Management Control Systems Chapter 8: Planning & Budgeting Systems 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.

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.

Planning cycle ... Strategic Planning Programming Capital Budgeting Increasingly specific, detailed, short-term, and dispersed at all organizational levels Relatively broad processes of thinking about the missions, goals, and strategies; Normally a top management process. Strategic Planning Specification of specific action programs to be implemented over the next few years and specification of the resources each will consume; It involves many more people at different organizational levels (top-down+bottom-up). Programming Capital Budgeting Short-term financial planning; Budgets match the organization’s responsibility structure. Emphasis on quantitative data. Operational Budgeting

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.

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.

The budget preparation process ... Department Budget Committee Business Managers 1. Issuance of Guidelines 2. Initial Budget Proposal 3. Negotiation 4. Approval Top-Down Bottom-Up The budgeting process takes about four months in most firms.

What is a “good” budget target? Purpose of Budgeting Conservative Best guess Optimistic Target Difficulty Motivation Planning Coordination Cost control Evaluation Target should be after-the-fact assessment of what could have been accomplished, not any of the three choices listed.