Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future.
Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.
Budgetary control involves the use of budgets to plan, coordinate and control day-to -day operations of business in accordance with the overall objectives of business.
Learn about: 1. Meaning of Budgetary Control 2. Definitions of Budgetary Control 3. Nature 4. Characteristics 5. Objectives 6. Essentials 7. Procedure 8. Advantages 9. Limitations.
Budgetary Control Meaning: Definitions, Objectives, Nature, Characteristics, Process, Steps, Advantages and Limitations
Budgetary Control – Meaning
Budgetary control is the regular monitoring of budgets periodically and current period expenditures or outlays. It seeks to explain any budget variations that are unexpected or unusual and determining necessary adjustments. It ensures compliance with laws; regulations and helps organizations achieve budget targets and monitor program goals.
It also aims at preventing cost overruns (and disallowed costs) if monitored on a regular basis and improve the reliability of financial reporting.
Budgetary control involves the use of budgets to plan, coordinate and control day-to -day operations of business in accordance with the overall objectives of business.
According to Walter W. Bigg, “the term budgetary control is applied to system of management and accounting control by which all operations and output are forecast as far ahead as possible and the actual results, when known, are compared with the budget estimates.”
It may be defined as the establishment of budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision.
Thus, budgetary control involves the following three steps:
1. Preparation of budgets,
2. Continuous comparison of actual results with the planned ones, and
3. Revision of plans or budgets in the light of changed circumstances.
A budget is a financial or quantitative statement prepared for a definite period of time. It states the policy to be pursued during that period for the purpose of attaining a given objective. It provides standards for comparison with the results actually achieved.
According to George R. Terry, “Budget is an estimate of future needs, arranged to an orderly basis, covering some or all of the activities of an enterprise for a definite period of time”. In the words of Professor Larders, “the essence of a budget is a detailed plan of preparations for some specified future period, followed by a system of records which will serve as a check upon the plan.”
Budgeting is the process of preparing budgets whereas budgetary control is a device or technique of managerial control through budgets. According to J. Batty, “Budgetary control is a system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities or services”. Thus, budgetary control is planning in advance of the various aspects of business can be controlled.
The important characteristics of budgetary control are – planning of activities of each department, co-ordination among various departmental plans, recording of actual performance, comparison between budgets standards and actual performance, determining the deviations, if any, finding out the reasons for deviations and taking of follow-up action.
Budgetary Control – Definitions
Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.
Control may be defined as “comparing operating results with the plans, and taking corrective action when results deviate from the plans”. Control is a mechanism according to which something or someone is guided to follow the predetermined course.
It requires two things:
First that there is a clear-cut and specific plan according to which any work is to proceed.
Secondly, that it is possible to measure the results of operations with a view to detecting deviations. Only then action can be taken to prevent or correct deviations.
According to Brown and Howard:
“Budgetary control is a system of coordinating costs which includes the preparation of budgets, coordinating the work of departments and establishing responsibilities, comparing the actual performance with the budgeted and acting upon results to achieve maximum profitability”.
Wheldon characterises budgetary control as planning in advance of the various functions of a business so that the business as a whole is controlled.
I.C.M.A. defines budgetary control as:
“The establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual actions the objectives of that policy or to provide a basis for its revision”.
Budgetary Control – Nature
Budgets express plans, objectives and programmes of the organisation in numerical terms. Thus budgets are consolidated statements of planned revenue and expenditures — by category and period of time — of money, time, personnel, space, buildings or equipment. It is quite obvious that planning is an integral part of any budget.
In other words, preparation of the budget is an integral part of the planning function. Yet, as with MBO, the administration of the budget is an integral part of the control function.
Once the budget is planned, measures of expenditures are made on a periodic basis and compared with budgeted figures. Management is thus enables to observe deviation (upward or downward) of actual expenditures from budgeted accounts and take corrective action, if warranted.
Budgeting involves expressing a set of planned activities for the coming time period (month, quarter, or year) in money or other quantitative terms. Budgets may be established for sub-units, departments, or the whole organisation.
The usual time period for a budget is one year, although we often come across other types of budget such as monthly budget or quarterly budget. Budgets are generally expressed in financial terms, but they are sometimes expressed in terms of units of output, time, or other quantifiable factors.
Budgets are the foundation of most control systems. Due to their quantitative nature, they provide yardsticks for measuring performance and facilitate comparison across departments, between levels in the organisation, and from one time period to another.
In particular, budgets serve four primary purposes. Firstly, they help managers co-ordinate resources and projects. (This stems from their use of a common denominator). Secondly, they help define the standards needed in all control systems. Thirdly, they provide clear and unambiguous guidelines about the organisation’s resources and expectations. Finally, they facilitate performance evaluations of managers and units.
Budgetary Control – Characteristics
Budgets are prepared for each department and then the plans and objectives are presented before the management.
The budgetary control co-ordinates the plans of various departments and the master budget is prepared.
3. Continuous Comparison:
The essential feature of budgetary control is to conduct continuous comparison of actual performance with budgeted figures, revealing the variations.
Budgets are revised, if necessary, according to changed conditions.
Budgetary Control – 6 Basic Objectives
The basic objectives of budgetary control are discussed below:
(i) Budgetary control aims at specific action programmes which are amenable to implementation through the various activity centers of the enterprise. It is necessary for the determination of goals of the enterprise.
(ii) Budgetary control is intended to impart precision, discipline, direction, and predictability to the day-to-day activities of the enterprise.
(iii) Budget aims at coordination and integration of enterprise functions and operations performed by various departments. They highlight the inter-departmental nature of enterprise functions and operations as also the need for consistency in operations.
(iv) It provides participation to the subordinates. The subordinates can make their suggestions and comments on the estimates.
(v) A budget lays down sufficient and satisfactorily norms of performance over various activities. It ensures efficient utilization of various resources.
(vi) It is an important instrument of managerial control of an enterprise. It helps in comparing the performance of various individuals and departments with the predetermined standards laid down in various budgets.
Budgetary Control – Essentials
(1) Effective Organisation – The concern should be effectively organised and the responsibilities of each departmental managers are clearly defined and the line of authority sharply drawn.
(2) Quick reporting – The subordinates must send reports on performance without any delay. The managers on their part must analyse the report and take necessary action immediately.
(3) Support of top management – The top management must have a clear idea of the objectives of budgetary control and should implement the budgetary control programme seriously in order to infuse a sense of seriousness among the subordinates.
(4) Reward and Punishment – The employees whose performance is according to the budget plans should be suitably rewarded and the employees whose performance is not as per budget should not go unpunished.
(5) Appropriate Authority – The employees who are entrusted with the responsibilities of implementation of budgetary control should also be given appropriate authority to do so. If a person lacks authority to enforce his decision, it is difficult for him to fulfil his responsibilities
(6) Flexibility – If the circumstances warrant, the management should not hesitate to alter the budget figures. But at the same time, care must be taken to see that the budget figures are not altered too much or too often.
Budgetary Control – Procedure (With 5 Steps)
The procedure of introduction of budgetary control system in a business organization enterprise involves the following steps:
The responsibility of budgeting is entrusted to a Budget Committee under the inchargeship of Budget officer. The budget committee consists of heads of various department s in addition to the budget officer. The budget officer acts as a convener of the budget committee. The budget committee formulates a general programme of budgeting, discussing departmental budget and brings coordination among them.
The budget officer is an expert in accounting and finance and plays an important role in preparing and implementation of budgets. He advises the CEO and departmental heads on budgetary matters. He ensures proper communication of budgets at all levels.
He supervises execution of budget, analyses variances in performance and suggest suitable actions to the concerned persons. He also revises budgets in accordance with the recommendations of the budget committee.
Budgetary control should be introduced in phases so that there is least resistance to it by the people working in the enterprise. It should be gradually introduced in other parts of the enterprises after it functions well in one part. Rigidities in budgetary control should be avoided. The budgets should provide for some degree of flexibility to the executives in implementation of it. The extent of budgetary control differs from one firm to another.
Budget is prepared for a certain period of time. The length of the budget period depends on – i. Nature of business; ii. The degree of control required; iii. Production period; and iv. Timings of availability of finance. For example, firms with huge capital expenditure require long-term budgeting; whereas other firms require short-term budgeting.
When the business is changing fast, the preparation of budgets for a longer period will prove to be meaningless. Therefore, the length of the budget period should be restricted to such a span of time for which an accurate forecast can be made.
It is that factor which influences the functional budgets. It is also known as “Principal Budget” factor. It is the factor the extent of whose influence must first be assessed in order to ensure that the functional budgets are reasonably capable of fulfillment. Key factor may be raw material, labor, plant capacity, sales, or government factor. For example, the shortage of power supply leads to under-utilization of plant capacity.
So, industrial undertakings prepare first plant utilization budget keeping in view the availability of power, and then other budgets like sales and promotion.
Most of the budgets are based on sales forecasts which are made by sales manager. If there is any other key factor, the budget estimates for such factor may be prepared first. Budget committee discusses these estimates and gives its approval tentatively. After that, the entire department makes their budget on these estimates and submits them to the budget committee.
Cash budget is prepared on the basis of sales and other budgets. The committee discusses these budgets and makes modifications where ever necessary and then incorporates all budgets into a “master budget” which is sent to the top level of management for approval.
Budgetary Control – 8 Important Advantages
Some of the important advantage of budgetary control are as follows:
(1) The various functional budgets state clearly the limits for expenses and also the results expected in a given period. By this, the uncertainties that may have to be faced by the enterprise are eliminated. Further, it should be possible for the enterprise to adopt a planned approach to various activities of the enterprise.
(2) As limits and authority of each manager are laid down in the budget, the management should delegate authority and responsibilities without sacrificing the overall control of the enterprise.
(3) Generally, the budgets are prepared by committee consisting of important executives of the enterprise and this provides to the enterprise the fruits of combined wisdom.
(4) Budgetary control tries to keep the expenditure within control and also to achieve the targets laid down. This keeps everybody always alert and encourages the optimum use of the enterprise resources.
(5) Budgetary control helps in finding out the deviations from the predetermined standards and by this, the management is enable to take suitable corrective action promptly. It means wastages and losses of the business concern are reduced to the minimum.
(6) Budgetary control is concerned with the activities of various departments which are interrelated or interconnected. This may help in promoting co-operation and team spirit among the employees of the different departments.
(7) Budgetary control involves the communication of management’s policy and objectives to all the managers. Again, the reports of actual performance against the budget, how each manager has fared, what actions are necessary etc., are communicated to the managers. Thus, Budgetary control ensures proper communication in the enterprise.
(8) Budgetary control involves two function, viz., (a) planning for its own future performance and (b) control to ensure adherence to the plans laid down. Thus, budgetary control ensures proper performance of the above two managerial functions.
Budgetary Control – Limitations
Budgetary control is not a fool proof tool and it has some limitations.
(1) Since an effective budgetary programme reveals the performance of employees, there may not be wholehearted co-operation from inefficient employees for budgetary programmes.
(2) Budgets are based on estimates and hence the effectiveness of budgetary control depends on the accuracy with which the estimates are made about the future.
(3) Conditions and circumstances under which an enterprise functions are not static and hence, budgetary control to be effective must be so flexible as to suit the requirements of any change in the circumstances. But it is very difficult to attain flexibility in budget making.
(4) Budgetary control will not be effective if no arrangements are made for proper supervision and administration.
(5) Budgeting is only one of the tools of management. But often budgeting is taken as a substitute for management rather than as a tool of management. This may result in harmful consequences for the business.
(6) Budgetary control programme is very cumbersome and time- consuming process.
(7) The manager is discouraged from undertaking activities for which provision was not been made in the budget, but which are otherwise useful for the enterprise. Thus, the managers are discouraged from taking initiative.
We may conclude that in spite of these limitations, budgetary control confers many benefits on modern management. The benefits are such that the management cannot afford to disregard budgetary programme and control. Moreover, by planning and operating budgetary programmes carefully and wisely, some of the limitations can be overcome. Prof. C.T. Horngreen has rightly said that “if budgets are administered wisely, they compel management planning, provide definite expectations for judging subsequent performance and promote communication and co-ordination among the various segments of the business.”
Budgets are widely used as a tool of planning and control.
There are certain aspects of dangers of budgeting which are as follows:
i. In some faces, budgetary control are so detailed that they become cumbersome, meaningless, and unduly expensive. There is a danger of over-budgeting as it may bring rigidity in the enterprise. Which may deprive the managers of the needed freedom in managing their departments?
ii. Budgets are usually based on historical trends which may not repeat in future. They may also be influenced by what top management likes to expect. Naturally, the top management is interested in larger profits, lower costs, and greater market share and may make budgets to achieve these aims which may not be possible in actual practice.
iii. Another larger problem lies in allowing budgetary goals to supersede enterprise goals. In their effort to keep within budget limits, the managers may forget that budgets are only means to enterprise goals.
iv. Sometimes, budgets may be used to hide inefficiencies. A department may be inefficient even though its expenses are within the budget limit. Moreover, the budgets are based on the past year’s figure and a certain expenditure incurred in the past may become an evidence to cut down the budget proposals sent by various departments. This naturally leads to inflation of figures by various departments.
v. There may be psychological problems with the people supposed to work within the budget framework. While, on the one hand, people like to know what they are working for and how they will be judged, on the other hand , many of them are resentment caused by the fear of inflexibility which might be brought about by the budget.