Table of Contents
What is Budgetary Control?
Budgetary control is the process of comparing various actual revenues and expenditures with budgeted figures/planned income or expenditure to identify whether or not corrective action is required & for calculating variances if any.
Objectives Of Budgetary Control
To compel planning
This is the most important feature of budgetary control because management is forced to look ahead, set targets, anticipate problems and give the organization purpose and direction,
To communicate Ideas and Plans
To everyone affected by them. It is necessary to have a formal system to make sure that each person is aware of what he is supposed to be doing.
To co-ordinate the activities
Of different department or sub-units of the organization, this concept of co-ordination implies, for example, that the purchasing department should base its budget on production requirements, and that the production budget should, in turn, be based on sales expectations.
To establish a system of control
The organisation should have a plan against which actual results can be progressively compared.
To motivate employees
Motivation will help them to improve their performance.
Steps in Budgetary Control System
- Preparing the budget
- Communicating the budget
- Measuring result
- Comparing result & analysing deviations
- Reporting the result and taking corrective actions
- Revising the budget
Important Matters Covered in a Budget Manual
- A statement regarding the objectives of the organization and how they can be achieved through budgetary control.
- A statement regarding the functions and responsibilities of each Executive by designation both regarding the preparation and execution of budgets.
- Procedures to be followed for obtaining the necessary approval of budgets.
- The authority of granting approval should be stated in explicit terms. Whether one, two or more signatures are to be required on each document should also be clearly stated.
- Timetable for all stages of budgeting.
- Reports, statements, forms and other records to be maintained.
- The accounts classification to be employed. It is necessary that the framework within which the costs, revenues and other financial amount are classified must be identical both in accounts and the budget departments.
Common budgetary control measures
- Make & review the proposed budget, and define the departmental targets in respect of expenditure, sales volume, revenue etc.
- Brief the departmental heads about their targets and discuss the possible ways to achieve it.
- Keep records of all the measurable activities on the regular/daily basis like the volume of production, processes, sales, purchase, store, errors, time of production etc.
- Make the variance report periodically and analyse to find out the loopholes and possible reasons there off.
- Implementing new policies or amending the present one to minimise the deviation.
- Follow the activities again and repeat the variance analysis periodically.
Advantages and Disadvantages of Budgetary Control (Table)
Sl No. | Advantages | Disadvantages |
|---|---|---|
1 | Maximization of Profits | Uncertain Future |
2 | Provide Specific Aims | Revision Required |
3 | Creates Budget Conciousness | Conflict Among Different Departments |
4 | Reduced Costs | Depends Upon Supports of Top Management |
5 | Determine Weakness | Discourage Efficient Persons |
Advantages of Budgetary Control
The budgetary control system help in fixing the goals for the organization as the whole and concerted efforts are made for its achievements. It enables ‘economies in the enterprise.
Some of the advantages of budgetary control are:
Maximization of Profits
The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, proper planning and coordination of different functions are undertaken. There is proper control over various capital and revenue expenditures. The resources are put to the best possible use.
Co-ordination
The working of different departments and sectors is properly coordinated. The budgets of different departments have a bearing on one another. The coordination of various executives and subordinates is necessary for achieving budgeted targets.
Specific Aims
The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal, of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving some specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.
Tool for Measuring Performance
By providing targets to various departments, the budgetary control provides a tool for measuring managerial performance. The budgeted targets are compared to actual results and deviations are determined. The performance of each department is reported to the top management. This system enables the introduction of management by exception.
Economy
The planning of expenditure will be systematic and there will be an economy in spending. The finances will be put to optimum use. The benefits derived from the concern will ultimately extend to the industry and then to the national economy. The national resources will be used economically and wastage will be eliminated.
Determining Weaknesses
The deviations in budgeted and actual performance will enable the determination of weak spots. Efforts are concentrated on those aspects where performance is less than the stipulated.
Corrective Action
The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system, the deviations can be determined only at the end of the financial period.
Consciousness
It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.
Reduces Costs
In the present day, competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more.
Introduction of Incentive Schemes
The budgetary control system also enables the introduction of incentive schemes of remuneration. The comparison of budgeted and actual performance will enable the use of such schemes.
Limitations of Budgetary Control
Despite many good points of budgetary control, there are some limitations to this system.
Uncertain Future
The budgets are prepared for the future period. Despite best estimates made for the future, the predictions may not always come true. The future is always uncertain and the situation which is presumed to prevail in future may change. The change in future conditions upsets the budgets which have to be prepared on the basis of certain assumptions. The future uncertainties reduce the utility of a budgetary control system.
Budgetary Revision Required
Budgets are prepared on the assumptions that certain conditions will prevail. Because of future uncertainties, assumed conditions may not prevail necessitating the revision of budgetary targets. The frequent revision of targets will reduce the value of budgets and revisions involve huge expenditures too.
Discourage Efficient Persons
Under the budgetary control system, the targets are given to every person in the organization. The common tendency of people is to achieve the targets only. There may be some efficient persons who can exceed the targets but they will also feel content by reaching the targets. So budgets may serve as constraints on managerial initiatives.
Co-ordination Problem
The success of budgetary control depends upon the coordination among different departments. The performance of one department affects the results of other departments. To overcome the problem of co-ordination a Budgetary Officer is needed. Every concern cannot afford to appoint a Budgetary Officer. The lack of coordination among different departments results in poor performance.
Conflict Among Different Departments
Budgetary control may lead to conflicts among functional departments. Every departmental head worries for his department goals without thinking of business goal. Every department tries to get the maximum allocation of funds and this raises a conflict among different departments.
Depends Upon Support of Top Management
Budgetary control system depends upon the support of top management. The management should be enthusiastic about the success of this system and should give full support for it. If at any time there is a lack of support from top management then this system will collapse.
How useful was this post?
5 star mean very useful & 1 star means not useful at all.
Average rating / 5. Vote count:
No votes so far! Be the first to rate this post.
We are sorry that this post was not useful for you! 😔
Let us improve this post!
Tell us how we can improve this post?
