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60 budgetary control
The budgetary control cycle begins with establishing
realistic financial goals for the organisation,
followed by developing an action plan that will
implement these goals. The actual results are then
compared with projected results and corrective
action is taken where appropriate to facilitate
improvement. Those items that are appropriate for
management action are determined from analysing
the variances and determining those that are
significant.
Often an organisation will employ a technique
called zero-base budgeting �ZBB). This form of
budgeting requires all participants in the process
to start at zero and justify what they need in
expenses. This technique is most effective during
periods of excessive spending because it prevents a
department from saying that they will need
whatever they spent the previous year plus an
additional amount for cost increases. With ZBB,
the manager is forced to examine every cost
incurred. ZBB is a form of budgetary control.
Budgetary controls require that periodic reports
be prepared for each level of responsibility. The
most common period of time for such reports is
monthly. Since financial statements are usually
prepared under the uniform system of accounts,
the budgetary control reports should also be
prepared using this format. Schedules are required
for each operating and service department. These
periodic reports must be relevant and timely to
have any meaning and to be of use in a control
process. The relevance issue means that operating
managers should only be given departmental
statements for which they have control. For
example, if an enterprise is allocating service
department costs to operating departments, the
departmental manager will not be able to make the
necessary changes since the comparison and the
significant variances could possibly include allocated
costs, which are beyond the scope of this
individual's control. If the report is not timely, the
necessary corrections will not be made until further
deviations from the standard have been perpetuated.
Although budgetary control reports can take
many forms, the most common ones show actual
results for a particular period in the first column
and the budgeted amount in the second column,
with a difference column expressed in dollars and a
relative difference column expressed in percentages.
The budget can be of little use as a control
vehicle if it is not prepared in a manner consistent
with the financial reporting employed by the
enterprise.
Budgetary controls require that an operation
establish standards and standard procedures for
every activity. The budgetary control process
assumes that all employees are properly trained
in the established standards and procedures.
Periodic measurement and comparison of actual
results to the budget allow management to make
the determination if the established standards of
performance are being met, and if not corrective
action is put into place.
As a result of budgetary controls, errors and
irregularities are kept to a minimum. An error is an
unintentional mistake, and an irregularity is an
intentional mistake. Errors and irregularities can be
made by both management and hourly employees.
The most common irregularities by employees is
theft of assets and the omission of transactions.
Management can create equity and record fictitious
transactions.
The hospitality industry is especially vulnerable
to errors and irregularities for a variety of
reasons. This industry is a cash business with many
transactions, and often is the source of employment
for low-skilled individuals and employees
first entering the workforce, groups that generally
earn low wages. The items used in a typical
hospitality enterprise all have a street value and are
used by the general population. For these reasons,
it is important to maintain good budgetary controls
to monitor the expected performance versus the
actual performance. Budgetary controls are preventative
controls, that is, controls that are
implemented before a problem occurs. Since a
budget is prepared in advance of the activity, it
becomes a standard to compare actual results.
Detective controls, on the other hand, are designed
to discover problems after the fact; an example is
external audit. Detective controls also monitor
preventative controls to make certain that they are
working.
Budgetary control includes reforecasting the
operations budget. There are times when unknown
factors have caused the operations budget to lose its
effectiveness as a control vehicle. Reforecasting is