Management Accounting
Budgeting & Budgetary Control
Budgetary control questions require you to prepare functional and master budgets, produce flexible budget statements, reconcile budgeted with actual costs, and evaluate the behavioural and non-financial aspects of budgeting.
For flexible budgets, always re-state fixed and variable costs separately at the actual level of activity before comparing with actual figures. In reconciliation statements, label every variance clearly as F or A, and in evaluation questions address behavioural aspects and non-financial factors — not just the numbers.
Key Concepts to Revise
Types of Budget
Functional: Sales, production, purchases, labour, trade receivables, trade payables, cash
Master: Budgeted income statement & statement of financial position
Fixed vs Flexible Budgets
Fixed: Set at one activity level — not adjusted for actual output
Flexible: Re-stated at actual activity level; allows like-for-like comparison with actuals
Limiting Factors
A scarce resource that constrains output — e.g. machine hours, labour hours, or materials. The binding constraint determines the production budget sequence.
Reconciliation Statements
Cost reconciliation: Flexible budgeted cost → Actual cost via variances
Profit reconciliation: Flexible budgeted profit → Actual profit via variances
Behavioural Aspects
Targets, incentives & motivation — budgets can motivate if achievable, or demotivate if too tight or too loose. Participation in budget-setting improves acceptance.
Non-Financial Factors
Staff morale, quality of output, customer satisfaction, environmental impact — must be evaluated alongside numerical budget performance.