Budget Analysis Management Review


Budget Analysis Management

A budget can be termed as a tool often used by managers to see to it that the required inputs are made available and employed efficiently and effectively as the entity moves to achieve its objectives which could be long term or short term in nature. It is a comprehensive financial plan which indicates estimates of revenues and expenses for a given period, normally a year. It states all expenses, revenues, draws cash flows, determines the payment process and gives specific saving plans. A budget is usually stated in monetary terms and made yearly, on the basis of the budget for the previous year or on programs that exist in the organization. Budget Management Analysis is a tool or a technique used by corporate managers to ensure that all resources in a given organization are utilized efficiently.

Creation of a budget is not an easy undertaking and for it to be functional, efforts must be made for the organization to remain within the budget stipulation very closely. However, variances are always expected in any budget. A variance is defined as a difference that arises between an actual outcome and the budgeted input. These budgets are prepared on an annual basis and in most cases, the budgets and variances for the preceding year are used as a reference point.

Budgets are of different types, such as production budget, sales budget, cash budget, marketing budget, etc. Unlike the budget, forecasts are predictions or projections of anticipated revenues and sales. It is arrived at by making an analysis of historical data and conducting some statistical methods to determine trends in the future. (Boussabaine, 2004) This essay will look into various strategies that managers use to keep budgets within forecast, outline comparison of various types of expenses related to expectations of budget, as well as describing possible reasons that lead to variances and highlight strategies that can be used to keep outcome aligned with the forecast. The paper will also recommend some benchmarking techniques and isolate those which can possibly improve the accuracy and correctness of budget so as to reduce variance. It will also justify the options made.


A number of strategies may be employed by an organization to control the budgeting process and budgets. Top managers, as well as departmental managers, keep close liaison with the chief finance manager of most institutions so as to utilize the tools necessary for budget management. Through budget management, the institution stands a better chance of preparedness for the financial forecasts, which represent the organization’s future expenses. Some of the tools and strategies which can be employed to manage the budget include activity based, zero-based, and performance-based, benchmarking and cost variances. (Wireman, 2004)

Zero-based budgeting is an approach in budgeting whereby all expenses have to be justified for each year. As the name suggests, zero-based budgeting begins from a zero base, with each function in an institution being analyzed for its costs and needs. Budgets are then developed around what is required for the upcoming period, without considerations of whether the budget is lower or higher than the previous one. This kind of budgeting technique is a powerful tool for lowering costs by avoidance of blanket decreases or increases to a budget of a prior period. However, zero-based budgeting consumes a lot of time than the traditional budgeting technique which is cost based. It also favors those areas which achieve direct production or revenues.

Activity-based costing (ABC) is a new approach in accounting whereby activities which a firm performs are identified and then indirect costs assigned to products. (Maher, 2008)ABC approach recognizes the relationship which exists between products, costs, and activities and by following this relationship costs are assigned to products in a less arbitrarily manner than other approaches. Costs are assigned according to real consumption by each activity, hence more realistic and accurate.

The performance-based approach is whereby budgets are developed on the basis of the relationship between the funding levels of programs and the results expected from that particular program. It is a tool used by program administrators to manage more cost effective and cost efficient budgeting outlays. Performance budgets apply statements of goals, missions, and objectives to justify why the financial resources are being spent. The whole framework of planning and budgeting is a result- oriented in this approach. (Kelly, 2011)

Benchmarking is the technique whereby the superior performance of other entities and internalizing that knowledge to create a competitive advantage. It is where an organization measures its achievement or performance against the best organizations. Benchmarking can be characterized by measurement through comparison, and incorporation of those practices that have been proven better into our institution. Another tool that can be used to help an organization is by motivating the employees as well as involving the staff in preparation of budgets.

Cost variance analysis is the comparison of the actual costs incurred versus the budgeted one, and probably takes corrective measures where possible.

Expense results will in always indicate some variations from the budgeted figure. Variance is the difference between the actual costs incurred and the initial allocation via the budget. These variances may be either favorable or unfavorable. Variance is useful to the management in that, it can help to prepare budgets for upcoming periods, to evaluate the performance of departmental manager as well as helping in spending in the present year.

There are different types of variances and different factors cause them. One category of variance is the direct material variance. This kind of expense results shows the difference between the real cost of material for real units and the standard cost of material of standard units. It is the subtotal of material quantity variance and material price variance. Direct material variance arises due to reasons like inflation, use of an inferior or superior form of material, effect of discounts, etc. We also have labor variance which is the difference between the real cost of labor for real production and the standard cost of labor.

Labor variance could result from instances like strikes. Under labor, the variance is labor rate variance, labor hour variance, labor rate variance, etc. We also have another category called overhead variance which indicates the variance for all indirect costs.  It is the difference between the overhead standard cost and the real overhead for real production. Sales variance is the type of variance whereby actual sales and budgeted sales differ. Sales variance arise due to factors like change in demand.

Benchmarking is applied to identify gaps in performance and also identify where improvement is required. One category of benchmarking is called financial benchmarking. This involves conducting financial analysis and having a comparison of the results so as to assess an organization’s productivity.

Another form of benchmarking is operational benchmarking which embraces everything including staffing, office flow including analysis of procedures carried out, productivity among others. It performs a wide analysis put into consideration various angles of business and operational performance. It, therefore, helps organizations in decision making.

Performance benchmarking is another kind of benchmarking technique that involves comparing the activity levels of companies for a particular process. This information derived can then be applied in getting opportunities for advancement or even setting performance goals. Performance levels pertaining to other companies are referred to as benchmarks. The ideal benchmark should originate from a company recognized as a champion in the related field.

The benchmarking choices have been reached at on the basis of the basis that all three mechanisms together will have their focus on the whole company and not just one section and have chances of improving budget accuracy. They offer to the management the right tools to justify their budgetary decisions.


Techniques of managing budgets are employed to keep the actual cost projected for budgets and to correct variances that arise in costs. Variances occur at any time, internal or external.  in most instances are correctable once analyzed by management.  Benchmarking is one of the strategic management techniques which compare procedures and performance so as to improve organizations.

Work cited

Boussabaine, H. (2004). Whole life-cycle costing: risk and risk responses. Oxford: Blackwell Pub.

Kelly, J. M. (2011). Performance budgeting for state and local government. London: M.E. Sharpe.

Maher, M. (2008). Managerial accounting: an introduction to concepts, methods, and uses. Mason: Thomson/South-Western.

Wireman, T. (2004). Benchmarking best practices in maintenance management. New York: Industrial Press.





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