Page 159 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 7.9.1 Formal Information

1. Task control information: A production control system provides information that schedules
the flow of material, labour and other resources, so the correct end products in the correct
quantities emerge at the end of the production.
2. Budget reports: The approved budget is the prescribed financial device for controlling the
activities of the responsibility centre and a report that compares actual revenues and
expenses with budgeted amounts is the main part of the report.
3. Non-financial information: Sales volume in units as well as in rupees. Others are reported
because the information may require prompt action. These are termed as key variables
bookings, back orders market share, key actual numbers, capacity utilisation, quality, on
time delivery, inventory turnover. Recent developments that have influenced the
Management Control System, include just-in-time systems, total quality control, computer
integrated manufacturing and decision support systems.

7.9.2 Preparation of Flexible Budget

The steps are as under:
1. Since decentralisation of cost responsibility is an essential features of flexible budgetary
control system, the first step is to define the departments of the business. A department
should be established if its functions or processes are of a similar nature or are related in
one logical group.

Example: In textile mills, carding and spinning can constitute one department, weaving
another department, processing of cloth yet another department and so on. Another factor in
establishing a department is that it should not consist of two parts of the organisation each
having different executives responsible for its activities.
2. The budgeted cost of each department will be related to the standard activity of the
department and of the constituent cost centres of the respective departments. Similarly,
the budget of service departments will be based on the level of activity planned for the
production departments. The standard activity is demonstrated by standard hours.
A standard hour may be defined as a hypothetical hour which measures the amount of
work which should be performed in one hour. Once this is established, standard hours of
the actual output can be calculated and by comparing the same with the actual hours spent,
the efficiency of the cost centre can be assured. The concept of standard hour is also useful
for the firm producing a large number of different products requiring different standard
hours.
3. The next step is the establishment of departmental overhead expenses budgets based on
the level of activity planned for each cost centre. Past experience can serve as a guide. The
budgets should by and large be set on the basis of studies of what is reasonable including
possible economies. It is also preferable to estimate the expense under each account for
each cost centre based on the proposed level of activity and then to term up to arrive at the
departmental budget.
4. The next step is to segregate all expenses into fixed and variable. Some of the expenses are
semi variable in nature and hence, these expenses have to be segregated into fixed and
variable for giving proper budget allowances.

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