After reading this article you will learn about:- 1. Meaning of Budgetary Control 2. Objectives of Budgetary Control 3. Merits 4. Limitations 5. Requisites 6. Classification.
Meaning of Budgetary Control:
The budgetary control is defined as the establishment of budget relating to the responsibility of executive to the requirement of a policy and the continuous comparison of actual with budgeted results either to secure by individual actions the objective of that policy or to provide a basis for its revision.
There is a difference in forecast and budgeting, the former is just a statement of a fact likely to occur, but the later is a target. The concern of the forecast is probable events but budget is planned event and a statement of the policy to be carried out.
A budget is indicates a target and is a financial and quantitative statement prepared and approved prior to a defined period for the purpose of attaining a given objective. It may include income, expenditure, and the employment of capital.
Budget or budgetary control is rigid and one of the systems in which dynamism is infused for the organisation to follow, through the process of setting up a target whose achievement means progress, a great deal of freedom is allowed in the given field for the executives of seeing to it that all will work in a concerned manner for achieving the objectives of the firm.
Budgetary control, in short, means laying down in monetary and quantitative term what exactly has to be done and how exactly it has to be done over the coming period and then to ensure that actual results do not diverge from the planned course more than necessary.
Objectives of Budgetary Control:
Since budget is forward planning the basic objectives are that losses be avoided and maximum profit is earned, to bring coordination among different functions of the enterprise, the actions are in time with target.
Merits of Budgetary Control:
The resources are best utilised and returns arc satisfactory, there is sense of awareness in fulfilling the target, coordination and understanding are brought between different functions. The success of an enterprise which come from self-examination and self-criticism is attained under proper budgeting, and the support and active participation of top management is ensured.
Limitations of Budgetary Control:
Despite of the fact that budgeting plays a significant role in making the business a great success there are certain limitations which should be kept in mind and they are:
There is not a high objectivity in forecasting and planning and the subjectivity creeps in the system, top management does not give full support and show less enthusiasm sometimes, the purpose is sometimes defeated when there is a lack of effective control and action in the business, and finally, installation of budgeting is time consuming.
Requisites for the Operation of a Budgetary Control System:
1. There is a need for a well-planned organisational set up responsibility and authority must be clearly demarcated.
2. Timely information comes from a good accounting system.
3. The variance from the planned budget must be immediately reported to the appropriate level of management.
4. Feedback of control action to make budget meaningful.
5. Support and cooperation of top management is necessary.
Classification of Budgetary Control:
There are four bases adopted in budgeting:
(a) Coverage,
(b) Flexibility,
(c) Characteristics of activity covered,
(d) Time span.
Thus, the classes of budget are:
1. Master Budget:
When all functions are consolidated in one, a targeted profit and loss and balance sheet.
2. Functional Budget:
The one in which targets are approved for the individual functions.
3. Flexible Budget:
When cost and revenue do not coincide with the targeted one and it is compared with each other to make it more meaningful.
4. Stationary or Fixed Budget:
If the budget designed does not change with the volume of activity. It would show wide divergence.
5. Capital Budgeting:
Business activity has two processes, viz., creation of facilities and actual carrying out of operation. Creation of manufacturing facilities and repair facilities are covered under the budget and this budget is called capital budgeting.
6. Revenue Budget:
Where formulation of sales, production, financial and other budgets ending up in the master budget, fall under revenue budget.
7. Short Range Budget:
A budget is based on forecasts which is the quantification of future. Short range budgets are for a period of one year.
8. Long range budget is for a longer period more than one year.
A good budgetary system is supported by a good organisational structure with line authority and responsibility clearly demarcated.
The two important characteristics of a modern budgetary control system are:
(i) Participation of line executives in the decision-making process.
(ii) Perfect coordination among all functions of an organisation.