Budgeting and Control
Budgeting approaches
Understand incremental (last year plus adjustment), zero-based (every cost justified from scratch) and rolling (continuously updated) budgets. Activity-based budgeting builds from cost drivers. Traps: confusing zero-based budgeting with activity-based budgeting, or assuming rolling budgets suit stable environments (they suit volatile ones).
Flexible budgets and variances
A flexible budget flexes to actual activity, so volume effects are removed before comparing with actual cost. This isolates price and efficiency variances. Standard costing variances include material price and usage, labour rate and efficiency, and fixed overhead expenditure and volume. Remember the operating statement reconciles budgeted profit to actual profit via variances. Traps: mixing up the direction of a favourable/adverse sign, and using actual hours instead of standard hours in the efficiency variance.
Behavioural and quantitative aspects
Budgets motivate but can cause budgetary slack; participative budgeting improves commitment but may increase slack. Learning curves reduce average time by a constant percentage each time cumulative output doubles; use the learning curve only where labour is repetitive and new.
Worked example
Standard: 2 kg at $5/kg. Actual output 1,000 units used 2,200 kg costing $11,440. Usage variance = (2,200 − 2,000) × $5 = $1,000 adverse. Price variance = (11,440/2,200 − 5) × 2,200 = $440 adverse.