3.1.2 Taking action to achieve the objectives of the budget
When we check performance against the standard, or the budget figure, and have identified a variance we need to do two things:
- Determine the size of the variance
- Decide on action to be taken to correct that variance
There are four main options available to us to correct a variance between the budget standard and the budget actual, they are listed below:
- Take No Action
In many cases, organisations allow for an amount of variance, which they consider acceptable. In some cases a manager is allowed a certain level of discretion in signing off on departmental expenses. For example, if you have the authority to spend $500 without getting approval from a more senior manager, then this amount of variance may be tolerated. In other cases a manager may be able to fund the variance in one budget using funds available in another budget.
- Increase the performance
In this case the work team has to improve its performance in order to rein-in the variance within a specified time. Methods for achieving the performance improvement include:
- Training or counselling - In this case a participative, non-threatening approach is taken to help the work team achieve improve performance, and thereby achieve the budgetary goal.
- Disciplinary procedures - The work team is rebuked for its failure to perform and, in some cases, the team may be threatened with consequences such as loss of staff, if it doesn't eliminate the variance by the end of a specified period.
- Remove root causes - Identify and remove causes of problems, don't just fix the problems.
- Increase Revenue
If expenses are higher than anticipated then these may be offset by an equal, or greater, rise in revenue. Activities such as promotional campaigns may help to increase the level of sales revenue.
- Decrease Expenditure
By decreasing the cost of one, or all, of the elements of direct labour, direct materials or overheads, the organisation may seek to eliminate the variance. These processes are known as cost-cutting or cost correction exercises. In some cases costs can be reduced through scrap-reduction campaigns, but in other instances cost reduction can be painful and seen as a negative, such as laying-off staff.
The benefits of achieving budget control
Correct budgeting and budgetary control is critical to the success of an organisation. When budgetary control is done correctly, it provides:
- A motivating force for achievement within the organisation
- An effective early warning system that enables undesirable trends to be identified and corrected before it is too late.
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