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Budget reports in management accounting – explained

Performance evaluation and reporting of variances is an integral part of all control systems. Establishing budgets in itself is of no use unless a comparison is made regularly between theactual expenditure and the budgeted allowances, and the results reported to the management. For this purpose, budget reports showing the comparison between the actual and budgeted expenditure should be presented periodically and promptly.

The budget reports should be prepared in such a manner that they reveal the responsibility of a department or an executive and give full reasons for the variances so that proper corrective action may be taken. The reporting should be on the principle of exception and both favourable and unfavourable variances should be shown and commented upon.

In brief, a budget report is a comparison of the actuals with the budgets both for the month and cumulative up to the current month. The variations from budgets are worked out in respect of each items of expenses so as to locate the responsibility and facilitate corrective action. A budget report, to be effective in the purpose, must be:

  • Simple in its form so as to be easily intelligible to the recipient concerned:
  • It should bear a suitable heading and make the period in which it relates;
  • Regularly and promptly presented;
  • Designed to give only the essential information required and avoid unnecessary details;
  • Expressed as far as possible in direct figures;
  • Correlated to a “money value” wherever possible;
  • Free from personal bias of the person preparing it; and
  • Dated and signed by those who prepare and check it.

Every budget report should be followed up till the finally desired results are achieved. This follow-up would require either a discussion with the individual responsible for taking the necessary action or whose action alone can prevent recurrence of such variations; or revision in the budget itself arising out of errors of changes in policy.

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