February 29, 2012

February 16, 2012

Budget, Budgeting and Budgetary Control


A budget is a formal quantitative expression of management plans.
Budgets can be made by managers at any level including a single person managing a machine or operating a machine. In the context of business, budget may have revunue, expenses and profits, all in a single statement. But one can think of a budget for revenues alone, budget for expenses alone.

Master Budget

Master budget for a big organization summarizes the goals of all subunits of an organization - either business divisions if the company is organized along divisional lines or managerial functions if the company is organized along functional lines.
The master budget consists of expected or projected income statement, balance sheet, and a cash flow statement, along with supporting schedules.

Benefits of Budgeting or Imperative for Budgeting

The advocates of budgeting state that the process of preparing budget forces executives to become better managers. Budgeting schedule of a company puts planning where it belongs - in the forefront of every manager's mind. It also forces him to review his performance in the last period and identify good practices that enhanced performance and issues that contributed negatively to performance.
The formal budgeting system has the following major benefits.
1. Budgeting due to its formal time table or schedule compels managers to think ahead apart from taking care of their current activities.
2. Budgeting, due to its approval and authorization  by the superiors, provides definite expectations that are the best framework for judging subsequent performance.
3. Budgeting helps in coordinating the various departements of the organization. The budget harmonizes the goals (objectives) of the individual departments into the organization wide goals (objectives).
Budgetary control at department level is encouraging department level personnel to plan their operations for the forth coming period. Both outputs and inputs are to be planned. If possible outputs and inputs are converted into revenues and costs.

The accounting system of the company will prepare the actual revenues and costs generated at the end of the period as well as during the period. The department managers have to responsibility to carry out the day to day activities to achieve the best possible results with their plan/budget as the guiding document.

Budgets can be made flexible so that cost estimates are in relation to the output produced.

Variance analysis can be done to pin point the variables that changed during the period and their effect on actual results.

Budgetary control system facilitates participation of department managers as well as senior level managers in explicitly planning for the future. The plan can be optimized with various optimization techniques.

These techniques include linear programming (for product mix problems), transportation (for planning transport of finished goods) and assignment (assigning machines for jobs or operators for jobs) and other operations research techniques. A formal budgeting system can question the department managers on whether they have applied the optimization techniques or not and where necessary advise them to use those techniques and provide specialist support in cases where necessary.


Horngren, Charles, T., Gary L. Sundem, and William O. Stratton, Introduction to Management Accounting, 13th Ed., Prentice Hall, 1999.




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For Further Study or More Information


 Knol no. 62

February 6, 2012

Principles of Efficiency - Harrington Emerson

Harrington Emerson contributed to the systems efficiency focus of industrial engineering. His book Twelve Principles of Efficiency was classic.

He discussed efficiency design of organization through 12 principles:

1. Clearly defined ideals.
2. Common sense
3. Competent counsel
4. Discipline
5. The fair deal
6. Reliable, immediate and adequate records
7. Despatching
8. Standards and schedules
9. Standardized conditions
10. Standardized operations
11. Written standard-practice instructions
12. Efficiency-reward

Standards and standardization as a basis for efficiency was strongly advocated by him. Nearly two hundred companies adopted various features of the Emerson Efficiency system, which included production routing procedures, standardized working conditions and tasks, time and motion studies, and a bonus plan which raised workers' wages in accordance with greater efficiency and productivity [Guide].

Harrington Emerson (1853-1931) was one of America's pioneers in industrial engineering and management and organizational theory. His major contributions were to install his management methods at many industrial firms and to promote the ideas of scientific management and efficiency to a mass audience [Guide].

After a successful tenure as a general manager of a small Pennsylvania glass factory in 1900, Emerson resolved to take up efficiency engineering as a profession. Through meetings of the American Society of Mechanical Engineers, he became personally acquainted with the pioneering work of Frederick W. Taylor, the founder of scientific management, ans assimilated much of the methodology for standardizing work and remunerating workers in accordance with productivity.

Between 1907 and 1910, the Emerson Company  consulted over 200 corporations, submitting reports for which they were paid twenty-five million dollars. Emerson efficiency methods were applied to department stores, hospitals, colleges, and municipal governments. Between 1911 and 1920 Emerson's firm averaged annual earnings of over $100,000.00.

To distinguish his methods from those of Taylor, Emerson published three books: Efficiency as a Basis for Operation and Wages (1909); The Twelve Principles of Efficiency (1912); and Colonel Schoonmaker and the Pittsburgh and Lake Erie Railroad (1913).

The 1910 Eastern Freight Case brought much wider public attention to Emerson's ideas.  Emerson served as Louis D. Brandeis's star witness in the appeal of major eastern trunk railroads to the Interstate Commerce Commission for a rate increase. Emerson testified that the railroads wasted one million dollars daily by not applying efficiency methods. His brief against the railroads won wide acclaim and marked the growth in public awareness of scientific management.  Emerson became known as the "High Priest of Efficiency." He spoke more frequently about his effficiency ideas to businessmen, civil organizations, and management and engineering students. In 1912, Emerson helped to found the New York Efficiency Society which promoted and disseminated the ideals of reform through scientific management. Emerson joined  other progressive engineers in founding the Society of Industrial Engineers in 1917.

Through the decade of the 1920s, Emerson publicized the potential for promoting efficiency on a global scale. He was one of eighteen prominent engineers chosen by Secretary of Commerce Herbert Hoover in 1921 to serve on a committee investigating the elimination of waste in industry.

Emerson documents are available in Pennsylvania State University Library. http://www.libraries.psu.edu/speccolls/FindingAids/emerson.frame.html for reference.

Guide, http://www.libraries.psu.edu/speccolls/FindingAids/emerson.frame.html

Access the books by Emerson from Archive.org
The Twelve Principles of Efficiency (1912)
Efficiency as a Basis for Operation and Wages

Quotations by Harrington Emerson

"The twentieth century dawns with as yet unaccomplished task of conservation, of eliminating wastes-wanton and wicked wastes of all kinds, wastes that make our civic governments a by-word, our destruction of natural resources a world scandal, our complacent industrial efficiency a peculiarly national disgrace, of all nations, we Americans ought to know better."
The Twelve Principles of Efficiency (1912) P.9]

"Efficiency like hygiene is a state, an ideal not a method" P.23

Strenuousness and efficiency are not only not the same, but are antagonistic. To be strenuous is to put forth greater effort; to be efficient it to put forth less effort.  (P.39)

"He did not know that efficiency reward  ought to be preceded by the careful, systematic, and expert application of  eleven other principles, of which "Wages" is a minor element of one."  P.41
Accounting in all its phases is a minor division of one of the twelve efficiency principles, trustworthy, immediate and adequate records. P.43
An efficiency engineer ought similarly to act as funnel, being equipped to gather from all available sources whatever is of operating value for the organization he is advising. P.54
If all the ideals animating all the  organization from top to bottom could be lined so as to pull in the same straight line, the resultant would  be a very powerful effort. P.60
The railway line between st. Petersburg and Moscow cost $337,000 a mile for a distance of 400 miles. In Finland similar line was made for $23,000 a mile P. 65 (Sentence rewritten)
The ideas of one company are that its customers shall be treated with absolute fairness, that its employees shall be of higher skill and be better paid than those of neighboring competitors, that they shall have permanence of employment.P.84
There are only a dozen shops in the United States in which any scientific standards of man and machine efficiency exist. P.111
The legal counselor does not, cannot know all the laws and proper legal formalities in every state, and he therefore employs junior and often senior counsel. Similarly a counselor as to efficiency, would not pretend to be expert as to all efficiency, but it would be his duty to be in touch both as to men and scientific reports with all that was latest and best and make it all available for his employer whether individual or corporation. P.129

There is nothing men will not attempt when great enterprises hold out the promise of great rewards. - Livy

Out of eighteen items of operating costs, as distinguished from selling costs, only one is directly influenced by the worker, that is time-quality of the work. P.355

Efficiency reward is not a money payment, this is only one of its myriad forms. Men have been willing to die for a smile.  P.365-66

The ideal that inspires the formulation of the principles of efficiency is elimination of waste, of wastes of all kinds resulting finally in wastes of the collective soul. P.371

The ideal that inspires the formulation of the principles of efficiency is elimination of waste, of wastes of all kinds resulting finally in wastes of the collective soul. P.371

The ideals of United States Steel Corporation

The ideals of the corporation seem to have been
(1) Law abidence
(2) Rational publicity
(3) Steady prices at a high level
(4) maximum tonnage
(5) Permanence for its own business by the purchase of large ore and coal reserves
(6) Rapid improvement of the properties so as to make them worth the capitalized value
(7) Maintenance of a high level of wages
(8) Identification of the worker with the profits of his work, thus increasing his interesting in his occupation.

Does the Steel Corporation know as to every detail what ought to be as well as it knows what has been? P.391

Efficiency in Printing and Packaging Processes A Webinar - 2 Parts




Industrial Engineering Knowledge Revision Plan - One Year Plan

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