Practice questions:
The director of Leisure Magazines Ltd recently introduced a budgetary control system. An accountant was appointed who drew up budgets for the advertising and editorial departments based on the actual results for the last 3 years. At the end of the first month of the new financial period, the actual total revenue was higher than planned, but the total advertising department costs were higher than budgeted. The editorial department actual costs were the same as those budgeted and the actual profit for the period was higher. On receiving the first month's results, the director threatened to dismiss the advertising manager for exceeding the budgeted costs. The advertising manager retaliated by saying that he would resign unless the budgetary control system was scrapped. The accountant left to join another company.
You work for the firm of consultants which has been asked to advise the company.
Prepare a preliminary report covering the following:
a. an analysis of the problems. and how you think they have arisen;
b. guidelines for the operation of a successful and effective budgetary control system;
c. recommendations as to what action the director of the client company should take.