Budgetary Control: Definitions, Objectives, Types, Advantages and Limitations

The more detailed and extensive the breakdown by activities, the more readily and accurately total expenditure can be estimated, controlled and reviewed. It will always be an ideal situation if the activity can be broken down into adequate detail to measure the performance in terms of cost per unit of activity. Zero base budgeting has assumed greater significance in recent years, particularly in the government sector. It has given a new thrust to the theory of budgetary control. It is argued that the traditional approach to budgeting in which generally a certain percentage is added to the previous year’s expenditure to take care of inflation, etc. is not scientific.

Controlling function is made to be effective as the control is centralised while budgets are prepared and implemented. Estimated increases in sales necessitating higher production capacity provides advance warning for the possible capital expenditure in near future. Budgetary control is inevitable for policy formulation, planning, control and coordination. The essence of budgeting is to plan and control.

Budget Reports – Essential Features and Various Reports Prepared and Submitted

However, forgetting these benefits, sufficient preparation should be made. There is a need for investigation of the same and take appropriate action so that the deviations will not repeat in the future. Responsibilities can be fixed on proper persons so that they can be held responsible for any such deviations. As the resources are directed to the most productive use, budgeting budgetary control involves helps in reducing the wastages and losses. Budgeting facilitates the planning of various activities and ensures that the working of the organization is systematic and smooth. The benefits derived by an organization from an effective system of budgeting can be summarized as given below. It outlines the anticipated expenses of the organization in a specified period.

It forces all managers to think about the future and chalk out plan for future. Budgets are expected costs used for forecasting profits. Budgets are based on past actuals adjusted to future trends. It requires each manager to re-evaluate all the programmes and activities of his department and justify his entire budget. Conflict between departments may affect the overall profitability of the organisation.

Budgets and Budgetary Control

Such budgets detail where the organization expects to get its cash for the coming period and how it plans to spend it. Usual sources of cash include sales revenue, the sales of assets, the issuance of stock, and loans. Any deviation between the two can be found https://online-accounting.net/ out and analyzed to ascertain the reasons behind the deviation so that necessary corrective action can be taken to rectify the same. Thus budgeting helps immensely in controlling function. There should be enough scope of flexible individual initiative and drive.

Budgets of various departments are prepared by mutually considering each other. E.g., sales department’s budget is coordinated with the production department. A budget is a mechanism to plan for the operations of the organisation and utilisation of its resources. Thus, revenue planning and expenditure planning together with planning of investments and sources of capital are included in various budgets. While making decisions, it is, therefore, necessary for every manager to co­ordinate the inter-related aspects of business activities. The desired co-ordination is brought about by means of a budget. A budget is thus, a plan of action for a future period.

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The budgets provide incentive and motivation to work with greater vigour and vigilance for attaining the budget targets. It increases the overall efficiency and productivity. Budgetary control system brings economy in the overall working of the business concern. Budgets aim at regulating and controlling expenditure by exposing all types of wastages and inefficiencies and thus help in the efficient operation of the business.

A method of budgeting whereby all activities are-re-evaluated each time a budget is set. Discrete Levels of each activity are valued and a combination chosen to match funds available. It is an adjusted budget prepared after operations to compare actual results with cost, that should have been incurred at actual level attained. CIMA defines it as a budget of income and/or expenditure applicable to a particular function. A function may refer to a department or a process.

Types of Budgetary Controlling Techniques

Any type of irregularity or violation of accounting norms and standards are reported internally and these are addressed before the external audit commences. In other words, internal audit sets the tone and context for external audit. The work of preparing a budget manual should be entrusted to a Budget Committee. The manual should specify the steps to be taken to prepare budgets. It is also the duty of the Budget Committee to lay down the form in which budgets should be prepared. To bring to the notice of the management the need for revision of budgets. A ‘Budget Officer’ or ‘Budget Controller’ is appointed to link up the various operations to bring them together and to coordinate their efforts in the matter of the preparation of budgets.

• There should be a well-defined organisation chart for budgetary control.
• Expenses are properly planned and financial resources are put to optimum use.
• Hence the coordination is automatically facilitated.
• He should be equal in rank to other departmental managers.
• To achieve this aim, a proper planning and co ordination of different functions is undertaken.

Zero-base Budgeting may be more suitably applied. Thus, service or support- type activities are more suitable for Z.B.B.

Meaning

A budget centre may be a department, section of a department or any other part of the department. The establishment of budget centres is essential for covering all parts of the organization.

• Hence, future uncertainty reduces the value of budget control.
• An investment centre manager is responsible for achieving the target ROI or EVA.
• Forward planning and policy formulation are indispensable to a system of budgetary control.
• These reports should include the details of labour efficiency achieved, plant utilisation, productions overheads incurred, material usage and scrap reports.
• In my experience, what often happens is that someone will make the budget way too tight and unrealistic and when they can’t keep to it, they just give up completely rather than adjusting.

It is prepared in advance and approved prior to a definite period of time during which it is to operate. Budgets are prepared for a specified period of time. The periodicity may be month, quarter, half year, a year or even more than that, say, 5 years.

It is a plan laying down the targets to be achieved within a specified period. It is a final and approved share of a forecast. When forecasts are approved by the management as a tentative plan for the future they become budget. A proper planning and control are essential for an efficient management.

• For example, cutting of present advertisement costs may affect future sales.
• CIMA defines profit centre as a part of business accountable for costs and revenues.
• A profit centre is a segment of activity or area of responsibility for which both revenues and costs are accumulated.
• Continuous comparison of actual with the budgets for achievement of targets and fixing the responsibility for failure to achieve the budget figures.