Budgetary Control and Variance Analysis
FINANCIAL MANAGEMENT DEVELOPMENT Management Reporting Budgetary Control NO 213
BUDGETARY CONTROL AND VARIANCE ANALYSIS
£ £££ ££££££
1 333 35753
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 actual performance can be measured. This is only worth doing if action will be taken as a result. In too many organisations the production of results compared to budget is seen as the end of the process. If no action is taken on the basis of management accounts then there is little point in producing them and even less point in wasting management time discussing them.
PLAN MONITOR EVALUATE
FEEDBACK LOOP
By identifying progress from a preceding position we are better informed regarding the effects of our actions and have a clearer understanding of the effect of any future action we take. Knowing how much is being spent each month enables a manager to consider whether action needs to be taken to spend more or less in the future. THIS PROCESS IS ONLY WORTHWHILE IF THE BUDGET IS REALISTIC. ANALYSING VARIANCES AGAINST AN UNREALISTIC BUDGET IS POINTLESS. However, in a well run organisation the comparison between actual and budget is used as the basis for deciding the appropriate action. This paper sets out how the analysis is used to maximum effect. The process is really part of the normal control process. WHAT CAUSES BUDGET VARIANCES? There are four key reasons and it is important that good managers recognise the differences, because
BUDGETARY CONTROL AND VARIANCE ANALYSIS
£ £££ ££££££
1 333 35753
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 actual performance can be measured. This is only worth doing if action will be taken as a result. In too many organisations the production of results compared to budget is seen as the end of the process. If no action is taken on the basis of management accounts then there is little point in producing them and even less point in wasting management time discussing them.
PLAN MONITOR EVALUATE
FEEDBACK LOOP
By identifying progress from a preceding position we are better informed regarding the effects of our actions and have a clearer understanding of the effect of any future action we take. Knowing how much is being spent each month enables a manager to consider whether action needs to be taken to spend more or less in the future. THIS PROCESS IS ONLY WORTHWHILE IF THE BUDGET IS REALISTIC. ANALYSING VARIANCES AGAINST AN UNREALISTIC BUDGET IS POINTLESS. However, in a well run organisation the comparison between actual and budget is used as the basis for deciding the appropriate action. This paper sets out how the analysis is used to maximum effect. The process is really part of the normal control process. WHAT CAUSES BUDGET VARIANCES? There are four key reasons and it is important that good managers recognise the differences, because