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BUDGETING : BUDGETARY CONTROL & TYPES OF

COST ACCOUNTING PROJECT
BUDGETING : BUDGETARY
CONTROL & TYPES OF BUDGET

Submitted to :-
Mr. H.K.Porwal

Submitted By :-
BUDGET

Varun Atolia-4272
Nidhi Jain-4459
Nupur Agarwal– 4458

Mansi Chanana-4455

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ACKNOWLEDGEMENT

Perseverance, inspiration and motivation have always
played a key role in the success of any venture.
It has been a privilege that Shaheed Sukhdev College of
Business studies has given us the opportunity to work on
business projects as part of the course curriculum. These
projects serve as a stepping stone into the corporate world
and to know it inside out. Words cannot express the
gratitude we feel towards the innumerable people who
have helped us in our endeavor.

At this level of understanding it is often difficult to
understand the spectrum of knowledge without proper
guidance and advice. First and foremost we would like to
express our gratitude towards Mr. H.K.Porwal, Cost
Accounting without whose support and guidance this
project would not have been possible.

Special thanks to all the people from the various segments
explored for providing useful insights that have helped
add value to our project.

Mansi Chanana - 4455

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ACKNOWLEDGEMENT 2 INTRODUCTION 4-6 2. TOPICS NO. 1. NO.Nupur Aggarwal . BUDGETARY CONTROL 12 .4272 BBS 2B 4 .15 5. CONTROL SYSTEM 7 .10 3. BUDGET DEVELOPMENT 11 4.27 8. MGT. EXAMPLE 20 .19 6.4458 TABLE OF CONTENTS PAGE SR. Nidhi Jain . ZERO BASE BUDGETING 28 9.4459 Varun Atolia .24 7. TYPES OF BUDGET 16 . APPLICATION 25 . BIBLIOGRAPHY 29 10.

d. It provides the organization with a goal. Each department. It provides contingency plans for potential problems that may develop during the budget year. c. b. 5 . Significantly large budget variances may indicate the presence of problems in the organization's operations. They are responsible for the development of the budget and their department's subsequent performance against its budget. INTRODUCTION What is a budget? The budget is a projection of the organization's income statement for the next fiscal year. It brings coordination throughout the organization. A budget. Companies develop budgets because of the benefits: a. Responsibility is assigned to Management in each organizational unit. Management compares their actual results with budgeted forecasts and then must account for any significant variances. It usually includes estimates of sales. will also include a cash flow projection and a capital expenditure budget. within the organization is responsible to prepare its part of the budget. Other statistical information is frequently included as part of the budget. expenses and net income. in addition to the income statement. or unit. It provides control over revenues and expenses during the budget year. which is then coordinated with the overall company budget.

It is more short-term. a document which all managers will hold. Management control is the process by which management assures that the organisation carries out its strategies. A common sub division of the wider planning and control framework in organisations is strategic planning. Strategic planning is the process of deciding on the goals of the organisation and the formulation of the broad strategies to be used in attaining these goals. Fixed and Flexible Budgets By the start of an annual budget cycle the managers of any organisation should have formalised their views and identified the most likely outcomes and targets they will work to for the coming year in terms of profit. the budget will have been set and agreed. These will be incorporated into the master budget statement. before the event. It is the responsibility of top management. Often it is based on the use of non-financial measures and may be based on clearly defined input/output relationships. and addresses targets of junior management. Operational or task control is the process of assuring that specific tasks are carried out effectively and efficiently. The timescale here can be very short-term. costs etc. perhaps daily.Budgets in context of organisation A good starting point is to set budgets within an overall organisational planning and control framework. This is an example of a fixed budget that is a planning budget of expected outcomes. it is creative and involves identifying a company’s strengths and opportunities to grow whilst minimising weaknesses and threats. sales.. is focused on middle managers and is more rhythmic and routine. that is. A set of feasible and desirable end results will have been established. 6 . It has a long-term orientation and looks outside the organisation at customers and competitors. management control and operational or task control.

Flexible budgets are budgets that are designed to change in response to changes in output levels or. When actual output levels have varied from those planned in the fixed budget the cost targets being used for all variable and semi-variable costs should be adjusted. market prices. 7 . At a simplistic level all budgeted variable and semi-variable costs should be adjusted proportionately to take account of the actual output level. Fixed costs being by definition ‘fixed’ would not be expected to change in spite of changing output. Flexing does not. Flexible budgets can complement the use of fixed budgets. on occasions. An equally appropriate use of the flexible budget is for the purposes of control. It is not helpful comparing the actual costs incurred for a certain output level with the budget developed for another output level. incidentally. This is part of the feed forward process mentioned earlier and as such flexible budgets are a useful part of planning. a flexible approach to budgets takes account of this. they have a part to play and can apply in more than one context. because managers can be confused and frustrated if faced throughout the year with a possibly moving target. When preparing performance reports it is important to take account of the variability of some costs with different levels of output. if taken to extremes. have to be restricted just to output levels but can incorporate changes for any factor which differs from what applied when the budget was prepared. changes in other relevant factors. In this way. flexing is saying “If I knew then what I know now what budget would I set?” It is a useful concept but can lead to some concern. for example different states of the economy. etc. In the planning process it is quite usual to produce a range of estimates for different planning scenarios of sales. costs.

The management control process involves both informal and formal communication and interaction. MANAGEMENT CONTROL SYSTEM Any system consists of a structure and a process. profit and investment. Figure 1 is used to depict the phases of this process in a typical organisation. Centres established on the above lines attempt to tailor the budgetary control system to the organisation structure and the consequent delegation of authority within the organisation. revenue. This is in line with the controllability principle of reporting to a manager about those things over which he/she has control or most influence over. omitting items which are uncontrollable. 8 . The formal planning and control structure is built around responsibility centres which emphasize performance related to cost.

Figure 1 . It identifies the products a company intends to develop. 9 . Finally. reporting and analysis takes place as a basis for control to the budget. projects which management intend to pursue to meet the organization’s overall goals.Phases of Management Control. Operating and measurement is the collecting of actual costs and outcomes identified to both programmes and responsibility centres. To elaborate on the features of Figure 2 programming is the link with strategic planning. Budgets are derived from these and are specified in terms of a manager’s responsibility. for the co-ordination of activities and as a basis for future decisions perhaps to change the original plan.

In contrast. feed forward control consists of a prediction being made of 10 . the detection of a deviation between actual results and an objective is what causes a control action to occur. Motivation The value of a budget is enhanced still further if it not only states expectations but motivates managers to strive towards those expectations. communication. That is. control.Budgets as they are generally understood form the cornerstone of management control and the management control system. Control Once a budget is formulated a regular reporting system can be established so that the extent to which plans are. Feedback and feed forward Models of control can be based on feedback or feed forward. being met can be established and some form of management by exception can be established. performance evaluation and motivation. Co-ordination In this role budgets ensure that no one department is out of line with the action of others. If sales targets are met or satisfactory service provided within reasonable spending limits then bonus or promotion prospects are enhanced. Planning The budget ensures that managers have thought ahead about how they will utilise resources to achieve company policy in their area. A feedback style is carried out after the event and is essentially error-based. Communication The construction of the budget can be a powerful aid to defining or clarifying the lines of horizontal or vertical communication within the enterprise. co-ordination. Performance evaluation Budgets become useful tools for evaluating how the manager or department is performing. they are a multi-purpose management tool supporting planning. or are not.

Every part of the organisation should be represented on the committee. including the issue of a manual  Issuing of timetables for preparation of budgets  Provision of information to assist budget preparations  Comparison of actual results with budget and investigation of variances. Budget Organisation and Administration: In organising and administering a budget system the following characteristics may apply: a) Budget centres: Units responsible for the preparation of budgets.. production. comparison of actual to budget. e. ROI. if the control actions are effective. They are adapting the principles of feed forward and feedback to meet their planning and control needs. If the expected outputs differ from what outputs are desired. achieved. In practice it may be observed that many companies do not simply adopt a feedback approach i. These are revised in successive iterations until a desired outcome is identified.g. They operate processes which require periodic re-forecasting of likely outcomes in order to better manage their planning and control activity. A budget centre may encompass several cost centres. The budgetary process is one of feed forward. e. Traditional budgetary control is an example of feedback where actual outcomes are compared to budgets. market share etc. Functions of the budget committee include:  Coordination of the preparation of budgets. Control is therefore. See Figures 3 and 4 for examples of feedback and feed forward systems. c) Budget Officer: Controls the budget administration an the job involves: 11 . departmental heads and executives (with the managing director as chairman).g. control actions are implemented to minimise these differences.e. b) Budget committee: This may consist of senior members of the organisation.. spending levels. marketing and so on. before any deviation from the objective output occurs.anticipated future outputs. so there should be a representative from sales. in that expected outcomes are compared with desired outcomes.

 Liaising between the budget committee and managers responsible for budget preparation  Dealing with budgetary control problems  Ensuring that deadlines are met  Educating people about budgetary control. 12 . d) Budget manual: This document:  Charts the organization  Details the budget procedures  Contains account codes for items of expenditure and revenue  Timetables the process  Clearly defines the responsibility of persons involved in the budgeting system.

After the review and final revisions. The company’s actual operating and budget variance figures from the previous year. c. such as prices. Any change in company’s operating policies e. The forecast of sales is the most important and difficult part of the income statement due to its volatility. Management consolidates the department and unit budgets into an overall comprehensive income statement budget. Statistics to back up budget numbers. 13 . d. Payroll statistics. portion size and costs h. the final budget and plan is prepared and submitted to the appropriate departments within the organization. The company's goals c. negotiation and revision. Sales statistics from the past d. DEVELOPING A BUDGET Manager needs to collect the following types of information in order to prepare an accurate and useful budget: a. Local and national economic conditions f. Estimate sales revenue and volume. b. The budgeted income statement is submitted to upper management for review. Estimate other expenses based on planned activities. e. Estimate expenses that are related of sales. Sales and expense trends g. Basic steps to prepare a budget: a. customer preference. and its pronounced effect on expenses and profits b.

• BC seeks to maximise the aspiration levels of participants. the constituent budgets come together in the Master budget. If a budget is perceived as impossible to achieve. Forces 14 . BUDGETARY CONTROL (BC) • BC provides budget as a yardstick for comparison • Planned performance in BC is a target that should motivate managers towards achievement of the goals implied by the budget • BC expresses information in monetary terms • BC targets problems by focusing on variances • BC should measure and highlight performance relative to controllable factors • Budgets are not a forecast (a forecasts predicts what will happen. while a plan is what is intended to happen and is being striven for by management) but note forecasts are necessary to produce a budget) • Budget is a co-ordinated plan for the entire organisation . which is probably the most important feature of a budgetary planning and control system.although each part has its own budget. • BC seeks goal congruence. which is the state which exists in a control system when individuals and groups in an organisation take actions that are at the same time both in their own self-interest and in the best interests of the entity. • BC seeks to minimise budgetary slack. which relate to the personal goals of the budgetee and reflect the level of performance that they hope to achieve. aspiration levels will fall Advantages of budgeting and budgetary control There are a number of advantages to budgeting and budgetary control:  Compels management to think about the future. which is the process by which managers seek to obtain budget targets that can be easily achieved through a process of understating revenues and overstating costs.

It helps to co-ordinate the activities of the organisation. b) Budgetary control Budgetary control is a control technique whereby actual results are compared with budgets.  Economises management time by using the management by exception principle. An example would be an advertising budget or sales force budget. to anticipate and give the organisation purpose and direction. A budget is basically a yardstick against which actual performance is measured and assessed.  Enables remedial action to be taken as variances emerge.  Provides a basis for performance appraisal (variance analysis). Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets. 15 .  Improves the allocation of scarce resources. Budgetary Control Methods a) Budget A formal statement of the financial resources set aside for carrying out specific activities in a given period of time. management to look ahead. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors. operation and (ideally) each manager. Control is provided by comparisons of actual results against budget plan.  Motivates employees by participating in the setting of budgets.  Promotes coordination and communication. to set out detailed plans for achieving the targets for each department.  Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.

i. ROI. particularly in perception terms.Where outputs are compared with the assets employed in producing them. 16 . There are four types of responsibility centres: a) Revenue centre -Organisational units in which outputs are measured in monetary terms but are not directly compared to input costs. d) Investment centre . c) Profit centre -Here performance is measured by the difference between revenues (outputs) and expenditure (inputs).  Budgets can be seen as pressure devices imposed by management. Problems in budgeting Whilst budgets may be an essential part of any marketing activity they do have a number of disadvantages. thus resulting in: a) bad labour relations b) inaccurate record-keeping.  It is difficult to reconcile personal/individual and corporate goals.e.Budgetary Control and Responsibility Centres A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit.  Departmental conflict arises due to: a) Disputes over resource allocation b) Departments blaming each other if targets are not attained. b) Expense centre -Units where inputs are measured in monetary terms but outputs are not. Inter-departmental sales are often made using "transfer prices".

Characteristics of A Good Budget A good budget is characterised by the following:  Participation: Involve as many people as possible in drawing up a budget. Responsibility versus controlling. This is often coupled with "empire building" in order to enhance the prestige of a department.  Flexibility: Adequate provision must be made for changing circumstances. "we had better spend it or we will lose it". i.  Standards: It must be based on established standards of performance.e. some costs are under the influence of more than one person.  Managers may overestimate costs so that they will not be blamed in the future should they overspend. e.  Waste may arise as managers adopt the view.  Comprehensiveness: A budget should embrace the whole organisation. power costs.g.  Analysis of costs and revenues 17 .  Feedback: It should constantly monitor performance.

The production manager's duties include:  analysis of plant utilisation  work-in-progress budgets. 18 . Methods of sales forecasting include:  sales force opinions  market research  statistical methods  mathematical models In using these techniques consider:  company's pricing policy  general economic and political conditions  changes in the population  competition  consumers' income and tastes  advertising and other sales promotion techniques  after sales service  credit terms offered. b) Production budget: expressed in quantitative terms only and is geared to the sales budget. TYPES OF BUDGET a) Sales budget: this involves a realistic sales forecast. This is prepared in units of each product and also in sales value. If requirements exceed capacity he may:  subcontract  plan for overtime  introduce shift work  hire or buy additional machinery  The materials purchases budget's both quantitative and financial.

Receipts of cash may come from one of the following:  cash sales  payments by debtors  the sale of fixed assets  the issue of new shares  the receipt of interest and dividends from investments. Hence. It summarises monthly receipts and payments.c) Raw materials and purchasing budget:  The materials usage budget is in quantities. it highlights monthly surpluses and deficits of actual cash.g. Factors influencing a) and b) include:  production requirements  planning stock levels  storage space  trends of material prices. change of credit terms offered to customers. Its main uses are:  to maintain control over a firm's cash requirements. This is influenced by:  production requirements  man-hours available  grades of labour required  wage rates (union agreements)  the need for incentives. e.  The materials purchases budget is both quantitative and financial. stock and debtors  to enable a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises  to show the feasibility of management's plans in cash terms  to illustrate the financial impact of changes in management policy. d) Labour budget: is both quantitative and financial. 19 .g. e. e) Cash budget: a cash plan for a defined period of time.

Month 1 Month 2 Month 3 Rs. Rs. Below is a suggested layout. Rs. dividends or taxation.Payments of cash may be for one or more of the following:  purchase of stocks  payments of wages or other expenses  purchase of capital items  payment of interest. Cash receipts Receipts from debtors Sales of capital items Loans received Proceeds from share issues Any other cash receipts Cash payments Payments to creditors Wages and salaries Loan repayments Capital expenditure Taxation Dividends Any other cash expenditure Receipts less payments Opening cash balance b/f W X Y Closing cash balance c/f X Y Z ii) Step 2: sort out cash receipts from debtors iii) Step 3: other income iv) Step 4: sort out cash payments to suppliers 20 . Steps in preparing a cash budget i) Step 1: set out a pro forma cash budget month by month.

v) Step 5: establish other cash payments in the month Composition of a master budget OPERATING BUDGET FINANCIAL BUDGET consists of:. budget Stocks budget f) Other budgets: These include budgets for:  Administration  Research and Development  Selling And Distribution Expenses  Capital Expenditures  Working Capital (Debtors and Creditors) AN EXAMPLE A sugar cane farm in the Lowveld district may devise an operating budget as follows:  Cultivation  Irrigation 21 . consists of Budget P/L acc: get: Cash budget Production budget Balance sheet Materials budget Funds statement Labour budget Admin.

000 tonnes 16.g. there will be costs for labour. and to further break this down to shorter periods.100 hours 700 hours Cane trailers nil 9. materials and machinery usage. for e. The length of period chosen is important in that the shorter it is.000 tonnes 10.000 tonnes Each item is measured in different quantitative units. these may include four resources.000 tonnes Imp.000 tonnes 16. say. & sundries nil 9. The quantitative budget for harvesting may be calculated as shown below: Quantitative harvesting budget Harvesting 1st quarter 2nd quarter 3rd quarter 4th quarter Labour Cutting nil 9.000 tonnes 10. the greater the control that can be exercised by the budget but the greater the expense in preparation of the budget and reporting of any variances. unit costs can then be allocated to the individual items to arrive at a budget for harvesting in financial terms as shown in the table Charge out costs 22 . Therefore. harvesting.000 tonnes Sundry nil 300 man days 450 man days 450 man days Tractors nil 630 hours 1.000 tonnes 16. one month or three months.000 tonnes 10. Once the budget in quantitative terms has been prepared. Having identified cost centres. With each operation.  Field maintenance  Harvesting  Transportation. namely:  Labour  Tractors  Cane trailers  Implements and sundries. the next step will be to make a quantitative calculation of the resources to be used.

e.250 4. 1.400 1.250 18. If the tractor is used for more than 1.250 5. whereas some vary directly with use of the tractor.750 12.25 per .000 hours there will be under- recovery. Harvesting cost budget Item Unit cost 1st 2nd 3rd 4th Total harvesting quarter quarter quarter quarter Labour Cutting $0. e.500 26.e. 750 1. driver.000 day Tractors $7. overall operating cost of the tractor for the year may be budgeted as shown in the above figure.125 3.725 8. $15.In the above table.500 8.50 per hour machines like tractors have a whole range of costs like fuel and oil.000 hours then there will be an over-recovery on its operational costs and if used for less than 1.000.225 hour Cane Trailers $0.875 $61.475 So.00 23 .775 $17.000 2. Tractor costs Unit rate Cost per annum (1.000 7. road tax and insurance and depreciation.000 hours) ($) ($) Fixed costs Depreciation 2.350 2. fuel and oil. depreciation and insurance. repairs and maintenance.00 200. tractors have a unit cost of $7.15 per . 6.000.500 5.g. 4.g.750 tonne .75 per .50 per .50 per .00 2. licence. in the first instance making an internal 'profit' and in the second a 'loss'.250 tonne Sundry $2.00 Licence and 200. Some of the costs are fixed. 2.250 tonne Imp.825 $27. i. & sundries $0.125 1.

567 Less: Closing 135. insurance Driver 100.473 11.260 90.00 per hour 2.000 Less: Costs Cultivation 37.000.290 90.100 24.165 112.278 15.00 No.000 500.50 Master budget The master budget for the sugar cane farm may be as shown in the above figure.240 94.00 Cost per hour 7.290 24 .297 18. expressed in financial terms.240 94.377 Field maintenance 4.825 27.000.597 201.475 Transportation .875 61.991 7.750 15. of hours used 1.165 241.200.00 per 600.268 42.368 55.00 per 200 1.261 48.923 15.600 49.767 Add: Opening 85.00 costs Maintenance 3.357 107.000 250.800 valuation 135.413 129. 15.165 112.260 85.00 Repairs 600.002 Harvesting .00 per month 1.416 183.892 478.500.826 12.750 54.00 annum Variable Fuel and oil 2. Operating budget for sugar cane farm 19X4 1st 2nd 3rd 4th Total $ quarter quarter quarter quarter Revenue from cane 130.775 17.262 41. 14.800 135.313 Irrigation 7.365 106.578 241.00 hours 7.500.000 120.329 52.632 392. The budget represents an overall objective for the farm for the whole year ahead.

277 Gross surplus .750 (310) .044 Net profitless) (5. There are many ways in which management accounts can be prepared.337 111.200 102.338 147. management accounts at the end of the third quarter can be presented as shown below. It is of great importance that the business has sufficient funds to support the planned operational budget.Sundry 742 1. Balance sheet at the end of the year. namely: i.699) 95. Cash flow budget which shows the amount of cash necessary to support the operating budget. 66. two further budgets can be done.Cutting 12.060 18. This statement will calculate the difference between the 'budgeted' and the 'actual' cost.actual costs against budget costs Management accounts for sugar cane farm 3rd quarter 19X4 3rd quarter Year to date Actual Budget Variance Actual Budget Variance Item Harvesting Labour . To continue with our example of harvesting on the sugar cane farm.723 Less: Overheads 5.077 85.361 7.875 291 25 .602 388. as quickly as possible after each operating period.876 7. in our example.584 1. ii.200 12.000 (200) 19. setting out the actual operating costs against the budgeted costs.486 5.679 Once the operating budget has been prepared.663 8. Management accounts . which is called the 'variance'.321 26. 129. Reporting back During the year the management accountant will prepare statements.125 383 1.876) (6. each quarter.177 3.valuation Net crop cost .398 111.

For example.250 (263) 28. actual harvesting costs for the 3rd quarter are $28.50 .245 Imp & sundries 4.000 (270) 6.375 8.00.000.000 tonnes in the 3rd quarter and a cumulative tonnage of 25.00. Most costs are composed of two elements . If the actual production was much higher than budgeted then these costs represent a very considerable saving.00 per man day . showing a saving of $25.775 indicating an increase of $490 whilst the cumulative figure for the year to date shows an overall saving of $438.270 4. say it is budgeted to take 300 man days at $3.giving a total budgeted cost of $900. 26 . even though only a marginal saving is shown by the variance.a favourable usage variance but a very unfavourable price variance. APPLICATION Price and quantity variances Just to state that there is a variance on a particular item of expenditure does not really mean a lot.265 27. A variance between the actual cost of an item and its budgeted cost may be due to one or both of these factors.400 722 2. Further investigations may reveal that the job took 250 man days at a daily rate of $3.250 (1. The actual cost on completion was $875.162 43.678 2.500 12. then what is indicated as a marginal saving in the variance may. The budget was based on a cane tonnage cut of 16. in fact. so the harvesting operations are proceeding within the budget set and satisfactory.750 1.the quantity used and the price per unit. Apparent similarity between budgeted and actual costs may hide significant compensating variances between price and usage. Management may therefore need to investigate some significant variances revealed by further analysis. If these tonnages have been achieved then the statement will be satisfactory.Tractors 9. be a considerable over spending.775 (490) 43. Similarly. It appears that actual costs are less than budgeted costs.265 against a budget of $27.513 6.125) 13. if the actual tonnage was significantly less than budgeted.975 (525) Cane trailers 1.505 3. which a comparison of the total costs would not have revealed. Price and usage variances for major items of expense are discussed below.00.600 438 Here.

g.e. discounts.Labour The difference between actual labour costs and budgeted or standard labour costs is known as direct wages variance. e. Overheads Again. e. alternative suppliers etc.g. using more unskilled labour. i. a budgeted fertiliser at 350 kg per hectare may be increased or decreased when the actual fertiliser is applied. giving rise to a usage variance.g. Materials The variance for materials cost could also be split into price and usage elements: i) Material price variance: It arises when the actual unit price is greater or lower than budgeted. ii) Material quantity variance: arises when the actual amount of material used is greater or lower than the amount specified in the budget. ii) Labour efficiency variance: arises when the actual time spent on a particular job is higher or lower than the standard labour hours specified. 27 . It could be due to inflation. the wage rate. a production higher or lower than budgeted will cause an over-or under-absorption of overheads. or working overtime at a higher rate. e. The direct wages variance can be split into: i) Wage rate variance: the wage rate was higher or lower than budgeted. overhead variance can be split into: i) Overhead volume variance: where overheads are taken into the cost centres. breakdown of a machine. This variance may arise due to a difference in the amount of labour used or the price per unit of labour.

actual price) X actual quantity Usage variance = (budgeted quantity . Other 28 .actual quantity) X budgeted price Management action and cost control Producing information in management accounting form is expensive in terms of the time and effort involved. and e) Taking any appropriate action based on the analysis of the variances in d) above. showing any variances and disclosing the reasons for them. There are five parts to an effective cost control system. Action(s) that can be taken when a significant variance has been revealed will depend on the nature of the variance itself.ii) Overhead expenditure variance: where the actual overhead expenditure is higher or lower than that budgeted for the level of output actually produced. a) Preparation of budgets b) Communicating and agreeing budgets with all concerned c) Having an accounting system that will record all actual costs d) Preparing statements that will compare actual costs with budgets. It will be very wasteful if the information once produced is not put into effective use. Calculation of price and usage variances The price and usage variance are calculated as follows: Price variance = (budgeted price . Some variances can be identified to a specific department and it is within that department's control to take corrective action.

Variances revealed are historic. and particularly the current level of constraints on resources. some businesses find that historical comparisons. and sometimes impossible. they can be used to influence managerial action in future periods. a zero base). One way of breaking out of this cyclical budgeting problem is to go back to basics and develop the budget from an assumption of no existing resources (that is. can inhibit really innovative changes in budgets. Even using such an analytical base. it will be difficult for the business to make the progress necessary to achieve longer term objectives. In fact this is part of the financial analysis discussed so far. 29 . Thus. if changes are not started in the budget period.variances might prove to be much more difficult. to control. This can cause a severe handicap for the business because the budget should be the first year of the long range plan. They show what happened last month or last quarter and no amount of analysis and discussion can alter that. However. but the proper analysis process takes into account all the changes which should affect the future activities of the company. ZERO BASE BUDGETING (ZBB) After a budgeting system has been in operation for some time. there is a tendency for next year's budget to be justified by reference to the actual levels being achieved at present.

an alternative way is to look in depth at one area of the business each year on a rolling basis. the current existing field sales force will be ignored. and the company then has to plan how to implement this new strategy.This means all resources will have to be justified and the chosen way of achieving any specified objectives will have to be compared with the alternatives. 30 . so that each sector does a zero base budget every five years or so. some companies carry out the full process every five years. or a different-sized team. Hence. in the sales area. The obvious problem of this zero-base budgeting process is the massive amount of managerial time needed to carry out the exercise. Thus. but in that year the business can almost grind to a halt. For example. This might not include any field sales force. and the optimum way of achieving the sales objectives in that particular market for the particular goods or services should be developed.

ucc.nau.org/docrep/W4343E/w4343e05.fao.ac.htm • http://www.edu/~jtm/ha355/class/statement/budget/ • http://www. pdf#search='Budgetary%20Control 31 .uk/rbp/Courses/BEA2003/Materials/BEA2003Lecture15. BIBLIOGRAPHY We have prepared the Cost Accounting Project on “Budgeting : Budgetary Control & Types Of Budget” on the basis of the help taken and useful information obtained from the following sources: • http://jan.ex.