Budgeting and budget control – CEOWORLD magazine
Operational management must know the causes of out-of-standard performance in order to improve operations. Knowledge of the variances (actual result versus budget) will facilitate control, at least if and when these variances are sufficiently well understood. The only criterion for calculating a variance is its usefulness. Of course, the deviations should be calculated immediately after the event and should be acted upon appropriately.
In many cases, budget processes actually illustrate what is hurting businesses rather than helping them. Jensen, 2001 describes what happens in practice (re SSRN_ID267651). Measuring performance, based on whether or not the objectives set for the period have been achieved or not met, is ridiculous. Budgets and targets mean nothing without careful and detailed budgetary control; how should it be conducted?
The analysis of variance, the way it is taught in many schools and universities, according to a wide variety of textbooks, is put to the test. This article refers to a free downloadable article and two books, showing examples, with citations from various textbooks and exams. Problem definitions are quoted literally. Elaborations as explained by famous writers/lecturers/consultants are given if needed and otherwise are available at places cited in the literature. My opinion is that these workouts cannot stand the test. Anyway my opinion is not important, it is the reader who decides. I give my elaboration in detail, in reaction to the corresponding elaboration published in well-known textbooks / examination papers, and may the best prevail. Of course, the elaborations of others and I have much in common, but the differences are at stake. Wrong, incomplete and unclear analyzes will lead to mismanagement. Only the best integral elaboration is the essential basis for better (operational) management.
Of course, the analysis of variance is only a means to an end. A deeper understanding of the state of the business is the ultimate goal of all representations when it comes to budgeting and budget control. The task of management is to find the reasons for the variances and take the appropriate measures to bring operations into line with the budget. Perhaps the discrepancies and trends indicate that the standards need to be changed.
A strategic investment proposal is also a budget. The results realized ex post (not just the future cash flows resulting from an investment today) must be analyzed in detail; monitoring and evaluation is actually learning. Monitoring/evaluation must become second nature for any operational manager. Actual results need to be accurately measured. Compare these measures to the standard and/or actual budget(s). Locate the discrepancies and study all the differences carefully. Last but not least, implement and monitor the necessary actions. The results obtained ex post must be compared with the (required) ex ante estimates. The definition of the problem is very simple. Likewise, in theory, the path to the solution is also simple. However, in practice the workouts are often not incontrovertible as they should be. Discrepancies should be reported fairly quickly to the right people. Clear and complete. Unfavorable and favorable deviations, each down to the smallest detail, together the whole story, including cause and effect. Proven data. Don’t believe anything. Demand to see everything. Don’t jump to conclusions. Be aware of possible relationships between gaps. A favorable variation in material price may be more than offset by unfavorable material utilization and labor variances caused by poor quality materials, which may simultaneously be the very reason why material price is a pleasant surprise. What has not (yet) been analyzed in detail is the “terra incognita”. If more unsuitable products than the norm are allowed, to give an example, this often does not only correspond to wasted production costs; the revenue lost in the reporting period indicates what the unfavorable unsuitable product variance or process loss variance really is in many cases. Or, conversely, what is the total, after selling all fit-for-use products, of the favorable process loss variance, if the number of unfit products is indeed below the allowed standard? In particular, process loss deviations are often handled too piecemeal. Yet the analysis of variance is recognized as an important topic to which entire chapters are devoted in many management accounting textbooks. Matching totals – only these total amounts – do not provide any guarantees. The analysis must be correct in all respects, not only as a whole, but also in every detail. Perhaps you can claim certain losses from third parties, provided you can prove it.
No formula was used explicitly in my workouts. Regarding my free downloadable article “Budget and budget control” http://ssrn.com/abstract=400120 to see various elaborations for which it only takes common sense to read and understand the reconciliation between Standard Budget-profit and Realized Result-profit. Necessary for all operational managers is this book: ‘Budget control: Scientific development 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 Budget Control; After Chapter 9, you are familiar with various cost and revenue concepts, for example: sales result, capacity utilization result, contribution margin in addition to efficiency losses, price advantages, unsuitable product deviations , assortment gaps, etc. You are then able to give an in-depth assessment of where the benefits are being realized in your organization and where and by whom exactly the money is being lost. It is a question of finding the causes of the discrepancies between the budget (a budget is a plan translated into money) and the result achieved. No Greek word has been used in my elaborations, and although factual formulas have been used, everything is automatically written in the sense of logic so that everyone can also understand the analysis made. There is no need for analysis of the differences, but rather common sense. Remember that each analysis must be clear and transparent.
Budgeting and budget control is just one of the 8 scientific perfections in my book, not to be overlooked, suitable for self-study, hardly needing a teacher.
My book THEORY, n° 1 of a triptych, is indeed revolutionary with even more than these 8 Scientific Perfections, available on Amazon ISBN sites 9781086355635
I am an independent researcher in business economics and inventor of The profit formula® The path to easy profit measurement. I have over 20 years of experience as a lecturer in business economics and have always been critical of what was in many textbooks. My book breaks the boundaries of set science and rewrites/improves large areas of business economics as it is currently poorly taught around the world.
Business Economics is a sum-making education.
Number 2 of the Exercises, Problems, Questions triptych is the ultimate test for everyone: https://www.youtube.com/watch?v=Bcy-C6Mp1yE&t=4s
Number 3 of the Elaborations, Answers triptych gives everyone the ultimate solution:
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