COLLEGE OF SCIENCE AND TECHNOLOGY

Cagamutan Norte, Leganes, Iloilo - 5003

Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

COO – FORM 12
SUBJECT TITLE: FINANCIAL CONTROLLERSHIP
INSTRUCTOR: ELNA AMOR H. BOQUEÑA, CPA
SUBJECT CODE: FM7

TOPIC 1: SPECIFIC INTERNAL CONTROLS

Learning Objectives:

At the end of the topic, the students are expected to:

1. Analyze, discuss and determine specific internal control.

Notes:

*Revenue Cycle*

Assume that the firm’s sales personnel prepare sales orders for potential sales (many other
possibilities, such as the customer filling out the sales order, are found in practice). The sale
is approved by the credit department, the goods are shipped, and the billing department (a
part of accounting) prepares a sales invoice (a copy of which becomes the customer’s “bill”).

After the sales invoice is prepared, the sales journal, the general ledger, and the accounts
receivable subsidiary ledger are posted. The customer pays the account with a check, and a
remittance advice is enclosed to describe which invoice the check is paying.

As a preventive control, two individuals open the mail that includes these customer
remittances. The checks are listed and sent to the cashier who daily deposits them in the
bank (recall that the checks should not go to the accounting department, as that would give
the accounting department custody of assets as well as recordkeeping responsibility). Another
copy of the list of checks and the remittance advices is sent to accounting to be used to post
the cash receipts journal, which is subsequently posted to the general and accounts receivable
subsidiary ledgers.

Major Controls

Sales
1. Credit granted by a credit department
2. Sales orders and invoices pre-numbered and controlled
3. Sales returns are presented to receiving clerk who prepares a receiving report which
supports pre-numbered sales return credit memoranda

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

Accounts Receivable
1. Subsidiary ledger reconciled to control ledger regularly
2. Individual independent of receivable posting reviews statements before sending to
customers
3. Monthly statements sent to all customers
4. Write-offs approved by management official independent of recordkeeping
responsibility (e.g., the treasurer is appropriate)

Cash Receipts
1. Cash receipts received in mail listed by individuals with no recordkeeping responsibility
Ø Cash goes to cashier
Ø Remittance advices go to accounting
2. Over-the-counter cash receipts controlled (cash register tapes)
3. Cash deposited daily
4. Employees handling cash are bonded
5. Lockbox, a post office box controlled by the company’s bank at which cash
remittances from customers are received. The bank collects customer remittances,
immediately credits the cash to the company’s bank account, and forwards the
remittance advices to the company. A lockbox system is considered an extremely
effective control because company employees have no access to cash and bank
employees have no access to the company’s accounting records.
6. Bank reconciliation prepared by individuals independent of cash receipts recordkeeping

*Disbursement Cycle*

Assume that the purchase requisition is an internal document sent by the department in need
of the supplies to the purchasing department. The purchasing department determines the
proper quantity and vendor for the purchase and prepares a purchase order. One copy of the
purchase order is sent to the vendor. Another copy is sent to the receiving department to
allow receiving personnel to know that items received have been ordered; however, the copy
of the purchase order sent to receiving will not have a quantity of items on it so as to
encourage personnel to count the goods when they are received. When the goods are
received, a receiving report is prepared by the receiving department and forwarded to the
accounting department.

A vendor’s invoice or “bill” is received by the accounting department from the vendor. When
the accounting department has the purchase order, receiving report, and vendor’s invoice,
the payment is approved and then recorded in the purchases journal since evidence exists

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

that the item was ordered, received, and billed. A check and remittance advice is subsequently
sent to the vendor in accordance with the terms of the sale. The purchase order, receiving
report, and vendor’s invoice are stamped paid to prevent duplicate payments.

Major Controls

Purchases
1. Pre-numbered purchase orders used
2. Separate purchasing department makes purchases
3. Purchasing personnel independent of receiving and recordkeeping
4. Suppliers’ monthly statements compared with recorded payables.

Accounts Payable
1. Accounts payable personnel independent of purchasing, receiving, and disbursements
2. Clerical accuracy of vendors’ invoices tested
3. Purchase order, receiving report, and vendor’s invoice matched

Cash Disbursements
1. Pre-numbered checks with a mechanical check protector used
2. Two signatures on large check amounts
3. Checks signed only with appropriate support (purchase order, receiving report, and
vendor’s invoice). Treasurer signs checks and mails them
4. Support for checks canceled after payment
5. Voided checks mutilated, retained, and accounted for
6. Bank reconciliations prepared by individual independent of cash disbursements
recordkeeping
7. Physical control of unused checks

*Inventories and Production Cycle*

Assume you are auditing a retailer who purchases products from a wholesaler and then
sells the goods to the public. As in the acquisitions and payments cycle, purchase requisitions
and purchase orders are used and controlled to purchase the inventory items that are of a
“finished goods” nature. Likewise, when ordered goods are received, a receiving report is
filled out by personnel in the receiving department. Perpetual inventory records are
maintained for large dollar items. The firm has calculated economic reorder points and
quantities. When quantities on hand reach the reorder point, a purchase requisition is
prepared and sent to the purchasing department that places the order.

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

At the end of the year, a physical inventory is taken during which items on hand are
counted. In the case of items for which perpetual records exist, the perpetual are corrected
for any errors—large errors should be explained. For items without perpetual records, the
total on hand is used to adjust the cost of goods sold at year-end (Beginning inventory +
Purchases – Ending inventory = Cost of goods sold).

The case of the manufacturing firm is somewhat more involved. Recall that basically
three types of inventory accounts are involved. First, supplies and raw materials are
purchased from suppliers in much the same manner as described above for the
nonmanufacturing firm. Second, work in process is the combination of raw materials, direct
labor, and factory overhead. Third, when the items in process have been completed, they are
inspected and transferred at their cost (typically standard cost) to finished goods. Finally,
when the goods are sold, the entry is to credit finished goods and to debit cost of goods sold.

Work in process is controlled through use of a standard cost system as described in

elementary cost accounting courses. Direct labor is also identified with the product (e.g.,
assembly line labor). Overhead includes materials not specifically identified with the product
(amount of glue used) and supervisory, non-administrative labor.

Major Inventory and Production Controls

1. Perpetual inventory records for large dollar items
2. Pre-numbered receiving reports prepared when inventory received; receiving reports
accounted for
3. Adequate standard cost system to cost inventory items
4. Physical controls against theft
5. Written inventory requisitions used
6. Proper authorization of purchases and use of pre-numbered purchase orders

*Payroll and Personnel Cycle*

Assume that a separate personnel department maintains complete, up-to-date records

for each employee. Included in such records is information on level of education, basic payroll
information, experience, and authorization for any changes in pay rates. Assume that the
firm’s factory direct labor personnel use a time clock to punch in each morning and out each
evening. Their employee clock card thus shows the total hours worked each day. These direct
labor personnel also fill out job time tickets for each job they work on each day. At the end
of each week their supervisor compares job time tickets with employee clock cards that have
already been signed by the employees. Assume also that salaried and other employees fill
out weekly time summaries indicating hours worked.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

All of the above information is sent to the payroll accounting department whose
responsibility is to prepare the payroll journal and to prepare the unsigned payroll checks.
The checks are then signed by the treasurer and distributed by an independent paymaster
who has no other payroll functions. The summary payroll entry is then posted to the general
ledger in the accounting department.

The internal auditing department periodically compares the payroll department’s file
on each employee with that in the personnel department’s file to determine that no
unauthorized changes in payroll records have been made. Employees with cash handling and
recordkeeping responsibilities should be covered by fidelity bonds, a form of insurance which
protects an employer against losses caused by dishonest employees (fidelity bonds also serve
as a control when new employees are hired since the insurer will typically perform a
background check on prospective employees).

Major Personnel and Payroll Controls

1. Segregate: Timekeeping, Payroll Preparation Personnel & Paycheck Distribution
2. Time clocks used where possible
3. Job time tickets reconciled to time clock cards
4. Time clock cards approved by supervisors (overtime and regular hours)
5. Treasurer signs paychecks
6. Unclaimed paychecks controlled by someone otherwise independent of the payroll
function (locked up and eventually destroyed if not claimed). In cases in which
employees are paid cash (as opposed to checks) unclaimed pay should be deposited
into a special bank account.
7. Personnel department promptly sends termination notices to the payroll department.

*Financing Cycle*

This cycle includes issuance and repurchase of debt (bank loans, mortgages, bonds
payable) and capital stock, and payment of interest and dividends. Debt and capital stock
transactions should be authorized by the board of directors. Often an independent trustee
issues bonds, monitors company compliance with the provisions of the debt agreement, and
pays interest.

For capital stock transactions, corporations may either employ an independent stock
registrar and a stock transfer agent, or handle their own transactions. Normally, internal
control is stronger when a stock registrar and a stock transfer agent are utilized. A stock
registrar’s primary responsibility is to verify that stock is issued in accordance with the

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

authorization of the board of directors and the articles of incorporation; the stock transfer
agent’s primary responsibility is maintaining detailed stockholder records and carrying out
transfers of stock ownership.

Major Financing Controls

1. Debt and equity transactions are properly approved by the company’s board of
directors.
2. An independent trustee handles bond transactions.
3. A stock registrar and a stock transfer agent handle capital stock transactions.
4. Canceled stock certificates are defaced to prevent their reissuance.

*Investing Cycle*

This cycle includes investments in the debt and equity of other organizations, and purchases
of property, plant, and equipment. Investments may be categorized as marketable securities
and long-term investments.

Major Investment Controls

1. Segregation of duties among the individuals authorizing purchases and sales of
securities, maintaining custody of the securities, and maintaining the records of
securities
2. Use of an independent agent such as a stockbroker, bank or trust company to maintain
custody of securities
3. Securities not in the custody of an independent agent maintained in a bank safe-
deposit box under the joint control of the treasurer and one other company official;
both individuals should be present to gain access
4. Registration of securities in the name of the company
5. Detailed records of all securities and related revenue from interest and dividends
6. Periodical physical inspection of securities by individuals with no responsibility for the
authorization, custody, or recordkeeping for investments

Property, plant, and equipment acquisitions require board of directors’ approval for purchases
over a certain amount. Otherwise, the purchase is handled similarly to a merchandise
purchase. As in the case of merchandise purchases, the item is recorded as an addition when
some form of purchase authorization is present with a vendor’s invoice and a receiving report.
The company then selects an appropriate life and depreciation method (e.g., straightline,
sum-of-the-years’ digits, double-declining balance). Depreciation entries are made in the
general journal with a debit to depreciation expense (manufacturing overhead for
manufacturing equipment) and a credit to accumulated depreciation. The company should

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

also have controls to determine that repair and maintenance expenses have not been
capitalized.

Major Property, Plant, and Equipment Controls

1. Major asset acquisitions are properly approved by the firm’s board of directors and
properly controlled through capital budgeting techniques.
2. Detailed records are available for property assets and accumulated depreciation.
3. Written policies exist for capitalization vs. expensing decisions.
4. Depreciation properly calculated.
5. Retirements approved by an appropriate level of management.
6. Physical control over assets to prevent theft.
7. Periodic physical inspection of plant and equipment by individuals who are otherwise
independent of property, plant, and equipment (e.g., internal auditors).

Exercise:

1. Discuss specific internal control.

2. What is the used of specific internal control to the organization.

End

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

TOPIC 2: MANAGEMENT CONTROL PROCESS

Learning Objectives:

At the end of the topic, the students are expected to:

1. Define control and controlling.

2. Describe the purpose of control and importance of controlling.
3. Apply the ways in controlling risks in real life situations.

NOTES:

Control is the process of monitoring activities to ensure that they are being accomplished as
planned and of correcting any significant deviations.

What is controlling?
ü The process of measuring performance and taking action to ensure desired results.
ü It helps ensure that objectives and accomplishments are consistent with one another
throughout an organization.
ü It helps maintain compliance with essential organizational rules and policies.
ü Done well, it ensures that the overall directions of individuals and groups are consistent
with short and long range plans.

The Purpose of Control

Ø To ensure that activities are completed in ways that lead to accomplishment of

organizational goals.

• Provides organizations with indications of how well they are performing in relation
to their goals.
• Provides a mechanism for adjusting performance to keep organizations moving
in the right direction.

Ø Control is one of the four basic management functions. The control function, in turn, has
four basic purposes.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

WHY IS CONTROLLING IMPORTANT?

• Controlling is an important function of management. Its importance becomes apparent

when we find that it is needed in all the functions of management. Controlling checks
mistakes and tells us how new challenges can be met or faced. The success of the
organization thus hinges on the effective controlling.

• Controlling is the last function of the management process which is performed after
planning, organizing, staffing and directing. On the other hand, management control means
the process to be adopted in order to complete the function of controlling.

The importance of controlling becomes clear from the following facts:

(1) Accomplishing Organizational Goals:

The controlling process is implemented to take care of the plans. With the help of
controlling, deviations are immediately detected and corrective action is taken.
Therefore, the difference between the expected results and the actual results is reduced
to the minimum. In this way, controlling is helpful in achieving the goals of the
organization.

(2) Judging Accuracy of Standards:

While performing the function of controlling, a manager compares the actual work
performance with the standards. He tries to find out whether the laid down standards
are not more or less than the general standards. In case of need, they are redefined.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

(3) Making Efficient Use of Resources:

Controlling makes it possible to use human and physical resources efficiently. Under
controlling, it is ensured that no employee deliberately delays his work performance. In
the same way, wastage in all the physical resources is checked.

(4) Improving Employee Motivation:

Through the medium of controlling, an effort is made to motivate the employees. The
implementation of controlling makes all the employees to work with complete dedication
because they know that their work performance will be evaluated and if the progress
report is satisfactory, they will have their identity established in the organization.

(5) Ensuring Order and Discipline:

Controlling ensures order and discipline. With its implementation, all the undesirable
activities like theft, corruption, delay in work and uncooperative attitude are checked.

(6) Facilitating Coordination in Action:

Coordination among all the departments of the organization is necessary in order to

achieve the organizational objectives successfully. All the departments of the
organization are interdependent. For example, the supply of orders by the sales
department depends on the production of goods by the production department. •
Through the medium of controlling an effort is made to find out whether the production
is being carried out in accordance with the orders received. If not, the causes of deviation
are found out and corrective action is initiated and hence, coordination between both
the departments is established.

The Nature of Control

Ø Establish Standards

• Control standard—a target against which subsequent performance will be

compared. – Control standards should be expressed in measurable terms.

ü Control standards should be consistent with organizational goals.

ü Control standards should be identifiable indicators of performance.

Ø Measure Performance

• Performance measurement is an ongoing process.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

• Performance measures must be valid indicators (e.g., sales, costs, units

produced) of performance.

Steps in the Control Process

1. Establishing standards and methods for measuring performance

Ø A company must develop, document and explain clear standards and methods for
measuring particular performances. These must be specific and understood so effective
measuring of tasks and responsibilities can take place. In this way, an enterprise can
gain a good understanding of who is performing according to company objectives.
Proper standards and methods for measuring performance helps a company tweak their
processes as required for better results. Performance measurement helps them see
where their processes and procedures need improvement.

2. Measuring the Performance

Ø This must be done in a consistent, regular manner to facilitate proper data acquisition
to make informed decisions concerning performance. This regular measuring gives
management substantial information so they can again make adjustments as
necessary to their protocols.

3. Determining Whether the Performance Matches the Standard

Ø Company management compares measured results with the standards they previously
established. Therefore, they can determine if performance is up to their expectations
- or not. With this comparing, they can decide to abandon certain policies, procedures
or tasks, modify them, or leave them in place.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

4. Taking Corrective Action

Ø A company must use the information gathered from the control process. Not taking
action based on revealed information (which shows inefficiencies and/or poor
employee performance) means they wasted their time and resources instituting the
control process. They must take action that gives solutions to problems. They must
then measure these corrective actions some time down the road to see if they are
performing up to corporate expectations. Consequently, the control process is
something that is ongoing in organizations to make sure that the business is
performing optimally.

TYPES OF CONTROL

TOOLS FOR CONTROLLING ORGANIZATIONAL PERFORMANCE

Ø Feedforward Control

• A control that prevents anticipated problems before actual occurrences of the

problem.

ü Building in quality through design.

Ø Concurrent Control

• A control that takes place while the monitored activity is in progress.

ü Direct supervision: management by walking around.

Ø Feedback Control

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

• A control that takes place after an activity is done.

ü Corrective action is after-the-fact, when the problem has already

occurred.

• Advantages of feedback controls

ü Feedback provides managers with information on the effectiveness of

their planning efforts.
ü Feedback enhances employee motivation by providing them with
information on how well they are doing.

TAKING MANAGERIAL ACTION

Ø Courses of Action

• “Doing nothing”

ü Only if deviation is judged to be insignificant.

• Correcting actual (current) performance

ü Immediate corrective action to correct the problem at once.

ü Basic corrective action to locate and to correct the source of the
deviation.
ü Corrective Actions – Change strategy, structure, compensation scheme,
or training programs; redesign jobs; or fire employees.

Ø Revising the standard

• Examining the standard to ascertain whether or not the standard is realistic,

fair, and achievable.

ü Upholding the validity of the standard.

ü Resetting goals that were initially set too low or too high.

CHARACTERISTICS OF EFFECTIVE CONTROL SYSTEMS

Ø Accurate. Information on performance must be accurate. Evaluating the accuracy of

the information they receive is one of the most important control tasks that managers
face.
Ø Timely. Information must be collected, routed, and evaluated quickly if action is to be
taken in time to produce improvements.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

Ø Objective and Comprehensible. The information in a control system should be

understandable and be seen as objective by the individuals who use it. A difficult-to
understand control system will cause unnecessary mistakes and confusion or
frustration among employees.
Ø Focused on Strategic Control Points. The control system should be focused on those
areas where deviations from the standards are most likely to take place or where
deviations would lead to the greatest harm.
Ø Economically Realistic. The cost of implementing a control system should be less than,
or at most equal to, the benefits derived from the control system.
Ø Organizational Realistic. The control system has to be compatible with organizational
realities and all standards for performance must be realistic.
Ø Coordinated with the Organization's Work Flow. Control information needs to be
coordinated with the flow of work through the organization for two reasons: (1) each
step in the work process may affect the success or failure of the entire operation, (2)
the control information must get to all the people who need to receive it.
Ø Flexible. Controls must have flexibility built into them so that the organizations can
react quickly to overcome adverse changes or to take advantage of new opportunities.
Ø Prescriptive and Operational. Control systems ought to indicate, upon the detection of
the deviation from standards, what corrective action should be taken.
Ø Accepted by Organization Members. For a control system to be accepted by
organization members, the controls must be related to meaningful and accepted goals.

Exercises:
1. Define control and controlling.
2. Describe the purpose of control and importance of controlling.
3. Apply the ways in controlling risks in real life situations.
End

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

TOPIC 3: FINANCIAL CONTROL

Learning Objectives:

At the end of the topic, the students are expected to:

1. Define a budget, budgetary control and responsibility centers.

2. Advantages of budgeting and budgetary control.
3. Identify problems in budgeting.
4. Discuss the characteristics of a budget.
5. Discuss the budget organization and administration.
6. Describe management action and cost control.

NOTES:

WHAT IS A BUDGET?

Ø Simply put, a budget is an itemized summary of likely income and expenses for a given
period. It’s an invaluable tool to help you prioritize your spending and manage your
money—no matter how much or how little you have.
Ø Planning and monitoring your budget will help you identify wasteful expenditures,
adapt quickly as your financial situation changes, and achieve your financial goals.

BENEFITS OF BUDGETING

Ø Gives you control over your money – A budget is a way of being intentional about the
way you spend and save your money. It is said that with budgeting, you control your
money and not your money controls you. Budgeting saves you the stress of suddenly
having to adjust to lack of funds because you did not initially plan how to spend them.
It also helps you decide if you want to sacrifice short term spending like buying coffee
every day in exchange for a long term benefit like a cruise vacation or a new HDTV.

Ø Keeps you focused on your money goals – You avoid spending unnecessarily on items
and services that do not contribute to attaining your financial goals. If you are working
with limited resources, budgeting makes it easier to make ends meet.

Ø Makes you aware what is going on with your money – With budgeting, you are clear
on what money is coming in, how fast it goes out, and where it is going to. Budgeting

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Cagamutan Norte, Leganes, Iloilo - 5003
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Email Address : svcst_leganes@yahoo.com

saves you from wondering every end of the month where your money went. A budget
enables you to know what you can afford, take advantage of buying and investing
opportunities, and plan how to lower your debt. It also tells you what is important to
you based on how you allocate your funds, how your money is working for you, and
how far you are towards reaching your financial goals.

Ø Helps you organize your spending and savings – By dividing your money into
categories of expenditures and savings, a budget makes you aware which category of
expenditure takes which portion of your money. That way, it is easy for you to make
adjustments. Budget also serves as a reference for organizing your bills, receipts, and
financial statements. When all of your financial transactions are organized for tax time
or creditor questions, you save time and effort.

Ø Enables you to communicate with your significant others about money – If you share
your money with your spouse, family, or anyone, a budget can communicate how you
use money as a group. This promotes teamwork on working for common financial goals
and prevents conflict on how money is used. Creating a budget in tandem with your
spouse will avoid conflicts and resolve personal differences on how your money is
spent. Budgeting teaches family members spending responsibility and accountability.

Ø Provides you with an early warning for potential problems – When you budget and
take a “big picture” view, you will see potential money problems in advance, and be
able to make adjustments before the problem appears.

Ø Helps you determine if you can take debt and how much – Taking debt is not
necessarily a bad thing if the debt is necessary or you can afford it. Budgeting shows
you how much a debt load you can realistically take without being stressed or if taking
the debt load is worth it.

Ø Enables you to produce extra money – In budgeting, you get to identify and eliminate
unnecessary spending like late fees, penalties and interests. These seemingly small
saving can add up over time.

Ø Budgets serve four purposes:

ü Help managers coordinate resources and projects.

ü Help define the established standards for control.
ü Provide guidelines about the organization’s resources and expectations.

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ü Enable the organization to evaluate the performance of managers and

organizational units.

Budgetary control

Ø The use of the comprehensive system of budgeting to aid management in carrying out
its functions like planning, coordination and control.
Ø The establishments of budgets relating the responsibilities of executives to the
requirements of a policy, and the continuous comparison of actual with budgeted
results, either to secure by individual action the objectives of that policy or to provide
a firm basis of its revision.
Ø Budgetary control is implementing budgets and making managers responsible for
implementing it.
Ø This system involves:
ü Division of organization on functional basis into different sections known as a
budget center.
ü Preparation of separate budgets for each “budget center”.
ü Consolidation of all functional budgets to present overall organizational
objectives during the forthcoming budget period.
ü Comparison of actual level of performance against budgets.
ü Reporting the variances with proper analysis to provide basis for future course
of action.

ADVANTAGES OF BUDGETARY CONTROL

Ø The major strength of budgeting is that it coordinates activities across departments.
Ø Budgets translate strategic plans into action. They specify the resources, revenues,
and activities required to carry out the strategic plan for the coming year.
Ø Budgets provide an excellent record of organizational activities.
Ø Budgets improve communication with employees.
Ø Budgets improve resources allocation, because all requests are clarified and justified.
Ø Budgets provide a tool for corrective action through reallocations.

DISADVANTAGES OF BUDGETARY CONTROL

Ø The major problem occurs when budgets are applied mechanically and rigidly.
Ø Budgets can demotivate employees because of lack of participation. If the budgets are
arbitrarily imposed top down, employees will not understand the reason for budgeted
expenditures, and will not be committed to them.
Ø Budgets can cause perceptions of unfairness.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

Ø Budgets can create competition for resources and politics.

Ø A rigid budget structure reduces initiative and innovation at lower levels, making it
impossible to obtain money for new ideas.

Problems in budgeting

Whilst budgets may be an essential part of any marketing activity they do have a number of
disadvantages, particularly in perception terms.

Ø Budgets can be seen as pressure devices imposed by management, thus resulting in:
ü bad labor relations
ü Inaccurate record-keeping.

Ø Departmental conflict arises due to:

ü disputes over resource allocation
ü Departments blaming each other if targets are not attained.

Ø It is difficult to reconcile personal/individual and corporate goals.

Ø Waste may arise as managers adopt the view, "we had better spend it or we will lose
it". This is often coupled with "empire building" in order to enhance the prestige of a
department.

Ø Responsibility versus controlling, i.e. some costs are under the influence of more than
one person, e.g. power costs.
Ø Managers may overestimate costs so that they will not be blamed in the future should
they overspend.

Characteristics of a budget

A good budget is characterized by the following:

Ø Participation: involve as many people as possible in drawing up a budget.

Ø Comprehensiveness: embrace the whole organization.
Ø Standards: base it on established standards of performance.
Ø Flexibility: allow for changing circumstances.
Ø Feedback: constantly monitor performance.
Ø Analysis of costs and revenues: this can be done on the basis of product lines,
departments or cost centers.

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

Budget organization and administration:

In organizing and administering a budget system the following characteristics may apply:

Ø Budget centers: Units responsible for the preparation of budgets. A budget center may
encompass several cost centers.
Ø Budget committee: This may consist of senior members of the organization, e.g.
departmental heads and executives (with the managing director as chairman). Every
part of the organization should be represented on the committee, so there should be
a representative from sales, production, marketing and so on. Functions of the budget
committee include:
ü Coordination of the preparation of budgets, including the issue of a manual
ü Issuing of timetables for preparation of budgets
ü Provision of information to assist budget preparations
ü Comparison of actual results with budget and investigation of variances.

Ø Budget Officer: Controls the budget administration The job involves:

ü Liaising between the budget committee and managers responsible for budget
preparation
ü Dealing with budgetary control problems
ü Ensuring that deadlines are met
ü Educating people about budgetary control.

Ø Budget manual:

This document:

ü Charts the organization

ü Details the budget procedures
ü Contains account codes for items of expenditure and revenue
ü Timetables the process
ü Clearly defines the responsibility of persons involved in the budgeting system.

Management action and cost control

Producing information in management accounting form is expensive in terms of the time and
effort involved. It will be very wasteful if the information once produced is not put into
effective use.

There are five parts to an effective cost control system. These are:

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

Ø preparation of budgets
Ø communicating and agreeing budgets with all concerned
Ø having an accounting system that will record all actual costs
Ø preparing statements that will compare actual costs with budgets, showing any
variances and disclosing the reasons for them, and
Ø taking any appropriate action based on the analysis of the variances in d) above.

Action(s) that can be taken when a significant variance has been revealed will depend on the
nature of the variance itself. Some variances can be identified to a specific department and it
is within that department's control to take corrective action. Other variances might prove to
be much more difficult, and sometimes impossible, to control.

Variances revealed are historic. They show what happened last month or last quarter and no
amount of analysis and discussion can alter that. However, they can be used to influence
managerial action in future periods.

Exercises:

1. Define a budget, budgetary control and responsibility centers.

2. Advantages of budgeting and budgetary control.
3. Identify problems in budgeting.
4. Discuss the characteristics of a budget.
5. Discuss the budget organization and administration.
6. Describe management action and cost control.

End

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