Budget and Budgetary Control

L.V.Appasaba.

Intro.
Budgeting is an all-important activity. It originated before both accounting and management. Governments have been preparing

budgets from times immemorial.

Business houses has also followed it. A lot of improvements have been effected in the budgeting techniques over the years. It has really been a dynamic exercise.

By now, it is the greatest aid to management, and the most widely used tool for profit planning and control.

For effective running of a business, management must know:

Where it intends to go i.e. organizational objectives

How it intends to accomplish its objective i.e. plans

Whether individual plans fit in the overall organizational objective. i.e. coordination Whether operations conform to the plan of operations relating to that period i.e. control

Budgetary control is the device that a company uses for all these purposes.

 WHAT IS A BUDGET?
A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending.

FEATURE OF A BUDGET ARE:

It is prepared, generally, a year in advance of the operations. It is a guide or blueprint for the forthcoming period. It is expressed in monetary terms, though initially it is drawn in

physical quantities.

 WHAT IS BUDGETARY CONTROL

Budgetary control is the use of the comprehensive system of budgeting to aid management in carrying out its functions like

planning, coordination and control.

This System Involves

Clear allocation of duties and responsibilities.

Establishment of budgets or fixation of targets of performance for each department or function of the organization.

 Comparison of actual with budgeted figures, calculation of the variations between the two, analysis of variations according to causes and responsibilities and reporting to management for

corrective actions.

When, however, a scrutiny of the variations reveals that there has been some change in the basic conditions in which the budget was prepared, and the change is of permanent nature, steps have to be

taken to revise the budget.

 Objectives of a Budgetary Control System

1. Definition of Goals: The overall aims of the business and determining targets of performance for each section or

department of the business. 2. To Coordinate Different Activities: Budgets are the operating

decisions. Production has to be coordinated with sales, and then

with purchasing, inventory, finance, and other activities of the business. The different budgets force members of the

management and other employees to seek the support of each

other.

3. To motive employees: Budgetary control sets physical and financial targets to be achieved for the next year. In most cases, employees are involved in them. As such, budgeting motivates

managers to accomplish the targets.

4. To provide basis for performance evaluation: After the budget is approved by the management, it becomes a measuring stick for actual performance. A continuous comparison is made of actual with budgeted results. It reveals the cause of difference which is then tracked down.

5. To implement MBO and MBE: By comparing the actual performance against the planned one, variances are calculated. While the targets in budgets act as objectives, budgeting helps

implement the principle of "Management by Objectives" (MBO).

Similarly, variances also help implement the principle of "Management by Exception" (MBE). Only significant variances

are reported to the higher level for investigation. All others are
supposed to conform with the plan, and no time and efforts be spent for them

MBE : The idea is that management should spend its valuable time concentrating on the more important items (such as shaping the company's future strategic course). For example, only those

creditors having outstanding accounts for more than 45 days will

receive a second billing notice.

 Essentials of successful budgeting

1. Support and involvement of top management: The budget

should be sponsored by management and it should have the active

and whole-hearted support of top management.

2. Built-up by responsibility centers: For successful budgeting, it is also necessary that it should be built-up by responsibility

centres and should show the controllable costs in each

responsibility centre.

3.Participation by responsible supervisors: The responsible supervisors should participate in the process of setting the budget figures and should agree that the budget goals are reasonable. If

they are not consulted, their attitude towards the budget is likely
to be one of indifference and resentment.

4. Clear-cut organizational structure: A successful budgetary program pre-supposes a clear allocation of authority, duties and

responsibilities in the organization. Everybody in the organization

should know who is responsible to whom.

5. Continuous budget education: If the budget is to be effective, all responsible supervisors must be actively interested in it. This requires that the responsible supervisors are aware of the entire

budgeting process. The best way to assure this is a program of

continuous budget education through manuals, meetings, etc. to discuss the preparation of budget and actual results achieved.

6. Timeliness: The time period covered by the budget should be

related to the necessity for and the possibility of effective

management action.

7. Reasonably attainable targets: The targets laid down in the budget should be reasonably attainable. Too high a target will be frustrating and too low a target will encourage complacency.

8. Management by exception (MBE): In comparing actual

performance with budgeted performance, attention should be focused on significant exceptions-items that are significantly different than expected. 9. Thorough review of budget estimates: The review of budget

estimates by successively higher levels of management should be

thorough. Casual review is a signal that management is really not much interested in the budget process.

10. Proper Communication: Final approval of the budget should be specific and this approval should be communicated to the organization. An attempt to operate on the doctrine "silence gives

consent" inevitably leads to misunderstanding.

11. Responsibility Accounting: Since budget is based upon historical data and since control includes the measurement of plans and objectives, the accounting system must be built-up around the responsibility structure of the enterprise.

Comparisons between budgeted and actual results are meaningless if revenues used in the budget and the accounting system are not in harmony.

12. Flexible: It is important that budgeting is flexible rather than static. Instead of basing budgets on a single fixed level of activity, they should be prepared for several levels of activity. Again,

budget should be revised if market conditions change.

ADVANTAGES OF BUDGETARY CONTROL

1) 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 are

undertaken. There is a proper control over various capital and revenue expenditure. The resources are put to the best possible

use.
2) Co-ordination: The working of different departments and sections is properly coordinated. The budget at different departments has a bearing on one another. The co-ordination of various executives and subordinated is necessary for achieving budgeted targets.

3) Tool for Measuring Performance: By providing targets to various departments budgetary control provides a tool for measuring managerial performance. The budgeted targets are

compared to actual results and deviations are determined. The

performance of each department is reported to the top management.

4) Economy: The planning expenditure will be systematic and there

will be economy is spending. The finance will fee put to optimum use. The benefits desired for the concern will ultimately extend to industry and then to national economy.

5) Corrective Action: The management will be able to take corrective measures whenever there is discrepancy in

performance. The deviations will be regularly reported so that

necessary action is taken at the earliest.

6) Cost Reduction: In the present competitive world budgetary control has a significant role to play. Every business tries to reduce the cost a production for increasing sales.

LIMITATIONS OF BUDGETARY CONTROL

1) Opposition Against the Very Spirit of Budgeting : There will be always active and passive resistance to budgetary control as it

points efficiency or inefficiency of individuals. The opposition is

due to human nature- the tendency to resist change.

2) Budgeting And Changing Economy: The preparation of a budget, which gives a realistic position of the firm's affairs under

inflationary pressure and changing government, is very difficult.

Thus, the accurate position of the business cannot estimate.

3) Time Factor: Accuracy in budgeting comes through experience. Management must not expect too much expect too much during the development period.

4) Not A Substitute For Management: Budget is only a management tool. It cannot substitute management. Besides that no budgetary programmer can be successful unless adequate arrangements are made for supervision and administration.

5) Co-operation required: The success of the budgetary control depends upon willing cooperation and teamwork. Budget officer must have co-operation from all department managers. These

managers must feel the responsibility for achieving departmental

goals laid down in the budget.

ACCORDING TO FUNCTION
1) SALES BUDGET: Sales budget is the most important budget based on which all the other budgets are built up. This budget is a forecast of quantities and values of sales to be achieved in a budget period.

2) PRODUCTION BUDGET: Production budget involves planning the level of production which in turn involves the answer to the following questions: What is to be produced? When is it to be produced? How is it to be produced? Where is it to be produced?

3. COST OF PRODUCTION BUDGET: This budget is an estimate of cost of output planned for a budget period and may be classified into Material Cost Budget Labour Cost Budget Overhead Cost

Budget

4. PURCHASE BUDGET: This budget provides information about the materials to be acquired from the market during the budget period

5) PERSONNEL BUDGET: This budget gives an estimate of the requirements of direct labour essential to meet the production target. This budget may be classified into

a. Labour requirement budget

b. b. Labour recruitment budget .

6) RESEARCH AND DEVELOPMENT BUDGET: This budget provides an estimate of expenditure to be incurred on R & D

during the budget period.

7) CAPITAL EXPENDITURE BUDGET: This is an important budget providing for acquisition of assets necessitated by the following factors:

a. Replacement of existing assets.

b. Purchase of additional assets to meet increased production c. Installation of improved type of machinery to reduce costs.

8) CASH BUDGET: This budget gives an estimate of the anticipated

receipts and payments of cash during the budget period. Cash

budget makes the provision for minimum cash balance to be maintained at all times.

9) MASTER BUDGET: The summary budget incorporating its component functional budget and which is finally approved, adopted and employed. Thus master budget is a summary of all

functional budgets in capsule form available in one report.

ACCORDING TO FLEXIBLITY
1) FLEXIBLE BUDGET: Which, by recognizing the difference in behavior between fixed and variable costs in relation to

fluctuations in output, turnover or other variable factors such as

number of employees, is designed to change appropriately with such fluctuations.

2) FIXED BUDGET: This is defined as a budget which is designed

to remain unchanged irrespective of the volume of output or

turnover attained.

ACCORDING TO TIME
1) Long Term Budgets: The Budgets are prepared to depict long term planning of the business. The period of long term budgets various between five to ten years. The long term planning is done by the top'-level management and generally it is not known to lower levels of management. Long-term budgets are prepared for some sectors of the concern such as capital expenditure, research and development, long-

term finances etc.

2) Short Term Budgets: These budgets are generally for one or two years and are in the form of monetary terms. The consumer's goods industries-like sugar, cotton, textiles, etc., use short-term

budget.
3) Current Budget: The period of current budget is generally of months and weeks. The budgets relate to the current activities of the business. "Current budget is a budget which is established for use over a short period of time and is related to current conditions"

4) Rolling Budgets : It Repeatedly extend the original budget period. For example, if you prepare a rolling budget for 12 months and the budget runs from Jan. 1 to Dec. 31, at the end of

January, your budget period will change to Feb. 1 to next years

Jan. 31. This means that a rolling budget is not static and continues perpetually. It incorporates information from

experience to build or renew the budget for the next period.

RECENT DEVELOPMENT IN BUDGETING

1) ZBB: The zero base budgeting is not based on the incremental

approach and previous figures are not adopted as the base. Zero
is taken as the base and a budget is developed on the basis of likely activities for the future period. A unique feature of ZBB is that it tries to help management answer the question, Suppose we are to start our business from scratch, on what activities would we spent out money and to what activities would we give the highest priority?

2) Performance Budgeting: Performance budgeting involves evaluation of the performance of the organization in the context of both specific as well as overall objectives of the organization.