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Budget and Budgetary Control

NEED FOR BUDGETING

Budget is not only essential for government and various business organisations but also for the individuals. So everyone is very familiar with the budgeting. Without the budget or predetermined objectives no one can achieve its targets and go for performance evaluation. Whenever the organisation fixes its targets, it is necessary to evaluate its performance. i.e., the actual performance can be compared to the targeted one. If any deviation arises, the organisation can take a suitable action for correcting the deviation in future with the help of budgeting.

BUDGETING AND BUDGETARY CONTROL

Introduction

Modern industrial world faces stiff competition, uncertainty and it is exposed to different types of risks. Apart from the competition, modern era is the age of technology where fast changes are taking place. Due to this iast changes, automatic competition is generated at higher level and reactions of competitors are unknown and it is difficult to determine the consumer preferences in the context of too many products are available in the market.

Planning is very important function of management. It relates to what is to be done, how, when and where it is to be done. Thus planning is related to the future course of events. Intimate aim of efficient management is that all types of operations should be predetermined in advance. So cost can be controlled at all levels. If management is effective, it accomplishes the objective with minimum effort and cost.

Budget is not a new term. Everyone is familiar with the idea of budget because it is essential in every movement of our life-individual, institution or industry, State Government or Central Government.

Definition

The word budget is derived from a French term “Bougette” which denotes a leather pouch fund allocated for meeting anticipated expenses.

According to ICMA, England, a budget is “a financial and or quantitative statements prepared and approved prior to a defined period of time, of the policy to be pursued during the period for the purpose of attaining a given objective”.

It is also defined as “a blue print of a projected plan of action of a business for a definite period of time”.

Budgetary Control

The Chartered Institute of Management Accountants, London, defines budgetary control “as the establishment of budgets relating to 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 to provide a basis for its revision”.

Meaning of budget, budgeting and budgetary control, according to Rowland and William

H. Harris, is that “Budgets are the individual objectives of a department etc., where as budgeting may be said to be the act of building budgets. Budgetary control embraces all this and in addition includes the science of planning the budgets themselves and the utilisation of such budgets to effect on overall management tool for the business planning and control.

Advantages of Budgetary Control

The advantages and benefits of budgetary control are summarized below.

  1. It brings efficiency and economy in” the work of the whole enterprise. Simply it is an impersonal policeman that generates ordered effort and brings about the efficiency in results.
  2. It establishes divisional and departmental responsibilities so back passing is not possible.
  3. It secures proper co-ordination among various functional activities of the organisation. And also it promotes mutual co-operation and team spirit among the persons involved.
  4. Reduction in cost and elimination of inefficiency is achieved automatically. As a result, decrease in cost of production by increasing the volume of output.
  5. It enables the management to decentralise responsibility without losing control of entire business operations since it pin-points inefficiency.
  6. It facilitates to receive great favour from credit agencies. i.e., if the organization has a well developed budget and operates accordingly, it receives more amount of bank credit.
  7. It aims at maximisation of profit through cost control and proper utilisation of resources.
  8. Budget provides advance information, not only for the elimination of financial crisis but also for the efficent use of available capital.
  9. It provides adequate guidance to the field of research and development in future.
  10. It enables to evaluate the performance.
  11. It allows to achieve the balanced capital structure i.e., it avoids over capitalization or under capitalisation.
  12. Budgets fix the goals and targets without which operation lacks direction.

Disadvantages of Budgetary Control 

  1. Opposition against the spirit of budgeting
  2. The success of the budgetary control depends upon the degree of accuracy of the estimates. Forecasting is essential for budgeting. But there are no possibilities for hundred percent accuracy in forecasts and estimates.
  3. Inflation, Deflation, Economic & Government policies will affect the success of the budgetary control.
  4. Effectiveness of the budgetary control depens upon the willing co-operation or team work of all concerned. If there is no co-operation the system will be ineffective.
  5. Budgetary control is essentially a tool of decision making and helps the management to take various decisions. But it cannot replace the management.
  6. It is not suitable for small concerns because it requires huge amount of money and professional staff for preparing budget.
  7. It is a time consuming process.

Essentials of a Sound Budgetary Control

For an effective and efficient system of Budgetary control certain pre-requisites must be needed. These are :

  1. The system should have full support from top management.
  2. There should be a true delegation of authority and responsibility with the well planned organisational setup.
  3. Staff should be strongly and properly motivated towards budgeting.
  4. Budgets should actually work as a co-ordinating device rather than control device.
  5. The accounting system should provide accurate and timely information.
  6. Deviations from the standard targets should be reported promptly and clearly to all levels of management.
  7. The budget should lay down the targets which are easily attainable.
  8. Sufficient operational freedom should be given to the concerned executives within the overall framework.
  9. Past experience is a very useful guide for the future. So important points revealed by past experience should be taken into account while preparing budget in future.