Control Systems Are Proposed To Monitor And Control Revenue And Expenses

After the budget has been prepared and approved, budgetary control becomes important. While the preparation process takes place during the financial year, budgetary control is a continual process.

The budget report is used frequently as a mechanism to coordinate, assess and control various operations. The detail needed in the budget report of the office function for instance will be determined by the report’s intended use. Because department reports are frequently consolidated to make a larger budget report, less detail will perhaps be needed than if such consolidation does not take place.

A fundamental purpose of budgeting is the enhancement of the organisation’s profitability. In many instances, the organisation’s profit is improved because of the use of skillfully written, carefully prepared budget reports.

Budget errors happen as a result of poor preparation of the original budget. Sales will be lower than expected while costs will be out of control. It is vital that you understand where you went wrong so that you do not make the same mistakes again.

Actual budget errors may be due to insufficient research into budgeted amounts, lack of understanding of what drives the business financially or insufficient questioning of the figures. The obvious solution to low income and high costs would be for you to reverse the situation and increase sales and reduce costs.

You need to analyse why things went wrong and ask the following questions:

• What are the most common variances encountered when monitoring costs, their cause and effects and possible remedies?
• In particular, what are the main variances in sales revenue, likely causes and effects and possible remedies?
• It can help to understand where errors have crept in by categorising revenue and expenditure variances into the price, volume and timing.

Once these questions have been answered you are ready to report on the Budget, its variances and the measures that can be taken to control them.

A meaningful way of looking at unexpected variances is by considering the variance as a planning variance or as an operational one. A typical budget contains information that was thought to be correct at the time of the preparation. A post-budget is written after the period to which it relates. It is used to produce, with hindsight achievable budget. A planning variance is a variance generated by the original budget that is changed to a post-budget.

An example of this may be the variance that happens when an original budget does not take into account a significant increase in raw material prices due to a world shortage. The post-budget builds in this factor for the original time period. An operation variance is where a post-budget is compared with actual performance in the current time period. It shows how the department might be currently performing in line with hindsight which is all that might be reasonably expected.