Essay about Budgetary Control and Variance Analysis

2848 Words Oct 9th, 2010 12 Pages
FINANCIAL MANAGEMENT DEVELOPMENT Management Reporting Budgetary Control NO 213
BUDGETARY CONTROL AND VARIANCE ANALYSIS

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FINANCIAL

MANAGEMENT

DEVELOPMENT

ONE OF A SERIES OF GUIDES FOR FINANCIAL MANAGEMENT DEVELOPMENT FROM www.FinancialManagementDevelopment.com

This is one of a series of documents produced by David A Palmer as a guide for managers on specific financial topics to assist informed discussion. Readers should take appropriate advice before acting upon any of the issues raised.

Financial Management Development

DAP 213 Page 2 of 10

BUDGETARY CONTROL AND VARIANCE ANALYSIS
WHY COMPARE ACTUAL AND BUDGET? One of the objectives of budgeting is to provide a base against which
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This means either putting through a correction in the next period, which will then also be wrong, or adjusting the past results to correct the error. Failing to note that the correction can cause misleading results can lead to wrong decisions being made. AVOID: "The Accounts figures are always different from ours so we ignore them and keep our own records."

Reality is Wrong Sometimes the Actual results are useless as an indicator. A strike or natural disaster will have an impact on results. This does not mean that the budget process in future should include an allowance for this happening again. (However in large organisations it is normal to allow for the impact of a disaster centrally as a contingency even if it is not budgeted at operating unit level.) If necessary, insurance should be taken out. If business is disrupted for two weeks, then it is pointless to compare the remaining two weeks of the month against a full month's budget. Produce a realistic budget for only two weeks and compare against that to establish true performance under normal circumstances. AVOID: "The variances are distorted because of.......so its not my fault." © David A Palmer 2000

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Financial Management Development

DAP 213 Page 4 of 10

Differences between Budget Assumptions and Actual Outcome This is the key issue and the one which involves the use of variance analysis techniques.

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