25 • 1

CHAPTER

25

MULTINATIONAL BUDGETING AND

CONTROL SYSTEMS

Frederick D. S. Choi

New York University

Gerald F. Lewis

Mobil Corporation (retired)

CONTENTS

25.1 Introduction 2
25.2 Forecasting Exchange Rates 2
(a) Floating Exchange Rates 2
(b) Fundamental Approach 3
(c) Technical Approach 3
25.3 The Multinational Organization 3
(a) Corporate Structure 3
(b) Corporate Level and
Operating Divisions 4
25.4 Basic Approaches to Capital
Budgeting and Profit Planning 5
(a) Basic Approaches 5
(b) Guidance 5
(c) Local Conditions 5
25.5 Building the Capital Budget 5
(a) Objectives 5
(b) Annual and Total
Requirements 6
(c) Interface Between Objectives
and Capital Budget 6
(d) Determination of Exchange
Rates 6
(e) Capital Budgets Illustration 6
(i) Functional Elements 6
(ii) Timing of Cash
Expenditures 7
(iii) Regional Budget
Retention 7
25.6 Controlling the Capital Budget 8
(a) Budget Controls 8
(b) Status Report Illustration:
Fixed Exchange Rates 9
(c) Status Report Illustration:
Current Exchange Rates 10

(d) Assessment of Alternative

Approaches 10

25.7 Building the Profit Plan 11

(a) Income Forecasting: The Profit

Plan 11

(b) Development of the Profit

Plan 11

(i) Local Currency-Based

Income Statement 11

(ii) Conversion of Income

Statement to U.S. Basis 12

(iii) An Affiliate’s Profit

Plan 12

25.8 Profit Planning Controls 12

(a) Periodic Income Reports 12

(b) Income Comparison 13

(c) Variance Analysis 14

(d) Local Variance Analysis:

Illustration 15

(e) Variance Analysis for Parent

Company Use 17

(i) Functional Currency

Determination 17

(ii) Analysis If Functional

Currency Is That of

Parent Company 17

(iii) Analysis If Functional

Currency Is That of Local

Company 18

(f) Assessment of Variance

Analysis Approaches 21

(g) Other Profit Plan Control

Aspects 22

25.9 Summary 22