Budgetary Control: Definition, Objectives and Benefits
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. 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.
What are the steps involved in budgetary control?
- The 5 Step Budgetary Control Process.
- The process of controlling budgets can be broken down into several steps:
- Step 1 – Establish Actual Position.
- Step 2 – Compare Actual with Budget.
- Step 3 – Calculating Variances.
- Step 4 – Establish Reasons for Variances.
- Step 5 – Take Action.
Traditional budgeting makes a routine approach. Zero base budgeting makes a very straightforward approach and immediately spotlights the decision packages enjoying priority over others. A forecast merely takes note of the future events. Being a prerequisite to planning, a forecast results in planning. If a realistic original sales forecast has been made, there should be no need to make https://online-accounting.net/ upward revision to sales forecast, even though the sales are well above the level originally projected. This is a happy situation and the higher- than-expected income can be identified as the cause of larger than ever expected favourable variance in income. The function of control is concerned with satisfying oneself that the actual work proceeds according to that which is budgeted.
Limitations of Budgetary Control:
Let us take the example of a company to illustrate how budgetary control works. Let us assume that the company had decided on the budget for January 2020 at the start of the month. Now the management is reviewing the actual performance vis-à-vis the budgeted performance in the following month. The comparison of the actual figures with the budgeted figures is shown in the table below.
Plans and objectives set in budgets are compared with the actual performance. If actual performance is less than objectives, this deviation is reported to the top level management to take corrective action for future. In a budget control system, a firm assigns targets to each department, individual, etc.
Budgetary Control: Meaning, Objectives, Control, Advantages and Limitations
Good budgetary control involves keeping track of performance over time. A one-time overspending variance of 25 percent is one thing; if it happens month after month, that indicates serious misjudgment or a systemic problem of some sort. Different budget problems require different fixes. Budgetary control involves assigning different managers responsibility for their departmental budget.
All organisations have some form of an accounting system which records their income and expenditure. Depending on the system, budgets will be identified by some form of budget code. Income and expenditure is then recorded against the budget code. This enables budget holders to identify their actual budget position at any point in time. To ensure effective budgetary control, budgets must be effectively monitored and managed. Although the difference between monitoring and managing budgets is not clearly defined, there are certain characteristics that set them apart.
Types of Budgetary Control
A government might need to budget to build a new bridge, while something like a household budget covers household expenses for an indefinite period of time. This results in the creation of a budget, a document detailing budgetary control involves how much money can be dedicated to different aspects of the project, based on projected expenses and income. Performance and working of various activities is effectively coordinated through budgetary control.
Revisions may reveal the need for additional funding, forcing parties in charge of budgetary control to figure out where that money will come from. This could include taking on debt, cutting the scope of a project, or moving funds over from another project or program to keep it going. A company, for example, could partially remove funds from a department to push through completion of an important product. Through the process of budgeting the goals of different departments are set in advance in consultation with those in charge of them. This makes the vision of the organisation clear and employee motivation and morale boosted by achievement of clearly set objectives. Actual performance is compared with standards and deviations are reported to top management for action against unfavourable deviations.
Important Forms of Budgeting Process
Budget control helps the organization to understand its strengths and weaknesses simply by measuring the performance of departments, cost centers, etc., over a period of time. Third, the company analyses the reasons for the deviation in the actual performance and takes corrective actions.
They agree to shoulder responsibility for the purpose of achieving the budgeted objectives. To lay a system of comparison of actual performance of each person, section or department with the relevant budget and to ascertain the causes for the variations / discrepancies, if any.
They are a plan and plan can be changed, as new and better opportunities arise. There should be a separate performance report for each budget centre Performance report should be regularly made to the required level of management.
The great advantage of flexible budgeting is that variance analysis will enable the management to take appropriate action. It has different budgeted costs for different levels of activity. That is, under this method, a series of budgets would be prepared at varying levels of activity, e.g., 70%, 80%, 90% and 100% capacity. Downward revisions to budgeted costs can be required by many types of changes in operating conditions.
Budgetary Control: Definition, Objectives and Benefits
Budgeting in the organisation makes financial planning and control easy. The ultimate effect of budgeting is the thorough examination and scrutinizing the financial aspect of the business enterprise. This helps in optimum use of financial resources of the enterprise. Budgetary control is an important instrument of managerial control in any enterprise. Budgetary control helps in comparing the performance of various individuals and departments with the predetermined standards laid down in various budgets. Budgetary control involves continuous comparison of actual results with the planned ones and taking corrective actions in the organisation.
- Hence, budget control may create conflict between the two departments.
- An effective budgeting system plays a crucial role in the success of a business organization.
- Every member of the organisation knows clearly the scope of his authority and responsibility.
- Budgets should not be rigid, but flexible enough to allow altering or remodelling in the light of any change in circumstances in the organization.
- In future, conditions may change which will upset the budgets.
Consequently, what he thinks to be in the best interests of the organisation may not be so in fact, when considered in the context of the organisation as a whole. The success of budgetary control depends upon the support of top management. If the top management is not enthusiastic for its success, the budgetary control will collapse.
The existence of idle capacity as well its cost is easily revealed. It also ensures availability of sufficient working capacity and pinpoints operational efficiency by setting targets of performance. Budgetary control thus guides management in planning and formulation of policies thereby enabling them to think ahead.
Generally, it can be said that functional budgets like sales, purchase, production, etc. are prepared for one year and then broken down monthly. Budgets like capital expenditure are generally prepared for a period from 1 year to 3 years. Budgets provide the basis for such controlling in the sense that the actual performance can be compared with the budgeted performance.