1. PAUL FEARNLEY Management Accounting and Finance Budgetary control Atrill & McLaney Accounting & Finance for non-specialists Chapter 9

2. Course material on PC network L PBS LectData FearnleyP MACCFIN

3. In Course Tests Surnames A-OThursday 6 November 5.05 p.m. Surnames P-ZThursday 6 November 6.00 p.m. Monday lecture group: room H101 Thursday lecture group: room D111 Second test as above on Thursday 11 December

4. Control cycle Purpose – to enable management to take action to keep the business moving towards its intended targets Compare with the autopilot in an aeroplane This concept of a control cycle appears in nature and engineering

5. Control cycle plan action compareVariance OK? Plan still valid? yes no yes Amend action Amend plan no Negative feedback

6. Management by exception A system of control allowing managers to focus on items of poor performance instead of reporting items which do not need attention It filters the mountain of corporate information to a manageable amount Based on comparing budget to actual and identifying what is off target

7. Budget Variances The difference between what was budgeted and what actually happened If the difference means actual profit>budget profit, variance is favourable If the difference means actual profit<budget profit, variance is unfavourable and usually shown in brackets e.g. (£300) Cost: actual £100, budget £200 variance £100 Income: actual £100, budget £200, variance (£100)

8. Reasons for variances Changes in: –Price –Volume –Rate (exchange, inflation, labour etc.) –Hours worked Timing differences Errors

9. Compensating variances Favourable profit variance may consist of unfavourable cost variable and favourable income variance, netting out Similarly a cost variance may consist of compensating F and U variances E.g. we worked fewer hours, but the pay rate was greater, etc. Need to be aware of this effect

10. Calculation of Variances e.g. materials variance Price variance PV Usage Variance UV Actual unit price AP Budget unit Price BP Actual volume AV Budget volume BV Budget cost BC

11. Calculation of variances Budget cost = BP x BV Actual cost = AP x AV Price variance = (AP-BP) x AV Usage variance = (BV-AV) x BP Similarly for other variances e.g.Labour variance If actual hours = AH Actual rate = AR Budget hours = BH Budget rate = BR Then, Rate variance = (AR-BR) x BH time variance =(BH–AH) x BR Sales variance Work out formulae for sales price and sales volume variances

12. Flexible budgets Budget is changed to reflect the volume actually incurred as opposed to budget Assumption is that we cannot control the volume, so should measure against the achieved volume In effect, this removes the volume variance Danger: could we have influenced the volume? More appropriate for adjusting for external influences such as exchange rates, interest rates, inflation etc. Here we would change the budget to take account of actual exchange rates etc.

13. Revised annual forecast (RAF) An alternative to flexible budgets Keep original budget – fixed budget Produce a forecast for the budget year taking into account actual volume or rate changes. Still produce budget variances. Consider also reporting variances between budget and RAF

14. Reporting Variances need to be reported to management so they can take action Frequency Detail Relevance Only report variances to those managers who are able to control them

15. Human aspects Motivation –Reward –Direction –Authorisation –control Demotivation –Stress –blame

16. Human aspects Dysfunctional behaviour –Build in budget slack –Over optimistic budget to please –Spending up to budget limit –Year end accruals to hide expenses or bring forward income –If reward based on achieving budget, causes focus on budget and short-termism rather than long term corporate good