Chapter 25

Budgetary and Cost Control

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
1 Upper Saddle River, NJ 07458
 Budgeting Is a planning process.

Is the process of
Budgetary
regulating the operating
Control
budgets of the organization.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
2 Upper Saddle River, NJ 07458
 Purposes of Budgeting

Helps ensure the organization’s operations are

performed more efficiently.
Helps management maintain the cost-
effectiveness of the organization’s
operations.
Helps the organization better plan for the future.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
3 Upper Saddle River, NJ 07458
 Advantages of Budgeting
(1 of 2)

1. It requires adequate management consideration

of the organization’s policies.
2. It requires that department-level managers
develop practices that facilitate the attain-
ment of budgetary goals.
3. It requires that managers identify the
resources necessary for accomplishing the
organization’s goals.
Administrative Office Management, 8/e ©2005 Pearson Education, Inc.
by Zane Quible Pearson Prentice Hall
4 Upper Saddle River, NJ 07458
 Advantages of Budgeting
(2 of 2)

4. It helps management make accurate,

timely decisions regarding various
organizational operations.
5. It helps management determine which
functions are not operating efficiently.
6. It helps management determine which
functions are experiencing difficulty in
achieving goals and objectives.
Administrative Office Management, 8/e ©2005 Pearson Education, Inc.
by Zane Quible Pearson Prentice Hall
5 Upper Saddle River, NJ 07458
 Limitations of Budgeting

1. Because budgeting is based on estimates, the

validity of the budget is, to a large extent,
determined by the accuracy with which the
estimates are made.
2. The operating effectiveness of an organization is
clearly dependent upon how well management is
able to motivate employees to operate within the
budgeted allowances.
3. The effectiveness of the budget is, to a large extent,
dependent upon the accuracy with which budget
revisions are made.
Administrative Office Management, 8/e ©2005 Pearson Education, Inc.
by Zane Quible Pearson Prentice Hall
6 Upper Saddle River, NJ 07458
 Prerequisites for Successful Budgeting

Proper Organization
Financial Data
Commitment of Top Management

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
7 Upper Saddle River, NJ 07458
 Proper Organization

Requires the presence of these characteristics:

1. The proper group of tasks within functions,
definitive lines of authority, and areas of
responsibility.
2. Definitive lines of authority and areas of
responsibility.
3. Lines of communication.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
8 Upper Saddle River, NJ 07458
 Financial Data

Unless needed data are available, the basis for budget

development does not exist.
Types of financial data needed:
1. Number of units sold during the previous
financial period.
2. The relationship between the number of units
sold and the cost incurred in producing these
units.
3. Emerging financial trends.
Administrative Office Management, 8/e ©2005 Pearson Education, Inc.
by Zane Quible Pearson Prentice Hall
9 Upper Saddle River, NJ 07458
 Commitment of Top Management

For the process to work well, management

must be committed to the use of the
budget as a control mechanism.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
10 Upper Saddle River, NJ 07458
 Elements of Budget Preparation

Determining the Budget Period

Developing the Budget
Revising the Budget

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
11 Upper Saddle River, NJ 07458
 Determining the Budget Period

Involves determining the length of the period,

which generally coincides with the organization’s
fiscal period.
Length should be sufficiently long to
compensate for any seasonal fluctuations.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
12 Upper Saddle River, NJ 07458
 Developing the Budget

Two types of budgets:

Departmental Is a unit budget.
Budget

Master Is a composite
Budget of unit budgets.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
13 Upper Saddle River, NJ 07458
 Responsibility for Budget Preparation
Must Be Assigned

In larger organizations, it is often the responsibility

of the controller or treasurer.
In other organizations, it is often the responsibility
of the vice president who is concerned with the
organization’s financial areas.
A budget committee is also involved in many
instances.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
14 Upper Saddle River, NJ 07458
 Types of Office Costs
(1 of 2)
Costs that remain constant
Fixed Costs regardless of the number of
units produced.
Rent, insurance, and taxes are examples.
Costs vary proportionately in
Variable Costs relation to the output levels.

Materials and supplies are examples.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
15 Upper Saddle River, NJ 07458
 Types of Office Costs
(2 of 2)

Costs increase as production

Semivariable increases but not in a direct
Costs proportion to production
increases.
Photocopier charges are an example.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
16 Upper Saddle River, NJ 07458
 Guiding Principles of Budget Preparation

1. Employee participation in budget preparation

is advantageous.
2. Budget should reflect realistic estimates of
operating costs.
3. Budget must provide for unforeseen
circumstances.
4. Employees should feel committed to the
budget.
Administrative Office Management, 8/e ©2005 Pearson Education, Inc.
by Zane Quible Pearson Prentice Hall
17 Upper Saddle River, NJ 07458
 Revising the Budget

Is generally required because of uncontrolled or

unforeseen circumstances that require the
expenditure of the organization’s financial
resources.
Techniques for Revising
the Budget
Periodic review
Progressive review
Moving review
Administrative Office Management, 8/e ©2005 Pearson Education, Inc.
by Zane Quible Pearson Prentice Hall
18 Upper Saddle River, NJ 07458
 Periodic Review

Budget is revised at predetermined times for the

remainder of the year.
Budget can be reviewed every month, every two
months, every quarter, etc.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
19 Upper Saddle River, NJ 07458
 Progressive Review

Uses standard time spans, perhaps 6 months.

Involves revising the budget at specified times and
for a constant length of time.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
20 Upper Saddle River, NJ 07458
 Moving Review

Budget is revised every month.

As one month is completed, the same month for the
next year is included in the revision.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
21 Upper Saddle River, NJ 07458
 Zero-Based Budgeting
(1 of 2)

Is a budgeting concept that requires the re-

evaluation of every program and expenditure
each time a year’s budget is prepared.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
22 Upper Saddle River, NJ 07458
 Zero-Based Budgeting
(2 of 2)

Involves these steps:

1. Describe each discrete organizational activity
in a decision package.
2. Evaluate and rank these decision packages in
terms of a cost-benefit analysis.
3. Allocate resources on the basis of need.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
23 Upper Saddle River, NJ 07458
 Preparing the budget report is a frequent
part of budgetary control.
Guidelines to Follow When Preparing
Budget Reports
1. Exception situations should be pointed out.
2. When presenting figures in a report, a
comparison base should be given.
3. To assist the reader, information should be
summarized whenever possible.
4. When appropriate, reports should include
interpretative information.
5. Reports should be standardized as much as
possible.
Administrative Office Management, 8/e ©2005 Pearson Education, Inc.
by Zane Quible Pearson Prentice Hall
24 Upper Saddle River, NJ 07458
 Common Sections of Budget Reports

Purpose of the Report

Presentation of Financial Data
Summary
Conclusions
Recommendations

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
25 Upper Saddle River, NJ 07458
 Cost Control

Is concerned with the expenses incurred in

performing various office operations.
Is also concerned with keeping expenditures as
low as possible.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
26 Upper Saddle River, NJ 07458
 Objectives of Cost Control

1. To develop standard costs for various office

operations.
2. To develop, within the employees, a desire to
be cost conscious.
3. To assist in the development of efficient
operating procedures.
4. To allocate the costs of operations to the
appropriate functions.
5. To identify inefficient operations.
Administrative Office Management, 8/e ©2005 Pearson Education, Inc.
by Zane Quible Pearson Prentice Hall
27 Upper Saddle River, NJ 07458
 Techniques for Controlling Office Costs

Standard Breakdowns

Standard Costs
Cost Analysis Studies

Taking Corrective Action

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
28 Upper Saddle River, NJ 07458
 Cost Breakdowns

This technique involves determining what

percentage of the total cost of an operation
is classified as a salary or a labor cost, for
example.
Includes Several Categories
Salaries
Supplies and/or Materials
Overhead
Administrative Office Management, 8/e ©2005 Pearson Education, Inc.
by Zane Quible Pearson Prentice Hall
29 Upper Saddle River, NJ 07458
 Standard Costs

This technique involves determining the unit costs

of various office operations.
Once the unit cost is determined, it can be compared
with comparable standard costs.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
30 Upper Saddle River, NJ 07458
 Cost Analysis Studies

This technique involves comparing the cost of a

current period’s operations with those of a prior
period.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
31 Upper Saddle River, NJ 07458
 Taking Corrective Action

When analysis indicates that corrective action is

necessary, those in positions of responsibility
must take corrective action.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
32 Upper Saddle River, NJ 07458
 Areas for Which Office Costs Can
and Should Be Controlled

Personnel
Supplies and Materials
Equipment
Work Processes
Overhead

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
33 Upper Saddle River, NJ 07458
 Personnel

The cost of personnel is likely to be the

largest budget item; therefore, personnel
costs provide greater flexibility than do
other areas.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
34 Upper Saddle River, NJ 07458
 Supplies and Materials Costs

This involves keeping supplies and materials

costs to a minimum, minimizing the number
of different forms used, and using equipment
that facilitates the interchange of supplies.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
35 Upper Saddle River, NJ 07458
 Equipment Costs

This involves purchasing reliable equipment

as well as the early trade-off of equipment
that has higher-than-average repair charges.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
36 Upper Saddle River, NJ 07458
 Work Process Costs

Special attention should be devoted to

developing efficient work processes.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
37 Upper Saddle River, NJ 07458
 Overhead Costs

Because some overhead costs are variable,

controlling them should be a conscious
effort of employees.

Administrative Office Management, 8/e ©2005 Pearson Education, Inc.

by Zane Quible Pearson Prentice Hall
38 Upper Saddle River, NJ 07458