Budgetary Control: Principles, Merits and Objectives

In this article we will discuss about Budgetary Control:- 1. Definition of Budgetary Control 2. Principles of Budgetary Control 3. Characteristics 4. Merits 5. Demerits 6. Objectives.

Contents:

  1. Definition of Budgetary Control
  2. Principles of Budgetary Control
  3. Characteristics of Budgetary Control
  4. Merits of Budgetary Control
  5. Demerits of Budgetary Control
  6. Objectives of Budgetary Control



1. Definition of Budgetary Control:

“Budgetary control is a system of controlling costs which includes the preparation of budget, coordinating the departments and establishing responsibilities, comparing actual performance with that budgeted and acting upon results to achieve maximum profitability.” —Brown and Howard

CIMA defines budgeting control as “The establishment of departmental budgets relating to 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 objectives of that policy or to provide a firm basis for its revision”.

Budgetary control is therefore, means laying down in monetary and quantitative terms what exactly has to be done and how exactly it has to be done over the coming period and then to ensure that actual results do not deviate from the planned course. Budgetary control is a tool of great potency for infusing forward looking dynamism and for harnessing the energies of people at all levels.



2. Principles of Budgetary Control
:

The following are the fundamental principles of budgetary control:

i. Establish a plan or target of performance which coordinates all the activities of the business.

ii. Record the actual performance.

iii. Compare the actual performance with that planned.

iv. Calculate the differences or variances, and analyse the reasons for them.

v. Proper action is to be taken immediately to remedy the situation.



3. Characteristics of Budgetary Control
:

The salient features of Budgetary Control may be enumerated as follows:

(i) Budgetary Control determines the objectives to be achieved over the budget period. It also frames policies that are expected to be adopted for the achieve­ment of these ends.

(ii) It addresses variety of activities that should be undertaken for the achievement of the objectives.

(iii) An effective budgetary control draws up a plan or a scheme of operation in respect of each class of activity, in physical as well as monetary terms, for the entire budget period and its parts.

(iv) It lays out a system of comparison of actual performance by each person, section or department with the relevant budget and determine the causes for the discrepancies, if any.

(v) It ensures that corrective action will be taken, where the objective is not achieved and, that be not possible, for the revision of the plan.

In brief, it is a technique to assist the management in the allocation of responsibility and authority, to provide it with aid for making estimating and planning for the future and to facilitate the analysis of the variations between estimated and actual performance. By doing so, weak areas of performance are identified and corrective measures are taken so that objectives can be achieved.




4. Merits of Budgetary Control
:

The following advantages can be drawn from budgetary control:

(i) Budgetary control ensures maximum utilisation of available resources with a view to achieving maximum profitability.

(ii) It leads to better coordination between different departments and hence better understanding between different functions.

(iii) It creates a sense of awareness at all levels of management in the process of achieving the planned targets.

(iv) It is a process of self-examination and self-criticisms which is essential for the success of any business enterprise.

(v) Budgeting gets the support and active participation of top management without which a budgeting programme cannot succeed.

(vi) Budgetary control directs capital expenditure in the most profitable time.

(vii) It helps in increasing productivity of men, materials and machine.

(viii) It acts as a yard-stick for measuring actual performance against targeted performance.

(ix) By comparing the actual with the targeted performance, budgetary control can identify the variances and helps to take remedial measures for correcting the variances.



5. Demerits of Budgetary Control
:

(i) Forecasting, planning or budgeting is not an exact science and a certain amount of judgement is present in any budgeting plan.

(ii) Lacking of support from the top management may lead to the collapse of plans.

(iii) Budgetary control is expensive.

(iv) It will be ineffective in a situation like strikes, lockout and economic revision.

(v) Budgetary control loses its importance when policies, programmes, techniques are to be changed to keep peace with socio-economic and political environment.

(vi) To be effective budgeting should be followed up by effective control system. Many organisations lack this effective control system which defeats the very purpose of budgeting.

(vii) Factors that cannot be controlled by the management cannot be incorporated in implementing the policies of budgetary control system.



6. Objectives of Budgetary Control
:

Objectives of Budgetary Control are outlined below:

i. To.combine the ideas of all levels of management.

ii. To coordinate the activities of the business.

iii. To centralize control.

iv. To decentralize responsibility on to each manager involved.

v. To plan and control income and expenditure in such a fashion so as to achieve maximum profitability.

vi. To direct capital expenditure in profitable direction.

vii. Budgetary control has to act as a guide to the management for taking management decisions when budgets are affected by unforeseeable conditions.

viii. Budgetary control has to ensure the availability of sufficient working capital for efficient operations of the business.

ix. It is to provide a yard stick against which actual performance can be compared with the targeted to identify the deviations, if any.

x. To show management when action is needed to remedy a deviation.


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