Chapter 3
The Profit Planning and Control Process

Management must perform several steps to properly to properly budget.

Management’s goal is to maintain an internal environment that is structured so that individuals can work towards the broad objectives of the company (Mission Statement).


The Budgetary Process:
It is a comprehensive approach to all phases of the operation
    See Figure 3.1

Please note that this is an annual process (with constant review)

The Substantive Plan-
1. Broad objectives and strategies in concurrence with the mission statement (Chapter 2)

    Other factors that have to be considered:
        A. Organization Culture
        B. Climate
        C. Structure
        D. General philosophies and ethics
2. Developing specific goals
    The specific goals are quantitative in nature.
        A. Production Goals
        B. New Products
        C. Growth
        D. Profit Margins
        E. ROI
3. Development of strategies
    How are we going to reach our goals?
        A. General Alternatives
        B. Evaluate
        C. Decision

4. Executive Management Communicating the plans
            downward.
            A. MBO    
            B. Participation
            C. Meetings with
                Dept. Heads
            D. Justification
            E. Q and A
The financial Plans
The actual ‘nuts and bolts’ of the budgetary process. Sales plans, production plans, administrative
expenses, COGS, Distribution, etc.

Other important goals of the budgetary process:
    -Identifying and evaluation of  the internal and external   variables (internal variables are 100% controllable)
    -Implementation
        Leadership, Vision, Rewards, punishments, etc.
    -Performance reports
            -Timely


Flexible Expense Budgets:
- Only used with expenses
-It is not part of the Budget (It is used to compliment the
    budget.
-Flexible budgets give realistic information volume changes  (expenses)


Expenses are classified into three categories:
1. Fixed- Constant-
    There is no change in this expense (regardless of
    volume)
Ex. Supervisor’s salaries, rent
2. Variable- Expenses that vary w/ volume
Ex. Labor, Materials
3. Semi-Variable- There are fixed and  variable components
Ex. Utilities, some sales people

By understanding expense structure, a manager can identify the source of control.


Line and staff Responsibilities:

Line:
    -Budgeting is a tool to be  used by line managers to assist them in operations.
    -Implementation
    -Control of the operation


Staff:
    -Designing and improving the system
    -Providing technical support
    -Make recommendations and help to interpret the variances
    -Oversee the budgetary process
    -Support

   
More Behavior Management:    The purpose of Budgeting is to influence behavior with positive
reinforcement for goal accomplishment.

-Overcome individual goals
-Overcome goal conflict
-Strong leadership
-Line vs. Staff conflicts
-The staff does not (nor should it ) have reprimand
    responsibility over the line.    


-The staff has a responsibility to report the budget with an actual vs. budget comparison. They DO NOT enforce the              budget.
-Corrective action is a line function


Herzberg Motivational Theory
Hygiene factors- Extrinsic to the employee.
    The are necessary to help reduce dissatisfaction:
    Ex: Salary, work conditions, security, supervision,
            relationships, etc.

Motivational factors- Intrinsic to the employee
    The are necessary to help motivate the employee:
   
Ex: Recognition, achievement, responsibility, growth, advancement, work itself, etc.

Participative Budgeting
-Enables top management to gain  insight into lower levels
    (Environmental and technological issues)
-More commitment
-More support- The group will be more likely to support the decision if they are part of the decision.

-More information ( from customers, from other
    employees, from competition)
-Reduces stress
The level of participation depends on the following:
    1. Group size
    2. Type of decision that is to be made. (Certain decisions are not open for
        discussion- Safety, policy issues, etc)
    3. Structure- A centralize organization does not
        lend itself to participation.
4. Time. How much time is needed to make the decision?
5. Department. Certain departments require more participation then other departments:
    (R and D, marketing, etc.)

The Expectancy Theory
        Victor Vroom
1. Can I as an individual perform the tasks?
2. If I accomplish the tasks, will  I be rewarded?

3. The valances - (Personal satisfaction with the outcomes)
    Do I want the reward?
   
       
What does this mean for PPC:
1. The budget should be set at reasonable and attainable goals
2. Participation is important
3. Extrinsic rewards must be administered
4. PA’s only on controllable issues (Responsibility Acct.)