unit 2:BUDGET AND BUDGETARY CONTROL
Key unit competence: To be able to maintain budget and budgetary control within organization.
Introductory activity:
Questions:
1. Identify the different books brought by every participant in meeting
as seen on the above picture.
2. Suggest the main motif of the above meeting.
3. Enumerate the two responsibilities of chief Budget Committee in
budgeting process.
4. Suggest the above meeting is held in manufacturing business;
enumerate the list of participants according to their function in
budgeting process.
5. One of the purposes of the above meeting is to increase the
production of business. What is approach the participants shouldadopt to achieve the organizational objective?
Accounting Management | Student Book | Senior Six
2.1. Budget
Learning Activity 2.1
Questions
6. Outline the main stages of budgeting
Learning Activity 2.1
2.1.1. Definition of concepts
Budget: is a financial and quantitative statement, prepared and approved prior
to a defined period of time, of the policy to be pursued during that period for the
purpose of attaining a given objective.
Budget is also defined as a quantified plan in monetary terms, prepared and
approved prior to a defined period of time, usually showing planned income to
be generated and expenditure to be incurred during that period. It shows theprojections or future estimates of output, costs and revenues.
Management Accounting | Experimental Version | Student Book | Senior Six
This implies that the budget is a plan of management intentions to attain the
specified objectives.
a) Budgets: is an estimate of income and expenditure for a set period of
time for portion or part of business/ organization.
b) Budgeting: Is the process of preparing and using budgets to achieve
management objectives.
c) Budget manual: Is a book containing charts of organization, details of
budget procedures, account codes for items of expenditure and revenue,
timetables of process, clearly defines the responsibility of persons involved
in the budgeting system. Is a rule book which lays down the budgeting
procedures, organization structure, designations of responsibility and
budget time table.
d) Budget period: Is a specific period on which the budget is supposed
to be prepared for. The budget period may be one month, six months,
one year or five year. If the budgets are prepared for a longer period then
these budgets may be divided into short periods. These short periods are
known as control periods for the purpose of budgetary control.
e) Master budget: Is a budget contains various subsidiary or functional
budgets. It is the kind of summary of all budgets including even budgeted
profit, loss account and balance sheet.
f) Key factors: those are limiting factors or principal budget factors. Those
factors limit the activities of an organization. The key factors may include
limited demand, limited production capacity and shortage of labor,
shortage of material, less space or lack of finance… As the challenges,
the key factors affect the preparation of budgets. For example, if the
limiting factor is shortage of material or labor then the production cannot
be increased beyond some limits. Similarly, the limited demand will affect
the sales.
g) Budget committee: those are persons responsible for the coordination
and administration of the budget process. The chief executive of
this committee is the chairman who is usually a senior member of the
management. The other member of the budget committee may be
department heads.
h) Budget officer: is a person who is responsible for formulating the general
procedure of the budget preparation and submits to budget committee
the budgets for a specific period from departments.
i) Budget control: is a process of comparing actual results on regular
basis with budgeted results. The aim of budget control is not only to
check at which rate the budget was unrealistic in implementation pathwaybut also inefficiency use of available resources.
Management Accounting | Experimental Version | Student Book | Senior Six
2.1.2.Advantages / importance and disadvantages of budget
• Advantages of budget
Within an organization, each activity carried out presents certain benefits not
only to the business owner but also to the stakeholders. Certain advantages
include efficiency and improvement in the working of organization, easy way
of communicating the plans to the various units of organization. Assigning the
responsibilities through establishing the divisional, departmental or sectional
budgets, minimizing the possibilities of buck passing if the budget figures are
not met, a way of motivating managers to achieve the goals set for their units.
Serving as a benchmark for controlling on-going operations, developing a team
spirit, reducing wastage and losses by revealing them in time for collective
action, serving as a basis for evaluating the performance of managers and entire
business production process.
• Disadvantages of budget
Although high number of advantages of budget, some authors present its
disadvantages namely conflict arises because of competition for resource
allocation, budgets are perceived by the work force as pressure devices
imposed by to management, the pressure in the budgeting system may result
in inaccurate record keeping, manager may overestimate cost in order that
they will not be held responsible in future for over spending accompanied with
uncertainties in the system.
2.1.3. Skills needed for budget preparation
Skills budget preparation is a comprehensive program that focuses on the
essential skills required to understand the processes of costing and budgeting
within organizations. The structure designed to address all the relevant issues
concerning cost analysis, budget preparation and performance measurement.
The effective budget preparation requires not only knowledge but also skills. The
necessary skills to every participant (head of center) in budget preparation are
from field relating to accounting and finance, inventory planning, budgeting and
forecasting, cash flow management, accounting standards, capital structure,
sales and marketing, economic factors analysis.
2.1.4. Stages in budgeting process
Budgeting process is a set of stages along with every center manager has to
fulfill a certain number of responsibilities. The procedures involved in preparing
a budget will differ from organization to organization, but the step by stepapproach described is indicative of the steps followed by many organizations.
Management Accounting | Experimental Version | Student Book | Senior Six
The preparation of budget may take several periods where budget committee
may meet several times before an organization’s budget is finally agreed.
The main stages are:
– Budget formulation
• Communicating details of budget policy
The need to prepare budget and needed guidelines is communicated to those
people responsible for preparation of budgets. Management must ensure that
all policy effects should be made aware to staff who are participating in budget
making. Managers responsible for preparing the budget must be aware of the
way it is affected by the plan so that it becomes part of the process of meeting
the organization’s objectives.
• Determining the factors that restrict performance
This period represents the resource that constrains the productivity or capacity
of the firm. Management should strive and identify the factor that restricts
performance, since this factor determines the point at which the annual budgeting
process should begin. However, the proper identification of the budget factor
enables management to allocate resources in the most efficient manner.
Example of limiting factors may include machine, labor, and raw material.
– Budget approval
• Preparation of revenue /Sales budget
This provides a forecast of future sales or revenue to be made. This stage is a bit
burdensome because it involves the forecast and analysis of economic factors
or market forces. Since all other operational (functional) budgets are based
on the sales or revenue budget, it is important that the sales budget must be
prepared first.
• Preparation of budgets
The managers who are responsible for meeting the budgeted performance
should prepare the budget for those areas for which they are responsible. The
preparations of budgets should be a “bottom-up” process. All these budgets
are integrated and coordinate into a master budget
• Negotiation of budgets
The step at which the lower cadres who originate sectional budget usually
negotiates the budgets with their subordinates or with their supervisors in their
lines of command. At each stage of the process, the budget would be negotiated
between the manager who had prepared the budget and their superior untilagreed by both parties.
Management Accounting | Experimental Version | Student Book | Senior Six
• Coordination and review of budgets
The independent budgets prepared by different sections or department
managers should be reviewed and reconciled to ensure that they address
the same objectives. Such review may indicate that some budgets are out of
balance with others and need modification. The budget officer must identify
such inconsistencies and bring them to the attention of the manager concerned.
However, the revision of one budget may lead to the revision of all budgets.
During this process, the budgeted statement of profit or loss and budgeted
statement of financial position and cash budget should be prepared to ensure
that all the individual parts of the budgets combine into an acceptable master
budget.
• Final acceptance of the budgets
After the prepared budgets have been harmonized and accepted, they are
integrated into a master budget. A master budget is compressive plan which
include sales budget, production budget, material usage, labor cost and factory
overhead cost budgets.
– Budget execution
Once a budget is approved by the budget committee, business departments/
centers are authorized to spend money, consistent with the legal appropriations
for each line item. The budget execution includes different stages namely the
authorization stage , the commitment stage, the verification stage (this signifies
that goods have been delivered fully or partially according to the contract, or the
service has been rendered and the bill has been received), Payment authorization
or payment order stage, Payment stage (at this stage, the bill is paid by cash,
check, or electronic transfer), Accounting stage (the cash transactions are
recorded as complete in the books, which allows a reconciliation from the cash
based).
– Budget review
This covers a control stage which must be carried out in order to establish
whether the set of objectives or target are being achieved. The review exercise
will also involve the taking of action to address any anomaly. The important
point to note is that the budgeting process does not end for the current period
once the budget period begun; budgeting should be seen as a continuous and
dynamic process.
2.1.5. Techniques in budgetary process
Budgeting is a process with stages across the time. Due to the time for which thebudget is prepared, the budgeting process uses different techniques including
Management Accounting | Experimental Version | Student Book | Senior Six
economic techniques consisting to planning for future markets, technological
evolutions and environment parameters, statistical techniques focusing on linear
adjustment, correlation analysis, regression analysis; discounting techniques
basing on profitability analysis, investments choice (NPV, IRR) and accounting
techniques that point on cost accounting, financial accounting and variances
analysis.
2.2.6. Classification of budget
Budget can be classified basing on different attributes which includes the
function they serve, the time they are covering and the ability to change them
when need arises. Hence the following are classification.
a) Types of budget according to time
The period budgets cover a fixed period of time but continuous budgets are
updated and this procedure provides a base to review the budgets of longer
periods after shorter intervals. The type of budget according to time can be
prepared for one year (annual budgets); for six months (semi-annual budgets);
for three months (quarterly budgets) and one month (monthly budgets).
b) According to the ability to change
The rate of change of budget improves two main types of budget namely fixed
budget which is designed to remain unchanged irrespective of the volume of
output or turnover attained for specific period of time and flexible budget which
is designed to adjust the costs according to actual level of activity attained. For
the preparation of flexible budgets, the costs are divided into fixed and variable
elements.
The main objective of a flexible budget is to provide an instrument of control.
The actual results should be compared with flexible budget of the activity level
achieved. This comparison helps the management to evaluate the performance
of the organization.
c) According to the function
A functional budget is one which relates to any of the functions of an enterprise.
The following describes the various functional budgets as used in different
organizations.
– Sales budget
Shows the number of units of different products which a firm wants to sell in
next incoming determined period. The sales budget indicates the amount of
sales in units and value the company intends to sale in the next coming period.This is an important budget which must be prepared before any other budget
Management Accounting | Experimental Version | Student Book | Senior Six
is prepared because all other budgets are relaying on it. The preparation of this
budget involves the need to make sales forecasts and prediction of economic
factors and market forces that will influence the sales budget to be prepared.
– Production budget
The production budget provides production units to satisfy the sales forecasts
and to achieve the desired level of closing finished goods inventory. It gives the
details of goods to be produced in a specific period.
Throughout the production budget preparation, Unit to produce = budgeted
sales (units) desired closing inventory of finished goods – opening stock of
finished goods.
– Production cost budget
This represent the quantity of products to be manufactured expressed in terms
of cost. This budget summaries the materials utilization budget, labor budget
and the factory overhead budgets. The cost of units to be produced in a period
is given by units needed multiplied by the units cost.
– The direct materials utilization budget
The direct materials are simply the function of the production budget, with an
allowance made for any waste. This budget indicates the amount of materials in
units that will be needed to meet the production requirements. The preparation
of this budget is based on the information drawn from the production budget
and the materials utilization budget must provide material units to satisfy the
units to be produced.
– The direct purchase budget
This kind of budget express the direct materials utilization budget and closing
level inventory in monetary terms. This means that the units of materials to be
purchased are expressed in terms of costs by multiplying materials purchase
price by units involved.
Unit needed= raw material units needed for production desired closing
inventory of raw materials- opening stock of raw materials
The main advantage of materials purchases budget is to enable the purchase
department to plan its programs well in advance and make its purchases under
the best conditions.
– The direct labor cost budget
This budget estimates the adequate labor in number and grades to enable the
production budget to be realized. The labor budget prepared must disclose thenumber of each type or grade of workers required in a period to achieve the
Management Accounting | Experimental Version | Student Book | Senior Six
budget output, period of training necessary for different types of worker.
However, the labor cost to be incurred in a period is computed by multiplying
number of labor needed for production by the rate per direct labor hour.
Budgeted labor hour = budgeted production units number of hours per units
Budgeted labor cost = budgeted labor hours rate per hour
– The factory overhead cost budget
This budget is prepared to accommodate all manufacturing factory costs that
cannot be traced to specific products or services. These are usually referred
to as common cost or overhead costs. The factory overhead budget covers
indirect labor costs, indirect material costs and indirect expenses.
– Cash budget
It comprises the details of expected cash receipts and cash payments in
specific next period. In other words, cash budget involves a projection of future
cash receipts and cash disbursements over various time intervals. It consists
of the projected cash receipts (inflows) and the planned cash disbursement
(outflows).
Moreover, Cash receipts include collection from debtors, cash sales, dividend
received, sale of assets, loans received and issue of shares and debentures
whereby payment include wages and salaries, payment to creditors and
suppliers, rent and rates, capital expenditure, dividend payable.
– The capital expenditure budget
Capital expenditure budget refers to the plan of purchase of durable, fixed
assets. Always it is a long term budget set for three to five or more years. It
requires frequent revision because of the changes in cost of land, buildings,
machinery and equipment.
– Budgeted profit and loss account and balance sheet.
At the end of budgeting process, the budget officer in accordance with budget
committee prepares the forecasted results through the final accounts namely
profit and loss account and balance sheet. This budgeted profit and loss
account should be real and perfect if the planned operations and activities are
exhaustively implemented.
2.1.7. Approaches to budgeting
Application of budgeting process using different methods and techniques as
early explained requires certain approaches for achieving the same frameworkinstitutional objectives. The following are certain different approaches used in
Management Accounting | Experimental Version | Student Book | Senior Six
organizational budgeting process.
– Incremental Budgeting /Rolling / Revolving / Continuous
In this approach, the previous budget is used as a reference point in preparing
of budgets. This approach involves making adjustment to the previous budget
figures. The budgets formulated using this approach tends to reinforce
the status quo and they are often extrapolations of the past. This approach
prepares budgets by updating periodically the previous budgets by adding a
new incremental time period such as quarter, a month.
This approach presents some weaknesses like to justify previous budgets as
correct. Inefficiencies in the previous budgets are carried forward to the next
budget, it discourages innovation and creativity to the budget preparation, it
promotes complacency on part of management or managers.
– Zero-Based Budgeting (ZZB) or Priority budgeting
It involves a budget for each cost centre from zero-base. It sets budget for
every activity in an organization from zero bases. It assumes that the budget is
being made at the first time. However, it presents both advantages (leads to
efficient allocation of resources, encourages the identification and removal of
inefficient or obsolete operations from the budget, encourages innovation and
creativity in budgeting, forces managers to look for alternatives activities and
challenge the status quo) and disadvantages (time consuming or wasting and
can generate a lot of paper work, skilled manpower /managers are required to
draw the decisions packages and rank them, it requires the skilled managers
who are expensive therein).
– Activity Based Budgeting (ABB)
This seeks to challenge traditional budgets especially those budgets that are
based on departments or functions (cost centers). This is the modern approach
to budgeting and it is based on the principle that there are activities that drive
costs and these activities should be identified with cost pools. The budget is
prepared based on the activities to be carried out by each cost centre.
– Self-Imposed Budgeting (SIB)
It is also called participative budgeting; Participative budgeting involves
employees throughout an organization in the budgetary process, most people
will perform better and make greater attempts to achieve a goal if they have
been consulted in setting that goal. Such participation can give employees the
feeling that “this is our budget” rather than the all-too-common feeling that “this
is their budget you imposed on us”.
To the business and other partners, self-imposed budget present advantageson one hand where individuals at all levels of the organization are recognized
Management Accounting | Experimental Version | Student Book | Senior Six
as members of the team whose views and judgments are valued by the top
management, budget estimates prepared by employees themselves tend to be
more accurate and reliable, if people are not able to meet budget specifications,
they have only themselves to blame. But when a budget is imposed to them,
they can always say that the budget was unreasonable or unrealistic to start
with and therefore was impossible to meet.
On other hands there some challenges; too much participation and discussion
the self-imposed budgeting will be time-consuming (delay), difficult to agree
mutually on the same estimates, the problem of budget padding can be severe
and too much budgetary slack, before a budget is accepted, the budgets
prepared by lower-level managers should be carefully reviewed by immediate
supervisors that necessitate more time.
2.8.1.Characteristics of good budget
Practically and typically, the business is different one from another. This implies
that the content of budget is different from another as business is different one
from another. But whatever the difference, the structure remains the same with
same following characteristics if processed perfectly. The good budget must
be participative (every party in business has own duties and responsibilities
to fulfill for achieving the business target), Comprehensiveness (the contents
must be comprehensive to the whole organization), Standards (it should have
measures of performance), Flexibility (allow for changing due to reasonable
circumstances), Feedback (constantly monitor performance) and analysis of
costs and Revenues.
2.1.9. Hierarchy of budget in an enterprise
The hierarchical budget differs from one business to another due to respective
business operational sector. As discussed from 2.1.6, the end of each budget
process is finalized with pointing out the results throughout the budgeted profit
and loss account and balance sheet.
With the same budget process end, the hierarchical budgeting is different
to different businesses. However, the following hierarchical can be observed
meanwhile. It presents Sales budget, Production budget and budgeted stock
levels, Direct materials usage budget, Direct materials purchase budget, Direct
labor budget, Factory overheads budget, Administration overheads budget,
Selling and distribution overheads budget, Departmental budgets, Musterbudget, Cash budgets and Profit and loss accounts and balance sheets
Management Accounting | Experimental Version | Student Book | Senior Six
2.1.10. Preparation of budget
AKABUYE PLC manufactures two types of product for the printing industry.Budgeted sales of the products, known as P and Q for 2020 are:
For different businesses, the pictures of budget are not exhaustive but the cash
budget has the common manner of being presented. It looks like.
Management Accounting | Experimental Version | Student Book | Senior Six
2.1.11. Impact of external and internal factors on budget
– Impact of external factors on budget
External factors on budget means the variables beyond the business that can
change or influence (positively or negatively) the specific budget for given
period of time.
• General trade prospects
The general trade prospects (diagnosis, predictions) gathered in this connection
from trade papers and magazines affect the sales considerably.
• Technology factor
Technology is used extensively in modern business, from production to product
selling and customer support. Technology allows a company to save time and
labor costs while achieving more efficiency which in the long run can result in
a competitive advantage. Technology factor includes automation (is the use of
robots to perform repetitive tasks formerly done by humans), e-commerce (is
the buying and selling of goods and services on the internet) and digital media
(are online channels that get businesses in contact with their customers).
• Orders on hand
In case of industries where production is quite a lengthy process, orders on
hand also have a considerable influence in the amount of sales.
• Seasonal fluctuations
Past experience will be the best guide in this respect. However, efforts should
be made to minimize the effects of seasonal fluctuations by giving specialconcessions or off-season discounts thus increasing the volume of sales.
Management Accounting | Experimental Version | Student Book | Senior Six
• Potential markets
Market research should be carried out for ascertaining the potential markets for
the company’s products. Such an estimates like expected population growth,
purchasing power of consumers and buying habits of the people should always
be brought to play.
• Availability of material and supply
Adequate supply of raw materials and other supplies must be ensured before
drafting the sales program. The rate at which the raw materials are available
would like to influence the quantity to produce.
• Competition level
Competitive influence refers to the impact of competition in the business
environment. The impact can come from changes in price, product, or business
strategy. For example, if a company selling similar products at a similar price
to your business suddenly drops its price to attract more customers, you may
have to reduce the price as well or risk losing customers. The volume of budget
in terms of units, money to receive or to pay will change depending on the
structure of market in fraction of competitiveness.
To avoid the negative impact of competitive influence, a company can develop
competitive advantages. These are attributes that allow the company to
outperform its rivals. A business can gain a competitive advantage by investing
in a high-quality labor force, exceptional customer support, stellar products,
extra services, or a reputable brand image.
• Political situation
This refers to new legislation that affects consumers, employees, and businesses
rights. Political factors are grouped into consumer laws (these are laws that
ensure businesses will provide consumers with quality goods and services),
employment laws (these are laws that protect employee rights and regulate
the relationship between employees and consumers) and intellectual property
laws (these are laws that protect creative work within the business world, e.g.
copyrights of music, books, films, and software).
• Economic factors
Businesses and the economy have a mutual relationship. The success of
businesses results in a healthier economy, whereas a strong economy allows
businesses to grow faster. Thus, any changes in the economy will have a
significant impact on taxes rate, unemployment, interest rate and inflation that
consequently affect the organizational budget.Changes in tax, interest rates, and inflation can result in a rise or fall in
Management Accounting | Experimental Version | Student Book | Senior Six
aggregate demand, which affects economic activity. For example, with lower
taxes, individuals and households have more income at their disposal to spend
on goods and services. This contributes to higher demand, resulting in more
production and jobs created. As a result, business activities grow and the
economy flourishes.
• Availability of capital
The budget provides guidance to the amount of funds that may be needed
for procurement of capital assets during the budget period. The budget is
prepared after taking into account the available productive capacities, probable
reallocation of existing assets and possible improvement in production
techniques. If necessary separate budgets may be prepared for each item of
assets, such buildings budget, a plant and equipment budget.
• Social factors
Social influence on business refers to changes in consumer tastes, behavior, or
attitude that might affect business sales and revenues. For example, nowadays,
consumers are paying more attention to environmental issues such as climate
change and pollution. This puts pressure on firms to adopt eco-friendly solutions
to their production and waste disposal that affect the budget therein.
– Impact of internal factors on budget
Internal factors on budget means the variables under the control of the business
that can change or influence (positively or negatively) the specific budget for
given period of time. Internal factors include values, organizational structure,
culture and management style, human resources, labor unions, and physical
and technological resources.
• Plant capacity
How much can be budgeted and produced depends upon the available plant
capacity. There must be sufficient capacity to process the annual requirements
and also to meet seasonal high demands.
• Receipts and payments method
In case of this method the cash receipts from various sources and the cash
payments to various agencies are estimated. In the opening balance of cash,
estimated cash receipts are added from the total, the total of estimated cash
payments is deducted to find out the closing balance. The length (delaying ornot method) can lead to inefficiency of budget.
Management Accounting | Experimental Version | Student Book | Senior Six
Application activity 2.1
Questions:
4. Present the hierarchy of budget in given enterprise.
5. Referring to environment in which is located your school; explain the
factors that can lead to non execution of budget.
6. AKABUYE PLC manufactures two types of product for the printing
industry. Budgeted sales of the products, known as P and Q for2020 are:
Required: Prepare production budget
7. AGAHOZO PLC is producing the bricks at new village. For three
months ago, it budgeted to produce 100,000 bricks at Frw 50.
The expected labor cost was Frw 180,000, raw materials were Frw
100,000 and overhead expenses were Frw 80,000. At the end of
three months all heads of departments hold a meeting to present how
budgeted plans were implemented. The sales manager presents the
total sales of 120,000 bricks at Frw 60; the production manager
shows the use of raw materials values to Frw 120,000, labor cost
value to Frw 150,000 and overheads expenses Frw 160,000. You
are one of decision maker of the above manufacturing business; you
are required to compare the planned and actual results and advisethe top management.
Management Accounting | Experimental Version | Student Book | Senior Six
2.2. Budgetary control
Learning Activity 2.2
AGAHOZO PLC is producing the bricks at new village. For three months
ago, it budgeted to produce 125,000 bricks at FRW 50. The expected
labor cost was Frw 200000, raw materials were Frw 80,000 and overhead
expenses were FRW 8000. At the end of each three months all heads
of departments hold a meeting to present how budgeted plans were
implemented and give recommendation. The sales manager presents the
total sales of 150,000 bricks at Frw 60, the production manager shows the
use of raw materials values to Frw 120,000, and overheads expenses Frw
25,000.
Question
1. What was the objective of meeting hold at each every three months
at AGAHOZO PLC?
2. What do expect as the results from the actual results of activities and
the planned
2.2.1. Definition of concepts
– Budgetary control
It is the process of preparing budgets for the future period, comparing the
standards set by the budget with the actual performance, finding out the reasons
for the differences in performance, and taking corrective actions.
Budgetary control is also method of controlling the total expenditure on
material, wages and overhead by comparing actual performance with planned
performance.
– Variance
Variance in management is the difference between the planed variables and
actual variables (amount, units, value).
2.2.2. Budgetary control objectives, purpose and tools.
Budgetary control has different objectives including formulation of the policy of
the business, coordinating the business activities, controlling each function set
through the budget. The budgetary control finally shows the variance that is the
difference between planned, budgeted or standard cost (S6, Unit 4) and actualcosts and similarly in respect of revenues.
Management Accounting | Experimental Version | Student Book | Senior Six
The purpose of budgetary control system is to assist management in planning and
controlling the resources of their organization by providing appropriate control
information. The information will only be valuable, however, if it is interpreted
correctly and used purposively by managers and employees. However, the
managers who set the budget or standards are often not the managers who
are then made responsible for achieving budget targets. A supervisor might get
weekly control reports, and act on them; their supervision might get monthly
report, and decide to take different control actions. Different managers can get
in each other’s way and resent the interference from others.
Whatever the types of budget to be controlled; only three factors to take into
consideration in budgetary control are standard variables (cost and revenues),
actual variables (cost and revenues) form both which results in variance.
2.2.3. Advantages of budgetary control
Compels management to think about the future, which is probably the
most important feature of a budgetary planning and control system. Force
management to look ahead, to set out detailed plans for achieving the targets
for each department, operation and (ideally) every manager, to anticipate and
give the organization purpose and direction.
Budgetary control clearly defines areas of responsibility and promotes
coordination and communication and provides a basis for performance appraisal
(variance analysis). A budget is basically a yardstick against which actual
performance is measured and assessed. Control is provided by comparisons
of actual results against budget plan. Departures from budget can then be
investigated and the reasons for the differences can be divided into controllable
and non-controllable factors.
Budgetary management enables remedial action to be taken as variances
emerge and motivates employees by participating in the setting of budgets by
improving the allocation of scarce resources.
2.2.4. Budgetary control process
There are five steps to an effective budgetary control system that including
preparation of budgets, communicating and agreeing budgets with all
concerned, having an accounting system that will record all actual costs,
preparing statements that will compare actual costs with budgets, showing
any variances and disclosing the reasons for them, and taking any appropriate
action based on the analysis of the variances.
Action(s) that can be taken when a significant variance has been revealed will
depend on the nature of the variance itself. Some variances can be identified
Management Accounting | Experimental Version | Student Book | Senior Six
to a specific department and it is within that department’s control to take
corrective action. Other variances might prove to be much more difficult, andsometimes impossible, to control.
Application activity 2.2
AMARA PLC is a manufacturing company producing the cement from
western province of Rwanda. The number of customers is increasing day
to day due to the development of construction sector across the country.
For each six months, the heads of department from AMARA PLC hold a
meeting for evaluating the six past months and preparing the upcoming six
months production’. From this meeting, different alternatives are discussed
with the purpose of getting high effective and efficiency production to
meet the consumers’ testes and preferences. Chief budget committee has
to present all necessary documents related to production budget, sales
budget, labor cost budget and overheads budget to ensure the proper
use of available resources. Given the data from the previous periods, the
budget committee adopts new technology in production, new system in
labor management, requesting fund from neighbor financial institutions. The
new management planning results not only in high increase in production,
increase of salaries and remarkable construction development sector but
also exclusion of some unnecessary employees, changing the raw materials
previously used and imposing the overtime to the less number of remainingstaff.
Questions
1. What do you suggest as the main advantages of budget2. Enumerate the main disadvantages of budget
Management Accounting | Experimental Version | Student Book | Senior Six
Skills Lab 2
Students guided by their teacher, visit the bursary officer of their respective
schools.
The bursary officer provides the documents showing the different budget
lines of schools.
The students read carefully and interpret the given information from the
received documents.
The teacher asks the students in manageable team to prepare the budgetfor nine months from the information provided by bursary officer.
End of unit assessment 2
3. Respond by true or false
a) Budget is defined as a document outlining the revenue of one year
and expenses of six months for the same business
b) Budget is a financial and quantitative statement, prepared and
approved prior to a defined period of time, of the policy to be pursued
during that period for the purpose of attaining a given objective
c) Budget is the same as budgeting in matter of budgetary control
d) Master budget is different from budget manual
e) The sales budget cannot be semi-annually
1. List the characteristics of good budget
2. Classify the budget according to their function
3. Enumerate the disadvantages of budget.4. Explain Approaches to budgeting