Page 155 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes The final approved budget is recommended by the budget committee to the chief executive
office. The CEO also places the approved budget to the Board of Directors for ratification. This
happens prior to the start of the budget year.

7.6 Budget Revisions

There are two general types of budget revisions:
1. Procedures that provide for systematic (say quarterly) updating of the budgets.

2. Procedures that allow revisions under special circumstances.
If budget revisions are limited only to unusual circumstances, such revisions should be adequately
renewed. In general, permission to go for budget revision is difficult to obtain. Budget revisions
should be restricted to those cases where approved budget has become so unrealistic that it no
longer provides a useful control device i.e., budget revision must be justified on the basis of
significant changed conditions from those existing when the original budget was approved.

Contingency Budgets

Some companies routinely prepare contingency budgets that identify management action to be
taken if there is significant decrease in sales volume from what was anticipated at the time of
developing the budget (e.g. actions to be taken if there is a decrease of 20 percent from the best
estimate of sales volume). The contingency budget provides a way of quickly adjusting to
changed conditions if the situation arises. To find the effect of changes in sales volume while
preparing contingency costs are divided into three categories - fixed costs, unavoidable variable
costs and management discretionary costs. Besides, business units, managers describe the specific
actions that would like to take to control employment, total assets and capital expenditures in
case of a reduction in sales, when these actions would be put into effect.

Self Assessment

Fill in the blanks:
7. The budgeted ……………….shows how much of the cash needs can be met by retained
earnings and how much must be obtained by borrowing it from other outside sources.
8. The first step in the ………………………..process is to develop guidelines that govern the
preparation of the budget for dissemination to all managers.

7.7 Behavioural Aspects while Preparing Operating Budgets

One of the purposes of management control system is to encourage the manager to be effective
and efficient in attaining the goals of the organization.
Some of the motivational considerations while preparing the operating budgets are described
below:
1. Participation in the budgetary process: Actually, an effective budget preparation process
blends the two approaches - ‘top down’ and ‘bottom up’. Top down budgeting means
senior management sets the budget for the lower levels and bottom up budgeting signifies
lower level managers participate in setting the budget amounts. In most of the cases,
budgetees prepare the first draft of the budget for their area of responsibility which is
“bottom up” but they do so within guidelines established at higher levels, which are “top
down”. Senior managers review these proposed budgets with the budgetee, the purpose

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