BUDGETING FOR PLANNING AND CONTROL Continuous (or rolling) budget

Budgets - moving 12-month budget wherein every time

a month expires in the budget, an additional
• Translate the goals and strategies of an
month in the future is added
organization into operational terms
• Used in the (1) process of setting standards, (2) Static budget
receiving feedback on actual performance, (3)
taking corrective action whenever actual - budget developed for a single level of activity
performance deviates significantly from planned based on historical data adjusted for inflation
performance
Flexible budget
• Forces the management to develop an overall
direction for the organization, foresee problems, - budget that provides expected costs at
and develop future policies various levels of activity
- managers can deal with uncertainty by
Master Budget
examining the expected financial results for a
- a comprehensive financial plan for the year number of plausible scenarios
made up of various individual departmental
Zero-based budgeting
and activity budgets
- budgeting approach that involves developing
a new budget from scratch every time (i.e.,
starting from “zero”)
- expenses must be justified before adding it to
the new budget, as such, costs can be minimal
as we take the starting point to be zero

Behavioral Dimension of Budgeting

1. Goal congruence. This occurs when the goals of

individual managers are aligned with the goals of
the organization.
2. Dysfunctional behavior. Individual behavior is
in conflict with the goals of the organization.

Characteristics of a Good Budgetary System

1. Frequent feedback on performance.

Management by exception. The process of
selective investigation of significant variances
allows managers to focus only on areas that need
attention
2. Monetary and nonmonetary incentives.
3. Participative budgeting. A budgeting process
Operating budgets which involve the lower level management in the
process of decision-making and budget
- consists of a series of schedules for all phases
preparation.
of operations
Advantages: lower-level managers are more
- expected output: pro forma income statement
capable of giving the real picture, greater goal
Financial budgets congruence, increased responsibility and
challenge inherent in the process provide
- concerned with the inflows and outflows of nonmonetary incentives that lead to a higher level
cash and with financial position of performance.
- expected output: cash budget, pro forma Disadvantages: setting standards too high or too
balance sheet, pro forma statement of cash low, building slack into the budget (often referred
flows to as padding the budget), pseudoparticipation
4. Controllability of costs.
Budgets can be broken down into quarterly and
5. Multiple measures of performance.
monthly budgets. The use of shorter time periods
Myopic behavior. This occurs when a manager
allows managers to compare actual data with
takes actions that improve budgetary
budgeted data as the year unfolds and to make timely
performance in the short run but bring long-run
corrections.
harm to the firm.