Budget control is the performance measurement in which the company uses budget to monitor cost and revenue to ensure the profit can hit the target. The budget needs to monitor and adjust to reflect the real situation if necessary. It is very normal to revise the budget as the actual situation will different from planning. Annual budget usually prepared a few months or even quarters beforehand, so we must keep reviewing to reflect with actual operation.
Keeping update a whole budget may be ineffective and time-consuming, so we need to separate and control it in small parts. The company may breakdown the whole budget into department, division, a monthly or quarterly basis, they need to perform the budget control.
Budget Control Example
Company A has prepared the annual budget as follows:
Every quarter, the management needs to review the actual performance with the budget.
The result of the first quarter:
Then the accountant has prepared the annualized figure for the whole year and compares it with the annual budget.
|Annualize (1Q x 4)
- Base on the current situation, the total sale for the whole year will be less than budget 12M.
- COGS is better than the budget, the company may be able to save on direct labor due to the learning curve, or the wastage is reduced.
- The operating expense is the same as the budget.
- The annualized figure is not telling the whole story. The company’s sales may increase or decrease due to the seasonal. Some products are doing well in winter or summer. After receiving the actual result of quarter one, we still not sure about the result for the whole year.
- The COGS is less than expected, we need to look at the accounting treatment if there are any understate COGS.
Budgetary Controlling Techniques
- Financial Budgets.
- Operating Budget.
- Non-Monetary Budgets.
|Budget Control Techniques
|Financial Budget It is how the company plan for the cash receipt and how to use it.
|Cash Flow Forecast: It will forecast the cash inflow, which is usually from the revenue, and the cash outflow due to the expenses. The company needs to ensure that there is enough cash to run the business. The cash inflow is enough to cover the short term obligation.
|Investment: This budget focus on the use of cash surplus to purchase land, building, and machinery. These investments usually from borrowing, bonds or share equity.
|Budgeted balance sheet: The company needs to have a clear plan for its future balance sheet. They may want to increase the asset side and reduce the long term loan. It is various due to the company budget.
|Operating Budget It focuses on the company’s actual operation and budget.
|Sale volume: The company needs to have a specific number of product sales in a year, quarter and month as it will impact company cash flow and the going concern.
|Expense: The expenses should be planned appropriately such as admin expenses, advertising and so on. The higher expense will impact both profit and cash outflow.
|Profit: We need to compare both income and expense and control the profit.
|Fixed Cost: The fixed cost supposed to be fixed at least at a certain point. If it is changing, something is not right, and we should take a closer look.
|Variable Cost; Variable cost includes direct material and direct labor. These costs will be fixed per unit, and change according to production change. We will look at the labor/machine hour per unit, and the Kg of material per unit. If it is too fluctuate, there may be something wrong.
|Mixed Cost: It is the cost that has both characteristics of variable and fixed cost.
What are the Advantages of Budget Control?
|Advantages of budget control
|To reflect the change
|The budget usually prepares at the beginning of the year, however, the market keeps changing, and it will impact our business. We have to identify the gap, if it is too big, our budget needs to change.
|To avoid demotivation
|If the market turns down quickly while our budget stays the same as before, the target will never hit even the employees work 200% harder. So it turns out to be an unrealistic target for employees, which will demotivate them to work. The company needs to adjust this target and make it realistic for them. It will encourage them to work hard to make it happen.
|To increase the target
|On the other hand, the market may be better than before, and our target seems not high enough. So we have to revise the budget to make it suitable for the business.
|Basic for future budget
|It will help us in next year’s budget preparation. The standard cost may need to revise due to the learning curve and machine breakdown.
|To reduce the budget slack
|The variance can be a sign of budget slack. The management will be to investigate and revise the budget to eliminate the slack.
What are the Disadvantages of Budget Control?
|Disadvantages of budget control
|The company needs to spend a lot of time tracking the actual result, comparing, calculate variance and seeking the reason. Instead of doing these tasks, they should work on product design, customer service and much other work, which can boost the company sale.
|The more time we spend, the higher it cost. Besides the time, some companies also require to use complex accounting software in order to keep track of actual results with the budget. Changing the accounting system for only budget control is such as waste of money, and it is very complicated.
|Conflict between departments
|The control procedure requires all departments to work together. Most of them have different interests and try to avoid punishment, so the discussion may not go smoothly. It may end up as the conflicts among people in various departments.
|Require top management time
|Top management should spend its time on the strategic level which decides the future of the company. It such a waste of time if they focus on budget control.