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.
All the organization’s policies (e.g. marketing) must be formulated and co-ordinated to achieve the sales and
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:
2. Production budget
3. Capital expenditure
(planned spending on fixed assets, things kept in the business for a long time like
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
(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
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.
“If you can’t measure it, you can’t control it”
- Meg Whitman (eBay’s ex-boss,
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”.
“Competition is the keen cutting edge of business, always shaving away at
- 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
“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.
Thomas Johnson (pictured right above) and Robert Kaplan (pictured right below),
Relevance Lost: The Rise and Fall of Management Accounting
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