Budgetary control Variance analysis Management Accounting Benoit SENAUX  [email_address] 1-A-006
Feedback control and variance analysis From Atrill & McLaney,  Management Accounting for Decision Makers  (2007), Pearson ...
Flexed budget <ul><li>A flexible budget is a budget which varies according to the level of activity. </li></ul><ul><li>The...
Variance analysis <ul><li>Variance analysis aims at explaining the difference between what actually happened and what was ...
Sales variance (1)    Q = (Q A  - Q B ) P B    P = (P A  - P B ) Q A  Adverse Favourable Unit price Volume Budgeted Actu...
Sales variance (2) <ul><li>Sales volume variance: </li></ul><ul><ul><li>Difference between the sales figure in the flexed ...
Cost variance (1) <ul><li>Three main causes of variance: </li></ul><ul><ul><li>‘ Volume’ (or activity) variance: the compa...
Cost variance (2) <ul><li>Volume variance: </li></ul><ul><ul><li>difference between flexed and original budgets. </li></ul...
Cost variance (3) <ul><li>V = volume of activity </li></ul><ul><li>Q = quantity of resource consumed per unit </li></ul><u...
Behavioural issues of budgetary control <ul><li>Having a budget tends to focus attention and to improve performance </li><...
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Pcm Mngt Acctg Budgetary Control

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Pcm Mngt Acctg Budgetary Control

  1. 1. Budgetary control Variance analysis Management Accounting Benoit SENAUX [email_address] 1-A-006
  2. 2. Feedback control and variance analysis From Atrill & McLaney, Management Accounting for Decision Makers (2007), Pearson Prepare budget Collect information on actual performance Perform Compare actual performance with budget and take action on deviations Feedback Feedback Feedback
  3. 3. Flexed budget <ul><li>A flexible budget is a budget which varies according to the level of activity. </li></ul><ul><li>The flexed budget is generally a ‘revised’ budget , based on actual activity level (sales mainly). </li></ul><ul><li>It allows for a distinction between ‘volume effect’ and ‘cost effect’ when assessing the variance between actual and budgeted figures. </li></ul>
  4. 4. Variance analysis <ul><li>Variance analysis aims at explaining the difference between what actually happened and what was budgeted. </li></ul><ul><li>It is calculated for every line of the income statement, and then split into more detailed variances when possible (e.g. volume variance and price variance). </li></ul><ul><ul><li>Detailed enough to provide useful information for action </li></ul></ul><ul><ul><li>But not too detailed (risk of confusion etc.) </li></ul></ul><ul><li>Adverse variance: </li></ul><ul><ul><li>Is a variance which, taken alone , has the effect of making the actual profit lower than what was budgeted. </li></ul></ul><ul><li>favourable variance: </li></ul><ul><ul><li>Is a variance which, taken alone , has the effect of making the actual profit higher than what was budgeted. </li></ul></ul>
  5. 5. Sales variance (1)  Q = (Q A - Q B ) P B  P = (P A - P B ) Q A Adverse Favourable Unit price Volume Budgeted Actual Price variance Volume variance Actual Budgeted Total variance = P A Q A -P B Q B Volume variance Price variance
  6. 6. Sales variance (2) <ul><li>Sales volume variance: </li></ul><ul><ul><li>Difference between the sales figure in the flexed budget and the sales figure in the original budget. </li></ul></ul><ul><li>Sales price variance: </li></ul><ul><ul><li>Difference between the actual sales figure and the sales figure in the flexed budget. </li></ul></ul>
  7. 7. Cost variance (1) <ul><li>Three main causes of variance: </li></ul><ul><ul><li>‘ Volume’ (or activity) variance: the company produced/sold less than budgeted. </li></ul></ul><ul><ul><ul><li>e.g. production of 2,000 products instead of 1,500. </li></ul></ul></ul><ul><ul><li>‘ Usage’ (or ‘efficiency’) variance: we used more or less resources per unit than budgeted. </li></ul></ul><ul><ul><ul><li>e.g. using 3.2 kg of raw material per unit instead of 3.0 kg. </li></ul></ul></ul><ul><ul><li>‘ Price’ (or ‘rate’): the actual cost of resources is higher or lower than budgeted. </li></ul></ul><ul><ul><ul><li>e.g. DLH costs € 25 instead of € 24 per hour. </li></ul></ul></ul>
  8. 8. Cost variance (2) <ul><li>Volume variance: </li></ul><ul><ul><li>difference between flexed and original budgets. </li></ul></ul><ul><li>Usage or efficiency variance: </li></ul><ul><ul><li>difference between the actual quantity of the resource used and the quantity of resources as per the flexed budget (multiplied by the standard / budgeted cost of the resource) </li></ul></ul><ul><li>Cost or rate variance: </li></ul><ul><ul><li>difference between the actual cost of the resource used and the cost of the resource in the flexed budget (=actual quantity of resource used at the budgeted cost). </li></ul></ul>
  9. 9. Cost variance (3) <ul><li>V = volume of activity </li></ul><ul><li>Q = quantity of resource consumed per unit </li></ul><ul><li>P = unit cost of resource </li></ul><ul><li>V A Q A P A V A Q A P S V A Q S P S V S Q S P S </li></ul><ul><li>Actual Budget </li></ul><ul><li>Always identify variances in this specific order </li></ul>Cost variance Usage variance Volume variance
  10. 10. Behavioural issues of budgetary control <ul><li>Having a budget tends to focus attention and to improve performance </li></ul><ul><li>Budget targets : </li></ul><ul><ul><li>Motivate more if they are challenging (but achievable) </li></ul></ul><ul><ul><li>Can have negative effect on managers’ motivation and performance if they are unrealistic / too challenging </li></ul></ul><ul><li>When managers participate in setting their targets, motivation and performance are usually higher. </li></ul>

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