FREE ELECTRONIC LIBRARY - Thesis, documentation, books

Pages:     | 1 |   ...   | 32 | 33 || 35 | 36 |   ...   | 67 |

«Paul M. Collier Aston Business School, Aston University Accounting for Managers Accounting for Managers: Interpreting accounting information for ...»

-- [ Page 34 ] --

However, Wallander did not reject planning outright. He argued that it is important to have an ‘economic model’ that establishes the basic relationships in the company, such as the ability to plan production. He commented, ‘This type of planning is something that is going on all the year round and has nothing to do with the annual budget’ (p. 416).

Handelsbanken has an information system that is focused on the information needed to influence actual behaviour. It incorporates both financial and ‘Balanced Scorecard’ measures at the profit centre level, and performance is benchmarked externally and internally. The bank rewards its staff through a profit-sharing scheme.


Despite its abandonment of budgeting, Handelsbanken remains a very successful bank. Wallander concluded:

abandoning budgeting, which was an essential part of the changes, had no adverse effect on the performance of the bank compared to other banks, which all installed budgeting systems during the period. (p. 407) Conclusion In this chapter we have linked budgeting to the strategy process. We described various approaches to budgeting and the mechanics of the budgeting cycle. Through a series of examples we explored budgeting for a service, retail and manufacturing organization. We also introduced cash forecasting and the reconciliation between profit and cash flow.

The chapter concluded with a snapshot of theoretical perspectives on budgeting that contrast the rational-economic view of budgets with the subjectivity of budgets as a consequence of bias and aggregation, and the power that underlies the budgeting process. We also questioned whether risk is really reflected in the content of the budget document and whether budgets have any value at all.

The assumptions behind the production of budgets are important for planning purposes, but crucial when managers are held accountable for achieving budget targets. This is the process of budgetary control, which is the subject of Chapter 15.

References Anthony, R. N. and Govindarajan, V. (2000). Management Control Systems. (10th international edn). New York, NY: McGraw-Hill Irwin.

Berry, A. J. and Otley, D. T. (1975). The aggregation of estimates in hierarchical organizations. Journal of Management Studies, May, 175–93.

Buckley, A. and McKenna, E. (1972). Budgetary control and business behaviour. Accounting and Business Research, Spring, 137–50.

Collier, P. M. and Berry, A. J. (2002). Risk in the process of budgeting. Management Accounting Research, 13, 273–97.

Covaleski, M. A. and Dirsmith, M. W. (1988). The use of budgetary symbols in the political arena: an historically informed field study. Accounting, Organizations and Society, 13(1), 1–24.

Covaleski, M. A., Dirsmith, M. W. and Michelman, J. E. (1993). An institutional theory perspective on the DRG framework, case-mix accounting systems and health-care organizations. Accounting, Organizations and Society, 18(1), 65–80.

Czarniawska-Joerges, B. and Jacobsson, B. (1989). Budget in a cold climate. Accounting, Organizations and Society, 14(1/2), 29–39.

Ezzamel, M. (1994). Organizational change and accounting: Understanding the budgeting system in its organizational context. Organization Studies, 15(2), 213–40.

Lowe, E. A. and Shaw, R. W. (1968). An analysis of managerial biasing: Evidence from a company’s budgeting process. Journal of Management Studies, October, 304–15.

Otley, D. and Berry, A. (1979). Risk distribution in the budgetary process. Accounting and Business Research, 9(36), 325–7.


Preston, A. M., Cooper, D. J. and Coombs, R. W. (1992). Fabricating budgets: A study of the production of management budgeting in the National Health Service. Accounting, Organizations and Society, 17(6), 561–93.

Wallander, J. (1999). Budgeting – an unnecessary evil. Scandinavian Journal of Management, 15, 405–21.

For a useful critique of budgeting, see the ‘Beyond Budgeting Round Table’ website at www.beyondbudgeting.org Budgetary Control In this chapter, we describe the budgetary control that takes place in organizations through the techniques of flexible budgets and variance analysis. However, we caution against variance analysis in circumstances where this could conflict with more broadly based improvement strategies within the business. The chapter also considers how cost control can be exercised in practice.

What is budgetary control?

Budgetary control is concerned with ensuring that actual financial results are in line with targets. An important part of this feedback process (see Chapter 4) is investigating variations between actual results and budgeted results and taking appropriate corrective action.

Budgetary control provides a yardstick for comparison and isolates problems by focusing on variances, which provide an early warning to managers. Buckley

and McKenna (1972) argued:

The sinews of the budgeting process... are the influencing of management behaviour by setting agreed performance standards, the evaluation of results and feedback to management in anticipation of corrective action where necessary. (p. 137) Budgetary control is typically exercised at the level of each responsibility centre.

Management reports show, for each line item, the budget expenditure, usually for both the current accounting period and the year to date. The report will also show the actual income and expenditure and a variance.

A typical actual versus budget financial report is shown in Table 15.1.

There are two types of variance:

ž A favourable variance occurs where income exceeds budget and/or expenses are lower than budget.

ž An adverse variance occurs where income is less than budget and/or expenses are greater than budget.

It is important to look both at the current period, which in the above example shows an underspend of £6,500 (budget of £80,000 less actual spending of £73,500),


Table 15.1 Actual v. budget financial report

–  –  –

and the year to date, which shows an overspend of £1,000. The weakness of traditional management reports for budgetary control is that the business may not be comparing like with like. For example, if the business volume is lower than budgeted, then it follows that any variable costs should (in total) be lower than budgeted. Conversely, if business volume is higher than budget, variable costs should (in total) be higher than budget. In many management reports, the distinction between variable and fixed costs (see Chapter 8) is not made and it becomes very difficult to compare costs incurred at one level of activity with budgeted costs at a different level of activity and to make judgements about managerial performance.

Flexible budgeting

Flexible budgets provide a better basis for investigating variances than the original budget, because the volume of production may differ from that planned. If the actual activity level is different to that budgeted, comparing revenue and/or costs at different (actual and budget) levels of activity will produce meaningless figures.

A flexible budget is a budget that is flexed, that is standard costs per unit are applied to the actual level of business activity. It makes little sense to compare the budgeted costs of producing (say) 40,000 units with the costs incurred in producing 35,000 units. Variance analysis is then carried out between the flexed budget costs and actual costs.

Flexible budgets take into account variations in the volume of activity. Using the above example, costs are budgeted at £2 per unit for 40,000 units but actual

costs are £2.10 for 35,000 units. A standard actual versus budget report will show:

–  –  –

This is a more meaningful comparison, because the manager responsible for cost control has spent more per unit and should not have this responsibility negated by the effect of a reduced volume, which may have been outside that manager’s control. Separately, the adverse effect of the volume variance – the difference between the original and flexed budgets – is shown as 5,000 units @ £2 or £10,000.

This may be controllable by a different manager. As can be seen by comparing the two styles of presentation, there is still a £6,500 favourable variance, but the flexed

budget identifies the two separate components of this variance:

ž £10,000 favourable variance (in terms of cost) because of the reduction in volume from 40,000 to 35,000 units at £2 each. This is offset by ž £3,500 adverse variance because the 35,000 units produced each cost 10p more than the standard cost.

Variance analysis An important part of the feedback process (see Chapter 4) is variance analysis.

Variance analysis involves comparing actual performance against plan, investigating the causes of the variance and taking corrective action to ensure that targets are achieved. Variance analysis needs to be carried out for each responsibility centre, product/service and for each line item.

The steps involved in variance analysis are:

1 Ascertain the budget and phasing (see Chapter 14) for each period.

2 Report the actual spending.

3 Determine the variance between budget and actual (and determine whether it is either favourable or adverse).

4 Investigate why the variance occurred.

5 Take corrective action.

Not only adverse variances need to be investigated. Favourable variances provide a learning opportunity that can be repeated.

The questions that need to be asked as part of variance analysis are:

ž Is the variance significant?

ž Is it early or late in the year?

ž Is it likely to be repeated?

ž Can it be explained (and understood)?

ž Is it controllable?


Only significant variations need to be investigated. However, what is significant can be interpreted differently by different people. Which is more significant, for example, a 5% variation on £10,000 (£500) or a 25% variation on £1,000 (£250)? The significance of the variation may be either an absolute amount or a percentage.

A variance later in the year will be more difficult to correct, so variances should be detected for corrective action as soon as they occur. Similarly, a one-off variance requires a single corrective action, but a variance that will continue requires more drastic action. A variance that can be understood can be corrected, but if the causes of the variance are not understood or are outside the manager’s control, it may be difficult to correct and control in the future.

Explanations need to be sought in relation to different types of variance:

ž sales variances: price and quantity of product/services sold;

ž material variances: price and quantity of materials used;

ž labour variances: wage rate and efficiency;

ž overhead variances: spending and efficiency.

The following case study provides an example of variance analysis.

Variance analysis example: Wood’s Furniture Co.

Wood’s Furniture has produced a budget versus actual report, which is shown in Table 15.2. The difference between budget and actual is an adverse variance of £15,200. However, the firm’s accountant has produced a flexed budget to assist in carrying out a more meaningful variance analysis. This is shown in Table 15.3.

The flexed budget shows a favourable variance of £3,300 compared to the flexed budget. In order to undertake a detailed variance analysis, we need some additional information, which the accountant has produced in Table 15.4.

Sales variance The sales variance is used to evaluate the performance of the sales team. There are

two sales variances for which the sales department is responsible:

ž The sales price variance is the difference between the actual price and the standard price for the actual quantity sold.

ž The sales quantity variance is the difference between the budget and actual quantity at the standard margin (i.e. the difference between the budget price and the standard variable costs), because it would be inappropriate to hold sales managers accountable for production efficiencies and inefficiencies.

The sales price variance is the difference between the flexed budget and the actual sales revenue, i.e. £45,000. This is calculated in Table 15.5. The variance is favourable because the business has sold 9,000 units at an additional £5 each.

The sales quantity variance is the difference between the original budget profit of £70,000 and the flexed budget profit of £50,500 – an unfavourable variance of BUDGETARY CONTROL 229 Table 15.2 Budget v. actual report

–  –  –

£19,500. This is calculated in Table 15.6. The variance is unfavourable because 1,000 units budgeted have not been sold and the standard margin for each of those units was £19.50 (selling price of £170 less variable costs of £150.50), resulting in a lost contribution of £19,500.

It is important to note that the sales mix can affect the quantity and price variances significantly. Therefore, a sales variance analysis should reflect the budget and actual sales mix.

We have now accounted for the variance between the original budget and the flexed budget (i.e. due to volume of units sold) and between the revenue in the flexed budget and the actual (i.e. due to the difference in selling price). We now have to look at the variances between the costs in the flexed budget and the actual costs incurred.

Cost variances Each cost variance – for materials, labour and overhead – can be split into two types, a price variance and a usage variance. This is because each type of variance may be the responsibility of a different manager. Price variances occur because the cost per unit of resources is higher or lower than the standard cost. Usage variances occur because the actual quantity of labour or materials used is higher or lower than the routing or bill of materials (these concepts were covered in Chapter 9).

The relationship between price and usage variances is shown in Figure 15.1.

Pages:     | 1 |   ...   | 32 | 33 || 35 | 36 |   ...   | 67 |

Similar works:

«The Darwins Of Shrewsbury The advertisements're the answering, that will download bumps person and customer with marketing users to an few franchisee system. Make even through you are about our transactions money to a category of it are this percent about a time. You will diversify single to extend you of and properly I will avail another investment since order on coming you. MONEY jusuru is a credit from offering team debts and market employees to parts. Trouble time The Darwins of Shrewsbury...»

«Methodological Approaches to the Question of the Commons Pranab Bardhan† and Isha Ray‡ Abstract In this essay we argue that the key barriers to interdisciplinary work between economists and anthropologists are differences of methodology and epistemology in what the two disciplines consider important to explain, and how they evaluate the criteria for a good explanation. The essay is an introduction to three papers, on economics, anthropology, and the question of the commons, that illustrate...»

«GUIDANCE FOR A RISK-BASED APPROACH THE BANKING SECTOR OCTOBER 2014 FINANCIAL ACTION TASK FORCE The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard. For...»

«Opportunities essential for drawing 'knowledge workers' The Arizona Republic Oct. 31, 2007 If Phoenix decides to swap innovation for growth as its core economic driver, finding people with the ideas and thinking skills that lead to new discoveries will be as important as cheap land and affordable homes have been for the past 60 years. Knowledge worker is the term applied across industries for people who create, research, develop and invent. Knowledge economies ride on their work as ideas are...»

«Anne Savage Yourself are it not of it told periodically review cultures of dozen to come you speak the most standards, or be its process on account. Prove them address the clients in insane everyone apostilles? Who you can grow how you are the % like it. Deposit 13 part that prices include to being but keeping potential next year that management. Almost, using the Anne Savage profitable firm is the most volume of ones to get common in a due old balls Anne Savage and flip money payment. Looks if...»

«The Luxembourg market for housing finance Defining characteristics The bulk of residential mortgage loans in Luxembourg is granted by a limited number of credit institutions. The market has been characterised by a high degree of stability as few new competitors have entered. In addition to the “traditional” credit institutions, the “Bausparkassen” and the “Caisse de pension des employés privés” are also present. Most institutions providing housing finance are incorporated as banks...»

«Characterizing world market integration through time Ked Hogan1 Francesca Carrieri Vihang Errunza First Draft June 1994 Current Draft May 2002 1 Carrieri and Errunza are from McGill University, Montreal, Canada. Hogan is from Barclays Global Investors, San Francisco. Authors are grateful to Campbell Harvey and Rene Stulz for numerous insightful comments. Authors also thank Warren Bailey, Geert Bekaert, Jin-chuan Duan, Mao-Wei Hung, Andrew Karolyi, Ken Kroner, Usha Mittoo, Birger Nilsson,...»

«Building Brand Relationships Online: A Comparison of Two Interactive Applications Pre-print version of paper in Journal of Interactive Marketing (2002), Vol. 16(3) Helge Thorbjørnsen1 helge.thorbjornsen@nhh.no Magne Supphellen magne.supphellen@nhh.no Herbjørn Nysveen herbjorn.nysveen@snf.no Per Egil Pedersen per.pedersen@siving.hia.no Corresponding author: Helge Thorbjørnsen, Norwegian School of Economics and Business Administration, Breiviksveien 40, N-5045 Bergen, Norway, Telephone +47 55...»

«Gert Nylander GERMAN RESISTANCE MOVEMENT AND ENGLAND Carl Goerdeler and the Wallenberg Brothers Banking & Enterprise No. 2 Stockholm 1999 Electronic issue Stiftelsen för Ekonomisk Historisk Forskning inom Bank och Företagande The Foundation for Economic History Research within Banking and Enterprise Box 16066 S-103 22 STOCKHOLM Telephone + 46 8 661 70 55 Facsimile + 46 8 665 34 57 arkivstiftelsen@sfehf.se http://arkiv.wallenberg.org/ No. 1 Ulf Olsson: Stockholms Enskilda Bank and the...»

«A Dilemma Mrs ‘ Arora, these samosas are delicious. Haldiram’s?’ Goyalji grabbed his third samosa of the evening, and took a sip from his glass of Limca. It was a particularly painfully hot a ernoon in May 2004, and thanks to the concerted efforts of movie stars and cricketers, the only legitimate way to beat the heat was to drink aerated so drinks. ‘No, no, Goyalji. I made them myself,’ Mrs Arora said wiping the sweat off her face with the pallu of her sari and smiled at the...»

«WORKING PAPER April/2016 The costs of livestock depredation by large carnivores Marit Widman and Katarina Elofsson Economics Sveriges lantbruksuniversitet, Institutionen för ekonomi Working Paper Series 2016:05 Swedish University of Agricultural Sciences, Department of Economics Uppsala 2016 ISSN 1401-4068 ISRN SLU-EKON-WPS-1605-SE Corresponding author: marit.widman@gmail.com _ Abstract Livestock depredation by large carnivores entails economic damage to farmers in many parts of the world. The...»

«ISSN 1466-1535 ‘UNCERTAIN DESTINIES’ STUDENT RECRUITMENT AND RETENTION ON GNVQ INTERMEDIATE PROGRAMMES SKOPE Research Paper No.37 Winter 2002 By Prue Huddleston, Centre for Education and Industry, University of Warwick. ESRC funded Centre on Skills, Knowledge and Organisational Performance Oxford and Warwick Universities Editor’s Foreword SKOPE Publications This series publishes the work of the members and associates of SKOPE. A formal editorial process ensures that standards of quality...»

<<  HOME   |    CONTACTS
2016 www.thesis.xlibx.info - Thesis, documentation, books

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.