Budgetary Control System (BCS) is defined as a “methodical control of an organization's operations through establishment of standards and targets regarding income and expenditure, and a continuous monitoring and adjustment of performance against them” (http://www.businessdictionary.com/definition/budgetary-control.html). For an organization, the budgetary control system is widely considered as one of the most crucial tools used for financial planning and setting goals for the business enterprise.
Effective and accurate planning can lead the organization towards success or failure. For the Ferguson & Son Manufacturing Company, the strategy was to compare the fixed budgeted cost with the actual cost each month of every department. This would enable them to view the performance for each department and allow them to better estimate the budget for the next year. However there is also an issue/problem that exists with this approach. In the comparison, the volume of the goods being produced is not necessarily being taken into consideration. The focus is entirely on the dollar amount of the fixed budgeted cost and the actual cost.
For example, consider that the fixed budgeted cost for a company is set as $100,000 with 1000 units of good being produced. Let’s assume that at the end of the accounting period, the actual cost comes up to $120,000, however, that is with 1250 units of goods produced. If the organization is to view just the dollar amounts for the budgeted cost with the actual cost, the analysis might show as an overspending of $20,000. However, the more efficient and accurate way would be to view the actual and the budgeted cost relative to the quantity of the good produced. In our example, if we adjust our budgeted estimate of number of goods to be produced from 1000 to 1250, we’ll see our budgeted increase to $125,000 [($100,000 / 1000) * 1250]. This would change our perspective and present the company in a positive light since now we’re accurately portrayed as being within our budget.
Another significant issue with the Ferguson & Sons Budgetary Control system (BCS) is the lack of employee performance being taken into consideration when evaluating the ‘performance’ of a department. In our case study, we hear Tom Emory, manager of the machine shop in the company’s factory, complain how they are always interrupting the “big jobs for all those small rush orders” (Cite Source from university). The BCS does not account for the financial impact of these ‘interruptions’ nor does it account for the resources that needs to be allocated for all of these changes. By looking at just the budgeted and the actual dollar amounts, and portraying the department negatively as overspending, Ferguson & Sons run the danger of damaging the employee morale and constantly pressurizing them to do better. To improve their effectiveness, Ferguson & Sons should consider making a few adjustments to their BCS. The first one would be to ensure that the company introduces the idea of a flexible budget, as opposed to a static budget. A flexible budget allows the organization to compare how the “actual sales figures stack up against expected sales figures” (http://smallbusiness.chron.com/advantages-disadvantages-flexible-static-budgets-23430.html). It can better serve as an overall indicator of the organization’s performance depending on the sales figures or the number of goods produced. The static budget cannot be adjusted regardless of the sales figures or the company’s performance. The second adjustment that Ferguson & Sons can implement is to start taking into consideration new work to be done in the future. This also ties back to having flexible budget which can be adjusted based on the actual work being done within the department and further accommodate any uncertainties for the organization. By having unreasonable budget estimates, the company sets itself up for failure. The planning and control department within the company should be
