Budgeting and Control

Budgeting

Budgets have multiple functions, namely:

  • Planning – Management produce detailed plans for implementation.
  • Coordination – Actions of different parts of organisation are brought together.
  • Communication – Everyone is informed of the plans and policies; top management communicates to lower level management.
  • Motivation – This influences managerial behaviour, individuals motivated to perform in line with objectives. This can encourage inefficiency and conflict between managers.
  • Control – Assists managers in controlling activities with management’s attention concentrated on deviations from a pre-set plan.
  • Performance Evaluation – Measuring success of achieving the budget rewards like bonuses are given in some companies and is meant to influence human behaviour.

Incremental budgeting

Indirect cost and support activities are prepared incrementally.

Zero based budgeting

Activities are justified & prioritised before decisions are taken.  The approach is that ‘budgeted’ expenditure starts from base zero and description of each activity is included in a decision package, they are evaluated, ranked and resources allocated.

The benefits are that the deficiencies of traditional budgeting are avoided, resources are allocated by need or benefit; a questioning attitude is created and the focus is on attention on outputs in relation to value for money.

Anthony (1965) categorised control into three main types:

Strategic Control

  • The setting of corporate strategy and long term objectives for the organisation.

Operational Control

  • Operational control is ensuring that specific tasks are carried out. This is primarily concerned with the processing of inputs and raw materials to get outputs.

Management Control

  • Management control is the coordination of the day to day activities in an organisation to ensure that inputs and raw materials are used efficiently and effectively towards achieving long term goals. Management control, therefore, links strategic control and operational control.

Management control utilises regular feedback reporting systems so that corrective action can taken where variances from plan are identified. The budget plays an important role here in providing controls to aid management control.

The systematic comparison of planned inputs to actual results made using the budget, followed by corrective action where deviations from plan exist, is known as a ‘control system’. The system providing the reports for this control system is known as ‘responsibility accounting’. This will be discussed in more detail later in the session.

Feedback and Feed-forward Controls

  • Feedback control – occurs where actual outputs are monitored against desired outputs and corrective action is taken where there is a variance between the two.
  • Feed-forward control – predictions are made about future outputs and compared to desired outputs and action is taken where there is a difference between the two.

So, with feed-forward controls any likely errors can be foreseen and actions taken to avoid them, whereas, with feedback control actual errors against the plan are identified and corrective actions taken to achieve the remainder of the plan.

The budgeting process is an example of both a feed-forward and feedback control system.

Budgets as feed-forward control

In putting budgets together, and submitting them to the budget committee, they are compared against the future expectations of the organisation as outlined in the long term plan. If the budget falls short of these expectations then it may be adjusted and alternatives considered. This process may continue until a budget is agreed that will meet long term expectations.

Budgets as feedback control

During the budget period actual results are compared to the budget and any deviations from budget identified. Corrective actions are then taken to ensure that future results are in line with the budget.