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Budget as an Instrument

of Control
 Budgets are business plans that are stated
in quantitative terms and are usually
based on estimations.
 These plans aid an organization in the
successful execution of strategies.
 Due to the uncertainties in the business
environment and / or due to wrong
estimation, there may be significant
deviations between the a c t u a l s and
the plans.
 Budgeting as a control tool, provides an
action plan for the organization to ensure
least deviations
learning experience
Managers should participate in
the budgeting process to ensure
consistency in the overall
adherence to corporate goals.
Budgeting helps mangers to
enhance their learning
experience. Learning takes place
as they plan and later, compare
a c t u a l s with plans.
Investigating the reasons for
Importance of Budgets
 Budgets are used to give an
overview of the organization and its
operations. They are useful in
resource allocation whereby
resources are allocated in such a way
that the processes which are
expected to give the highest returns
are given priority.
 Budgets are also used as forecast
tools and make the organization
better prepared to adapt to changes
Importance of Budgets
 Budget preparation requires the
participation of managers from different
functions / departments. This helps in
integrating the tactical and operational
strategies of the departments with the
corporate strategy of the organization.
 Budgets act as a means to verify the
progress of the various activities
undertaken to achieve the planned
objectives. The verification is done by
comparing the a c t u a l s against
Importance of Budgets
They help in the delegation of
authority and allocation of
responsibility and accountability
to more people in an
organization. They thus promote
division of labor, which , in turn,
promotes the process of
specialization. Functional
specialization leads to the overall
Steps in Budget Formulation
 Creating a budget department or
appointing a budget controller
 Developing guidelines for budget
 Developing budget proposals at
department/business unit level
 Developing the budget for the entire
 Determining the budget period and key
budgets factors
 Benchmarking the budget
 Budget review and approval
Budgeting procedures at Ford Motor
 Ford motor company is one of the
leaders in the global automotive
industry. It is based in Dearborn,
Michigan, and has a presence in 200
markets in six continents.
 Ford’s financial budget consisted of
both financial and non-financial
objectives that are set for the
organization. It included the sales
volumes to be achieved, the time
frame, and the types of financing to
Budgeting procedures at Ford
Motor Company
 Two types of budgets were prepared:
one is the yearly budget which was
detailed, and the other, a budget for
a period of five to ten years which
was not detailed. The financing from
external sources needed to achieve
the sales volumes was estimated.
Production costs including overhead
costs were computed to calculate the
profitability that could be achieved.
Budgeting procedures at Ford
Motor Company
 Fordhad over 2,000 cost centers and
the head of each cost center was
responsible for preparing the budget
for that center. In addition to this,
the cash flow budgets were
prepared. The budgets were then
reviewed by ford’s board of directors.
Achievement of budgets was the
financial control used by Ford. It also
emphasized the importance of
Rolling Budgets at Cisco
 Cisco systems, inc, established in 1984, is
based in San Jose, California, USA. It is one
of the world’s leading providers of
products and solutions in the areas of
routing, switching, and other computer
networking equipment.
 In Cisco, a combination of traditional and
rolling budgets and financial forecasts was
used. At the beginning of the financial
year, an annual budget was fixed under
the supervision of the top management
with information provided by the lower
levels of management being used for the
Rolling Budgets at Cisco

 It was called as “plan of record” and was

fixed for that particular year. Every
quarter, the management for the rest of
the year.
 In addition to these budgets with quarterly
reviews, the finance group of the company
developed rolling financial budgets – on a
monthly basis – for the next twelve
months. By factoring in the ever-changing
environment , these budgets helped the
management to decide on capital
expenditure projects, revise the manpower
plan, update the inventory policy, etc.
these budgets also helped the company to
Master Budget
 The master budget is also known as
the financial plan. Master budgets
form the basis of the control systems
in organizations. The master budget
has two components: the operating
budget and the financial budget. The
operating budget includes the sales
budget, cash collections from
customers, purchases budget,
disbursements for purchases,
operating expense budgets.
Master Budget
 The master budget may take the
form of a profit and loss account and
a balance sheet at the end of the
budget period. It shows the gross
and the net profits and the important
accounting ratios. Sometimes more
than one master budget has to be
prepared before the final one is
agreed upon. It is the duty of the
budget committee to approve the
Types of Characteri Examples
Appropriation stics
A ceiling is set for Training, advertising,
certain discretionary sales promotion and
budget expenditures R&D
Based on the
management decision
A static amount is The static part: Salaries,
Flexible budget established for depreciation, property
discretionary and taxes, and planned
committed fixed costs maintenance. The
and a variable rate is flexible part : direct
determined per unit of material, direct labor,
activity for variable cost and variable overhead
.sales commission
Decisions regarding New plant and
Capital budget potential investments equipment
are made using
discounted cash flow
Master budget A comprehensive plan All revenue and
is developed for all expenditures for any
revenue and organization
Components of the Master Budget
Capital budgets
Master budget

Operating Financial Cash

Budgets Budgets budgets


sales Direct Direct Closing Cost of Income

material labor inventory Goods sold statement

Selling and
production Factory over head budgets
Zero-Based Budgeting
 Itwas put into practice first time by
Peter Phyrr at Texas Instruments , a
world leader in digital signal
processing and analog technologies
based in the US, in 1969.
 A traditional budgeting process is a
yearly process and uses the budget
of the previous year as a starting
point to devise the current year’s
budget. However, this process results
in discrepancies.
Zero-Based Budgeting
 For example, if there are
inaccuracies in the previous year’s
budget, they are carried forward to
the next year, or, if the activities do
not show a major impact on the
budget, they are continued even if
they are not contributing to the
performance of the organization.
 On the other hand, in ZBB the base is
taken as zero and the budget is
devised as for a new venture.
Zero-Based Budgeting
 InZBB , the responsibility centers are
called decision units and the process and
activates involved in each decision unit
are called decision packages. The ZBB
process involves the following steps:
 Decision unit identification
 Decision package development
 Evaluation and grading of decision
 Resource allocation
Thank you
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