).
Can be from:

• Controlled factors, driven by assumptions (e.g. poorly planned budgets)

• Uncontrolled factors (mostly external causes, such as changes in the economic landscape)

Budget Variances: differences between actual profit and budgeted profit

Budgeted Profit – Adverse Variances + Favourable Variances = Actual Profit

Fixed Budgets: consider only one (fixed) level in sales units and its effect on revenue and cost.

Flexible Budgets: consider various levels in sales units and its effects on revenue and cost; it’s a more sensitive
analysis.

• Adjust with changes in volume or activity

• To be used during the planning phase to understand the impact of different sales levels.
• Analyzing deviations of actuals to plans is supported by flexible budgets.

Budget variances by applying flexed budgets:

Budgeted Profit ± Adjustment for variance in Sales Volume = Flexed Budget or Profit *

Flexed Budget or Profit – Adverse Variances + Favourable Variances = Actual Profit

* Flexing the budget: adjusting the budget in accordance with different volumes of output (variance in sales
volume). A flexed budget gives us more details, showing us something aout labour efficiency.

The concept of flexing budgets is to adjust the budget to reflect the actual sales volume. This allows for a more
accurate comparison between the budgeted and actual figures, and helps to identify the reasons for any variances.

If we sell less or more units than originally budgeted (planned), this will result in less or more actual profit than
originally budgeted. Having a different profit than planned will not allow us to make informed decisions about the
business’s performance and future direction.

➢ By flexing the budget, we can compare the actual profit with the profit that should have been expected from the
actual level of production and sales. This process allows for more realistic variance analysis at the end of the financial
period in question.

Steps:

1. O.B. Sales Revenue / O.B. Units = Price One Unit

2. Actual Units x Price One Unit = F.B. Sales Revenue
3. O.B. Material / O.B. Units = Price One Material Unit
4. Actual Units x Price One Material Unit = F.B. Material

27
 5. O.B. Labour / O.B. Units = Price One Labour Unit
6. Actual Units x Price One Labour Unit = F.B. Labour
7. O.B. Fixed Expenses = F.B. Fixed Expenses -> they don’t change because they are fixed
➢ Now, we just compare the flexed budget with our actual results to analyse the variances.
a. If actual sales > flexed budget: favourable variance (good)
b. If actual costs > flexed budget: adverse variance (bad). It’s indicated with a minus sign.

Example: Determine the Flexed Budget

Original Budget Flexed Budget Actuals

Sales Revenues [in €] 500,000 450,000 460,000
[5,000 units] [4,500 x (500,000 / 5,000)] [4,500 units]

Material [in €] - 200,000 - 180,000 - 184,500

[40 kg x €1/kg] [200, 000 kg] [4,500 x (200,000 / 5,000)] [185,000 kg]
[material for total sales: 180 000 kg]
Labour [in €] - 100,000 - 90,000 - 87,500
[€8/hr] [4,500 x (100,000 / 5,000)] [10,750 hrs]
[labour for total sales: 11 250 hrs]
Fixed Expenses [in €] - 100,000 - 100,000 - 103,500
Operating Profit [in €] 100,000 80,000 85,500

Variance Analysis:

Initially, we experience a positive outcome as actual sales are higher than the flexed sales (favorable variance). This
could result from better-than-expected market conditions, effective sales strategies, or other factors contributing to
increased revenue.

Subsequently, an adverse variance occurs, indicating that actual costs were higher than the flexed costs. This could
signal challenges such as increased expenses, inefficient cost management, or unexpected costs that were not
accounted for in the budget.

Types of Variances: Determine Price (or Cost), Volume and Mixed Variance for Sales, Material and Labour

Sales Price/Cost Variance (PVar) =

Method 1: (Actual Price/Cost x Unit – Budgeted Price/Cost x Unit) x Actual Volume

- E.g.: (102.22 – 100.00) x 4500 = 9.990

Method 2: (Actual Price/Cost x Unit – Budgeted Price/Cost x Unit) x Budgeted Volume

- E.g.: (102.22 – 100.00) x 5000 = 11.100 Price/Cost x Unit = Sales

Revenue / Volume in
With Flexed Budget: Actual Sales – Flexed Sales
Units
- E.g.: 460 000 – 450 000 = 10 000

Sales Volume Variance (VVar) = Sales Caused Variances:

Method 1: (Actual Volume – Budgeted Volume) x Actual Price/Cost x Unit Alternatively Sales Volume
Variance is understood as the
- E.g.: (4500 – 5000) x 102.22 = – 51.110 impact of price differences on
Method 2: (Actual Volume – Budgeted Volume) x Budgeted Price/Cost x Unit profit.

- E.g.: (4500 – 5000) x 100.00 = – 50.000 Sales Volume Variance (VVar) = F.B.
Operating Profit - O.B. Operating
With Flexed Budget: Flexed Sales – Budgeted Sales Profit = 80,000 – 100,000 = -
20,000
- E.g.: 450 000 – 500 000) = – 50 000

28
Sales Mixed Variance (MVar):

(Actual Volume – Budgeted Volume) x (Actual Price/Cost x Unit – Budgeted Price/Cost x Unit)

- E.g.: (4500 – 5000) x (102.22 – 100.00) = – 1.110

Total Variance = Determine total variance for all Profit & Loss lines

Method 1: Pvar + Vvar – Mvar

- E.g.: 9.990 – 51.110 + 1.110 = 40.000

Method 2: Pvar + Vvar + Mvar

- E.g.: 11.100 – 50.000 + 1.110 = 37.79

Price/Cost x Unit =
Materials Cost Variance (PVar) =
Material / Volume in kg
Method 1: (Actual Price/Cost x Unit – Budgeted Price/Cost x Unit) x Actual Volume

- E.g.: (0.9973 – 1.000) x 185 000 = – 499.5 (Favourable)

Method 2: (Actual Price/Cost x Unit – Budgeted Price/Cost x Unit) x Budgeted Volume

- E.g.: (0.9973 – 1.000) x 200 000 = – 540

With Flexed Budget 1: (Actual Price/Cost x Unit – Flexed Price/Cost x Unit) x Actual Volume

- E.g.: (0.9973 – 1.000) x 185 000 = – 499.5

With Flexed Budget 2: (Actual Price/Cost x Unit – Flexed Price/Cost x Unit) x Flexed Volume

- E.g.: (0.9973 – 1.000) x 180 000 = – 486

Materials Volume Variance (VVar) =

Method 1: (Actual Volume – Budgeted Volume) x Actual Price/Cost x Unit

- E.g.: (185 000 – 200 000) x 0.9973 = – 14 960 (Positive Impact)

Method 2: (Actual Volume – Budgeted Volume) x Budgeted Price/Cost x Unit

- E.g.: (185 000 – 200 000) x 1.000 = – 15 000

With Flexed Budget 1: (Actual Volume – Flexed Volume) x Actual Price/Cost x Unit

- E.g.: (185 000 – 180 000) x 0.9973 = 4 986,5

With Flexed Budget 2: (Actual Volume – Flexed Volume) x Flexed Price/Cost x Unit

- E.g.: (185 000 – 180 000) x 1.000 = 5 000

Materials Mixed Variance (MVar):

(Actual Volume – Budgeted Volume) x (Actual Price/Cost x Unit – Budgeted Price/Cost x Unit)

- E.g.: (185 000 – 200 000) x (0.9973 – 1.000) = + 40

With Flexed Budget: (Actual Volume – Flexed Volume) x (Actual Price/Cost x Unit – Flexed Price/Cost x Unit)

- E.g.: (185 000 – 180 000) x (0.9973 – 1.000) = – 14

29
Total Variance =

Method 1: Pvar + Vvar – Mvar

- E.g.: – 499.5 – 14 960 + 40 = – 15.500

Method 2: Pvar + Vvar + Mvar

- E.g.: – 540 – 15 000 + 40 = – 15.500

With Flexed Budget 1: Pvar + Vvar – Mvar

- E.g.: – 499.5 + 4 986,5 + 14 = 4 501

With Flexed Budget 2: Pvar + Vvar + Mvar

- E.g.: – 486 + 5 000 - 14 = 4 500

Price/Cost x Hour = Labour / Volume in hrs

Labour Cost Variance (PVar) =

Method 1: (Actual Price/Cost x Hour – Budgeted Price/Cost x Hour) x Actual Volume

- E.g.: (8.14 – 8.00) x 10 750 = 1 500

Method 2: (Actual Price/Cost x Hour – Budgeted Price/Cost x Hour) x Budgeted Volume

- E.g.: (8.14 – 8.00) x 12 500 = 1 744

Determine Labour
With Flexed Budget 1: (Actual Price/Cost x Hour – Flexed Price/Cost x Hour) x Actual Volume
Variances for budgeted
- E.g.: (8.14 – 8.00) x 10 750 = 1 500 labour hours for actual
output (comparison
With Flexed Budget 2: (Actual Price/Cost x Hour – Flexed Price/Cost x Hour) x Flexed Volume
with Flexed Budget)
- E.g.: (8.14 – 8.00) x 11 250 = 1 570

Labour Volume Variance (VVar) =

Method 1: (Actual Volume – Budgeted Volume) x Actual Price/Cost x Hour Budgeted Volume =
Labour / Price x Hour
- E.g.: (10 750 – 12 500) x 8.14 = – 14 244

Method 2: (Actual Volume – Budgeted Volume) x Budgeted Price/Cost x Hour

- E.g.: (10 750 – 12 500) x 8.00 = – 14 000

With Flexed Budget 1: Labour Efficiency Variance = (Actual Volume – Flexed Volume) x Actual Price/Cost x Hour

- E.g.: (10 750 – 11 250) x 8.14 = – 4 070

With Flexed Budget 2: Labour Efficiency Variance = (Actual Volume – Flexed Volume) x Flexed Price/Cost x Hour

- E.g.: (10 750 – 11 250) x 8.00 = – 4 000

Labour Mixed Variance (MVar):

(Actual Volume – Budgeted Volume) x (Actual Price/Cost x Hour – Budgeted Price/Cost x Hour)

- E.g.: (185 000 – 200 000) x (8.14 – 8.00) = – 244

With Flexed Budget: (Actual Volume – Flexed Volume) x (Actual Price/Cost x Hour – Flexed Price/Cost x Hour)

- E.g.: (10 750 – 11 250) x (8.14 – 8.00) = – 70

30
Total Variance =

Method 1: Pvar + Vvar – Mvar

- E.g.: 1500 – 14 244 + 244 = – 12.500

Method 2: Pvar + Vvar + Mvar

- E.g.: 1744 – 14 000 – 244 = – 12.500

With Flexed Budget 1: Pvar + Vvar – Mvar

- E.g.: 1500 – 4 070 + 70 = 2 500

With Flexed Budget 2: Pvar + Vvar + Mvar

- E.g.: 1 570 – 4 000 - 70 = 2 500

➢ Slide 129 for exercises.

Key Value Drivers:

The key value drivers in planning and performance management are divided into two categories: Income
focused and Cash Flow focused. Under Income focused, the drivers are Revenue & Gross Margin and Operating
Expenses & Effectiveness. Under Cash Flow focused, the drivers are Working Capital and Long-term
Assets. Additionally, Innovation, Agility, and Human Capital are highlighted as overarching factors

31