Budgetary control

 

Meaning

Budgetary control is the use of budgets and budgetary reports throughout the period to co-ordinate, evaluate and control the day to day operations in accordance with the goals specified by the budget. The actual performance is compared with the targets and it is kept under constant control. The actual results are evaluated in such a manner that corrective measures may be taken where and when required.

 

Budgetary control system is an integral part of the management control. Before embarking upon a study of budgetary control in detail, let us first understand the managerial control process, since this process implemented through budgets, is known as budgetary control process.

 

Thus, budgetary control involves :

1. Establishment of budgets ;

2. Continuous comparison of actuals with budgets for achievement of targets;

3. Placing the responsibility for failure to achieve the budget figures.

4. Revision of budgets in the light of changed circumstances.

 

In the words of J. Batty, budgeting control is .a system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities or services.

 

The purpose of budgetary control system is to assist management in holding the business as early as possible on that chartered course. Thus, the emphasis of budgeting is on the necessity for advance decision on future course of action to be followed.

However, budgeting control system points out the result which would accrue by following that course of action.

 

ADVANTAGES OF BUDGETARY CONTROL

A budget helps in

  • Planning
  • Coordination
  • Control
  • Decentralization
  • Efficiency
  • Co-operation
  • Efficient communication
  • Efficient use of resources

 

 

Steps for Adoption of Budgetary Control

Preplanning is a cardinal feature of budgetary control. A series of budgets are prepared under the system and all are coordinated together into the plan of action. The actions of people, their performances and the costs they incur.all are reflected in the budgets, in financial/quantitative terms.

 

The following steps should be taken for adopting a system of budgetary control :

 

1. The first step in installing a budgetary control system is to determine the objectives of the business sought to be achieved.

2. Managerial policies regarding range of products, levels of inventories, channels of distribution etc. are required to be determined keeping in view the objectives of the firm.

3. With the given objectives in mind, the standards of performances expected of within the concern by the management are to be set.

4. Financial estimates regarding cash requirements for the planned operations and investments are prepared, first, particularly when cash is the limiting factor.

5. The third step in the process is to prepare budgets for each segment of business.

The budgets may be prepared for each activity of the organisation and ultimately consolidated in master budget, i. e., budgeted profit and loss account and budgeted balance sheet.

6. The actual performances are compared with the budgeted figures, so as to find out deviations, if any.

7. After comparison of actuals and budgets, the position is placed in the statements or reports to be submitted to management.

8. Particularly when three are adverse variations, the reasons are to be investigated in detail so that persons/centres may be held responsible for inefficiencies.

9. Management takes remedial action on the basis of principle of exception. Wherever, there are unfavourable variations due to the negligence on the part of some department/personnel, suitable action is taken to correct the situation so  that wastes, losses, inefficiencies, in economies etc. are removed and targets are fulfilled in future.

 

 

Type of budgets

As budgets serve different purposes, different types of budgets have been developed. The following are the different classification of budgets developed on the basis of time, functions, and flexibility or capacity.

 

(A) Classification on the basis of Time:

1. Long-Term Budgets

2. Short-Term Budgets

3. Current Budgets

 

(B) Classification according to Functions:

1. Functional or Subsidiary Budgets

2. Master Budgets

 

(C) Classification on the basis of Capacity :

1. Fixed Budgets

2. Flexible Budgets

 

The following chart can explain this more:

Cost ac types of budget BCCA 2nd yr

(A) Classification on the Basis of Time

 

1. Long-Term Budgets: Long-term budgets are prepared for a longer period varies between five to ten years. It is usually developed by the top level management. These budgets summarize the general plan of operations and its expected consequences. Long-Term Budgets are prepared for important activities like composition of its capital expenditure, new product development and research, long-term finance etc.

2. Short-Term Budgets: These budgets are usually prepared for a period of one year. Sometimes they may be prepared for shorter period as for quarterly or half yearly. The scope of budgeting activity may vary considerably among different organization.

3. Current Budgets: Current budgets are prepared for the current operations of the business. The planning period of a budget generally in months or weeks. As per ICMA London, “Current budget is a budget which is established for use over a short period of time and related to current conditions.”

 

(B) Classification on the Basis of Function

 

1. Functional Budget: The functional budget is one which relates to any of the functions of an organization. The number of functional budgets depend upon the size and nature of business. The following are the commonly used:

 

(1) Sales Budget

(2) Purchase Budget

(3) Production Budget

(4) Selling and Distribution Cost Budget

(5) Labor Cost Budget

(6) Cash Budget

(7) Capital Expenditure Budget

 

2. Master Budget: The Master Budget is a summary budget. This budget encompasses all the functional activities into one harmonious unit. The ICMA England defines a Master Budget as the summary budget incorporating its functional budgets, which is finally approved, adopted and employed.

 

(C) Classification on the Basis of Capacity

1. Fixed Budget: A fixed budget is designed to remain unchanged irrespective of the level of activity actually attained.

2. Flexible Budget: A flexible budget is a budget which is designed to change in accordance with the various level of activity actually attained. The flexible budget also called as Variable Budget or Sliding Scale Budget, takes both fixed, variable and semi fixed manufacturing costs into account.

 

 

 

 

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