Budgetary Control Is Part of Overall Organisational Control and Is Concerned Primarily with the Control of Performance. the Use of Budgetary Control in Performance Management Has of Late Taken on Greater Importance

Managerial Accounting

Introduction

The focus of management is always on increasing market value of the firm, which in turn, creates value for shareholders. (Hawawini & Viallet, 2002: 1) Budgets are a translation of a firm’s long term strategic goal into financial plans that are actionable. (Hanninen, 2013) The control of a firm’s performance is mainly monitored through budgetary control, which involves different components from controlling costs to setting financial goals. Typically, the performance of companies is primarily accessed on whether those goals were met while maintaining costs. Then in the 1990s, there emerged two vastly different schools of thought to more effectively evaluate a company’s performance. The debate on which system is better carries on to this day because there was a need for a control mechanism that compassed the performance of everyone in the company as a whole.

Traditional Budgeting

Traditionally, the static or master budget is used. The output for the financial year is set, the relevant fixed and variable costs required follows, and this ultimately gives the projected amount of profits to be generated. This is the most basic form of budgeting because at the end of the financial year, the actual revenue and expenses are compared with budgeted amounts and profits. Performance for that year is then evaluated and if profits meet or exceed the projected amount then performance is deemed as good and vice versa.

In reality however, actual results rarely correspond perfectly with the original budget due to unforeseen circumstances or external factors that are out of the firm’s control.

These discrepancies, known as variances, and are analyzed because major inconsistencies year after year, particularly unfavorable ones, can lead to the loss of organizational credibility and shareholders’ loyalty towards the company. (Ryan, 2007) It is too time consuming to investigate all variances thus one method of variance analysis is...