Page 149 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes
Example: Plans of the production responsibility centres are not consistent with the
planned sales volume in total or in certain product lines.
Further, within the production organisation, plans for the shipment of finished products
may be inconsistent with the plans of plants or departments within plants to provide
components for these products.
3. To assign responsibility to managers, to authorize the amounts they are sanctioned to
spend and to inform them of the performance that is expected of them: The approved
budget should make clear what each manager is responsible for. The budget also authorizes
responsibility centre managers to spend the specified amount of money for certain specified
purposes without seeking the approval of the higher authority.
4. To obtain a commitment that is a basis for evaluating a manager’s actual performance: the
budget represents a commitment by the budgetee to his superior and therefore a benchmark
against which actual performance can be judged. The budget assigns responsibility to each
responsibility centre in the organisation. At the top level, the budget summary assigns
responsibility to individual profit centers (business units) within profit centre, the budget
assigns responsibility to functional areas (such as marketing). Within the functional areas
of marketing, the budget assigns responsibility to individual responsibility centres such
as Regional Sales Office.

7.2.1 Contents of an Operating Budget

Figure 7.1: Contents of an Operating Budget

Strategic Plan Operating Budget Capital Budget
Revenue and expense for each For organisation as a whole and Each major capital project
major programme for each business unit listed separately
Not necessarily by Classified by responsibility
responsibility centres centres
Not as much detail as Typically includes:
operating budget Revenues
Production cost and Cost of
sales
Marketing expenses
Logistic expenses
General & Administrative
Research & Development
Income tax
Net Income
Expenses may be:
Flexible,
Discretionary or
Committed
For one year, divided into
months or quarters
Total reconciles to strategic plan
(unless revised)

Cash Forecast
Budgeted Balance Sheet

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