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  BUDGETING BASICS AND BEYOND (4 th Edition) Jae K. Shim Joel G. Siegel Allison I. Shim






  A budget is defned as the formal expression of plans, goals, and objectives of management that

covers all aspects of operations

for a designated time period


  A budget is a fnancial plan to control future operations and results

Efective Budgeting


Efective budgeting requires the existence

of the following:

  Predictive ability

  Clear channels of communication, authority, and responsibility

  Accounting-generated accurate, reliable, and timely information


Compatibility and understandability of



Support at all levels of the organization


Types of Budgets

   Supplemental Budget

   Probabilistic Budget

   Target Budget

   Activity-Based Budget (ABB)

   Strategic Budget

   Stretch Budget

   Bracket Budget

   Add-On Budget

  Master Budget

   Rolling Budget

  Program Budget

  Capital Expenditure Budget

  Cash Budget

  Operating and Financial Budgets

  Flexible (Expense) Budget

  Static (Fixed) Budget

   Life-cycle budget


The Budgetary Process

Setting objectives.Analyzing available resources.


Negotiating to estimate budget



Coordinating and reviewing components

   Obtaining fnal approval.Distributing the approved budget.


Actual Costs vs. Budget


  At the beginning of the period, the budget is a plan. At the end of the period, the budget is a control instrument to assist management in measuring its performance against plan so as to improve future performance. Budgeted revenue and

costs are compared to actual revenue

and costs to determine variances

Budget Issues


  Bottom-up (Participative) versus Top- down


  Advantages and Disadvantages of Budgets


  Budgetary Slack: Padding the Budget




Planning and Budgeting?

  Planning should link short-term, intermediate-term, and long-term goals. The objective is to make the best use of the companies’ available resources over

the long term. Budgeting is simply one

portion of the plan.

   The plan is the set of details

implementing the strategy. The plan of

ex ecution is typically explained in sequential steps including costs and

timing for each step. Deadlines are set.


Strategic Planning

Strategic plans are long-term, broad plans ranging from 2 to 30 years, with 5 to 10 years being most typical


The strategic plan is the mission of

the company and looks to existing and prospective products and markets. Strategic plans are designed to direct the company’s activities, priorities, and goals.


Short-term and Long-

term Plans


Short-range plans are typically for one year

(although some plans are for two years). The plans examine expected earnings, cash fow, and capital expenditures

   Long-term planning is usually of a broad, strategic (tactical) nature to accomplish objectives. A long-term plan is typically 5-10 years (or more) and looks at the future

direction of the company. It also considers

Budget Accuracy The accuracy of budget preparation may be


determined by comparing actual numbers to

budget numbers in terms of dollars and units. Budget accuracy is higher when the two fgures are closer to each other. Ratios showing budget accuracy include:

   Sales Accuracy = Actual Sales/Budgeted Sales

   Cost Accuracy = Actual Cost/Budgeted Cost

   Proft Accuracy = Actual Proft/Budgeted Proft




Types of Reports

   Planning reports may be short term, looking at the company as a whole, each division, each department, and each responsibility center within the department

   Control reports concentrate on performance efectiveness and areas needing improvement.

   Information reports assist in planning and policy formulation. The re ports show areas of growth or contraction


More on Reports

Budget reports should contain the following data:


Trends over the years


Comparison to industry norms

   Comparison of actual to budget

with explanation and responsible

party for variances. Follow-up procedures are needed for control.

More Report Types

   Periodic Reports. These are reports prepared at regular intervals


Advance Reports. Important partial

information may be reported before all information is available for a periodic report

   Special Studies. Special reports are issued for a specifc, nonroutine purpose


A budget manual describes how a budget is to be prepared. The manual includes:


Standardized forms, lists, and reports

   Instructions


Format and coverage of performance


   Administrative details

   The Budget Manual


The Budget Sheet

A budget sheet should be designed to record the information used by the op erating manager and budget preparer. The budgeting sheet should include the following information:


Historical cost records used


Cost formulas


  Changes in operating conditions



The Budget Committee

  A standing budget committee is usually responsible for overall policy relating to the budget program and for coordinating the preparation of the budget itself. This committee may consist of the president; vice presidents in charge of various functions such as sales, production, purchasing, CFO, and the controller.

Budget Calendar


  The budget planning calendar is the schedule of activities for the development and adoption of the budget. It should include a list of dates indicating when specifc information is to be provided by each information source to others.





Questions Answered by Break-

even and Contribution Margin


   What sales volume is required to break even?

   What sales volume is necessary to earn a desired proft?

   What proft can be expected on a given sales volume?

   How would changes in selling price, variable costs, fxed costs, and output afect profts?

   How would a change in the mix of products sold afect the break-even and target income volume and proft potential?

   Economic analysis of new product. Labor contract negotiations. Choice of production process. Pricing policy. Location selection.Financing decisions.

   Capital budgeting analysis.


Applications of the CVP


Make or buy decision

Some Applications of Contribution Margin Analysis and “What-If” Analysis


Sales Mix Analysis


Contribution Margin Analysis and Nonproft Organizations


CVP Analysis with Step-function


   CVP-based Strategies



Assumptions Underlying

Break-even and Contribution

Margin Analysis

   The selling price per unit is constant throughout the entire relevant range of activity.

   All costs are classifed as fxed or variable.The variable cost per unit is constant.

  There is only one product or a constant sales mix.

   Inventories do not change signifcantly from period to period.

   Volume is the only factor afecting variable





Proft Planning


Profts are planned, they just do

not happen. Proft planning involves setting realistic and attainable proft objectives and

targets, and then accomplishing


Objectives in the Proft Plan


The objective must be defnite and specifc


  An objective states what is going to be done. The objective must be clear, quantifable, compatible, practical, strong, realistic, and attainable (not too easy or too difcult). A general and vague objective is of little value. The objective should be in writing



  Master Budget Flowchart Structure


Master (Comprehensive)


  Obviously these budgets cannot be prepared independently. Production is scheduled to meet the sales demand. Materials, labor, and factory overhead

costs are related to production. Selling and

administrative ex penses are based on

sales. Cash receipts and disbursements can

be esti mated only after sales revenue and costs are known. It is obvious that all of these separate budgets must be closely


Sales Planning Compared

with ForecastingSales planning and forecasting often are confused.

  Although related, they have distinctly diferent purposes.


A forecast is not a plan; rather it is a statement and/or

a quantifed assessment of future conditions about a particular subject (e.g., sales revenue) based on one or more explicit assumptions.


A sales plan incorporates management decisions that

are based on the forecast, other inputs, and management judgments about such related items as sales volume, prices, sales efects, production, and


Types of Budgets

  Sales budget

  Production budget

  Materials requirement budget

  Materials purchases budget

  Direct labor budget

  Factory overhead costs budget

  Selling and administrative expenses budget


  Cash budget


  Budgeted income statement


  Budgeted balance sheet

          Expected   Desired   Producti on = Planned sales + Ending — Beginning inventory Volume   Inventory          

The Production Budget






An understanding of cost -

behavior is helpful to

managers for four reasons:

  An understanding of cost -behavior is helpful to managers for four reasons:


  Flexible budgeting


  Break-even and contribution margin analysis


  Appraisal of divisional performance


  Short-term choice decisions


Costs by Behavior

  VARIABLE COSTS. Variable costs, also

known as engineered costs, vary in total

with changes in volume or level of activity


FIXED COSTS. Fixed costs do not change

in total regardless of the volume or level

of activity

   MIXED (SEMI-VARIABLE) COSTS. As previously discussed, mixed costs contain

both a fxed element and a variable one.


Analysis of Mixed

(Semi-variable) Costs

Since the mixed costs contain both fxed and variable elements, the analysis takes the

following mathematical form, which is called a

fexible budget formula: Y = a + bX where Y = the mixed cost to be broken up (dependent variable). X = any given measure of activity (cost driver) such as direct labor hours, machine hours, or production volume (independent variable). a = the fxed cost component (constant). b = the variable rate per unit of X (slope).


The Contribution Income


  An alternative format of income

statement, known as the contribution

income statement, organizes the costs by behavior rather than by function. It shows the relationship of

variable costs and fxed costs a given

cost item is associated with, regardless of the functions .

  More on Contribution



Contribution margin is available to cover fxed costs

   The statement highlights the concept of contribution margin, which is the diference between sales and variable

costs. The traditional format, on the

other hand, emphasizes the concept

of gross margin, which is the

diference between sales and cost of

goods sold.






Variance analysis compares standard to actual costs or performances

   There are two types of variances: material and immaterial


Defning a Standard Cost

  Standard cost, which is the predetermined cost of manufacturing, servicing, or marketing an item during a given future period. It is based on current and projected conditions. This norm is also dependent upon quantita tive and qualitative measurements (e.g., working conditions ).


Setting Standards

There are four types of standards


Basic. These are not changed from period

to period

   Maximum efciency. These are perfect standards, which assume ideal, optimal conditions

   Currently attainable. These are based on efcient activity

   Expected. These are expected fgures, which should come very close to actual fgures


Cost Variances

Three cost measures:


Quantity per unit of work times actual units of work produced


Standard cost equals standard price

times standard quantity, where standard quantity equals standard quantity per unit of work times actual units of work produced.

   Total cost variance equals actual cost less standard cost

Flexible Budgets


The fexible budget is geared toward a

  range of activities rather than a single level of activity. A fexible budget employs budgeted fgures at diferent capacity levels. It allows you to choose the best expected (normal) capacity level (100%) and to assign pessimistic (80%), optimistic (110%), and full (150%) capacity levels



  Manufacturing Cost


   In order to budget for manufacturing costs, a production budget needs to be established, which in turn requires a sales budget. Manufacturing costs are subdivided

   into direct materials, direct labor, and factory overhead.


Planning and Control of

Material Purchases and


  After determining the number of units to be produced, the company prepares the materials requirement budget and the materials purchase budget. Purchase of materials depends on production requirements and inventories. The direct materials budget involves a balancing of raw material needed for production, the raw

material inventory balances, and the purchase of

raw materials. The budget may provide for allowances for waste and spoilage.


Sales Budget

  The sales budget is the starting point in preparing the master budget, since estimated sales volume infuences nearly all other items appearing in the master budget. The sales budget, which ordinarily indicates the quantity of each product expected to be sold, allows all departments to plan their

Sales Forecasts

   Sales forecasts are especially crucial aspects of many fnancial management activities, including budgets, proft planning, capital expenditure analysis, and

acquisition and merger analysis. It

is the key to other forecasts and


Percentage of sales or




Objective-task method


Budgeting Advertising

Unit sales method


  Trend in advertising cost to sales


  Advertising cost per unit sold


  Advertising cost per sales dollars


  Advertising cost per customer


  Advertising cost per transaction


  Advertising cost by product, media, and territory


Measures of Advertising





Research and Development



Research and development (R&D)

is needed to develop new products and services or to signifcantly improve existing ones in order to remain competitive and grow

The R&D Budget The R&D budget may be based on:

   Estimated cost of specifc projects

   A percentage of expected sales

   A percentage of current year and/or prior year sales

   A percentage of proft

   A percentage of operating income

   A percentage of investment in capital assets

   A percentage of cash fow

   R&D per unit


Costs and Planning

There are direct and indirect costs associated with R&D projects


Any project limitations have to be


   In R&D, individual projects have to be planned, appraised, and controlled


General and Administrative


  Administrative departments include general administration, personnel, accounting, legal,

insurance, computer services, and

treasury. Administration is

personnel existing because of the

organization structure. Examples


Headcount Forecasting

  In the nonmanufacturing functions of a business (such as general administration, R&D, marketing, and product engineering), the most signifcant expense usually is salaries. Some companies have developed formal procedures for projecting and controlling such expenses. These methods are known as headcount


Capital Expenditures

  Capital expenditures include replacing machinery to economize on costs, expanding production to increase volume, marketing of a new product, improving the quality of products or services, and manufacturing under proposed contracts. Capital expenditures should take into account current and needed facilities. Commitments must also be considered.


Capital Budget Process

The four steps in the capital

expenditure budgetary process are:

Approving the project


Approving the estimate


Authorizing the project

   Follow-up

Who Uses Forecasts?

   Forecasts are needed for marketing, production, purchasing, manpower, and fnancial planning. Further, top management

needs forecasts for planning and implementing

long-term strategic objectives and planning for

capital expenditures. More specifcally, marketing managers use sales forecasts to determine optimal sales force allocations, set sales goals, and plan promotions and advertising. Market share, prices, and trends in new product development are also required.

  Sales Forecasts and

Managerial Functions


Qualitative Forecasting


Qualitative approach—forecasts

based on judgment and opinion

Expert opinions


Delphi technique


Sales force polling

   Consumer surveys

  Quantitative Forecasting


  a. Forecasts based on historical data

  Naive methods

  Moving average

  Exponential smoothing

  Trend analysis

  Classical decomposition

  b. Associative (causal) forecasts

  Simple regression

  Multiple regression




Exponential smoothing


Quantitative Forecasting

Naive models

Moving averages


Exponential Smoothing

  Exponential smoothing is a popular technique for

short-run forecasting by managers. It uses a weighted

average of past data as the basis for a forecast. The procedure gives heaviest weight to more recent

information and smaller weight to observations in the

more distant past. The reason is that the future is more dependent on the recent past than on the distant past.

   The method is known to be efective when there is

randomness and no seasonal fuctuations in the data.


One disadvantage of the method, however, is that it

does not include industrial or economic factors such as market conditions, prices, or the efects of competitors’ actions.


Least-Squares Method

  The least-squares method is widely used in regression analysis for estimating the parameter values in a regression equation. The regression method includes all the -observed data and attempts to fnd a line of best ft. To fnd this line, a technique called the least-squares method is used.


Regression Statistics

  Correlation coefcient (r) and 2 coefcient of determination (R )


  Standard error of the estimate (S e ) and prediction confdence interval


  Standard error of the regression coefcient (S ) and t-statistic b

  Using Regression on


  Excel has an easy-to-use

regression routine. To utilize Excel

2010, for example, for regression analysis, three steps need to be followed:Click the Data menu.

   Click Data Analysis.

  Excel on Regression


Regression Output

SUMMARY OUTPUT            Regression           Statistics                  R Square 0.6084            Multiple R 0.7800            Adjusted R 0.5692           Square   Observati Error ons Standard 2.3436           12                 Coefci Standa t Stat P- Lower Upper                ents rd Error value 95% Intercept 10.583 2.1796 4.855 0.000 5.7272 15.44 * 95%  


Cash Flow Forecasting

A forecast of cash collections and potential write-ofs of accounts receivable is essential in cash

  budgeting and in judging the appropriateness of current credit and

discount policies. The critical step in

making such a forecast is estimating

the cash collection and bad debt percentages to be applied to sales or accounts receivable balances.

The Cash Budget

   The cash budget presents the

amount and timing of the expected

cash infow and outfow for a

designated time period. It is a tool

for cash planning and control and should be detailed so that your know how much is needed to run

  Cash Budget



The cash receipts section, which is cash

collections from customers and other cash

receipts such as royalty income and investment income.

   cash disbursements section, which comprises all cash payments made by purpose.

   cash surplus or defcit section, which simply shows the diference between the total cash available and the total cash needed including a minimum cash balance if required

   fnancing section, which provides a detailed account of the borrowings, repayments , and interest payments


A Financial Model

A fnancial model is one in which:

  One or more fnancial variables appears (expenses, revenues, investment, cash fow, taxes, and earnings).

   The model user can manipulate (set and alter) the value of one or more fnancial variables.

   The purpose of the model is to infuence

strategic decisions by revealing to the decision

maker the implications of alternative values of

these fnancial -variables.


Use of Financial Modeling

in Practice

  The use of fnancial modeling, especially a computer-based fnancial modeling system, is in wide use. The simple reason is the growing need for improved and quicker support as a decision support system (DSS) and enterprise resource planning (ERP) and wide and easy availability of computer


Use of a Spreadsheet Program

for Financial Modeling and


   Spreadsheet programs such as Excel and a

stand-alone package such as Up Your Cash Flow

can be used to develop a fnancial model. These

packages are an efective tool for sensitivity analysis. Sensitivity analysis is a "what-if" technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes. to For illustrative purposes, we

present some examples of projecting an income


Construction of a Rolling



A Rolling budget, often called continuous or perpetual

budget is a 12-month (four-quarter) budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. In other words, one month

(or quarter) is added to the end of the budget as each

month (or quarter) comes to a close. This approach keeps managers focused at least one year ahead so that they do not become too narrowly focused on

short-term results. Also, markets are changing so fast

that the traditional budget is quickly out of date within

weeks of its publication. Many companies adopt a

rolling-forecast process so that budget allocations can

be constantly adjusted to meet changing market


Rolling Budget Example

    March April May June July August Total Six-Month Budget (March through August) $210,0 $216,0 $224,0 $208,0 $190,0 $180,00 $1,228,0 00 00


00 00 00 Gross margin sold Cost of goods 126,00 129,60 134,40 124,80 114,00 84,000 86,400 89,600 83,200 76,000 72,000$491,200 108,000$736,800 Operating G&A expenses 26,000 27,000 27,000 25,000 24,000 24,000 153,000 expenses Selling 48,000 49,600 52,400 48,800 41,000 37,000 276,800 52,000 53,000 55,000 51,000 49,000 47,000 307,000 Income (before expenses Interest income 47,000 48,600 51,200 47,600 40,100 36,100 270,600 1,000 1,000 1,200 1,200 900 900 6,200 (40%) Income taxes taxes) 18,800 19,440 20,480 19,040 16,040 14,440 108,240


Rolling Budget Example

  2   April May June July August Total Revised Six-Month rolling Budget (April through September) Septem ber Sales sold Cost of goods $220,0 $225,0 $210,0 $192,0 $182,0 $195,00 $1,224, 88,000 90,000 84,000 76,800 72,800 78,000 00 00


00 00 000 $489,60 Gross margin Selling expenses 53,000 55,000 51,000 49,000 47,000 50,100 305,100 132,00 135,00 126,00 115,20 109,20 $734,40 117,000 Interest income Operating G&A expenses 27,000 27,000 25,000 24,000 24,000 25,000 152,000 52,000 53,000 50,000 42,200 38,200 41,900 277,300 taxes) Income (before expenses 51,000 52,000 48,800 41,100 37,100 40,800 270,800 1,000 1,000 1,200 1,100 1,100 1,100 6,500




The e in e-budgeting stands for both electronic

and enterprisewide; employees throughout an

organization, at all levels and around the globe, can submit and retrieve budget information electronically via the Internet.

   Budgeting software is utilized and made available on the Web (in a cloud computing environment), so that budget information

electronically submitted from any location is in

a consistent companywide format.


E-budgeting Software

  There are much user-oriented software specifcally designed for corporate planners, treasurers, budget preparers, managerial accountants, CFOs, and business analysts.


  Web-based (Web-enabled)


  Intranet or Internet


  Cloud computing


  Enterprise Resource Management (ERM)




   Rate of return

   Budget ceiling

   Probability of success

   Competition

   Tax rate

   Dollar amounts

   Time value of money

   Risk

   Liquidity

   Long-term business strategy

   Forecasting errors Factors to Consider in Determining Capital Expenditures


  Accounting Rate of Return (ARR)


  Payback Period


  Payback Reciprocal


  Net Present Value (NPV)


  Internal Rate of return (IRR)


  Probability Index

  Evaluation Methods

Real Options


  Almost all capital budgeting proposals can be viewed as real options. Also, projects and operations contain implicit options, such as the option as to when to take a project, the option to expand, the option to abandon, and the option to suspend or contract operations. Deciding when to take a project is called the investment timing option.


Capital Budgeting under

Risk Several methods to incorporate risk into capital budgeting are


  Sensitivity analysis

  Decision (probability) trees Other means of adjusting for uncertainty include

  Decreasing the expected life of an investment

  Use of pessimistic estimates of cash fow


Comparison of the results of optimistic, pessimistic,

and best-guess estimates of cash fows





Activity-Based Budgeting


In contrast to functional budgeting,

Activity-based Budgeting (ABB) is activity-oriented. Activity-based budgets focus on the budgeted cost of activities required to produce and sell products and services. An activity-based budgetary system emphasizes the planning and control purpose of cost management.

  ABB Example   Quarter   Year

Electricity ($.18 per unit) 3,240 1,728 2,484 3,888 11,340

Indirect material ($.20 per unit) $3,600 $1,920 $2,760 $4,320 $12,600

Units 18,000 9,600 13,800 21,600 63,000

Unit-Level Costs 1st 2nd 3rd 4th

Total unit-level costs $6,840 $3,648 $5,244 $8,208 $23,940

Production runs Batch-Level Costs

Setup ($110 per run) $3,300 $1,760 $2,530 $3,960 $11,550

Purchasing and material handling 30 16 23 36 105

Total batch-level costs $9,300 $4,960 $7,130 $11,16 $32,550

($125 per unit)

Inspection ($75 per run) 2,250 1,200 1,725 2,700 7,875

3,750 2,000 2,875 4,500 13,125 Engineering designs

Total product-level costs $1,800 $1,800 $1,800 $1,800 $7,200

Facility-Level Costs Product-Level Costs+A42

Design ($600 per design) $1,800 $1,800 $1,800 $1,800 $7,200

3 3 3 3 12 Maintenance 2,600 2,600 2,600 2,600 10,400

Property taxes 1,000 1,000 1,000 1,000 4,000

Insurance 1,400 1,400 1,400 1,400 5,600

Supervisory salaries $14,00 $14,00 $14,00 $14,00 0 $56,000

Depreciation 15,000 15,000 15,000 15,000 60,000

Utilities 2,500 2,500 2,500 2,500 10,000


Life-cycle Budgeting

A relatively recent focus of the budgeting process

is to plan for all of the costs that will be incurred throughout a product's life cycle, before a

commitment is made to the product. Product life-

cycle costs encompass the following three phases

in a product's life cycle.


Development (product planning, concept design


preliminary design. detailed design, and testing)

   Manufacturing (conversion activities)

   Logistics (distribution and customer service)

Life-cycle Budget Example


Budgeted Costs

2X12 2X13 2X14 Total Item Units produced

Development costs $195,000 $195,000

Manufacturing costs 240,000 360,000 600,000 40,000 60,000

After-purchase costs   80,000 120,000 200,000

Annual subtotal $195,000 $320,000 $480,000$995,000

Logistics costs   80,000 120,000 200,000 Annual total $195,000 $400,000 $600,000 $1,195,0 00

Kaizen Budgeting


  Kaizen budgeting incorporates expectations for continuous improvement into budgetary estimates. Kaizen costing determines target cost reductions for a period, such as a month. Thus, variances are the diferences between actual and targeted cost reduction. The objective is to reduce actual costs below




Zero-base Budgeting

  ZBB begins with a zero balance and formulates objectives to be achieved. All activities are analyzed for the current year. The manager may decide to fund an existing project as last year after his or her yearly review. However, it is most likely that funding will be increased or decreased based on new information. It is also possible that an alternative way may be used for that project based on current cost or time considerations


Developing assumptions


Ranking proposals


Appraising and controlling


Preparing the budget

   Identifying and evaluating ZBB Process


   With responsibility must come authority to carry out decisions. Proft planning requires that managers be held accountable for their results as long as they have

authority over the items in question.

If responsibility is assigned without

authority, the proft planning system

. fails and manager frustration occurs




  Responsibility accounting is the system for collecting and reporting revenue and cost information by areas of responsibility.


  It operates on the premise that managers should be held responsible for their performance, the performance of their subordinates, and all activities within their responsibility center.


Responsibility Centers

Responsibility centers can be one of the following types:

  Cost center. A cost center is the unit within the

organization which is responsible only for costs

   Investment center. An investment center is

the unit within the organization which is held

responsible for the costs, revenues, and related investments made in that center


Proft center. A proft center is the unit which

is held responsible for the revenues earned and costs incurred in that center


The Balanced Scorecard

  A Balanced Scorecard (BSC) is a set of performance measures --constructed for four dimensions of performance.






  Internal processes

   Learning and growth.


Balanced Scorecard

Dimensions Financial Operating income     Description Measures   Is the company achieving

fnancial goals? Cash fow from operations



Sales growth Return on assets Customer Is the company meeting Customer satisfaction   customer expectations? Customer retention New customer acquisition


Reduction of administrative expense       Internal Processes Is the company improving Defect rate Time to fll orders On-time delivery Market share       critical internal processes? Lead time Percent of practical capacity Material turnover Number of suppliers Growth improving its ability to Employee satisfaction Learning and Is the company Amount spent on employee training innovate? New product sales as a percent of Number of new products Employee retention Number of patents total sales


Balanced Scorecard –Web

Resources Web resources that you can log on to learn more about industry “best practices” or examples of successful implementations at other frms when developing measurement program

  The Balanced Scorecard Institute (

   American Productivity and Quality Center (

   Management Help (

  Performance Measurement Association (PMA)


Why Service industries?

There are two reasons why special attention should be devoted to budgetary planning and control techniques in the service industry

  First, planning and control are critical functions in all business, whether they produce and sell goods or provide services. Many service businesses have become more competitive in recent years

  Second, the practice of budgeting is

probably not as well developed in service

Common Six-step Pattern

  • A proft or target for the company is established.
  • An annual plan is developed that indicates expected revenues and expenses by the

    organizational segments and in total, by month.

    The cash budget is established.

  A planned statement of fnancial position is developed and tested against selected standards. Actual performance is measured against plan by

  • specifc levels of management position.
  • Corrective action is taken as deemed necessary.


Nonproft Organizations

Nonproft organizations can be broken down into three major types

  The frst is comprised of voluntarily supported organizations, such as hospi tals, churches, colleges, foundations, health and welfare agencies, and privately funded schools

  The second type includes organizations supported through tax assessments, such as government units and state-supported schools


The third type operates primarily for the beneft

of its supporters, such as cooperatives, country

clubs, and other community-based organizations.


Objective Of Financial



The objective of fnancial reporting is

accountability to the public rather than to investors. There is no proft

distribution. The accounting equation

associated with fund accounting is: Assets = Restrictions on Assets. A

nonproft entity may have a surplus or

defcit depending on whether revenues exceed expenditures


Some Goals of

Management Games

Improve decision making and analytical skills

  Facilitate participants’ understanding of the external environment simulated Interactively apply the knowledge, concepts, and skills acquired in various business courses

Develop awareness of the need to make decisions without

complete -information Improvise appropriately and adapt constructively from previously learned concepts, theories, and techniques

Develop ability to recognize the need for additional factual


Develop an understanding of the interrelationships of the

various functions within the frm and how these interactions


The Capstone Business


students optimize planning.

capability to evaluate alternate worst-case/best-case scenarios, to help

and analyze decision tactics in each round. Capstone.xls provides the Students use a Capstone spreadsheet, called capstone.xls, to create organized around several primary functional areas: Research and Development (R&D)

The Strategy menu in the capstone.xls spreadsheet is

Finance Production Marketing Human Resources Total Quality Management Several additional optional modules include: Labor Contract Negotiation

  Sample Individual

Participant Results Report




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