Budget Control Course: Master ACG

Course instructor: Ms. MOUMOU

General course outline

1. Introduction to budget control

2. Definition of budgetary control

3. The limits of budget control

4. Gap analysis

The analysis of discrepancies in revenue

The analysis of cost variances

5. Example of application

REFERENCES (INDICATIVE)

ALAZARD.C, SEPARI.S: "Management Control", Dunod edition, 2010

2. BONNIER.C, LANGLOIS.L, BRINGER.M: 'Management Control', Berti Edition, Algiers
2008.
BURLAND: "Cost, Control, and Management"
4. DAVASSE.H, G. LANGLOIS: "Analytical accounting and budget management", ed BERTI,
2010.
5. DE RONGE.Y, CERRADA.K: "Management Control", Paris Pearson 2012
6. Didier LECLERE, budget management, EYROLLES edition, Paris, France, 1994.
7. Hamini.A. "budget management and forecasting accounting", BERTI edition, Algiers,
Algeria, 2001.
8. HEMICI.F, HENOT ;C : "Management Control", Breal edition 2007
9. Jack Forget, budget management, organization publishing, Paris, France, 2005.
10. JACQUOT, MILKOF.R. "management accounting, Analysis and control of costs", Ed
economic, 2010.
11. LECLERE .D. : "The Essentials of Budget Management"
12. Thierry Cuyaubère, management control: forecasting and budget management, the
Fiduciaires Publications SA, Paris, France, 1996.
Note:othertitlesareavailable.
1. Introduction to Budget Control:

Budget management involves establishing budgets and periodically comparing them.

achievements with the budgeted data in order to implement corrective actions if
necessary. It allows:

¾ To concretely translate the strategic objectives set by the management;

¾ To coordinate the different actions of the company;
¾ To plan the necessary means for their implementation (cash flow, capacity to
production);
¾ To make choices between several hypotheses. Moreover, it allows for management.
decentralized by making delegation of powers possible: each manager of
to be allocated resources and goals to be met while being free from
means employed.

The forecasting approach aims to prepare the company to leverage its strengths and to
facing the difficulties she will encounter in the future. It includes a definition of
objectives to be achieved and means to be implemented. It is divided into:

in the long term (> 5 years): strategic plan

o in the medium term (2 to 4 years): operational plan
o in the short term (1 year): budgets
o in the very short term: dashboards

2. Definition of budget control

Budget control allows for the comparison of actual results with forecasts. To uncover
the significant deviations, analyze them and take corrective measures include the
main aspects ofmanagement controlBudget control is not just synonymous with
budget management is also a real tool for verification. It allows for checking the
performance of the different centers of responsibility.

In other words, budget control is a procedure that compares ex post the achievements.
with the budget forecasts of a responsibility center.

3. The limits of budget control

9The responsibility center must have real autonomy in its decisions.

must be a place of decision-making power: what would be the responsibility of a
responsible for a center if he has no control over his budget?

9the implementation of budget control is often poorly experienced, as it is perceived as a

sanctioned by the company's staff.
 9Complex and lengthy process, budget control does not always ensure a good
reactivity of the company. In the face of an increasingly turbulent environment, others
tools will be implemented, including dashboards.

9an efficient accounting information system: the responsiveness of control depends on

large part of the accounting information system. The arrival of ERPs facilitated the
work of the controller and propose specific management control modules
(reporting, dashboard, etc.).

4. The analysis of variances

4.1. Analysis of the revenue variance:

The projected revenue is obtained from the sales budget. The variances on revenue
business matters are the responsibility of the business units. It is therefore from these units that must
emanate the adjustments of forecasts, the corrective actions. (see the application example)
Deviation of revenue = Actual revenue - Expected revenue

4.1. The analysis of cost variances:

All the methods studied so far are based on cost analysis and
known consumptions, that is to say on an analysis conducted a posteriori on elements
observed and therefore able to be known with precision. These historical costs present
several disadvantages.
Administrative delays:
They come from the processing time of invoices and the allocation procedures of
charges on responsibility centers.
The slowness of the calculation procedures:
Cost calculation is, by nature, sequential: if the production process is relatively
complex, accounting information will be slow and delayed in time.
Historical costs are focused on the past.
The cost analysis aims to facilitate decision-making which is naturally
touring towards the future. It is partly contradictory to want to exclusively illuminate the future
by references to the past that cannot take into account changes in the processes
of production or in prices.

4.1.1. Definition:
The General Accounting Plan defines a predetermined cost as: "a cost assessed beforehand:"
So as to facilitate certain analytical processes,
· To enable management control through variance analysis.

It is about establishing in advance, based on normal activity, normal forecasted costs.

in order to retrospectively calculate the discrepancies between actual costs incurred and established costs.
 4.1.2. The determination of predetermined costs

- They can be calculated based on actual or average costs incurred during the periods.
previous accountants.
- They can be calculated based on the activity level of the considered company.
as "normal".
- We can calculate them based on an analysis conducted by a design office.
- costs calculated from an operating budget.
This last method involves establishing a direct link between budget calculation
of operation and the calculation of pre-established costs seems to us the best. Indeed, it allows
to determine the causes of the non-fulfillment of the budget and therefore the responsibilities.

4.1.3. Typology of predetermined costs: The pre-established costs are presented under
different forms:

A/ The standard cost: Costs are said to be 'standard' when they are calculated from
from a technical and economic analysis conducted by the methods office. They
present the characteristics of a standard.
Example:
The production of a series of 100 products requires 50 kg of raw material at €40 per kg.
What would be the pre-established cost of the raw material for an order of 500 products?
(5series) ?
Cost of a series = 40 DA x 50 kg = 2,000 DA.
Standard cost of 5 series = 2,000 DA x 5 = 10,000 DA.

B/- The budgeted cost: It is made up of a set of specific budgets corresponding to

each has a different activity level from the analysis center. We start from the normal budget or
budget type.
C/ - The estimated cost: is assessed based on the data obtained during the periods
previous accountants, using statistical averages.
D/- The quote: This refers to costs determined in advance for an order of goods or
services.

4.1.4. The process of determining predetermined costs and variance analysis:

Based on the objectives set by the production manager, the determination of costs
The predefined process takes place in four stages, as indicated in the following table:

steps Nature of the work to be carried out

Step 1 Preparation of a predetermined cost sheet for a unit produced. This sheet is
called standard unit cost sheet

Step 2 Determination of the predetermined cost of production recognized or actual (or real):
CPPC

Step 3 Determination of the actual production cost (or real): CPR

Step 4 Determination of a volume variance that corresponds to the difference between the cost
pre-established of the recorded production and the cost of the actual production

The choice of the type of predetermined cost depends on the management style of the company and the type of
problem to solve.

5. Example of application:
The following example shows us how to analyze the different gaps, namely: (gap on
direct charges and variances on indirect charges) :
A manufacturing company uses the standard cost method, the actual situation of
The company resulting from the actual activity at the end of the period is as follows:

Purchase of raw material: 6,800 Kg x 0.22 = 1,496 DA

Raw materials consumed: 5,500 Kg X 0.22 = 1,210 DA

- MOD: 190 H at 1.68 DA/H
Indirect costs: 1,140 DA
Actual production for the period: 600 U
Sales for the period: 600 X 5 = 3000 DA
For management control reasons, the studies conducted by the company have led to the
beginning of the period for the determination of the standard unit cost sheet that is presented
as follows:

Direct raw material: 09Kg at 0.20 DA

MOD: 0.35 H to 1.60 DA
- Indirect costs: 05 DA for each HMOD
The company has budgeted for the production of 700 units for a total of 1,225.
DA (don't 490DA as fixed charges)
T.A.F: Present the comparative table, analyze all the discrepancies, and comment on the results.

Remarks:
The variances: compare the actual results to the forecasts. By convention, a variance is calculated
in the real sense - forecast.
All variances can be analyzed in terms of a price variance and a quantity variance.
- Deviations on quantities are valued at a predetermined price (cost). Deviations on prices are
weighted by the actual quantity.
Corrigé :

1°/- Comparison table: actual production cost - standard cost of the

real production:

Designation Actual cost (A.C) Standard cost (S.C) of the actual X° Gaps
Q P.U MTS Q P.U MTS FAV DEFAV
Direct MP 5500 kg 1 210 600 X09Kg=5 400kg 0.20 1,080 130
MOD 190H 1.68 319.20 600 X 0.35 = 210 H 1.60 336 16.8
Fees 1,140 600 X 0.35 = 210H 5 1050 90
indirects
Cost 2,669.2 2,466 203.2

RA (actual cost) = CA - actual cost

= 3,000 - 2,669.2 = 330.8 DA
RA (Standard cost) = CA - standard cost
3,000 - 2,466 = 534 DA
Global deviation = 330.8 - 534 = -203.2 (unfavorable)

The overall gap which is negative represents a loss of earnings for the company. This loss
is due to the non-compliance with the standards that were established by the company at the beginning of the period.
The analysis of discrepancies will allow us to detect their origins and to implement actions.
correctives.

The analysis of variances;

There are 2 types of gaps:
The variances on direct costs: (Raw materials, Direct labor)
Differences in indirect costs or differences by work center.

a) Deviation on Raw Materials:

Variance on raw materials

Variance on Raw Material Quantity difference in MP price

Global cart MP=[5 500X0, 22] - [600X09X0, 20]=+ 130 (unfavorable)

Difference on Q = (QR – QS) X PS = (5,500 – 5,400) 0.2 = +20 (unfavorable)
Cart on PX= ( PR x X
- PS) QR = ( 0.22 0.2) - 5 500 =
+110DA(disfavorable)

The unfavorable variance on materials is mainly due to the variance in price and also to the variance in
quantity for which the cause needs to be investigated: decrease in quality of MP, adjustment issue with
machines, rebounds more important than expected.

b) Deviation on MOD:
Gap on MOD

gap in time spread on rate

 Global cart MOD = [190X 1.68] - [600X0.35 X1.60] =16.8
(favorable)
Difference over Time = ( Tp R – TpS) Rate S = (190 - 210) 1.60 = -32
(favorable)
Difference on RATE = (Rate R - Rate S) TpR = (1.68 - 1.6) 190 = +15.20
(unfavorable)

The favorable gap in time (better productivity of the workforce)? is offset by the
increase in staff remuneration rates (including overtime)

b) Deviation on indirect charges:

The flexible budget: It is a forecast of the total cost of a center of activities.
It distinguishes the projected charges into two parts:
variable (or operational) costs that are proportional to the activity of the center (or
to the number of UO of the center;
fixed costs (or overhead) that are independent of the activity of the center.
The forecast is established for several levels of activity (for quantities of U.O
different)
Three sub-differences are analyzed:
Difference on indirect costs (in the previous example E/CI = 90 (def))

Deviation on cost of charges deviation on activity deviation on yield

(Or budget)

Deviation on cost of expenses (or budget):

This gap can be related to the cost variance, and in particular to the cost variance of the
factors of production. If the gap is positive, it is therefore unfavorable. If it is negative, it is therefore
favorable.

VARIANCE on BUDGET (V/B) = ACTUAL COST - BUDGET of ACTUAL ACTIVITY (VC + FC)
ax + b

The budget equation is as follows: Y = a x + b where (a: standard variable cost, b: standard fixed cost, x:
activities)
Knowing that the normal activity is: 0.35 X 700 U = 245H
so: (1225 - 490) / 245H = 03DA
E/B = 1,140 - (3 x 190) + 490 = 1,140 - 1,060 = +80 (unfavorable)

Deviation on activity:
The actual activity may be lower than the normal activity. In this case, all expenses
fixes could not be attributed to production due to underactivity. In the opposite case,
The favorable gap translates to overactivity.
The variance on activity corresponds to the variance on the allocation of fixed costs (see method)
of the rational imputation of structural charges). If the gap is positive, it is therefore
unfavorable. If it is negative, then it is favorable

DEVIATION on ACTIVITY (E/A) = BUDGET of THE ACTUAL ACTIVITY - PREVIOUSLY ESTIMATED COST of
THE REAL ACTIVITY
(CUO Preetabli x NUO Reel)
CUO preétabis = 1225/245H = 05DA
E/A = 1 060 - 5 x 190H = 1 060 - 950 = +110DA (unfavorable)
We logically observe an unfavorable discrepancy since the workshop is underperforming (190H in
place of 245H)

This discrepancy can be found, for verification, in the following way:

E/A = Pre-established fixed cost of the unit of work x (Normal Activity - Actual Activity) = (5 -
3) x (245H - 190H) = +110
Or through the CIR: 490 – 490 x (190H/245H) = +110

-Variance on yield:
It comes from the fact that for a completed production, the consumption of work units is
different from the forecasts, hence a discrepancy in the quantity of units consumed.
This is an internal origin and the responsibility of the workshop or analysis center. If
The gap is positive, it is therefore unfavorable. If it is negative, it is therefore favorable.

VARIANCE on PERFORMANCE = PRE-ESTIMATED COST of ACTUAL ACTIVITY - PRE-ESTIMATED COST

of the REAL PRODUCT
(E/R) (CUO Preetabli x AR) (CUO Preetabli x NUO
PREETABLI ) PR

E/R = 950 - 1,050 = -100 DA (favorable)

Verification: E/G of CI = 80 + 110 - 100 = +90 (unfavorable)