“Budgetary control refers to how well managers utilize budgets to monitor and co
ID: 2571346 • Letter: #
Question
“Budgetary control refers to how well managers utilize budgets to monitor and control costs and operations in a given accounting period. In other words, budgetary control is a process for managers to set financial and performance goals with budgets, compare the actual results, and adjust performance, as it is needed."
Give 2 examples of each budgetary control.
1)A control technique whereby actual results are compared with budgets.
2)Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.
Explanation / Answer
Examples for Budgetary control:
Budgets help in controlling cost. Budgeted figures are compared with actual results and variances are noted and analysed. The variance analysis is used to take corrective action, in the next period.
Let us consider the data for a hypothetical company. The Oct17 budgeted and actual results are given. Alongside, Year to date (YTD) budget & actual figures are given. The variance of Oct17 actual Vs budget is given & percentage of variance is given.
For eg., Personnel cost in Oct17 is 38.87 whereas the budget figure is 26.62m. The cost has exceeded by 12.25m, which is 46% deviation. The reason when analyzed is reported as follows;
One time performance bonuses paid in oct17: 7.00
Cost increase due to new project recruitment: 4.00
Staff welfare expense included in personnel cost: 1.25
Total deviation in Personnel cost: 12.25m (7+4+1.25)
This is used in controlling the cost in Nov17.
Normally, the deviations which are less than 3% (for eg.,) is ignored, whereas more sharp deviations are carefully analyzed.
XYZ Inc
Oct'17
YTD
Oct'17 Variance with Budget
% Variance
In $millions
Budget
Actual
Budget
Actual
Income
330.79
357.89
2,140.51
2,300.39
27.09
Rent
37.65
33.38
256.75
259.19
(4.27)
-11%
Power n Fuel
2.91
3.82
21.40
24.80
0.91
31%
Personnel Cost
26.62
38.87
157.21
190.28
12.25
46%
Total Direct fixed cost
67.17
76.07
435.37
474.27
8.90
13%
Labour Charges
54.29
65.99
358.08
381.68
11.70
22%
Vehicle charges
130.96
130.96
878.84
878.84
-
0%
Security Charges
12.69
8.85
75.17
76.62
(3.84)
-30%
Repair & Maintenance
1.93
5.65
12.51
18.40
3.72
193%
Hire Charges
4.52
5.25
31.46
31.39
0.73
16%
Other expenses
9.00
9.09
47.78
65.18
0.09
1%
Total Direct variable cost
213.39
225.79
1,403.84
1,452.11
12.40
6%
Total WH Cost
280.56
301.86
1,839.21
1,926.37
21.30
8%
In addition to the corporate budgets, divisional budgets are prepared and it is the responsibility of the divisional managers to ensure that that there are no deviations. In case of deviation from the actual budgets, then it is his responsibility to take corrective action. If it is not possible to correct the situation causing the deviation, the budget figure is suitably revised, with the approval of Top management.
It is illustrated in the below example:
Electronics category
Oct'17
YTD
Oct'17 Variance with Budget
% Variance
$ millions
Budget
Actual
Budget
Actual
Income
14.06
14.15
91.06
92.35
Rent
2.36
2.36
13.58
14.16
0.00
0%
Power n Fuel
0.16
0.20
0.97
1.31
0.04
28%
Personnel Cost
1.06
1.06
6.24
5.91
-
0%
Total Direct fixed cost
3.58
3.62
20.80
21.38
0.05
1%
Labour Charges
1.34
1.33
8.82
7.81
(0.01)
-1%
Vehicle charges
5.64
5.64
40.71
40.71
-
0%
Security Charges
0.25
0.24
1.29
1.86
(0.01)
-3%
Repair & Maintenance
0.16
0.20
0.64
0.61
0.04
28%
Hire Charges
0.06
0.05
0.19
0.41
(0.01)
-22%
Other expenses
0.52
0.52
2.50
3.12
(0.00)
0%
Total Direct variable cost
7.97
7.95
54.14
54.52
(0.02)
0%
Total WH Cost
11.55
11.57
74.95
75.89
0.02
0%
In this case, the Power & Fuel has increased in Oct17, by 0.04m (0.2-0.16). When analysed for the deviation, it is noted that till Sep17, the whole building was shared by 2 divisions. As one of the division has vacated the building near mid of the month, the power cost has increased. Here, it is not possible to correct the deviation, unless the budget is revised going forward.
On the other hand, the Repair & Maint cost has increased by 0.04, due to usage of unlisted vendors for repair works, which had pushed up the cost. Here, the division manager is responsible for ensuring that it is not repeated going forward.
XYZ Inc
Oct'17
YTD
Oct'17 Variance with Budget
% Variance
In $millions
Budget
Actual
Budget
Actual
Income
330.79
357.89
2,140.51
2,300.39
27.09
Rent
37.65
33.38
256.75
259.19
(4.27)
-11%
Power n Fuel
2.91
3.82
21.40
24.80
0.91
31%
Personnel Cost
26.62
38.87
157.21
190.28
12.25
46%
Total Direct fixed cost
67.17
76.07
435.37
474.27
8.90
13%
Labour Charges
54.29
65.99
358.08
381.68
11.70
22%
Vehicle charges
130.96
130.96
878.84
878.84
-
0%
Security Charges
12.69
8.85
75.17
76.62
(3.84)
-30%
Repair & Maintenance
1.93
5.65
12.51
18.40
3.72
193%
Hire Charges
4.52
5.25
31.46
31.39
0.73
16%
Other expenses
9.00
9.09
47.78
65.18
0.09
1%
Total Direct variable cost
213.39
225.79
1,403.84
1,452.11
12.40
6%
Total WH Cost
280.56
301.86
1,839.21
1,926.37
21.30
8%
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