Management Control Systems

Chapter 8:
Planning & Budgeting Systems

Wim Van der Stede

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003
Financial results controls ...
 Three core elements:
– Financial responsibility centers
» The apportioning of accountability for financial results
within the organization.

– Formal management processes

» Planning & budgeting to define performance expectations
and standards for evaluating performance.

– Motivational contracts
» To define the links between results and various
organizational incentives.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -2-
Planning and budgeting ...
 Produce written plans that specify …
– Where the organization wishes to go;
– How it intends to get there;
– What results should be expected.

 Purposes of the planning and budgeting process?

– To engage in longer-term thinking;
– To achieve coordination (top-down, bottom-up, sideways);
– To enhance management control;
– To arrive at challenging but realistic performance targets.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -3-
Planning cycle ...
Increasingly specific, detailed, short-term, and

• Relatively broad processes of thinking

Strategic about the missions, goals, and strategies;
dispersed at all organizational levels

Planning • Normally a top management process.

• Specification of specific action programs

Programming to be implemented over the next few years
and specification of the resources each
Capital will consume;
Budgeting • It involves many more people at different
organizational levels (top-down+bottom-up).

• Short-term financial planning;

Operational • Budgets match the organization’s
Budgeting responsibility structure.
• Emphasis on quantitative data.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -4-
Characteristics of a budget ...
 It is usually stated in monetary terms;
 It generally covers a period of one year;
 It contains an element of management commitment,
i.e., the managers agree to accept the responsibility
for attaining the budgeted objectives;
 The budget is approved by an authority higher than
the budgetee;
 Once approved, the budget can be changed only
under specified conditions;
 Periodically, actual financial performance is compared
to budget and variances are analyzed and explained.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -5-
Budgeting and management control ...
 Budgeting involves setting targets which are often
used later as standards against which to evaluate
performance — results controls;

 Planning and budgeting processes involve formal

reviews of plans and include the actions that are
felt to be good for the organization to take —
action controls;

 Planning and budgeting processes serve to get

information needed for decision making to the
right managers — personnel controls.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -6-
The budget preparation process ...
Budget Committee
Top-Down
3. Negotiation

Budget
Department

4. Approval

Bottom-Up
Business Managers

The budgeting process takes about four months in most firms.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -7-
What is a “good” budget target?
Purpose of Budgeting Target Difficulty

 Motivation
 Conservative
 Planning

 Coordination  Best guess

 Cost control
 Optimistic
 Evaluation
Target should be after-the-fact assessment of what could
have been accomplished, not any of the three choices listed.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -8-