Responsibility Budgeting and MBO

Name Mayur Bhat Vikram Deshmukh Hemant Kothawade Tushar Kambli Nilesh Shingade Rohit Sopori
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Roll No 4 9 22 18 44 45 51

Akshada Wagh

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Introduction to Budgeting
y A budget is a quantitative expression of plans. y Most of the well-managed business firms use a budget

which is a comprehensive and coordinated plan for the operations and resources of the firm. y It is commonly used by business firms, governmental agencies, non-profit institutions, and even households.

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Benefits of Budget Budgets provide several benefits in that they: y Induce managements to think systematically about the future y Serve as a device for coordinating the complex operations of the business y Provide a medium for communicating the plans of the firm y Motivate managers at all levels to perform well y Serve as a standard against which the actual performance may be judged 4 .

Framework for budgeting y Strategy. Planning and Budgeting y The Budget Period y Programme Budget and Responsibility Budget y Organization for Budgeting y The Budget Base y Limiting Factor y Participation 5 .

Master Budget y Operating Budget y Capital Expenditure Budget y Cash Budget y Projected Financial Position 6 .

Operating Budget y Sales forecast y Production Budget y Material and Purchases Budget y Labour Cost Budget y Manufacturing overhead Budget y Non Manufacturing Cost Budget 7 .

Capital Expenditure Budget y List of capital projects for investment y Prepared separately from operating budget y Prepared by Controller and Capital Expenditure committee y Approved by Board of Directors y Justifiable criteria for Budget y Payback period y Internal Rate of Return y Cost reductions per unit 8 .

Cash Budget ‡ Cash Sales ‡ Collection of Account Receivables ‡ Dividend and Interest Income ‡ Issue of Equity Capital ‡ Long term and Short term Borrowings ‡ Cash Purchases ‡ Payments of accounts payable ‡ Salaries. Rent and Utilities payment ‡ Tax payment ‡ Dividend Payment Cash Inflow 9 Cash Outflow . Wages.

Cash Budget y Applying suitable ³Lag´ scheme y Pattern of collection of Account Receivables y Cash disbursement on credit purchases y Operating expenses to be paid month wise y Depreciation and other non cash charges are not included in the cash budget 10 .

Projected Balance Sheet y It shows y Projected assets y Projected liabilities y Owner¶s equity at the end of Budget y Inputs required y Initial Balance Sheet y Profit Plan y Capital Expenditure Budget y Cash Budget 11 .

y It is the preparation of comprehensive operating and financial plans for specific intervals of time. y An estimate of future needs arranged according to orderly basis covering some or all activities of enterprise for define period of time. Budget y The monetary or quantitative presentation of business plan and policies to be pursued in the future period of time. Budgeting y A part of management process which includes preparation of budget. y y y 12 .Budget. in which business activities are operated on the basis of pre-prepared budget and thereafter actual results are evaluated in the light of budget estimates. budget control. Budgeting & Budgeting Control y y Linked with one generic term and all the three reflect different aspect of the same system. y Budgetary control is a system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities or services. Budgetary Control y An important technique of control on business activities by management. budget co-ordination and all those activities that are related with budget.

Budgeting and Budgeting Control y Budgets are the individual objectives of a department. 13 . y Budgetary control embraces all this and in addition includes the science of planning the budgets themselves and the utilization of such budgets to affect an overall management tool for the business planning and control. y Whereas budgeting may be said to be the act of building budgets.Difference B/ W Budget.

Management Functions y Planning y Directing and Motivating y Controlling 14 .

Budgetary Control In Management y One of the three main functions of management is to control. y Budgets are useful in controlling operations. y Compare actual results with planned objectives. y The use of budgets to control operations. 15 .

Budgetary Control Process 16 .

‡ Examples: A specific store in a chain of grocery stores. profit centre or investment centre. ‡ A work-station in a production line manufacturing automobile batteries.Responsibility centre ‡ A division or unit of an organization for which a manager is held responsible ± may be a cost centre. ‡ The payroll data processing center within a firm 17 .

and its manager is to preserve the interests of the larger organization. y Should promote the long terms interests of the organization and should be compatible with other responsibility center activities. 18 .Attributes of a responsibility center y It is like a small business. y Goals for the center should be specific and measurable.

A simple summary of the responsibility centers Revenue Center Output measured in monetary terms Expense/Cost Centers Input measured in monetary terms Profit Centers Output measured in monetary terms Investment Centers 19 Output measured in monetary terms .

A simple summary of the responsibility centers 20 .

and c) Financial success or failure is attributed entirely to managerial decisions and/or employee performance. and monitoring/reporting relationships. (b) Only financial measures are used to measure and reward accomplishment or punish failure. y y y y procedural.Responsibility budgeting y Responsibility budgeting is a framework of structural. 21 . Responsibility budgeting is the most common remote control system used by large-scale organizations in the private sector. It is a form of internal contracting in which: (a) Units and managers are evaluated relative to the targets they accept.

. for the relative performance of managers to be evaluated and increasing the motivational efficacy of internal competition.Responsibility budgeting Contd. y Operating performance targets must be expressed in financial terms for comparisons across responsibility centers. y Operating performance is monitored and subordinate managers are evaluated and rewarded. y Helps in keeping higher levels of administration of operating details 22 .

A Strategic Management Perspective on Responsibility Budgeting and Accounting y It is an ongoing process that evaluates and controls the y y y y business and industries in which company is involved. Responsibility budgeting and accounting takes place within an organizational configuration known as an M-form In this the decisional authority over strategy formulation is reserved to top management. The practice has also been described in terms of organizational design and strategic management. The responsibility budget formalizes a performance target for a given business unit over a specified time scale 23 .

however. y Diagnostic control severely restricts the upward flow of operating information within organizations & making decentralization a necessity as well as an ideal. All that is required is to give them either the correct incentives or the necessary flexibility 24 . which it sets for the operating divisions.Diagnostic control y Under traditional responsibility budgeting and accounting systems. y This approach. using financial targets. top management exercises control "by the numbers" from a small corporate headquarters. is based on the assumption managers know how to improve performance.

improved choices. clearer vision.Interactive control y An alternative to diagnostic control or control by the numbers is control by debate and dialogue. proceeding from strategic vision through choices and their consequences to better understanding. and higher valued consequences. 25 . also known as interactive control y It is by design a learning process.

Arguments y The best-managed. operating efficiency. decentralized organizations are precisely those where less emphasis is given to meeting financial targets than to the effectiveness with which operating managers engaged. competitive position and that their action plans and programs will realize the larger organizational purpose or interest. y Operating managers must persuade their superiors that they fully understand every aspect of their businesses & costs. 26 . trends. marketing strategy.

Management by Objective 27 .

MBO« y The concept of µManagement by Objectives¶ (MBO) was first given by Peter Drucker in 1954. 28 . y The essence of MBO is participative goal setting. choosing course of actions and decision making.

MBO : Block Diagram 29 .

Advantage of MBO« y Clarity of Goals (MBO) y Specific y Measurable y Achievable y Realistic. and y Time bound y Motivation y Focus y Better 30 .

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