needed. If, however, the local currency exchange rate strengthens compared to the
budgeted exchange rate assumption, higher-level authorization normally would be
required.
The reporting mechanism discussed in the foregoing paragraphs represents a con-
trol approach that stresses parent company (including division and region) emphasis
on the total company budget, with relatively weak control needs over local variances
due to fluctuating exchange rates.
(c) Status Report Illustration: Current Exchange Rates. A different control environ-
ment exists if the parent company wants to exercise more direct controls over an af-
filiate’s budgets, including all the vagaries of changing exchange rates. In that case,
the budgeted exchange rate is used for the capital budget only, while appropriations
(like expenditures) are recorded as the exchange rate in force on the day, or in the
month, of recording the appropriation.
This approach has the advantage of coming somewhat closer to real “actual” data,
but it has the disadvantage that budgets have to be adjusted and projects may have to
be abandoned solely because of shifts in the exchange rate.
The difference between the two control approaches depends, of course, upon the
degree and frequency of exchange rate changes. If we use the same LC data as were
illustrated in Exhibit 25.6 and if we assume that the average actual exchange rate in
20X0 was PC 1 = LC 2.2, the results are those shown in Exhibit 25.7 (the LC
amounts are the same as the “Local Analysis” in Exhibit 25.6). Comparing the two
exhibits, we note that, while the PC amounts are different, the direction of the vari-
ances from budget are the same and, as before, marketing underappropriated its
budget in PC terms, while in actuality, in LC terms, a higher amount was appropri-
ated than had been budgeted.
(d) Assessment of Alternative Approaches. No preference can be expressed for one
or the other alternative control approach. Capital budgets represent intended capital
programs. Other considerations entering into a decision regarding which control pro-
25 • 10 MULTINATIONAL BUDGETING AND CONTROL SYSTEMSAFFILIATE B
Capital Budget Status Report
Appropriations
Year Ended December 31, 20X0
PC LC
Actual Budget Variance Actual Budget VarianceManufacturing 2,600 3,000 400 5,700 6,000 300
Marketing 4,700 5,000 300 10,400 10,000 (400)
Transportation _2,200 __2,000 (200) __4,800 __4,000 (800)___
Total 9,500_ 10,000____ (500)____ __20,900__ 20,000____ (900)____
Note:The actual exchange rate is PC 1 = LC 2.2.
The budget exchange rate is PC 1 = LC 2.
Exhibit 25.7. Capital Budget Status Report: Appropriations.