11-06-2014, 03:00 PM
Budgetary Control
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Meaning and Definition of Budget, Budgeting and Budgetary Control:
A budget is the monetary and / or quantitative expression of business plans and policies to be pursued in the future period of time. Budgeting is preparing budgets and other procedures for planning, coordination and control or business enterprises.
I.C.M.A. defines a budget as “A financial and / or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective”.
Budgeting refers to the process of preparing the budgets. It involves a detailed study of business environment clearly grasping the management objectives, the available resources of the enterprise and capacity of the enterprise.
Budgeting is defined by J.Batty as under: “The entire process of preparing the budgets is known as budgeting”.
Thus budgeting is a process of making the budget plans. Preparation of budgets or budgeting is a planning function and their implementation is a control function. ‘Budgetary control’ starts with budgeting and ends with control.
Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.
According to Brown and Howard “Budgetary control is a system of coordinating costs which includes the preparation of budgets, coordinating the work of departments and establishing responsibilities, comparing the actual performance with the budgeted and acting upon results to achieve maximum profitability”.
Wheldon characterizes budgetary control as planning in advance of the various functions of a business so that the business as a whole is controlled.
I.C.M.A. define budgetary control as “the 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 actions the objectives of that policy or to provide a basis for its revision”.
Features of Budgetary Control:
A budgetary control system can be defined 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 base for its revision.
The salient features of such a system are the following:
(a) Objectives: Determining the objectives to be achieved, over the budget period, and the policy or policies that might be adopted for the achievement of these ends.
(b) Activities: Determining the variety of activities that should be undertaken for the achievement of the objectives.
© Plans: Drawing up a plan or a scheme of operation in respect of each class of activity in physical as well as monetary terms for the full budget period and its part.
(d) Performance evaluation: Laying out a system of comparison of actual performance by each person, section or department with the relevant budget arid determination of causes for the discrepancies, if any.
(e) Control Action: Ensuring that corrective action will be taken where the plan is not being achieved and, if that be not possible, for the revision of the plan.
Advantages of Budgetary Control:
A budget is a blue print of a plan expressed in quantitative terms. Budgeting is technique for formulating budgets. Budgetary Control, on the other hand, refers to the principles, procedures and practices of achieving given objectives through budgets. Here are the some Advantages of Budgetary Control:
Maximization of Profit: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and co-ordination of different functions is undertaken. There is proper control over various capital and revenue expenditures. The resources are put to the best possible use.
Efficiency: It enables the management to conduct its business activities in an efficient manner. Effective utilization of scarce resources, i.e. men, material, machinery, methods and money - is made possible.
Specific Aims: The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving come specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.
Limitations of Budgetary Control System
The list of advantages given above is impressive, but a budget is not a cure all for organisational ills. Budgetary control system suffers from certain limitations and those using the system should be fully aware of them.
The budget plan is based on estimates: Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is not possible in forecasting and budgeting. The strength or weakness of the budgetary control system depends to a large extent, on the accuracy with which estimates are made. Thus, while using the system, the fact that budget is based on estimates must be kept in view.
Danger of rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may affect day-to-day operations and ignores the dynamic state of organization functioning.
Budgeting is only a tool of management: Budgeting cannot take the place of management but is only a tool of management. ‘The budget should be regarded not as a master, but as a servant.’ Sometimes it is believed that introduction of a budget programme alone is sufficient to ensure its success. Execution of a budget will not occur automatically. It is necessary that the entire organisation must participate enthusiastically in the programme for the realisation of the budgetary goals.