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Objectives of Budgeting

Objectives of Budgeting

  1. To determine organisational objectives.
  2. To minimise waste and control expenses.
  3. To plan and control the income and expenditure of the firm.
  4. To fix responsibilities in different departments or heads.
  5. To ensure the availability of working capital.
  6. To centralize the control system.
  7. Increase profitability through elimination of waste.
  8. To take remedial action in order to correct deviations from established standards.
  9. To find in which area action is needed and to solve the problem without delay.
  10. To provide long term and short term plans for attaining organisational goals.
  11. Installations of Budgetary Control

The organisation which has to achieve an effective system of budgetary control, will need the following steps.

1.      Organisation Chart. A concern must have a well defined organisation chart for budgetary control. It is essential in order to have clear determination of authority and responsibility of each individual. Determination of authorities helps to minimise conflict among the personnel.

 2.      Objectives. It requires a clearly defined objective in terms of both quantity and quality that are sought to be achieved by the system of budgetary control.

3.      Budget Centre. A budget centre is a part of the organisation for which budget is prepared to cover entire operational activities of the organisation. It is necessary for cost control purposes. With the help of the different budget centres, performance should be evaluated in an easy manner.

 4.      Budget Committee. Budget committee should be established for the purpose of incorporation and execution of plans. In small organisations, either the Cost Accountant or Chartered Accountant prepares the budget. In case of big companies a separate committee is formed for this task. The committee consists of various section heads, the chief executive and the budget controller. The ultimate aim of budget committee is to prepare a master budget with the help of the department wise budget which has already been prepared by the departmental executives.

5.      Budget Manual. It is a written document which sets out the authorities and responsibilities of persons engaged in regular operational activities. It clearly lays down objectives of the organisation and the procedure to be followed by the executives concerned. It is the responsibility of the budget officer to prepare and maintain this manual.

6.      Budget Period. The length of time for which the budget is prepared and employed is called budget period. It may be different for different industries or even it may differ among the same industry or business. The budget period will depend upon the following factors.

  • The type of business
  • Length of the trade cycle
  • Nature of the product

7.       Key Factor. Key factor is also known as limiting factor or governing factor or principal budget factor. Simply, if these factors are not available in sufficient quantity, that should be referred as limiting or key factor. It may arise due to shortage of material, labour, hours, capital, plant capacity. It is essential for other budgets. So the concern will have to first prepare key factor related aspects and then other budgets are prepared