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 controlis concerned with ensuring that actual financial results are
in line with targets. An important part of thisfeedback 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:
žA favourable variance occurs where income exceeds budget and/or expenses
are lower than budget.
žAn 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),