Responsibility Budgeting and MBO

Name Roll No

Mayur Bhat 4

Vikram Deshmukh 9

Hemant Kothawade 22

Tushar Kambli 18

Nilesh Shingade 44

Rohit Sopori 45

Akshada Wagh 511

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Introduction to BudgetingA budget is a quantitative expression of plans. Most of the well-managed business firms use a budget

which is a comprehensive and coordinated plan for the operations and resources of the firm.

It is commonly used by business firms, governmental agencies, non-profit institutions, and even households.

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Benefits of BudgetBudgets provide several benefits in that they:Induce managements to think systematically about the

future Serve as a device for coordinating the complex

operations of the businessProvide a medium for communicating the plans of the

firmMotivate managers at all levels to perform wellServe as a standard against which the actual

performance may be judged

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Framework for budgetingStrategy, Planning and BudgetingThe Budget PeriodProgramme Budget and Responsibility BudgetOrganization for BudgetingThe Budget BaseLimiting FactorParticipation

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Master BudgetOperating BudgetCapital Expenditure BudgetCash BudgetProjected Financial Position

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Operating BudgetSales forecastProduction BudgetMaterial and Purchases BudgetLabour Cost BudgetManufacturing overhead BudgetNon Manufacturing Cost Budget

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Capital Expenditure BudgetList of capital projects for investmentPrepared separately from operating budgetPrepared by Controller and Capital Expenditure

committeeApproved by Board of DirectorsJustifiable criteria for Budget

Payback periodInternal Rate of ReturnCost reductions per unit

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Cash Budget

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Cash BudgetApplying suitable “Lag” scheme

Pattern of collection of Account ReceivablesCash disbursement on credit purchases

Operating expenses to be paid month wiseDepreciation and other non cash charges are not

included in the cash budget

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Projected Balance SheetIt shows

Projected assetsProjected liabilitiesOwner’s equity at the end of Budget

Inputs requiredInitial Balance SheetProfit PlanCapital Expenditure BudgetCash Budget

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Budget, Budgeting & Budgeting Control Linked with one generic term and all the three reflect different aspect of the same system. Budget

The monetary or quantitative presentation of business plan and policies to be pursued in the future period of time.

An estimate of future needs arranged according to orderly basis covering some or all activities of enterprise for define period of time.

Budgeting A part of management process which includes preparation of budget, budget control, budget co-ordination

and all those activities that are related with budget. It is the preparation of comprehensive operating and financial plans for specific intervals of time.

Budgetary Control An important technique of control on business activities by management, in

which business activities are operated on the basis of pre-prepared budget and thereafter actual results are evaluated in the light of budget estimates.

Budgetary control is a system which uses budgets as a means of planning and

controlling all aspects of producing and/or selling commodities or services.  

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Difference B/ W Budget, Budgeting and Budgeting ControlBudgets are the individual objectives of a department,

Whereas budgeting may be said to be the act of building budgets.

Budgetary control embraces all this and in addition includes the science of planning the budgets themselves and the utilization of such budgets to affect an overall management tool for the business planning and control.

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Management Functions

Planning Directing and Motivating Controlling

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Budgetary Control In Management

One of the three main functions of management is to control.

Budgets are useful in controlling operations.The use of budgets to control operations.Compare actual results with planned objectives.

BUDGET

FINAN

CIAL

STATE

MEN

TS

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Budgetary Control Process

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Responsibility centre• A division or unit of an organization for which a

manager is held responsible – may be a cost centre, profit centre or investment centre.

• Examples: A specific store in a chain of grocery stores.• A work-station in a production line manufacturing

automobile batteries.• The payroll data processing center within a firm

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Attributes of a responsibility center

It is like a small business, and its manager is to preserve the interests of the larger organization.

Goals for the center should be specific and measurable,

Should promote the long terms interests of the organization and should be compatible with other responsibility center activities.

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A simple summary of the responsibility centers

Revenue CenterOutput measured in monetary terms

Input measured in monetary terms

Output measured in monetary terms

Output measured in monetary terms

Expense/Cost Centers

Profit Centers

Investment Centers

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A simple summary of the responsibility centers

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Responsibility budgetingResponsibility budgeting is a framework of structural,

procedural, and monitoring/reporting relationships.Responsibility budgeting is the most common remote

control system used by large-scale organizations in the private sector. It is a form of internal contracting in which:

(a) Units and managers are evaluated relative to the targets they accept,

(b) Only financial measures are used to measure and reward accomplishment or punish failure, and

c) Financial success or failure is attributed entirely to managerial decisions and/or employee performance.

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Responsibility budgeting Contd..Operating performance is monitored and subordinate

managers are evaluated and rewarded. Operating performance targets must be expressed in

financial terms for comparisons across responsibility centers, for the relative performance of managers to be evaluated and increasing the motivational efficacy of internal competition.

Helps in keeping higher levels of administration of operating details

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A Strategic Management Perspective on Responsibility Budgeting and Accounting It is an ongoing process that evaluates and controls the

business and industries in which company is involved.The practice has also been described in terms of

organizational design and strategic management. Responsibility budgeting and accounting takes place

within an organizational configuration known as an M-form

In this the decisional authority over strategy formulation is reserved to top management.

The responsibility budget formalizes a performance target for a given business unit over a specified time scale

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Diagnostic controlUnder traditional responsibility budgeting and accounting

systems, top management exercises control "by the numbers" from a small corporate headquarters, using financial targets, which it sets for the operating divisions.

Diagnostic control severely restricts the upward flow of operating information within organizations & making decentralization a necessity as well as an ideal.

This approach, however, is based on the assumption managers know how to improve performance. All that is required is to give them either the correct incentives or the necessary flexibility

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Interactive controlAn alternative to diagnostic control or control by the

numbers is control by debate and dialogue, also known as interactive control

It is by design a learning process, proceeding from strategic vision through choices and their consequences to better understanding, clearer vision, improved choices, and higher valued consequences.

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Arguments The best-managed, decentralized organizations are

precisely those where less emphasis is given to meeting financial targets than to the effectiveness with which operating managers engaged.

Operating managers must persuade their superiors that they fully understand every aspect of their businesses & costs, trends, operating efficiency, marketing strategy, competitive position and that their action plans and programs will realize the larger organizational purpose or interest.

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Management by Objective

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MBO…The concept of ‘Management by Objectives’ (MBO)

was first given by Peter Drucker in 1954.

The essence of MBO is participative goal setting, choosing course of actions and decision making.

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MBO : Block Diagram

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Advantage of MBO…Clarity of Goals (MBO)

Specific

Measurable

Achievable

Realistic, and

Time boundMotivationFocusBetter

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