PERFORMANCE

MANAGEMENT &
CONTROL

PM & Control 1
 BUDGETING

• Budgeting is concerned with the implementation of the LT plan for

the year ahead
• With shorter planning horizon, budgets are more precise & detail
• Quantitative terms expression of a plan for a defined period of time
• Includes planned volumes, revenues, costs & cash flows
• Budgets are indications of what is expected to be achieved during
the budget period whereas LT plans represent the broad directions
that top management intend to follow

 
2

PM & Control
FLEXIBLE BUDGET
BUDGET PREPARED AT A NUMBER OF ACTIVITY LEVELS & CAN BE ‘FLEXED’ OR CHANGED TO THE
ACTUAL LEVEL OF ACTIVITY FOR BUDGETARY CONTROL PURPOSES EFFICIENTLY

PM & Control 3
2. Flexible budget
Strengths
i. Dynamic in nature – helps managers to analyse actual performance by comparing it
with budgeted performance
ii. Allows planning for alternative use of idle capacity if it is envisaged that actual
production according to the plan will be less than capacity level

Weaknesses
iii. Difficult to analyse costs according to their variability
iv. In the long run, FC do not remain fixed & VC do not remain proportionate to
production/sales volume

PM & Control
 3. INCREMENTAL BUDGETING

Weaknesses
i. No attempt is made to justify each item of expenditure
ii. Encourages slack & wasteful spending
iii. Is sufficient if current operations are effective, efficient &
economical
iv. Makes expenditure cuts/increases more dependent on
persuasive powers of managers than on the genuine needs of
organisation
v. Assessing amount of increment can be difficult
vi. Not appropriate in a rapidly changing business
vii. Can ignore the true (activity based) drivers of a cost leading to
poor budgeting

PM & Control 5
 3. INCREMENTAL BUDGETING

Strengths
i. Simple to prepare
ii. Can be flexed to provide more meaningful information for
control

PM & Control 6
ABB

PM & Control 7
 5. ABB (CONT)

Strengths
iii. More focus on efficiency and effectiveness & alternative methods
by which they may be achieved -
iv. ABB avoids arbitrary cuts in specific budget areas to meet the
overall financial targets. Non-value added activities may be
identified and eliminated.
v. ABB can increase management commitment to the budget process
as the activity analysis enables management to focus on the
objectives of each activity. Identification of primary & secondary
activities & non-value added activities help in motivating
management in activity planning and control.
Weaknesses
i. Suitable only for organisations which have adopted ABC
ii. Time consuming

PM & Control 8
6. Zero-based budgeting
• A method of budgeting that requires each cost element to be specifically justified as
though the activities to which the budget relates were being undertaken for the first
time
• Justification of any cost should consider how the expenditure helps to meet
organisation’s objectives

Strengths
i. Aims to curtail unnecessary costs
ii. Helps to decide most appropriate way of performing activity
best suited to service industries & NPO
iii. Can be applied to discretionary costs & support activities
iv. For activities where there is no clear relationship between input & output
v. Helps to curtail activities by creating questioning attitude 9

vi. Focuses attention on features of products/service in relation to value for money

PM & Control
ZBB

6. Zero-based budgeting (cont)

Weaknesses
i. Time consuming & expensive
ii. Managers whose areas of responsibility are subjected to ZBB may
feel threatened by it

PM & Control 10
PLANNING AND OPERATIONAL
VARIANCE

PM & Control 11
PLANNING VS OPERATIONAL

PLANNING VARIANCE
• VARIANCES CAUSED BY ERRORS or problems IN ORIGINAL BUDGET
• DIFFERENCES BETWEEN ORIGINAL BUDGET AND REVISED BUDGET
• NOT CONTROLLABLE BY OPERATIONAL MANAGERS
• MANAGERS ARE NOT RESPONSIBLE FOR PLANNING VAR.
OPERATIONAL VARIANCE
• VARIANCES CAUSED BY differences in ACTUAL PERFORMANCE AND the REVISED BUDGET OR STANDARD
• WITHIN OPERATIONAL MANAGERS CONTROL

PM & Control 12
BUDGET REVISION

• ONLY FOR ITEMS BEYOND THE control of the company

• REVISED BASED on INDEPENDENT AND VERIFIABLE EVIDENCE
• CANNOT BE FOR MERE OPERATIONAL MATTERS
• CANNOT FOR THE PURPOSE OF MAKING A PARTICULAR VARIANCE MORE
FAVOURABLE

PM & Control 13