Budgeting and Budgetary Control

Operational management needs to know the causes of off-standard performance in order to improve operations. The knowledge of variances (real result versus budget) will aid control, at least if and when these variances are understood well enough. The only criterion for the calculation of a variance is its usefulness. Of course variances must be calculated immediately after the event and one should act upon them adequately.

Budget processes in many cases actually exemplify what is harming companies instead of helping them. Jensen, 2001, describes what is happening in practice (re SSRN_ID267651). Measuring performance, by whether or not achieving set targets for the period or missing them, is ridiculous. Budgets and targets mean nothing without thorough detailed budgetary control; how should it be conducted?

Variance analysis, the way it is taught at many schools and universities, in accordance with a wide variety of textbooks, is put to the test. This article refers a freely downloadable paper and two books, presenting examples, with quotes from various textbooks and examinations. Problem definitions are quoted literally. Working-outs as explained by famous writers / lecturers / consultants are given where necessary and otherwise they are available at the quoted places in literature. My opinion is that these working-outs cannot stand the test. Anyway my opinion is not important, the reader decides. I give my elaboration in full detail, in reaction to the corresponding working-out published in well-known textbooks / examination papers, and may the best one prevail. Of course the elaborations of others and myself have a lot in common, but the discrepancies are at stake. Wrong, incomplete, unclear analyses will lead to mismanagement. Only the best integral working-out is the essential base to better (operational) management.

Of course variance analysis is but a means to an end. A deeper understanding of the state of the company is the ultimate goal of all representations in budgeting and budgetary control. Management’s task is to find the reasons for the variances and to take proper action to bring operations into line with the budget. Maybe the variances and trends indicate that the standards need amendment.

A strategic investment proposal is also a budget. The realised results ex post (not just future cash flows resulting out of an investment today), should be analysed in full detail; monitoring and evaluating in fact is learning. Monitoring / evaluating should become a second nature to any operational manager. One should precisely measure the real results. Compare these measurements to the standard and/or actual budget(s). Locate the variances and study all differences thoroughly. Last but not least, implement and follow-up the necessary actions. Realised results ex post must be compared to the (necessary) estimates ex ante. The problem definition is dead simple. Likewise, in theory, the way to the solution is also simple. However, in practice, working-outs are often not beyond dispute as they should be. The variances must be reported quickly enough to the right people. Clear and complete. Adverse and favourable variances, each in full detail, altogether the whole story, inclusive cause and effect. Proven data. Do not believe anything. Demand to see everything. Do not jump to conclusions. Be aware of possible relationships between the variances. A favourable material price variance can be more than offset by adverse material usage and labour variances caused by poor quality material, which simultaneously may be the very reason for the material price being a pleasant surprise. What has not (yet) been analysed in full detail is ‘terra incognita’. If more unfit products than standard is allowed, to give an example, it often does not amount to just the wasted costs in production; the lost turnover in the period under consideration indicates what the adverse unfit products variance or process loss variance really is in many cases. Or, the other way round, what is the total, after selling all products that are fit for use, of the favourable process loss variance, if the number of unfit products is actually less than the standard allowed? Notably process loss variances are often being treated in a too fragmentarily way. Yet variance analysis is acknowledged to be an important subject matter to which whole chapters are devoted in many textbooks regarding management accounting. Totals that fit – just these total amounts – do not give any guarantee. The analysis has to be correct in all respects, not just in total but also in each and every detail. Maybe one can claim certain losses to third parties, on condition one is able to prove it. 

No formula has been used explicitly in my working-outs. Re my freely downloadable paper ‘Budgeting and Budgetary Control’ http://ssrn.com/abstract=400120 to see various working-outs for which no more is necessary than just common sense in order to read and understand the reconciliation between Standard Budget-profit and Realised Result-profit. Needed for all operational managers is this book: ‘Budgetary Control: Scientific Perfection Business Economics‘ https://www.amazon.com/gp/product/B08WJY51SY/ref=dbs_a_def_rwt_hsch_vapi_tpbk_p1_i7 

My book Business Economics VI Groundbreaking, learning content Chapter 9, Budgeting and Budgetary Control; after Chapter 9 you are familiar with various cost and revenue concepts, for example: sales result, capacity usage result, contribution margin in addition to efficiency losses, price advantages, unfit products variances, assortment variances, and so on. You are then able to give a thorough assessment of where benefits are being realised in your organization and where and by whom exactly money is lost. It is about finding the causes of the differences between the budget (a budget is a money-translated plan) and the realised result. No Greek word has been used in my working-outs, and although factual formulas have indeed been used, everything is automatically drawn up along the lines of logic so that everyone can also understand the analysis made. There is no need for difference analysis rather just common sense. Remember, every analysis must be clear and transparent.

Budgeting and Budgetary Control is just one of 8 Scientific Perfections in my book, not to be neglected, suitable for self-study, hardly needing a teacher.

https://ceoworld.biz/2020/07/06/basis-for-better-business-administration-and-management/

My book THEORY, No. 1 from a triptych, is indeed groundbreaking with even more than these 8 Scientific Perfections, available at Amazon websites ISBN 9781086355635 

https://www.youtube.com/watch?v=cdtCIFKwpNI

I am independent researcher Business Economics and inventor of The Profit Formula® The Way to Easy Profit Measurement. I have more than 20 years of experience as a lecturer in Business Economics, and I have always been critical of what was in many textbooks. My book goes beyond the borders of set science, and rewrites / improves large tracts of Business Economics as it is currently badly taught worldwide. 

Business Economics is a training course of making sums. 

No. 2 from the triptych Exercises, Problems, Questions is for everyone the ultimate test: https://www.youtube.com/watch?v=Bcy-C6Mp1yE&t=4s

No. 3 from the triptych Elaborations, Answers gives everyone the ultimate solution:

https://www.youtube.com/watch?v=z_lXxRy__wQ&t=6s

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