abbreviations - cre learning · web view1.7 learning patterns - review. 1.8 instructions (15...

PBC WORKPACK PART 1

AGL - AUTONOMOUS GROUP LEARNING

IND - INDIVIDUAL

SG - SMALL GROUP

CGS - COMBINED SMALL GROUP

MG - MAIN GROUP

ASS - ACCOUNTING STEP BY STEP

BC - BUDGETARY CONTROL TEXT

PL - PROGRAMME LEARNING

L - LECTURE

D - DISCUSSION

CH - CHAPTER

STOP! DO NOT TURN THE PAGE UNTIL SPECIFICALLYINSTRUCTED

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Abbreviations

AssignmentSheet Activity Group Time

1 Introduction SG (New) 8.30 – 9.00am

2 Quiz IND 9.00 – 9.45am

3 PL –Basics of Budgeting

INDSG 9.45 – 10.30am

Coffee

4 Lecture –Basics of Budgeting

MGSG 10.45 – 11.15am

5 Case –John Marais

SGCSG

11.15 – 12.10pm12.10 – 12.40pm

6 Lecture –John Marais

MGCSG 12.40 – 1.00pm

Lunch

7 PL –Budget Preparation

INDSG (New) 2.00 – 3.00pm

8 Lecture –Budget Preparation MG 3.00 – 3.30pm

9 Case –Giltim Company (A) SG 3.30 – 4.15pm

Tea

- Case –Giltim Company (A) CSG 4.30 – 5.15pm

10 Lecture –Giltim Company (A)

MGCSG 5.15 – 5.45pm

11 Summary Lecture MGSG 5.45 – 6.30pm

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Programme – Part 1

(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.

The AGL method is designed to achieve rapid individual learning using special materials and the stimulus of group activity without a formal instructor. The groups use the materials to find the answers to all problems and questions.

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 Groups (two small groups together, with one group acting as “dealer” to lead the discussion and record key points on the “flipcharts” provided),

(d) MG – Main Group (for short taped lectures on key learning points with visual aids).

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ASSIGNMENT 1.0INTRODUCTION (30 minutes)

1.1 SPECIFIC OBJECTIONS OF THE PROGRAMME

1.2 AUTONOMOUS GROUP LEARNING (AGL)

1.3 GROUP ARRANGEMENTS

1.4 SG – SMALL GROUPS

Initial group names provided. Note the name of your SG and names of the other members. Groups change three times during the course.

(a) Retained by members:-

TextbookNotebook – for recording every key pointCourse Diary

(b) Used but not retained by members:-

Work Packs for Part I and II including:Introductions, cases, key learning points to be noted.

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) Programme learning(b) Case analysis(c) Lectures(d) Quizzes(e) Learning patterns(f) Homework reading

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1.5 LEARNING MATERIALS

1.6 METHOD

NOTE:Use your workbook. Do not mark the Work Pack which must be handed back at the end of each day. You receive all the materials in your SG. Don’t ‘look ahead’ in the

Acknowledgment is made to many published and unpublished sources which have provided the basic ideas, practical experience, and case materials

1.7a OBJECTIVES

1.7b GROUPS

1.7c METHOD

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1.7 LEARNING PATTERNS - REVIEW

(a) Assemble in SG’s to introduce yourself, indicate your past experience in budgetary control and what you hope to contribute to and gain from the course. (10 minutes)

(b) Complete page one of the Course Diary. (5 minutes)

(c) Reassemble in MG when the bell rings.

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1.8 INSTRUCTIONS (15 MINUTES)

NOTE:Check that you have a full set of learning materials NOW. Locate the simplified glossary of

(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. (45 minutes)

(c) Work as quickly as possible but don’t guess – leave blanks.

(d) The organiser will mark your answers and give you a quantitative measure of your budgetary control knowledge at the start of the course.

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ASSIGNMENT 2.0QUIZ (45 minutes)

2.1 INSTRUCTIONS – INDIVIDUAL WORK

(a) Assemble in SG.

(b) Read ASS pages 7 and 8 “How to use the Programme (3 minutes) and reach Ch. 1. (5 minutes)

(c) Do quickly in writing ASS:Set 1 (17 minutes) Pages 7/16Set 8 (20 minutes) Pages 81/92

(d) Record key points in your notebook.

NOTE: Read the questions out loud, around the group, after discussion record your consensus answer in the space provided in the ASS book

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ASSIGNMENT 3.0PROGRAMME LEARNING: BASIC OF BUDGETING (45 minutes)

3.1 INSTRUCTIONS – SMALL GROUP WORK

NOTE:Work quickly, don’t hesitate to cheat when you don’t know the answer – limited cheating

Budgets are financial plans of future action.

Budgetary control uses budgets to measure performance and control behaviour.

Both involve technical and human problems.

(a) Plan future operations to balance objectives, resources and environment.

(b) Communicate targets and plans to the organisation – 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 behaviour of managers.

Budgetary control may involve both project planning and period planning.

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 period planning.

Flexible to meet needs – USEFUL is the key!

Factors shaping a budget system:

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ASSIGNMENT 4.0BASICS OF BUDGETING (30 minutes)

4.1 BUDGETS AND BUDGETARY CONTROL

4.3 PERIOD AND PROJECT PLANNING

4.2 OBJECTIVES OF BUDGETARY CONTROL

4.4 BUDGET SYSTEMS

(a) Industry – profit-making characteristics.

(b) Top Management objectives – system to promote specific objectives.

(c) Other considerations – organisational structure, information technology, incentives and staff available.

NOTE: System initially affected by Top Management attitudes towards financial planning and control.

(a) Assumptions – Budgets are future forecasts based upon assumptions. Sales forecast is usually the key assumption.

(b) Sponsorship – Top Management must convince the Organisation that the budget system is important. Top Management attitude revealed mainly not by words but by action and involvement in budget process.

(c) Responsibility centres – Organisation centres provide for control and responsibility. Centre Manager involved in setting budget targets. Building block approach to total budget process.

(d) Participation – by both manager and “managed” in setting targets.

(e) Education – Continuous education to understand the system, what is expected, and how performance is judged.

(f) Time – Control period is shortest time for Management to intervene and change performance. Varies by responsibility centres and activity.

(g) Controllable Costs – Emphasise 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 starting point for performance analysis. Report signals of exceptions only!

(i) Appraisal – Budget as a standard to evaluate performance – both measured in same terms.

Operations, cash, capital, funds flow, and overall financial position.

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4.5 BUDGET CONCEPTS

4.6 BUDGET PROCESS

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.

(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 budget is a MANAGEMENT GAME calling for skill, strategy, shrewdness… and quiet manipulation….

Budget of overall financial position.

Assets and how they are financed from liabilities and owners equity.

Plan balance sheet at end of budget period. Forecasts:

- 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

- fixed asset requirements in a special “capital” budget,

- loans by specific management policies,

- owner’s equity (balance plus profit less dividends).

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4.8 BUDGETED BALANCE SHEET

Difference between required assets and finance available (liabilities and owner’s equity) represents cash surplus or deficiency for the budgeted level of activity.

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 organisation.

T Targets – Analyse how the system provides guidance and interaction in setting the key budget targets.

R Reporting – Analyse 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 behaviour patterns of managers in achieving overall company objectives.

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4.9 OTRA APPROACH TO BUDGET PROBLEMS

4.10a OBJECTIVES

4.10b BUDGET SYSTEMS

4.10c BUDGET CONCEPTS

4.10d OPERATING BUDGET

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4.10e BALANCE SHEET

4.10f OTRA

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(a) Reassemble in SG now.

(b) Study this note and learning patterns very carefully and record each key point in your notebook. (10 minutes)

(c) Discuss key points in SG. (5 minutes)

(d) When the bell rings, carry on with the case study which follows.

(a) General

John Marais is a case study in your Work Pack (Exhibits 1 to 5). It is the story of a business in words and figures; the questions are to help you to analyse the problems.

(b) SG Work (55 minutes)

Work as a group but keep notes individually. You need not all agree but you must decide!

(c) Combined Small Group Work (30 minutes)

Groups will be combined as follows:

Groups A, B and C will act as ‘Dealers’ i.e. theyA with D make a short presentation giving the answers to theB with E questions, lead the discussion, record key pointsC with F continually on the ‘flipchart’ and lead the CSG to a

definite range of decisions.

NOTE: Don’t look at the solution until after the lecture on the case! No ‘checking’ here please.

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ASSIGNMENT 5.0CASE ANALYSIS OF JOHN MARAIS (55 + 30 minutes)

5.1 INSTRUCTIONS

EXHIBIT 1Assignment 5.1

John Marais Company

This case challenges you to develop budgets for operations and the overall financial position of a company and to use those budgets to control operations (see previous lecture points 3, 7 and 3.8).

Read the case carefully (Exhibits 2, 3, 4, 5).

Then as a SG work together on each of the following questions, one at a time, in the order given. Work quickly to cover every question in the time allowed. Keep individual notes.

1. Prepare budgets for next year based on the data available in the case, and any reasonable assumptions. Use copies of Exhibits 4 and 5 in your Course Diary:

(a) Accept the sales target of 2,500,000.

(b) Forecast selling and administrative expense using a common sense approach.

(c) Complete the Operating Budget using a gross profit percentage of 33.3%.

(d) Finally, compute the budgeted balance sheet showing the required assets for operations and how they are financed.

2. Comment on the key factors of next years budget. What specific items must be carefully controlled if the company is to achieve budget targets?

3. How well did the company perform this year? List all possible explanations of the fall in gross profit percentage (creative thinking here to find nine possible causes).

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Questions (65 minutes)


John Marais Company

Useful Ratios

Last yrActual

This yr

Budget

This yrActual

Next yrBudget

(a) Activity:

Stock % of cost of sales times turned over

26.3%3.8

25.0%4.0

30.0%3.3

33.3%3.0 times

Debtors % of sales days of sales

6.5%24

8.2%30

7.0%29

8.2%30 days

Creditors % of cost of sales days of cost of sales

3.8%14

2.4%9

13.2%48

16.6%60 days

(b) Profitability

Gross Profit Sales x100% 35.0% 37.0% 33.5% 33.3%

Net Profit Owner’s equity x100% 18.0% 25.0% 26.0% ?

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NOTE:Work as a group but keep notes individually.


John Marais Company

The John Marais Company was formed 8 years ago as a distributor of electrical supplies. In January last the year the Standard Bank granted loan (overdraft) facilities of up to 75,000 to finance a new building (40,000) and working capital (35,000). The loan was established on a three year basis calling for a reduction of 25,000 each year beginning on January 31, this year.

With encouragement from the bank on January 15, this year John Marais prepared the comparative financial report (Exhibit 3) as a first step towards developing a budget for this year using the following assumptions:

(a) Operations – sales 2,500,000; gross profit percentage 33.3%; sales and administrative costs following trends, dividend unchanged

(b) Capital – No substantial capital expenditure

(c) Financial Position – debtors – 8.2% of sales (30 days), creditors 16.6% of cost of sales (60 days), income tax unpaid at year end, overdraft reduced to 50,000, stock (inventory) at year end equal to 33.3% of cost of sales

and to develop a plan of action for the company to achieve its budget targets.

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NOTE:This case was developed and adapted from other cases.


John Marais Company

Selling and Administrative Expense: Actual and Budget

ActualYr – 2

BudgetYr – 1

ActualYr – 1

BudgetThis Yr

000* 000* 000* 000*Selling Expense: Sales salaries 20 25 25 ? Office salaries 15 15 15 20 Office expenses 10 10 16 20 Sales commission 45 50 70 ? Travel expense 10 15 25 45 Advertising 50 55 60 70 General promotion 10 15 35 ? Sales discounts allowed 40 47 80 ?

200 232 326

Administrative Expense: Salaries 20 25 25 25 Office expense 39 35 29 35 Legal expense 4 10 6 ? General expense, interest and Depreciation 3 15 26 ?

69 90 90Total (see below) 269 322 416 ?

Operating Statements and Budgets

ActualYr – 2

BudgetYr – 1

ActualYr – 1

BudgetThis Yr

000* 000* 000* 000*

Net SalesCost of Sales

969630

1,163733

1,5831,053

2,5001,667

Gross profitSelling and administrativeExpense (see above)

339

269

430

322

530

416

833

?

Operating profitIncome tax (40%)

7028

10843

11445

??

Net profit after tax 42 65 69 ?

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Dividend paid 28 43 43 ?

*All figures in thousands (000) SEE COPY IN COURSE DIARYEXHIBIT 5

Assignment 5.1

John Marais Company

Balance Sheets – Actual and Budget

ActualYr – 2

BudgetYr – 1

ActualYr – 1

BudgetThis Yr

000* 000* 000* 000*

Current Assets: Cash 27 45 - note A Debtors (Receivables) 63 96 127 208 Stock (Inventory) 166 183 314 ?

Current assets 256 324 441

Fixed Assets: Cost 39 80 92 92 Less: Accumulated depreciation 7 10 12 30

32 70 80 62

Total assets 288 394 521 ?

Current Liabilities: Creditors (Payables) 24 18 139 288 Current tax liability 28 43 45 ? Bank (loan) - 75 75 50 Current Liabilities 52 136 259 ?

Owner’s Equity: Capital 100 100 100 100 Accumulated profit 136 158 162 ?

288 394 521 ?

Note A: All figures in thousands (000). Cash is the difference between the estimates total assets and total liabilities & Owners Equity, which may be positive (a balance) or negative (a. cash shortage). SEE COPY IN COURSE DIARY

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(a) Assemble in (new) SG.

(b) Do quickly in writing ASS:

PagesSet 9 (frames 1-11 only) (10 minutes) 93-97 Chapter 4Set 2 (20 minutes) 17 - 29 17/29 Chapter 2Set 6 (15 minutes) 65 - 72 65/72 Chapter 3Set 4 (15 minutes) 41 - 51 41/51 Chapter 3

(c) Record key points in your notebook.

Plan cash to finance immediate operations and avoid shortages.

Translate sales, costs, and expenses into weekly and monthly cash receipts and payments based on assumption 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!!

(a) Key to long term profitability. Invest now for benefits in the future.

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ASSIGNMENT 7.0PROGRAMME LEARNING: BUDGET PREPARATION (60 minutes)


ASSIGNMENT 8.0LECTURE: BUDGET PREPARATION (30 minutes)

8.1 CASH BUDGET

8.2 CAPITAL BUDGET

(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 “disinvestments” (sale of fixed assets, etc.).

Forecasts future sources and uses of funds.

Sources of funds are: profit before depreciation, new capital, new long 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 – difference simply changes working capital.

If “required working capital” is computed – then the difference between sources and uses of funds represents: fund surplus or deficient to requirements.

Management provides funds by (a) increasing sources, or (b) reducing uses!

Funds flow shows key management decisions in allocating company resources.

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” or “profit plus depreciation”.

Budgets are based on assumptions.

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8.3 FUNDS FLOW BUDGET

8.4 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.

There is no “true” cost – only “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 centres on “fair” basis; never “true” cost, but may well 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.

(e) Managed cost – spent as management judges; no “right” level; performance is never minimum cost (e.g. advertising must be spent!).

(f) Standard cost – target cost levels based on engineering standards; variances between actual and standard analysed by: price, efficiency and volume (e.g. direct labour 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. direct material). Conversely – indirect cost.

NOTE: Any one cost may be classified in several ways!

Fixed budget assumes unchanging sales targets when sales target is not achieved.

No automatic adjustment for cost and profit targets when sales target is not achieved.

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8.5 ANALYSIS OF COSTS

8.6 FIXED BUDGET

Changed only as a specific budget revision – which involves technical and human problems.

Not a fixed budget.

Series of alternative budgets according to different forecasted sales levels (i.e. 60%, 80%, 100%, 120% of target sales).

Costs and profit targets change in relation to sales targets.

Shows behaviour 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.

May not motivate managers as effectively as fixed budget.

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8.7 VARIABLE OR FLEXIBLE BUDGET

(a) Useful tool for understanding the effect on profit of volume, costs and prices. Sales and costs computed at different sales volumes. Distinguish fixed and variable costs. Break even point – sales equals total cost – no profit and no loss.

(b) Break even analysis aids understanding of budget.

(i) Shows profit (loss) at different sales volumes.

(ii) For any volume indicates what must be changed to achieve profit target, i.e. managed costs, engineering costs, allocated costs, sales prices, product elimination, etc.

(c) Not accurate. An estimate for a limited known range of volumes.

(d) 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%.

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.

(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.

(b) Setting the targets

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8.8 BREAK EVEN ANALYSIS

8.9 CONTRIBUTION ANALYSIS

8.10 BUDGET PREPARATION PROCESS

- Define organisational 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).

(c) Co-ordination

- Separate budgets consolidated to form overall budget for the firm.

- Budgets for each responsibility centre 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 being passed along. Need to meet long term reasonable market prices but not short term or “dumping” prices.

(d) Review and Approval

- Budget moves upwards through the organisation for review, approval and change in discussion with responsible managers.

- Top management gives final overall approval.

- Targets then communicated to managers throughout the organisation.

In all stages there is interaction between different management levels.

Interaction 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.

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8.11 OVERALL BUDGET PREPARATION

Controller’s staff and top management create an organisational environment which may be “creative” or “defensive”.


(a) Objectives

- What are the key profit-making factors of the industry?

- How is the firm formally organised into cost, profit or investment centres? 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?

(b) Targets

- Does Top Management give adequate and timely guidelines?

- Is the organisational 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) Reportsto be discussed in Part II

(d) Action

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8.12 OTRA APPROACH

8.13a CASH BUDGET

8.13b CAPITAL BUDGET

8.13c FUNDS FLOW

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8.13d COSTS

8.13e BREAK EVEN

8.13f BUDGET STEPS

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8.13g FIXED AND FLEXIBLE BUDGET


(b) Study this note and learning patterns very carefully and record key points in your notebook. (10 minutes)


(d) When the bell rings, carry on with the case study which follows.

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(a) SG Work (Exhibits 1-4) (45 minutes)

(b) CSG Work (45 minutes)

A with EB with F ‘Dealers’ D, E and FC with D

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ASSIGNMENT 9.0CASE ANALYSIS OF GILTIM COMPANY (A) (45 + 45 minutes)

9.1 INSTRUCTIONS


Giltim Company (A)

This case challenges you to analyse the effectiveness of a budgetary control system with special emphasis on setting the budget targets (see previous lecture points 6.10, 6.11 and 6.12).

Dealers - (Plant Managers)

Receivers - (Controller)

Read the case carefully. Consider both the human and technical aspects of the budget preparation process.

Then as a SG, work together on each of the following questions one at a time in the order given. Work quickly and cover every question in the time allowed. (Keep individual notes.)

1. Is it a fixed or flexible budget? What are Top Management objectives from the budget system? What are the critical profit-making features of the industry? Who is the best able to deal with them and achieve profit targets?

2. Evaluate carefully each stage of the budget preparation process? Where does it begin? How does it continue? Where does it end? Are the targets creative? Is the controller’s very short visit really worthwhile?

3. Does plant manager feel responsible for profit? Why? How will he behave regarding special costs that he controls (such as maintenance, training, R&D, etc.) during the early months of the year when sales are uncertain? Why is budget revision discouraged in the company?

4. How should the plant manager react to the budget problem at Plant X indicated in Exhibit 5? Decide and justify.

5. Predict the motivation and behaviour of managers under the system.

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QUESTIONS (45 MINUTES)

Role Assignment


Giltim Company (A)

The Company

Giltim Company is a quoted public limited company recognised as a growth stock with regularly increasing earnings per share each year. It has several product divisions headed by senior executives as outlined in Exhibit 3. Each division is regarded by the Chief Executive as a decentralised profit and investment centre.

The Glass Division

The Division is headed by a Divisional General Manager with functional managers for manufacturing and marketing. Ten plant managers and twenty district sales managers report to the functional managers.

There were several plants manufacturing similar but not identical products. Orders had to be filled within two to three weeks. Quality was important and even slight errors in manufacturing could lead to rejection by the customers. Standard costs were set at divisional level for all plants with specific “variances from standard” included in the budgets to meet special local problems. Outline of the Glass Division Organisation is given in Exhibit 4.

The Industry

The industry was characterised by competition in product quality, delivery, efficient cost control and customer service. The biggest threat was from plastic containers. There was little price cutting!

Profit Responsibility

Each division operates as an independent company except that market research, capital expenditure, control, finance and labour relations were conducted through head office which also provided a policy and review function. Divisional managers reported direct to the Chief Executive.

The budget was the principal tool used by head office to direct divisions towards goals. Top management regards the system as “decentralised management control and responsibility”.

Budget Preparation

Preparation of the budget began in May each year when Divisional Managers submitted to Head Office preliminary estimates of divisional sales, capital expenditure requirements and profit for the next calendar year. Forecasts were consolidated at Head Office.

The Market

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In June Head Office studies the reports together with the forecast of the economic, political and market climate prepared by the H.O. Market Research Department. A sales and profit target was then set for the company and for each division with consideration given to the general economy as affecting Giltim market share and required earnings per share. The Company thus assured uniformity of assumptions about environmental changes. Divisions received sales and profit targets during June.

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Giltim Company (A)

Exhibit 4Assignment 9.1

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SEE COPY IN COURSE DIARY

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Divisional Sales Targets

In July each of the 20 district managers then forecast his personal sales target (often with “guidance” from the divisional marketing manager). Forecasts were consolidated and adjusted to divisional targets by divisional marketing managers for approval by Head Office. Once approved nobody was relieved of responsibility without specific authority from Top Management. No arbitrary changes were made without the approval of all parties concerned and responsible!

Divisional managers then divided the total divisional sales and profit targets among the ten plants which ship the finished products. Plant sales budgets were then broken down by products, months, price, volume, etc.

Plant Operating Budgets

In August the sales target formed the basis of each plant’s operating budget. Plant managers determined fixed and variable costs for a fixed (not flexible) budget. Divisional standard costs were applied with budgeted variances where it was not technically possible to achieve standard.

Plants were expected, however, to budget continuous cost reduction programmes and to cut costs below budget levels when sales fall off. Costs for maintenance, training, research and development were particularly susceptible to cost cutting.

The plant manager was responsible for profit. This was defined as the fixed sales budget less budgeted variable costs, less budgeted fixed costs and less budgeted other expense (income). He had to meet his profit target even if the sales target even if the sales target was not achieved. He was thus not merely cost oriented but profit oriented!

Controller’s Visit

In September each year, before plant budgets were finalised, the Head Office Controller and his staff visit each plant personally for one day only! His objective was “not to criticise but to become familiar with the thinking behind the figures” so that when they were reviewed by Top Management, questions could be answered.

However, he also enquired into the general plant activity and the detail of some specific budget costs. He gave “guidance” to plant managers to help them ensure that their targets are in line with overall company thinking.

Head Office

In October plant budgets were consolidated by the divisional staff. Divisional executives reviewed targets in the light of overall objectives, and often asked plants to

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trim the budgets. When agreed at divisional level the budgets were forwarded to Head Office for approval.

In November the Chief Executive and the Controller were personally concerned in the approval of each budget and would often specify areas for re-examination by plant and divisional managers.

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In December Budgets were finally approved and communicated to all responsible managers. Profit targets were fixed for the budget year regardless of the level of actual sales achieved.

Revision

Revision of the budgets on the grounds that radical changes had taken place in the market environment could be applied for in March of the current budget year. However, they were rarely approved since plants and divisions were expected to “act responsibly” by managing costs to achieve profit targets despite difficult conditions.

General

For many political, economic and technical reasons, plants had to ship products to customers in different sales districts.

NOTE: This case was developed and adapted from other cases.

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Giltim Company (A)

Budget Problem at Plant X

Last Year Current Year Disputed Next

Year BudgetActualPlus

BudgetTarget Controller

Plant Manager

Gross Sales 2,800 3,650 4,000 4,200 4,200Less: Discounts & Allowances 200 250 200 200 200Net Sales 2,600 3,400 3,800 4,000 4,000Variable cost of sales 1,200 1,600 1,800 1,840 2,000Gross Margin 1,400 1,800 2,000 2,160 2,000Fixed manufacturing cost 700 960 960 960 1,040Operating income 700 840 1,040 1,200 960Sales (25%) (23%) (26%) (28%) (23%)Special costs controlled by the Plant Manager including: method changed, standard revisions, training, R&D, special maintenance, etc. 400 360 560 560 660Plant income 300 480 480 640 300Net assets employed 2,200 2,600 2,400 2,600 2,800Return 14% 18% 20% 24% 11%Capital budget 400 200 200 300 600

NOTE:

(a) Plant Manager

Current year – sales decline and poor manufacturing efficiency due to low capital budget (request for 400,000 refused!). Profit target will be achieved by cutting and postponing special costs.

New budget – sales target over-optimistic; need for high capital budget to improve efficiency; special costs high (due to postponement in current year); profit target down!

(b) Controller

Current year – despite decline in the economy, company needs high profit and consistent earnings per share; sales decline countered by Plant Manager in cutting costs to meet profit target.

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New budget – improved manufacturing efficiency necessary; fixed costs to be held to previous level; special costs for maintenance and training and R and D increased only if activity and profit justify; need to increase earnings per share. Immediate liquidity problem reduces capital expenditure in all divisions by 40%; opportunity to replace old equipment next year; Plant Manager must meet target for new budget period!

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 for action.

Period plans incorporate project planning.

Budget systems are never “correct” – but only “useful” to achieve specific objectives.

Assumptions – underlying all budgets

Sponsorship – by Top Management

Responsibility centres – for motivation and control

Interaction – participation, discussion, “conditioning” and agreement

Education – necessary and continuous

Timely – budget period fits objective

Management by exception – highlight key areas

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ASSIGNMENT 11.0SUMMARY LECTURE FOR PART I (45 minutes)

11.1 ESSENTIALS OF BUDGETARY CONTROL

11.2 BUDGET CONCEPTS

Appraisal – actual vs. budget

(a) Operating Budget – Forecasts plans and targets of all operating statistics for a future period. Shows contribution (sales – variable cost) to fixed cost and profits.

(b) Cash Budget – Forecast of cash flow from operations, based upon assumption of credit terms.

(c) Capital Budget – Key long term investments in: property, plant, equipment, R&D, advertising, etc. Key to long term profitability. Invest now for benefit later. Also plan “disinvestments”.

(d) Budgeted Balance Sheet – Budget of overall financial position of firm at end of budget period. “Required assets” financed by liabilities and owner’s equity.

(e) Funds Flow Budget – Plan of sources and uses of long term funds. Reveals effects of key management decision 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: All budgets are inter-related. Thus with an opening balance sheet plus (a), (b) and (c) above, allows (d) to be produced by simple arithmetic!!

Usefulness of budget rests on validity of assumptions.

Broad assumptions only justify broad figures.

Highly detailed figures not justified, not useful. Probably fraud!

Variable – vary with volume.

Fixed – do not change with increased volume.

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11.3 TYPES OF BUDGETS

11.4 ASSUMPTIONS

11.5 COSTS

Allocated – charged to responsibility centre by subjective judgement of what is a “fair” distribution.

Engineering – costs that necessarily increase with volume of activity; not management discretion; easily determined.

Managed – costs spent as a matter of management judgement.

Standard – a control mechanism – calculation of efficient product costs standards.

Committed – fixed costs over a short term that cannot be changed.

Opportunity – cost or value of benefit missed by failure to take advantage of an available opportunity. (Absolutely vital – but never recorded by the accountants.)

Fixed budget – unchanging sales volume and profit targets.

Flexible budget:

- series of “fixed” budgets

- shows expected behaviour of costs and profit at different sales volumes (60%, 80%, 100%, 120% of budget).

- adds flexibility, usefulness (and complication) to budget system

- affects management motivation.

Budget revision – normally better to leave original budget targets unchanged by to change “forecast” of expected activity to year end.

NOTE:(a) In stable organisations 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 may operate effectively. However, these frontiers should never become an IRON CURTAIN. “Meeting the budget” is not necessarily doing the job!

Determines profits at varying sales volumes.

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11.6 FIXED AND FLEXIBLE BUDGETS AND REVISION

11.7 BREAK-EVEN ANALYSIS AND CONTRIBUTION

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.

Guidelines – circulated to responsible managers setting objectives.

Estimates – by responsible managers with discussion, change and approval by superiors.

Review and Appraisal – interaction, participation and discussion at all levels to “condition” and motivate managers to achieve targets.

NOTE: Motivation – money, fear, jealousy, status and KITA do work in practice but do not develop creative environment.

Challenge, responsibility and sense of achievement do, however, allow a creative organisational environment to develop.

11.9a ESSENTIALS

11.9b BUDGET CONCEPTS

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11.8 BUDGET PREPARATION PROCESS


11.9c BUDGET TYPES

11.9d “GIVE ME THE COST OF….” SAID THE MANAGER

11.9e BREAK EVEN

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11.9f PREPARATION

11.9g MOTIVATION

11.9h APPROACH

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(a) Objectives

- What are the key profit-making factors of the industry?

- How is the firm formally organised into cost, profit or investment centres? 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?

(b) Targets

- Does Top Management give adequate, and timely, guidelines?

- Is the organisational 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) Reportsto be discussed in Part II

(d) Action

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11.11 OTRA APPROACH


(b) Study these instructions carefully.


(d) Do the following homework tonight:

Read your copy of the summary lecture for Part I in the Course Diary.

Complete your Course Diary for Part I, including notes on each case, and the key points for review later.

Do ASS set 3 and 10, also the postscript, study the summaries and glossary. Pages 31/40, Chapter 2, and Pages 105/120 Chapter 5.

Further readings and tasks to be decided by the Course Leader.

9.1 INSTR

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NOTE:Please try to complete the homework allocated to you tonight because it will ease your workload tomorrow.

Programme – Part II

AssignmentSheet Activity Group Time

1 Review & Quiz SG (New) 8.30 – 9.15am

2 PL – Budget Reporting and Action

INDSG 9.15 –10.00am

3 Lecture – Budget Reporting and Action

MGSG 10.00 – 10.30am

Coffee

4 Case: Giltim Company (B)

SGCSG

10.45 – 11.30am11.30 – 12.00 noon

5 Lecture – Giltim Company (B)

MGCSG 12.00 – 12.30pm

6 Case: Bill Brown IND 12.30 – 1.00pm

Lunch- Case: Bill Brown SG 2.00 – 2.15pm

7 PL – Planning & Control Systems

INDSG (New) 2.15 – 2.45pm

8 Lecture – Planning & Control Systems

MGSG 2.45 – 3.15pm

9 Case: Speedy Company SG 3.15 – 4.00pm

Tea- Case: Speedy

Company CSG 4.15 – 4.45pm

10 Lecture – Speedy Company

MGCSG 4.45 – 5.15pm

11 Quiz IND 5.15 – 6.00pm

12 Summary Lecture MG 6.00 – 6.30pm

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(a) Assemble in your new SG.

(b) Discuss the work completed in Part I, your summaries of key points and any outstanding questions. (15 minutes)

(c) Do in Small Group the short quiz of 50 questions on “The Effect of Assumptions on Budgets” (Exhibit 1). Discuss each answer in SG. (Don’t look at the solution yet.) (15 minutes)

(d) Then check your answers, (see Exhibit 2) discuss questions arising and record your score in your Course Diary. (15 minutes)

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ASSIGNMENT 1.0REVIEW & QUIZ (45 minutes)

1.1 INSTRUCTIONS


Short Quiz on the Effect ofASSUMPTIONS ON BUDGETS

A draft set of budgets has been completed, including operating budget, cash budget, capital budget, and budgeted balance sheet. What effect would each of the following changed assumptions have on specific figures in the various budgets? Mark each line as follows:

+ means : probably increased- means : probably decreased0 means : unchanged or cannot specify

Answer one line at a time individually. Then discuss your answer in SG. Make appropriate changes in your solution. Then do the next line. Start with the example numbered “0”. Then do numbers 1 to 10. When you have completed and discussed every item, check your answers with the correct solution (Exhibit 2) and record your score in your Course Diary.

Budgets: Operating Budget

Affect on the figure of:

Assumptions Changed ProfitCash

Balance

Net Amount for Capital

Expenditure

Assets (excluding

cash)

Liabilities (excluding Owner’s Equity

0. Debtors 90 days instead of 60 days 0 - 0 + 0

1. Sales, stock and purchases increased

2.New long term loan spent to replace old equipment (loan and equipment)

3. Repay loan to reduce interest charges

4.Raw material price increase not reflected in sales price

5. Equipment sold for cash for more than book value

6. Cash dividend increased

7. Labour cost efficiency improved

8. Income tax increased

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NOTE: Use the Copy in your Course Diary. Please do not mark

9. Increased R & D

10. Manufacturing overheads increased


Solution to Short Quiz on“The Effect of Assumptions on Budgets”

Budgets: Operating Budget

Affect on the figure of:

Assumptions Changed ProfitCash

Balance

Net Amount for Capital

Expenditure

Assets (excluding

cash)

Liabilities (excluding Owner’s Equity

0. Debtors 90 days instead of 60 days 0 - 0 + 0

1. Sales, stock and purchases increased + 0 0 + +

2.New long term loan spent to replace old equipment (loan and equipment)

- 0 or - + + or 0 +

3. Repay loan to reduce interest charges + - 0 0 -

4.Raw material price increase not reflected in sales price (inv & crs up)

- 0 or - 0 + +

5. Equipment sold for cash for more than book value + + 0 or - - 0

6. Cash dividend increased 0 - 0 0 0

7. Labour cost efficiency improved + + 0 - or 0 0

8. Income tax increased - - 0 0 0

9. Increased R & D - - 0 or + 0 0 or +

10. Manufacturing overheads increased - - 0 + +

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Score: _______ out of 50

ASSIGNMENT 2.0PROGRAMME LEARNING: BUDGET REPORTING & ACTION (45 minutes)

(a) Assemble in SG.

(b) Do quickly in writing ASS:

Set 11 (30 minutes) Chapter 5, pages 121/131Ch.1 (reading only) (10 minutes)Set 12 (frames 1-11 only) (5 minutes) Chapter 5, pages 133/137


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2.1 INSTRUCTIONS

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.

(a) Reports should meet managers’ needs at both head office and local levels.

(b) Reports designed for managers by responsibility centres:

- expense centres – performance measured as actual cost against target.

- profit centres – performance measured as actual profit against target.

- investment centres – 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 responsible centres.

Reports for control and action.

Designed to achieve results.

Materiality is important. Unnecessary detail distracts attention from key data.

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ASSIGNMENT 3.0LECTURE: BUDGET REPORTING & ACTION (30 minutes)

3.1 TOTAL BUSINESS PLANNING

3.2 REPORTING BY ORGANISATIONAL RESPONSIBILITY

3.3 FUNCTION OF REPORTS

Objectivity – do “try” to avoid bias (but the selection of what is chosen to be reported automatically adds to some bias).

(a) Design – serve user needs, signal variances, minimum data with maximum information.

NOTE: Every report can be designed to fit one sheet of paper with supporting detail on following pages. Thus each page is complete in itself. Complex reports 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 “dysfunctional”.

(d) Clarity – reports absolutely clear to the user – without undue effort and with proper training. Significant data only.

(e) Signals – managers need signals of key items. They do not need all the time. Distinguish routine from special reporting.

NOTE: All figures are estimates based on assumptions. Excessive accuracy is wasteful, ridiculous…fraudulent…. Rough accuracy is generally fast and adequate!

Reports must communicate information not merely contain it.

Design reports for the user – accountants like figures, engineers like graphs, managers like the pictures.

Pictures and patterns communicate basic ideas rapidly.

Show deviation of actual from one target only – and the reasons why.

NOTE: “One way communication” is always poor. Restrict every number to the vital digits only.

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3.4 REPORTING ESSENTIALS

3.5 COMMUNICATION

(a) Treat reports as “information products” to be “marketed” as skilfully 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 – standardisation, fits to the organisation, minimum interruption of daily functions.

(e) Set a price policy for reports – value of the information is difficult to set, but consider the opportunity cost or value of not having the data (never really recorded by accountants?).

(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.

NOTE: Need an appropriate “marketing mix” to “market” budget reports effectively to managers throughout the organisation. Think of reporting in marketing not merely selling terms – satisfy needs!!

Focus on the responsible manager.

Report for each centre to build up from centres below.

Trace variances through reports to managers responsible, but “tread softly….”

NOTE: Don’t bury the manager in a grave of paperwork.

(a) The budget is a device to achieve objectives in organisation.

(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!

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3.6 MARKETING BUDGET REPORTS

3.7 RESPONSIBILITY REPORTING

3.8 HUMAN PROBLEMS

(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!

NOTE: Other methods may achieve the results to survive today without developing anyone for the future! (i.e. fear! money! KITA!)

Top management and the controller set the organisational 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 confident bold decisions, use resources creatively, take balanced risks, and achieve both personal and corporate goals.

NOTE: How is your organisational environment?

85

3.9 ORGANISATIONAL ENVIRONMENT

3.10a TBP

3.10b REPORTING

3.10c ENVIRONMENT

86

3.10 LEARNING PATTERNS

3.10d MOTIVATION

3.10e MARKETING CONCEPTS

3.10f OTRA

87

ASSIGNMENT 4.0CASE ANALYSIS OF GILTIM COMPANY (B) (45 + 30 minutes)

4.1 INSTRUCTIONS

(a) Assemble in SG now.

(b) SG work. (Exhibits 1-4) (45 minutes)

(c) CSG work. (30 minutes)

A with DB with E ‘Dealers’ A, B and CC with F

88


Giltim Company (B)

In Giltim (A) you made a simple analysis of a budget system with emphasis on setting budget targets. Now Giltim (B) challenges you to make a more sophisticated analysis of the reporting and overall effectiveness of the budget system. (See previous lecture points 2.2, 2.4, 2.8 and 2.9.)

Role Assignments:

Dealers - (Plant Manager)Receivers - (Controller)

1. Evaluate the Giltim budget reporting system in terms of: design, speed, frequency, clarity, and overall effectiveness for plant, division and Head Office.

2. Evaluate the performance of Plant X as indicated in Exhibit 3. What action would you take if you were (a) Plant Manager, and (b) Controller? Criticise the design of the report.

3. How well does the budget system motivate plant managers to achieve company objectives? Consider the long term effects of the system on the behaviour of managers.

4. How could Top Management make the system more effective? Consider all the alternatives. Set out a plan and justify your decision in both technical and human terms.

89



Giltim Company (B)

Top Management Approach to Reporting

The Chief Executive and Controller of Giltim insisted upon a rapid and efficient reporting system of monthly operations. They believe in timely reports to allow timely action by Head Office, Division and plant managers.

However, they believed that plant managers should not wait until the month end to deal with critical problems but should be on top of them daily.

Plant reports were reviewed on an “exception” basis comparing actual against budget performance. This was felt to be good for morale and plant managers were expected to explain over-spending but not under-spending.

Top management concentrated on: sales, gross profit, manufacturing efficiency, etc. – but also checked up on cost and progress of projects under control of the plant managers.

A schedule of plant monthly reports is given in Exhibit 4.

Monthly Flash Reports

On the third business day after the month end each plant wired to Division and Head Office the key figures for: sales, gross profit, manufacturing efficiency and net profit, together with the variances from budget. A summary of these figures was studied the next day by Top Management, which was concerned with critical variances.

Monthly Detailed Reports

On the eighth business day the plant operating summary (Exhibit 3) and supporting reports (see Exhibit 4) were due at Division and Head Office. These were consolidated to show the results by plant and division and distributed the next day to Top Management.

In addition, at the beginning of each month, plant managers were expected to submit current re-forecasts of anticipated performance for the month and year end. Such re-forecasts enabled Head Office to shape financial plans and to get plant managers to look at their programmes on a yearly as well as day-to-day basis.

90

Dealing with Plant Problems

When a potential trouble spot became apparent, daily reports were required on this item for Division and Head Office. A staff specialist team was sometimes sent to the plant concerned to make recommendations. It was up to the plant manager to accept or reject such recommendations. However, it was expected that they would generally accept such “advice” gracefully.

Sales Decline

If a sales decline became evident early in the year and the plant manager could convince Top Management that the change was permanent, then plant budgets could be revised to reflect these new circumstances. However, if towards the year end the sales fell below predicted volume no revision was allowed.

Plant managers were expected to go back over the budgets with their staff and see where cost reductions could be effected to do the least harm. Specifically they were expected to consider what could be either eliminated or postponed until next year.

Sales and Plant Co-ordination

Whenever problems arose between plants and sales districts, local managers were expected to solve the problems themselves. If customers insisted upon immediate delivery, plants were expected to comply somehow. Customers’ needs always came first.

However, if the sales programme involved a major plant expense out of line with the budget then this was decided upon by Division or Head Office.

Sales districts had sole responsibility for product, volume, pricing, sales mix and delivery. Direct responsibility for plant operations and profit was the concern of the plant manager. However, it was understood that Sales should co-operate with Plant wherever possible.

Motivation of Plant Manager

Plant managers and indeed all their staff were motivated to meet profit targets through promotion, bonuses and pressures from Division Head Office. In addition, each month plants were ranked competitively for manufacturing efficiency and results published widely throughout the group.

Plant managers were entirely responsible for manufacturing variances against divisional standards. Efficiency ratings were computed as actual variable manufacturing cost as a percentage of standard cost.

91

Inter-plant competitions with prizes were also conducted for special cost reduction programmes, improvements in methods, etc.

Plants were encouraged to stress quality and delivery to meet competitive pressures. All plant workers knew that to survive in the competitive market, Giltim had to produce high quality products on time and at reasonable cost.

Overall

Plant managers and other staff were not “happy” under the system but they worked hard to achieve targets and were generally successful despite changes in the market conditions.

NOTE: This case has been developed from other cases and practical experience.

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Giltim Company (B)

No. 1 Plant Operating Summary – March

This Month This Month

Actual Budget Last Month Last Year

Gross Sales 264,432.27 326,425.00 237,111.26 316,201.27 Discounts & allowances 47,132.16 16,100.00 37,420.16 13,111.11

Net Sales 217,300.11 310,325.00 199,691.10 303,090.16Variable cost of sales 142,216.99 187,500.00 137,821.26 192,174.72Gross margin 75,083.12 122,825.00 61,869.84 110,915.44Fixed manufacturing cost 41,211.11 36,400.00 38,174.14 41,117.76

Operating income 33,872.01 86,425.00 23,695.70 69,797.68

% sales 15.587% 27.849% 11.865% 23.028%

Special profits or (costs): Method improvements 17,426.22) 21,300.00 28,321.89 12,174.16

Standard revisions (24,174.14) (9,400.00) (7,416.27) (6,811.20) Mater. price variance 12,111.11 6,000.00 (3,567.47) (4,666.54)

Misce. (profits) 8,126.46 6,000.00 30,100.26 22,178.88

Total (profits) 13,489.65 23,900.00 47,438.41 22,875.30Plant Income 47,361.66 110,325.00 71,134.11 92,672.98

Assets employed 1,816,411.22 1,874,426.001,742,111.8

91,052,111.9

1

% Return 3.58654% 5.88714% 4.08345% 8.80912%

NOTE: Year to date figures on next page (not provided here)

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Giltim Company (B)

Schedule of Monthly Plant Reports

1. Plant Operating Summary Sales, costs, other income and expense. Actual against budget for the month and year to date. Percentage analysis on sales and assets employed.

2. Sales Analysis Sales and margins by product groups. Actual, budget and variance analysis for the month and year to date.

3. Plant Variable Cost of Sales Raw material, labour and variable expense. Actual, budget and variance analysis.

4. Plant Fixed Manufacturing Plant expense other than variable and specialExpense expense. Actual, budget and variance analysis.

5. Special Costs and Profits Special items under the control of the plant manager including: sale of scrap, methods improvements, standard revisions, material price variances, cost reduction programmes, etc. Actual, budget and variance analysis.

6. Plant Investment Stock, capital projects, debtors included in computation of assets employed by the plant. Actual, budget, variance and ageing analysis.

(a) , to make

(b) Review and redesign budget reports periodically to meet current needs.

(c) Recognise that reports for HO may not necessarily meet local management key needs – thus leading to two (or more) reporting systems – formal and informal.

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95


ASSIGNMENT 6.0

CASE OF BILL BROWN (45 minutes)6.1 INSTRUCTIONS – INDIVIDUAL AND SG WORK (30 MINUTES)6.2 INSTRUCTIONS – SG WORK (15 MINUTES)NOTE:Use your notebook. Do not mark the Work


Bill Brown

Study the budget reports for the year ended December 31, (Exhibits 2-6) and answer the following questions:

1. Which assets differ materially from the Budget?

2. By how much did gross sales exceed the target?

3. What effect did excess sales have upon: debtors and stock (inventory)?

4. Did the increase in sales require increased assets?

5. How have the extra assets been mainly financed?

6. Did gross profit meet the target?

7. List seven possible reasons why the net profit percentage to sales has fallen? (5.6% - 3.8%)

8. Specify which costs in Exhibit 5 are managed or committed.

9. Which commercial and administrative expense items should be specifically investigated? To what extent could increases be explained by the increased sales?

10. Review the factory overhead expense as compared with the target. Specify those items requiring investigation.

11. From Exhibit 4 which product group has performed better? Why?

12. Does the allocation of fixed overhead on the basis of sales give management useful information?

13. What specific action do you suggest be taken upon receipt of this budget report?

14. What additional data should be given for evaluating performance in addition to the actual, budget figures for this year only?

NOTE: This case has been developed from other cases and practical experience.

SEE IN COURSE DIARY

28

QUESTIONS


Bill Brown

Balance Sheets – Actual and Budget as at December 31

Actual Budget

VariancesOver (Under)

BudgetASSETSCurrent Assets: Cash 34 59 (25) Marketable securities 17 17 - Debtors 614 469 145 Raw material 2 197 (195) Work in process 252 225 27 Finished goods 258 51 207 Prepaid expense 45 17 28

Total current assets 1,222 1,035 187

Fixed Assets: Land 32 32 Buildings 246 246 Machinery and equipment 661 459 Delivery equipment 8 8

947 745 Less: Accumulated depreciation 196 193

751 552 199Patents less amortization 20 20

Total assets 1,993 1,607 386

LIABILITIES & OWNER’S EQUITY

Current Liabilities Bank loan 500 150 350 Accounts payable 164 159 5 Accrued taxes 82 84 (2) Accrued wages 16 9 7 Accrued commissions 3 5 (2) Total current liabilities 765 407 358Long term loan 150 150 -

Owner’s equity Capital 800 800 Accumulated profit 278 250

1,078 1,050 28

1,993 1,607 386

SEE IN COURSE DIARY

29


Bill Brown

Operating Statement and BudgetYear ended December 31

Actual Budget

VariancesOver (Under)

Budget

Gross sales 763 462 301

Less: Returns and allowances 64 4 60 Net sales 699 458 241

Cost of sales 630 394 236 Gross profit 69 (10%) 65(14%) 5Commercial and administrative expense 47 25 22

Operating profit 22 39 (17)

Other income (expense) 21 2 19 Profit before taxes 43 41 2

Income tax 16 15 1 Net profit 27 26 1

% to Net Sales 3.2% 5.6% (2.4%)

SEE IN COURSE DIARY

30


Bill Brown

Operations – Reports by Product GroupsYear ended December 31

Product Group A

ProductGroup B TOTAL

ActualBudge

tActua

lBudge

t ActualBudge

t

Net sales 325 297 374 161 699 458Cost of sales 297 290 333 104 630 394

Gross Profit 28 7 41 57 69 64

Commercial & administrative expense 27 16 20 9 47 25

Operating profit (loss) 1 (9) 21 48 22 39

% to Net sales - 3.0% 5.6% 30.1% 3.2% 5.6%

SEE IN COURSE DIARY

31


Bill Brown

Factory Overhead – Year ended December 31

A C T U A L B U D G E TProduct Group Non-

Allocable Total Product Group Non-Allocable TotalA B A B

Supplies 30 3 1 34 25 3 - 28

Indirect labour 45 8 11 64 31 9 21 61

Supervision – departmental 2 1 - 3 2 1 - 3

Supervision – general factory - - 3 3 - - 3 3

Tools and dies - 2 - 2 2 1 - 3

Light and power 2 1 - 3 1 1 - 2

Fuel 1 1 - 2 1 1 - 2

Liability insurance 1 1 - 2 1 1 - 2

Social security taxes 2 1 - 3 2 1 - 3

Freight - - 1 1 - - 1 1

Taxes - - 1 1 - - 1 1Depreciation 2 1 - 3 2 1 - 3

85 19 17 121 67 19 26 112Allocated on basis of direct labour 13 4 17 - 22 4 26 -

TOTAL 98 23 121 89 23 112

SEE IN COURSE DIARY

32


Bill Brown

Commercial and Administrative ExpenseYear ending December 31

Actual Budget

Officers’ salaries 9,800 4,800Office salaries 12,542 10,467Commissions to agents 13,423 4,603Office supplies 1,153 844Telephone and telegraph 563 571Group insurance 865 847Postage 144 132Travelling 723 674Advertising 7,109 1,387Legal and professional 240 200Dues and subscriptions 60 40Social security tax 142 130Depreciation 212 212Miscellaneous 222 177

47,198 25,084

Allocated to Product Groups: Product Group A 28 16 Product Group B 19 9

(000) 47 25

NOTE: Allocation made mainly as percentage of sales.

SEE IN COURSE DIARY

43


Bill Brown

1. Cash, debtors, raw materials, finished goods, machinery and equipment differ materially from the budget.

2. Gross sales exceeded the target by 301.

3. Increase in debtors (469 – 614) and stock (473 – 512).

4. Increase in sales required increased assets of 386 (1,993 – 1,607) above budget. Current assets (187) and fixed assets (199).

5. Extra assets mainly financed by an increased bank loan (500 – 350).

6. Gross profits above target in amount (64 – 69) but substantially down in percentage (14 – 10%).

7. Possible reason for lower net profit percentages:

(a) Cost of materials higher than expected. (Gross profit fell.)

(b) Returns and allowances higher.

(c) Commercial and administrative expense almost double budget amount.

(d) Possible inefficiency in production because of higher volume.

(e) Sales mix different from plan.

(f) Budget unrealistic.

(g) Errors in reporting.

8. Costs in Exhibit 5:

Managed costs - indirect labour- supervision- fuel

Committed costs - depreciation- liability insurance- taxes

9. Officers’ salaries, commission to agents, advertising should be investigated. Commission to agents and advertising could be explained by

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ANSWERS

the sales increase.

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10. Supply expense, indirect labour, non-allocable indirect labour expense, and expenses allocated on the basis of direct labour, should be investigated.

11. Product Group A has performed better in terms of overall profitability against budget. Its net sales and gross profit have not deviated materially from the budget.

Product Group B’s net sales were twice the budget amount but its cost of sales was more than three times the budgeted amount, indicating its performance fell below the target.

Product Group A’s operating profit was below standard because its commercial and administrative expenses were a higher percentage of net sales than anticipated.

NOTE: Alternative viewpoints might be justifiable on this.

12. No. Allocation of fixed overhead is always subjective. It does not normally vary with sales. Allocating by sales % is merely accounting convenience.

13. Investigate why:

(a) Sales above budget.

(b) Product Group B gross profit percentage decline.

(c) Commercial and administrative expense so high. (How allocated?)

(d) Debtors, stock and equipment differ from budget.

(e) Possible defects in budget process.

14. Actual and budget data for the year to date.

SEE IN COURSE DIARY

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(a) Assemble in new SG.

(b) Do quickly in writing ASS set 12 (frames 11-73). (30 minutes)Pages 137/157. Chapter 5.

(c) Quickly review all the summaries and the glossary, and note any words that you still do not immediately understand.

(d) Record key points in your notebook.

(a) Budget is more than a one year phenomenon. More meaningful in light of 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) Replan every year for five years ahead (not merely revision!).

(d) Annual planning involves:

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ASSIGNMENT 7.0PROGRAMME LEARNING: PLANNING AND CONTROL SYSTEMS (30 minutes)

7.1 INSTRUCTIONS – SMALL WORK GROUP

ASSIGNMENT 8.0LECTURE – PLANNING AND CONTROL SYSTEMS (30 minutes)

8.1 TOTAL BUSINESS PLAN

- 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.

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TBP a tool to influence management behaviour.

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 organisational environment which influence 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 of performance.

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).

(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 organisation 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 systems.

(e) Reporting.

(f) Encourage an organisational environment in which control system functions creatively not defensively.

NOTE: System should encourage not repress action to achieve corporate objectives.

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8.2 TOTAL BUSINESS PLAN AND MANAGEMENT BEHAVIOUR

8.3 PLAN AND ACTION

8.4 CONTROLLER’S FUNCTION IN CONTROL SYSTEM

A poorly designed or poorly functioning system or a non-creative environment will result in efforts to beat the system. Managers normally take defensive action against an oppressive system.

Techniques for beating the system:

(i) Setting low targets

- low sales targets- ‘padded’ cost targets- ‘no change from previous year’

(ii) Timely use of secret reserves

- orders, sales and purchase invoices delayed or advanced as convenient

- excessive reserves for possible losses not yet really sustained- special gains or losses delayed or advanced as convenient

(iii) Sabotage the system

- meet the budget without doing the job- accept target and justify revision later- use authority skilfully to create delays regardless of cost- use committees to delay action- avoid variances by inter-departmental and inter-account

transfers- pay excessive attention to useless detail (a popular

occupation….)

Budget revision changes the target. Re-forecasting retains the budget target but forecasts the probable actual performance for the year!

Fixed budgets can be revised.

Revision of budget targets may be dangerous, may motivate managers to work harder at justifying a budget revision than at achieving the original budget target!

During the budget year failure of actual performance to achieve target should require managers to re-forecast the year end result – without changing budget target. Top Management thus able to plan more effectively. Manager’s failure to achieve original target is not concealed!

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8.5 BEATING THE SYSTEM

8.6 TARGET REVISION OR RE-FORECASTING

In evaluating a planning and control system consider:

- Objectives – to be achieved from the system

- Targets – the way they are set

- Reporting – speed, content, effectiveness

- Action – resulting behaviour and development managers under the system.

8.8a TBP + BUDGETS IN PERSPECTIVE

8.8b TBP PROCESS

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8.7 OTRA APPROACH


8.8c CONTROLLER

8.8d BEATING THE SYSTEM

8.8e OTRA

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(b) Study this note and learning patterns very carefully and record each key point in your notebook. (10 minutes)


(d) When the bell rings carry on with the case study which follows.

(a) SG Work (Exhibits 1-5) (45 minutes)

(b) CSG Work (30 minutes)

A with EB with F ‘Dealers’ D, E and FC with D

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8.9 INSTRUCTIONS (15

ASSIGNMENT 9.0CASE – SPEEDY COMPANY (45 + 30 minutes)

9.1 INSTRUCTIONS


Speedy Company

This case challenges you to evaluate a Total Business Planning and Control System in both technical and human terms and to solve short and long term budgetary control problems. (See previous lecture points 7.2, 7.4 and 7.5.)

Role Assignments:

Dealers - (John Bold)

Receivers - (Edward Adolphus)

Read the case carefully (Exhibits 2-5).

Then as a SG, work together on each of the following questions one at a time, in the order given. Work quickly to cover every question in the time allowed. (Keep individual notes.)

1. Evaluate the WWC Business Planning & Control System in terms of:

- Objectives- Targets- Reporting- Action- Overall effectiveness

2. What are the underlying causes of conflict between Speedy and WWC? What are the key problems confronting WWC in installing the system in the Speedy Company?

3. Evaluate the performance of the Speedy Company outlined in Exhibits 3 and 4. Should Mr Bold leave Speedy alone to get on with the job? Is the system an effective way to develop and motivate operating managers?

4. As consultant to Mr Bold what would you advise him to do regarding his two problems? Decide upon and justify your opinion.

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SPEEDY COMPANY

In November John Bold, the European Controller of Worldwide Chemicals Corporation (WWC) of New York, was wondering how to deal with the latest of a series of Telex messages from Edward Adolphus, the General Manager of Speedy Company, a small Italian WWC subsidiary. (Exhibit 3)

WWC acquired Speedy in May last year from its previous owner-manager. Speedy was a relatively small (400 employees) chemical manufacturer. Brief financial reports for the last 2 years (to date) are given in Exhibit 4.

Although WWC initially retained the Speedy management team, it introduced Rudy Schutz, an experienced WWC Controller, with instructions “to install the WWC Business Planning and Control Systems (Exhibit 5) as a first step for controlling Speedy operations”.

Bold recalled a recent meeting with Schutz who said:

“When I came here in May last year nobody understood financial control except the previous owner and he left abruptly in July. Only annual accounts were prepared, cost accounting, inventory records, inventory control, production control and budgetary control simply did not exist.

However, Adolphus and I worked with the old Speedy departmental managers to develop this year’s Business Plan, although it was the first time they had ever participated in planning and budgeting. The managers did not appreciate financial cost control and they accepted the budgets, without really feeling committed to the results.

This year’s Business Plan included the following key management actions: implement standard costing, install automated inventory control, revise product prices, cut low margin products, create forward product planning and research, and finally standardise the product line. Some progress has been made but so much depends on the standard cost system, which is difficult and slow. We have had to maintain old records in parallel so that if we abandon the mechanisation plan NOW … nobody would notice the difference!

This year’s Business Plan was discussed at a WWC management meeting and although sales and profit targets were approved, they “suggested” and we “agreed” to cut total employees and assets employed by 10%. Furthermore, as part of a WWC total cut back in capital expenditure our capital projects were cut by 33% ….!

Frankly, here at the little Speedy Company, both Adolphus and I feel particularly pressured by WWC telling us that “you must, you must…” Everything is dominated by the numbers and the financial control. We have

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asked Speedy staff for a great effort and although things are moving we have no results yet…!

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Getting all that monthly data to WWC is a major headache because our people don’t understand the system. Without WWC we could operate in a much more informal and efficient way and do things at different times. The overall cost of meeting WWC’s requirements is very high indeed!”

In his three years at WWC, Bold appreciated that WWC Top Management attributed its success to the “Business Planning and Control System”, mainly because it:

(a) measured progress conventionally in sales, earnings, and return on investment (good for the stock market price!)

(b) focused operating staff on critical areas that might not receive adequate attention

(c) forced managers to commit themselves to future goals and long range objectives

(d) was effective as a training and educational device

(e) encouraged managed to use and demand more sophisticated information

(f) led to better long run decisions.

Small operating units were always asking for a more simplified system but New York always said “no”, but today, Bold faced two problems with Speedy:

(a) The Inventory Control problem. (Exhibit 3) Should he insist on Speedy meeting the budget targets? Or send in a staff team to advise? Or forget it until December figures were received? Or replace Schutz? Or report to New York on Adolphus’ failure?

and

(b) The urgent request for a simplified system , should he refuse? Or ignore it? Or delay his reply? Or send in a study team? Or ask New York approval? Or agree and then fight it out with New York? Or raise it at the next monthly meeting?

In his mind at the time was the comment by the original owner of Speedy Company when he left on “premature retirement”: “If the WWC Business Planning and Control System is developing anything, it’s a whole new race of important managers….!!!”

The Chairman of WWC was at one time a qualified professional accountant!!

NOTE: This case has been developed and adapted from other cases and practical experience.

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SPEEDY COMPANY

1. SEPTEMBER 26 TELEX FROM BOLD (REGIONAL HO) TO ADOLPHUS (SPEEDY) – SUBJECT: INVENTORY CONTROL

July and August inventory and sales vary from budget. August sales forecast reflects decrease in year end sales yet increased inventory over budget. Request latest forecast, explanation and proposed action. Kind regards, Bold.

2. SEPTEMBER 27 TELEX FROM ADOLPHUS TO BOLD – SUBJECT: INVENTORY CONTROL

Your September 26 Forecast September to December follows (detail provided). Variances due to three new policies which left 1977 inventory budget optimistically low. First policy: achieve 19% sales increase with outmoded product. Second policy: manufacture long series to achieve cost reduction. Third policy: reduce purchase orders and maintain minimum inventory low value items.

Corrective action: Running 40 people under budget, reviewing purchase orders myself, dropping low volume items and getting cleaner finished inventory.

Great concern over inventory valuation with new standard cost system. Physical inventory does not check with balances. Rechecks under way but slow with limited staff. Your specialists promised help when their priorities permitted. Regards, Adolphus.

3. NOVEMBER 10 TELEX FROM BOLD TO ADOLPHUS – SUBJECT: INVENTORY CONTROL

September inventory again increased over August yet sales under budget. Explain failure to meet forecast despite corrective action. List achievements and plans to December. Consider aggressive action:

(1) Realistic master production schedules.

(2) Immediate physical shortage control to expedite shipments.

(3) Work in process analysis to maximise saleable December output.

(4) Manpower reduction.

4. NOVEMBER 16 TELEX FROM ADOLPHUS TO BOLD – SUBJECT: INVENTORY CONTROL AND GENERAL POLICY

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Your November 10. October inventory over budget (detail provided). Items controlled. Orders rescheduled to achieve maximum December sales.

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We manufacture six months supply of many low volume items and cannot repeat cannot make cost and inventory reductions because most items necessarily in stock to achieve increased sales. Carrying out all aggressive action recommended.

Grace policy issue. Local management excessively occupied with HO reporting to detriment of operations. Urgently request consideration of simplified business planning and control system suited to small operating unit. Speedy just too small for WWC system.

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SPEEDY COMPANY

Brief Financial Reports Last 2 Years

Income StatementsThis yr to Sept 30

Last Yr Actual BudgetSales 5,800 3,814 4,500Cost of sales 2,430 1,400 1,600 Gross Profit 3,370 2,414 2,900Operating expenses 2,842 2,026 1,100 Operating Profit 528 386 1,800Tax 250 190 900

Net Profit 278 198 900

Operating ExpensesThis yr to Sept 30

Last Yr Actual Budget

Research and Development 626 445 300Sales 1,501 860 140Accounting 474 411 550General 241 310 110

2,842 2,206 1,100

Balance SheetsThis yr to Sept 30

Last Yr Actual BudgetCash 210 126 150Receivables 1,200 1,040 1,100Inventory 1,374 1,690 1,400

2,784 2,856 2,650

Fixed Assets 824 1,210 1,2003,608 4,066 3,850

Payables 1,788 2,056 1,630Owner’s equity 1,820 2,010 2,220

3,608 4,066 3,850

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SEE COPY IN COURSE BOOKEXHIBIT 5

Assignment 9.1

Speedy Company

Brief Outline of WWC Business Planning and Control System

The system involves six phases:

1. Broad Objectives (January – April)2. Tentative Plan (May – June)3. HO Review and Approval (July – August)4. Detailed Budgets (September – November)5. Reporting6. Performance Review and Action

1. Broad Objectives

From January to April, tentative objectives were “negotiated” in meetings between New York and European HO Managers, Product Line Managers and Operating Unit Managers (subsidiary companies) involved key measures: sales, net income, assets employed, total employees and capital expenditures.

2. Tentative Plan

In May/June each operating unit submitted a tentative five year business plan beginning in the following January showing how these objectives could be achieved. The plan contained up to 100 pages including:

(a) One page financial and operating summary(b) Analysis of changes in the net income(c) Projected financial statements and commentary(d) Major management actions planned(e) Simulated financial results for sales of 60%, 80% and 120% of forecast

levels.

NOTE: The plan was supported by detailed plans for each functional area (Marketing, production, finance, research, etc.) including the mission, analysis of present problems and opportunities and statement of specific management action.

NOTE: The simulated financial results for 60%, 80% and 120% of forecast sales levels included analysis of costs into: fixed costs, unavoidable

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variable costs and management discretionary costs. Management described specific actions it would take in case of sales reduction, to control employment, assets and capital expenditure.

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3. Head Office Review and Approval

In July/August, Business Plans for all operating units were reviewed and defended in meetings attended by senior WWC managers from New York, European Headquarters and by General and Functional Managers of operating units.

NOTE: WWC viewed these meetings as a key factor in its efforts to encourage operating unit managers to share their experience in resolving common problems and to understand overall WWC problems and objectives.

4. Detailed Budgets

By mid-November each operating unit submitted detailed budgets for the following year (monthly) based upon the first year of the approved Business Plan.

5. Reporting

All operating units used identical reporting forms and accounting classifications in thirteen monthly reports to European and New York HO covering activities for the month and year to date (actual and budget):

1. “Flash” Income State (due within 5 days)2. Income statement3. Balance sheet4. Changes in retained earnings5. Cash flows6. Employment statistics7. Orders received, cancelled and outstanding8. Inter-company transactions9. Transactions with headquarters10. Analysis of inventories11. Analysis of receivables12. Status of capital projects13. Controller’s monthly operating and financial review (about 10 pages)

Monthly reports items 2-13 were due within 10 working days. In addition to the monthly reports each unit submitted about twelve other reports: quarterly, six-monthly or once a year.

6. Performance Review and Action

Reports forwarded to New York and European HO were reviewed by financial analysts who focused on actual performance against budget for: sales, net

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income, assets employed, total employees and capital expenditure. They tried to detect trouble spots or unhealthy trends.

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Reports also contained monthly revised forecasts for the year-end. If the forecast indicated that the planned objectives would not be achieved the situation was considered critical.

An operating unit manager with a problem could call for help from European staff specialists including: the financial analyst, and experts in cost analysis, inventory control, and industrial engineering, etc.

Deviations from the fixed annual budget and current operating problems were discussed at regular monthly meetings with senior executives from European HO and New York together with the General Managers and Controllers of all operating units. This was a “live case discussion” every month.

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ASSIGNMENT 11.0QUIZ (45 minutes)


(a) Assemble in Small Group.

(b) Small group work. Answer the quiz of 100 questions and mark the special form provided with an X. You will find this special form in your Course Diary.

(c) After you have completed the quiz, it will be collected by the Course Leader. It will be marked and returned to you. Your score will be recorded in the appropriate place in your Course Diary.

(d) Please complete your feed back summary, which you will find in your Course Diary.

(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.

Language and conceptsOperating, cash, capital and funds flow budgetsBudgeted balance sheetsBudget preparationBudget reporting and actionTotal business planningTechnical and human problems

PlanningCommunication

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ASSIGNMENT 12.0SUMMARY LECTURE FOR PART II (30 minutes)

12.1 SPECIFIC OBJECTIVES OF THE PROGRAMME

12.2 WORK COMPLETED

12.3 BUDGETARY CONTROL OBJECTIVES

MotivationReportingOverall – to influence the behaviour of managers

SystematicRelated to: industry, organisation and top management objectivesOverall – to influence the behaviour of managers

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12.4 BUDGET PREPARATION

Design for managers and revise periodicallyActual against target performanceRelate to: organisation operating managers’ needs and top management requirementsEffective reporting is: speedy, key signals, not excessively accurate, computerised, graphic, impressive, ‘marketed’ to managersOverall – to influence the behaviour of managers

Reports should be marketed to managers just as any other product is marketed to customers.

Need a marketing mix involving: product, price, promotion, and distribution.

Budget reports like products do not ‘sell themselves’.

Budgets help managers achieve objectives through people.

Need a creative (not defensive) environment.

Controller and staff may reduce the ‘natural’ friction in the system.

Top management is the key influence to a creative organisational environment.

NOTE: Budgets – whips or tools? Technical problems always easier to solve than human problems.

Key role in the budget system.

Duties include: design, education, preparation, information storage and retrieval, reporting, follow up to action …. helping to develop a creative environment.

Budgets only meaningful as part of a Total Business Plan (TBP).

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12.5 BUDGET REPORTING AND ACTION

12.6 MARKETING BUDGET REPORTS

12.7 HUMAN PROBLEMS

12.8 CONTROLLER’S FUNCTION

12.9 TOTAL BUSINESS PLANNING

TBP sets the direction for at least five years ahead.

Annual replanning involves:

- setting strategy and guidelines and key policies- detailed planning- interaction- participation and revision- approval and communication of targets- annual and monthly budgets based on the first year of the plan .

TBP is a key tool to influence behaviour of managers.

Environment created by top management effects the way each manager tries to achieve his own targets.

Defensive or non-creative environment generally results in efforts to ‘beat the system’ using such techniques as:

- setting low targets- padding costs- using secret reserves- sabotaging the system

Changing a system, however, involves technical, human and strategic problems – we must judge the ability of the organisation to change – and the appropriate speed of change towards a more effective system (one to five years?).

Fixed budgets set stable targets for the budget period.

Flexible budgeting (multiple budgets at different sales levels) provide flexible targets but add complication to the system.

Budget revision has technical and human implications – short term and long term.

Normally better not to revise the budget target but to continually ‘re-forecast the probable year end performance’.

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12.10 BEATING AND CHANGING THE SYSTEM

12.11 BUDGET REVISION AND RE-FORECASTING

Evaluate each budget system in terms of:

O - Objectives – Define specific objectives management seeks to achieve with the system, within the specific company organisation and industry.

T - Targets – Analyse how the system provides guidance and interaction in setting the key budget targets.

R - Reporting – Analyse the frequency, content, design and effectiveness of the reporting system of actual against budget (target) performance.

A - Action – Evaluate the effect of the system in terms of action taken and behaviour patterns of managers in achieving overall company objectives.

NOTE: Just how do the managers ‘dance’ to the music provided by the system….

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12.12 OTRA APPROACH TO BUDGETING PROBLEMS

12.13a OBJECTIVES

12.13b TBP

12.13c OTRA

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12.14 CONCLUSIONS

(a) Budgets set performance standards against which to measure the actual results – they guide management towards acceptable achievement.

(b) Budgets control through cost profit or investment responsibility centres which associate managers with their own budgets and motivate managers to achieve targets.

(c) Clear-cut organisational structure is vital. Managers must clearly understand to whom they report and who reports to them.

(d) Budgets must be useful but not necessarily models of accounting practice – all items should be simply presented and simply explained.

(e) Budget may be tool or a whip. Continuous education of managers is vital for budget effectiveness. However, sometimes we may not have the time to develop that creative environment.

(f) Active participation of top management is essential. Managers soon know how top management views the budget system regardless of what they say. Action communicates very well….

(g) Tough budgeting does produce results in practice but it also fails to develop human and other resources. What are the priorities?

(h) Budgets may be fixed or flexible and may be revised. Be careful not to motivate managers to work harder to justify a revised target than to achieve the original target.

(i) Budgets are only part of a long term Total Business Planning – which provides ‘balance and direction and constraints’ for management.

(j) Meeting the budget target is not at all the same as doing the management job – and it may take a little time for this to become evident!

(k) “Budgetary control rests on the concepts that have more to do with human relationships than the rules of accounting.”

FINAL NOTE:THIS ENDS OUR PROGRAMME. WE HOPE IT HAS INSPIRED YOU TO DEVELOP YOUR SKILLS BY PRACTICAL APPLICATION. THANK YOU FOR YOUR INTEREST AND HARD WORK. KEEP ASS GLOSSARY HANDY AS A DAILY REFERENCE FOR BUDGET LANGUAGE. READ AND CONTINUE YOUR STUDIES. WE HOPE YOU HAVE ENJOYED THE AGL GROUP LEARNING EXPERIENCE.

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UCTIONS

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