GBS 520 :FINANCIAL AND

MANAGEMENT
ACCOUNTING

BY
BRYSON MUMBA
MBA, MAcc, FCCA, FZICA, DiCG, BSc(Hons)

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FINANCIAL AND MANAGEMENT
ACCOUNTING

UNIT 9
BUDGETARY CONTROL

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Outline

 What is budgetary Control

 Organising for budgetary control

 Monitoring Budgets and Reporting

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Budgetary Control cycle
 Budgetary
Budgetary Control
Control

Budgetary
Budgetary Control
Control isis thethe establishment
establishment of of Budgets
Budgets
relating
relating toto the
the responsibilities
responsibilities ofof executives
executives to to the
the
requirement
requirement of of aa policy,
policy, and
and the
the continuous
continuous comparison
comparison
of
of the
the actual
actual with
with thethe budgeted
budgeted results,
results, either
either toto secure
secure
by
by individual
individual action
action thethe objective
objective ofof the
the policy
policy or
or to
to
provide
provide aa firm
firm basis
basis for
for its
its revision.
revision.

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Organising for budgetary control

•Board of Directors responsibility:

• Ensure company survives and thrives
• Inform and approve strategy
• Ensure that strategy will result in
sustainable outcomes
• Satisfy itself that the Strategy and Business
Plans are not encumbered by risks
• Business Plans include Budgets

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Organising for budgetary control

• Management
• Budget Committee
• Comprise Key functional managers
• Develop budgeting time table and budget
instructions/manual
• Develops outline plans from the strategic objectives and the
Log Frame
• Departmental or divisional plans
• Key Assumptions:
• Inflation
• Interest rates
• Exchange rates
• etc
• Consider and approve the budget for presentation to the
Board:
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 Budgets
Budgets
Budget Organisation and Administration
c)c)Budget
BudgetOfficer:
Officer:Controls
Controlsthe
thebudget
budgetadministration
administrationThe
Thejob
job
involves:
involves:
··liaising
liaisingbetween
betweenthethebudget
budgetcommittee
committeeand
andmanagers
managers
responsible
responsiblefor forbudget
budgetpreparation
preparation
··dealing
dealingwith
withbudgetary
budgetarycontrol
controlproblems
problems
··ensuring
ensuringthat
thatdeadlines
deadlinesare
aremet
met
··educating
educatingpeople
peopleabout
aboutbudgetary
budgetarycontrol.
control.
-Communicating
-Communicatingdecision
decisionof
ofthe
thecommittee
committeetotofunctional
functional
managers
managers
-Ensure
-Ensurereports
reportsget
getto
tocommittee
committeewhen
whendue
due

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 MONITORING BUDGETS
• Budgets as a Standard for Evaluation
• Actual amounts are compared with budgeted
amounts

• Differences between actual and budgeted amounts

are referred to as budget variances

• Budget variances should be investigated when they

are material

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Investigating Budget Variances

Causes of Budget Variances

• Budget may not have been well conceived

• Conditions may have changed

• Managers may have performed particularly

well or poorly

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 Budget Variances
•Budget variances are the differences
between the budget and the actual results
•Variances can be:
• Favourable/Positive or
• Unfavourable/Negative

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 Budget Variances
• Favourable/Positive
• – if the actual outcome is BETTER than budget.
• For Revenue/Income a Variance is Favourable if the
Actual Income is higher than Budget
• For Expenditure a Variance is Favourable if the Actual
Expenditure is below Budget
• Unfavourable/Negative
• – if the actual outcome is WORSE than budget.
• For Revenue/Income a Variance is Unfavourable if the
Actual Income is LOWER than Budget
• For Expenditure a Variance is unfavourable if the
Actual Expenditure is HIGHER Budget

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VARIANCE CALCULATIONS

Budget Variances
Variance Type of
Budget Actual Variance % Variance
K K K %

Revenue 3,500 4,500 1,000 29%Favourable

Direct Materials 1,500 2,000 (500) -33%unfavourable
Contribution 2,000 2,500 1,500 75%Favourable
Operating
expenses 500 700 (200) -40%unfavourable
Profit for the Year 1,500 1,800 300 20%Favourable

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 Budget Variances
•Budget variances reflect:
• Quantity variances -- the difference between the
planned and the actual usage of inputs per unit of
output
• Cost variances -- the difference between the planned
and the actual price or cost per unit of the various
cost items

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 BUDGET VARIANCES CALCULATIONS -
EXAMPLES
Budget Actual Variance
Selling
Qty Price Total Qty Selling Price Total Total
Revenue 100 35 3,500 150 30 4,500 1,000

Price Variance = Actual Quantity x (Actual price - Budgeted Price) (750)

Quantity Variance = Budgeted Price x (Actual Quantity - Budgeted Quantity) 1,750

Total
Variance 1,000

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BUDGET VARIANCES
CALCULATIONS - EXAMPLES
Budget Actual Variance
Qty Unit Cost Total Qty Unit Cost Total Total
Direct Materials 15 100 1,500 25 80 2,000 (500)

Cost Variance Actual Quantity x (Budgeted Unit Cost - Actual Unit Cost) 500

Budgeted Unit Cost x (Budgeted Quantity - Actual

Quantity Variance Quantity) (1,000)
Total Variance (500)

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Behavioral Aspects of Budgeting

•Issues:
• Staff Participation in Budgeting
• Motivational Issues
• Incentives schemes

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Behavioral
Behavioral Aspects
Aspects of
of Budgeting
Budgeting

• Budgeting should be used to promote

productive employee behavior directed
toward meeting the organizational goals
• Participation in budgeting is viewed as a
process in which individuals (in
organisations) are involved in, and have
influence on, the setting of the budget

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Behavioral
Behavioral Aspects
Aspects of
of Budgeting
Budgeting

• 2 approaches to employee participation in

budgeting that represent possible ends on
a continuum:
•Top-down or imposed budget: Top
management decides on the budget and
communicates them to lower management
levels
•Bottom-up or participative budget: Managers
at all levels, and in some cases, even non-
managers, are involved in the budgeting
process 20
Behavioral
Behavioral Aspects
Aspects of
of Budgeting
Budgeting

• Advantages of participative budgeting

• Setting of realistic goals through a better
understanding of how goals can be achieved
• Ensure that important issues are considered
and employees understand the importance of
their roles in meeting organizational goals
• Provides opportunities for problem solving
and fosters commitment to agreed-upon goals

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 Behavioral
Behavioral Aspects
Aspects of
of Budgeting
Budgeting

• Disadvantages of participative
budgeting
• Time-consuming
• Competition occurs between units for a
given quantity of resource commitments
• Political behaviour and dysfunctional
reactions
• Pad budget estimates - Slack

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Developing
Developing Budgets
Budgets that
that Work
Work
 Emphasize the importance of budgeting as
a planning device.
 Encourage wide participation in budget
preparation at all levels of the
organization.
 Demonstrate that the budget has the
complete support of top management.
 Recognize that the budget is not
unalterable.
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 Developing
Developing Budgets
Budgets that
that Work
Work
 Use budget performance reports not
just to identify poor performance, but
also to recognize good performance.
 Conduct programs in budget education
to provide new managers with
information about the purposes of
budgets and to dispel erroneous
misconceptions that may exist.
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 Limitations
Limitations of
of Budgets
Budgets
• Conflicting uses – Planning and Evaluation
• Attainment of budget is just one financial
performance criterion
• A budget that is not overspent does not mean it
was well-spent
• Budgeting can lead to negative behaviour, e.g.
manipulation of figures
• Too tight a budget is a pressure device (stress)
• When you are controlled by a budget, you are not
controlling the business
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 MONTHLY BUDGET REPORTS -
FORMAT

    Current Month   Current year Cumulative   Prior Year - Cumulative

Account Account
Description Code Actual Budget Var Var %   Actual Budget Var Var %   Actual Var Var %

                             

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BUDGET REPORTS - FORMAT

• Budget reports should provide:

• Full detailed explanation of variances
• Quantity variances
• Cost variances
• Efficiency variances
• Also
• Future plans to address the reported variances
• Recommendations

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Exercises

• Q1
• Explain the purpose of a cash budget. What are the main uses of a cash budget?
• Identify the principal sources of data for the preparation of a cash budget
• Discuss the role of the following in the budgeting and budgetary control:
• Board of directors
• Management
• Budget committee
• Budget Officer
• Explain the term budgetary control.
• Discuss the term “limiting budget factor” and how it is used in budget
preparation.
• Sales are normally a limiting budget factor. Explain the factors that are used in
determining the sales forecasts.
• A Cash budget may result in a cash position where the closing cash balance is
negative. Explain the remedies that a company can take to address a negative
cash position.
• By the use of examples, explain the term flexible budgets.
• Discuss the behavioural aspects of budgeting
• Discuss the limitations of budgets

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