Budgetary Control

BUDGET
 A budget is an estimate of costs, revenues, and resources over a
specified period, reflecting a reading of future financial conditions
and goals.
One of the most important administrative tools, a budget serves also
as a
1) Plan of action for achieving quantified objectives,
2) Standard for measuring performance, and
3) Device for coping with foreseeable adverse situations.

 A budget is a quantitative expression of a financial plan for a

defined period of time. It may include planned sales volumes and
revenues, resource quantities, costs and expenses, assets, liabilities
and cash flows. It expresses strategic plans of business units,
organizations, activities or events in measurable terms

Budget helps to aid the planning of actual operations by forcing managers

to consider how the conditions might change and what steps should be
taken now and by encouraging managers to consider problems before
they arise. It also helps to co-ordinate the activities of the organization by
compelling managers to examine relationships between their own
operation and those of other departments. Other essentials of budget
include:

 To control resources
 To communicate plans to various responsibility center managers.
 To motivate managers to strive to achieve budget goals.
 To evaluate the performance of managers
 To provide visibility into the company's performance
 For accountability.
Budgetary Control: Meaning, Definition, Objectives and
Essentials

Meaning:
Budgetary control is the process of determining various actual results with
budgeted figures for the enterprise for the future period and standards set
then comparing the budgeted figures with the actual performance for
calculating variances, if any. First of all, budgets are prepared and then
actual results are recorded.
The comparison of budgeted and actual figures will enable the management
to find out discrepancies and take remedial measures at a proper time. The
budgetary control is a continuous process which helps in planning and co-
ordination. It provides a method of control too. A budget is a means and
budgetary control is the end-result.

Definitions:
“According to Brown and Howard, “Budgetary control is a system of
controlling costs which includes the preparation of budgets, coordinating
the departments and establishing responsibilities, comparing actual
performance with the budgeted and acting upon results to achieve maximum
profitability.”

Weldon characterizes budgetary control as planning in advance of the

various functions of a business so that the business as a whole is controlled.

J. Batty defines it as, “A system which uses budgets as a means of planning

and controlling all aspects of producing and/or selling commodities and
services. Welsch relates budgetary control with day-to-day control
process.” According to him, “Budgetary control involves the use of budget
and budgetary reports, throughout the period to co-ordinate, evaluate and
control day-to-day operations in accordance with the goals specified by the
budget.”

From the above given definitions it is clear that budgetary control involves
the follows:
a) The objects are set by preparing budgets.
b) The business is divided into various responsibility centres for
preparing various budgets.
c) The actual figures are recorded.
d) The budgeted and actual figures are compared for studying the
performance of different cost centers.
e) If actual performance is less than the budgeted norms, a remedial
action is taken immediately.

Objectives of Budgetary Control:

Budgetary control is essential for policy planning and control. It also acts an
instrument of co-ordination.
The main objectives of budgetary control are the follows:
1. To ensure planning for future by setting up various budgets, the
requirements and expected performance of the enterprise are
anticipated.
2. To operate various cost centers and departments with efficiency and
economy.
3. Elimination of wastes and increase in profitability.
4. To anticipate capital expenditure for future.
5. To centralize the control system.
6. Correction of deviations from the established standards.
7. Fixation of responsibility of various individuals in the organization.
Essentials of Budgetary Control:
There are certain steps which are necessary for the successful
implementation budgetary control system.

These are as follows:

1. Organization for Budgetary Control
2. Budget Centers
3. Budget Mammal
4. Budget Officer
5. Budget Committee
6. Budget Period
7. Determination of Key Factor.

1. Organization for Budgetary Control:

The proper organization is essential for the successful preparation,
maintenance and administration of budgets. A Budgetary Committee is
formed, which comprises the departmental heads of various departments.
All the functional heads are entrusted with the responsibility of ensuring
proper implementation of their respective departmental budgets.
The Chief Executive is the overall in-charge of budgetary system. He
constitutes a budget committee for preparing realistic budgets A budget
officer is the convener of the budget committee who co-ordinates the
budgets of different departments. The managers of different departments
are made responsible for their departmental budgets.

2. Budget Centers:
A budget centre is that part of the organization for which the budget is
prepared. A budget centre may be a department, section of a department or
any other part of the department. The establishment of budget centers is
essential for covering all parts of the organization. The budget centers are
also necessary for cost control purposes. The appraisal performance of
different parts of the organization becomes easy when different centers are
established.
3. Budget Manual:
A budget manual is a document which spells out the duties and also the
responsibilities of various executives concerned with the budgets. It specifies
the relations amongst various functionaries.

4. Budget Officer:
The Chief Executive, who is at the top of the organization, appoints some
person as Budget Officer. The budget officer is empowered to scrutinize the
budgets prepared by different functional heads and to make changes in
them, if the situations so demand. The actual performance of different
departments is communicated to the Budget Officer. He determines the
deviations in the budgets and the actual performance and takes necessary
steps to rectify the deficiencies, if any.
He works as a coordinator among different departments and monitors the
relevant information. He also informs the top management about the
performance of different departments. The budget officer will be able to
carry out his work fully well only if he is conversant with the working of all
the departments.
5. Budget Committee:
In small-scale concerns the accountant is made responsible for preparation
and implementation of budgets. In large-scale concerns a committee known
as Budget Committee is formed. The heads of all the important departments
are made members of this committee. The Committee is responsible for
preparation and execution of budgets. The members of this committee put
up the case of their respective departments and help the committee to take
collective decisions if necessary. The Budget Officer acts as convener of this
committee.

6. Budget Period:
A budget period is the length of time for which a budget is prepared and
employed. The budget period depends upon a number of factors. It may be
different for different industries or even it may be different in the same
industry or business.

The budget period depends upon the following considerations:

a) The type of budget i.e., sales budget, production budget, raw materials
purchase budget, capital expenditure budget. A capital expenditure
budget may be for a longer period i.e. 3 to 5 years purchase, sale
budgets may be for one year.
b) The nature of demand for the products.
c) The timings for the availability of the finances.
d) The economic situation of the country.
e) The length of trade cycles.
All the above-mentioned factors are taken into account while fixing period
of budgets

7. Determination of Key Factor:

The budgets are prepared for all functional areas. These budgets are inter-
dependent and inter-related. A proper co-ordination among different
budgets is necessary for making the budgetary control a success. The
constraints on some budgets may have an effect on other budgets too. A
factor which influences all other budgets is known as Key Factor or Principal
Factor.
There may be a limitation on the quantity of goods a concern may sell. In
this case, sales will be a key factor and all other budgets will be prepared by
keeping in view the amount of goods the concern will be able to sell. The
raw material supply may be limited, so production, sales and cash budgets
will be decided according to raw materials budget. Similarly, plant capacity
may be a key factor if the supply of other factors is easily available.
The key factor may not necessarily remain the same. The raw materials
supply may be limited at one time but it may be easily available at another
time. The sales may be increased by adding more sales staff, etc. Similarly,
other factors may also improve at different times. The key factor also
highlights the limitations of the enterprise. This will enable the management
to improve the working of those departments where scope for improvement
exists.

Advantages of Budgetary Control:

The budgetary control system help in fixing the goals for the organization as
whole and concerted efforts are made for its achievements. It enables
economies in the enterprise.

Some of the advantages of budgetary control are:

1. Maximization of Profits:
The budgetary control aims at the maximization of profits of the enterprise.
To achieve this aim, a proper planning and co ordination of different
functions is undertaken. There is a proper control over various capital and
revenue expenditures. The resources are put to the best possible use.

2. Co-ordination:
The working of different departments and sectors is properly coordinated.
The budgets of different departments have a bearing on one another. The co-
ordination of various executives and subordinates is necessary for achieving
budgeted targets.

3. 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.

4. Tool for Measuring Performance:

By providing targets to various departments, 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.

5. Economy:
The planning of expenditure will be systematic and there will be economy
in spending. The finances will be put to optimum use. The benefits derived
for the concern will ultimately extend to industry and then to national
economy. The national resources will be used economically and wastage will
be eliminated.

6. 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.

7. 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.

8. 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.

9. 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.
10. Introduction of Incentive Schemes:
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 of many good points of budgetary control there are some limitations
of this system.

Some of the limitations are discussed as follows:

1. 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 budgetary control system.

2. Budgetary Revision Required:

Budgets arc 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.

3. Discourage Efficient Persons:

Under 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 contented by reaching the targets. So budgets may serve as
constraints on managerial initiatives.

4. Problem of Co-ordination:
The success of budgetary control depends upon the co-ordination among
different departments. The performance of one department affects the
results of other departments. To overcome the problem of coordination a
Budgetary Officer is needed. Every concern cannot afford to appoint a
Budgetary Officer. The lack of co-ordination among different departments
results in poor performance.
5. 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 maximum allocation of funds
and this raises a conflict among different departments.

6. Depends Upon Support of Top Management:

Budgetary control system depends upon the support of top management.
The management should be enthusiastic for 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.

Essentials of Effective Budgetary Control

Essentials of effective budgetary control are:

1. Sound forecasting
2. Goal orientation
3. Proper recording system
4. Participation
5. Top management support
6. Flexibility
7. Enforce timeliness
8. Efficient organization
9. Proper co-ordination
10.Sound administration
11.Constant review
12.Reward and punishment and
13.Results take time!

1. Sound forecasting:
The estimates for the future needs of business should be precise and
accurate.
A scientific forecasting system gives adequate and reliable data for
budgeting.
2. Goal orientation:
Budgets must directly flow from objectives of the enterprise, and goals of
budgetary control must be clearly defined.

3. Proper recording system:

Sound accounting procedures should be allowed for proper recording of
actual operations. Unless the actual performance is accurately recorded and
quickly reported; the whole structure of budgeting will fall. Budgeting is
greatly helped if there is also the system of standard costing in use.

4. Participation:
All individuals responsible for achieving results should be consulted in the
formulation of budgets. No system of budgetary control can succeed without
the mutual understanding of superiors and subordinates. Participation
assures full co-operation and commitment for making budgets successful.
Participation also makes budgets realistic and workable.

5. Top Management support:

Since budgeting highlights inefficiencies there is bound to be resistance. This
makes it more necessary that top management should believe in the
importance of budgetary control. Thus the overall budgets must be set and
approved at the chief executive level.

6. Flexibility:
Budgets should be flexible. If actual business conditions differ from what
was expected, it should be possible to recast the budget quickly.

7. Enforce timeliness:
Budgets must be prepared so as to be ready before the period to which they
relate. Moreover sufficient time should be allowed for the budget
programme to develop and reach near perfection.

8. Efficient organization:
A good organization structure is necessary for success in budgeting. There
should be fixed responsibility centers, budget committee and budget
controller.

9. Proper Co-ordination:
The budget plans must be properly co-ordinated in order to eliminate
bottlenecks. Individual budgets should be co-ordinated with one another.

10. Sound administration:

Budgets cannot replace good management. Budgets should be administered
efficiently by responsible executives.

11. Constant Review:

Constant review of the budgets is necessary so as to prevent them from
degenerating into license for spending the full budgeted amount even
though it may not be necessary.

12. Reward and punishment:

The concerned employees should be suitably rewarded for performance as
per the budget. But slack employees should not be allowed to go
unpunished.

13. Results take time:

The budgetary control is an efficient tool to control performance. But it
requires time to show results. Those who administer budgetary control
should have high degree of knowledge and experience in the field.
 9 Essentials of an Effective Budgeting
The following points highlight the nine essentials of an effective
budgeting.
Essentials of an Effective Budgeting:
1. Sound Forecasting
2. An Adequate, Planned and Reliable Accounting System
3. Efficient Organization
4. Formation of Budget Committee
5. Cleanly defined Business Policies
6. Availability of Standard Information
7. Support of Top Management
8. Good Reporting System
9. Motivation

Effective Budgeting: Essentials # 1.

Sound Forecasting:

Business forecasts are the foundation of budgets. The forecasts are discussed
by the executives and when most profitable combinations of forecasts are
selected, they become budgets. The more sound are the forecasts better
results would come out of the budgeting.

Effective Budgeting: Essentials # 2.

An Adequate, Planned and Reliable Accounting System:

There should be a proper flow of accurate and timely information in the

business which is ‘must’ for the preparation of budgets. The finance
department should continuously supply financial data on the basis of which
budget estimates and forecasts are to be made. If the data are wrong all the
estimates will be wrong and the very objectives of budget will be misguiding.

Effective Budgeting: Essentials # 3.

Efficient Organisation:
Preparation of Budget and its operation requires efficient, adequate and best
organisation. Therefore, a budgeting system should always be supported by
a sound organisational structure demarcating clearly the lines of authority
and responsibility.

Moreover, there should be true delegation of authority from top to lower

levels of management so that executives at all levels may get the opportunity
to make best decisions and get themselves involved in budget making
exercise.

Effective Budgeting: Essentials # 4.

Formation of Budget Committee:

It is the Budget Committee that receives the forecasts and targets of each
department as well as periodic reports and finalizes the final acceptable
targets in form of Mater Budget. The Budget Committee also approves the
departmental budgets. It is imperative that opportunities must be provided
to the executives of all the departments for their participation in the process
of budget making.

Effective Budgeting: Essentials # 5.

Cleanly defined Business Policies:

Budgets for each department should be prepared taking into account the
policies set for particular department. Policies should be precise and clearly
defined as well as free from any ambiguity.

Effective Budgeting: Essentials # 6.

Availability of Standard Information:

It is very essential that sufficient and accurate relevant data should be made
available to each department. Take for example, sales forecasts, production
targets, price data may not flow from normal accounting system alone and
these data should be collected and processed by using advanced statistical
techniques and methods.
Effective Budgeting: Essentials # 7.

Support of Top Management:

In order to make budgets effective, each member of top management should

cooperate and should involve themselves enthusiastically in the process of
budget making. The whole system of budget making should enjoy the active
and spontaneous support of the top management.

Effective Budgeting: Essentials # 8.

Good Reporting System:

An effective budgeting system also requires the presence of a proper feed

back system. As work proceeds in the budget period, actual performance
should not only be recorded but it should also be repaired with the budgeted
performance. The variations should be reported promptly and clearly to the
appropriate levels of management.

The reporting system should be designed in such a way that along with
variations, the causes of such variations and persons responsible for such
variations are also reported so that management may decide about suitable
remedial or corrective actions.

Effective Budgeting: Essentials # 9.

Motivation:

All the employees or staff other than executives should be strongly and
properly motivated towards budgeting system. There is need to make each
member of the staff feel too much involved in the budget making system.

Five Types of Budgets in Managerial Accounting

Managerial accounting approaches a company's financial situation in an operational way,
giving information in a manner that supports managers in planning and control
procedures. Various budget formats in managerial accounting influence how a manager
forecasts department activity and how he addresses progress or shortfall to meet goals.
Companies may use several types of managerial budgets concurrently.

1. Master Budget
A master budget is a comprehensive projection of how management expects to
conduct all aspects of business over the budget period, usually a fiscal year. The
master budget summarizes projected activity by way of a cash budget, budgeted
income statement and budgeted balance sheet. Most master budgets include
interrelated budgets from the various departments. Managers typically use these
subset budgets to plan and set performance objectives. Master budgets are
generally used in larger businesses to keep many managers on the same page.

2. Operational Budgets
The operational budget covers revenues and expenses surrounding the day-to-day
core business of a company. Revenues represent sales of products and services;
expenses define the costs of goods sold as well as overhead and administrative
costs directly related to producing goods and services. While budgeted annually,
operating budgets are usually broken down into smaller reporting periods, such
as weekly or monthly. Managers compare ongoing results to budget throughout
the year, planning and adjusting for variations in revenue.

3. Cash Flow Budget

A cash flow budget examines the inflows and outflows of cash in a business on a
day-to-day basis. It predicts a company's ability to take in more money than it pays
out. Managers monitor cash flow budgets to pinpoint shortfalls between expenses
and sales -- times when financing may be needed to cover overheads. Cash flow
budgets also suggest production cycles and inventory levels so that a company's
resources are available for activity, not sitting idle on warehouse shelves.

4. Financial Budget
A financial budget outlines how a business receives and spends money on a
corporate scale, including revenues from core business plus income and costs from
capital expenditures. Managing assets such as property, buildings, investments
and major equipment may have a significant effect on the financial health of a
company, particularly through the peaks and troughs of daily business. Executive
managers use financial budgets to leverage financing and value the company for
mergers and public offerings of stock.
5. Static Budget
A static budget contains elements where expenditures remain unchanged with
variations to sales levels. Overhead costs represent one type of static budget, but
these budgets aren't confined to traditional overhead expenses. Some departments
may have a fixed amount of money set in budget to spend, and it is up to managers
to make sure such amounts are spent without going over-budget. This condition
occurs routinely in public and nonprofit sectors, where organizations or
departments are funded largely by grants.