ENGINEERS EDUCATION ASSOCIATION

I. BACKGROUND OF THE STUDY

Engineers Education Association (EEA) is a volunteer membership

organization delivering educational and professional services to its members. The
professional staff is organized into four divisions with a total of 14 operating
departments. EEA adopted an annual budget program several years ago as a means
for planning and controlling activities. Each department of EEA prepares an annual
budget in consultation with its respective volunteer committee. After a series of reviews
by both the professional staff and the volunteer structure, the budget is adopted.
The professional staff is expected to comply with the budget in conducting its activities
and operations. The EEA’s accounting department generates monthly income
statements that present actual performance as compared to budget for each EEA
department.

Throughout their service, EEA experienced a downfall from their operating

results. The results for the entire organization and most departments are unfavorable
as compared to budget. These unfavorable (negative) variances became one of their
existing dilemmas and addressing to it was a crisis. In this study, it comprises factors
that could attribute to the improvement and development of the budget which includes
embarking into strategies, analyzing variances to determine problems, and casting
plans to eliminate such variances in the future.

II. STATEMENT OF THE PROBLEM

How will the management improve its budget planning and controlling to
eliminate unfavorable variances?

III. POINT OF VIEW

The Engineers Education Association president, Mr. Daniel Riley and all the
department heads of the organization

IV- OBJECTIVES

This study aims to:

 Discover what causes the organization’s unfavorable variances

 Come up with a good solution on how to eliminate unfavorable (negative)
variances
 Determine the importance of analyzing all significant variances, both positive
(favorable) and negative (unfavorable)

V- RELEVANT FACTS
  The Actual revenue falls short of the budgeted amount. Hence, net income is
below what management originally expected. The income statement shows
material variances, they must be investigated to determine the cause.
 Some positive variances are really not favorable. Thus, all significant variances
must be analyzed to eliminate unfavorable variances.
 Positive as well as negative variances can be unfavorable as the absence of
expenditures may indicate that important activities have not been
accomplished. Focusing solely on unfavorable variances, the management
might overlook problems that may result from favorable variances. For instance,
the income statement shows a 46.6% positive variance for promotion and
advertising expense. This reduction in the level of expenditures could be
directly linked to declining membership resulting to lower subscription
revenues. The variance may also be caused by good planning and efficiencies
within the department, but this is not clear until the variance has been analyzed.
 The total annual budget is divided by 12 To derive monthly figures, which is not
really ideal because there are months with less revenue or expenses.

VI- ALTERNATIVE COURSES OF ACTION

a) Implement Effective Budgeting System

Because of the growing complexity of business and business problems and

because of the movement toward decentralization in large enterprises, increased
attention is being given to better planning and control techniques. Consequently, the
use of sound budgeting techniques is becoming more prevalent. In addition, corporate
restructuring has resulted in a trend toward placing the responsibility for budgeting at
higher levels in the organization. In earlier days it was customary to find the budget
function buried deeply in the accounting operation; today it is not uncommon to have
the budget function report to levels of management above the controller. Although it is
still useful for the budget director to report to the corporate controller, the trend toward
reporting to a higher level is a recognition of the need to have the budget function
broadly based in all operating areas of the business.

Many companies use budget committees. The budget committee typically is

composed of representatives from most operating areas. This composition promotes
coordination. If properly administered, the budget committee can perform the very
useful role of encompassing and reconciling the many diverse interests that make up
a modern business.

An effective budgeting system facilitates control. The budgeting system must fit the
company's operational control needs. Budgeting when done properly, can serve as a
planning and controlling system.

Planning provides a framework which helps management to develop a plan of

action, to reduce uncertainty about the future resulting to an increase in chances of
achieving the goals and objectives of the organization. On the other hand, control is
the process of using feedback on actual performances and results, comparing the
actual results with the plans, measuring its deviations from plans and policies and
finally taking corrective actions to bring all future activities in line with the plan (budget).
If the deviation is a result of a plan that is unrealistic or incorrect, the plan (budget)
may have to be revised and updated. Thus, planning and control process helps
managers plan how to use resources, including people, to achieve particular goals
and objectives and to control the use of resources to achieve those goals and
objectives.

Advantages

1. Provides a tool through which managerial policies and goals are periodically
evaluated, tested and established as guidelines for the entire organization.
2. Compels and motivates management to make an early and timely study of its
problems. It generates a sense of caution and care, and adequate study among
managers before decisions are made by them.
3. Budgeting enables management to decentralize responsibility without losing
control of the business. It reveals weaknesses, inefficiencies, deviations in the
organization very promptly which can be checked immediately to achieve a
desired goal.
4. Helps management become aware of the problems faced by lower levels within
the organization. It promotes labor relation.
5. Encourages delegation of responsibilities and enables managers to focus more
on the specifics of their plans and how realistic the plans are, and how such
plans may be effectively achieved.

Disadvantages

1. Planning, budgeting or forecasting is not an exact science; it uses

approximations and judgment which may not be cent per cent accurate. At best,
a budget is an estimate; no one knows precisely what will happen in the future.
2. The establishment of a budgeting process takes time. Also, sometimes too
much is expected from a budget and in case expectations are not fulfilled, the
blame is put on the budget. An efficient budgeting program requires that the
responsible persons should understand the philosophy, objectives and
essentials of budgeting.
3. Excessive emphasis on budgeting may result in attempts by lower level
management and employees to buck the system by providing inaccurate
estimates of future costs and revenues, and by failing to take advantage of
changes in the environment because to do so would result in a deviation from
plan, they would be considered as operating contrary to the budget. Under an
unbalanced budget program, employees will tend to overestimate costs and
underestimate revenues, thus creating budget slack.
4. As the end of budget period approaches and employees realize that actual
expenses have not been as great as allowed by the budget, there may be a
 temptation to spend excessive amounts in order to “use up” the budget
allowance. Such activities result in sub-optimal profits for the company.
5. The success and utility of budgeting depends on the cooperation and
participation of all members of management. All persons should direct their
efforts according to the plan. The top management also should adhere to the
budget and provide cooperation. Many a time budgeting has failed because
executive management has paid only lip service to its execution.

b) Continual Review and Alterations of Standard Costs

Standard costing is the practice of substituting an expected cost for an actual cost
in the accounting records. Subsequently, variances are recorded to show the
difference between the expected and actual costs. This approach represents a
simplified alternative to cost layering systems, such as the FIFO and LIFO methods,
where large amounts of historical cost information must be maintained for inventory
items held in stock.

Standard costing involves the creation of estimated (i.e., standard) costs for some or all
activities within the organization. The core reason for using standard costs is that there are a
number of applications where it is too time-consuming to collect actual costs, so standard
costs are used as a close approximation to actual costs.

Since standard costs are usually slightly different from actual costs, the cost accountant
periodically calculates variances that break out differences caused by such factors as labor
rate changes and the cost of materials. The cost accountant may periodically change the
standard costs to bring them into closer alignment with actual costs.

Advantages

1. Improved cost control.

2. More useful information for managerial planning and decision making.
3. More reasonable and easier inventory measurements.
4. Cost savings in record-keeping.
5. Possible reductions in production cost.
Disadvantages

1. Low morale for some workers

2. Controversial materiality limits for variances
3. Non-reporting of certain variances
4. Drives inappropriate activities
5. Costly

c) Implement Budgetary Control

 Budgetary control is a system of procedures used to ensure that an organization’s
actual revenue and expenditures adhere closely to its financial plan. The system
typically involves setting personal goals for managers that are based on the
budget, along with a set of rewards that are triggered when the goals are attained.
In addition, budget versus actual reports are routinely issued to anyone having
responsibility for a line item in the financial statements; they are then expected to
take action to correct any unfavorable variances. Further, the results of the
business are closely monitored by a budget committee, which provides feedback
to managers whenever actual results threaten to fall below expectations.

Advantages

1. It promotes co-ordination between different departments or divisions of the

organization. It facilitates centralized regulation of diversified operations. The
budget committee acts as a coordinator of production, sales and other
departments.
2. It encourages delegation of authority. It fixes the limits within which delegated
authority can be used. Subordinates and executives can exercise initiative and
judgment within the budgetary limits.
3. The centralization of budgetary control over all divisions and departments help
in carrying out a uniform policy without the disadvantages of an authoritarian
type of business organization.
4. Everyone working in the concern knows exactly what to do because budgetary
control lay emphasis on the staff organization. It ensures that individual
responsibilities are clearly defined and that the required authority
commensurate with the responsibility is delegated so that buck passing may be
prevented when the budgeted results are not achieved.
5. Management by exception is possible because the comparison of actual and
budgeted results points out weak spots so that remedial action is taken against
weak spots which are not in conformity with the budgeted performance.
6. It helps in promoting a feeling of cost consciousness and in restricting
expenditure to the minimum. Thus, wasteful expenditure beyond budgeted
figure is not incurred without prior approval of the higher authority.
7. Functions of planning, co-ordination and control can be better performed with
the help of the budgetary control.

Disadvantages

1. Correlation and coordination of various budgets is expensive; so small

organizations cannot afford the employment of budgetary control as a cost
control technique.
2. Budgetary control may lead to conflicts among functional executives because
every executive may try to get a larger share of budgetary allocation, shirk
responsibility and blame others for pitfalls. The success of budgetary control
depends upon the team work which may be lacking in the organization.
 3. Problem of Co-Ordination. The success of budgetary control depends upon the
co-ordination among different departments. The performance of one
department affects the results of other departments. To overcome the problem
of co-ordination a Budgetary Officer is needed. Every concern cannot afford to
appoint a Budgetary Officer. The lack of co-ordination among different
departments results in poor performance.
4. Budgetary revisions are required. Budgets are prepared on the assumptions
that certain conditions will prevail. Because of future uncertainties, assumed
conditions may not prevail necessitating the revision of budgetary targets. The
frequent revision of targets will reduce the value of budgets and revisions
involve huge expenditures too.
5. Discourage efficient person. Under budgetary control system the targets are
given to every person in the organization. The common tendency of people is
to achieve the targets only. There may be some efficient persons who can
exceed the targets but they will also feel contented by reaching the targets. So
budgets may serve as constraints on managerial initiatives.

VII. CONCLUSIONS

In conclusion, to get rid of all material unfavorable variances, all variances whether
positive or negative must be investigated. Adherence to an effective and appropriate
planning and control is also significant in preventing such variances.

VIII. RECOMMENDATIONS

In the Alternative Courses of Action listed above, we have come into an evaluation
and came up with a decision to choose the main and primary course of action which
is the Implementation of Effective Budgeting System. It is because this alternative
course of action not only facilitates value creation process, but it is also an invaluable
component of a company's planning and control efforts. The system forces managers
to plan and promotes coordination. The system supports responsibility accounting and
reporting. The master budget, accompanied by detailed plans, documents the
company's goals and objectives. Linking the master budget to the company's long-
range and strategic planning enhances the overall planning effort.