Table of Contents:-
- Budgetary Control Meaning
- Features of budgetary control
- Objectives of Budgetary Control
- Advantages of Budgetary Control
- Limitations of Budgetary Control
- Working on a budgetary control system
- Objectives of budgeting control
Budgetary Control Meaning
Budgetary Control is a method of managing costs through the preparation of the budget. Budgeting is just one component of budgetary control.
According to CIMA, “Budgetary control is the establishment of budgets relating to the responsibilities of
executives of a policy and the continuous comparison of the actual with the budgeted results, either to secure by individual action, the objective of the policy or to provide a basis for its revision”.
Budgetary Control Involves the following points:
1. Establishment of budgets.
2. Continuous comparison of actual budgets for the achievement of targets.
3. Budget revision involves assessing changes in circumstances and adjusting the budget accordingly.
4. Assigning responsibility for failing to meet budget targets.
Meaning of Budgetary Control
Budgetary control refers to how effectively managers utilize budgets to monitor and control costs and operations in a given accounting period. In other words, budgetary control is a process for managers to establish financial and performance goals through budgets, compare the actual results, and adjust performance as needed.
The process involves the following steps:
(a) Objectives are set by preparing budgets.
(b) The business is divided into different responsibility centres for the preparation of various budgets.
(c) Actual figures are recorded.
(d) The budgeted and actual figures are compared to study the performance of different cost centres.
(e) If performance falls short of the budgeted norms, remedial action is taken immediately.
Features of budgetary control
The main features of budgetary control are:
1. Establishment of budgets for each business purpose.
2. Revision of budget given changes in conditions.
3. Comparison of actual performances with the budget continuously.
4. Taking suitable remedial action, wherever necessary.
5. Analyzing the differences between actual and budgeted performance to understand the reasons.
Objectives of Budgetary Control
Budgeting is planning. It primarily functions as a management control tool and is a central component of any effective control system.
Budgeting helps in establishing clear financial goals for an organization. The objectives of budgeting are given as follows:
- Planning
- Coordination
- Measurement of Success
- Motivation
- Communication
- Control
1. Planning
Planning is an essential tool for managing resources and achieving desired outcomes. It is the process of designing a desired future state for an entity, based on the belief that this future state can be achieved through consistent management actions. Specific plans regarding production, sales, raw materials, labour requirements, capital investments, and more are developed. Planning allows us to anticipate and address many problems long before they occur. In short, budgeting compels management to anticipate and prepare for future conditions, making it an ongoing process that requires regular adjustments as conditions change.
2. Coordination
Budgeting plays an important role in specifying and maintaining coordination. Budgeting helps managers coordinate their efforts to solve business problems in line with the goals of their divisions, promoting harmonious operations. Efficient planning and business contribute a lot to achieving the targets. A lack of coordination in an organization becomes evident when a department head is allowed to expand their department based solely on its specific needs, even if this growth has a detrimental impact on other departments and disrupts their performance. Coordination ensures that different departments work together seamlessly.
3. Measurement of Success
Budgets serve as a valuable tool for informing managers about their performance in achieving targets they have previously established. In many companies, there is a practice of rewarding employees based on their accomplished low-budget targets or the promotion of a manager is linked to his budget success record. We determine success by comparing the past performance with that of the previous period.
4. Motivation
A budget serves as an effective tool for driving managers to coordinate their actions with business objectives. The budgeting process becomes a powerful motivational force for goal achievement when individuals actively engage in it.
5. Communication
A budget serves as a tool for communicating information within a firm. Distribution of standard budget copies includes all management team members. These copies provide a clear understanding of the programs and guidelines to follow. It clearly defines the restrictions that individuals must adhere to.
6. Control
Control is important to guarantee that the plans and objectives specified in the budget are being successfully realized. When applied to budgeting, control becomes a systematic effort to keep management informed about whether planned performance is being realized.
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Advantages of Budgetary Control
These are several advantages of budgetary control. However, this tool provides many other advantages, including:
1. This system provides basic policies for various initiatives.
2. Budgets empower management to enhance business professionalism by optimizing resource utilization and achieving set objectives.
3. It ensures teamwork and thus encourages the spirit of support and mutual understanding among the staff.
4. It enhances production efficiency, reduces wastage, and effectively manages costs.
5. The report highlights the areas requiring management’s attention for corrective action.
6. Budgeting can also assist in securing bank credit.
7. It reviews the present situation and pinpoints the necessary changes.
8. With its help, tasks such as planning, coordination and control happen effectively and efficiently.
9. Credit rating agencies consider budgetary control as a key element of sound management and provide their endorsement.
10. Coordination and control help in the planning.
Limitations of Budgetary Control
1. It can introduce operational rigidity, which is harmful. Budget estimates, being numerical representations of essential data, may sometimes be seen as inflexible or definitive.
2. It is expensive is beyond the capacity of small undertakings. The budgeting system’s mechanism is a detailed process that consumes considerable time and resources.
3. Budgeting cannot replace management; it is merely a tool for management. Acknowledge the budget as a helpful tool, not a dominating force. It is a misconception to think that the introduction of budgeting alone is enough to ensure success and to security of future profits.
4. It sometimes leads to conflicts among the managers as each of them tries to take credit for achieving the budget targets.
5. Simple preparation of the budget will not ensure its proper implementation. Improper implementation may negatively affect morale.
6. The installation and function of a budgetary control system is a costly affair as it requires employing specialized staff and involves other expenditures which small companies may find difficult to incur.
Working on a Budgetary Control System
The successful introduction and implementation of a Budgetary Control System are the responsibilities of the Budget Committee, acting through the Budget Officer. The Budget Committee comprises all functional heads and is led by a Board member to preside over and guide the discussions.
The primary responsibilities of the Budget Officer include:
1. Assist in the preparation of the various budgets by coordinating the work of the accounts department which is normally responsible for compiling the budgets with the relevant functional departments like Sales, Production, Plant maintenance etc.;
2. Forward the budget to the individuals who are responsible for adhering to them, and guiding them in overcoming any practical difficulties in its working:
3. Prepare regular budget reports and distribute them to the relevant individuals concerned.
4. Action to be taken on the budget reports should be followed up.
5. Prepare a comprehensive budget working report to discuss at Budget. Committee meetings and ensure follow-up on the recommended action steps.
6. Prepare periodical reports for the Board meeting. Compare the budgeted Profit and Loss Account and the Balance Sheet with the actual results achieved.
Every budget must be thoroughly discussed with the functional heads before it is finalised. The Budget Officer must see that the periodical budget reports are supplied to the recipients at frequent intervals as far as possible.
The efficiency and effectiveness of the Budget Officer, as well as the Budget Committee, are measured by how well the system operates and the alignment of actual figures with budgeted ones.
Budgets are primarily an incentive and a challenge for better performance; it is up to the Budget Officer to see that the attention of the different functional heads is drawn to it to face the challenge successfully.
Objectives of Budgeting Control
The main objectives of budgeting control are as follows:
1. Defining the objectives of the enterprise.
2. Providing plans to achieve the defined objectives.
3. Coordinating the activities of various departments.
4. Operating different departments and cost centres efficiently and economically.
5. Increasing profitability by eliminating waste.
6. Centralizing the control system.
7. Correcting variances from set standards.
8. Setting the responsibility of various individuals in the company.