In this article we will discuss about:- 1. Meaning and Definition of Budgetary Control 2. Objectives of Budgetary Control 3. Essentials 4. Advantages 5. Limitations.
Meaning and Definition of Budgetary 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 characterises 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 defines 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 action the objectives of that policy or to provide a basis for its revision”.
Following are the features of budgetary control as per the above definitions:
1. The pre-requisite for budgetary control is to set different kinds of budgets and fix the responsibility of personnel for the successful implementation of the policy.
2. Actual performance is compared with budgets to reveal deviations for the purpose of cost control.
3. Corrective action is initiated to set right the unfavourable deviations.
Objectives of Budgetary Control:
Budgetary control is inevitable for policy formulation, planning, control and coordination. The essence of budgeting is to plan and control.
Following are the main objectives of budgetary control:
Budgeting ensures effective planning by setting up of budgets.
Budgets are helpful in coordination of business activities.
3. Efficiency and Economy:
Effective budgetary control results in cost control and cost reduction.
4. Increase in Profitability:
Costs are controlled with help of budgets and profits targeted are achieved.
5. Anticipation of Future Capital Expenditure:
Estimated increases in sales necessitating higher production capacity provides advance warning for the possible capital expenditure in near future.
Controlling function is made to be effective as the control is centralised while budgets are prepared and implemented.
Ascertainments of deviations are essential to fix responsibility and correct the deviations as far as possible.
Essentials of Successful Budgetary Control:
A business budget is a detailed plan covering phases of operations for a definite future period. It is laying down of policies, plans, objectives and goals set in advance by the top management for the enterprise as a whole and for each segment.
The following are the essential requisites for implementing budgetary control successfully:
1. Top Management Support:
The budgetary control system should have continuous support of top management which can ensure its all-round acceptance.
2. Clearly Defined Organisational Structure:
The authority and responsibilities are to be properly defined to pin-point the responsibility of specific individuals in key positions.
3. Efficient Accounting System:
The accounting system should provide the required information in time.
4. Reporting of Deviations:
Efficient system has to be devised to reduce the differences between the budgets and actual performance.
Staff are to be appraised of the budgets and benefits they are going to derive directly and indirectly.
6. Realistic Targets:
The targets set should be realistic so that they are achievable and budgets should not frustrate the workers by fixing unrealistic targets.
7. Participation of All Departments Concerned:
Budgets are to be set for all the departments so that their participation in implementation will be effective.
Budgets are prepared on the basis of certain conditions. If there is change in conditions budgets also should be adjusted to accommodate the changes.
Advantages of Budgetary Control:
Budgetary control is helpful in setting targets for the whole concern and achievement of the targets. It also makes the various operations of the enterprises economical.
Following are some of the advantages of budgetary control:
1. Maximisation of Profits:
Budgetary control aims at increasing the over-all profits of the organisation. This is achieved through planning, coordination and control of various activities in a programmed manner.
2. Effective Coordination:
Performance and working of various activities is effectively coordinated through budgetary control. Budgets of the various functions are interlinked and dependent. Effective implementation of budgets depends on cooperation of concerned personnel of various departments. Emphasis on co-ordination and cooperation helps in achieving the predetermined targets and goals.
3. Evaluation of Executive Performance:
Goals are set for each department. Actual performance is compared with standards and deviations are reported to top management for action against unfavourable deviations. Thus, the performance of the department heads and other executives is constantly monitored.
4. Clear-Cut Goals and Targets:
Through the process of budgeting the goals of different departments are set in advance in consultation with those in charge of them. This makes the vision of the organisation clear and employee motivation and morale boosted by achievement of clearly set objectives.
5. Economy in Operations:
Expenses are properly planned and financial resources are put to optimum use. The benefits are extended to the industry and then to national economy. Budgetary control is helpful in conservation, effective utilization and elimination of wastage in scarce resources.
6. Revelation of Ineffectiveness:
Comparison of actual performance with budgeted performance reveals week spots so that attention is focused on them to improve the performance.
7. Correction of Performance Continuously:
The deviations of actual performance compared with budgets are frequently reported and corrections are made to rectify the unfavourable deviations immediately. In the absence of budgetary control this may be done at the end of the accounting year by which time corrections may not be fruitful or practicable.
8. Introduction of Incentive Schemes of Remuneration:
Incentive schemes can be easily introduced as the predetermined targets act as base to compare actual performance and determine efficiency. Higher and lower efficiency are suitably rewarded or discouraged respectively.
9. Shutting Down of Unprofitable Products and Activities:
Budgetary control reveals inefficiencies in products, processes and departments. This is helpful in closing down of loss making divisions to improve the overall profitability.
Limitations of Budgetary Control:
Budgetary control is an effective tool for management control. However it has certain limitations while operating it as a technique.
1. Prediction of Uncertain Future:
Budgeting is a process of forecasting and estimation. Forecasting may not be accurate. Therefore budgets based on inaccurate forecasts and estimates may not be accurate and effective.
2. Changes of Conditions:
Budgets are prepared on the basis of certain prevailing conditions. If the conditions change budgets are also to be revised. Constant changes in budgets may frustrate the employees and the charm in budgeting and implementation may be lost.
General tendency of employees is to achieve the targets as budgeting fixes the targets. Some of the employees who are highly skillful may also be satisfied in performing up to the goals set without showing full potential, which will be a loss to the enterprise as well as the employee in terms of productivity.
4. Difficulty in Coordination:
Effective implementation of budgetary control depends upon proper coordination among various departments as the performance of a department depends on the work of other departments and vice versa. It requires budgetary officer to oversee the integration of various activities to successfully implement the budgets. Ineffective coordination leads to inefficient performance.
5. Conflict among Different Departments:
Budgetary control sets targets for different departments individually. This will make the departmental heads to be selfish to get maximum funds and think in terms of achieving their own set targets, thereby raising conflict among different departments. Inter-departmental rivalries may endanger the performance of the whole organisation.