Budgeting is designed to help management effectively perform significant phases of the planning and control functions within the business. Please note:     Budgeting process must has 3 very relevant aspect. These must bepresent for the budgeting process to work: 1. Budgeting requires major planning    decisions by Mgmt 2. Budgeting entails pervasive mgmt controls 3. Budgeting recognizes the critical behavior implications throughout the organization Budgeting is an important tool to help mgmt make better decisions and help to develop more effective managers. Fundamental concepts of Budgeting:         Exhibit 2.1 1. The management process-This process was discussed in the last chapter.     This includes decision-making 2. Managerial Commitment- All    levels. The commitment must be more then lip service. 3. Organizational structure-     Departments, chain of      command, s-of-c, etc. 4. Planning Process- Strategic, Tactical, Operational 5. Control process- Budgeting is control. Operational controls     and behavior controls must be in place so that the budgetary      process happen smoothly. 6. Continuous and consistent coordination 7. Communication Channels- Up and Down 8. Strategic Profit plan 9. Tactical profit plan 10. Responsibility accounting 11. The exception principle 12. Behavior Managementn program The fundamental purpose of mgmt planning is to provide for feed forward process for operations. (Feedback is also important. This is the continuous and constant control.) Managers should develop three     projections when they are in the planning process: 1. The Reference projection-This is an attempt to identify     the current environment if there were absolutely no     managerial involvement. 2. Wishful projection. This projection involves the best case scenario 3. Most likely projection     The Overall Planning Process     Mission Statements     This is the purpose for our company. This is the reason why we are in business.         From our mission statement, we start to narrow our plans     to objectives.     Objectives- Broad, long range, plans for the company         Economic         Owners         Customers         Societal         Employees         Many of these objectives can be outlined and discussed in policy manual. These objectives are also outlined in the ‘Leader’s Vision’. Goals- Fine tuning the     objectives with:     What are our Products/ Product lines?     Time     Quantitative measurement     Responsibilities- Which department will carry our         the specific goals.             Example: The Southern region will increase the sale of product A by 1.5 % during the first quarter.             Strategies- How the company will accomplish its goals ex: Reduce sales price, expand sales territory, increase advertisements Operations Mgmt Management Control using PPC: Control is ensuring that the goals and objectives are properly met by taking the necessary corrective action 1. Direct observation - MBWA-     This is the process of     observing work, customers,     and facilities by watching the ‘plant’ 2. Oral expression- This is the process of ‘telling’ your employees about their problems. 3. Performance reporting-     A. The performance reports must be distributed on a timely basis.     B. The performance reports should be based on the variance between the     budget and actual outcomes. If the variance is large, more frequent reports should be utilized (follow up report)     C. The controllable vs. non-controllable expenses         should identified as part of the performance report.     Controllable expenses are items that can be controlled by the company.         Ex: Payroll, materials, etc.     Uncontrollable expenses are items that are not controllable by the company.         Ex. Health insurance Benefits, Workman’s compensation, Taxes,etc. ALL COSTS ARE CONTROLLABLE IN THE                 LONG TERM    D. The expenses should be identified by responsibility                         center. 4. Memos- Everything must be written         Activity costing Analysis of redundant activities within the organization. There are many different activities that are repeated in different departments. Analyzing the activities on a broad basis can help identify if there are redundant activities.     Ex. Maintenance, Copy paper, Phone service             Zero based budgeting     It is an attitude     It assumes that the budget line items during each new budget cycle is zero.     It must warrant an insertion of money based on its cost and benefit.     Every expenditure must be justified every year.     There are no ‘givens’     Zero-based budgeting must have top management support.     Management must support the decreasing and increasing of lines.    Exception Principle Control is the measurement of performance (Actual vs.Budget) It must be approached in a systematic manner. It must    be consistent.         The exception principle states     that managers should concentrate on the exception in the control reports                  (variances) The ‘in budget’ items must be rewards. The ‘out of line’ items need immediate managerial attention. The manager must try to find out ‘why’ there is an exception: 1. Changes in the environments     -Social cultural, technological, economic, political-legal, competitive 2. Performance may be poor 3. Uncontrollable problems         -Machine maintenance, shipping/delivery problems Organizational structure and Budgeting: Budgeting needs a strong organizational structure with clear line of authority to properly work. Companies should be structurally broken into decision centers. Managers would be responsible for operations decisions w/in their units. Decision Centers:     -Cost     -Revenue - Sales     -Profit- Responsible for the revenues, costs, and p profits     -Investment Coordination of Budgeting -Synchronization of each unit to work towards the common objectives -Goal congruence- keeping units in proper relationship to each      other     ex: Sales department and production department. Coordination is achieved by people! Flexibility Management must have the ability to override the budget    if necessary. Opportunities must be investigated. Budgeting allows for some flexibility.                            Behavioral problems with PPC The term ‘budget’ has a negative connotation. People usually fight budgeting. The leader of the unit has the     responsibility to ease the pain of the budgetary process. The leader must make it be     positive. The budgetary process needs to     do the following:     1. Realistic expectations     2. Realistic time span     3. Positive reinforcement     4. Enthusiasm     5. Budgets should be set with participation Budgets must be implemented with people. It is imperative that the people understand and be a part of the process The manager must use the proper techniques to discuss the process with employees when the budget is not     reached. It is important that     the employees do not lose confidence, fear the process, develop bad attitudes,etc. Managers use the budget to motivate. People try not to exceed the budget. This may result in higher goals during the next budget cycle ‘Too Tight’ Budgets cause     1. stress     2. Job dissatisfaction     3. Constant pressure     4. Possible quality issues ‘Padding’ the budget 1. Underestimating the sales-     This sets an easier goal.     Our unit will look better since our goals are easily obtained. 2. Overestimating the expenses. 3. Requesting more cash then actually needed. Padding the budget can cause other problems: ex. If you underestimate sales, this effects the planning in the production department etc. ex. There can be a lack of efficiency in the company )in     all departments).         Upper level management must encourage good budgeting practices:     Communication     Positive attitudes/encouragement     Training Discuss pros and cons of PPC Pros     1. Budgeting provides for a sound plan for the company     2. Budgeting requires more     involvement from all levels     of management     3. Budgeting provides for constant review of the      company     4. Budgeting provides for efficiency.     5. Budgeting provides for timely handling of problems.     Budgeting forces the resolution of problems     6. Budgeting provides for a clear understanding of our         programs (and if they are working)     7. Budgeting promotes a better understanding of the     company (top to bottom). (Reduces uncertainty) 8. Budgeting identifies whether     or not the company is moving forward (Customers, products, profits) Cons 1. Budgeting is difficult 2.spontaneity is better 3. Budgeting is expensive 4. The employees and managers hate budgeting.