The City of Torrance produces monthly budgetary control reports. The amount shown in the budget column is 1/12 of the annual budget. Over lunch, two department heads were discussing this report. The first manager said, “I like the idea of using 1/12 of my annual budget each month. My costs are constant throughout the year. I can usually find small savings and show favorable variances each month.” The second manager disagreed. “I don’t like it. Most of my costs are incurred during Carnival and around Christmas. As a result, I always have unfavorable variances in March and December regardless of what I do. It is especially upsetting because employee performance appraisals are made in April, and the council looks especially hard at our March results.” What is the problem with the way these control reports are prepared? What should be done to make the reports more reflective of the actual performance of the departments
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
The City of Torrance produces monthly budgetary control reports. The amount shown in the budget column is 1/12 of the annual budget. Over lunch, two department heads were discussing this report. The first manager said, “I like the idea of using 1/12 of my annual budget each month. My costs are constant throughout the year. I can usually find small savings and show favorable variances each month.” The second manager disagreed. “I don’t like it. Most of my costs are incurred during Carnival and around Christmas. As a result, I always have unfavorable variances in March and December regardless of what I do. It is especially upsetting because employee performance appraisals are made in April, and the council looks especially hard at our March results.”
What is the problem with the way these control reports are prepared?
What should be done to make the reports more reflective of the actual performance of the departments?
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