BUDGETARY CONTROL
What is Budgetary control?
Budgetary control is the process by which budgets are prepared for the future period and are compared with the actual performance for finding out variances, if any. The comparison of budgeted figures with actual figures will help the management to find out variances and take corrective actions without any delay.
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.
Budgetary Control – Definitions
Budgetary control is a system whereby the budgets are used as a means of planning and controlling costs. Budgeting lays down as to what is to be attained and how it is to be attained while control ensures that the objectives are realised and actual results do not deviate from the planned course more than necessary.
According to J.L. Brown and L.R. Howard – “Budgetary control system 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.”
According to J. Batty-“Budgetary Control is a system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities or services.”
CIMA has defined budgetary control as “the establishment of budgets relating to the responsibilities of executives to the requirement of a policy, and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide a basis for its revision”.
Budgeting is the whole process of planning, implementing and operating budgets.
From these definitions, it is clear that budgetary control operates through different budgets. It aims at laying down a policy, coordinating the different activities of the business and exercising necessary control so that the individual targets set by different budgets can be achieved.
The targets set up under the system are such that they can be directly compared with the actual performances, and the difference, if any, can be traced to an individual who is responsible for the same. This building up of a sense of responsibility in accounting is the main feature of budgetary control.
Objectives of Budgetary Control
1. Planning:
A budget is nothing but a plan. Budgeting involves drawing up detailed plans relating to different functions like production, sales, raw material requirements, labour requirements, research programmes, etc. When plans are made in advance, many problems are anticipated long before they arise and solutions can be sought through careful study.
2. Coordination:
Coordination is the process whereby different sections of a business work towards achievement of the common goal. Budgets provide a means of coordination for the business as a whole. While making budgets, various factors like production, sales, etc., are balanced and coordinated.
3. Control:
Control is the action necessary to ensure that planned objectives are being achieved. Budgetary control makes control possible by comparing the actual performance against planned performance and taking action on the basis of variations between the two.
4. Communication:
Effective coordination is dependent upon adequate communication. Every member of the organisation should know very clearly, the part that he has to play in accomplishing the target laid down in the budget. He should know, in advance, what is planned, how it is planned, and when and by whom it is to be accomplished.
5. Optimum employment of capital :
The resources required for achieving the firm’s objectives are estimated and are made available.
6. Motivation:
A budget is a very useful device in influencing the behaviour of managerial personnel, and motivating them to put forth their efforts in the attainment of organisational objectives. By laying down standard of achievement, a budget acts as a challenge to the managerial personnel in the accomplishment of the standard set.
Having had the opportunity to participate in the preparation of the budget and thereby laying down standards of achievement, the very managerial personnel are made responsible for attainment of the standards. A budget is thus a strong motivational force and a challenge to managers.
Objectives of Budgetary Control
7. Responsibility accounting :
Each individual is entrusted with well-defined responsibilities and they are made accountable.
8. Performance Evaluation:
Evaluation of managerial performance is made on the basis of a manager’s achievement of the target laid down for his segment. A budget is thus a means of knowing as well as informing the managers how well they are performing in meeting the targets which they have themselves helped in setting.
9. Deviations:
Ascertainments of deviations are essential to fix responsibility and correct the deviations as far as possible.
10. Anticipation of Future Capital Expenditure:
Estimated increases in sales necessitating higher production capacity provides advance warning for the possible capital expenditure in near future.
11. Increase in Profitability:
Costs are controlled with help of budgets and profits targeted are achieved.
12. Efficiency and Economy:
Effective budgetary control results in cost control and cost reduction.
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