1. THE PURPOSE OF BUDGETS AIMS Forecasting Planning Control Communication
Co-ordination
Evaluation
Motivation
Authorization and delegation
THE PERFORMANCE HEIRARCHY
Strategic planning is long term , looks at the whole organization and defines resource requirements
Tactical planning is medium term, looks at the department/ divisional level and specifies how to use resources
Operational planning is very short tem very detailed and is mainly concerned with control . Most budgeting activities fall within operational planning and control

2. ESSENTIALS OF SUCCESSFUL BUDGETING
Top management support
Clear and realistic goals
Assignment of Authority and responsibility
Creation of responsibility centres
Reasonable participation
Effective communication
Budget education
Flexibility.

3. BUDGETS AND PERFORMANCE MANAGEMENT
Responsibility accounting
Responsibility accounting divides the organisation into budget centres , each of which has a manager who is responsible for its performance
The budget is the target against which the performance of the budget centre or the manager is measured

4. . Advantages Disadvantages Goal congruence
Managers may be involved In setting targets , which may make them more realistic
Budget targets can be linked to individual rewards , which may be provide motivation to improve performance
Managers may work towards specific short term targets to the detriment of long term organisational goals
Managers may distort results to try to exceed targets and gain rewards

5. Management by exception
Comparing budgeted results to actual results allows managers to focus on areas that differ from the plan, thus letting them concentrate on areas that might need attention

6. BEHAVIOURAL ASPECTS OF BUDGETING
KEY ISSUES .
Dysfunctional behaviour- Want goal congruence
Budgetary slack
Target setting and Motivation
An expectations budget is a budget set at current achievable levels. This is unlikely to motivate managers to improve but may give more accurate forecasts for resource planning
An aspirations budget is a budget set at a level which exceeds the achievable level. This will motivate managers to improve if it is seen as attainable but may always result in an adverse variance. This must be managed carefully
For Motivation purposes, an aspirations target should be set slightly above the anticipated performance level

7. Targets should be Communicated in advance
Dependent on factors controllable by the individual
Based on quantifiable factors
Likely to appropriate rewards and penalties
Chosen carefully to ensure goal congruence

8. PARTICIPATION- TOP DOWN V BOTTOM UP
Advantages of participative budgets
Disadvantages of participative budgets
Increased motivation
Should contain better information, especially in a fast moving or changing environment
Increases managers’ understanding and commitment
Better communication
Senior managers can concentrate on strategy
Senior managers may resent loss of control
Bad decisions from inexperienced managers.
Budgets may not be in line with org objectives
Budget preparation is slower and disputes can arise
Figures may be subject to bias if junior managers either try to impress or set easly achievable targets ( Budgetary slack)
Certain environments may preclude participation eg a procurement manager may be faced with long term contracts already agreed.

9. . Conflicting objectives Rolling ( Continous) budgets
Company v division
Division v division
Short termism
Individualism
Rolling V periodic budgeting
Periodic budgets
The budget is prepared fro typically one year at a time. No alterations once the budget has been set . Suitable for stable organisations where forecasting is easy and where tight control is not necessary.
A budget kept continuously up to date by adding another accounting period ( eg month or quarter) when the earliest accounting period has expired
Aim: To keep tight control and always have an accurate budget for the next 12 months.
Suitable if accurate forecasts cannot be made , or for any area of organisation that needs tight control

10. . Advantages of rolling budgets More costly and time consuming
Disadvantages of rolling budgets
The budgeting process should be more accurate
Much better information upon which to appraise the performance of management
The budget will be much more relevant by the end of the traditional budgeting period
It forces management to take the budgeting process more seriously
More costly and time consuming
An increase in budgeting work may lead to less control of the actual results

11. INCREMENTAL AND ZERO BASED BUDGETING
Incremental budgeting
Advantages of incremental budgeting
Start with the previous period’s budget or actual results and add ( or subtract) an incremental amount to cover inflation and other known changes
Suitable for stable organisations where costs are not expected to change significantly . There should be good cost control and limited discretionary costs
Quickest and easiest method
Assuming that the historic figures are acceptable , only the increment needs to be justified
Avoids ‘reinventing the wheel”.

12. FEED FORWARD CONTROL
Feed forward control is defined as the forecasting of differences between actual and planned outcomes and the implementation of actions before the event , to avoid such differences
An example would be suing a cash flow budget to forecast a funding problem and as a result arranging a higher overdraft well in advance of the problem

13. . ZERO BASED BUDGETING Advantages of zero based budgeting
Preparing a budget from a zero base, as though there is no expectation of current activities to continue from one period to the next, and justifying every piece of expenditure
1. Identify all possible services ( and levels of service) and then cost each service or level of service ; these are known individually as decision packages.
2. Rank the decision packages in order of importance
3. Identify the level of funding that will be allocated to the department
Emphasis on future need not past actions
Eliminates past errors that may be perpetuated in an incremental analysis
A disincentive for management to introduce slack into their budgets as each UGX has to be justified
A considered allocation of resources
Encourages cost reduction
Establishes priorities
Produces a working plan than can be adjusted if resource availability changes

14. Activity Based budgeting
Disadvantages of zero based budgeting
Activity Based budgeting
Can be costly and time consuming
May lead to increased stress for management
Only really applicable to a service environment may re invent the wheel each year
May lead to lost continuity of action and short term planning
Use ABC for budgeting purposes
Step 1. Identify cost pools and cost drivers
Step 2. Calculate a budgeted cost driver rate based on budgeted cost and budgeted activity
Step 3 Produce a budget for each department or product by multiplying the budgeted cost driver rate by the expected usage.

15. ADVANTAGES AND DISADVANTAGES OF ABB
Greater focus on understanding overheads
Greater control of overheads
Better decision making as costs will be more accurate.
Extra time and effort to establish an ABC system
Problems linking ABB activities to established responsibility centres
In the short term , many overheads are not controllable and do not vary directly with changes in the volume of activity for the cost driver

16. LINE ITEM BUDGETS AND PLANNING PROGRAMMING BUDGETING SYSTEMS(PPBS)
Deficiencies of line item budgets
Traditional format in Not for profit Organisations.
Expenditure – Expressed in considerable great detail
Activities being undertaken- Given little attention
Show nature of spending but not the purpose.
No information on planned and actual accomplishments
No provision on efficiency with which activities were carried out
No provision of a sound basis for deciding on resource allocation

17. . Eg Local Govt objective like Universal child care
PLANNING PROGRAMMING BUDGETING SYSTEMS
Eg Local Govt objective like Universal child care
To overcome deficiencies of line item budgets
Need to orient objectives or local needs to an objective based programme format hence PPBS
PPBS Steps:
Establishment of overall objectives
Identification of the programmes that might achieve these objectives.
Determination of the costs and benefits of each programme
Budget allocations on the basis of the cost/benefits of the different programmes.
The programme may look like this:
The construction of four new kindergartens
The repair and extension of seven existing kindergartens
The employment of 30 new nursery school teachers
The introduction of an hourly baby –sitting service
PPBS forces mgt to identify activities , functions or programmes to be provided, thereby establishing a basis for their worthiness .