1. F5-Chapter 8
Budgetary systems
Lecturer: FangFang

2. Budgetary systems Chapter Preview Planning and control cycle
Objectives of budgetary systems
Traditional
budgetary systems
Alternative
budgetary systems
Incremental budgeting
ZBB
ABB
Fixed & flexible budgets
Rolling budgets
Beyond budgeting

3. Overview Planning and control cycle
Objectives of a budgetary planning and control system
Budget perparation
Various budget types 3

4. Objectives Objectives Corporate objectives Profitability Growth
Market share
Cash flow
ROCE
EPS
Unit objectives
--specific to individual business units

5. Objectives
Corporate objectives may conflict with divisional objectives
Setting objectives is a political process using bargaining
Conflict is resolved using prioritisation, compromise, negotiation and satisfying.
Goal congruence

6. The planning and control cycle
Identify objectives
Implement the long-term plan
Identify potential strategies
Measure actual results and compare with plan
Control process
Planning process
Evaluate strategies
Respond to divergences from plan
Choose alternative courses of action 6

7. Planning and control Determine objectives Control - variances
Planning – set budget
Actual operations

8. Objectives of a budgetary systems
Achievement of the
business’ objectives
Motivations
Compel planning
Communications
Control system
Coordinate activities
Objectives

9. Planning and control in the performance hierarchy
Long-term and short-term planning
Planning hierarchy

10. Profit-making business
School
Profit-making business
Objective
To provide a high quality of education, so that within 5 years, 95% of pupils achieve grades A or B in their final examination
To achieve a 20% return on capital every year.
To increase earnings per share by 10% every year for the next 5 years
Strategic plans
(1)
Reduce class size.
Raise new funds to invest 1 million in new equipment and facilities.
Attract the highest quality of teacher by paying good salaries
Cut cost by 15% in domestic markets.
Expand into markets in Asia.
Increase domestic market share by 10% in the next 5 years.

11. Profit-making business
School
Profit-making business
Tactical plans
(2)
Set a target for this year for examination results.
Increase the number of teacher by 10% by the end of the year.
Plan the launch of a fund-raising campaign.
Carry out a cost reduction program next year.
Establish business relationships with customers in Asia and carry out market research.
To increase the size of the work force in order to improve total sales
Operational plans
(3)
Prepare teaching schedules for next term.
Monitor the marks gained by students in mock examination.
Provide whiteboard training to teaching staff.
To obtain prices from more than one supplier before purchasing materials.
Offering a bulk purchase discount of 10% to a major customer.

12. Other aspects of budget preparation
long-term plan
limiting factor
budget manual
sales budget
production capacity
functional budgets
discretionary costs
consolidation and coordination
cash budget
master budget

13. Participation in budgeting
Budget-setting styles
imposed (top down)
participation (bottom up)
negotiated 13

14. Top-down budgeting Advantages Disadvantages
Top management prepare a budget with little on no input from operating personnel
Advantages
Disadvantages

15. Bottom-up budgeting Disadvantages Advantages
Budgets are developed by lower-level managers who then submit the budgets to their superiors.
Disadvantages
Advantages

16. Negotiated style of budgeting
In top-down budgeting, operational managers will try to negotiate with senior managers.
In bottom-up budgeting, senior managers usually review and revise budgets presented to them.

17. Traditional budgetary systems
Incremental budgeting
add a certain percentage to last year’s
budget to allow for growth and inflation.
It encourages slack and wasteful
spending to creep into budgets.
Example: P

18. Fixed budgets VS flexible budgets
--on the basis of an estimated volume of production and an estimated volume of sales.
-- not adjusted to reflect actual activity levels
Fixed budgets
--change as activity level changes by recognising different cost behaviour patterns

19. Zero based budgetary systems (ZBB)
The initial budget is zero and every items of expenditure has to be justified in its entirety to be include.
Step 1
Step 2
Step 3
Define decision packages
Evaluate and rank
Allocate resources

20. Zero based budgetary systems (ZBB)
Advantages
Identify and removes inefficient and/or obsolete operations
Provide a psychological impetus to employees to avoid wasteful expenditures
Leads to a more efficient allocation of resources 20

21. Zero based budgetary systems (ZBB)
Disadvantages
Involves time and effort
Can cause suspicion when introduced
Costs and benefits of different alternative can be difficult to quantity
Ranking can prove problematic

22. Activity based budgeting (ABB)
Define the activities and using the level of activity to decide how much resource should be allocated, how well it is being managed and to explain variances from budget.
Example: P 22

23. Principles of ABB It is activity which drive costs and the aim
is to control the costs drivers. 1
Not all activities are value adding. 2 2
Not all activities are value adding.
Most departmental activities are driven by
demands and decisions. 3
Additional measures are needed. 4

24. Rolling/continuous budgets
Continuously updated by adding a further accounting period when the earlier accounting period has expired. 1 2 3 4 5 6 7 8 9 10 11 12
Annual
Month
Quarter
Semiannual

25. Rolling/continuous budgets
Advantages
Reduce uncertainty
Up-to-date budget always available
Realistic budgets are better motivators
Disadvantages
Involves more time, effort and money 25

26. Criticisms of budgeting
Beyond budgeting
Criticisms of budgeting
Time consuming and expensive
Provide poor value to user
Fail to focus on shareholder value
Too rigid and prevent fast respond
Stifle product and strategy innovation
Focus on sales targets rather than customer satisfaction
Divorced from strategy
Reinforce a dependency culture
Lead to unethical behaviour 26

27. Beyond budgeting fundamental concepts
Use adaptive management processed rather than the more rigid annual budget
Move toward devolved networks rather than centralised hierarchies

28. Other budgeting issues
Sources of budget information—past data, sales forecasts, production department costing information.
Difficulties of changing budgetary practices
Allowing for uncertainty—flexible budgeting, rolling budgets, probabilistic budgeting, sensitivity analysis

29. End of Chapter 8
Thank You !