Budgetary Control: It consists of the comparison of the budgetary figures with the real ones. The comparisons in the budget are made with:
- The original annual budget The adjusted budget made in pre-determined periods The adjusted budget made in non-pre-established periods
Comparisons make it possible to establish whether or not deviations or variations are under control or subject to management's own decisions.
CONTROL PRINCIPLES
They are:
1) Recognition
2) Exception
3) Standards
3) Cost Awareness.
It is the Surveillance of the different functions of the company, through the systematic comparison of the set of forecasts established by each of the functional budgets and the corresponding data recorded by the accounting system for the same period.
Control as the main element has given the name to this system: Budgetary control.
The confrontation techniques are:
By simple direct comparison By percentage methods
The study of differences should distinguish two types of errors:
Mistakes made when forecasting
Errors made when executing the budget.
The conditions that the control must meet are: Efficiency, speed and selectivity.
The control must be quick to avoid that the differences are aggravated or distorted.
The frequency of control is necessary to prevent mismanagement of the budget.
The control must be selective, since time and money are represented, so it is recommended that it be done by sampling, affecting the most important items.
The controller and the budget committee should be kept informed. The reports will be, some weekly and others monthly; but there should always be an annual report. When the actual amounts differ greatly from those budgeted, the causes must be sought.
Control Reports
Comparison of Sales and Profits
Gains or losses are shown with respect to sales standards and budgets, profit margins, manufacturing efficiency, fixed costs, operating expenses and invested capital.
Sales and revenue comparison Indicates figures from the same periods of the previous year. Progress or decline in sales and profits over time is indicated
Sales Analysis by main Product Groups
Net sales are classified by main product groups and control is carried out in order to easily see which of the products or product lines are more profitable for the company.
Standard cost
Historical costs are used to determine the actual amount of resources necessary for the acquisition of materials, labor, and some elements of indirect expenses. However, these actual costs do not provide information about the costs that must have been incurred to produce these products.
This unfavorable aspect of historical costs has encouraged the development of a more satisfactory determination of costs, called predetermined costs.
Default values are used in the standard cost system to record both direct labor and materials costs and manufacturing overhead. Comparisons are made of the differences between the standard costs assigned for a given level of production and the actual costs, in order to verify if what has been incorporated into production has been used efficiently.
This comparison process is known as Analysis of Variations.
The study of cost variations has important implications for the planning, control, and evaluation of production processes.
Advantages of standard cost systems:
Effective analysis of cost information. The reasons why costs are not what they should be can be determined as the standard serves as a measurement element that focuses attention on cost variations.
Reduction of accounting costs. In general, a complete standard cost system is accompanied by the standardization of production operations, in that the standard production order indicates the quantity required for the production of the product.
Standards can participate in determining the price that is needed to obtain a predetermined level of profit. The use of standard costs highlights the importance of budget control due to the close relationship between budgets and standards. Their use requires close cooperation between the Engineering and Cost departments to develop and improve the standardization of product design, quality, and manufacturing methods.
Classification of Standard costs
Ideal standards:
These present the level of operation that would be achieved with the best possible combination of factors, that is, maximum production at minimum cost.
Once fixed, it is rare that they be changed, unless there are modifications in the product or in the manufacturing processes.
Normal standards:
These are costs based on the normal operating conditions of the company during the period of a complete business cycle. Although it is easier for them to be achieved, their calculation is difficult due to the probable errors in predicting the scope and duration of the cyclical effects. They are also difficult in that the economic effects can cause large variations in standards at certain periods of the cycle.
The normal standards are based on an achievable goal and serve to identify the effects of business cycles on recorded costs.
Setting the standards:
For standard costs to be used successfully, well-defined authority and responsibility must be vested in some person or groups of people. This is often accomplished through a standards committee or the organization of a standards division. The Products engineering department must be represented in the standards committee or division because this department is the one that designs the product and determines the materials to be used.
The Purchasing department will also be represented because the purchasing agent must be able to indicate the standard cost of the materials that will be used during the period.
Representation of the personnel manager is necessary because he is responsible for determining wages, hiring procedures and working conditions, as well as negotiating contracts with unions.
Lastly, cost accounting staff and the controller because they are responsible for reporting standards and deviations to members of the management team.
Methods for determining standards
In many cases averages from previous experience are used as standards but this method is not convenient as it can result in perpetuating inefficiencies. What happened in the past does not indicate what should have happened.
It is best to use the fundamentals approach where standards are set based on each aspect of the production process. The process for determining standards is one of the most important aspects of standard cost accounting because the benefits to be derived will vary in direct proportion to the care with which the standards have been established.
Direct material quantity standards:
The following factors must be taken into account:
The amount of the material to be used.
The price or cost of this material.
Determining the amount of material is fairly straightforward, records from previous experiences can be used for this standard.
An important factor that must be taken into account in some industries is the standard provision for shrinkage, shrinkage and waste.
When determining the standards for the quantity of materials, it is necessary to analyze the records of previous years and the average quantity used can be selected as the standard.
The average can be calculated in several ways:
- Using the average of all similar work orders during a given period, Using the average of the best and worst results in the period prior to setting the standards, Using the best previous result in terms of the quantities of material used.
Material cost standards:
Two types of standards are used for the prices or costs of materials:
Current or expected pricing standards are the most convenient and effective. When these are used, the Purchasing department must determine in advance what the expected real costs will be for the following accounting period: this is done by making long-term commitments, using statistical forecasts, calculating the weighted average corresponding to the most recent purchases, the average paid or through the use of arbitrary estimates based on the knowledge and experience of this type of business. The accuracy of these pricing standards is a measure of the purchasing department's efficiency.
Normal price standards are more on the line of statistical standards or average price of materials. They are generally not recorded in the books because prices span a period of years, taking into account seasonal variations and long-term trends. Under these conditions, material inventories, work in process, and finished products should be based on actual material price costs rather than standard costs.
Labor efficiency standards:
The labor efficiency standard, or the standard amount of time, is an important phase of any cost accounting system. Through the careful elaboration of time standards, the administration is able to measure and control the productivity of the workforce.
The specific requirements for labor time standards are: Efficient layout of the plant, to obtain maximum production at minimum cost.
Creation of an administrative group in charge of the different labor functions that provide an uninterrupted production flow.
Provision for the purchase of materials that enter production in a timely manner.
Standardization of operations and methods of the workforce with adequate instructions and training of workers.
Procedures for developing standards:
Averaging records of past experiences
Conduct experimental tests of manufacturing operations under normal conditions.
Prepare studies of times and movements of the various operations.
Prepare a reasonable calculation based on experience and knowledge of manufacturing and product operations.
Measurement of work and movements that evaluate the time that must be necessary for the various body movements.
Once the estimated times for each operation have been determined, a standard cost sheet can be prepared presenting the expected labor costs for a particular work order.
Labor cost standards:
Standard fees for these costs can be determined based on current fees, adjusted for future changes in the following factors:
Agreements with unions
The average experience of the workforce
Changes in operating conditions
Changes in the mix of skilled, semi-skilled and unskilled labor.
The type of wage systems in use also influences standard cost shares. The basic types are: hourly or daily wage systems, piece rate and piece rate or bonus systems.
The cash budget
It provides figures that indicate the final cash balance, this can determine if in the future the company will face a deficit or a surplus of cash.
It also allows the company to program its short-term needs, to obtain positive cash flows.
The financial department of the company permanently plans possible cash surpluses such as its deficits, by having this information, the administrator makes the appropriate decisions regarding surplus investment situations or, conversely, if there is a shortage, he must seek the means to obtain financing in the short term.
ABC Company's projected cash inflow schedule
(See PDF)
All the expenditures made and projected by the ABC company during the same months are now listed. The company's purchases represent 70% of sales, 10% of purchases are paid in cash, 70% are paid in the month following the purchase and the remaining 20% is paid two months after the month of purchase. In October, $ 20,000 of dividends are paid. $ 500 monthly rent is paid. The company's wages and salaries can be calculated by adding 10% of its monthly sales to the fixed cost figure of $ 8,000. Taxes of $ 25,000 are paid in December. A new machine is purchased at a cost of $ 130,000 in November. Interest of $ 10,000 is paid in December. Also in December, a depreciation fund of $ 20,000 is paid. No repurchase or withdrawal of shares is expected during this period.The cash disbursement program is as follows:
Reduction of uncertainty in the Cash Budget
Apart from the care necessary in preparing the sales forecast and all the components of the cash budget, there are two ways to reduce the uncertainty (understood as "the variability of the results that can really occur") of the cash budget are shown below these options:
The first is to prepare several cash budgets, an initial one based on optimistic forecasts, another on probable forecasts and another on pessimistic forecasts, in order to see the impact that each of the scenarios would have on the company and make the corrections and more appropriate approaches when presenting an adverse situation.
The second is a little more complicated, it is through computer simulation, this is based on establishing a distribution of probabilities about the final cash flows over a period of time, thus having greater reliability of possible deviations and an analysis risk closer to reality.
The preparation of a cash budget must be done very carefully since, because it is so closely linked with forecast data, it is these that will allow appropriate decisions to be made by financial managers.
The financial budget refers to the economic and financial resources necessary to develop or carry out the activities or processes and / or to obtain the essential means that must be calculated, such as the cost of realization, the cost of time and the cost of acquiring new resources. Commonly, feasibility is the most important part, since it solves other insufficiencies of other resources. This is the hardest thing to achieve and additional actions are needed when they are not available.
It includes the analysis of the investment, the projection of income and expenses and the form of financing. In this work, people who want to start a business should keep in mind that this will be their greatest source of information.
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