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Budgeting and cost control


Budgeting is...Budgeting and cost control

Preparing budgets that state planned revenues and expenditures for the budgeting period (often the year ahead).

This will be carried out by a budget committee of senior managers. In zero-based budgeting each expenditure budget starts with zero and then every expense has to be justified.


How budgeting should work


1. Set a profit target for the budget period (the period of time covered by the budgets, usually a year)
e.g. to increase profit as a percentage of sales by 5%.



2. Sales forecast/production forecast (for a manufacturer)

Calculating sales and production forecasts that will achieve the profit target.



3. Policies

All the organization’s policies (e.g. marketing) must be formulated and co-ordinated to achieve the sales and production forecasts.



4. BudgetsBudgeting and cost control

On the basis of these policies, budgets will be drawn up for at least each month of the budget period by the managers who have to carry them out - see below.



Different types of budgets


Budgets with planned income/expenditures over the budget period will normally include:


1. Sales budget.



2. Production budget 

(for manufacturers).



3. Capital expenditure budget 

(planned spending on fixed assets, things kept in the business for a long time like machinery).



4. Current (or revenue) expenditure budgets (for day-to-day expenses like stocks, transport, raw materials or goods supplied, marketing, new product development and wages).



5.Debtors (or accounts receivable) budget.



6. Creditors (or accounts payable) budget



7. Cash budget (or cash flow forecast)

Planned cash inflows and outflows (see cash flow management).



8. Master budget 

(combining the budgeted, or planned, balance sheet, income statement and cash flow forecast – see financial accounting for details of these).



What is budgetary control?


This compares the difference between planned (or budgeted) and actual revenues and expenditures (called a variance).

Managers are motivated to make sure that planned expenditures aren’t exceeded (to control costs) and sales are higher than planned.

Going over budget (actual greater than planned spending) has two possible causes:

Inefficiency and waste.

Unforeseen increases in spending.


Key quotes explained

“If you can’t measure it, you can’t control it”Budgeting and Cost Control

- Meg Whitman (eBay’s ex-boss, pictured right)

You must measure something first (like costs and performance) before you can set targets and budgets to achieve them. The danger is that you can control people so much that you demotivate them.

For example, in Britain teachers have been demoralized and distracted from teaching by the bureaucratic pursuit of government targets and controls.

But without measurement you can’t evaluate performance. So the great scientist, Galileo, said:

“Measure what is measurable and make measurable what is not so”. 



Budgeting and cost control

“Competition is the keen cutting edge of business, always shaving away at costs”

- Henry Ford (American car manufacturer, pictured right).

You will lose business, if you have higher costs than your competitors. The golden rule of an industrialist, Henry Ford added, is to

“make the best quality of goods possible at the lowest cost possible, paying the highest wages possible”.



Budgeting and cost control

“Expenditures rise to meet income”

- C. Northcote Parkinson (English management writer, pictured right)

In budgets expenditure can correspond to the money available rather than what is necessary.


Best booksBudgeting and cost control


Thomas Johnson (pictured right above) and Robert Kaplan (pictured right below), Relevance Lost: The Rise and Fall of Management Accounting (1987)

Budgeting and cost control

Management accounting must help to achieve an organization’s long-term success. So costs must not be cut on future oriented strategies like marketing, innovation, quality and human resources.

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