This paper examines the flexible budgeting process used by Procter & Gamble, contrasting it with traditional fixed budgeting approaches. It discusses the core advantages of flexible budgets, including their ability to adjust variable costs and revenues in response to changes in sales volume. The paper also covers technical aspects such as standard hours, the linear cost assumption, and appropriate formatting for flexible budget operating statements. Additional sections address the use of flexible budgets at the planning stage and for managerial performance appraisal, concluding with an overview of how marketing expenditures are classified into variable, constant, and semi-variable cost categories under the flexible budget method.
Procter & Gamble uses a tailored budgeting process that is flexible enough to respond to the ever-changing realities of the business world. This approach is preferred over a standard, rigid budgeting process that cannot accommodate the observable dynamism of modern commerce. The budgeting process involves the flexible roll-out of forecasts that are adaptive to time-dependent events in the market (Blocher, Stout, Cokins, & Chen, 2008).
Realistic long-term goals are used to achieve sustainable growth. Depending on the overall contribution of a business unit, different targets are set across the full budget portfolio. Research, development, and innovation are incorporated into plans and budgets in order to avoid haphazard decision-making. This approach ensures that a balance is struck between accuracy in speculation and the pursuit of long-term discoveries (Blocher et al., 2008).
The ineffectiveness of fixed budgets for control purposes can be addressed by using a flexible budget instead. A flexible budget is designed to change as a business's activity level increases or decreases (Welch, 2000).
When the volume of sales differs from the budgeted figure, it makes sense to revise the original budget's variable costs and revenues accordingly. For example, if actual sales volume is 10 percent higher than the original budget, variable costs should also be increased by 10 percent. Without this adjustment, differences between the budget and actual figures that are solely due to volume changes will mask the variances attributable to differences in purchase prices and usage efficiency (Welch, 2000).
Flexible budgets are particularly valuable for control purposes in the manufacturing industry because they can be used to isolate variances that are simply caused by actual sales volumes differing from the budget (Matsusaka, 2001).
Budgeted and actual sales volumes can be measured in units, tonnes, or litres when there is a single product. It becomes more difficult to find a single output measure when more than one product is involved. One solution is to use the standard time required to achieve a particular level of output. As expected, standard time is measured in standard hours and minutes (McKinsey, 2002). The official definition of a standard hour or minute is the amount of work achievable, at standard efficiency levels, within one hour or one minute (Axson, 2010). Standard time may relate to machine hours if all output passes through the same or similar machines, or to process hours if all output goes through the same process. In most cases, however, standard time relates to direct labour hours, whether for a manufactured product or a service.
Most costs vary with input-based activity levels — for example, direct wages vary with direct hours worked. However, the flexible budget allowance should be based on output measures, such as tonnes delivered or standard hours produced. This approach highlights the efficiency with which resources are used. Costs and revenues that vary with output should therefore be identified, and the budget amended to reflect actual activity before comparing it with actual costs and revenues (Axson, 2010).
"Costing formats, linear cost rules, and planning use"
"Applying flexible budgets to evaluate managerial performance"
In order to explain the application of the flexibility concept within the marketing expenditure budget, the marketing expenditure is principally divided into the following categories: salesmen's basic salary, salesmen's commission awards, office expenses, expenses aimed at promoting and selling products, advertising and public relations activity expenses, and post-sale service expenses (McKinsey, 2002).
According to expenditure characteristics and state — specifically, the dependence relationship between changes in total expenditure and the portfolio level — and with the quantity of salesmen held constant, the constant expenses include items such as salesmen's salaries and office space rent. Variable expenses include product promotion costs and salesmen's commission awards. Semi-constant expenses include after-sales service expenses as well as advertising and public relations activity expenses (Blocher et al., 2008).
Axson, D. A. J. (2010). Best practices in planning and performance management: Radically rethinking management for a volatile world. Wiley.
Blocher, E., Stout, D., Cokins, G., & Chen, K. (2008). Cost management. McGraw-Hill Companies.
Matsusaka, J. G. (2001). Corporate diversification, value maximization, and organizational capabilities. The Journal of Business, 74(3), 409–431.
McKinsey, J. O. (2002). Organization and methods of the Walworth Manufacturing Company. Journal of Political Economy, 30(3), 420–458.
Welch, I. (2000). Views of financial economists on the equity premium and on professional controversies. The Journal of Business, 73(4), 501–537.
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