Page 157 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes
Example: The budget department tries to ensure that the budget does not contain excessive
allowances (i.e., water).
In other cases, the explanation of budget variances provided by the budgetee may hide or
minimize, a potentially serious situation and the discussion with the line managers may
sometimes perceive to be threatening or hostile by the latter. The budget department must walk
a fine line helping the line manager and ensuring the integrity of the system.

To perform their function effectively, the members of the budget department must have the
reputation for impartiality and fairness. The members of the budget department should also
have the personal skills to deal effectively with people.

Self Assessment

Fill in the blanks:
9. ………........ 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.
10. If the budgeted target is too difficult, managers are motivated to take ……………………
actions that may not be in the long-term interests of the company.

7.8 Budget Ratios

The following are usually used to measure development from the budget:
1. Labour utilisation can be measured by two ratios, namely:

(i) Measured work performance ratio calculated as under:
Measured work produced in Std. hours
×100
Time taken to produce the work
(ii) Attendance time performance ratio calculated as under :

Measured work produced in Std. hours
×100
Total attendance time
2. Standard capacity usage ratio: This is the relationship between the budgeted number of
working hours and the maximum possible no. of working hours in the budgeted period.
This % indicates the proportion of the available facilities which the company intends to
use during the budget period. The facilities are generally measured in machine hour or
direct labour hours.

Example: Budgeted no. of working hours 4,000 and maximum possible no. of working
4000
hours in a budget period 5,000. Capital usage ratio = × 100 = 80%
5000
3. Actual capacity utilisation ratio: This ratio indicates the extent of which facilities were
actually utilised during the budget period.

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