Budget and Budgetary Control

TABLE OF CONTENTS
1. NATURE AND PURPOSE OF BUDGET AND BUDGETARY CONTROL.......................... 3 1.2 Significance of Budget .......................................................................................................... 3 1.3 Budgetary Control ................................................................................................................. 4 2. PROCESS OF PREPARING BUDGET ..................................................................................... 4 3. BUDGET PREPARATION AND BUDGETARY CONTROL CAN AFFECT BEHAVIOUR IN THE BUSINESS ........................................................................................................................ 6 CONCLUSION ............................................................................................................................... 7 REFERENCES ............................................................................................................................... 8

INTRODUCTION
For every business, financial planning is significant in raising the funds, proper allocation of funds, and their optimal utilization so as to maximize the wealth of the company (Duchac and et.al., 2011). However, along with the good financial planning, effective control is also required to make sure proper implementation in order to achieve the desired results. Thus, for the effective financial planning and control, budgets are prepared. Budgets in simple terms can be defined as a systematic plan of estimation of revenues and expenditure that is expressed in monetary terms and are prepared in advance for a specific period of time usually for one year (Kimmel and Et.al., 2009). Budgets ensure the control over the internal operations of organization and also to evaluate the performance of every level of management and any inconsistency between the planned and actual performance is highlighted by budgets (Atrill and McLaney, 2009).

1. NATURE AND PURPOSE OF BUDGET AND BUDGETARY CONTROL

Basically Budgets are divided into two parts: Operating Budgets and Capital Budgets. Former is prepared for the routine operations or for the short term objectives of organization, for example Production objective etc. While latter represents the estimated expenditure for new projects and finance required to carry out that projects (Budget and Budgetary Control, n.d.). In a manufacturing firm there various departments like production, marketing, purchase, sales, human resource, accounts department etc. These departments have their own objectives which are harmonised with the organizations objectives. Therefore a systematic plan is need to make for the achieving the desired goals and thus the need of Budget arise. There are various types of Budgets such as production Budget, Raw-Material Budget, Sales Budget etc which are then integrated into a Master Budget that represents the overall operations of organization. 1.2 Significance of Budget Its a standard to control the routine operations of organization A budget provides the basis on which the performance of department and managers can be evaluated. It brings discipline and efficiency in working of organization. Through Budget, the activities of various departments are coordinated and are directed towards the achievement of desired company goals. 3

It serves as a direction to a company to move on the right track. It helps in properly allocating the resources and ensures their effective utilization by reducing waste and losses.

1.3 Budgetary Control Performance of organization is influenced by various factors like proper planning, coordination of various functions and activities, effective communication to all the level of organization etc. Monitoring over all the operations and effective control over the resources is therefore necessary for the organizations smooth functioning. And thus the need of budgetary control arises. The significance of Budget is controlling, the basic aim of preparing the Budget is to exercise control over operations of organization and so it is defined as budgetary control. An effective budgetary plan manages to control the use of resources in logical and systematic manner. Budgetary control process includes following steps: Making predictions and assumptions Preparing detailed Budgets according to the department and their respective objective. Comparing the actual performance with the budgetary performance. Taking the corrective actions that are needed to overcome the deviation in performance. Revising the budgets with the changed situations and business environment. From the last step, it can be said that the budgetary control process should be flexible enough to adapt itself to changing circumstances and environment (Jenkins and et. al., 2008). The main objective of budgetary control to monitor operating expense, sales revenues, cost of production and to ensure that they are operating as per the determined plan and if any variance is found then corrective action can be taken.

2. PROCESS OF PREPARING BUDGET

The principal element of preparing the budget is the Sales forecast that is an estimate of sales to be achieved in future within stipulated time in quantitative figure. The key to prepare a successful budget is to first identify and understand all the factors like production capacity, marketing decision that have direct impact on the sales. In addition with these factors, there are some more important decision that affects the sales forecast such as price, number of sales person, marketing strategy, competency and efficiency of sales people, etc.

 Defining Objectives: Budget is usually prepared to achieve certain short or long term objectives, so it needed to be defined specifically. Clearly defining the objectives will help the employees to know the targets that are to be achieved. So the objectives should be written out clearly, items of expenses and revenues should be covered and the areas of control segregated. Identifying key (Budget) factor: The key factors are also considered as factors that limit the organization ability for the achievement of specific goal. For instance, preparation of sales budget states that sales target need to be achieved in specific figures (Atrill and McLaney, 2009). First factor to be considered while preparing it is the production capacity; does the organization have that much capacity to manufacture largely, if not it is limiting or the key factor. So it is essential for the firm to identify such factors and to estimate their impact properly or in our case to revise the target. Past Performance Analysis: For preparing the budget, the results achieved in past should also be considered. However, these statistics of past are not completely reliable but it will provide the direction to the firm to achieve more in future compared to past achievement. Standard of activity and Output: Organization cannot completely rely on the past statistics for preparing the budget as they usually reflect the combination of bad and good factors. Thus, results of the past should be applied when the similar conditions prevails. Also, while setting the objectives and targets for the future, it must be considered that progress of business can only happen when achievement of current year exceeds the past results and outcomes. Therefore, what was good and profitable in past can only be beneficial for the present year and for the future. Budget preparation: The main source of cash inflows for any organization is the sales of good as they are the primary factor while preparing budget. The sales budget prepared in monetary form reveals the sales pattern forecasted, current economic conditions, competitor activities and mention the specific number of units that has to sell (Budgeting process, n.d). Budget period is usually prepared for one year and can be divided into half yearly or quarterly. Review the Budget: The set budget should be timely reviewed with the senior management. Possible issues, constraints and irregularities that are caused by the funding should be highlighted and then the updates and required modification should be made. 5

3. BUDGET PREPARATION AND BUDGETARY CONTROL CAN AFFECT BEHAVIOUR IN THE BUSINESS
The rapid advancement in technology has not only changed the working system of organization but also has improved the overall performance of organization. There are certain factors like inflation that leads to increase in price of raw material which further affects the cost of production, uncontrolled expenditures, wastage of resources and thus hinders the organization to achieve the targets , therefore the budgets are needed to monitors such factors and to have controls over them. For example, if the actual results achieved during the year is close with the budget result that means the budgetary control is effective and that business is moving on the right direction towards the achievement of goal, but in contrast is actual results does not match with the budget than it can be said that the business is going out of control and is not performing as expected. According to the Bremeser, budgets are the mode of communicating the top level managements expectation from managers and employees (Duchac and et.al., 2011). Base on many researches, it has found that budgetary control have positive impact on performance of organization. For this reason, the preparation of budgets and budgetary control is essential (Importance of Budgets, n.d). Some of the advantages of budgetary control are as follow: Resources and efforts of all employees are properly channelized with the help of budgetary control and thus ensure optimal utilization of resources and capital invested. It also promotes effective communication and coordination of all activities and functions among various departments in organization. As the objectives are clearly defined and time to time performance of organization is monitored through Budget, it helps in motivating the managers and employees to perform better so as to meet the desired results. And also during budget making process, employees are invited for their participation and are consulted that makes them committed towards the organization. Pre-planning compels management to concentrate on future, thus to anticipate change and accordingly prepare itself with the changing environment which is essential for every business success. A budget also provides a standard for performance appraisal when the set targets are accomplished. 6

Budget also increases the efficiency of production by eliminating the unnecessary wastage and thus control the cost associated with the production which further maximize the profits.

It makes the organization able to execute its strategic plans into action. It specifies the revenues, resources and efforts that are required to carry out the proposed plans and operations in future.

Budgets are the powerful tool used by the organizations to have control over the expenditures. Last but not the least, Budget provide a tool for taking corrective action to overcome the deviation between actual and standard performance.

However, budgetary control can also create certain troubles like as the budgets are rigid and are applied mechanically; therefore it limits the innovation, dynamism and new ideas that can be helpful for the organizations functioning. It can also cause sense of unfairness that in turn demotivates the employees to work hard. The dysfunctional aspect of the budgetary control may also hinder the organization in attainment of its goals and objectives. In addition to it, as the budgets are based on estimates and the future events, these assumptions may or may not actually happen. Moreover, the implementation of the budgetary system may be expensive.

CONCLUSION
From the above mentioned points it is clear that budgets and budgetary control are important tools in planning the activities and controlling along with the available resources so as to enhance the performance. Although in addition to proper budgetary control other factors are equally important like competency of employees, availability of adequate resources in terms of human and capital, ability of management to effectively control all operations and directing them towards the achievement of common goals.

REFERENCES
Books Atrill, P. And McLaney, E.J., 2009. Management Accounting for decision makers. 6th ed. Financial Times/Prentice Hall. Duchac, J.E. and et.al., 2011. Financial & Managerial Accounting. 11th ed. Cengage Learning. Jenkins, J.G. and et. al., 2008. Managerial Accounting: A Focus on Ethical Decision Making. 5th ed. Cengage Learning. Kimmel, P.D. and et.al., 2009. Managerial accounting: Tools for Business decision Making. 5th ed. John Wiley & Sons. Online Articles Budget and Budgetary Control. n.d. [pdf]. Available through: < http://ebooks.narotama.ac.id/files/Accounting%20for%20Managers/Chapter%2016%20% 20%20Budget%20and%20Budgetary%20Control.pdf>. [Accessed on 14th February 2013]. Budgeting process. n.d. [Online]. Available through: < http://www.zeepedia.com/read.php?budgeting_process_purpose_functions_of_budgets_ca sh_budgets%96preparation_interpretation_corporate_finance&b=22&c=24>. [Accessed on 14th February 2013]. Comprehensive Business Budgeting. n.d. [pdf]. Available through: http://www.microbuspub.com/pdfs/chapter8.pdf>. [Accessed on 14th February 2013]. <

Importance of Budgets. n.d. [Online]. Available through: < http://www.principlesofaccounting.com/chapter21/chapter21.html>. [Accessed on 14th February 2013]. Managerial Accounting: Tools for decision Making. n.d. [pdf]. Available through: < http://www.cambridgepub.com/managerialaccounting_6e/MA_6e_CH01_Website.pdf>. [Accessed on 14th February 2013]. Medium term Management control. 2005. [pdf]. Available through: < https://www.icsaglobal.com/assets/files/pdfs/BusinessPractice_and_IQS_docs/studytexts/ managementaccounting/n_Mgmt_Accounting_StudyText_Chapter_13.pdf>. [Accessed on 14th February 2013]. The relationship between two consequences of budgetary controls: budgetary slack creation and managerial short-term orientation. n.d. [pdf]. Available through: < http://directory.umm.ac.id/Data%20Elmu/jurnal/A/Accounting,%20Organizations%20and %20Society/Vol25.Issue6.Aug2000/2991.pdf>. [Accessed on 14th February 2013].