Read this essay to learn about Budgetary Control. After reading this essay you will learn about:- 1. Meaning of Budgetary Control 2. Objectives of Budgetary Control 3. Steps in the Process 4. Essential Conditions 5. Advantages 6. Limitations.
Essay Contents:
- Project Report on the Meaning of Budgetary Control
- Project Report on the Objectives of Budgetary Control
- Project Report on the Steps in the Process of Budgetary Control
- Project Report on the Essential Conditions for Budgetary Control
- Project Report on the Advantages of Budgetary Control
- Project Report on the Limitations of Budgetary Control
Project Report # 1. Meaning of Budgetary Control:
Budgetary control has been defined as “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 action the objective of that policy or provide a basis for its revision.”
The essential features of Budgetary Control as per above definition are as follows:
(i) Budgetary control requires setting up of different kinds of budgets which are related to the responsibilities of the executives for the implementation of the policy.
(ii) The actual performance are compared with the budgeted limits of targets, for the purpose of cost-control and cost-reduction.
(iii) Where the comparison reveals an unfavourable results, corrective measures are taken to improve upon.
Project Report # 2. Objectives of Budgetary Control:
The objectives of budgetary control are as follows:
1. To define objectives of the enterprise.
2. To exercise control on cost through comparison of actual performances with the budgeted figures.
3. To take corrective measures either on the budget side or on the performance side,
4. To exercise control on the responsibilities of the executives in order to achieve the targets fixed in different budgets.
5. It centralises management control.
Project Report # 3. Steps in the Process of Budgetary Control:
The following main steps are taken into account in the process of budgetary control:
1. Authority and responsibility should go hand in hand.
2. The executives held responsible for the implementation of the budgets should be encouraged to express their opinions on the points of budget, success and failures.
3. A central budget committee is constituted under the charge of budget controller and is responsible to carry out the plans to the resources available.
4. There should be a check-up periodically to see that the work is being carried on as per directions and plans. And the work should be measured and compared with the budget estimates.
5. Budgets are the means and not ends. It is, therefore, necessary that the budgets should be so prepared that they meet the desired goals of business activity.
6. The budgets should be based on the realities of the business and the resources available.
Project Report # 4. Essential Conditions for Budgetary Control:
These may be:
(i) Focus on objectives,
(ii) Consistent delegation,
(iii) Proper targets,
(iv) Appropriate period,
(v) Communication of Planning promises, and
(vi) Provision for flexibility.
(i) Focus on Objectives:
Budgeting must be done in terms of objectives and policies of the concern. If objectives are not stressed in budgeting, it provides aimless efforts and implies no more than mere advance accounting of expected transactions in the business.
(ii) Consistent Delegation:
Fixed duties and obligations are required to be allocated to individual managers at different levels of organisation for framing and executing budget. The overall budget is broken down into element parts in conformity with organizational components.
By breaking down the budget into component parts, each management member can be informed about that part of the total budget for which he is accountable and when he is required to accomplish the work.
To secure necessary co-ordination between operations of two or more departments, departmental budgets are integrated and woven into a master budget for the concern as a whole.
(iii) Proper Targets:
In matters of setting budget targets there should be adequate checks and safeguards against the adoption of too high or too low estimates. Both these extreme cases of budget estimates create difficulties in the organisation and demoralize human beings of the enterprise.
Utmost care must, therefore, be taken for fixing targets so that employee initiative and individual responsibility, can be aroused on the one hand and performance can be improved on the other hand.
(iv) Appropriate Period:
Every business requires some short-term budgets as well as some long-term budgets. The sales budgets, the operating expenditure budgets, the revenue and expense budget and the cash budget are the usual short-term budgets. On the other hand, the capital expenditure budget, the research budget and the management training and development budget are the common long term budgets of a business.
Preparation of yearly budgets is recognised as short-term budgeting, while five yearly or ten yearly budgets are deemed as long-term budgeting. In short-term budgeting, a year is the common budget period.
Budgets are prepared for a year and reviewed at yearly, six-monthly or quarterly intervals. In fact, budgeting is a continuous process and requires perfect harmonization between long-term and short-term budgets.
(v) Communication of Planning Promises:
If departmental and subsidiary budgets are to be prepared and interpreted consistently throughout the organisation the communication of planning promises assumes importance. Subsidiary budgets which are mostly interrelated must be based on the same assumptions in planning for securing co-ordinated action.
(vi) Provision for Flexibility:
There should be nothing rigid in budgeting and budgets must always be flexible to meet changed condition. Flexibility is one of the essential attributes of budgeting. This flexibility however should not be taken by operating managers as an excuse for lowering their performances.
Unless there are sufficient reasons, budgets should not be changed during their currency. Any alteration in budget figures must always be done at the highest level of management after thorough scrutiny.
Project Report # 5. Advantages of Budgetary Control:
Budget and budgetary control has many advantages in the working of an industrial undertaking.
Some of the important advantages are:
(i) It clearly defines the goals of the business concern.
(ii) It helps in making plans to attain these goals.
(iii) It helps in determining the policies of the concern.
(iv) It controls expenditure.
(v) It gives in advance complete information regarding amount of capital needed for the budget period.
(vi) It also helps to control the financial position of the undertaking,
(vii) It helps management in controlling the causes of inefficiency.
(viii) It promotes co-operation among different executives for determining future policies and plans.
(ix) It acts as a tool for administration.
(x) It helps to know that where executive action is required to obtain desired results.
(xi) It helps in measuring the performance of each department of the concern.
(xii) It centralises management control.
Project Report # 6. Demerits or Limitations of Budgetary Control:
The main demerits or limitations of budgetary control are as follows:
1. The system of budgeting is based on estimates. If estimates go wrong then the budgetary control system may suffer adversely.
2. A budgetary control can be effective only when it is flexible. But it is not an easy job to attain flexibility in a day in budget making and this can affect the effectiveness of a budgetary control system.
3. Budgeting is taken as a substitute rather than as a tool of management. This leads to harmful consequences in the business.