RESTAURANT MANAGEMENT ASSIGNMENT-2

BUDGET CONTROL. By Karthik Dutta

Importance budgetary control in restaurant

planning:
A budgetary control is a mechanism that helps senior managers ensure
that spending limits are adequate. This control is important because
spending excesses have an unfavorable impact on corporate profits.
Budgeting is a business practice that helps senior management set
limits or thresholds for expense items in corporate activities. It also helps
department heads and segment managers forecast revenue levels,
depending on economic trends. Revenue is income that a firm generates
by selling goods or providing services. An expense item is a cost or
charge that a company incurs when selling goods or providing services.
Department chiefs analayze cost variances, or overages, at the end of
each month or quarter to detect business performance. In management
accounting parlance, overage is the difference between actual cost and
budget amount

IMPLEMENTATION:
The process of controlling budgets can be broken down into several steps:

● Establishing actual position

● Comparing actual with budget
● Calculating variances
● Establishing reasons for variances
● Taking action to exert control

Step 1 – Establish Actual Position

All organisations have some form of an accounting system which records
their income and expenditure. Depending on the system, budgets will be
identified by some form of budget code. Income and expenditure is then
recorded against the budget code. This enables budget holders to identify
their actual budget position at any point in time.
This information is normally provided in the financial management report.
The style and content of the report will vary from one organisation to
another and will be dependent on the financial system used.
To establish the actual position, the budget holder will need to examine
and understand the financial information available. They will need to
know how current the information is and adjust it for any outstanding
transactions. These may include debtors and creditors. The budget holder
will also need to know if any part of their budget has been “committed” –
i.e. if goods and services have been ordered but not yet received.
Therefore, depending on the organisation, establishing the actual position
may require information from several different sources.

Step 2 – Compare Actual with Budget

After completing Step 1, the information gathered needs be compared to
the budgeted figures set at the beginning of the financial year. This
comparison should be simple if the actual income and expenditure
headings match those that were originally set.
The difference between the actual income and expenditure and the
budgeted income and expenditure is called a “variance”. Variance analysis
is an important technique in the budgetary control process.
Variance analysis is discussed in detail in some of our other resources,
such as our book “Managing the Devolved Budget”. We also have a very
good online course on the UDEMY platform called “Managing Budgets in
the Public and Non Profit Sector” which explains variances clearly.

Step 3 – Calculating Variances

In the context of budgetary control, the term variance refers to the
difference between actual and budget (planned) income and expenditure.
An example of a variance is shown as follows:
Month 6
Budget Budget to date Actual to date Variance
heading (Expected spend)(Actual spend) +/(-)

Salaries £120,000 £132,000 (£12,000)

The above example shows that by month six the budgeted expenditure on
salaries was set at £120,000. However, the actual spending on salaries in
those six months totalled £132,000. The difference between these two
figures is £12,000. This represents the variance from the budget. In this
case the variance is negative. The brackets represent over spending.
The “budget to date” column shows the amount of budget that should have
been spent by month 6. Ideally, the budget would be “profiled” to reflect
the pattern of expenditure over the year. Therefore, when the actual
expenditure for that period is compared with the budget, the true
variance can be calculated.
There are other variance calculations methods that can be used in assisting
the budget holder to control the budget. As mentioned in Step 2, we have
other resources that discuss this topic in further detail.

Step 4 – Establish Reasons for Variances

There are several reasons that can account for differences found between
the budgeted and actual expenditure. The reasons for all variances needs to
be identified. This process is critical to effective budgetary control, as the
budget holder needs to know when it is appropriate to take corrective
action. Variances can be both positive and negative, reflecting excess
spending or under spending, or over/under performance on income. All
require investigation.

The reasons for variances may include:

Incorrect figures entered on the accounting
Error
system
Delays in entering information on the
Delays
accounting system
Often incorrect budget profiles are entered,
which bear no relevance to the pattern of actual
Profiling
expenditure and income (e.g. no account taken
of seasonal fluctuations)
Little consideration given to initial budget
Poor budgeting
preparation
For example, increases and decreases in
Unplanned changes demand for services, or introduction of new
legislation
Step 5 – Take Action
Budgets can only be controlled if corrective action is taken in response to
the variances. Sometimes the explanation for the variance results in no
action being required. For example, timing differences. This is where the
variance will diminish over time as the actual income and expenditure
figures naturally match up with the budget. Variances that arise because
of fundamental changes, such as an increase in demand for a service,
require action. This is necessary to regain budgetary control.

Examples of the type of action that can be implemented are

given below:
● Reduce or halt expenditure in areas where expenditure is
controllable
● Increase income
● Make virements (moving money from one budget to another)
● Use contingency funds
● Delay activities
● Redefine objectives
● Redefine eligibility criteria
● Change the nature of the service and how it is delivered
● Cease or reduce services

MY VIEWS ON BUDGET CONTROL:

budgetary control can be viewed as a system of controlling cost which include the
preparation of budget coordinating the department and establishing responsibility,
comparing actual performance with that budgeted and acting upon results to achieve
maximum profitability.