Budgeting Basics and Beyond

2.14. Budget Accuracy

The accuracy of budget preparation may be determined by comparing actual numbers to budget numbers in terms of dollars and units. Budget accuracy is higher when the two figures are closer to each other. Ratios showing budget accuracy include:

Sales Accuracy = Actual Sales/Budgeted Sales

Cost Accuracy = Actual Cost/Budgeted Cost

Profit Accuracy = Actual Profit/Budgeted Profit

Example 2

A manager budgeted sales for 2 million but the actual sales were 2.5 million. This favorable development might be attributed to one or more of these reasons:

• Deficient planning because past and current information were not properly considered when the budget was prepared

• The intentional understatement of expected sales so the manager would look like a hero when actual sales substantially exceeded the anticipated sales

• Higher revenue arising from better economic conditions, new product lines, improved sales promotion, excellent salesperson performance, or other reasons

A significant deviation between budget and actual amounts may indicate poor planning. Is the planning unrealistic, optimistic, or due to incompetent performance? However, the problem may be with wasteful spending or inefficient operations.