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3/1
AGL - AUTONOMOUS GROUP LEARNING
NO.3 BASIC PLANNING AND
BUDGETARY
CONTROL FOR MANAGERS
PART I
Copyright RGAB 2006/1
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3/2 ABBREVIATIONS
AGL - AUTONOMOUS GROUP LEARNINGIND - INDIVIDUAL
SG - SMALL GROUP
CSG - COMBINED SMALL GROUP
MG - MAIN GROUP
ASS - ACCOUNTING STEP BY STEP
BC - BUDGETARY CONTROL TEXT
PL - PROGRAM LEARNING
L - LECTURE
D - DISCUSSIONCR - CHAPTER
CAI - COMPUTER ASSISTED
INSTRUCTION
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3/3 ASSIGNMENT 1.0 INTRODUCTION
1.1 SPECIFIC OBJECTIVES OF THE PROGRAM
(a) Understand the language and concepts of business planning
and budgetary control.
(b) Prepare budgets and interpret budget reports.
(c) Develop confidence in dealing with practical budget problems
both human and technical.
(d) Appreciate the need for a Total Business Planning system.
(e) Motivate further study in the future.
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3/4 1.2 AUTONOMOUS GROUP LEARNING (AGL)
The AGL method is designed to achieve rapid individual learning using
special rnaterials and the stirnulus of group activity without a formal
instructor.
The groups use the rnaterials to find the answers to all problerns and
questions.
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3/5 1.3 GROUP ARRANGEMENTS
The work will be done:
(a) IND - INDIVIDUALLY, or
(b) SG - SMALL GROUP (in small groups of four members
which will change daily), or
(c) CSG - COMBINED SMALL GROUP (two small groupstogether, with one group acting as "dealers" to lead the
discussion and record key points on the flipchart"
provided), or
(d) MG - MAIN GROUP (for short taped lectures on key learningpoints with visual aids).
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3/6 1.4 SG - SMALL GROUPS
Initial group names provided by the Organizer.
Note the name of your SG and names of the other
members.
Groups change three times during the course.
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3.7 1.5 LEARNING MATERIALS
(a) Retained by members:
- Text book
- Notebook for recording every key point
- Course Diary
- CAI
- Program Learning ASS
(b) Used but not retained by members:
- Work Packs for Part 1 and II including:
introduction, cases, and key learning points to be
noted.
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3/8 1.5 (continued)
NOTE:
(a) Use your notebook. Do not mark the Work Pack,
which must be handed back at the end of each day.
You receiveall the materials in your SG. Don't look
ahead" in the workpack until you are specificallyasked to do so
(b) Acknowledgment is made to many published and
unpublished sources which have provided the basic ideasand practical experience and case materials which have
been specially adapted for this program.
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3/9 1.6 METHOD
Try to complete fully every task in the time allowed.
Work as quickly and effectively as possible.
A pattern of learning methods will be used including:
(a) Program learning
(b) Case analysis(c) Lectures
(d) Quizzes
(e) Learning patterns
(f) Homework reading and CAI
.
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3/10 1.7 LEARNING PATTERNS
a. OBJECTIVE - CONFIDENCE
LANGUAGE AND CONCEPTS
BUDGET PREPARATION
BUDGET REPORTING
TOTAL BUSINESS PLANNING
HUMAN AND TECHNICAL PROBLEMS
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3/11 1.7 LEARNING PATTERNS
b. GROUPS
INDIVIDUAL WORK
SMALL GROUP WORK
COMBINED SMALL GROUP WORK
MAIN GROUP WORK
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3/12 1.7 LEARNING PATTERNS
c. METHOD - INDIVIDUAL LEARNING FOR YOU
PROGRAM LEARNING
CASES
READINGS
LECTURES
SG, CSG AND MG LEARNING
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3/13 1.8 INSTRUCTIONS
a. Assemble in SG to introduce yourself, indicateyour past experience in planning and budgetary
control, and what you hope to contribute to, and
gain from the course.
b. Complete page one of the Course Diary and discuss
the learning objectives.
c Reassemble in MG when the bell rings.
NOTE: Check that you have a full set of learning
materials. Locate the glossary in ASS.
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3/13a 2.0 QUIZ (45 minutes)
2.1 INSTRUCTIONS
a. Assemble in SG.
b. Answer the quiz of 100 questions; mark your answers a, b, c
or d with a clear X on the special form provided in the Course
Diary.
c. Work as quickly as possible, but dont guess - just
leave blanks.
d. The Organiser will mark your answers and give you
a measure of your knowledge at the start of the
course.
e. Reassemble in MG when the bell rings.
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3/13b 3.1 PROGRAM LEARNING (45 minutes)
2.1 INSTRUCTIONS - INDIIVIDUAL WORK
a. Assemble in SG and find your copy of the ASS book.
b. Quickly read the Introduction in ASS.
c. Quickly complete aloud and in writing Ch. II of ASS.
d. Record key points in your notebook.
e. Reassemble in MG when the bell rings.
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3/14 4.0 BASICS OF BUDGETING
4.1 BUDGETS AND BUDGETARY CONTROL
Budgets are financial plans of future action.
Budgetary control uses budgets to measure performanceand control behavior.
Both involve technical and human problems.
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3/15 4.2 OBJECTIVES OF BUDGETARY CONTROL
(a) Plan future operations to balance objectives, resourcesand environment..
(b) Communicate targets and plans to the organization,
which must be understood to be effective.
(c) Motivate managers to achieve company objectives.
(d) Compare actual performance with budget target and
locate trouble spots for management action.
(e) Influence the behavior of managers.
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3/16. 4.3 PERIOD AND PROJECT PLANNING
Budgetary control may involve both project planning and periodplanning.
Project planning - targets for each specific project over time,
from beginning to end.
Period planning - targets by time periods (months, quarters,
years) including all activities in the planning period.
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3/17 4.4 BUDGET SYSTEMS
Flexible to meet needs - USEFUL is the key!
Factors shaping a budget system:
a. Industry - profit- making characteristics.
b. Top Management objectives - system to promote
specific objectives.
c. Other considerations - organizational structure,
information technology, incentives and staff
available.
NOTE: System initially affected by Top Management attitudes
towards financial planning and control.
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3/18 4.5 BUDGET CONCEPTS
(a) Assumptions - Budgets are future forecasts based upon
assumptions. Only as good as assumptions. Sales forecast is
usually the key assumption.
(b) Sponsorship - Top Management must convince the Organization that
the budget system is important. Top Management attitudes
revealed mainly, not by words but by action and involvement in
budget process.
(c) Responsibility centers - Organizational centers provide for control
and responsibility. Center Manager involved in setting budget
targets. Building block approach to total budget process.
(d) Participation - by both manager and "managed" in setting targets.
and continuous education to understand the system, what is
expected, and how performance is judged.
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3/19 4.5 (continued)
(f) Time - Control period is shortest time for Management to
intervene arid change performance. Varies by responsibility
centers and activity.
(g) Controllable Costs - Emphasize costs over which manager can
influence (actually and/or psychologically). Use to measure
performance.
(h) Management by Exception - Focus attention, not on all items,
but those where actual performance differs significantly from
target. Conserve management time and provide a starting point
for performance analysis. Report signals of exceptions only!
(i) Appraisal - Budget as a standard to evaluate performance -
both measured in same terms.
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3/20 4.6 BUDGET PROCESS
Operations (income statement) budget
Cash budget
Ccapital budget
Funds flow budget
Balance sheet - budget - overall financial position.
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3/21 4.7 OPERATING BUDGET
(a) Plans and targets - covers all operating statistics for future
period.
(b) Key assumption is Sales related to:
- Market potential
- Management guidelines
- Productive capacity- Cash resources
(c) Includes sales, cost of sales, overhead expense and profit.
Distinguishes fixed and variable cost. Shows "Contribution"
(sales less variable cost) to fixed cost and profit.
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3/21a 4.7 OPERATING BUDGET(continued)
(d) Normal period one year - six months in detail and six
months in total.
(e) Budget set from past performance. Ratios, managers'
reasonable estimates and good common sense.
NOTE: Negotiating the budget is a MANAGEMENT GAME calling
for skill, strategy, shrewdness ... and quiet manipulation (but be
sure to call it creativity )
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3/22 4.8 BUDGETED BALANCE SHEET
Budget of overall financial position. Assets and how they are financed
from liabilities and owners equity.
Plan balance sheet at end of budget period. Forecast:
1. Current assets and current liabilities from sales target in operating
budget, or alternatively, each item of current assets and current
liabilities separately:
a. debtors as % of sales
b. stock as % of cost of sales
c. creditors as % of cost of sales
d. tax as actual liability
2. Fixed asset requirements in a special "capital" budget.
3. Loans by specific management policies.
4. Owner's equity (balance plus profit less dividends).
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3/22a 4.8 (continued)
The difference between required assets
and finance available (liabilities and owner's equity)
represents cash surplus or deficiency
for the budgeted level of activity.
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3/23 4.9 OTRA APPROACH TO BUDGET PROBLEMS
Evaluate a budgetary control system in terms of:
O - Objectives - Define specific objectives which management
seeks to achieve with the budget system, within the specific
company organization.
T - Targets - Analyze how the system provides guidance and I
interaction in setting the key budget targets.
R - Reporting - Analyze the frequency, content, design and
effectiveness of the reporting system. Compare actual
against budget (target) performance.
A - Action - Evaluate the effectiveness of the system in terms of
action taken and behavior-patterns of managers in achieving
overall company objectives.
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3/24 4.10 LEARNING PATTERNS
a. BUDGET OBJECTIVES
PLANNING
COMMUNICATION
MOTIVA\TING
CONTROLLING
TO INFUENCE THE BEHAVIOUR OF MANAGERS
AND THE WAY THEY DANCE
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3/25 4.10 LEARNING PATTERNS
b. BUDGET SYSTEMS
INDUSTRY PROFIT MAKING FACTORS
ORGANIZATION
TOP MANAGEMENT OBJECTIVES
SYSTEMS - FIXED OR FLEXIBLE
USEFUL? CREATIVE? DEFENSIVE?
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3/26 4.10 LEARNING PATTERNS
c. BUDGET CONCEPTS
ASSUMPTIONS
SPONSORSHIP
RESPONSIBILITY CENTERS
PARTICPATION
INTERACTION
CONTROL COSTS
MANAGEMENT BY EXCEPTION
APPRAISAL
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3/27 4.10 LEARNING PATTERNS
d. OPERATING BUDGET
MARKET
GUIDELINES
CAPACITY
CASH
SALES TARGET
SALES = COST OF SALES + OPERATING EXPENSE
+ PROFIT
3/28 4 10 LEARNING PATTERNS
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3/28 4.10 LEARNING PATTERNS
e. BALANCE SHEET
ASSETS ARE FINANCED BY OWNERS EQUITY
AND LIABILITIES.
AS SALES EXPANDREQUIRED ASSETS EXPAND...
AND HAVE TO BE FINANCED, EITHER FROM
PROFITS RETAINED IN OWNERS EQUITY, OR
FROM EXPANDED LIABILITIES
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3/29 4.10 LEARNING PATTERNS
f. OTRA
OBJECTIVES
TARGETS
REPORTING
ACTION
3/29a 4 11 INSTRUCTIONS
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3/29a 4.11 INSTRUCTIONS
INDIIVIDUAL AND SG WORK
a. Assemble in SG.
b. Study and discuss the lecture, to be sure that every member of your
SG, really understands, every key issue.
c. Record key points in your notebook.
d. Quickly read the case study (JOHN MARAIS) which follows.
e. Then work as a very efficient and effective action team, to quickly
resolve the case.
f. Be sure to record the complete answer to each question and your
final decision, on the SG f lip chart provided, so that you are fully
EI in what you agree upon.
3/29b 6 O CASE - JOHN MARAIS
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3/29b 6.O CASE JOHN MARAIS
6.1 - THE STORY OF THE GASE
John Marais finances business expansion with a bank loan. He budgetsa need of 75m.
His results show increased sales over forecast and slightly increased
profits.
However, dividends use up necessary cash; inventory is high; and
creditors are stretched.
The equity/debt relationship is weaker. Was the expansion really
worthwhile?
What budget should be set for next year?
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3/29c 6.2 BUDGET FOR NEXT YEAR - SELLING AND
ADMINISTRATION EXPENSE
Suggested solution: Actual Budgetthis yr next yr
000 000
Selling Expense:
Sales salaries 25 45
Office Salaries 15 20
Office Expense 16 20
Sales Commission 70 100
Travel Expense 25 45
Advertising 60 70
General Promotion 35 50
Discounts allowed 80 120
326 470
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3/30 6.2 . (continued)
Aministrative Expense:
Actual Budgetthis yr next yr
000 000
Salaries 25 25
Office expense 29 35Legal expense 6 10
Audit expense 4 10
General expens, interest
and depreciation 26 30
Total 90 110
Total S & A Expense (below) 416 580
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3/31 6.2 (continued)
NOTE:
(a) Moderate increase in sales expense, except for sales
commission, travel, advertising, promotion. Discounts allowed
increased substantially.
(b) Administrative expense well controlled.
(c) Total (416 - 580) due to sale increase from 1,583 -2,500. Fixed
cost stable but variable cost increased.
(d) ALL BUDGET TARGETS ARE ONLY REASONABLE
ESTIMATES. (YOU MAY HAVE ALTERNATIVE SOLUTIONSTHAT ARE EQUALLY ACCEPTABLE).
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3/32 6.3 BUDGET NEXT YEAR - OPERATIONS
Suggested solution: Actual Budgetthis yr next yr
000 000
Net Sales 1,583 2,500
Cost of sales 1,053 1,667
Gross profit 530 833 (33%)
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3/33 6.3 (continued)
Suggested solution: Actual Budget
this yr next yr000 000
Gross Profit 530 833
Selling and administrative expense 416 580
Operating profit 114 253
Income tax (40%) 45 101
Net profit 69 152
Dividend paid 43 43
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3/34 6.4 BUDGET NEXT YEAR - BALANCE SHEETS
Suggested solution:
Actual Budget
this yr next yr000 000
Current Assets:
Cash (19)
Accounts receivable (debtors) 127 208
Inventory (stock) 314 559441 748
Fixed Assets:
Cost 92 92
Less: Accumulated Depreciation 12 3080 62
Total Assets 521 810
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3/35 6.4 (continued)Actual Budget
this yr next yr
000 000
Current liabilities:
Accounts payable (creditors0 139 288
Current tax liability 45 101
Bank (loan) 75 50
259 439Owner's Equity:
Share captal 100 100
Accumulated profit 162 271
262 371
Total Liabilities and Owner's equity 521 810
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3/36 6.4 ASSUMPTIONS
NOTE:
(a) AR - Sales 2, 500 @ 8.2% = 208.
(b) INV - Cost of sales 1, 667 @ 33.3% = 559
(c) AP - Cost of sales 1,667 @ 16.6% = 288.
(d) OE - Accumulated profit 162 plus net profit 152
less dividend 43 = 271.
(e) CASH - Difference - cash deficiency (19)
3/37 6 5 EVALUATION OF NEXT YEAR'S BUDGET
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3/37 6.5 EVALUATION OF NEXT YEAR'S BUDGET
(a) Operations - Expansion of sales and profits, despite reduced
gross profit % and loss of purchase discounts. Good cashflow (152m + dep. 18m).
(b) Capital - No substantial additions. Will this be possible with
the increased sales?
(c) Cash - Liquidity difficult even with stock, debtors and
creditors controlled.
(d) Overall Financial Position - Poor. Required assets increased
by 289 (521 - 810) yet profit retained only 109 (152 - 43).This forces a stretching of creditors to finance the assets.
(e) Assets - Expansion at reduced margins is dangerous
unless "required assets controlled. Need higher equity base.
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3/38 6.6 ITEMS TO BE CAREFULLY WATCHED
(a) Continued expansion to achieve budget targets, which provide:
profit, cash flow to improve liquidity and equity base.
(b) Control carefully the following:
1. Sales - not to expand above budget because it would
involve increase in required assets.
2. Gross Profit - hold sales prices, avoid inventory losses,
improve purchasing, take cash discounts, etc., and thus
hold the 33% margin (gross profit percentage).
3. Sales expense - control carefully salesmen commission,
sales discount and advertising - the major costs.
4. Administrative expense - watch general expense and
hold other costs.
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3/39 6.6 (continued)
5. Debtors and Inventory - hold to budget levels with
careful controls.
6. Fixed assets - avoid substantial new expenditure.
7. Creditors - take cash discounts as available but stretch
other payables if possible.
8. Dividends - control to budget level or cut to nil if
possible. Get more equity!
(c) Overall - Sales and profits expansion can only lead to financial
strength, if finance is available for the increased assets. Thiscompany needs to get more equity base - and control operations
very carefully - cash availability is vital!
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3/40 6.7 PERFORMANCE THIS YEAR-
ACTUAL AGAINST BUDGET
(a) Operations:
1. Sales increased substantially (1,163 - 1, 583).
2. Gross profit increased (430 - 530).
3. Gross profit percentage fell substantially (37.6% - 33.3%)
4. Selling expense exceeded budget (232 - 326) due to
sales commission and excessive sales discount allowed.
5. Administrative expense controlled but general expense
requires investigation (15 - 26).
6. Dividends used up most of the cash flow (43 - 69).
7. Excess sales (1, 583 - 1,163 = 420) produced onlysmall additional net profit (69 - 65 = 4) due to falling
margins and high sales discount.
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3/41 6.7 (continued)
(b) ACTIVITY
1. Inventory higher than budget (183 - 314) and
inventory turnover fell (4.0 - 3.3 times).
2. Receivables higher but consistent with increased sales
(30 - 29 days).
3. Payables stretched (9 - 48 days).
(c) LIQUIDITY:Poor. Company will find it difficult to repay 25 to the
bank within two weeks.
(d) OVERALL:
Excessive activity at lower margins led to increased need forassets. Liquidity crisis and deterioration in equity/debt ratio
(2.8:1 - 1:1). Need to restrain sales or increase equity base with
new cash or retained earnings.
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3/42 6.8 FALL IN GROSS PROFIT PERCENTAGE
May be due to:
- poor inventory valuation- selling price cuts
- excessive returns and allowances
- inventory losses
- poor purchases- loss of purchase discounts
- embezzlement of cash
- sales not recorded to avoid tax
- etc...
Did you get them all?
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3/43 6.9 LEARNING POINTS
(a) Increased sales target must increase stock (inventory) and
debtors.
(b) Operating budget based upon assumptions of sales, margins
and overhead expenses. Margin means gross profit percentage.
(c) Capital budget provides fixed assets to support operating sales
targets.
(d) Overall financial position - budgeted balance sheet based on
assumptions for: stock, fixed assets, debtors, creditors and
capital.
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3/44 6.9 (continued)
(e) Distinguish fixed costs which remain stable from variable costs
which increase with sales volume.
(f) With sales expansion the increase in required assets must be
carefully controlled by management.
(g) Equity/debt position may be improved by high retained profits
and low dividends or new equity.
(h) Budgets not merely for operations, but also the effect of
operations on cash, capital and the overall financial position.
(I) Budgets based upon assumptions.
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3/44a 6.9 (continued)
k. Use the past performance, ratios, estimates and common
sense to forecast budget for the future.
l. Evaluate a budget in terms of: sales, costs, profit, assets
required and finance available.
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3/45 6.10 LEARNING PATTERNS
a. EXPANSION
AS SALES EXPAND
REQUIRED ASSETS EXPAND...
AND HAVE TO BE FINANCED, EITHER FROM
PROFITS RETAINED IN OWNERS EQUITY,
OR FROM EXPANDED LIABILITIES
3/46 6 10 LEARNING PATTERNS
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3/46 6.10 LEARNING PATTERNS
b. SALES
THE NEW SALES TARGET AFFECTS:
OPERATING BUDGET
CASH BUDGET
CAPITAL BUDGET
BALANCE SHEET BUDGET
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3/47 6.10 LEARNING PATTERNS
c. COSTS
DISTINGUISH:
FIXED COSTS - STABLE WITH INCREASED SALES
VARIABLE COSTS - NOT STABLE
SEMI-VARIABLE COSTS - NOT STABLE
3/48 6 10 LEARNING PATTERNS
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3/48 6.10 LEARNING PATTERNS
e. BUDGETS
OPERATING BUDGET
S = COS + E + PROFIT
BALANCE SHEET BUDGET
CA + FA = L+ OE
NOTE: CA + FA = REQUIRED ASSETS
3/49 6.10 LEARNING PATTERNS
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3/49 6.10 LEARNING PATTERNS
e. ASSUMPTIONS
ALL ESTIMATES BASED ON:
PAST
TRENDS
RATIOS
FUTURE FORECASTS
COMMON SENSE
3/50a 6.10 INSTRUCTIONS
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a. Re-assemble in CSG.
b. Study and discuss the guide to the case. Compare it to
your solution. Be sure that every member of your CSG,
really understands every key issue.
c. Record key points in your notebook.
d. Re-assemble in MG when the bell rings.
3/50b 7.0 PROGRAM LEARNING (45 minutes)
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7.1 INSTRUCTIONS - INDIIVIDUAL WORK
a. Assemble in new SG and find your copy of the ASS book.
b. Introduce yourself to the other SG members.
c. Quickly complete aloud and in writing Ch. III of ASS.
d. Record key points in your notebook.
e. Reassemble in MG when the bell rings.
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3/50c 8.0 BUDGET PREPARATION
8.1 CASH BUDGET
Plan cash to finance immediate operations and avoid shortages.
Translate sales, costs, and expenses into weekly and monthly cash
receipts and payments based on assumptions of credit terms.
Determine future cash needs - timing and duration of peak cash
requirements.
Revise forecast monthly for twelve months ahead.
Cash availability is ABSOLUTELY VITAL.!
3/51 8 2 CAPITAL BUDGET
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3/51 8.2 CAPITAL BUDGET
(a) Key to long term profitability. Invest now for benefits in the
future.
(b) Plan future requirements for fixed assets, research and
development, investments and other major expenditures.
(c) Key decisions which affect the long term "shape", direction,
financial strength of the company.
(d) Create the environment for future business operations.
(e) Need long term (five year) capital budget to make annual capital
budgets meaningful.
(f) Plan both new "investment" and new "dis-investment" (sale of
fixed assets, etc. ).
3/52 8 3 FUNDS FLOW BUDGET
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3/52 8.3 FUNDS FLOW BUDGET
Forecasts future sources and uses of funds.
Sources of funds are: profit before depreciation, new capital, newlong term loans, sale of fixed assets, reduction of working capital.
Uses of funds are: dividends paid, fixed assets, investments,
repayment of loans, increase in working capital, etc.
Sources always equal uses - the difference, simply changes working
capital. If the required working capital" is computed - then the
difference between sources and uses of funds represents: fund
surplus or deficiency to requirements.
Management provides funds by: (a) increasing sources, or (b)
reducing uses. Funds flow shows key management decisions in
allocating company resources in the period.
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3/53 8.3 (continued)
NOTE:
Profit is computed after charging depreciation but since
depreciation is a non-cash expense, the cash flow from operations
is always:
(a) Profit after charging depreciation plus
(b) Depreciation expense
which is the same as "profit before depreciation .
3/54 8 4 ASSUMPTIONS
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3/54 8.4 ASSUMPTIONS
Budgets are based on assumptions.
Usefulness of the budget depends on the validity of the
assumptions.
Broad assumptions only justify broad figures.
Detailed "pseudo accurate" figures are neither justified nor useful
to Management.
3/55 8 5 ANALYSIS OF COSTS
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3/55 8. 5 ANALYSIS OF COSTS
There is no "true" cost - only a "useful' cost to Management.
Cost may be:
(a) Variable cost - varies in total with volume (e. g. direct materials).
(b) Fixed cost - constant in total with volume (e.g. rent, office
salaries, audit fees).
(c) Allocated cost - charged to centers on "fair" basis; never "true"
cost, but it may motivate managers (psychologically) e.g.
selling and administrative overhead "allocated" to departments.
(d) Engineered cost - directly related to production, e.g.direct
labour, materials, etc.
3/56 8 5 ( ti d)
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3/56 8.5 (continued)
(e) Managed cost - spent as management judges; no "right" level;
good performance is not no cost e.g. advertising must be
spent!
(f) Standard cost - target cost levels based on engineering
standards; variances between actual and standard analyzed
by: price, efficiency and volume e.g. direct labor and
materials.
(g) Committed cost - fixed over the short term regardless of activity
level e.g. depreciation.
(h) Direct cost - clearly associated with a product e.g. directmaterial. Conversely - indirect cost is overhead.
NOTE: Any one cost may be classified in several ways!
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3/57 8.6 FIXED BUDGET
Fixed budget assumes unchanging sales target and fixed plans toachieve it.
No automatic adjustment for cost and profit targets when sales
target not achieved.
Changed only as a specific budget revision which involves
technical and human problems.
3/58 8.7 VARIABLE OR FLEXIBLE BUDGET
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3/58 8.7 VARIABLE OR FLEXIBLE BUDGET
Not a fixed budget.
Series of alternative budgets according to differentforecasted sales levels (i.e. 60%, 80%, 100%, 120% of
target sales).
Cost and profit targets change in relation to sales targets.
Shows behavior of cost with sales volume. Distinguishes
fixed from variable costs.
Computes "contribution" (sales less variable cost equals
contribution).
Adds flexibility and complication to budget system, BUT
may not motivate managers as effectively as a fixed budget.
3/59 8.8 BREAK EVEN ANALYSIS
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3/59 8 8 S S
(a) Useful tool for understanding the effect on profit, of volume,
cost and price. Sales and costs computed at different sales
volumes. Distinguishes fixed and variable costs. Break evenpoint - sales equals total cost - no profit and no loss.
(b) Break even analysis aids understanding of the budget:
1. Shows profit(loss) at different sales volumes.2. For any volume, indicates what must be changed to
achieve profit target i. e. managed costs, engineered
costs, allocatedcosts, sales prices, product dropped etc.
(c) Not accurate. Only an estimate for a limited known range of
volumes. Conceals real difficulty of changing assumptions, i.e. it
may be much more difficult to reduce cost by 2% than to
increase sale price by 4%.
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3/60 8.9 CONTRIBUTION ANALYSIS
Sales less variable cost equals contribution.
Contribution less fixed cost equals profit.
Contribution to fixed cost and profit. Contribution for a product is
easily computed since fixed costs are ignored (not allocated).
TO ACHIEVE PROFIT, CONTRIBUTION FOR ALL PRODUCTS
MUST EXCEED TOTAL FIXED COST.
3/61 8 10 BUDGET PREPARATION PROCESS
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3/61 8.10 BUDGET PREPARATION PROCESS
(a) Budget guidelines
- Top Management sets objectives for the year and
outlines the means to achieve them.
- Forecast of the general economic, political and
business environment.
- Data circulated to responsible managers.
3/62 8 10 (continued)
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3/62 8.10 (continued)
(b) Setting the targets and defining 0rganisational
responsibilities.
- Responsible managers at every level prepare
estimates for their centres based on the guidelines.
- Interaction and discussion with supervisors leading
to targets for approval.
- Controller's staff aid in computations, provide
historical data etc., but managers should set targets
(at least in theory).
3/63 8.10 (continued)
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(c) Co-ordination:
- Separate budgets consolidated to form overallbudget for the firrm
- Budgets for each responsibility center are the
building blocks for the overall budget.
- Products and services transferred from one
department to another valued at special transfer
prices (cost plus profit or fair" market price or
negotiated price, or committee agreed price, etc. )
- Danger in "transfer prices" of inefficiency beingpassed along. Need to meet long term reasonable
market prices, but not short term or "dumping"
prices.
3/64 8 10 (continued)
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3/64 8.10 (continued)
(d) Review and Approval
- Budget moves upwards through the organization
for review, approval and change in discussion with
responsible managers.
- Top management gives final overall approval.
- Targets then communicated to managers
throughout the organization.
3/65 8 11 OVERALL BUDGET PREPARATION
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3/65 8.11 OVERALL BUDGET PREPARATION
In all stages there is interaction between different management
levels. Inter-action is not time wasted.
It is essential to:
(a) avoid decision without discussion
(b) provide participation as key to motivation to achieve goals
(c) "condition managers psychologically to accept final targets
(d) allow time for managers to change.
Controller's staff and top management create an organizational
environment which may be "creative" or "defensive".
3/66 8 12 OTRA APPROACH
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3/66 8.12 OTRA APPROACH
Evaluate a budgetary control system in terms of:
(a) Objectives
- What are the key profit-making factors of the
industry?
- How is the firm formally organized into cost, profit or
investment centers. Informally what really happens?
- What are Top Management objectives from the
budget system - short term and long term?
- How does Top Management want the responsible
manager to behave?
3/67 8.12 (continued)
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3/67 8.12 (continued)
(b) Targets:
- Does Top Management give adequate, and timely,
guidelines?- Is the organizational environment defensive or
creative?
- Who sets initial and final targets?
- How much interaction and participation is involvedto set the targets? How creative and realistic are
the agreed targets?
- Do the targets motivate managers in terms of
challenge, responsibility and sense ofachievement?
(c) Reports and (d) Action to be discussed in Part II.
3/68 8.13 LEARNING PATTERNS
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a. CASH BUDGET
RECEIPTS, PAYMENTS AND BALANCES
FOR THE BUDGET PERIOD.
KEY DATA: THE PEAK CASH NEED AND THE
DURATION OF THE PEAK.
CASH IS MORE IMPORTANT THAN PROFIT!
3/69 8.13 LEARNING PATTERNS
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b. CAPITAL BUDGET
LARGE AMOUNTS
LONG TERM
COCONUTS NOT PEANUTS
PLANNING FOR KEY INVESTMENTS AND
DIS-INVESTMENTS
EI IS RELEVANT HERE!!
3/70 8.13 LEARNING PATTERNS
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c. FUNDS FLOW BUDGET
KEY MANAGEMENT DECISIONS REVEALED.
SOURCES OF FUNDS:
PROFIT BEFORE DEPRECIATION
NEW LOANS AND CAPITALSALE OF FIXED ASSSETS
USES OF FUNDS:
FIXED ASSETSDIVIDENDS
LOAN REPAYMENT
THE DIFFERENCE BETWEEN SOURCES AN USES
FLOWS AUTOMATICALLY INTO WORKING CAPITAL.
3/71 8.13 LEARNING PATTERNS
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d. COSTS
FIXED
VARIABLE
ENGINEERED
MANAGEDSTANDARD
COMMITTED
ALLOCATED
DIRECTINDIRECT ETC.
3/72 8.13 LEARNING PATTERNS
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e. BREAK-EVEN CHART
ASSUMPTIONS VALID ONLY FOR A LIMITED RANGE
OF VOLUME OF SALES
SFC
VC
BEP - THE BREAK-EVEN POINT IS WHERE SALES
EQUALS FIXED COST PLUS VARIABLE COST.
3/73 8.13 LEARNING PATTERNS
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f. BUDGET STEPS
TOP MANAGEMENT GUIDELINES
TARGETS
REVIEW, COORDINATION AND APPRAISAL
ALL BASED ON ASSUMPTIONS .
3/74 8.13 LEARNING PATTERNS
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g. FIXED AND FLEXIBLE BUDGETS
BUDGET CHANGE - AFFECTS MOTIVATION OF
MANAGERS.
FIXED BUDGET - ONE TARGET FOR SALES, COST
AND PROFIT - NOT NORMALLY CHANGED.
FLE/XIBLE BUDGET - SEVERAL TARGETS,
FOR DIFFERENT LEVELS OF SALES.
3/74a 9.14 INSTRUCTIONS
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INDIIVIDUAL AND SG WORK
a. Assemble in SG.
b. Study and discuss the lecture, to be sure that every member of your
SG, really understands, every key issue.
c. Record key points in your notebook.
d. Quickly read the case study (GILTIM A) which follows.
e. Then work as a very efficient and effective action team, to quickly
resolve the case.
f. Be sure to record the complete answer to each question and your
final decision, on the SG f lip chart provided, so that you are fully
EI in what you agree upon.
3/75 10.0 CASE: GILTIM A
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10.1 THE STORY OF THE CASE
Giltim is a quoted public company organized into decentralized"
divisions.
The Glass Division has separate marketing and manufacturing
arrangements, but plant managers have profit responsibility.
The budget system involves a long interaction in setting sales and
profit targets to achieve company objectives.
Does it motivate the managers to behave appropriately?
3/76 10 2 TOP MANAGEMENT OBJECTIVES
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3/76 10.2 TOP MANAGEMENT OBJECTIVES
Top management requires increased earnings per share (EPS)
every year.
Probably concerned with stock market reaction of EPS on the
market price of the company. Willing to sacrifice even better long
term development and profit for .... a continuous but steady
improvement in earnings regardless of the poor economic climate.
Managers encouraged to economize in costs even below budget
levels unless sales targets achieved. Increased profit this year and
every year - "a reliable growth company". Fixed not flexible budget
system.
3/77 10.3 INDUSTRY PROFIT- MAKING FEATURES
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Product quality, customerservice, cost control and
delivery.
Plant manager best able to meet and control achievement,
in these critical areas.
3/78 10.4 ORGANIZATIONAL STRUCTURE
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Company "decentralized" into divisional profit and investment
centers.
Divisions function as independent companies except for: labor
relations, capital expenditure, finance and the many informal controls
that Head Office imposes without realizing it.
Sales districts andplants are not consistently organized for special
reasons not explained in detail in the case.
Plant manager not merely cost but profit conscious. Extreme
pressure on the plant manager if sales fall off. Budgets consolidated
at divisional level but considerable Head Office pressure on plants.
Are divisions really managing the plants?
3/79 10.5 BUDGET PREPARATION
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May - Division heads submit estimates of sales, profits and capital
requirements.
June - Market research forecasts of overall political, economic and
business environment. Head Office sets the guidelines for
each division.
July - Divisional marketing managers and district sales managersset and adjust targets.
August - Sales targets allocated to plant to develop operating
budgets.
September - Head Office Controller visits plants.
3/80 10.5 (continued)
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October - Plant and divisional budgets consolidated for Head Office
review and approval.
November - Changes negotiated and final targets agreed to achieve
overall objectives.
December - Top management final approval. Targets communicatedto responsible managers as fixed commitments for the budget
year.
3/80a 10.5 (continued)
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NOTE:
Top management retains complete control of long term planning.
Managers involved in short term budgets for many months.
This continuous "interaction" probably leads to budget "acceptance".
Management by exhaustion?
Budget appears to be imposed but probably agreed by managers
during the long period of "conditioning".
3/81 10.6 CONTROLLER'S VISIT
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Worthwhile for many reasons.
Investigates budget "padding' and obtains information to justifythe budgets to Head Office.
Demonstrates Head Office interest and involvement. Allows lower
managers to express aggressions. Creates relationships with
Head Office and lower levels.
Tends to bypass the Divisional Managers and emphasizes the
close centralized control - not at all decentralized!
3/82 10.7 BEHAVIOUR OF PLANT MANAGERS
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(a) Plant manager best able to control quality, delivery and cost
competitive features of the Industry.
(b) Feels responsible for profit because of extensive interaction
in setting targets.
(c) System seeks behavior that achieves profit targets.Environment probably highly defensive and managers may
try to "pad" cost budgets and keep targets of sales activity
low, to provide the necessary freedom to live" under the
system. May result in poor quality of production at year end.
3/83 10.7 (continued)
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(d) Probable tendency to economize on anything but
absolutely necessary maintenance, training, research and
development, etc. in early months of the year when salesand profits are uncertain.
(e) Such behavior is probably economic and effective for cost
economy and profit achievement SINCE NO COSTS ARE
ABSOLUTELY VITAL EXEPT IN RELATION TO OTHERPRIORITIES.
(f) The manager who gets promoted in GILTIM is probably
the one who meets. budget targets.
3/84 lO.8 BUDGET REVISION
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Company needs improved EPS every year for stock market
purposes. Needs to achieve a fixed profit target every year. Fixed
budget targets are clear and definite.
Revision may excuse poor performance and may encourage
managers to devote more energy to justifying budget revision than
to achieving the budget.
Revised budget could relieve the plant managerof undue pressure
due to poor sales performance.
3/85 lO.8A BUDGET PROBLEM AT PLANT X
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(a) Decision: Plant Manager should fight hard for:
1.Capital equipment budget (600) required to putthe plant into an efficient condition and then accept
the required profit target, OR
2. Lower profit target for the technical reasons
outlined in the case.
NOTE: If unsuccessful, accept the required target then, if sales fall
off, press for budget revision. Lower sales target and profit target
could be achieved by cutting costs for this one further year despite
manufacturing inefficiency. Possibly request an "action team" tohelp the plant. Get Divisional Manager's support for this critical
period and it will help the budget revision request.
3/85a lO.8A (continued)
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(b) Justification:
Company's policy to hold Plant Managers responsible for meetingHead Office targets motivates "beating the system" through,
padding and sabotage, etc. However, overall company need for
earnings per share, takes precedence over immediate technical
efficiency in the plant, although long term problems must be dealt
with by the system.
NOTE: Key problem in budget setting is the strategic power of the
parties concerned. Does the Plant Manager have the power and
support to overcome the Controller's sales and profit objectives? If
not, he may as well accept the targets, do his best and then pressfor revision early in the year. However, if he gets his capital budget
substantially, then he must meet the targets.'
3/86 10.9 MOTIVATION AND BEHAVIOUR
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A sophisticated budget preparation designed fora specific industry
and organization to achieve specific objectives.
Interaction over long periods "conditions" managers to believe that
budget targets have been participatively agreed" .... they probably
feel responsible and act accordingly, even though in purely rational
economic terms, this is ridiculous ... but then managers neverbehave rationally in purely economic terms or do they?
System probably very effective in achieving short term goals. May
well perform adequately (if not optimally) in long term. However,
does not "develop" creative managers!
3/87 10.10 LEARNING POINTS
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(a) Budget preparation systems, depend not only on technical
problems but also the organizational environment.
(b) Before setting the budget system determine the industry's
critical profit making factors.
(c) Top Management sets short term and long term objectives
.... it may well prefer reasonable rather than "optimum"long term goals.
(d) Top Management and the controller create the
organizational environment for the budget system.
3/88 10.10 (continued)
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(e) Controller and Head Office visits provide both technical
and hurnan benefits.
(f) Defensive or creative environments, motivate managers
accordingly
(g) Budget preparation may involve several months of technical
and human interaction .... interaction is not necessarily
"wasted" time since manager motivation is complex!
(h) Top Management can agree the key common assumptions
about the political, economic and business environment and
then sets sales and profit guidelines.
(i) Market research at corporate level ensures consistent
overall assumptions at the lower levels.
3/89 10.10 (continued)
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(j) Managers may be "conditioned" by interaction in the
budget process to accept "irrational responsibilities and
yet be motivated to achieve required targets.
(k) Budget revision may excuse poor performance and reduce
motivation to achieve targets.
(1) Organizational structure and responsibility must be clearlydefined for effective budget systems.
(m) The lower in the organization we locate profit centers, the
more profit oriented the managers behave. Get "profit
orientation into the FRONT LINE".
3/89a 10.10 (continued)
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(n) Managers should be profit rather than merely cost
conscious.
(o) In multi plant operations, it may be possible to use divisional
standard costs and to budget local deviation from standards.
(p) Cost reduction. programs can be featured in annual budget
targets.
(q) OTRA approach.
(r) Motivation of managers is a complex problem: money, status,
fear, jealousy and KITA may be less effective than challenge,
responsibility and achievement.
3/90 10.11 LEARNING PATTERNS
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a. BUDGET PREPARATION SYSTEM
INDUSTRY PROFIT MAKING FEATURES
ORGANIZATIONAL CLIMATE.
TOP MANAGEMENT OBJECTIVES
CONTROLLERS - ACCOUNTING AND BUSINESS
DEFENSIVE OR CREATIVE?
3/91 10.11 LEARNING PATTERNS
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b. INTERACTION
TOP MANAGEMENT
CONTROLLER
MANAGERS
WASTED TIME OR CONDITIONING TO ACCEPT
TARGETS?
3/92 10.11 LEARNING PATTERNS
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c. MOTIVATION
MONEY, STATUS, JEALOUSY, KITA?
CRA? ORGANIZATIONAL CLIMATE?
COST, PROFIT OR INVESTMENT CENTERS?
IN THE FRONT LINE?
3/93 10.11 LEARNING PATTERNS
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d. BUDGET REVISION
TARGET REVISED REVISED REVISED
EXCUSES PROMISES EXCUSES
MANAGEMENT TIME PRIORITY?
TARGET REVISION OR TARGET ACHIEVEMENT?
3/94 10.11 LEARNING PATTERNS
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e. CONTROLLER
LOCAL MANAGMENTCOST CONTROL
HUMAN PROBLEMS
BUDGET
LAWPROFIT TAX AND CASH
HEAD OFFICE
TECHNICAL PROBLEMS
ACCOUNTING
ORGANIZATIONAL PRBLEMS
AND HE MUST BE CREATIVE?
3/95 10.11 LEARNING PATTERNS
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f. OTRA
OBJECTIVES
TARGETS
REPORTING
ACTION
3/95a 10.12 INSTRUCTIONS
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a. Re-assemble in CSG.
b. Study and discuss the guide to the case. Compare it to
your solution. Be sure that every member of your CSG,
really understands every key issue.
c. Record key points in your notebook.
d. Re-assemble in MG when the bell rings.
3/96 11.0 SUMMARY FOR PART I
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11.1 ESSENTIALS OF BUDGETARY GONTROL
Budgetary Control involves:
- planning for the future
- communication of ideas and plans
- motivation through interaction (and participation)
- appraisal of performance against target as a basis foraction.
Period plans incorporate project planning.
Budget systems are never "correct" - but only "useful" to achievespecific objectives.
3/97 11.2 BUDGET CONCEPTS
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Assumptions - underlying all budgets
Sponsorship - by Top Management
Responsibility centers - for motivation and control
Interaction - for participation, discussion, "conditioning"and
agreement.
Educati6n - necessary and continuousTimely - budget period that fits objectives
Management by exception - to highlight key areas
Appraisal - actual vs. budget.
3/98 11.3 TYPES OF BUDGETS
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(a) Operating Budget - Forecasts plans and targets of all
operating statistics fora future period. Shows contribution
(sales - variable cost) to fixed costs and profits.
(b) Cash Budget - Forecasts cash flow from operations, based
upon assumption of credit terms.
(c) Capital Budget - Forecasts key long term investments in:property, plant, equipment. R & D, advertising, etc. Key to
long term profitability. Invest now for benefit later. Also plan
"dis-investments" (despite the EI!).
(d) Budgeted Balance Sheet - Forecast the overall financial
position of firm at end of budget period. "Required assets"
financed by liabilities and owners equity.
3/99 11.3 (continued)
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(e) Funds Flow Budget - Forecasts the sources and uses of
long term funds. Reveals effects of key management
decisions on long term resource allocation.
Sources of Funds:
profit (before depreciation), new capital, new long
term loans, sale of fixed assets, reduction of working
capital.
Uses of funds:
dividends, fixed assets, repayment of long term
loans, increase of working capital.
NOTE: Alll budgets are inter-related. Thus with an opening balance
sheet plus operating, cash and capital budgets, allows a budgeted
balance sheet to be produced by fairly simple arithmetic!
3/100 11.4 ASSUMPTIONS
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Usefulness of budget rests on validity of assumptions.
Broad assumptions only justify broad figures.
Highly detailed figures not justified not useful.
Probably a bit fraudulent!
3/101 11.5 COSTS
Variable ar ith ol me
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Variable - vary with volume
Fixed - do not change with increased volume.
Allocated - charged to responsibility center by judgment
of what is a "fair" distribution.
Engineered - costs that necessarily increases with volume of
activity; not management discretion; easily
determined.
Managed - costs spent as a matter of management judgment.
S tandard - a control mechanism calculation of efficient product
costs .
Committed - fixed costs over short term that cannot be changed.
Opportunity - cost or value of benefit missed by failure to take
advantage of an available opportunity. Absolutely
vital concept, but never recorded on the books!
3/102 11.6 FIXED & FLEXIBLE
BUDGETS & REVISION
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BUDGETS & REVISION
Fixed budget - unchanging sales volume and profit targets.
Flexible budget, changed profit targets based on sales volume:
- series of "fixed" budgets, which show expected behavior of
costs and profit at different sales volumes (60%, 80%, 100%,
120% of budget).
- adds flexibility, usefulness (and complication) to budget
system and affects management motivation.
Fixed budget - revision when sales fall off? - No! Normally better to
leave original budget targets unchanged but to change "forecast" of
expected activity to year end.
3/102a 11.6 (continued)
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NOTE:
(a) In stable organizations fixed budgets work well.
However in rapidly developing companies any
budget system may give troubles to management!
(b) Budgets should set frontiers" within which managers mayoperate effectively. However these frontiers should never
become an IRON CURTAIN. "Meeting the budget is not
necessarily doing the job!
(c) Review and improve all accounting and budget systemsat least every five years!
3/103 11.7 BREAK-EVEN ANALYSIS
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AND CONTRIBUTION
Determines profits at varying sales volumes.
Break-even point - sales volume where revenue equals total cost.
Aids understanding and effectiveness of planning.
Contribution - computed as sales less variable cost.
Contribution to fixed cost and profit. Computed by product and for
whole company.
3/104 11.8 BUDGET PREPARATION PROCESS
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Guidelines - circulated to responsible managers setting objectives.
Estimates - by responsible managers with discussion, change andapproval by superiors.
Review and Appraisal - Interaction, participation and discussion at all
levels to "condition" and motivate managers to achieve
targets.
NOTE ON MANAGER MOTIVATION: Money, fear, jealousy, status
and the KITA, do work in practice, but may create a defensive
environment. Challenge, responsibility and sense of achievement
however, allow a creative organizational environment to develop.
3/105 11.9 OTRA APPROACH
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Evaluate a budgetary control system in terms of:
(a) Objectives
- What are the key profit-making factors of the
industry?
- How is the firm formally organized into cost, profit orinvestment centers. Informally what really happens?
- What are Top Management objectives from the
budget system - short term and long term?
- How does Top Management want the responsible
manager to behave?
3/106 11.9 (continued)
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(b) Targets:
- Does Top Management give adequate and timely, guidelines?
- Is the organizational environment defensive or creative?
- Who sets initial and final targets?
- How much interaction and participation is involved to set the
targets?
- How creative and realistic are the agreed targets?
- Do the targets motivate managers in terms of challenge,
responsibility and sense of achievement?
(c) Reports and (d) Action, to be discussed in Part II.
3/107 11.10 LEARNING PATTERNS
a ESSENTIALS OF PBS
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a. ESSENTIALS OF PBS
PLANNING
COMMUNICATION
COORDINATION
APPRAISAL
BEHAVIOUR TO ACHIEVE
THE HO OBJECTIVES ...
3/108 11.10 LEARNING PATTERNS
b BUDGET CONCEPTS
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b. BUDGET CONCEPTS
INTERACTIONEDUCATION
EXCEPTION
TIMEAPPRAISAL
ASSUMPTIONS
SPONSORSHIP
ORGANIZATIONRESPONSIBILITY
3/109 11.10 LEARNING PATTERNS
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c. BUDGET TYPES
OPERATING
CASH
FUNDS FLOW
CAPITAL
BALANCE SHEET
ALL DEPEND UPON ASSUMPTIONS ...
3/110 11.10 LEARNING PATTERNS
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d. GIVE ME THE COST OF XXY!!! SAID THE MANAGER .
SO THE CONTROLLER WONDERED WHAT TO GIVE:
FULL OR DIRECT COST?
VARIABLE OR FIXED?
HISTORICAL OR CREATIVE?STANDARD OR ACTUAL?
DIRECT OR INDIRECT?
CONTROLLABLE OR NON-CONTROLLABLE?
ENGINEERED? MANAGED? COMMITTED? SUNK?
OPPORTUNITY? REPLACMENT? DISPOSAL?
WHAT DO YOU WANT THE COST FOR?
3/111 11.10 LEARNING PATTERNS
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e. BREAK EVEN AND CONTRIBUTION
S - VC = C
WHEN: C = FC THEN SALES ARE AT BEP
3/112 11.10 LEARNING PATTERNS
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f. PREPARATION
GUIDELINES
ESTIMATES
REVIEW
APPRAISAL
3/113 11.10 LEARNING PATTERNS
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g. MOTIVATION
MONEY
JEALOUSY
FEAR
STATUS
KITA - PHYSICAL
KITA - PSCHOLOGICAL
CHALLENGERESPONSIBILITY
SENSE OF ACHIEVEMENT AND YOU?
3/114 11.10 LEARNING PATTERNS
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h. OTRA
OBJECTIVES
TARGETS
REPORTING
ACTION
ORGANIZATIONAL CLIMATE? C OR D?
COST, PROFIT OR INVESTMENT CENTERS?
GET PROFIT INTO THE FRONT LINE!!!
3/115 FINAL NOTE
Thi d P t I f th h it h b
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This ends Part I of the program we hope it has been a
challenge to you in helping each other to learn
And now to reinforce the learning of the day we have
a little exciting homework tonight so that tomorrow
PART II will be downhill all the way
so on we go together ...
3/116 AGL - AUTONOMOUS GROUP LEARNING
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NO.3 BASIC PLANNING AND
BUDGETARY
CONTROL FOR MANAGERS
PART II
3/117 1.0 REVIEW & QUIZ
1.1 INSTRUCTIONS
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a. Assemble in new SG.
b. Discuss all the work done in Part I, your summaries of
key points and all questions arising.
c. Do the short quiz of 50 questions as a SG.
d. Check your answers, discuss and make notes.
e. Re-assemble in MG when the bell rings.
3/117a 3.0 PROGRAM LEARNING (45 minutes)
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3.1 INSTRUCTIONS - INDIIVIDUAL WORK
a. Assemble in SG and find your copy of the ASS book.
b. Quickly complete aloud and in writing Ch. III of ASS.
c. Record key points in your notebook.
d Reassemble in MG when the bell rings.
3/118 3.0 TOTAL BUSINESS PLANNING
3 1 TBP CONCEPTS
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3.1 TBP CONCEPTS
TBP starts with Strategy" for a five year planning horizon.
It relates objectives to resources and environment.
Sets management objectives in words and figures.
Allocates resources to meet objectives.
Sets meaningful basis for annual budget preparation and
reporting systems.
3/119 3.2 REPORTING BY ORGANIZATIONALRESPONSIBILITY
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(a) Reports should meet managers' needs at both head office and
local levels.
(b) Reports designed for managers by responsibility centers:
EXPENSE centers - performance measured as actual cost against
target.
PROFIT centers - performance measured as actual profit against target.
INVESTMENT centers - manager responsible not only for profit target
but also the return on assets, I.e. assets employed to achieve
the profit
(c) Reports should pyramid to provide summary data for top management.
Each report built upon reports from lower responsibility centers.
3/120 3.3 FUNCTION OF REPORTS
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Reports for control and action.
Designed to achieve results.
Materiality is important.
Unnecessary detail distracts attention from the key data.
Objectivity - do "try" to avoid bias (the selection of what is
chosen to be reported automatically adds to some bias).
3/121 3.4 REPORTING ESSENTIALS
(a) Design - serve user needs, signal variances, minimum data with
maximum information
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maximum information.
NOTE: Every report can be designed to fit one sheet of paperwith supporting detail on following pages. Thus each page is
complete in itself. Report complexities are NOT unavoidable.
(b) Speed - rapidly changing situations need quick decisions and
rapid reporting. Conversely - when nothing can be done, no rapid
reporting! Increased speed trades off for less accuracy.
Timeliness of decisions affected by delay in reporting.
(c) Frequency - changing situations need reporting but too many
reports restrict the manager and are "dis-functional".
3/122 3.4 (continued)
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(d) Clarity - reports absolutelyclear to the user- withoutundue effort
and with proper training. Significant data only.
(e) Signals - managers need signals of key items. They do not need
all the information all the time. Distinguish routine from special
reporting.
NOTE: All figures are estimates based on assumptions. Generally fast
and adequate!
3/123 3.5 COMMUNICATION
Reports must communicate information not merely contain it.
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Reports must communicate information not merely contain it.
Design reports for the user - accountants like figures, engineers like
graphs, managers like the (sexy) pictures.
Pictures and patterns communicate basic ideas rapidly.
Show deviation of actual from one target only - and the reasons
why?
NOTE: 0ne way communication is always poor. Restrict everynumber to the vital digits only.
3/124 3.6 MARKETING BUDGET REPORTS
( ) T t t "i f ti d t " t b " k t d"
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(a) Treat reports as "information products" to be "marketed"
as skillfully and professionally as the company markets its
products to customers.
(b) Research the "market" for reports: Who? Why? Where? When?
How?
(c) Adapt the product to customer needs and personalities.
(d) Set a "product policy" for reports - standardization. fitted
to the organisation, minimum interruption of daily
functions.
3/125 3.6 (continued)
(e) Set a price policy for reports - value of the information must
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( ) p p y p
consider the opportunity cost or value of NOT having the
data. (Not recorded by accountants?). Difficult to get data that
is not routinely recorded.
(f) Set a promotion and distribution policy for reports - "sell" and
deliver reports. Encourage fast, adequately accurate reporting,
educate managers to use the reports, create the need for reports,
promote reporting aggressively. (Test occasionally by not sendinga report to get a quick reaction as to its urgency and value?)
NOTE: Need an appropriate "marketing mix" to "market" budget reports
effectively to managers throughout the organization. Think of
reporting in marketing not merely selling terms - satisfy needs!!
3/126 3.7 RESPONSIBILITY REPORTING
Focus on the responsible manager
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Focus on the responsible manager.
Report for each center to build up from centers below.
Trace variances through reports to managers responsible,
But tread softly
NOTE: Don't bury the manager in a grave of paperwork.
3/127 3.8 HUMAN PROBLEMS
(a) The budget is a device to achieve objectives in organization.
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3/1 2 7 3 .8 HUMAN P ROBLEMS(a )T h e b ud get is ad ev ice to ac hie veo bje ctiv es
in org a niz atio n.(b )Co - op era tio nis th e ke y.Willi ng ne ss topa rtic ipa te an db ec ome inv olv ed
d isc ou rag esind ivid u ala nd gro u po pp os itio ntoT opMa na ge me nt.
(c )P e o ple g en era lly may "sa y" tha tthe y do no tlik e targ ets o rb ud ge tsbu tin pra c tice s uch b ud gets d op rov ide :ch alle ng e, res po ns ibil ity an das en se ofac hie ve ment. '
(d ) M o tiv atio n is vita l. He lpman ag ers a ndemplo ye es to rec on cile h ea do ffic e,lo ca l an dp ers on al prio rit ies . Mo tiv atio n
is co mple x,but in the lo ng ru nc ha lle nge ,re sp on sib ility a nda ch iev emen ta re effe cti ve .1NOTE :Othe rmeth o ds ma ya ch iev e
( ) g j g
(b) Co-operation is the key. Willingness to participate and become involved
discourages individual and group opposition to Top Management.
(c) People generally may "say" that they do not like targets or budgets
but in practice such budgets do provide: challenge, responsibility and a
sense of achievement.'
(d) Motivation is vital. Help managers and employees to reconcile head office,
local and personal priorities. Motivation is complex, but in the long run
challenge, responsibility and achievement are effective.1
NOTE: Other methods may achieve the results to survive today withoutdeveloping anyone for the future. i.e. Fear! Money! KITA!
3/128 3.9 ORGANIZATIONAL ENVIRONMENT
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Top Management and the controller set the organizational environment
which is key to the effectiveness of the budget system.
A defensive environment encourages managers to: set low targets, show
little initiative, be reluctant to make decisions and to settle for safe plans.
A creative environment (whereby managers feel secure yet motivated)
encourages managers to: set high achievable targets, make confidentbold decisions, use resources creatively, take balanced risks, and achieve
both personal and corporate goals.
NOTE: How is your organizational environment?
3/129 3.10 LEARNING PATTERNS
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a. TBP
OBJECTIVES - RESOURCES
3/130 3.10 LEARNING PATTERNS
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b. REPORTING
DESIGN, SPEED, FREQUENCY, CLARITY, SIGNALS
MANAGEMENT RESPONSIBILITY - FORMAL & INFORMAL
ORGANIZATIONAL PYRAMID
COMMUNICATION FOR ACTION
3/131 3.10 LEARNING PATTERNS
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b. ENVIRONMENT
TOP MANAGEMENT & CONTOLLER
ORGANIZATION
CREATIVE OR DEFENSIVE?
3/132 3.10 LEARNING PATTERNS
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d. MOTIVATION
FEAR, JEALOUSY, MONEY, KITA
CHALLENGE, RESPONSIBILITY, ACHEIVEMENT
SURVIVE TODAY
DEVELOPMENT FOR LONG TERM
3/133 3.10 LEARNING PATTERNS
MARKETING CONCEPTS FOR REPORTING
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e. MARKETING CONCEPTS FOR REPORTING
FIND A NEED - FOR MANAGER INFORMATION
DECIDE ON A MARKETING MIX
PRODUCT, PLACE, PRICE, PROMOTION
SATISFY THAT NEED (PROFITABLY)
REPORTS AS TOOLS FOR MANAGEMENT ACTION
3/134 3.10 LEARNING PATTERNS
f OTRA
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f. OTRA
OBJECTIVES
TARGETS
REPORTING
ACTION
3/135 3.11 INSTRUCTIONS
INDIVIDUAL AND SG WORK
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a. Assemble in SG.
b. Study and discuss the lecture, to be sure that every member of your
SG, really understands, every key issue.
c. Record key points in your notebook.
d. Quickly read the case study (GILTIM B) which follows.
e. Then work as a very efficient and effective action team, to quickly
resolve the case.
f. Be sure to record the complete answer to each question and your
final decision, on the SG f lip chart provided, so that you are fully
EI in what you agree upon.
3/136 5.0 CASE: GILTIM B
5.1 THE STORY OF THE CASE
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Giltim (A) described budget objectives and preparation.
Giltim (B) deals with reporting and action.
Problems arise in evaluating the reporting system and its effect on the
behaviour of managers in the company.
3/136 5.2 EVALUATION OF REPORTING SYSTEM
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(a) Design - reports include actual and target data. H.O. requires
reforecasting of activity that deviates from budget.
Highlight on excess spending over budget but no importance attached
to under-spending. Concentrates on problem areas with special
reports. Report sample badly designed.
(b) Speed - flash reporting in three days and full reporting to H.O. in 8 days
provides timely data for management.
Probably achieved by cut-off of activities before the month end and
efficient data processing.
3/137 5.2 (continued)
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(c) Frequency - monthly data on regular operations, weekly or daily
data for critical problems - excellent.
(d) Clarity - poor layout and lack of graphical presentation.
(e) Effectiveness - highly effective for H.O. control of activity
against budget. Provides control data to focus manager on
target achievement and critical problems. Probably over-
emphasizes short term "meeting the budget" at the expense of
long-term performance.
3/138 5.3 PERFORMANCE AT PLANT X AND
DESIGN OF REPORT NO. 1
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(a) Difficult to evaluate the performance of Plant X from this reportsince the 'year to date" figures not provided.
(b) However, evaluation of March performance raises many
questions to be investigated:
1. Sales seriously below target with very high discounts and
allowances - why sales department failure?
2. Variable cost of sales controlled - due to manufacturingefficiency?
3/139 5.3 (continued)
3. Fixed manufacturing cost seriously above target - why?
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4. Operating income well below target both in the amountand percentage - due to failure of sales?
5. Special costs and profits generally consistent with targets
but why did Plant Manager fail to cut back costs to makeup for the lack of activity?
6. Plant income well below target and return on assets
employed unacceptable.
3/140 5.3 (continued)
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NOTE: Plant Managers action depends on results for "year to date". If
below target he could apply for budget revision on the grounds that thesales are failing to meet targets. Alternatively, he could cut other special
costs extensively and press the Sales Manager hard to achieve both
sales volume and prices!
Controller also should press Sales Manager and then "follow" Plant
Manager in cutting costs where possible. Situation requires immediate
investigation and possibly an Action Team" to visit the plant and Sales
Department to help them achieve results.
3/141 5.3 (continued)
(c) Improvement of Report No. 1:
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1. Eliminate previous month and last year figures since the
budget is the real target.
2. Show only actual data for the month and from the budget
(not budget itself), but the year to date with variances
3. Eliminate all data below 000 to reduce the digits to
significant items only. Reports should not be "too black withfigures".
4. Design each report page as a complete entity supported by
detail on subsequent sheets. Every report can be so
designed for easy and effective communication.
5. Design report with graphical sections to highlight signals.
3/142 5.3 GILTIM COMPANY (B)
Revised Plant Operating Summary - March This Year REPORT NO.1
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MONTH YEAR TO DATE
Actual (Under) Actual (Under)
Over Over
Budget Budget
GROSS SALES 264 (62) 847 (122)
DISCOUNTS & ALLOWANCES 47 31 84 56NET SALES 217 (93) 763 (66)
% GAIN (LOSS) (30.0%) (7.9%
3/142a 5.3 (continued)
Actual u/o Budget Actual u/o Budget
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GAIN (LOSS) DUE TO:
SALES PRICE (150) (10)
SALES VOLUME 50 (34)
SALES MIX 7 (22)
(93) (66)
VARIABLE COST OF SALES 142 (45) 384 (64)
GROSS MARGIN 75 (48) 379 (2)
% SALES 34.5% (4.0%) 49.6% 3.6%
3/143 5.3 (continued)
Actual u/o Budget Actual u/o Budget
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FIXED MANUFACTURING
EXPENSE 41 5 211 10OPERATING INCOME 34 53 168 (12)
% SALES 15.6% 22.0%
SPECIAL COSTS (PROFITS) 23 (30) 12 11
10.5% 1.5%
PLANT INCOME 11 (83) 156 (1)
% SALES 5.1% 20.4%
ASSETS EMPLOYED 1,816 (58) 1,816 (58)
% RETURN 6% 5.1% 8.6% 8.4%
3/144 5.3 GILTIM COMPANY (B)
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REVISED PLANT OPERATING SUMMARY
EXAMPLE OF GRAPHICAL REPORTING
SEE WORK PACK FOR DETAILS
3/145 5.4 MOTIVATION OF MANAGERS
(a) System provides highly centralized control by HO and is
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( ) y p g y y
probably defensive.
(b) Extensive "interaction in setting the targets probably
"conditions managers to accept them. Personal contact with
HO staff and visit by Controller most helpful.
(c) Unreasonable to expect plant managers to meet profit targets ifsales fall off, but quite possible for them to feel bound to do so
and to "accept" and believe that they can ... and to achieve
target.'
(d) Plant managers probably underspend on maintenance,
research, training, etc. in the early months of the year until
sales levels indicate that they can "afford" to spend up to the
budgeted cost levels.
3/146 5.4 (continued)
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(e) Plant managers motivated to achieve targets by
1. Budget preparation process.
2. Top management interest and follow up of reporting.
3. Salaries and bonuses.
4. Competition among plants.
5. Staff assistance and daily reports on critical problems.
6. Requirement to continually re-forecast any expected
performance below target.
7. Budget effect on personal promotion in the company.
(f) Tendency to achieve short term targets with some loss of long
term potential. However, this loss may not be significant.
3/147 5.4 (continued)
(g) Long term planning retained by HO and Divisional
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Management (latter fairly impotent). Little motivation to think
beyond current year at plant level. Poor development of plantmanager's potential.
(h) Fairly dynamic environment created by the constructive friction
between plant, HO and Division.
(i) May achieve lower level of long term performance but all staff
not merely cost but PROFJT oriented.
(j) System meets Top Management objectives of profit now. Puts
profit responsibility close to operations which achieve profit.
Relates to the specific industry features of: delivery, qualityand efficient cost.
3/148 5.5 CHANGES RECOMMENDED
(a) Consider the technical human and organizational problems that
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(a) Consider the technical, human and organizational problems that
any change would have to overcome.
Managers may prefer "The devil they know , to the devil they
don't" and therefore be reluctant to accept and to work with
any new system!
3/148a 5.5 CHANGES RECOMMENDED
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(b) Consider all alternatives and their implications:
1. Make Division a profit center (plants become only cost
oriented)?
2. Make plant responsible for the sales department as well
(new type of plant manager)?
3. Makes sales districts and plants profit centers with a
"Transfer Price" system and guaranteed volumes
(arguments over the transfer price)?
4. Allow budget revision when sales fall off (managers more
motivated to justify revisions than to achieve profit
target)?
3/149 5.5 (continued)
(c) Proposals
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1. Try to assign sales and profit responsibility to one
manager in one center.
2. If not possible, introduce some flexibility in budget
revision when sales fall off substantially.
3. Expand budget system to "Total Business Planning"in words and figures for a five year horizon period.
Replan every year for five years ahead. Let the
annual budget targets be developed from the first year
of the plan.
4 Include all managers in short and long term planning
3/149a 5.5 (continued)
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4. Include all managers in short and long term planning
process.
5. Introduce a training and development program for
managers to provide an understanding of long term
and short term planning.
6. Discourage the idea that meeting the budget is the
same as doing the management job!
3/150 5.6 LEARMNG POINTS
(a) Budget reports should be available three to eight days after the
month end.
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(b) Achieve fast reporting day early cut off" and efficient dataprocessing (possibly use critical path techniques to determine
delay factors).
(c) Design reports for use by managers not accountants. Simple,
graphic, exciting. Exclude non-target history.
(d) Report signals of key factors, not complete detail.
(e) Design reports for local as well as top management.
(f) Recognize that manager motivation is not automatically
achieved by participation but is a complex factor resulting from
the total system.
3/151. 5.6 (continued)
(g) Managers may sometimes not be rationally "responsible" but
may be convinced that they are responsible and may act
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y y p y
accordingly. Behavior is not completely rational in logical or
economic terms .. emotional needs.
(h) To modify the budget system and motivate managers is a
complex problem. They may not work as effectively under a
new "better" system.
(j) Sales and manufacturing together make a more logical basis
or a profit center, but transfer price systems are available if this
combination is not practicable.
(j) Set profit centers as close to operations ("the front line") as
practicable, to make managers not merely cost oriented but
profit oriented:
(k) HO "advice" may really be "orders".
3/152 5.6 (continued)
(1) Plant "agreement" may really be imposed by HO.
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(m) Budget technical problems are fairly easy to solve but humanproblems are complex and difficult.
(n) Top management involvement in the budget process is vital if
it is to motivate managers.
(o) Total business planning in five year horizons involving all
managers is more useful than mere budgetary control each
year. The TBP provides the under-lying data for the annual
and monthly budget targets.
(p) Design the budget system in relation to top managementobjectives, industry profit-making factors and the
organizational structure of the firm.
3/153 5.6 (continued)
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(q) Measure the effectiveness of the budget system by the action
and behavior of the managers and not by what managers say
(r) Review and redesign budget reports periodically to meet current
needs.
(s) Recognize that reports for HO may not necessarily meet localmanagement key needs - thus leading to two (or more)
reporting systems formal and informal.
3/154 5.7 LEARNING PATTERNS
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a. REPORTING
FLASH - 3 DAYS
DETAILED - 5 DAYS
PROBLEM AREAS - DAILY
RE-FORECAST FAILURES TO YEAR END - DONT
CHANGE THE BIUDGET!
3/155 5.7 LEARNING PATTERNS
b. DESIGN
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SIGNALS
ACTUAL v BUDGET
GRAPHS
INTERESTING - NOT DULL!!
ELIMINATE: NON STANDARD OLD DATA , ITEMS
FOR INTEREST ONLY, USELESS DETAIL AND DIGITS
3/155 5.7 LEARNING PATTERNS
c. DO DIGITS COUNT?
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TO THE MANAGER?
TO THE ACCOUNTANT?
HOW MUCH IS USEFUL:
9,824,463,26
9,824,000
9,824m or just 9.8 million?
3/157 5.7 LEARNING PATTERNS
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d. MOTIVATORS OF THE PLANT MANAGER
PERSONAL, ACTION TEAMS, RE-FORECASTING,
HO ADVICE, COMPETITION, PROMOTION, TOP
MANAGEMENT ACTION, MONEY, INTERACTION, DAILY
REPORTS ...
KITA OR CRA?
3/158 5.7 LEARNING PATTERNS
e PROFIT CENTERS
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e PROFIT CENTERS
PLANT OR SALES?
DIVISION?
TRANSFER PRICES
COST OF CHANGE - HUMAN AND TECHNICAL
KEEPING PROFIT IN THE FRONT LINE ...
3/158a 5.8 INSTRUCTIONS
a. Re-assemble in CSG.
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b. Study and discuss the guide to the case. Compare it to
your solution. Be sure that every member of your CSG,
really understands every key issue.
c. Record key points in your notebook.
d. Re-assemble in MG when the bell rings.
3/158b 6.0 CASE: BILL BROWN
6.1 INSTRUCTIONS
a Assemble in SG
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a. Assemble in SG.
b. Answer the questions.
c. Check your answers, discuss and make notes.
d. Re-assemble in MG when the bell rings.
3/158c 7.0 PROGRAM LEARNING (45 minutes)
7.1 INSTRUCTIONS - INDIIVIDUAL WORK
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a. Assemble in SG and find your copy of the ASS book.
b. Quickly read the Introduction in ASS.
c. Quickly complete aloud and in writing Ch. IV of ASS.
d. Record key points in your notebook.
e. Reassemble in MG when the bell rings.
3/159 8.0 PLANNING & CONTROL SYSTEMS
8.1 TOTAL BUSINESS PLANNING
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(a) Budget is more than a one year phenomenon. More meaningfulas part of a long term plan which indicates direction and growth
of firm. Basis of a planning and control system.
(b) Need to define business strategy for at least five years ahead:
- relate objectives to resources and environment- set out objectives in words and figures, with plans
showing how to achieve them
- allocate resources to meet specific marketing, financial,
production and research goals
- include alternative plans to achieve objectives
(c) Re-plan every year for five years ahead (not merely revision!
3/160 8.1 (continued)
(d) Annual re planning involves:
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(d) Annual re-planning involves:
- set overall business strategy
- set management guidelines and major policies
- functional plans
- detailed planning (including budgets)
- interaction and revision of plans
- approval of final five year plan and communication to
managers
- development of detailed monthly budgets for first year
of the five year plan.
3/161 8.2 TOTAL BUSINESS PLAN
& MANAGEMENT BEHAVIOR
TBP t l t i fl t b h i
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TBP a tool to influence management behavior.
As manager participates in planning and quantifying targets, he achieves
a more precise definition of responsibilities and becomes further
motivated to achieve those targets!
Top management creates the organizational environment whichinfluences managers:
- system used not to threaten but to plan co-operatively.
- system communicates to help managers.
- system develops confident creative managers who seek high
levels ofperformance.
3/162 8.3 PLAN AND ACTION
T t l b i l t l b d t b t l f ti d
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Total business plan not merely budget but a plan for action and
reaction.
Alternative plans of action are included in the TBP to cover
reaction to different situations (especially sales above or below
target).
3/163 8.4 CONTROLLER'S FUNCTION IN THE
CONTROL SYSTEM
(a) Design the planning and control system. Periodic revision of the
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(a) Design the planning and control system. Periodic revision of the
system to meet developing needs. No system works well
indefinitely because the environment and the organization
change!
(b) Information recording, storage and retrieval.
(c) Aid to managers in (i) developing and using data effectively,
and (ii) developing TBP and budgets.
(d) Review and control of TBP and budget system.(e) Reporting.
(f) Encourage an organizational environment in which control
system functions creatively not defensively.
NOTE:System should encourage not repress action to achievecorporate objectives.
3/164 8.5 BEATING THE SYSTEM
A poorly designed or poorly functioning system or a non-creative
environment will result in efforts to beat the system Managers
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environment, will result in efforts to beat the system. Managers
normally take defensive action against an oppressive system.Techniques forbeating the system:
(1) Setting low targets:
- low sales targets
- "padded" cost targets
- "no change from previous year"
(2) Timely use of secret reserves:
- orders, sales and purchase invoices delayed or