PM - Budgeting and control
Contents
Performance Hierarchy ............................................................................................................... 2
BUDGET IMPORTANCE: ........................................................................................................... 2
BUDGETS AT DIFFERENT HIERARCHIES: .................................................................................. 2
BUDGETARY SYSTEM USEFUL IN: ............................................................................................ 2
Master, Functional, Fixed and Flexible Budgets ...................................................................... 3
Participation In Budgeting: Top-Down & Bottom-Up Budgeting ................................................ 4
TOP-DOWN BUDGETING: ........................................................................................................ 4
BOTTOM-UP BUDGETING: ....................................................................................................... 4
Incremental and Zero Based Budgeting ...................................................................................... 6
INCREMENTAL BUDGETING: .................................................................................................... 6
ZERO BASED BUDGETING: ....................................................................................................... 6
Rolling Budgets ............................................................................................................................ 8
Rolling budgets are: ................................................................................................................. 8
Activity Based Budgeting............................................................................................................. 9
Beyond Budgeting ..................................................................................................................... 10
TRADITIONAL BUDGETING: ................................................................................................... 10
DRAWBACKS OF TRADITIONAL BUDGETING: ........................................................................ 10
CONCEPT OF BEYOND BUDGETING: ...................................................................................... 12
BENEFITS OF BEYOND BUDGETING: ...................................................................................... 14
DRAWBACKS OF BEYOND BUDGETING: ................................................................................ 14
SUMMARY: ............................................................................................................................ 14
Feedforward Control ................................................................................................................. 15
1
,Performance Hierarchy
BUDGET IMPORTANCE:
1) It provides a benchmark for organisations;
2) It allows variance analysis and performance assessment;
3) It allows improved performance based on prior period assessment.
BUDGETS AT DIFFERENT HIERARCHIES:
Long term planning → Senior management → Plan to develop new products
Medium term planning → Middle management → Budgeted sales targets
Short term planning → Junior management → Budgeted material costs
Note: All levels of budgeting are linked. Budgetary system assists all levels of management.
BUDGETARY SYSTEM USEFUL IN:
Planning;
Control;
Motivation;
Communication;
Performance assessment.
2
, Master, Functional, Fixed and Flexible Budgets
Budget
Description
type
Master _ Collates budgets of different business
budget: functions;
_ Consistent with overall financial
statements;
_ Profit or loss account, statement of
financial position and cash flow;
_ Represents an overall budget of
organisation;
_ Not useful for management control.
Functional _ Prepared for each organisation’s
budget: business functions;
_ Sales, material, labour, or overall
budget;
_ Highlight organisation’s structure and
responsibility;
_ Cannot be linked to a business
function.
Fixed
_ Made at the start of the year;
budget:
_ One level of activity;
_ Anticipated levels of sales and
production
Advantages Disadvantages:
_ Not useful in rapidly
_ Benchmark for control purposes;
changing environment;
_ Difficult to incorporate into
_ Highlights organisational potential;
performance appraisal.
Flexible
_ Prepared at the start of the year;
budget:
_ Multiple levels of activity.
Advantages:
_ Budget for multiple levels of activity;
_ Easier to assess the performance.
3
Contents
Performance Hierarchy ............................................................................................................... 2
BUDGET IMPORTANCE: ........................................................................................................... 2
BUDGETS AT DIFFERENT HIERARCHIES: .................................................................................. 2
BUDGETARY SYSTEM USEFUL IN: ............................................................................................ 2
Master, Functional, Fixed and Flexible Budgets ...................................................................... 3
Participation In Budgeting: Top-Down & Bottom-Up Budgeting ................................................ 4
TOP-DOWN BUDGETING: ........................................................................................................ 4
BOTTOM-UP BUDGETING: ....................................................................................................... 4
Incremental and Zero Based Budgeting ...................................................................................... 6
INCREMENTAL BUDGETING: .................................................................................................... 6
ZERO BASED BUDGETING: ....................................................................................................... 6
Rolling Budgets ............................................................................................................................ 8
Rolling budgets are: ................................................................................................................. 8
Activity Based Budgeting............................................................................................................. 9
Beyond Budgeting ..................................................................................................................... 10
TRADITIONAL BUDGETING: ................................................................................................... 10
DRAWBACKS OF TRADITIONAL BUDGETING: ........................................................................ 10
CONCEPT OF BEYOND BUDGETING: ...................................................................................... 12
BENEFITS OF BEYOND BUDGETING: ...................................................................................... 14
DRAWBACKS OF BEYOND BUDGETING: ................................................................................ 14
SUMMARY: ............................................................................................................................ 14
Feedforward Control ................................................................................................................. 15
1
,Performance Hierarchy
BUDGET IMPORTANCE:
1) It provides a benchmark for organisations;
2) It allows variance analysis and performance assessment;
3) It allows improved performance based on prior period assessment.
BUDGETS AT DIFFERENT HIERARCHIES:
Long term planning → Senior management → Plan to develop new products
Medium term planning → Middle management → Budgeted sales targets
Short term planning → Junior management → Budgeted material costs
Note: All levels of budgeting are linked. Budgetary system assists all levels of management.
BUDGETARY SYSTEM USEFUL IN:
Planning;
Control;
Motivation;
Communication;
Performance assessment.
2
, Master, Functional, Fixed and Flexible Budgets
Budget
Description
type
Master _ Collates budgets of different business
budget: functions;
_ Consistent with overall financial
statements;
_ Profit or loss account, statement of
financial position and cash flow;
_ Represents an overall budget of
organisation;
_ Not useful for management control.
Functional _ Prepared for each organisation’s
budget: business functions;
_ Sales, material, labour, or overall
budget;
_ Highlight organisation’s structure and
responsibility;
_ Cannot be linked to a business
function.
Fixed
_ Made at the start of the year;
budget:
_ One level of activity;
_ Anticipated levels of sales and
production
Advantages Disadvantages:
_ Not useful in rapidly
_ Benchmark for control purposes;
changing environment;
_ Difficult to incorporate into
_ Highlights organisational potential;
performance appraisal.
Flexible
_ Prepared at the start of the year;
budget:
_ Multiple levels of activity.
Advantages:
_ Budget for multiple levels of activity;
_ Easier to assess the performance.
3
