Budgets in manufacturing companies
Text adapted by Hugues Boisvert, from chapter 11 of the book La comptabilité de management, prise de decision et contrôle, 3e edition, ERPI, 2004, p. 278-292, written by Hugues BOISVERT, Claude laurin and Alexander mersereau (HEC Montreal).
Table of contents
2. Budgetary styles
3. The budget process in a manufacturing company
4. Comprehensive example of a budgetary process of a manufacturing company
5. Budgetary management challenge
1 The origin of budget
The word budget arises from the French “bougette”, a small leather case used in France by finance officials to carry state plans. Eventually the term came to refer to the plans themselves although these early documents did not resemble budgets as we know them today. Rather, budgets as management tools first appeared in government. In the United States, budgets were introduced at the municipal level in the late 1800’s to limit the ability of the state to tax and spend and by 1919, forty four US states had adopted some form of state budget. The first US national budget was transmitted to Congress in 1921. Thus, the initial role of budgeting was to control spending in the public sector.
It was not until the 1920’s however that budgeting evolved as a control tool for managing business enterprises. This occurred first in the United States mainly due to the influence of Frederick Taylor and the Scientific Management movement but also thanks to the demonstrated efficacy of public budgeting.
Budget innovation in the private sector spread quickly to a large variety of industries, including oil, railroads, banks, newspapers, construction, metal working and department stores. A survey conducted in 1930 among 294 large US industrial companies revealed that 55% had budgets of some kind, although few reported using budgets throughout the organisation. In 1941, another study also estimated that roughly half of large well established companies in the US used budgetary control in some form, while another 1958 survey reported practically universal use of budgeting by large US companies. Canadian practice in budgeting is likely to have compared closely to that in the US. It would appear that budget use among European companies came somewhat later, influenced by the US experience.
Today, budgets are used as management tools covering the full spectrum of planning and control perspectives.
2 The role of budgets
Over time budgets focus on both organisational planning and control. Planning activities occur in the months leading up to the budget period. Control activities refer to measurement reporting, intervention and follow-up during the budget period, that is, all activities designed to get back on track as initially planned on budgets. This dual nature budgeting is evident in early budget literature. As early as 1928, management accounting literature defined budgetary control as “the procedure by which the plans of various departments are drawn up and co-ordinated into a plan or program for the business as a whole”  and also as “ the use of this instrument to direct business operations.”
It is likely however that early budgeting practice emphasised control over planning. Frederick Taylor compared the budget to a thermostat. In this metaphor, the planning function was relatively straightforward since the desired temperature was set and left alone. The control function was a continuous cycle of measuring, comparing and taking corrective action. This emphasis on control makes sense given the circumstances of the time. Factories in the early part of the 20th century employed many workers, however work itself was deskilled as much as possible to small easily learnable tasks. The planning activity...