The managing director of Green and Fair Ltd, which publishes a monthly magazine, has recently introduced a budgetary control system. The accountant 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 budget period, the actual income was higher than planned, but the actual total advertising department costs were higher than budgeted. The actual costs for the editorial department were the same as those budgeted and the actual profit for the period was higher. On receiving the first month's budget report, the managing director threatened to dismiss the advertising manager for exceeding the budgeted costs.

The advertising manager responded by saying that unless the budgetary control system was scrapped, he would resign. The accountant left to join another company.

Required You work for the firm of consultants that 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 managing director of Green and Fair Ltd should take.