AGL

1

• AGL
• AUTONOMOUS
• GROUP
• LEARNING

Boland1
Dr. Bob Boland
2

• 3/1
• AGL - AUTONOMOUS GROUP LEARNING
• NO.3 BASIC PLANNING AND BUDGETARY
• CONTROL FOR MANAGERS
• PART I

3

• 3/2 ABBREVIATIONS
• AGL - AUTONOMOUS GROUP LEARNING
• IND - INDIVIDUAL
• SG - SMALL GROUP
• CSG - COMBINED SMALL GROUP
• MG - MAIN GROUP
• ASS - ACCOUNTING STEP BY STEP
• BC - BUDGETARY CONTROL TEXT
• PL - PROGRAM LEARNING
• L - LECTURE
• D - DISCUSSION
• CR - CHAPTER
• CAI - COMPUTER ASSISTED
• INSTRUCTION

4

• 3/3 ASSIGNMENT 1.0 INTRODUCTION
• 1.1 SPECIFIC OBJECTIVES OF THE PROGRAM
• (a) Understand the language and concepts of
  business planning and budgetary control.
• (b) Prepare budgets and interpret budget
  reports.
• (c) Develop confidence in dealing with practical
  budget problems both human and technical.
• (d) Appreciate the need for a Total Business
  Planning system.
• (e) Motivate further study in the future.

5
3/4 1.2 AUTONOMOUS GROUP LEARNING (AGL)
The AGL method is designed to achieve rapid
individual learning using special
rnaterials and the stirnulus of group activity
without a formal instructor. The
groups use the rnaterials to find the answers to
all problerns and questions.
6
3/5 1.3 GROUP ARRANGEMENTS
The work will be done (a) IND -
INDIVIDUALLY, or (b) SG - SMALL GROUP (in
small groups of four members
which will change daily), or (c) CSG -
COMBINED SMALL GROUP (two small groups
together, with one group acting as "dealers" to
lead the discussion and record key points on
the flipchart" provided), or (d) MG - MAIN
GROUP (for short taped lectures on key learning
points with visual aids).
7
3/6 1.4 SG - SMALL GROUPS
Initial group names provided by the
Organizer. Note the name of your SG
and names of the other members.
Groups change three times during the
course.
8
3.7 1.5 LEARNING MATERIALS
(a) Retained by members - Text
book - Notebook for recording every key
point - Course Diary - CAI - Program Learning
ASS (b) Used but not retained by
members - Work Packs for Part 1 and II
including introduction,
cases, and key learning points to be
noted.
9
3/8 1.5 (continued)
NOTE (a) Use your notebook. Do not
mark the Work Pack, which must be
handed back at the end of each day.
You receiveall the materials in your SG. Don't
look ahead" in the workpack until
you are specifically asked to do
so (b) Acknowledgment is made to many
published and unpublished sources which have
provided the basic ideas and practical
experience and case materials which have been
specially adapted for this program.
10
3/9 1.6 METHOD
Try to complete fully every task in the
time allowed. Work as quickly and
effectively as possible. A pattern of
learning methods will be used including
(a) Program learning (b) Case analysis (c)
Lectures (d) Quizzes (e) Learning
patterns (f) Homework reading and CAI .
11
3/10 1.7 LEARNING PATTERNS a.
OBJECTIVE - CONFIDENCE LANGUAGE AND
CONCEPTS BUDGET PREPARATION
BUDGET REPORTING
TOTAL BUSINESS PLANNING
HUMAN AND TECHNICAL PROBLEMS
12
3/11 1.7 LEARNING PATTERNS b.
GROUPS INDIVIDUAL WORK
SMALL GROUP WORK
COMBINED SMALL GROUP WORK
MAIN GROUP WORK
13
3/12 1.7 LEARNING PATTERNS c.
METHOD - INDIVIDUAL LEARNING FOR YOU
PROGRAM LEARNING CASES
READINGS LECTURES
SG, CSG AND MG LEARNING
14
3/13 1.8 INSTRUCTIONS
a. Assemble in SG to introduce yourself,
indicate your past experience in planning and
budgetary control, and what you hope to
contribute to, and gain from the course. b.
Complete page one of the Course Diary and
discuss the learning objectives. c
Reassemble in MG when the bell rings. NOTE
Check that you have a full set of
learning materials. Locate the glossary in ASS.
15
3/13a 2.0 QUIZ (45 minutes) 2.1
INSTRUCTIONS a. Assemble in SG.
b. Answer the quiz of 100 questions mark your
answers a, b, c or d with a
clear X on the special form provided in the
Course Diary. c. Work as
quickly as possible, but dont guess - just
leave blanks. d. The Organiser
will mark your answers and give you a
measure of your knowledge at the start of the
course. e. Reassemble in MG
when the bell rings.
16
3/13b 3.1 PROGRAM LEARNING (45
minutes) 2.1 INSTRUCTIONS - INDIIVIDUAL WORK
a. Assemble in SG and find your copy of
the ASS book. b. Quickly read the
Introduction in ASS. c. Quickly complete
aloud and in writing Ch. II of ASS. d.
Record key points in your notebook. e.
Reassemble in MG when the bell rings.
17
3/14 4.0 BASICS OF BUDGETING
4.1 BUDGETS AND BUDGETARY CONTROL Budgets are
financial plans of future action.
Budgetary control uses budgets to measure
performance and control behavior. Both
involve technical and human problems.
18
3/15 4.2 OBJECTIVES OF BUDGETARY CONTROL
(a) Plan future operations to balance
objectives, resources and environment.. (b) Com
municate targets and plans to the organization,
which must be understood to
be effective. (c) Motivate managers to
achieve company objectives. (d) Compare actual
performance with budget target and locate
trouble spots for management action. (e)
Influence the behavior of managers.
19
3/16. 4.3 PERIOD AND PROJECT PLANNING
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 planning period.
20
3/17 4.4 BUDGET SYSTEMS
Flexible to meet needs - USEFUL is the key!
Factors shaping a budget system a. Industry
- profit- making characteristics. b. Top
Management objectives - system to promote
specific objectives. c. Other considerations
- organizational structure, information
technology, incentives and staff available.
NOTE System initially affected by Top
Management attitudes towards financial
planning and control.
21
3/18 4.5 BUDGET
CONCEPTS (a) Assumptions - Budgets are future
forecasts based upon assumptions. Only as good
as assumptions. Sales forecast is
usually the key assumption. (b) Sponsorship -
Top Management must convince the Organization
that the budget system is important. Top
Management attitudes revealed mainly, not by
words but by action and involvement in budget
process. (c) Responsibility centers -
Organizational centers provide for control and
responsibility. Center Manager involved in
setting budget targets. Building block approach
to total budget process. (d) Participation - by
both manager and "managed" in setting targets.
and continuous education to understand
the system, what is expected, and how
performance is judged.
22
3/19
4.5 (continued) (f) Time - Control period is
shortest time for Management to intervene arid
change performance. Varies by responsibility
centers and activity. (g) Controllable Costs -
Emphasize costs over which manager can influence
(actually and/or psychologically). Use to measure
performance. (h) Management by Exception -
Focus attention, not on all items, but those
where actual performance differs significantly
from target. Conserve management time and
provide a starting point for performance
analysis. Report signals of exceptions
only! (i) Appraisal - Budget as a standard to
evaluate performance - both measured in same
terms.
23
3/20 4.6 BUDGET PROCESS
Operations (income statement)
budget Cash budget Ccapital
budget Funds flow budget
Balance sheet - budget - overall financial
position.
24
3/21 4.7 OPERATING
BUDGET (a) Plans and targets - covers all
operating statistics for future period. (b) Key
assumption is Sales related to - Market
potential - Management guidelines -
Productive capacity - Cash resources (c) Inclu
des sales, cost of sales, overhead expense and
profit. Distinguishes fixed and variable cost.
Shows "Contribution" (sales less variable cost)
to fixed cost and profit.
25
3/21a 4.7 OPERATING BUDGET(continued) (d)
Normal period one year - six months in detail and
six months in total. (e) Budget set from past
performance. Ratios, managers' reasonable
estimates and good common sense. NOTE
Negotiating the budget is a MANAGEMENT GAME
calling for skill, strategy, shrewdness ... and
quiet manipulation (but be sure to call it
creativity )
26
3/22 4.8 BUDGETED BALANCE SHEET Budget of
overall financial position. Assets and how they
are financed from liabilities and owners
equity. Plan balance sheet at end of budget
period. Forecast 1. Current assets and
current liabilities from sales target in
operating budget, or alternatively,
each item of current assets and current
liabilities separately a.
debtors as of sales b. stock as
of cost of sales c. creditors as
of cost of sales d. tax as actual
liability 2. Fixed asset requirements in a
special "capital" budget. 3. Loans by
specific management policies. 4. Owner's
equity (balance plus profit less dividends).
27
3/22a 4.8 (continued)
The difference between required assets and
finance available (liabilities and owner's
equity) represents cash surplus or deficiency
for the budgeted level of activity.

28
3/23 4.9 OTRA APPROACH TO BUDGET PROBLEMS
Evaluate a budgetary control system in terms
of O - Objectives - Define specific
objectives which management seeks to
achieve with the budget system, within the
specific company organization. T
- Targets - Analyze how the system provides
guidance and I interaction in setting
the key budget targets. R - Reporting -
Analyze the frequency, content, design and
effectiveness of the reporting system. Compare
actual against budget (target)
performance. A - Action - Evaluate the
effectiveness of the system in terms of
action taken and behavior-patterns of
managers in achieving overall
company objectives.
29
3/24 4.10 LEARNING PATTERNS a.
BUDGET OBJECTIVES PLANNING
COMMUNICATION MOTIVA\TING
CONTROLLING
TO INFUENCE THE BEHAVIOUR OF MANAGERS
AND THE WAY THEY DANCE
30
3/25 4.10 LEARNING PATTERNS b.
BUDGET SYSTEMS INDUSTRY PROFIT MAKING
FACTORS ORGANIZATION
TOP MANAGEMENT OBJECTIVES SYSTEMS - FIXED
OR FLEXIBLE USEFUL? CREATIVE?
DEFENSIVE?
31
3/26 4.10 LEARNING PATTERNS c.
BUDGET CONCEPTS ASSUMPTIONS
SPONSORSHIP RESPONSIBILITY
CENTERS PARTICPATION
INTERACTION CONTROL COSTS
MANAGEMENT BY EXCEPTION APPRAISAL
32
3/27 4.10 LEARNING PATTERNS d.
OPERATING BUDGET MARKET
GUIDELINES CAPACITY CASH
SALES TARGET SALES COST OF
SALES OPERATING EXPENSE
PROFIT
33
3/28 4.10 LEARNING PATTERNS e.
BALANCE SHEET ASSETS ARE FINANCED BY
OWNERS EQUITY AND
LIABILITIES. AS SALES EXPAND
REQUIRED ASSETS EXPAND...
AND HAVE TO BE FINANCED, EITHER FROM
PROFITS RETAINED IN OWNERS EQUITY, OR FROM
EXPANDED LIABILITIES
34
3/29 4.10 LEARNING PATTERNS f.
OTRA OBJECTIVES TARGETS
REPORTING ACTION
35
3/29a 4.11
INSTRUCTIONS INDIIVIDUAL AND SG WORK
a. Assemble in SG. b. Study and
discuss the lecture, to be sure that every member
of your SG, really understands,
every key issue. c. Record key points
in your notebook. d. Quickly read the
case study (JOHN MARAIS) which follows.
e. Then work as a very efficient and effective
action team, to quickly
resolve the case. f. Be sure to record
the complete answer to each question and your
final decision, on the SG f lip chart
provided, so that you are fully EI
in what you agree upon.
36
3/29b 6.O CASE - JOHN MARAIS
6.1 - THE STORY OF THE GASE
John Marais finances business expansion with a
bank loan. He budgets a need of 75m. His
results show increased sales over forecast and
slightly increased profits. However, dividends
use up necessary cash inventory is high and
creditors are stretched. The equity/debt
relationship is weaker. Was the expansion really
worthwhile? What budget should be set for next
year?
37
3/43 6.9 LEARNING
POINTS (a) Increased sales target must increase
stock (inventory) and debtors. (b) Operating
budget based upon assumptions of sales, margins
and overhead expenses. Margin means gross
profit percentage. (c) Capital budget provides
fixed assets to support operating sales
targets. (d) Overall financial position -
budgeted balance sheet based on assumptions for
stock, fixed assets, debtors, creditors and
capital.
38
3/44 6.9 (continued) (e) Dis
tinguish fixed costs which remain stable from
variable costs which increase with sales
volume. (f) With sales expansion the increase in
required assets must be carefully controlled by
management. (g) Equity/debt position may be
improved by high retained profits and low
dividends or new equity. (h) Budgets not
merely for operations, but also the effect of
operations on cash, capital and the overall
financial position. (I) Budgets based upon
assumptions.
39
3/44a 6.9 (continued) k.
Use the past performance, ratios, estimates and
common sense to forecast
budget for the future. l. Evaluate a budget
in terms of sales, costs, profit, assets
required and finance available.
40
3/45 6.10 LEARNING PATTERNS a.
EXPANSION

AS SALES EXPAND REQUIRED ASSETS
EXPAND... AND HAVE TO
BE FINANCED, EITHER FROM PROFITS
RETAINED IN OWNERS EQUITY, OR FROM
EXPANDED LIABILITIES
41
3/46 6.10 LEARNING PATTERNS b.
SALES THE NEW SALES TARGET AFFECTS
OPERATING BUDGET CASH BUDGET
CAPITAL BUDGET BALANCE SHEET BUDGET

42
3/47 6.10 LEARNING PATTERNS c.
COSTS DISTINGUISH FIXED COSTS -
STABLE WITH INCREASED SALES VARIABLE
COSTS - NOT STABLE SEMI-VARIABLE COSTS
- NOT STABLE
43
3/48 6.10 LEARNING PATTERNS e.
BUDGETS OPERATING BUDGET
S COS E PROFIT BALANCE SHEET
BUDGET CA FA L OE
NOTE CA FA REQUIRED ASSETS
44
3/49 6.10 LEARNING PATTERNS e.
ASSUMPTIONS ALL ESTIMATES BASED ON
PAST TRENDS
RATIOS FUTURE FORECASTS
COMMON SENSE
45
3/50a 6.10
INSTRUCTIONS a. Re-assemble in
CSG. b. Study and discuss the guide to
the case. Compare it to your
solution. Be sure that every member of your
CSG, really understands every key
issue. c. Record key points in your
notebook. d. Re-assemble in MG when
the bell rings.
46
3/50b 7.0 PROGRAM LEARNING (45
minutes) 7.1 INSTRUCTIONS - INDIIVIDUAL
WORK a. Assemble in new SG and find
your copy of the ASS book. b. Introduce
yourself to the other SG members. c.
Quickly complete aloud and in writing Ch. III of
ASS. d. Record key points in your
notebook. e. Reassemble in MG when the
bell rings.
47
3/50c 8.0 BUDGET PREPARATION
8.1 CASH BUDGET Plan cash to
finance immediate operations and avoid
shortages. Translate sales, costs, and expenses
into weekly and monthly cash receipts and
payments based on assumptions of credit
terms. Determine future cash needs - timing and
duration of peak cash requirements. Revise
forecast monthly for twelve months ahead. Cash
availability is ABSOLUTELY VITAL.!
48
3/51 8.2 CAPITAL
BUDGET (a) Key to long term profitability.
Invest now for benefits in the future. (b) Plan
future requirements for fixed assets, research
and development, investments and other major
expenditures. (c) Key decisions which affect the
long term "shape", direction, financial
strength of the company. (d) Create the
environment for future business
operations. (e) Need long term (five year)
capital budget to make annual capital budgets
meaningful. (f) Plan both new "investment" and
new "dis-investment" (sale of fixed assets,
etc. ).
49
3/52 8.3 FUNDS FLOW
BUDGET 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 - the difference, simply changes
working capital. If the required working
capital" is computed - then the difference
between sources and uses of funds represents
fund surplus or deficiency to requirements. Manag
ement provides funds by (a) increasing sources,
or (b) reducing uses. Funds flow shows key
management decisions in allocating company
resources in the period.
50
3/53 8.3 (continued)
NOTE Profit is computed after charging
depreciation but since depreciation is a non-cash
expense, the cash flow from operations is
always (a) Profit after charging depreciation
plus (b) Depreciation expense which is the same
as "profit before depreciation .
51
3/54 8.4 ASSUMPTIONS Budgets
are based on assumptions. Usefulness of the
budget depends on the validity of the
assumptions. Broad assumptions only justify
broad figures. Detailed "pseudo accurate"
figures are neither justified nor useful to
Management.
52
3/55 8. 5 ANALYSIS OF
COSTS There is no "true" cost - only a
"useful' cost to Management. Cost may
be (a) Variable cost - varies in total with
volume (e. g. direct materials). (b) Fixed cost
- constant in total with volume (e.g. rent,
office salaries, audit fees). (c) Allocated
cost - charged to centers on "fair" basis never
"true" cost, but it may motivate managers
(psychologically) e.g. selling and
administrative overhead "allocated" to
departments. (d) Engineered cost - directly
related to production, e.g.direct labour,
materials, etc.
53
3/56 8.5
(continued) (e) Managed cost - spent as
management judges no "right" level good
performance is not no cost e.g. advertising
must be spent! (f) Standard cost - target cost
levels based on engineering standards
variances between actual and standard analyzed
by price, efficiency and volume e.g. direct
labor and materials. (g) Committed cost -
fixed over the short term regardless of activity
level e.g. depreciation. (h) Direct cost -
clearly associated with a product e.g. direct
material. Conversely -
indirect cost is overhead. NOTE Any
one cost may be classified in several ways!
54
3/57 8.6 FIXED BUDGET Fixed
budget assumes unchanging sales target and fixed
plans to achieve it. No automatic adjustment for
cost and profit targets when sales target not
achieved. Changed only as a specific budget
revision which involves technical and human
problems.
55
3/58 8.7 VARIABLE OR FLEXIBLE BUDGET Not a
fixed budget. Series of alternative budgets
according to different forecasted sales levels
(i.e. 60, 80, 100, 120 of target
sales). Cost and profit targets change in
relation to sales targets. Shows behavior of
cost with sales volume. Distinguishes
fixed from variable costs. Computes
"contribution" (sales less variable cost equals
contribution). Adds flexibility and
complication to budget system, BUT may not
motivate managers as effectively as a fixed
budget.
56
3/59 8.8 BREAK EVEN
ANALYSIS (a) Useful tool for understanding the
effect on profit, of volume,
cost and price. Sales and costs computed at
different sales volumes. Distinguishes fixed and
variable costs. Break even point -
sales equals total cost - no profit and no
loss. (b) Break even analysis aids understanding
of the budget 1. Shows profit(loss) at
different sales volumes. 2. For any volume,
indicates what must be changed to
achieve profit target i. e. managed
costs, engineered costs, allocatedcosts,
sales prices, product dropped etc. (c) Not
accurate. Only an estimate for a limited known
range of volumes. Conceals real
difficulty of changing assumptions, i.e. it
may be much more difficult to reduce
cost by 2 than to increase sale
price by 4.
57
3/60 8.9 CONTRIBUTION ANALYSIS Sales
less variable cost equals contribution.
Contribution less fixed cost equals
profit. Contribution to fixed cost and profit.
Contribution for a product is easily computed
since fixed costs are ignored (not
allocated). TO ACHIEVE PROFIT, CONTRIBUTION FOR
ALL PRODUCTS MUST EXCEED TOTAL FIXED COST.
58
3/61 8.10 BUDGET PREPARATION PROCESS
(a) Budget guidelines - Top Management sets
objectives for the year and outlines the
means to achieve them. - Forecast of the
general economic, political and
business environment. - Data circulated to
responsible managers.
59
3/62 8.10 (continued) (b)
Setting the targets and defining 0rganisational
responsibilities. -
Responsible managers at every level prepare
estimates for their centres based on the
guidelines. - Interaction and discussion with
supervisors leading to targets for
approval. - Controller's staff aid in
computations, provide historical data
etc., but managers should set targets (at
least in theory).
60
3/63 8.10 (continued) (c) Co-
ordination - Separate budgets consolidated to
form overall budget for the firrm -
Budgets for each responsibility center are the
building blocks for the overall budget. -
Products and services transferred from one
department to another valued at special transfer
prices (cost plus profit or fair" market
price or negotiated price, or committee
agreed price, etc. ) - Danger in "transfer
prices" of inefficiency being passed along.
Need to meet long term reasonable market
prices, but not short term or "dumping"
prices.
61
3/64 8.10 (continued)
(d) Review and Approval - Budget moves
upwards through the organization for
review, approval and change in discussion with
responsible managers. - Top management
gives final overall approval. - Targets then
communicated to managers throughout the
organization.
62
3/65 8.11 OVERALL BUDGET PREPARATION In all
stages there is interaction between different
management levels. Inter-action is not time
wasted. It is essential to (a) avoid decision
without discussion (b) provide participation as
key to motivation to achieve goals (c) "condition
managers psychologically to accept final
targets (d) allow time for managers to
change. Controller's staff and top management
create an organizational environment which may be
"creative" or "defensive".
63
3/66 8.12 OTRA APPROACH Evaluate
a budgetary control system in terms of (a)
Objectives - What are the key profit-making
factors of the industry? - How is the firm
formally organized into cost, profit or
investment centers. Informally what really
happens? - What are Top Management objectives
from the budget system - short term and long
term? - How does Top Management want the
responsible manager to behave?
64
3/67
8.12 (continued) (b) Targets - Does Top
Management give adequate, and timely,
guidelines? - Is the organizational
environment defensive or creative? - Who sets
initial and final targets? - How much
interaction and participation is involved to
set the targets? How creative and realistic are
the agreed targets? - Do the targets motivate
managers in terms of challenge, responsibility
and sense of achievement? (c) Reports and
(d) Action to be discussed in Part II.
65
3/68 8.13 LEARNING PATTERNS a.
CASH BUDGET RECEIPTS, PAYMENTS AND
BALANCES FOR THE BUDGET PERIOD.
KEY DATA THE PEAK CASH NEED AND THE
DURATION OF THE PEAK. CASH IS MORE
IMPORTANT THAN PROFIT!
66
3/69 8.13 LEARNING PATTERNS b.
CAPITAL BUDGET LARGE AMOUNTS
LONG TERM COCONUTS NOT PEANUTS
PLANNING FOR KEY INVESTMENTS AND
DIS-INVESTMENTS EI IS RELEVANT HERE!!
67
3/70 8.13 LEARNING PATTERNS c.
FUNDS FLOW BUDGET KEY MANAGEMENT
DECISIONS REVEALED. SOURCES OF FUNDS
PROFIT BEFORE DEPRECIATION
NEW LOANS AND CAPITAL SALE OF FIXED
ASSSETS USES OF FUNDS FIXED
ASSETS DIVIDENDS LOAN
REPAYMENT THE DIFFERENCE BETWEEN SOURCES
AN USES FLOWS AUTOMATICALLY INTO
WORKING CAPITAL.
68
3/71 8.13 LEARNING PATTERNS d.
COSTS FIXED VARIABLE ENGINEERED MANAGED STAN
DARD COMMITTED ALLOCATED DIRECT INDIRECT
ETC.
69
3/72 8.13 LEARNING PATTERNS e.
BREAK-EVEN CHART ASSUMPTIONS VALID ONLY FOR A
LIMITED RANGE OF VOLUME OF SALES S
FC VC BEP - THE BREAK-EVEN
POINT IS WHERE SALES
EQUALS FIXED COST PLUS VARIABLE COST.
70
3/73 8.13 LEARNING PATTERNS
f. BUDGET STEPS TOP MANAGEMENT
GUIDELINES TARGETS
REVIEW, COORDINATION AND APPRAISAL ALL
BASED ON ASSUMPTIONS .
71
3/74 8.13 LEARNING PATTERNS g.
FIXED AND FLEXIBLE BUDGETS BUDGET
CHANGE - AFFECTS MOTIVATION OF
MANAGERS. FIXED BUDGET - ONE TARGET FOR
SALES, COST AND PROFIT - NOT NORMALLY
CHANGED. FLE/XIBLE BUDGET - SEVERAL
TARGETS, FOR DIFFERENT LEVELS OF SALES.
72
3/74a 9.14
INSTRUCTIONS INDIIVIDUAL AND SG WORK
a. Assemble in SG. b. Study and
discuss the lecture, to be sure that every member
of your SG, really understands,
every key issue. c. Record key points
in your notebook. d. Quickly read the
case study (GILTIM A) which follows. e.
Then work as a very efficient and effective
action team, to quickly
resolve the case. f. Be sure to record
the complete answer to each question and your
final decision, on the SG f lip chart
provided, so that you are fully EI
in what you agree upon.
73
3/75 10.0 CASE GILTIM A 10.1
THE STORY OF THE CASE Giltim is a quoted
public company organized into decentralized"
divisions. The Glass Division has separate
marketing and manufacturing arrangements, but
plant managers have profit responsibility. The
budget system involves a long interaction in
setting sales and profit targets to achieve
company objectives. Does it motivate the
managers to behave appropriately?
74
3/87 10.10 LEARNING
POINTS (a) Budget preparation systems, depend
not only on technical problems but also the
organizational environment. (b) Before setting
the budget system determine the industry's
critical profit making factors. (c) Top
Management sets short term and long term
objectives .... it may well prefer reasonable
rather than "optimum" long term goals. (d) Top
Management and the controller create the
organizational environment for the budget
system.
75
3/88 10.10
(continued) (e) Controller and Head Office
visits provide both technical and hurnan
benefits. (f) Defensive or creative
environments, motivate managers
accordingly (g) Budget preparation may involve
several months of technical and human
interaction .... interaction is not necessarily
"wasted" time since manager motivation is
complex! (h) Top Management can agree the key
common assumptions about the political, economic
and business environment and then sets sales and
profit guidelines. (i) Market research at
corporate level ensures consistent overall
assumptions at the lower levels.
76
3/89 10.10
(continued) (j) Managers may be "conditioned"
by interaction in the budget process to accept
"irrational responsibilities and
yet be motivated to achieve required
targets. (k) Budget revision may excuse poor
performance and reduce motivation to achieve
targets. (1) Organizational structure and
responsibility must be clearly defined for
effective budget systems. (m) The lower in the
organization we locate profit centers, the more
profit oriented the managers behave. Get "profit
orientation into the FRONT LINE".
77
3/89a 10.10
(continued) (n) Managers should be profit
rather than merely cost conscious. (o) In
multi plant operations, it may be possible to use
divisional standard costs and to budget local
deviation from standards. (p) Cost reduction.
programs can be featured in annual budget
targets. (q) OTRA approach. (r) Motivation of
managers is a complex problem money, status,
fear, jealousy and KITA may be less effective
than challenge, responsibility and achievement.
78
3/90 10.11 LEARNING PATTERNS a.
BUDGET PREPARATION SYSTEM INDUSTRY
PROFIT MAKING FEATURES ORGANIZATIONAL
CLIMATE. TOP MANAGEMENT OBJECTIVES
CONTROLLERS - ACCOUNTING AND BUSINESS
DEFENSIVE OR CREATIVE?
79
3/91 10.11 LEARNING PATTERNS b.
INTERACTION TOP MANAGEMENT CONTROLLER
MANAGERS WASTED TIME OR CONDITIONING TO
ACCEPT TARGETS?
80
3/92 10.11 LEARNING PATTERNS c.
MOTIVATION MONEY, STATUS, JEALOUSY,
KITA? CRA? ORGANIZATIONAL CLIMATE? COST,
PROFIT OR INVESTMENT CENTERS? IN THE
FRONT LINE?
81
3/93 10.11 LEARNING PATTERNS d.
BUDGET REVISION TARGET REVISED
REVISED REVISED EXCUSES PROMISES EXCUSES
MANAGEMENT TIME PRIORITY?
TARGET REVISION OR TARGET ACHIEVEMENT?
82
3/94 10.11 LEARNING PATTERNS e.
CONTROLLER LOCAL MANAGMENT COST
CONTROL HUMAN PROBLEMS BUDGET LAW PROFIT TAX
AND CASH HEAD OFFICE TECHNICAL
PROBLEMS ACCOUNTING ORGANIZATIONAL PRBLEMS
AND HE MUST BE CREATIVE?
83
3/95 10.11 LEARNING PATTERNS f.
OTRA OBJECTIVES
TARGETS REPORTING
ACTION
84
3/95a 10.12
INSTRUCTIONS a. Re-assemble in
CSG. b. Study and discuss the guide to
the case. Compare it to your
solution. Be sure that every member of your
CSG, really understands every key
issue. c. Record key points in your
notebook. d. Re-assemble in MG when
the bell rings.
85
3/96 11.0 SUMMARY FOR PART I 11.1
ESSENTIALS OF BUDGETARY GONTROL Budgetary
Control involves - planning for the future -
communication of ideas and plans - motivation
through interaction (and participation) -
appraisal of performance against target as a
basis for action. Period plans
incorporate project planning. Budget systems
are never "correct" - but only "useful" to
achieve specific objectives.
86
3/97 11.2 BUDGET CONCEPTS
Assumptions - underlying all budgets
Sponsorship - by Top Management
Responsibility centers - for motivation and
control Interaction - for participation,
discussion, "conditioning"and
agreement. Educati6n - necessary and
continuous Timely - budget period that fits
objectives Management by exception - to
highlight key areas Appraisal - actual vs.
budget.
87
3/98 11.3 TYPES OF
BUDGETS (a) Operating Budget - Forecasts plans
and targets of all operating statistics for a
future period. Shows contribution
(sales - variable cost) to fixed costs and
profits. (b) Cash Budget - Forecasts cash flow
from operations, based upon assumption of credit
terms. (c) Capital Budget - Forecasts key long
term investments in property,
plant, equipment. R D, advertising, etc. Key
to long term profitability. Invest
now for benefit later. Also plan
"dis-investments" (despite the EI!). (d) Budget
ed Balance Sheet - Forecast the overall financial
position of firm at end of budget period.
"Required assets" financed by liabilities and
owners equity.
88
3/99 11.3
(continued) (e) Funds Flow Budget - Forecasts
the sources and uses of long term
funds. Reveals effects of key management
decisions on long term resource
allocation. Sources of Funds profit
(before depreciation), new capital, new long
term loans, sale of fixed
assets, reduction of working
capital. Uses of funds dividends, fixed
assets, repayment of long term loans,
increase of working capital. NOTE Alll budgets
are inter-related. Thus with an opening balance
sheet plus operating, cash and capital budgets,
allows a budgeted balance sheet to be produced by
fairly simple arithmetic!
89
3/100 11.4 ASSUMPTIONS
Usefulness of budget rests on validity of
assumptions. Broad assumptions only
justify broad figures. Highly detailed
figures not justified not useful. Probably
a bit fraudulent!
90
3/101 11.5 COSTS Variable
- vary with volume Fixed
- do not change with increased
volume. Allocated - charged to
responsibility center by judgment
of what is a "fair"
distribution. Engineered - costs that
necessarily increases with volume of
activity not management
discretion easily
determined. Managed - costs spent as a
matter of management judgment. S tandard -
a control mechanism calculation of efficient
product costs
. Committed - fixed costs over short term
that cannot be changed. Opportunity - cost
or value of benefit missed by failure to take
advantage of an available opportunity.
Absolutely vital
concept, but never recorded on the books!
91
3/102 11.6 FIXED FLEXIBLE
BUDGETS REVISION Fixed budget -
unchanging sales volume and profit
targets. Flexible budget, changed profit targets
based on sales volume - series of
"fixed" budgets, which show expected behavior of
costs and profit at different sales
volumes (60, 80, 100, 120 of
budget). - adds flexibility, usefulness
(and complication) to budget
system and affects management motivation. Fixed
budget - revision when sales fall off? - No!
Normally better to leave original budget targets
unchanged but to change "forecast" of expected
activity to year end.
92
3/102a 11.6 (continued)
NOTE (a) In stable organizations fixed
budgets work well. However in rapidly
developing companies any budget system
may give troubles to management! (b) Budgets
should set frontiers" within which managers may
operate effectively. However these frontiers
should never become an IRON CURTAIN. "Meeting
the budget is not necessarily doing the
job! (c) Review and improve all accounting and
budget systems at least every five
years!
93
3/103 11.7 BREAK-EVEN ANALYSIS
AND CONTRIBUTION Determines
profits at varying sales volumes. Break-even
point - sales volume where revenue equals total
cost. Aids understanding and effectiveness of
planning. Contribution - computed as sales less
variable cost. Contribution to fixed cost and
profit. Computed by product and for whole
company.
94
3/104 11.8 BUDGET PREPARATION
PROCESS 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 ON MANAGER MOTIVATION Money,
fear, jealousy, status and the KITA, do work in
practice, but may create a defensive environment.
Challenge, responsibility and sense of
achievement however, allow a creative
organizational environment to develop.
95
3/105 11.9 OTRA
APPROACH Evaluate a budgetary control system in
terms of (a) Objectives - What are the
key profit-making factors of the industry?
- How is the firm formally organized into cost,
profit or investment centers. Informally what
really happens? - What are Top Management
objectives from the budget system - short term
and long term? - How does Top Management
want the responsible manager to behave?
96
3/106 11.9 (continued)
(b) Targets - Does Top Management
give adequate and timely, guidelines? -
Is the organizational environment defensive or
creative?
- Who sets
initial and final targets? - How much
interaction and participation is involved to set
the targets?

- How creative and
realistic are the agreed targets? - Do
the targets motivate managers in terms of
challenge, responsibility and
sense of achievement? (c) Reports and
(d) Action, to be discussed in Part II.
97

3/107 11.10 LEARNING
PATTERNS a. ESSENTIALS OF PBS
PLANNING COMMUNICATION
COORDINATION APPRAISAL
BEHAVIOUR TO ACHIEVE
THE HO
OBJECTIVES ...
98
3/108 11.10 LEARNING
PATTERNS b. BUDGET CONCEPTS INTERACTION
EDUCATION EXCEPTION TIME APPRAISAL ASSUMPTIO
NS SPONSORSHIP ORGANIZATION RESPONSIBILITY
99
3/109 11.10 LEARNING PATTERNS
c. BUDGET TYPES OPERATING CASH FUNDS
FLOW CAPITAL BALANCE SHEET ALL DEPEND UPON
ASSUMPTIONS ...
100
3/110 11.10 LEARNING PATTERNS
d. GIVE ME THE COST OF XXY!!! SAID THE
MANAGER . SO THE CONTROLLER WONDERED WHAT TO
GIVE FULL OR DIRECT COST?
VARIABLE OR FIXED? HISTORICAL OR CREATIVE?
STANDARD OR ACTUAL? DIRECT OR INDIRECT?
CONTROLLABLE OR NON-CONTROLLABLE? ENGINEERED?
MANAGED? COMMITTED? SUNK? OPPORTUNITY?
REPLACMENT? DISPOSAL? WHAT DO
YOU WANT THE COST FOR?
101
3/111 11.10 LEARNING PATTERNS
e. BREAK EVEN AND CONTRIBUTION S -
VC C WHEN C FC THEN SALES ARE AT
BEP
102
3/112 11.10 LEARNING
PATTERNS f. PREPARATION
GUIDELINES ESTIMATES

REVIEW
APPRAISAL
103
3/113 11.10 LEARNING
PATTERNS g. MOTIVATION
MONEY JEALOUSY FEAR STATUS KITA -
PHYSICAL KITA - PSCHOLOGICAL
CHALLENGE RESPONSIBILITY
SENSE OF ACHIEVEMENT AND YOU?
104
3/114 11.10 LEARNING PATTERNS h.
OTRA OBJECTIVES TARGETS
REPORTING ACTION
ORGANIZATIONAL CLIMATE? C OR D?
COST, PROFIT OR INVESTMENT CENTERS?
GET PROFIT INTO THE FRONT LINE!!!
105
3/115 FINAL NOTE
This ends Part I of the program we
hope it has been a challenge to you in
helping each other to learn And now to
reinforce the learning of the day we have a
little exciting homework tonight so that
tomorrow PART II will be
downhill all the way so on we go
together ...
106

• AGL
• AUTONOMOUS
• GROUP
• LEARNING

Boland1
Dr. Bob Boland
107
3/116 AGL - AUTONOMOUS GROUP LEARNING
NO.3 BASIC PLANNING AND
BUDGETARY
CONTROL FOR MANAGERS
PART II
108
3/117 1.0 REVIEW QUIZ 1.1
INSTRUCTIONS a. Assemble in new SG.
b. Discuss all the work done in Part I,
your summaries of key points and all
questions arising. c. Do the short quiz
of 50 questions as a SG. d. Check your
answers, discuss and make notes. e.
Re-assemble in MG when the bell rings.
109
3/117a 3.0 PROGRAM LEARNING (45
minutes) 3.1 INSTRUCTIONS - INDIIVIDUAL WORK
a. Assemble in SG and find your copy of
the ASS book. b. Quickly complete aloud
and in writing Ch. III of ASS. c. Record
key points in your notebook. d
Reassemble in MG when the bell rings.
110
3/118 3.0 TOTAL BUSINESS PLANNING
3.1 TBP CONCEPTS TBP starts with
Strategy" for a five year planning horizon.
It relates objectives to resources and
environment. Sets management
objectives in words and figures.
Allocates resources to meet objectives.
Sets meaningful basis for annual budget
preparation and reporting systems.
111
3/119 3.2 REPORTING BY ORGANIZATIONAL

RESPONSIBILITY (a) Reports should meet
managers' needs at both head office and
local levels. (b) Reports designed for
managers by responsibility centers
EXPENSE centers - performance measured
as actual cost against target.
PROFIT centers - performance
measured as actual profit against target.
INVESTMENT centers - manager
responsible not only for profit target
but also the return on assets, I.e. assets
employed to achieve the profit (c)
Reports should pyramid to provide summary data
for top management. Each report built
upon reports from lower responsibility centers.
112
3/120 3.3 FUNCTION OF REPORTS
Reports for control and action.
Designed to achieve results.
Materiality is important. Unnecessary
detail distracts attention from the key data.
Objectivity - do "try" to avoid bias (the
selection of what is chosen to be
reported automatically adds to some bias).
113
3/121 3.4 REPORTING ESSENTIALS (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. Report
complexities are NOT unavoidable. (b) Speed -
rapidly changing situations need quick decisions
and rapid reporting. Conversely - when
nothing can be done, no rapid reporting!
Increased speed trades off for less accuracy.
Timeliness of decisions affected by
delay in reporting. (c) Frequency - changing
situations need reporting but too many
reports restrict the manager and are
"dis-functional".
114
3/122 3.4
(continued) (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 information all the time.
Distinguish routine from special
reporting. NOTE All figures are estimates
based on assumptions. Generally fast
and adequate!
115
3/123 3.5 COMMUNICATION Reports
must communicate information not merely contain
it. Design reports for the user - accountants
like figures, engineers like graphs, managers
like the (sexy) pictures. Pictures and
patterns communicate basic ideas rapidly. Show
deviation of actual from one target only - and
the reasons why? NOTE 0ne way communication is
always poor. Restrict every
number to the vital digits only.
116
3/124 3.6 MARKETING BUDGET REPORTS
(a) Treat reports as "information products" to
be "marketed" as skillfully and
professionally as the company markets its
products to customers. (b) Research the
"market" for reports Who? Why? Where? When?
How? (c) Adapt the product to customer
needs and personalities. (d) Set a "product
policy" for reports - standardization. fitted to
the organisation, minimum interruption of
daily functions.
117
3/125 3.6
(continued) (e) Set a price policy for reports -
value of the information must consider the
opportunity cost or value of NOT having the
data. (Not recorded by accountants?).
Difficult to get data that is not
routinely recorded. (f) Set a promotion and
distribution policy for reports - "sell" and
deliver reports. Encourage fast, adequately
accurate reporting, educate managers to use the
reports, create the need for reports, promote
reporting aggressively. (Test occasionally by not
sending a report to get a quick
reaction as to its urgency and value?) NOTE
Need an appropriate "marketing mix" to "market"
budget reports effectively to
managers throughout the organization. Think of
reporting in marketing not merely
selling terms - satisfy needs!!
118
3/126 3.7 RESPONSIBILITY REPORTING Focus
on the responsible manager. Report for each
center to build up from centers below. Trace
variances through reports to managers
responsible, But tread softly
NOTE Don't bury the manager in a grave of
paperwork.
119
3/127 3.8 HUMAN PROBLEMS (a)
The budget is a device to achieve objectives in
organization. (b) Co-operation is the key.
Willingness to participate and become involved
discourages individual and group
opposition to Top Management. (c) People
generally may "say" that they do not like
targets or budgets but in practice such
budgets do provide challenge, responsibility and
a sense of achievement.' (d)
Motivation is vital. Help managers and employees
to reconcile head office, local and
personal priorities. Motivation is complex, but
in the long run challenge,
responsibility and achievement are effective.1
NOTE Other methods may achieve the results
to survive today without
developing anyone for the future. i.e. Fear!
Money! KITA!
120
3/128 3.9 ORGANIZATIONAL ENVIRONMENT Top
Management and the controller set the
organizational environment which is key to the
effectiveness of the budget system. A defensive
environment encourages managers to set low
targets, show little initiative, be reluctant to
make decisions and to settle for safe plans. A
creative environment (whereby managers feel
secure yet motivated) encourages managers to
set high achievable targets, make confident bold
decisions, use resources creatively, take
balanced risks, and achieve both personal and
corporate goals. NOTE How is your
organizational environment?
121
3/129 3.10 LEARNING PATTERNS a. TBP
OBJECTIVES - RESOURCES
122
3/130 3.10 LEARNING PATTERNS b.
REPORTING DESIGN, SPEED, FREQUENCY, CLARITY,
SIGNALS MANAGEMENT RESPONSIBILITY - FORMAL
INFORMAL ORGANIZATIONAL PYRAMID
COMMUNICATION FOR ACTION
123
3/131 3.10 LEARNING PATTERNS b.
ENVIRONMENT TOP MANAGEMENT CONTOLLER
ORGANIZATION
CREATIVE OR DEFENSIVE?
124
3/132 3.10 LEARNING PATTERNS d.
MOTIVATION FEAR, JEALOUSY, MONEY, KITA
CHALLENGE, RESPONSIBILITY, ACHEIVEMENT
SURVIVE TODAY DEVELOPMENT FOR
LONG TERM
125
3/133 3.10 LEARNING PATTERNS e.
MARKETING CONCEPTS FOR REPORTING FIND A
NEED - FOR MANAGER INFORMATION DECIDE ON A
MARKETING MIX PRODUCT, PLACE, PRICE,
PROMOTION SATISFY THAT NEED (PROFITABLY)
REPORTS AS TOOLS FOR MANAGEMENT ACTION
126
3/134 3.10 LEARNING
PATTERNS f. OTRA OBJECTIVES
TARGETS
REPORTING
ACTION
127
3/136 5.0 CASE GILTIM B
5.1 THE STORY OF THE
CASE Giltim (A) described budget objectives
and preparation. Giltim (B) deals with
reporting and action. Problems arise in
evaluating the reporting system and its effect on
the behaviour of managers in the company.
128
3/150 5.6 LEARMNG POINTS (a) Budget reports
should be available three to eight days after the
month end. (b) Achieve fast reporting day early
cut off" and efficient data processing
(possibly use critical path techniques to
determine delay factors). (c) Design reports
for use by managers not accountants. Simple,
graphic, exciting. Exclude non-target
history. (d) Report signals of key factors, not
complete detail. (e) Design reports for local as
well as top management. (f) Recognize that
manager motivation is not automatically
achieved by participation but is a complex
factor resulting from the total system.
129
3/151. 5.6 (continued) (g) Managers may
sometimes not be rationally "responsible" but
may be convinced that they are responsible and
may act accordingly. Behavior is not
completely rational in logical or economic
terms .. emotional needs. (h) To modify the
budget system and motivate managers is a
complex problem. They may not work as
effectively under a new "better"
system. (j) Sales and manufacturing together
make a more logical basis or a profit center,
but transfer price systems are available if this
combination is not practicable. (j) Set profit
centers as close to operations ("the front line")
as practicable, to make managers not merely
cost oriented but profit oriented (k) HO
"advice" may really be "orders".
130
3/152 5.6 (continued) (1) Plant "agreement" may
really be imposed by HO. (m) Budget technical
problems are fairly easy to solve but human
problems are complex and difficult. (n) Top
management involvement in the budget process is
vital if it is to motivate managers. (o) Total
business planning in five year horizons involving
all managers is more useful than mere
budgetary control each year. The TBP provides
the under-lying data for the annual and monthly
budget targets. (p) Design the budget system in
relation to top management objectives, industry
profit-making factors and the organizational
structure of the firm.
131
3/153 5.6 (continued) (q) Measure the
effectiveness of the budget system by the action
and behavior of the managers and not by what
managers say (r) Review and redesign budget
reports periodically to meet current
needs. (s) Recognize that reports for HO may
not necessarily meet local management key needs
- thus leading to two (or more) reporting
systems formal and informal.
132
3/154 5.7 LEARNING PATTERNS a.
REPORTING FLASH - 3 DAYS DETAILED -
5 DAYS PROBLEM AREAS - DAILY
RE-FORECAST FAILURES TO YEAR END - DONT
CHANGE THE BIUDGET!
133
3/155 5.7 LEARNING PATTERNS b.
DESIGN SIGNALS ACTUAL v
BUDGET GRAPHS INTERESTING -
NOT DULL!! ELIMINATE NON STANDARD OLD
DATA , ITEMS FOR INTEREST ONLY, USELESS
DETAIL AND DIGITS
134
3/155 5.7 LEARNING PATTERNS c.
DO DIGITS COUNT? TO THE MANAGER?
TO THE ACCOUNTANT? HOW MUCH IS
USEFUL 9,824,463,26
9,824,000
9,824m or just 9.8 million?
135
3/157 5.7 LEARNING PATTERNS d.
MOTIVATORS OF THE PLANT MANAGER PERSONAL,
ACTION TEAMS, RE-FORECASTING, HO
ADVICE, COMPETITION, PROMOTION, TOP
MANAGEMENT ACTION, MONEY, INTERACTION, DAILY
REPORTS ... KITA OR CRA?
136
3/158 5.7 LEARNING PATTERNS e
PROFIT CENTERS PLANT OR SALES?
DIVISION? TRANSFER PRICES
COST OF CHANGE - HUMAN AND
TECHNICAL KEEPING
PROFIT IN THE FRONT LINE ...
137
3/158a 5.8 INSTRUCTIONS
a. Re-assemble in CSG. b.
Study and discuss the guide to the case. Compare
it to your solution. Be sure that
every member of your CSG, really
understands every key issue. c.
Record key points in your notebook. d.
Re-assemble in MG when the bell rings.
138
3/158b 6.0 CASE BILL BROWN 6.1
INSTRUCTIONS a. Assemble in SG.
b. Answer the questions. c. Check
your answers, discuss and make notes. d.
Re-assemble in MG when the bell rings.
139
3/158c 7.0 PROGRAM LEARNING (45
minutes) 7.1 INSTRUCTIONS - INDIIVIDUAL WORK
a. Assemble in SG and find your copy of
the ASS book. b. Quickly read the
Introduction in ASS. c. Quickly complete
aloud and in writing Ch. IV of ASS. d.
Record key points in your notebook. e.
Reassemble in MG when the bell rings.
140
3/159 8.0 PLANNING CONTROL SYSTEMS
8.1 TOTAL BUSINESS
PLANNING (a) Budget is more than a one year
phenomenon. More mea