Page 153 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 7.5 Budget Preparation Process

7.5.1 Budget Department

The budget department which normally reports to the corporate controller administers the
information flow of the budgetary control system. The budget department performs the
following functions:
1. Publishes procedures and forms for the preparation of the budget.
2. Co-ordinates and publishes each year, the basic corporate wide assumptions that are to be
made while preparing the budgets (e.g. assumptions about the economy, inflation factor,
exchange rate etc.).

3. Makes sure that information is properly communicated between inter-related organisation
units (e.g. sales and production).
4. Gives assistance to budgetees in the preparation of their budgets.

5. Analyses proposed budgets and makes recommendation first to the budgetee and
subsequently to the senior management.
6. Administers the process of budget revisions during the year.

7. Co-ordinates the work of budget departments in business unit budget departments.
8. Analyses report performance against the budget, interprets the result and prepares
summary reports for senior management.

7.5.2 Budget Committee

The Budget Committee is composed of the members of senior management such as Chief
Executive Officer, Chief Operating Officer and the Chief Financial Officer. In some companies,
the CEO decides without a committee. The budget committee reviews and either approve or
modify each of the budgets. In large diversified company, the budget committee might meet
only with the senior operating executives to review the budgets for a business unit or group of
business units. In some companies, however, each business unit manager meets with the budget
committee and presents his budget proposals.

Did u know? Usually, the budget committee must approve major budget revisions made
during the year.

7.5.3 Issuance of Guidelines

The first step in the budget preparation process is to develop guidelines that govern the
preparation of the budget for dissemination to all managers. These guidelines are those that are
implicit in the strategic plan modified by developments that have taken place since its approval,
especially the company’s performance for the year to date and its current outlook. All
responsibility centres must follow some of the guidelines e.g. inflation in general and inflation
for specific items such as: wages, cost of utilities, corporate policies on how many persons can be
promoted, compensation at each wage and salary level, including employee benefits. Others
may be specific to certain responsibility centres.

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