Budgeting Principles

Jill Hart, Clive Wilson, and Bruce Keers

Chapter 9:
Performance Reports
Learning outcomes
• Describe the function of performance report
• Outline the format of performance report
• Explain the role of performancce reports and responsibility accounting
• Calculate favourable and unfavourable revenue and cost variances
• Explain the purpose of responsiblity centres
• Describe how management by exception principles apply to variance
analysis
• Identify and analyse significant budget variances
Overview
One of the most This constant
important aspects of monitoring process
preparing a budget is the gives a management
careful consideration of budget control
the strategies required to
achieve the various
desired outcomes.

As the year progresses,

Following a budget is management has to
like reading a road know how successful the
map. A road map tells organization has been in
you how to get from Budgets likewise set reaching performance
point A to point B. the direction of the targets and what action
organization for the may be required to avoid
next year, so it would future problems.
be foolish to lock a
budget away in a
cupboard and never
refer to it again.
Budget Control
Consult
(a) A performance report must
be prepared, at regular intervals,
to provide details of budget and
actual variances.
(b) This report must be read by
section manager to analyze
favourable or unfavourable
budget variations.
Consider
Correct
(a) Performance reports should provide
(a) Follow up action is essential.
budget results in a way that allows the reader
to interpret variances. (b) Variations caused by
accounting errors should be
(b) These may be shown as percentage
corrected.
variations, current month and year to date
comparisons, or appropriate activity raios. (c) In other cases strategies may
be necessary to solve any
(c) Significant variations or adverse trends
problems that are causing a drift
must be noted and further investigation
away from the budget targets.
made, if appropriate.
Definition
• Performance reports compare details of actual performane against
. budget, also known as feedback.

• Management relies on this feedback to measure the success or

. failure sections and staff in achieving the budget outcomes.

• The feedback received will enable management to control costs

. and revenue and maintain the desired course for the organization.
Budget control flow chart
Planning

Assumptions

Cost Strategies
Input Output
Resources Process Methods
Goals
Drivers Decisions

Feedback

Control
Responsibility accounting

This will mean that revenue

The information provided by
Responsibility accounting has and expense detials will need
the accounting system
the task of providing an to be divided between all
should enable management
overall information system functional units and be
at all levels to evaluate their
that will enable management represented in a report
performance and be able to
to assess the performance of format that will be
make decisions on
each section and of the understood by management
appropriate courses of action
organization as a whole. and provide a basis for future
where necessary.
decision making.
Attributes of quality information
For reports to be useful, they must provide feedback at
Timeliness regular intervals so that problems can be identified quickly
and corrective action taken.

Inacccurate information leads to wrong conclusions on

Accuracy performance against the budget. All accounting data entered
must be correctly coded and classified.

The report must be presented in a way that is readily

Clarity understood by management and be useful for decision
making.
Responsibility centres
Responsibility centres are sub sections of the overall responsibility accounting system.

Responsibility centres represents a section of the organization over which a manager has control

If a manager is responsible for the costs that are incurred by a responsibility centre, then the costs
assigned to that centre must be costs over which the manager is deemed to have control.

Responsibility centres can cover revenues, costs, profirs and investment.

Decision chart
Variance analysis Corrective action

Yes
Accounting error? Correct it
No
No
Is the variance significant? Ignore it

Yes

Is the variance controllable?

Yes
No
Revise

Revise budget?
Yes
Report it
No

Identify problem? Decision

* More training?
* Efficiency? * Evaluate alternatives
* Cost control? * Develop strategies
* Profitability? * New assumptions
* Risk? * Monitor performane
* Marketing? * Revise estimates
Example 1:
Use the following budget and actual figures to prepare a variance
report.
Solution:
Example 2:
Grommets Manufacturing presents the following budget and actual figures
for the year ended 30 June 20x6:

There are no opening or closing inventories of work in process. Prepare a

cost production report and a gross profit statement.
Solution:
Cost of production report
for the year ending 30 June 20x6

Costs Actual Budget Variance % Analysis

$ $ $
Direct material 120,000 140,000 (20,000) -14% favourable
Direct labour 288,000 250,000 38,000 15% unfavourable
Factory overhead 200,000 187,500 12,500 7% unfavourable
608,000 577,500 30,500 5% unfavourable

Gross profit report

for the year ending 30 June 20x6
 Costs Actual Budget Variance % Analysis
$ $ $
Direct material 120,000 140,000 (20,000) -14% favourable
Direct labour 288,000 250,000 38,000 15% unfavourable
Factory overhead 200,000 187,500 12,500 7% unfavourable

Solution: 608,000 577,500 30,500 5% unfavourable

Gross profit report

for the year ending 30 June 20x6

Costs Actual Budget Variance % Analysis

$ $ $
Sales 1,200,000 1,064,000 (136,000) -13% favourable
Finished goods 1 July 48,000 65,000 (17,000) -26% favourable
Cost of production 608,000 577,500 30,500 5% unfavourable
656,000 642,500 13,500 2% unfavourable
Finished goods 30 June 80,000 46,660 (33,340) -71% favourable
COGS 576,000 595,840 (19,840) -3% favourable
Gross profit 624,000 468,160 (155,840) -33% favourable
% of sales 52.0% 44.0% -8.0%