Following from budgeting in Chapter 16, in this chapter we describe the process of budgetary control that takes place in organizations to manage performance in line with targets. We demonstrate variance analysis by using flexible budgets. An extended case study is used to show how variances can be identified for sales and costs, separately identifying price and efficiency variances for costs that need to be investigated by operational managers as part of the feedback process. This chapter also contains a critique of variance analysis in the modern business environment although effective management of cost remains a focus for all managers. The chapter concludes with the application of different perspectives to the management accounting techniques covered in Chapters 14 to 17.
Budgetary control is concerned with ensuring that actual financial results are in line with targets. An important part of this feedback process (see Chapter 4) is investigating variations between actual results and budgeted results and taking appropriate corrective action.
Budgetary control provides a yardstick for comparison and isolates problems by focusing on variances, which provide an early warning to managers. Buckley and McKenna (1972) argued:
The sinews of the budgeting process . . . are the influencing of management behaviour by setting agreed performance standards, the evaluation of results and feedback to management in anticipation of corrective ...