1. F5 Performance Management

2. 2 Section C: Budgeting Designed to give you knowledge and application of: C1. Objectives C2. Budgetary systems C3. Types of Budget C4. Quantitative analysis in Budgeting C5. Behavioural aspects of Budgeting C1. Objectives C2. Budgetary systems C3. Types of Budget C4. Quantitative analysis in Budgeting C5. Behavioural aspects of Budgeting

3. 3 C1: Objectives Learning outcomes  Outline the objectives of a budgetary control system. [2]  Explain how corporate and divisional objectives may differ and can be reconciled. [2]  Identify and resolve conflicting objectives and explain implications. [2]

4. 4 The objectives of a budgetary control system Budget:  Quantitative statement  Prepared for a defined period of time  Formal expression of the future plan Budgetary control system:  Monitoring revenue & costs  Compares budgeted figures with actual results to find out discrepancies  Takes corrective action Planning Controlling Coordination MotivationPerformance evaluation Identify the areas of inefficiency Optimal use of resources Increase profitability Means of communication Objectives of budgetary control system

5. 5 Individual Organisation Different managers decide their objectives. This affects the goal congruence. Agreement between corporate objectives & the action of various departments & managers Conflict Corporate and divisional objectives may differ and can be reconciled Reasons:  Reward systems  Objectives are not clearly defined  Imperfect information  Departmental rivalry 1. Participation of all levels of management Cross-functional interaction to ensure congruence Continued…

6. 6 2. Co-ordination of budgets Co-ordination of individual budgets with others and then approval by top management will resolve the matter of conflicting objectives of the organisation, and that of the departments, as well as amongst the departments. Example A production manager proposes a budget in which production is 10% higher than the previous year. In order to achieve this, he will require extra hours of production. The finance manager is not willing to pay the extra amount in the form of overtime premium due to lack of sufficient working capital. Obviously, the production manager will need to modify his budget proposal to bring it in line with the cash budget. 3.Transparency in the budgeting process While preparing budgets there should be free communication horizontally as well as vertically. This will create a sense of belongingness within the organisation, and will motivate everyone to work hard. Continued…

7. 7 CO Planning Motivation PE Planning Motivation Performance evaluation Conflicts Identify and resolve conflicting objectives (CO) and explain the implications Conflicts between planning, motivation and performance evaluation:  Planning objective and motivation  Planning objective and performance evaluation (PE)  Motivation objective and PE Continued…

8. 8 To avoid / resolve conflicts in budget objectives, budget targets should be neither too high nor too low. Also, when substantial change takes place in the environment, the changes should be identified and, wherever required, budgets should be revised accordingly. I can’t reach so high Target Implications of conflicting objectives:  Unachievable targets may result in failure of budgetary system.  Budgets are prepared in advance and the circumstances may change subsequently. Therefore the budget targets may not remain equally achievable in the changed circumstances.  Under both circumstances, the success of the budgetary system would be doubtful. Techniques to resolve the conflicts between objectives:  Rolling budget  Contingency planning  Updating through revised forecasts  Performance evaluation on the basis of revised budgets  Judgment of the general manager  Tight ship policy  An approach combining bottom-up & top-down approaches Continued…

9. 9 RECAP  Outline the objectives of a budgetary control system. [2]  Explain how corporate and divisional objectives may differ and can be reconciled. [2]  Identify and resolve conflicting objectives and explain implications. [2]

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