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Unit 7: Budgeting: Tool for Management Control

The budget staff develops the guidelines and senior management approves them. The staff also Notes
develops a time table for the steps in the budget preparation process. The budget department
then disseminates this material throughout the organisation.

7.5.4 Initial Budget Proposal

Using the guidelines, responsibility centre managers, assisted by their staffs, develop a budget
request. Because most responsibility centers will start the budget year with the same facilities,
personnel and other resources that they have currently, this budget is based on the existing
levels, which are modified in accordance with the guidelines. Changes from the current level of
performance can be classified as: (a) changes in external forces and (b) Changes in internal
policies and practices. They include:
Changes in external factors:

1. Changes in the general level of economic activity as it affect the volume of sales. (e.g.
expected growth in the demand for a product line).
2. Expected changes in the price of purchased materials and services and expected changes in
labour rates.
3. Expected changes in the cost of discretionary activities (e.g. marketing, R&D and
administration).
4. Changes in selling prices. These are the changes in the cost which can be recovered (if
possible) through increase in selling prices.
Changes in internal policies and practices:
1. Changes in production costs, reflecting new equipments and methods.
2. Changes in discretionary costs, based on anticipated changes in workload.
3. Changes in the market share and product mix.

Negotiation
The budget discusses the proposed budget with his superior. The superior attempts to judge the
validity of each of the adjustments. The governing consideration is that the performance in the
budget year should be an improvement over performance in the current year. The superior also
recognizes that he will become the budgetee at the next level of the budget process and therefore,
must be prepared to defend the budget that is finally agreed to.

Many budgetees tend to budget revenues somewhat lower and expenses somewhat higher than
their best estimates. The superior should be able to find out such differences. The difference
between the budget amount and the best estimate is called slack.

Review and Approval

The proposed budgets go up through successive levels in the organisation. When they reach the
top of a business unit, analyst puts the piece together and examine in total. The analyst studies:
(1) whether production budget is consistent with planned sales volume (2) are service and
support centers planning for the services that are being requested of them (3) Overall, whether
the budget will produce a satisfactory profit.
If the above are not completed, the budget draft is sent back for reworking. The same types of
analysis takes place at corporate headquarters.

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