Session 2: Budget As A System by by Dr. Anubha Srivastava

Session 2

Budget As A System
By
By Dr. Anubha Srivastava
Learning Objectives

1. Budget as a comprehensive planning and
control system
2. Continues budget and fixed budget
3. Comprehensive budget and partial budget
L0 1-Budget as a comprehensive
planning and control system

Comprehensive planning and control entails a
systematic approach that focuses on quantitative
evaluation of the results managerial objectives control
through application of the management exception
principle.
A comprehensive approach involves the following-
1.The application of the broad concept of profit
planning and control to all phases of operation in an
enterprise.
2.The application of a total system approach.
Cont..

The essential step implicit in profit planning and control may be
outlines as follows
1.Evaluation of impact of all relevant variables on the enterprise.
2.Defining broad objectives of the enterprise.
3.Establishment of specific goals for the enterprise.
4.Development and evaluation of enterprise strategies
5.Preparation of planning instructions
6.Preparation and evaluation of project plans
7.Development of large range profit plans (strategic profit plan)
8.Development of short range profit plans (tactical profit plan)
9.Implementation of plans
10.Development of performance report – Prepare monthly report by
responsibility
11.Follow up actions – take corrective action, and replan
PPC Process

Sequential
phases of
PPC
process
1.Evaluation of relevant variables
on the enterprise

2. Development of the Broad
Objectives of the Enterprise
The statement of

broad objectives should
express the mission, vision, and ethical
character of the enterprise
 Responsibility of executive management.
 Should not specify quantitative goals
 Should be a narrative expression of the
purpose, objectives and philosophical
character of the business
3.Development of Specific Goals
for the Enterprise

Provides both narrative and quantitative goals
that are definite and measurable
Should be developed by executive
management
These are specific goals that relate to the
enterprise as a whole and to the major
responsibility centers
4.Development and Evaluation
of Company Strategies

Company strategies are the basic procedure,
ways, and tactics that will be used to attain
objectives and goals
Strategies focus on “how”; there for, they
outline a plan of action for the enterprise
Periodic reassessment of strategies is essential
5.Executive Management
Planning Instructions

This phase involves communication of the
substantive plan to middle-and-lower
management levels
It also is called the statement of planning
premises or the statement of planning
guidelines
6.Preparation and Evaluation of
Project Plans

Managers must decide upon the plan status of
each project in process and select any new
project to be initiated during time dimension
by the upcoming strategic and tactical profit
plan.
7 &8. Development & Approval
of Strategic and Tactical Profit
Plan 
“Executive Planning Instructions” is needed
to initiate activities on each responsibility
center to develop:
A Strategic long-range profit plan and a
tactical short-range profit plan. These two
plan are usually developed concurrently
9. Implementation of Profit
Plans

Involves the management function of
leading subordinates in attaining enterprise
objectives and goals.
A series of meetings should be scheduled to

discuss implementation and action
performance
10. Use of Periodic Performance
Report

Designed by top managers and prepared by
accounting or each responsibility centers on a
daily, weekly or monthly basis. Short-term
performance reporting is essential for effective
control. Item Actual Planned Variation
Month of March results
results ( Week 10) (Fav./ Unfav.)
Sales of
product A
Units 210 200 10
Amount $105000 $100000 $5000
Use of Flexible Budgets

Also referred to as the variable budget or
formula budget.
Each expense must be classified into one of
three categories:
– Fixed expenses
– Variable expenses
– Semi variable expenses
11. Implementation of Follow-
up

 Responsibilities are the basis for effective
follow-up actions.
 Performance variation are the effects.
 Line management must determine the
underlying causes.
 Corrective actions must be implemented.
 Should be a special follow-up to check if
corrective actions have worked
Case 1- X company

Assume that you have been engaged to make an independent
evaluation of the operations of X company , which is experiencing
certain difficulties you have concluded that a comprehensive profit
planning and control budget is required . In an executive meeting ,
an old man , the company controller comments in your presence “ oh
I realized that budgeting is perhaps all right in case of few large
organization but not ours . We have special problems such as sales
forecasting because we have five different products distributed all
over the USA . In addition you just can’t tell what our expenses for
the year are going to be . Besides I don’t have time to prepare a
budget . I probably could not make those sales people follow it
anyway.
 Narrate your reply exactly as you would give to executive group
in the presence of the controller .
L0 2-Continues budget and
fixed budget

When initiating a comprehensive profit planning and
control budget, the management of the enterprise must
make definite policy decision regarding continuous
budget and fixed budget
 The long term and short term budgets are called fixed
or periodic budgets where the budgets are prepared for
fixed period of time
Continuous budget is frequently used where ever
frequent replanning and reprojections are required
Case 2- Compte sales company

Compte sales company uses a continuous profit plan covering a six
month period, the plan is revised monthly. Following is the six monthly
budget of company
($000)
Details Mar Apr May June July Aug
Sales 210 216 224 208 190 180
COGS 84 86 90 83 76 72
GP 126 130 134 125 114 108
Dist. Exp 52 53 55 51 49 47
Adm. Exp 26 27 27 25 24 24
Fin Exp 1 1 1.2 1.2 .9 .9
PBT 47 49 50.8 47.8 40.1 36.1
TAX@40% 18.8 19.6 20.3 19.12 16.0 14.5
PAT 28.2 29.4 30.4 28.6 24.1 21.5
Cont..

 In accordance with the company planning procedure the
following data was provided to the budget director
 Sales department revised the estimates ; sales – April $220000,
May $225000,June $210000, July $192000, August $182000,
September $195000. Dist. Exp. straight 2% increase and in
September $50100
 Executive VP estimates financial expense from July through
September $1100 per month.
 Prepare a revised profit plan following the concept of
continuous plan including appropriate comments concerning
the estimate and an evaluation of the changes
L0 3-Comprehensive budget and
partial budget

 A Comprehensive budget is one that includes the
operating budget and the capital budget, that is, it is
designed to show all aspects of enterprise .
Comprehensive budget includes –
1. Broad objectives of the enterprise
2. Specific enterprise goals
3. Enterprise strategies
4. Executive management planning instructions
 A Partial budget helps managers evaluate the economic
effect of minor adjustments in some portion of the
business.
Perspective

Failure to distinguish long-range planning and
forecasting
 Partial planning (single keys areas)
 Definition of long-range (time)
Case 3- Micro corporation

The company uses variable budget procedure to aid in the control of
cost . The variable budget for cost centree23 is given below
Micro Corp.
Variable Exp. budget (for year 2019)
Cost center No.23
Accounts Fixed allow p. m. variable rate per 100 DMH
Supervisory salary $ 900 $--
Indirect labor $200 .90
Maint. Parts $50 .05
Supplies used ---- .05
Power used $30 .10
Mis exp. $40 .12
Dep. $100 --
Cont..

The annual profit plan is being developed. It includes
an estimate of planned volume of work for cost center
23. What amount of cost should be included in the
planned schedule of costs for cost center 23: (1) for the
January estimate of 20000 DMH (2) for the annula
estimate of 260000 DMH
Show your calculations
Few other issues

Behavioral Implications-
Basic purpose is to attain goal congruence between employees’
goals and the goals of the enterprise
The burden of attaining goal congruence is a primary
responsibility of the enterprise
A PPC program can accentuate or ameliorate the behavioral
problem in a company
Cont.
Budget Manual Content 

1. A statement of the objectives of the PPC
2.Procedures to be followed in developing profit plan:
a) Instruction and forms to be used
b) Procedures for making planning decisions
c) Top-management budget committee
3.PPC calendar
4. Distribution instructions for profit plan schedules
5.Instructions and procedures with respect to performance reports
6. Procedures for taking corrective action on variances
7. Follow-up and re planning procedures
Practice Question 1

On the basis of information given in case #3 , assume the profit
plan is completed and January of the new year has passed. Actual
DMH in January were 24000 . Actual exp. Were s follows
Supervisor salary $900, indirect labor $415, maintenance part $65,
supplied used $140, power used $50, mis exp. $70 and Dep. $100.
using these data and budgeted date
Prepare a performance report comparing the actual expense

with budgeted exp.
Question 2- Patrik company

 The president of Patrik company recently appointed a special
committee “ to make recommendation to the executive committee
with respect to use of profit planning and control program. The
committee spent considerable time finding out the various issues of
such program . The company is focusing on major problem areas
that might be encountered upon the initiation of such program. One
of the primary aspect has been motivational and behavioral aspects .
The committee was concerned about the effect of budget on lower
level manager and supervisors . Studies says budget is a pressure
devise for continual increasing the efficiency which sometimes
develops negative motivation and decreases efficiency. Another
study found that “participation in budget development is extremely
important. Another studies says budgeting is more concerned with
the concept of human resources than with the rules of accounting
 Appraise the findings of the several studies as reported by
special committee.

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Session 2

A series of meetings should be scheduled to

Budget Manual Content 

Prepare a performance report comparing the actual expense

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