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Accounting for Managers Part 8

15 Budgetary Control. In this chapter, we describe the budgetary control that takes place in organizations through the techniques of flexible budgets and variance analysis. However, we caution against variance analysis in circumstances where this could conflict with more broadly based improvement strategies within the business. | 15 Budgetary Control In this chapter we describe the budgetary control that takes place in organizations through the techniques of flexible budgets and variance analysis. However we caution against variance analysis in circumstances where this could conflict with more broadly based improvement strategies within the business. The chapter also considers how cost control can be exercised in practice. What is budgetary control Budgetary control is concerned with ensuring that actual financial results are in line with targets. An important part of this feedback process see Chapter 4 is investigating variations between actual results and budgeted results and taking appropriate corrective action. Budgetary control provides a yardstick for comparison and isolates problems by focusing on variances which provide an early warning to managers. Buckley and McKenna 1972 argued The sinews of the budgeting process . are the influencing of management behaviour by setting agreed performance standards the evaluation of results and feedback to management in anticipation of corrective action where necessary. p. 137 Budgetary control is typically exercised at the level of each responsibility centre. Management reports show for each line item the budget expenditure usually for both the current accounting period and the year to date. The report will also show the actual income and expenditure and a variance. A typical actual versus budget financial report is shown in Table 15.1. There are two types of variance A favourable variance occurs where income exceeds budget and or expenses are lower than budget. An adverse variance occurs where income is less than budget and or expenses are greater than budget. It is important to look both at the current period which in the above example shows an underspend of 6 500 budget of 80 000 less actual spending of 73 500 226 ACCOUNTING FOR MANAGERS Table 15.1 Actual v. budget financial report Budget for this period Actual for this period Budget for the .