Budget as an Instrument of Control


 Budgets

are business plans that are stated in quantitative terms and are usually based on estimations.  These plans aid an organization in the successful execution of strategies.  Due to the uncertainties in the business environment and / or due to wrong estimation, there may be significant deviations between the a c t u a l s and the plans.  Budgeting as a control tool, provides an action plan for the organization to ensure least deviations

learning experience

should participate in the budgeting process to ensure consistency in the overall adherence to corporate goals. Budgeting helps mangers to enhance their learning experience. Learning takes place as they plan and later, compare a c t u a l s with plans. Investigating the reasons for

Importance of Budgets
 Budgets

are used to give an overview of the organization and its operations. They are useful in resource allocation whereby resources are allocated in such a way that the processes which are expected to give the highest returns are given priority.  Budgets are also used as forecast tools and make the organization better prepared to adapt to changes

Importance of Budgets
 Budget

preparation requires the participation of managers from different functions / departments. This helps in integrating the tactical and operational strategies of the departments with the corporate strategy of the organization.  Budgets act as a means to verify the progress of the various activities undertaken to achieve the planned objectives. The verification is done by comparing the a c t u a l s against standards

Importance of Budgets

help in the delegation of authority and allocation of responsibility and accountability to more people in an organization. They thus promote division of labor, which , in turn, promotes the process of specialization. Functional specialization leads to the overall

Steps in Budget Formulation
 Creating

a budget department or appointing a budget controller  Developing guidelines for budget preparation  Developing budget proposals at department/business unit level  Developing the budget for the entire organization  Determining the budget period and key budgets factors  Benchmarking the budget  Budget review and approval

Budgeting procedures at Ford Motor Company
 Ford

motor company is one of the leaders in the global automotive industry. It is based in Dearborn, Michigan, and has a presence in 200 markets in six continents.  Ford’s financial budget consisted of both financial and non-financial objectives that are set for the organization. It included the sales volumes to be achieved, the time frame, and the types of financing to

Budgeting procedures at Ford Motor Company
 Two

types of budgets were prepared: one is the yearly budget which was detailed, and the other, a budget for a period of five to ten years which was not detailed. The financing from external sources needed to achieve the sales volumes was estimated. Production costs including overhead costs were computed to calculate the profitability that could be achieved.

Budgeting procedures at Ford Motor Company
 Ford

had over 2,000 cost centers and the head of each cost center was responsible for preparing the budget for that center. In addition to this, the cash flow budgets were prepared. The budgets were then reviewed by ford’s board of directors. Achievement of budgets was the financial control used by Ford. It also emphasized the importance of

Rolling Budgets at Cisco
 Cisco

systems, inc, established in 1984, is based in San Jose, California, USA. It is one of the world’s leading providers of products and solutions in the areas of routing, switching, and other computer networking equipment.  In Cisco, a combination of traditional and rolling budgets and financial forecasts was used. At the beginning of the financial year, an annual budget was fixed under the supervision of the top management with information provided by the lower levels of management being used for the

Rolling Budgets at Cisco
 It

was called as “plan of record” and was fixed for that particular year. Every quarter, the management for the rest of the year.  In addition to these budgets with quarterly reviews, the finance group of the company developed rolling financial budgets – on a monthly basis – for the next twelve months. By factoring in the ever-changing environment , these budgets helped the management to decide on capital expenditure projects, revise the manpower plan, update the inventory policy, etc. these budgets also helped the company to

Master Budget
 The

master budget is also known as the financial plan. Master budgets form the basis of the control systems in organizations. The master budget has two components: the operating budget and the financial budget. The operating budget includes the sales budget, cash collections from customers, purchases budget, disbursements for purchases, operating expense budgets.

Master Budget
 The

master budget may take the form of a profit and loss account and a balance sheet at the end of the budget period. It shows the gross and the net profits and the important accounting ratios. Sometimes more than one master budget has to be prepared before the final one is agreed upon. It is the duty of the budget committee to approve the

Types of Budgets Appropriation
budget Flexible budget

Characteri Examples A ceiling is set for Training, advertising, stics discretionary certain
expenditures Based on the management decision A static amount is established for discretionary and committed fixed costs and a variable rate is determined per unit of activity for variable cost Decisions regarding potential investments are made using discounted cash flow techniques

sales promotion and R&D

Capital budget Master budget

The static part: Salaries, depreciation, property taxes, and planned maintenance. The flexible part : direct material, direct labor, and variable overhead .sales commission

New plant and equipment

A comprehensive plan All revenue and is developed for all expenditures for any revenue and organization expenditure

Components of the Master Budget
Master budget Operating Budgets Financial Budgets Capital budgets Cash budgets Budgeted Balance sheet


Direct material

Direct labor

Closing inventory

Cost of Goods sold

Income statement


Factory over head

Selling and Administrative budgets

Zero-Based Budgeting
 It

was put into practice first time by Peter Phyrr at Texas Instruments , a world leader in digital signal processing and analog technologies based in the US, in 1969.  A traditional budgeting process is a yearly process and uses the budget of the previous year as a starting point to devise the current year’s budget. However, this process results in discrepancies.

Zero-Based Budgeting
 For

example, if there are inaccuracies in the previous year’s budget, they are carried forward to the next year, or, if the activities do not show a major impact on the budget, they are continued even if they are not contributing to the performance of the organization.  On the other hand, in ZBB the base is taken as zero and the budget is devised as for a new venture.

Zero-Based Budgeting
 In

ZBB , the responsibility centers are called decision units and the process and activates involved in each decision unit are called decision packages. The ZBB process involves the following steps:  Decision unit identification  Decision package development  Evaluation and grading of decision packages  Resource allocation

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