Budget as an Instrument of

Control
P. GURU PRASAD
FACULTY
INC GUNTUR
 Budgets
 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
 Managers 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
deviations, further adds to their learning
experience
 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 in the environment
 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
 They 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
efficiency of the organization
 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
 Monitoring progress and revising the budgets
 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 be adopted.
 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
achieving and improving the budgeted costs
 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 purpose.
 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 provide
guidance to investors on expected revenues and profit
 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 master budget
Types of Characteristic Examples
Budgets s
Appropriation A ceiling is set for certain Training, advertising,
discretionary expenditures sales promotion and R&D
budget Based on the management
decision

Flexible budget A static amount is

established for discretionary
The static part: Salaries,
depreciation, property
and committed fixed costs taxes, and planned
and a variable rate is maintenance. The flexible
determined per unit of part : direct material, direct
activity for variable cost labor, and variable
overhead .sales commission

Capital budget Decisions regarding

potential investments are
New plant and
equipment
made using discounted cash
flow techniques

Master budget A comprehensive plan is All revenue and

developed for all revenue expenditures for any
and expenditure organization
Components of the Master Budget
Capital budgets
Master budget

Operating Financial Cash

Budgets Budgets budgets

Budgeted
Balance
sheet

sales Direct Direct Closing Cost of Income

material labor inventory Goods sold statement

Selling and
Administrative
production Factory over head 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
 Thank you
 Advertising may be described as the
science of arresting the human intelligence
long enough to get money from it.
 It is not an achievement to make 10
friends a day but to make 1 friend for 10
years
 Have you ever noticed that anyone going
faster than you is a maniac and anyone
going slower than you is an idiot?