Management Control Systems Chapter 9 Budget Preparation Management Control Systems Chapter 9 August 2014 Iwan Pudjanegara SE., MM.

Nature of a Budget An Operating Budget usually covers one year and states the revenues and expenses planned for that year. Budget is prepared in more detail then the strategic plan and its preparation involves managers at all levels in the organization. August 2014 Iwan Pudjanegara SE., MM.

Nature of a Budget (Budget Characteristics) A budget estimates the profit potential of the business unit. It is stated in monetery terms. It generally covers a period of one year. It is a management commitment. The budget proporsal is reviewed and approved by an authority higher than the budgetee. (budgetee=the manager who prepares budget) August 2014 Iwan Pudjanegara SE., MM.

Nature of a Budget (Budget Characteristics) 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. August 2014 Iwan Pudjanegara SE., MM.

Nature of a Budget The process of preparing a budget should be distinguished (=dibedakan) from: Strategic Planning Forecasting August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation vs Strategic Planning Focuses on a single yr. A one-yr slice of the organization’s strategic planning. Structured by responsibility centers. Focuses on activities that extend over a period of several years. Precedes budgeting and provides the framework within which the annual budget is developed. Structured by product lines or other programs. August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation vs Forecasting Is a management plan. Stated in monetery term Covers a period of one year. It is both a planning tool and a control tool. All budgets include elements of forecasting. Is a prediction of what will most likely happen. May or may not be stated in monetery terms It can be for any time period. It is planning tool. August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation vs Forecasting Managers agree to accept responsibility for attaining the budgeted objectives. The budget proporsal is reviewed and approved by an authority higher than budgetee. The forecaster does not accept responsibility for meeting the forecasted results. Forecasts are not usually approved by higher authority. August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation vs Forecasting Once approved, the budget can be changed only under specified conditions. Periodically, actual finance performance is compared to budget, and variances are analyzed and explained. A forecast is updated as soon as new information indicates there is a change in conditions. Variances from forecast are not analyzed formally or periodically. August 2014 Iwan Pudjanegara SE., MM.

Forecasting Characteristics A forecast may or may not be stated in monetery terms. It can be for any time period. The forecaster does not accept responsibility for meeting the forecasted results. Forecasts are not usually approved by higher authority. August 2014 Iwan Pudjanegara SE., MM.

Forecasting Characteristics A forecastis updated as soon as new information indicates there is a change in conditions. Variances from forecast are not analyzed formally or periodically. August 2014 Iwan Pudjanegara SE., MM.

Use of a Budget (Principal Purpose of Budget) Fine-Tuning the Strategic Plan Coordination Assigning Responsibility Basis for Performance Evaluation August 2014 Iwan Pudjanegara SE., MM.

August 2014 Iwan Pudjanegara SE., MM.

Operating Budget Categories Revenue Budgets Budgeted Production Cost & Cost of Sales Marketing Expenses Logistic Expenses General and Administrative Expenses Research and Development Expenses Income Taxes August 2014 Iwan Pudjanegara SE., MM.

Other Budgets Capital Budget Budgeted Balance Sheet Budgeted Cash Flow Statement Management by Objectives August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation Process Organization Budget Department The Budget Committee Issuance of Guidelines Initial Budget Proposal Changes in External Forces Changes in Internal Policies&Practices August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation Process Negotiation Slack: the difference between the budget amount and the best estimate. Review and Approval Budget Revisions there are two types: Procedures that provide for a systematic updating of the budgets. Procedures that allow revisions under special circumstances. August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation Process Contingency Budgets Identify management actions to be taken if there is significant decrease in the sales volume from what was anticipated at the time of developing the budget. Provides a way of quickly adjusting to changed conditions if the situation arise August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation Process Participation in the Budgetary Process Top-down budgeting: senior management sets the budget for the lower levels. Bottom-up budgeting: lower-level managers participate in setting the budget amounts. August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation Process Two Reasons why Budget Participation has positive effects on managerial motivation : Leads to higher personal commitment to achieve goals. Participating budgeting results in effective information exchanges. August 2014 Iwan Pudjanegara SE., MM.

Budget Preparation Process Degree of Budget Target Difficulty The ideal budget is challenging but attainable. Senior Management Involvement Motivating budgetees The Budget Department Analyze the budgets in detail, prepared properly, and accurate information. August 2014 Iwan Pudjanegara SE., MM.

Quantitative Techniques Simulation Simulation is a method that constructs a model of a real situation and then manipulates this model in such a way as to draw some conclusions about the real situation. The preparation and review of a budget is a simulation process. August 2014 Iwan Pudjanegara SE., MM.

Quantitative Techniques Probability Estimates Each number in a budget is a point estimate. Ex. Sales Estimates are stated in terms of the specific number of units of each type of product to be sold. Monte Carlo process August 2014 Iwan Pudjanegara SE., MM.