Budgeting, Budgetary Control and Forecasting
Budgeting, budgetary control and forecasting tests budget preparation, behavioural and control issues, and the use of flexed budgets and forecasting methods. ICSAN expects both computational accuracy and an understanding of why budgets fail as control devices.
Core rules
- A fixed budget is set for one activity level; a flexed budget restates variable costs for actual activity before comparison. Fixed costs are not flexed within the relevant range.
- Incremental budgeting starts from last year; zero-based budgeting re-justifies activities and costs. Rolling budgets continually update the horizon.
- A cash budget records receipts and payments, including capital and financing; it is not a profit forecast.
- Forecast techniques include moving averages, exponential smoothing, regression and learning curves. Seasonal indices adjust trend forecasts.
Worked example
A budget is set for 10,000 units: variable cost ₦6 per unit and fixed cost ₦40,000, total ₦100,000. Actual output is 12,000 units and actual cost is ₦118,000. The flexed budget is 12,000×₦6 + ₦40,000 = ₦112,000. The variance is ₦6,000 adverse. Comparing actual ₦118,000 with the original ₦100,000 would wrongly suggest a ₦18,000 overspend, most of which is simply extra activity. The reasoning: flexing isolates the controllable cost variance from the volume effect.
Traps
Comparing actual with a fixed budget at a different activity level; flexing fixed costs; treating a cash budget as a profit statement; confusing zero-based budgeting with a zero budget; ignoring learning-curve effects in labour budgets.