The best laid plans don't work efficiently if your control system is not up to the task. All the planning and budgeting will be of little value if an organization cannot control its operations and costs. Whether you want to control product costs, production quality, the temperature in your office, the direction and speed of your car or your temper, you need a control system. Control systems have three components:
1- A feedback device that provides information about your current situation, that is, where you are, how fast you're going, what your blood pressure is and so on.
2- Information about what your current situation should be, for example standard costs, budgeted revenues, normal blood pressure and so on.
3- A means of getting from where you are to where you should be.
Think of the thermostat on the wall in your living room. Its thermometer tells you what the current temperature is. If you don't like the current temperature you can adjust the thermostat dial to one that is more comfortable. If the room temperature reads below the desired level you have selected, an electrical connection is made and the furnace kicks in. When the desired temperature is reached, the electrical connection is broken and the furnace shuts off. It is a very simple, very clever, very effective control device.
For the purposes of controlling your organization's operations and costs, financial statements tell you where you are and the budget tells you where you want to be. Remember, however, that when we talk about budgets we should do so in the context of planning. We should create static, before-the-fact planning devices. Chances are our actual level of sales and other results will be somewhat different than what we had originally budgeted.
Static budgets are great for planning purposes, but not necessarily so for control. If we do not achieve our exact projected level of sales, a static budget will not provide the information we need to compare what we did with what we should have done. Therefore it will not provide the information we need to control operations and costs. For control purposes, we need to modify our budget into a more flexible form.
A flexible budget differs from a static budget in several ways. A static budget is based on standard revenues and costs per unit of our product or service and the planned level of output. A flexible budget, on the other hand, is based on standard revenues and costs per unit and the actual level of output. Preparing a flexible budget begins with determining which costs and revenues are fixed and which are variable.
About Author : Tina S Smith
Tina Smith is an accountant with SageNext Infotech. She is having expertise in project management, accounting operations. With SageNext, she consults the client accountants about the benefit of QuickBooks Hosting. SageNext is a leading QuickBooks cloud provider, dealing in all kinds of tax and accounting application hosting.
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