Page 148 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 7: Budgeting: Tool for Management Control

4. A budget is approved by the higher authority, whereas, forecasts are not usually approved Notes
by higher authorities.
5. Once approved, the budget can be changed only under specified conditions. A forecast is
updated as soon as new information indicates change in conditions.
6. In case of budgeting, actual financial performance is compared to budget and variance
analysed and explained.

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Caution Variances from forecasts are not analysed formally or periodically.

Examples of a Forecast

This is one made by the treasurer’s office to help in cash planning. Such a forecast includes
estimates of revenues and expenses and other items that affect cash flows. The treasurer has of
course no responsibilities for making the actual sales, or other items to conform to forecast. The
cash forecast is not cleared with top management, it may change weekly or even daily, without
approval from higher authority and usually, the variances between actual and forecasts are not
systematically analysed.
From the management’s point of view, a financial forecast is exclusively, a planning tool,
whereas a budget is both a planning and a control tool. All budgets include the elements of
forecasting since the budgetee cannot be held responsible for certain events that affect their
ability to meet budgeted objectives.

Self Assessment

Fill in the blanks:
1. ……………… is the process of deciding on the nature and size of several programmes that
are to be undertaken in implementing an organisation’s strategies.

2. A ………………… is stated in monetary terms whereas a forecast may or may not be stated
in monetary terms.

7.2 Uses of a Budget

Operating budget has four principal purposes:

1. To fine-tune the strategic plan: Strategic plan is prepared early in the year and developed
on the basis of the best information available at that time; its preparation involves relatively
few managers and it is stated in fairly broad terms. The budget is completed just prior to
the beginning of the budget year, provides an opportunity to use the latest available
information and is based on the judgement of managers at all levels throughout the
organisation. The ‘first draft’ at the budget reveals that the overall performance of the
organisation or a business unit within an organisation may not be satisfactory. Budget
preparation would give an opportunity to improve the performance through commitment
made by respective managers.
2. To help co-ordinate the activities of the several parts of the organisation: Every
responsibility centre manager in the organisation participates in the preparation of the
budget. Then, when the budget staff assembles the pieces into overall plan inconsistencies
may show up.

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