A budget is a financial plan for a business, prepared in advance.

Budgets are used to plan and

control the business. Budgetary planning is the process of setting the budget for the next period.
Budgetary control uses the budgets to monitor actual results with budgeted figures.

Budgetary control
Chapter objectives
Structure of the chapter
Budgetary control methods
Management action and cost control
Zero base budgeting (ZBB)
Key terms

There are two types of control, namely budgetary and financial. This chapter concentrates on
budgetary control only. This is because financial control was covered in detail in chapters one
and two. Budgetary control is defined by the Institute of Cost and Management Accountants
(CIMA) 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 objective of that policy, or to provide a basis for its revision".

Chapter objectives
This chapter is intended to provide:

An indication and explanation of the importance of budgetary control in marketing as a key

marketing control technique

An overview of the advantages and disadvantages of budgeting

An introduction to the methods for preparing budgets

An appreciation of the uses of budgets.

Structure of the chapter

Of all business activities, budgeting is one of the most important and, therefore, requires
detailed attention. The chapter looks at the concept of responsibility centres, and the
advantages and disadvantages of budgetary control. It then goes on to look at the detail of
budget construction and the use to which budgets can be put. Like all management tools, the
chapter highlights the need for detailed information, if the technique is to be used to its fullest
advantage.
Budgetary control methods
a) Budget:

A formal statement of the financial resources set aside for carrying out specific activities in
a given period of time.

It helps to co-ordinate the activities of the organisation.

An example would be an advertising budget or sales force budget.

b) Budgetary control:

A control technique whereby actual results are compared with budgets.

Any differences (variances) are made the responsibility of key individuals who can either
exercise control action or revise the original budgets.

Budgetary control and responsibility centres;

These enable managers to monitor organisational functions.

A responsibility centre can be defined as any functional unit headed by a manager who is
responsible for the activities of that unit.

There are four types of responsibility centres:

a) Revenue centres

Organisational units in which outputs are measured in monetary terms but are not directly
compared to input costs.

b) Expense centres

Units where inputs are measured in monetary terms but outputs are not.

c) Profit centres

Where performance is measured by the difference between revenues (outputs) and

expenditure (inputs). Inter-departmental sales are often made using "transfer prices".

d) Investment centres

Where outputs are compared with the assets employed in producing them, i.e. ROI.

Advantages of budgeting and budgetary control

There are a number of advantages to budgeting and budgetary control:

 Compels management to think about the future, which is probably the most important
feature of a budgetary planning and control system. Forces management to look ahead, to set
out detailed plans for achieving the targets for each department, operation and (ideally) each
manager, to anticipate and give the organisation purpose and direction.

Promotes coordination and communication.

Clearly defines areas of responsibility. Requires managers of budget centres to be made

responsible for the achievement of budget targets for the operations under their personal
control.

Provides a basis for performance appraisal (variance analysis). A budget is basically a

yardstick against which actual performance is measured and assessed. Control is provided by
comparisons of actual results against budget plan. Departures from budget can then be
investigated and the reasons for the differences can be divided into controllable and non-
controllable factors.

Enables remedial action to be taken as variances emerge.

Motivates employees by participating in the setting of budgets.

Improves the allocation of scarce resources.

Economises management time by using the management by exception principle.

Problems in budgeting

Whilst budgets may be an essential part of any marketing activity they do have a number of
disadvantages, particularly in perception terms.

Budgets can be seen as pressure devices imposed by management, thus resulting in:
a) bad labour relations
b) inaccurate record-keeping.

Departmental conflict arises due to:

a) disputes over resource allocation

b) departments blaming each other if targets are not attained.

It is difficult to reconcile personal/individual and corporate goals.

Waste may arise as managers adopt the view, "we had better spend it or we will lose it".
This is often coupled with "empire building" in order to enhance the prestige of a department.

Responsibility versus controlling, i.e. some costs are under the influence of more than one
person, e.g. power costs.

Managers may overestimate costs so that they will not be blamed in the future should they
overspend.
Characteristics of a budget

A good budget is characterised by the following:

Participation: involve as many people as possible in drawing up a budget.

Comprehensiveness: embrace the whole organisation.
Standards: base it on established standards of performance.
Flexibility: allow for changing circumstances.
Feedback: constantly monitor performance.
Analysis of costs and revenues: this can be done on the basis of product lines, departments
or cost centres.

Budget organisation and administration:

In organising and administering a budget system the following characteristics may apply:

a) Budget centres: Units responsible for the preparation of budgets. A budget centre may
encompass several cost centres.

b) Budget committee: This may consist of senior members of the organisation, e.g.
departmental heads and executives (with the managing director as chairman). Every part of
the organisation should be represented on the committee, so there should be a representative
from sales, production, marketing and so on. Functions of the budget committee include:

Coordination of the preparation of budgets, including the issue of a manual

Issuing of timetables for preparation of budgets
Provision of information to assist budget preparations
Comparison of actual results with budget and investigation of variances.

c) Budget Officer: Controls the budget administration The job involves:

liaising between the budget committee and managers responsible for budget preparation
dealing with budgetary control problems
ensuring that deadlines are met
educating people about budgetary control.

d) Budget manual:

This document:

charts the organisation

details the budget procedures
contains account codes for items of expenditure and revenue
timetables the process
clearly defines the responsibility of persons involved in the budgeting system.

Budget preparation
Firstly, determine the principal budget factor. This is also known as the key budget factor or
limiting budget factor and is the factor which will limit the activities of an undertaking. This
limits output, e.g. sales, material or labour.

a) Sales budget: this involves a realistic sales forecast. This is prepared in units of each
product and also in sales value. Methods of sales forecasting include:

sales force opinions

market research
statistical methods (correlation analysis and examination of trends)
mathematical models.

In using these techniques consider:

company's pricing policy

general economic and political conditions
changes in the population
competition
consumers' income and tastes
advertising and other sales promotion techniques
after sales service
credit terms offered.

b) Production budget: expressed in quantitative terms only and is geared to the sales budget.
The production manager's duties include:

analysis of plant utilisation

work-in-progress budgets.

If requirements exceed capacity he may:

subcontract
plan for overtime
introduce shift work
hire or buy additional machinery
The materials purchases budget's both quantitative and financial.

c) Raw materials and purchasing budget:

The materials usage budget is in quantities.

The materials purchases budget is both quantitative and financial.

Factors influencing a) and b) include:

production requirements
planning stock levels
storage space
trends of material prices.
d) Labour budget: is both quantitative and financial. This is influenced by:

production requirements
man-hours available
grades of labour required
wage rates (union agreements)
the need for incentives.

e) Cash budget: a cash plan for a defined period of time. It summarises monthly receipts and
payments. Hence, it highlights monthly surpluses and deficits of actual cash. Its main uses
are:

to maintain control over a firm's cash requirements, e.g. stock and debtors

to enable a firm to take precautionary measures and arrange in advance for investment and
loan facilities whenever cash surpluses or deficits arises

to show the feasibility of management's plans in cash terms

to illustrate the financial impact of changes in management policy, e.g. change of credit
terms offered to customers.

Receipts of cash may come from one of the following:

cash sales
payments by debtors
the sale of fixed assets
the issue of new shares
the receipt of interest and dividends from investments.

Payments of cash may be for one or more of the following:

purchase of stocks
payments of wages or other expenses
purchase of capital items
payment of interest, dividends or taxation.

Steps in preparing a cash budget

i) Step 1: set out a pro forma cash budget month by month. Below is a suggested layout.

Month 1 Month 2 Month 3

$ $ $
Cash receipts
Receipts from debtors
Sales of capital items
Loans received
Proceeds from share issues
Any other cash receipts
Cash payments
Payments to creditors
Wages and salaries
Loan repayments
Capital expenditure
Taxation
Dividends
Any other cash expenditure
Receipts less payments
Opening cash balance b/f W X Y
Closing cash balance c/f X Y Z

ii) Step 2: sort out cash receipts from debtors

iii) Step 3: other income

iv) Step 4: sort out cash payments to suppliers

v) Step 5: establish other cash payments in the month

Figure 4.1 shows the composition of a master budget analysis.

Figure 4.1 Composition of a master budget

OPERATING BUDGET FINANCIAL BUDGET

consists of:- consists of
Budget P/L acc: get: Cash budget
Production budget Balance sheet
Materials budget Funds statement
Labour budget
Admin. budget
Stocks budget

f) Other budgets:

These include budgets for:

administration
research and development
selling and distribution expenses
capital expenditures
working capital (debtors and creditors).
The master budget (figure 4.1) illustrates this. Now attempt exercise 4.1.

Exercise 4.1 Budgeting I

Draw up a cash budget for D. Sithole showing the balance at the end of each month, from the
following information provided by her for the six months ended 31 December 19X2.

a) Opening Cash $ 1,200.

19X2 19X3
Sales at $20 per unit MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB
260 200 320 290 400 300 350 400 390 400 260 250

Cash is received for sales after 3 months following the sales.

c) Production in units: 240 270 300 320 350 370 380 340 310 260 250

d) Raw materials cost $5/unit. Of this 80% is paid in the month of production and 20% after
production.

e) Direct labour costs of $8/unit are payable in the month of production.

f) Variable expenses are $2/unit. Of this 50% is paid in the same month as production and
50% in the month following production.

g) Fixed expenses are $400/month payable each month.

h) Machinery costing $2,000 to be paid for in October 19X2.

i) Will receive a legacy of $ 2,500 in December 19X2.

j) Drawings to be $300/month.

An example

A sugar cane farm in the Lowveld district may devise an operating budget as follows:

Cultivation
Irrigation
Field maintenance
Harvesting
Transportation.

With each operation, there will be costs for labour, materials and machinery usage.
Therefore, for e.g. harvesting, these may include four resources, namely:

Labour:
-cutting
-sundry

Tractors
Cane trailers
Implements and sundries.

Having identified cost centres, the next step will be to make a quantitative calculation of the
resources to be used, and to further break this down to shorter periods, say, one month or
three months. The length of period chosen is important in that the shorter it is, the greater the
control that can be exercised by the budget but the greater the expense in preparation of the
budget and reporting of any variances.

The quantitative budget for harvesting may be calculated as shown in figure 4.2.

Figure 4.2 Quantitative harvesting budget

Harvesting 1st quarter 2nd quarter 3rd quarter 4th quarter

Labour
Cutting nil 9,000 tonnes 16,000 tonnes 10,000 tonnes
Sundry nil 300 man days 450 man days 450 man days
Tractors nil 630 hours 1,100 hours 700 hours
Cane trailers nil 9,000 tonnes 16,000 tonnes 10,000 tonnes
Imp, & sundries nil 9,000 tonnes 16,000 tonnes 10,000 tonnes

Each item is measured in different quantitative units - tonnes of cane, man days etc.-and
depends on individual judgement of which is the best unit to use.

Once the budget in quantitative terms has been prepared, unit costs can then be allocated to
the individual items to arrive at a budget for harvesting in financial terms as shown in table
4.2.

Charge out costs

In table 4.2 tractors have a unit cost of $7.50 per hour - machines like tractors have a whole
range of costs like fuel and oil, repairs and maintenance, driver, licence, road tax and
insurance and depreciation. Some of the costs are fixed, e.g. depreciation and insurance,
whereas some vary directly with use of the tractor, e.g. fuel and oil. Other costs such as
repairs are unpredictable and may be very high or low - an estimated figure based on past
experience.

Figure 4.3 Harvesting cost budget

Item harvesting Unit cost 1st quarter 2nd quarter 3rd quarter 4th quarter Total
Labour
Cutting $0.75 per tonne - 6,750 12,000 7,500 26,250
Sundry $2.50 per day - 750 1,125 1,125 3,000
Tractors $7.50 per hour - 4,725 8,250 5,250 18,225
Cane Trailers $0.15 per tonne - 1,350 2,400 1,500 5,250
Imp. & sundries $0.25 per tonne - 2,250 4,000 2,500 8,750
- $15,825 $27,775 $17,875 $61,475

So, overall operating cost of the tractor for the year may be budgeted as shown in figure 4.4.

If the tractor is used for more than 1,000 hours then there will be an over-recovery on its
operational costs and if used for less than 1,000 hours there will be under-recovery, i.e. in the
first instance making an internal 'profit' and in the second a 'loss'.

Figure 4.4 Tractor costs

Unit rate Cost per annum (1,000 hours)

($) ($)
Fixed costs Depreciation 2,000.00 2,000.00
Licence and insurance 200.00 200.00
Driver 100.00 per month 1,200.00
Repairs 600.00 per annum 600.00
Variable costs Fuel and oil 2.00 per hour 2,000.00
Maintenance 3.00 per 200 hours 1,500.00
7,500.00
No. of hours used 1,000.00
Cost per hour 7.50

Master budget

The master budget for the sugar cane farm may be as shown in figure 4.5. The budget
represents an overall objective for the farm for the whole year ahead, expressed in financial
terms.

Table 4.5 Operating budget for sugar cane farm 19X4

1st quarter 2nd quarter 3rd quarter 4th quarter Total $

Revenue from cane 130,000 250,000 120,000 500,000
Less: Costs
Cultivation 37,261 48,268 42,368 55,416 183,313
Irrigation 7,278 15,297 18,473 11,329 52,377
Field maintenance 4,826 12,923 15,991 7,262 41,002
Harvesting - 15,825 27,775 17,875 61,475
Transportation - 14,100 24,750 15,750 54,600
49,365 106,413 129,357 107,632 392,767
Add: Opening valuation 85,800 135,165 112,240 94,260 85,800
135,165 241,578 241,597 201,892 478,567
Less: Closing valuation 135,165 112,240 94,260 90,290 90,290
Net crop cost - 129,338 147,337 111,602 388,277
Gross surplus - 66,200 102,663 8,398 111,723
Less: Overheads 5,876 7,361 7,486 5,321 26,044
Net profitless) (5,876) (6,699) 95,177 3,077 85,679

Once the operating budget has been prepared, two further budgets can be done, namely:

i. Balance sheet at the end of the year.

ii. Cash flow budget which shows the amount of cash necessary to support the operating
budget. It is of great importance that the business has sufficient funds to support the planned
operational budget.

Reporting back

During the year the management accountant will prepare statements, as quickly as possible
after each operating period, in our example, each quarter, setting out the actual operating
costs against the budgeted costs. This statement will calculate the difference between the
'budgeted' and the 'actual' cost, which is called the 'variance'.

There are many ways in which management accounts can be prepared. To continue with our
example of harvesting on the sugar cane farm, management accounts at the end of the third
quarter can be presented as shown in figure 4.6.

Figure 4.6 Management accounts - actual costs against budget costs Management
accounts for sugar cane farm 3rd quarter 19X4

3rd quarter Year to date

Actual Budget Variance Actual Budget Variance
Item Harvesting
Labour
- Cutting 12,200 12,000 (200) 19,060 18,750 (310)
- Sundry 742 1,125 383 1,584 1,875 291
Tractors 9,375 8,250 (1,125) 13,500 12,975 (525)
Cane trailers 1,678 2,400 722 2,505 3,750 1,245
Imp & sundries 4,270 4,000 (270) 6,513 6,250 (263)
28,265 27,775 (490) 43,162 43,600 438

Here, actual harvesting costs for the 3rd quarter are $28,265 against a budget of $27,775
indicating an increase of $490 whilst the cumulative figure for the year to date shows an
overall saving of $438. It appears that actual costs are less than budgeted costs, so the
harvesting operations are proceeding within the budget set and satisfactory. However, a
further look may reveal that this may not be the case. The budget was based on a cane
tonnage cut of 16,000 tonnes in the 3rd quarter and a cumulative tonnage of 25,000. If these
tonnages have been achieved then the statement will be satisfactory. If the actual production
was much higher than budgeted then these costs represent a very considerable saving, even
though only a marginal saving is shown by the variance. Similarly, if the actual tonnage was
significantly less than budgeted, then what is indicated as a marginal saving in the variance
may, in fact, be a considerable overspending.

Price and quantity variances

Just to state that there is a variance on a particular item of expenditure does not really mean a
lot. Most costs are composed of two elements - the quantity used and the price per unit. A
variance between the actual cost of an item and its budgeted cost may be due to one or both
of these factors. Apparent similarity between budgeted and actual costs may hide significant
compensating variances between price and usage.

For example, say it is budgeted to take 300 man days at $3.00 per man day - giving a total
budgeted cost of $900.00. The actual cost on completion was $875.00, showing a saving of
$25.00. Further investigations may reveal that the job took 250 man days at a daily rate of
$3.50 - a favourable usage variance but a very unfavourable price variance. Management may
therefore need to investigate some significant variances revealed by further analysis, which a
comparison of the total costs would not have revealed. Price and usage variances for major
items of expense are discussed below.

Labour

The difference between actual labour costs and budgeted or standard labour costs is known as
direct wages variance. This variance may arise due to a difference in the amount of labour
used or the price per unit of labour, i.e. the wage rate. The direct wages variance can be split
into:

i) Wage rate variance: the wage rate was higher or lower than budgeted, e.g. using more
unskilled labour, or working overtime at a higher rate.

ii) Labour efficiency variance: arises when the actual time spent on a particular job is higher
or lower than the standard labour hours specified, e.g. breakdown of a machine.

Materials

The variance for materials cost could also be split into price and usage elements:

i) Material price variance: arises when the actual unit price is greater or lower than budgeted.
Could be due to inflation, discounts, alternative suppliers etc.

ii) Material quantity variance: arises when the actual amount of material used is greater or
lower than the amount specified in the budget, e.g. a budgeted fertiliser at 350 kg per hectare
may be increased or decreased when the actual fertiliser is applied, giving rise to a usage
variance.

Overheads

Again, overhead variance can be split into:

i) Overhead volume variance: where overheads are taken into the cost centres, a production
higher or lower than budgeted will cause an over-or under-absorption of overheads.

ii) Overhead expenditure variance: where the actual overhead expenditure is higher or lower
than that budgeted for the level of output actually produced.

Calculation of price and usage variances

The price and usage variance are calculated as follows:

Price variance = (budgeted price - actual price) X actual quantity

Usage variance = (budgeted quantity - actual quantity) X budgeted price

Now attempt exercise 4.2.

Exercise 4.2 Computation of labour variances

It was budgeted that it would take 200 man days at $10.00 per day to complete the task
costing $2,000.00 when the actual cost was $1,875.00, being 150 man days at $12.50 per day.
Calculate:

i) Price variance
ii) Usage variance

Comment briefly on the results of your calculation.

Management action and cost control

Producing information in management accounting form is expensive in terms of the time and
effort involved. It will be very wasteful if the information once produced is not put into
effective use.

There are five parts to an effective cost control system. These are:

a) preparation of budgets

b) communicating and agreeing budgets with all concerned

c) having an accounting system that will record all actual costs

d) preparing statements that will compare actual costs with budgets, showing any variances
and disclosing the reasons for them, and

e) taking any appropriate action based on the analysis of the variances in d) above.

Action(s) that can be taken when a significant variance has been revealed will depend on the
nature of the variance itself. Some variances can be identified to a specific department and it
is within that department's control to take corrective action. Other variances might prove to
be much more difficult, and sometimes impossible, to control.
Variances revealed are historic. They show what happened last month or last quarter and no
amount of analysis and discussion can alter that. However, they can be used to influence
managerial action in future periods.

Zero base budgeting (ZBB)

After a budgeting system has been in operation for some time, there is a tendency for next
year's budget to be justified by reference to the actual levels being achieved at present. In fact
this is part of the financial analysis discussed so far, but the proper analysis process takes into
account all the changes which should affect the future activities of the company. Even using
such an analytical base, some businesses find that historical comparisons, and particularly the
current level of constraints on resources, can inhibit really innovative changes in budgets.
This can cause a severe handicap for the business because the budget should be the first year
of the long range plan. Thus, if changes are not started in the budget period, it will be difficult
for the business to make the progress necessary to achieve longer term objectives.

One way of breaking out of this cyclical budgeting problem is to go back to basics and
develop the budget from an assumption of no existing resources (that is, a zero base). This
means all resources will have to be justified and the chosen way of achieving any specified
objectives will have to be compared with the alternatives. For example, in the sales area, the
current existing field sales force will be ignored, and the optimum way of achieving the sales
objectives in that particular market for the particular goods or services should be developed.
This might not include any field sales force, or a different-sized team, and the company then
has to plan how to implement this new strategy.

The obvious problem of this zero-base budgeting process is the massive amount of
managerial time needed to carry out the exercise. Hence, some companies carry out the full
process every five years, but in that year the business can almost grind to a halt. Thus, an
alternative way is to look in depth at one area of the business each year on a rolling basis, so
that each sector does a zero base budget every five years or so.

Budgetary Control : Meaning, Objectives

and Essentials
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Budgetary Control in Organization: Meaning, Definition, Objectives, Essentials and

Other Details!

Meaning:

Budgetary control is the process of determining various actual results with budgeted figures
for the enterprise for the future period and standards set then comparing the budgeted figures
with the actual performance for calculating variances, if any. First of all, budgets are prepared
and then actual results are recorded.

The comparison of budgeted and actual figures will enable the management to find out
discrepancies and take remedial measures at a proper time. The budgetary control is a
continuous process which helps in planning and co-ordination. It provides a method of
control too. A budget is a means and budgetary control is the end-result.

Definitions:

According to Brown and Howard, Budgetary control is a system of controlling costs which
includes the preparation of budgets, coordinating the departments and establishing
responsibilities, comparing actual performance with the budgeted and acting upon results to
achieve maximum profitability. Weldon characterizes budgetary control as planning in
advance of the various functions of a business so that the business as a whole is controlled.

ADVERTISEMENTS:

J. Batty defines it as, A system which uses budgets as a means of planning and controlling
all aspects of producing and/or selling commodities and services. Welsch relates budgetary
control with day-to-day control process. According to him, Budgetary control involves the
use of budget and budgetary reports, throughout the period to co-ordinate, evaluate and
control day-to-day operations in accordance with the goals specified by the budget.

From the above given definitions it is clear that budgetary control involves the follows:

(a) The objects are set by preparing budgets.

(b) The business is divided into various responsibility centres for preparing various budgets.

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(c) The actual figures are recorded.

(d) The budgeted and actual figures are compared for studying the performance of different
cost centres.

(e) If actual performance is less than the budgeted norms, a remedial action is taken
immediately.

Objectives of Budgetary Control:

Budgetary control is essential for policy planning and control. It also acts an instrument of
co-ordination.
ADVERTISEMENTS:

The main objectives of budgetary control are the follows:

1. To ensure planning for future by setting up various budgets, the requirements and expected
performance of the enterprise are anticipated.

3. To operate various cost centres and departments with efficiency and economy.

4. Elimination of wastes and increase in profitability.

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5. To anticipate capital expenditure for future.

6. To centralise the control system.

7. Correction of deviations from the established standards.

8. Fixation of responsibility of various individuals in the organization.

Essentials of Budgetary Control:

There are certain steps which are necessary for the successful implementation budgetary
control system.

These are as follows:

1. Organisation for Budgetary Control

2. Budget Centres

3. Budget Mammal

4. Budget Officer

5. Budget Committee

6. Budget Period

7. Determination of Key Factor.

1. Organization for Budgetary Control:

The proper organization is essential for the successful preparation, maintenance and
administration of budgets. A Budgetary Committee is formed, which comprises the
departmental heads of various departments. All the functional heads are entrusted with the
responsibility of ensuring proper implementation of their respective departmental budgets.

The Chief Executive is the overall in-charge of budgetary system. He constitutes a budget
committee for preparing realistic budgets A budget officer is the convener of the budget
committee who co-ordinates the budgets of different departments. The managers of different
departments are made responsible for their departmental budgets.

2. Budget Centres:

A budget centre is that part of the organization for which the budget is prepared. A budget
centre may be a department, section of a department or any other part of the department. The
establishment of budget centres is essential for covering all parts of the organization. The
budget centres are also necessary for cost control purposes. The appraisal performance of
different parts of the organization becomes easy when different centres are established.

3. Budget Manual:

A budget manual is a document which spells out the duties and also the responsibilities of
various executives concerned with the budgets. It specifies the relations amongst various
functionaries.

4. Budget Officer:

The Chief Executive, who is at the top of the organization, appoints some person as Budget
Officer. The budget officer is empowered to scrutinize the budgets prepared by different
functional heads and to make changes in them, if the situations so demand. The actual
performance of different departments is communicated to the Budget Officer. He determines
the deviations in the budgets and the actual performance and takes necessary steps to rectify
the deficiencies, if any.

He works as a coordinator among different departments and monitors the relevant

information. He also informs the top management about the performance of different
departments. The budget officer will be able to carry out his work fully well only if he is
conversant with the working of all the departments.
5. Budget Committee:

In small-scale concerns the accountant is made responsible for preparation and

implementation of budgets. In large-scale concerns a committee known as Budget Committee
is formed. The heads of all the important departments are made members of this committee.
The Committee is responsible for preparation and execution of budgets. The members of this
committee put up the case of their respective departments and help the committee to take
collective decisions if necessary. The Budget Officer acts as convener of this committee.

6. Budget Period:

A budget period is the length of time for which a budget is prepared and employed. The
budget period depends upon a number of factors. It may be different for different industries
or even it may be different in the same industry or business.

The budget period depends upon the following considerations:

(a) The type of budget i.e., sales budget, production budget, raw materials purchase budget,
capital expenditure budget. A capital expenditure budget may be for a longer period i.e. 3 to 5
years purchase, sale budgets may be for one year.

(b) The nature of demand for the products.

(c) The timings for the availability of the finances.

(d) The economic situation of the country.

(e) The length of trade cycles.

All the above-mentioned factors are taken into account while fixing period of budgets

7. Determination of Key Factor:

The budgets are prepared for all functional areas. These budgets are interdependent and inter-
related. A proper co-ordination among different budgets is necessary for making the
budgetary control a success. The constraints on some budgets may have an effect on other
budgets too. A factor which influences all other budgets is known as Key Factor or Principal
Factor.

There may be a limitation on the quantity of goods a concern may sell. In this case, sales will
be a key factor and all other budgets will be prepared by keeping in view the amount of goods
the concern will be able to sell. The raw material supply may be limited, so production, sales
and cash budgets will be decided according to raw materials budget. Similarly, plant capacity
may be a key factor if the supply of other factors is easily available.

The key factor may not necessarily remain the same. The raw materials supply may be
limited at one time but it may be easily available at another time. The sales may be increased
by adding more sales staff, etc. Similarly, other factors may also improve at different times.
The key factor also highlights the limitations of the enterprise. This will enable the
management to improve the working of those departments where scope for improvement
exists.

Advantages of Budgetary Control:

The budgetary control system help in fixing the goals for the organization as whole and
concerted efforts are made for its achievements. It enables economies in the enterprise.

Some of the advantages of budgetary control are:

1. Maximization of Profits:

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 a
proper control over various capital and revenue expenditures. The resources are put to the
best possible use.

2. Co-ordination:

The working of different departments and sectors is properly coordinated. The budgets of
different departments have a bearing on one another. The co-ordination of various executives
and subordinates is necessary for achieving budgeted targets.

3. 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 some specific aims. If there is no
definite aim then the efforts will be wasted in pursuing different aims.
4. 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. This
system enables the introduction of management by exception.

5. Economy:

The planning of expenditure will be systematic and there will be economy in spending. The
finances will be put to optimum use. The benefits derived for the concern will ultimately
extend to industry and then to national economy. The national resources will be used
economically and wastage will be eliminated.

6. Determining Weaknesses:

The deviations in budgeted and actual performance will enable the determination of weak
spots. Efforts are concentrated on those aspects where performance is less than the stipulated.

7. Corrective Action:

The management will be able to take corrective measures whenever there is a discrepancy in
performance. The deviations will be regularly reported so that necessary action is taken at the
earliest. In the absence of a budgetary control system the deviations can be determined only
at the end of the financial period.

8. Consciousness:

It creates budget consciousness among the employees. By fixing targets for the employees,
they are made conscious of their responsibility. Everybody knows what he is expected to do
and he continues with his work uninterrupted.

9. Reduces Costs:

In the present day competitive world budgetary control has a significant role to play. Every
businessman tries to reduce the cost of production for increasing sales. He tries to have those
combinations of products where profitability is more.

10. Introduction of Incentive Schemes:

Budgetary control system also enables the introduction of incentive schemes of remuneration.
The comparison of budgeted and actual performance will enable the use of such schemes.
Limitations of Budgetary Control:

Despite of many good points of budgetary control there are some limitations of this system.

Some of the limitations are discussed as follows:

1. Uncertain Future:

The budgets are prepared for the future period. Despite best estimates made for the future, the
predictions may not always come true. The future is always uncertain and the situation which
is presumed to prevail in future may change. The change in future conditions upsets the
budgets which have to be prepared on the basis of certain assumptions. The future
uncertainties reduce the utility of budgetary control system.

2. Budgetary Revision Required:

Budgets arc prepared on the assumptions that certain conditions will prevail. Because of
future uncertainties, assumed conditions may not prevail necessitating the revision of
budgetary targets. The frequent revision of targets will reduce the value of budgets and
revisions involve huge expenditures too.

3. Discourage Efficient Persons:

Under budgetary control system the targets are given to every person in the organization. The
common tendency of people is to achieve the targets only. There may be some efficient
persons who can exceed the targets but they will also feel contented by reaching the targets.
So budgets may serve as constraints on managerial initiatives.

4. Problem of Co-ordination:

The success of budgetary control depends upon the co-ordination among different
departments. The performance of one department affects the results of other departments. To
overcome the problem of coordination a Budgetary Officer is needed. Every concern cannot
afford to appoint a Budgetary Officer. The lack of co-ordination among different departments
results in poor performance.
5. Conflict Among Different Departments:

Budgetary control may lead to conflicts among functional departments. Every departmental
head worries for his department goals without thinking of business goal. Every department
tries to get maximum allocation of funds and this raises a conflict among different
departments.

6. Depends Upon Support of Top Management:

Budgetary control system depends upon the support of top management. The management
should be enthusiastic for the success of this system and should give full support for it. If at
any time there is a lack of support from top management then this system will collapse.

Budget:

A plan which for a definite period, covers, all phases of operations in the future is
known as a business budget. Policies, plans, objectives & goals are formally expressed by it
& are laid down in advance for the concern as a whole & for each of its sub-divisions by the
top management. Thus an overall budget will be there for the concern comprosed of several
sub-budgets which are in the form of departmental budgets. Expense limitations are
expressed by the budget in the expense budgets & in the sales budget, revenue goals are
expressed & for the purpose of realizing the desired profit objective, these must be attained.
Besides, plans relating to items such as levels of inventory, additions to capital assets, plans
of production, plans of purchasing, requirements of labour, requirements of cash etc. are
expressed by the budget. Thus, for a given period, budget is a formal management plans &
policies statement which can be used in that period as a guide or blue print.

The basic elements of a budget are:

(a) For a specified period of time, its a future plan of activity,

(b) Budget can be expressed in monetary or physical units or in both,

(c) Before the period during which the budget is supposed to operate, it is prepared
i.e. it is prepared in advance.

(d) Before the preparation of the budget, it is necessary to lay down the objectives
which are required to be attained & the policies which are required to be pursued for
the achievement of those objectives.

Budgetary Control:

Throughout the budget period, the use of budgets & budgetary reports for the purpose
of coordinating, evaluating & controlling day-to-day operations according to the goals which
are specified by the budget is involved by budgetary control. The mere presentation of budget
doesnt have much value, its real value lies in the aspects of the planning & its utilization
during the period for the purposes of control & coordination. Under budgetary control, actual
results are constantly checked & evaluated & comparison of actual result is made with the
budgeted goals & wherever indicated, corrective action should be undertaken. The following
steps are involved in the process of budgetary control:
 (a) The objectives which are required to be achieved by the business should be
defined & specified by budgetary control.

(b) For the purpose of ensuring that the desired objectives are accomplished, business
plans are needed to be prepared by budgetary control.

(c) Budgetary control translates the plans into budgets & relates to particular sections
of the budget, the responsibilities of individual executives & managers.

(d) Budgetary control constantly compares the actual results with the budget & the
differences between the actual & budgeted performance are calculated.

(e) For the purpose of establishing the causes, the major differences are investigated
by budgetary control.

(f) In a suitable form, budgetary control presents the information to the management,
relating to variances to individual responsibility.

(g) In order to avoid a repetition of any over-expenditure or wastage, management

takes corrective actions. Alternatively, where due to the change in circumstances, the
budgeted targets cannot be achieved, the budget is revised.

Difference between Budget, Budgeting & Budgetary control:

Individual objectives of a department etc. are indicated by budget, whereas the act of
setting the budgets is known as budgeting. All are embraced by budgetary control & also the
science of planning the budgets themselves & as an overall management tool, the utilization
of such budgets, for the purpose of business planning & control are included in budgetary
control. Thus, the term by budgetary control is wider in meaning & both budget & budgeting
are included in by budgetary control.

Objectives of Budgetary Control:

The objectives of budgetary control are:

(1)Compel for planning: As management is forced to look ahead, responsible for

setting of targets, anticipating of problems & giving purpose & direction to the
organization, this feature is the most important feature of budgetary control.

(2)Communication of ideas & plans: Communication of ideas & plans to everyone is

effected by budgetary control. In order to make sure that each person is aware of what
he is supposed to do, it is necessary that there is a formal system.

(3)Coordinating the activities: The budgetary control coordinates the activities of

different departments or sub-units of the organization. The coordination concept
implies, for example, on production requirements, the purchasing department should
base its budget & similarly, on sales expectations, the production budget should in
turn be4 based.

(4) Establishing a system of control: A system of control can be established by

 having a plan against which progressive comparison can be made of actual results.

(5) Motivating employees: Employees are motivated for improving their

performances by budgetary control.

Requisites of an effective system of budgetary control:

(a) There should be a clearly defined organizational structure where are area of
responsibility is emphasized.

(b) Within the budgeting process, the employees should participate.

(c) For the purpose of relying the measurement of performance, there should be
adequate accounting records & procedures.

(d) Budgetary control needs to be flexible, so that the plans & objectives may be
revised.

(e) An awareness of the uses of the budgetary control system should be spread by the
management.

(f) An awareness regarding the problems of budgetary control & especially the
individuals reactions to budgets should be spread by the top management.

Advantages of Budgetary control:

The advantages of budgetary control system are as follows:

(1) The objectives of the organization as a whole & the results which should be
achieved by each department within this overall framework are defined by the
budgetary control.

(2) When there is a difference between actual results & budget, then the extent by
which actual results have exceeded or fallen short of the budget is revealed by the
budgetary control.

(3) The variances or other measures of performance along with the reasons of
difference between the actual results with those from budgeted is indicated by the
budgetary control. Also, the magnitude of differences is established by it.

(4) As the budgetary control reports on actual performance along with variances &
other measures of performance; for correcting adverse trends, a basis for guiding
executive action is provided by it.

(5) A basis by which future budget can be prepared or the current budget can be
revised is provided by the budgetary control.

(6) A system whereby in the most efficient way possible the resources of the
organization are being used is provided by the budgetary control.
 (7) The budgetary control indicates how efficiently the various departments of the
organization are being coordinated.

(8) Situations where activities & responsibilities are decentralized, some centralizing
control is provided by the budgetary control.

(9) The budgetary control provides means by which the activities of the organization
can be stabilized, where the organizations activities are subject to seasonal
variations.

(10) By regularly examining the departmental results, a basis for internal audit is
established by the budgetary control.

(11) The standard costs which are to be used are provided by it.

(12) For the purpose of paying a bonus to employees, a basis by which the productive
efficiency can be measured is provided by the budgetary control.

Limitations of Budgetary Control:

The main limitations of budgetary control are:

(1) It used the estimates as a basis for the budget plan.

(2) In order to fit with the changing circumstances the budgetary programme must be
continually adapted. Normally for attaining a reasonably good budgetary programme,
it takes several years.

(3) A budget plan cannot be executed automatically. Enthusiastic participation is

required by all levels of management in the programme.

(4) The necessity of having a management & administration will not be eliminated by
any budgetary control system. The place of the management is not taken by it; rather
it is a tool of the management.

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Budget:

A plan which for a definite period, covers, all phases of operations in the future is
known as a business budget. Policies, plans, objectives & goals are formally expressed by it
& are laid down in advance for the concern as a whole & for each of its sub-divisions by the
top management. Thus an overall budget will be there for the concern comprosed of several
sub-budgets which are in the form of departmental budgets. Expense limitations are
expressed by the budget in the expense budgets & in the sales budget, revenue goals are
expressed & for the purpose of realizing the desired profit objective, these must be attained.
Besides, plans relating to items such as levels of inventory, additions to capital assets, plans
of production, plans of purchasing, requirements of labour, requirements of cash etc. are
expressed by the budget. Thus, for a given period, budget is a formal management plans &
policies statement which can be used in that period as a guide or blue print.

The basic elements of a budget are:

(a) For a specified period of time, its a future plan of activity,

(b) Budget can be expressed in monetary or physical units or in both,

(c) Before the period during which the budget is supposed to operate, it is prepared
i.e. it is prepared in advance.

(d) Before the preparation of the budget, it is necessary to lay down the objectives
which are required to be attained & the policies which are required to be pursued for
the achievement of those objectives.

Budgetary Control:

Throughout the budget period, the use of budgets & budgetary reports for the purpose
of coordinating, evaluating & controlling day-to-day operations according to the goals which
are specified by the budget is involved by budgetary control. The mere presentation of budget
doesnt have much value, its real value lies in the aspects of the planning & its utilization
during the period for the purposes of control & coordination. Under budgetary control, actual
results are constantly checked & evaluated & comparison of actual result is made with the
budgeted goals & wherever indicated, corrective action should be undertaken. The following
steps are involved in the process of budgetary control:

(a) The objectives which are required to be achieved by the business should be
defined & specified by budgetary control.

(b) For the purpose of ensuring that the desired objectives are accomplished, business
plans are needed to be prepared by budgetary control.
 (c) Budgetary control translates the plans into budgets & relates to particular sections
of the budget, the responsibilities of individual executives & managers.

(d) Budgetary control constantly compares the actual results with the budget & the
differences between the actual & budgeted performance are calculated.

(e) For the purpose of establishing the causes, the major differences are investigated
by budgetary control.

(f) In a suitable form, budgetary control presents the information to the management,
relating to variances to individual responsibility.

(g) In order to avoid a repetition of any over-expenditure or wastage, management

takes corrective actions. Alternatively, where due to the change in circumstances, the
budgeted targets cannot be achieved, the budget is revised.

Difference between Budget, Budgeting & Budgetary control:

Individual objectives of a department etc. are indicated by budget, whereas the act of
setting the budgets is known as budgeting. All are embraced by budgetary control & also the
science of planning the budgets themselves & as an overall management tool, the utilization
of such budgets, for the purpose of business planning & control are included in budgetary
control. Thus, the term by budgetary control is wider in meaning & both budget & budgeting
are included in by budgetary control.

Objectives of Budgetary Control:

The objectives of budgetary control are:

(1)Compel for planning: As management is forced to look ahead, responsible for

setting of targets, anticipating of problems & giving purpose & direction to the
organization, this feature is the most important feature of budgetary control.

(2)Communication of ideas & plans: Communication of ideas & plans to everyone is

effected by budgetary control. In order to make sure that each person is aware of what
he is supposed to do, it is necessary that there is a formal system.

(3)Coordinating the activities: The budgetary control coordinates the activities of

different departments or sub-units of the organization. The coordination concept
implies, for example, on production requirements, the purchasing department should
base its budget & similarly, on sales expectations, the production budget should in
turn be4 based.

(4) Establishing a system of control: A system of control can be established by

having a plan against which progressive comparison can be made of actual results.

(5) Motivating employees: Employees are motivated for improving their

performances by budgetary control.

Requisites of an effective system of budgetary control:

 (a) There should be a clearly defined organizational structure where are area of
responsibility is emphasized.

(b) Within the budgeting process, the employees should participate.

(c) For the purpose of relying the measurement of performance, there should be
adequate accounting records & procedures.

(d) Budgetary control needs to be flexible, so that the plans & objectives may be
revised.

(e) An awareness of the uses of the budgetary control system should be spread by the
management.

(f) An awareness regarding the problems of budgetary control & especially the
individuals reactions to budgets should be spread by the top management.

Advantages of Budgetary control:

The advantages of budgetary control system are as follows:

(1) The objectives of the organization as a whole & the results which should be
achieved by each department within this overall framework are defined by the
budgetary control.

(2) When there is a difference between actual results & budget, then the extent by
which actual results have exceeded or fallen short of the budget is revealed by the
budgetary control.

(3) The variances or other measures of performance along with the reasons of
difference between the actual results with those from budgeted is indicated by the
budgetary control. Also, the magnitude of differences is established by it.

(4) As the budgetary control reports on actual performance along with variances &
other measures of performance; for correcting adverse trends, a basis for guiding
executive action is provided by it.

(5) A basis by which future budget can be prepared or the current budget can be
revised is provided by the budgetary control.

(6) A system whereby in the most efficient way possible the resources of the
organization are being used is provided by the budgetary control.

(7) The budgetary control indicates how efficiently the various departments of the
organization are being coordinated.

(8) Situations where activities & responsibilities are decentralized, some centralizing
control is provided by the budgetary control.

(9) The budgetary control provides means by which the activities of the organization
 can be stabilized, where the organizations activities are subject to seasonal
variations.

(10) By regularly examining the departmental results, a basis for internal audit is
established by the budgetary control.

(11) The standard costs which are to be used are provided by it.

(12) For the purpose of paying a bonus to employees, a basis by which the productive
efficiency can be measured is provided by the budgetary control.

Limitations of Budgetary Control:

The main limitations of budgetary control are:

(1) It used the estimates as a basis for the budget plan.

(2) In order to fit with the changing circumstances the budgetary programme must be
continually adapted. Normally for attaining a reasonably good budgetary programme,
it takes several years.

(3) A budget plan cannot be executed automatically. Enthusiastic participation is

required by all levels of management in the programme.

(4) The necessity of having a management & administration will not be eliminated by
any budgetary control system. The place of the management is not taken by it; rather
it is a tool of the management.

Online Live Tutor Budget- Introduction & Budgetary Control:

We have the best tutors in Economics in the industry. Our tutors can break down a
complex Budget- Introduction & Budgetary Control problem into its sub parts and explain to
you in detail how each step is performed. This approach of breaking down a problem has
been appreciated by majority of our students for learning Budget- Introduction & Budgetary
Control concepts. You will get one-to-one personalized attention through our online tutoring
which will make learning fun and easy. Our tutors are highly qualified and hold advanced
degrees. Please do send us a request for Budget- Introduction & Budgetary Control tutoring
and experience the quality yourself.

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problem and need help, we have excellent tutors who can provide you with Homework Help.
Our tutors who provide Advantages, Limitations of Budgetary Control help are highly
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Budget and Budgetary Control
The budget is a vital part of planning and control and it represents as significant mechanism
for performance evaluation. The budget is a document designed to assess income and
expenditure over a time period usually the previous year and altered to accommodate any
predictable variations. In universal terms, a budget is an assessment of the income and
expenses over a specified future period of time.

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Concept of budget: According to CIMA, London, budget is described as financial and

quantitative statement prepared and approved prior to defined period of time, of the policy to
be pursued during that period for the purpose of accomplishing a given objective. It may
include income, expenditure and employment of capital. In other words, budget refers to a
plan covering all the sectors of operations expressed in monetary or quantitative terms for a
definite future period (Bhattacharyya, 2011).

A budget can be made for a person, family, and group of people, business, government,
country, multinational organization or for any thing that makes and spends money. Budget
facilitates people to vigilantly look at how much money they are taking in during a given
period, and work out the best way to divide it among various categories. When making a
personal budget, an individual will normally assign the appropriate amount of money to fixed
expenses such as rent, car payments, or utility bills, and then make an educated estimation for
how much money they will spend in other categories, such as groceries, clothing, or
entertainment.

Batty explained that the entire process of preparing the budget is known as budgeting.
Therefore the term budgeting refers to the act of preparing budget (Bhattacharyya, 2011). In
technical view, a budget is a statement that includes a conjecture of revenues and
expenditures for a period of time, generally a year. It is a broad plan of action intended to
accomplish the policy objectives set by the government for the coming year. A budget is a
plan and a budget document is a manifestation of the government actions in future. While any
plan need not be a budget, a budget has to be necessarily a plan. It explains detailed and
location of resources and pro production and taxation or other method for their
understanding. More explicitly, a budget contains information about plans, programmes,
projects, schemes and activities-current as well as new proposals for the coming year,
resource position and income from different sources, including tax and non-tax revenues,
actual receipts and expenditure for the previous year; and economic, statistical and
accounting data regarding financial and physical performance of the various agencies and
organs of the government.

Many persons, corporations and governments plan their financial actions by preparing
budgets. In order to get huge success in business area, an organization must plan its financial
activities well in advance. It must assess its income and expenditures using historical data of
activities in the past and predict future trends. The budget as explained by numerous experts
is not just a financial plan that sets forth cost and revenue goals but it is an effective tool for
controlling, synchronization, communication, enthusiasm and performance measurement.

Attributes of budget: A budget must have following features (Bhattacharyya, 2011):

 1. It should reflect the managerial plans and policies to accomplish business goals and
objectives.
2. It must be expressed in monetary or quantitative terms or both.
3. It is comprehensive plan for definite future period.
4. Though it is basically an instrument of planning, it still provides the basis for
performance evaluation.

Classification of Budgets
Budget is generally categorized on the basis of the need of respective organization.
Preparation of budget may be required by organization for the purpose of its flexibility of
production or its functions involved or for the purpose of its period covered.

Classification of budget on the basis of period: On the basis of period, or time covered in
budget, it is grouped into short term and long term budget. When budget is prepared for
business activity covering a period of more than one year, it is called long term budget. .
When budget is prepared for business activity covering a period of one year or less, it is
termed as short term budget such as for sales, cash.

Classification of budget on the basis of flexibility of production: In this category, budget is

classified into three parts that include fixed, flexible and current budget. Fixed budget is
prepared for particular level of production. Flexible budget include series of budgets prepared
in respect of different levels of activity during a budget period. Current budget is associated
with current business activities of a concern and is prepared under current condition for a
very short period.

Classification of budget on the basis of function and coverage: In this heading, budget is
grouped into three parts such as operating, financial and master budget. Operating budget is
related to different activities of concern. It is a plan of expected revenues and cost. This
budget has three categories that include production, cost and sales budget. Financial budgets
of function and coverage is associated with all expected financial transactions that are to be
incurred during budget period. This is classified into cash and capital expenditure budget.
Master budget is the summary of all financial budgets. This budget includes sales budget,
production budget, cost budget, cash budget, projected income statement, and projected
balance sheet (Bhattacharyya, 2011)

Figure: Classification of budget (Source: Bhattacharyya, 2011):

The Concept of Budgetary Control

Budgetary control is a method to control costs which includes the preparation of budgets.
Budgeting is only a part of the budgetary control. Chartered Institute of Management
Accountants explained Budgetary Control as "the establishment of the budgets relating to the
responsibilities of the executive to meet the objective of an organization and the continuous
comparison of actual with budgeted estimates so that if remedial is necessary it may be taken
at an early stage". CIMA London elucidated that budgeting control is establishment of
budgets relating to the responsibilities of executives of a policy and the continuous
comparison of actual with budgeted results either to secure by individual action objective of
the policy or to provide a basis for its revision. It can be established that budgeting control is
a technique of control under which budgets are prepared at first for all business activities of
an organization and actual performance of all those business activities are compared with the
respective budgeted data so that corrective measures can be taken for any adverse deviation
from the budget (Bhattacharyya, 2011).

Other experts described it as a continuous process which reviews and adjusts budgetary
targets during the financial year and produces a control mechanism to hold budget holder to
account. This signifies that budgetary control is a system that encompasses the complete
process starting from the preparation of the budget or the action plan, covering monitoring
and review culminating in counteractive action.

The characteristics of budgetary control are as follows:

1. Establish target of performance/budget
2. Record the actual performance
3. Compare the actual performance with the budgeted
4. Establish the differences and analyse the reason
5. Act immediately for corrective actions.

Objectives of budgetary control:

Planning: A budget provides a comprehensive plan of action for activities over a definite
period of time. Planning helps to anticipate many problems long before they arrive and
solutions wanted through careful study.

Next is to coordinate: Budgeting helps managers in coordinating their efforts so that

objectives of the organization are synchronized with the objectives of its constituents. This
will help in achieving result.

Other objective is to effectively communicate: A budget is a communication tool. The

approved budget represents the details of planned activities which assist in communicating
the plans. The copies are distributed to the different ministries, extra ministerial departments
and agencies.

Another objective is to control: The budget guarantees that plans and objectives are being
achieved. Control in budgeting may be combined effort aimed at keeping management
informed of what pre-determined plans will achieve. Control comes through variance analysis
and reporting.

Objective of budgetary control is to motivate: Careful budgeting control motivates the human
resource of the organization.

Performance evaluation: It is most powerful device to management for performance

evaluation (Bhattacharyya, 2011).

Advantages of Budgetary Control

There are numerous advantages of budgeting control:

It offers an efficient plan based on facts. It provides definite objectives with regard to future
operation.

It acts as standard for evaluation of actual performance.

Control: It facilitates management to control each function, sector, ministry or department in

order to accomplish the best possible result.

Coordination: It supports and encourages synchronization between departments of activities

for the accomplishment of the overall progress of the organization/institution

Cost awareness: It makes management to become more cost conscious and reduce waste and
inefficiency in its operations.

Management by exception: It is a time saving device, as attention is directed to areas of more

serious needs.

Management Responsibility: It allows each manager to presume responsibility which is

clearly established. It clearly defines the area of responsibility for all concerned executives
who are engaged in various business activities.

It increases the operational efficiency of various business actions.

It assists in effective utilization of resources of organization (Bhattacharyya, 2011).

Limitations of Budgetary Control: Besides several benefits, budgetary control has many
demerits:

The budget plan is based on estimates: Budgets are based on forecasts and prediction
estimates. Absolute exactness is not possible in forecasting and budgeting. The potency or
flaw of the budgetary control system depends to a large extent on the precision with which
estimates are made.

Danger of rigidity: Budget will not stand the test of time if not flexible because of the
dynamic and constant change in business condition.

Management tool: Budget is typically a mechanism of management and cannot reinstate it. Its
implementation depends on the will and nature of management concerned. The tool is as
good as its applier.

Expensive technique: Budget operation is expensive and need expert team as well as there is
incidental expenditure.

Inappropriate condition: Budgets are made round existing organizational structure which may
be unsuitable for existing conditions.

In budgets, it is difficult to make clear objectives, fulfil the desired goal.

The process of budgetary control lose its usefulness if it is not revised with changing
circumstances (Bhattacharyya, 2011).

Importance of Budgetary Control: In management, there is great significance of budgeting

control:

1. It increases competence
2. It reveals inefficiency positions
3. The causes of variances between the budgeted and actual are recognized to chart the
remedial process.
4. It checks over-expenditure on the part of spending officer.
5. It reduces huge losses since it is a constant measuring of actual and budgeted.

Essentials of good budgetary control system:

Good budgetary system must fulfil following requirement (Shah, 2009):

1. It should be headed by senior management of organization.

2. Representatives of all departments should be made part of the budget committee.
3. Organizational goals must be clearly defined.
4. There should be proper management information system.
5. Periodic reports should be made to disclose the performance of budgeting system.
6. Effective follow-up system should be present.

When comparing Budget and Budgetary Control, it can be demonstrated that budget is
quantitative plan of action for future period. Whereas Budgetary Control is a system of
controlling cost and performances of various business actions through preparation of budgets,
assigning responsibilities, evaluation of actual performance by comparing actual results with
budgeted data and taking corrective measures in case of any adverse deviation is noticed.
Although budget is essential part of Budgetary Control system, both are interrelated and
dependent on each other (Bhattacharyya, 2011).

To summarize, Budget and Budgetary Control is the staying power of financial control
system. In management literature, budget is plan relating to future. It is statement of various
activities to be performed in future and these activities are supported funds. Control exercise
for execution of budget is called Budgeting control. Budgeting control represents the
application of comprehensive system of budgeting in the organization to help the
management in the process of its planning, organizing, coordinating, controlling and
performance evaluation. It is an effective device to the management to accomplish the
business goals and objectives of the organization.

The stress of financial control was in the private sector. Government organize master budget
which is supported by budget classification as revenue, capital expenditure and cash budget.
The budget targets are traditionally evolved not by agreement but from top to bottom. The
incremental approach to budgeting surpasses the zero-base and programme-cum-performance
approaches.

INTRODUCTION:
Present business world is full of competition, uncertainty and exposed to different types
of risks. The complexity of managerial problems has led to the development of
various management control techniques and procedures useful for the management in
managing the business successfully. One of the essential features of modern
business management is planning and control.

Budgetary control is the most common, useful and widely used standard device of
planning and control. It is very helpful for the business organization to conduct a
business in the competitive market.

MEANING OF BUDGET&BUDGETARY CONTROL:

A budget is a detailed plain of operations for some specific future period. It is an

estimate prepared in advance of the period to which it applies. It acts as a business
barometer as it is complete programmed of activities of the business for the period
covered

Besides' budgetary control' refers to a system of management and accounting control by

which all operations and output are forecast as far as ahead as possible and the actual
results, when known are compared with the budget estimates. Thus the term budgetary
control is designed to evaluate the performance in terms of goals budgeted.

TYPES OF FUNCTIONAL BUDGETS:

(1) Sales Budget: These should be analyzed as between products, periods and areas. By
reference to the trends disclosed by the past figures and with the aid of information
supplied by the sales department forecast of anticipated sales for the forthcoming period
can be made. The sales forecast or sales budget is the basic core budget on which other
budget depend. As such rational efforts should be made to develop a proper sales
budget which can be reasonably accomplished.

Preparation Of Sales Budget: It has already been started that sales budget is prepared
by the sales manager. He is therefore, to consider the following matters at the time of
its preparation:

(i) Analysis of Historical Sales:Analysis of past sales, with the help of statistical
measurements, cyclical trends seasonal fluctuations etc

(ii) Reports By Salesman: Salesmen also can submit a report to the sales manager which
is highly significant since thery are in frequent contact with customer having an internal
knowledge about the habits tastes and demand of customers.

(iii) Business Conditions: The general business condition can be also studied from the
national as well as international economic statistics, political influences etc

(iv) Market Analysis: .Market analysis may be employed by the large firms where's
specialists are employed by the small firms for collecting necessary information about
the market demand products-design fashion trends, degree of competition etc.

(v) Special Condition: There are certain events which may influence sales outside the
firm e.g. introduction of electricity to a village will increase the demand for electrical
appliance.

(2) Production Budget: Production budget is prepared after the preparation of sales
budget, to the determine quality of goods which should be produced to meet the budget
sales .It is expressed in physical terms, such as (a)Union of output,(b)Labor of house
and (c) Material requirement.

(3) Raw Material Budget: This budget reveals the quantities of materials which are
needed to make the budget production. It also shows the anticipated cost of materials to
be purchased, terms of credit from suppliers ,the time taken to procure raw materials
etc.

(4) Direct Labor Budget: The direct labor budget tells about the estimates of direct labor
requirements essential for carrying out the budgeted output. The direct labor cost is
estimated as a results of the evaluation of standard hours worked or the quantity of
work done by the individual worker in terms of certain average wage rate. This wage
rate may be different for each department.

(5) Manufacturing Overhead Budget: Manufacturing overhead include the cost of indirect
labor indirect expenses. The manufacturing overhead can be classified into three
categories,(1)Fixed i.e. which tend to remain constant irrespective of any change in the
volume of output.(2)Variable i.e. which tend to vary with the output and(3)Semi-
variable i.e. which are party variable and party fixed.

(6) Selling And Distribution Overhead Budget: The selling expenses include all items of
expenditure on the promotion, maintenance and distribution of finished goods Sales off
cent rent ,salaries. depreciation and miscellaneous expenses are provided for as a fixed
amount per month.

(7) Cash Budget: The cash budget is a summary of the firms expected cash inflows and
outflows over a particular period of time .In other word, cash budget involves of a
projection of future cash receipts and cash disbursements over various time intervals.
There must be a balance between cash and the cash demanding activities.

(8) The Master budget: The institute of cost and management accountings England,
defines it as the Summery Budget ,incorporating its component functional budgets,
which is finally approved, adopted and employed. In other words, it is a summery
budget which is prepared from and summarizes all the functional budget.

(9) Fixed Budgets: It is a budget in which targets are rigidly fixed. Accord ting to
I.C.M.A. London. Fixed budget is a budget which to remain in changed irrespective
of the level of activity actually attained. Such budgets are usually prepared from one to
three months in advance of the fiscal year to which they are applicable.

(10) Flexible Budget: Fixed budget is generally rigid as it is based on one level of activity
and one set of condition and hence not quite helpful for control purpose. A flexible
budget is therefore, designed to provide information as to sales, expenses and profits for
different levels of activity which may be obtained.

(11) Performance Budget: Among the methods which relate costs to outputs,
performance budgeting stands out the most prominent. It has emerged as a whole new
way of considering fiscal responsibility.

(12) Zero-Base Budgeting(ZBB): The ZBB take account consequences that may flow if
the project or responsibility centre is scratched. In other words, the objective of ZBB is
to formulate the budget so as to estimate the amount of expenditure likely to be
incurred if the existing project resumes operation after being scratched. This method is
called Zero Base budgeting since the existing system is discontinued and a fresh is made
or the existing system is reviewed on the assumption of Zero-Base.
ADVANTAGEES OF BUDGETARY CONTROL:

Budgetary control has become an essential tool of management for controlling costs and
maximizing profits. It acts as a friend, philosopher and guide to the management. It
advantages to management can be summarized as follows:

(1) Economy in working: It brings efficiency and economy in the working of the
business enterprises .Even though a monetary reward is not offered, the budget
become a game

(2) Buck- passing avoided: It establishes divisional and departmental responsibility. It

thus prevents alibis and buck-passing when the budget figures are not met.

(3) Establishes coordination: It coordinates the various divisions of a business, the

production ,marketing, financial and administration divisions.

(4) Acts as a safety signal: It acts as a safety signal for the management. It show when
to proceed cautiously and when manufacturing expansion can be safety undertaken

(5) Adoption of uniform policy: Uniform policy without the disadvantages of military type
pf business organization can be pursued by all division of business.

(6) Decrease in production costs : Seasonal variation in production can be reduced by

developing new fill in products.

(7) Adoption of standard costing principles: The use of budget figures as measures of
operating performance and financial position makes possible the adoption of the
standard costing principle in divisions other than the production division.

(8) Optimum mix: It helps management in obtaining the most profitable combination of
different factors of production.

(9) Favor with credit agencies: management who have developed a well ordered budget
plan and who operate accordingly, receive greater favor from credit agencies

LIMITATIONS OF BUDGETARY CONTROL:

Based on estimates: The strength or weakness of the budgetary programmer depends

to a degree on the accuracy with which the basic estimate are made. The estimate must
be based on all available facts and good judgments.

Need for continuous adaptation: A budgetary programmed can not be installed and
perfected in a short time. Budget techniques must be continuously adapted not only for
each particular concern but for changing conditions within the concern.

No automatic execution of the budget: Once the budget is complete, it will be effective
only if all responsible executive get behind it and exert continuous and aggressive efforts
towards its achievement.

Only a tool of the management: The budget should be regarded not as a master but as a
servant .It is one of the best tools yet devised for advancing the affairs of accompany
and the individual in their various areas of management activity

BUDGETARY CONTROL ORGANISATION :

The shape and design of budgetary control system is largely determined by the size and
nature of the business organization. In a large sized organization, an effective budgetary
control system can be organized on the following lines:

Creation of budget centers: The first step in the budget preparation is the creation of
budget centers budget is a section of the organization of an undertaken defined for the
purpose of budgetary.

Provision of adequate accounting record: An efficient budgetary system requires the

provision of appropriate and adequate accounting records also.

Setting the guidelines: The next step in the preparation of budget is setting the
guidelines. It is mainly concerned with determining management policy with regard to
range of products, stock level, investment polices etc.

Establishment of a budget committee: In small organization budget may be prepared by

one executive and he is made in charge of all budgetary arrangements.

Budget officer: A major step in introducing the budgetary control programmer is the
appointment of an expert in budgeting, known as budget officer, budget accountant,
budget controller, or budget director.

Preparation of a budget manual: To systemize the budget procedure and provide the
necessary guidelines for the preparation of various budgets a budget manual can be
prepared. This manual would include such matters as the following functions and
responsibility of various members of the budget committee.

Determination of the key factor: Key factor is also known as a limiting factor, or principle
factor .For the successful implementation of a budgetary system, the individual budgets
for each item for should be co-coordinated and inter-related.

8. Laying down the levels of a activity: It is also essential to the normal level of activity,
i.e., the level of output/sales company can reasonably expect to achieve during the year.

9. Budget reports: Installation of a budgets is in itself of no use unless a comparison is

made regularly between the actual expenditure and the budgeted allowances.

10. Revision of budgets: To be of maximum use to the management, it is essential to

revise budgets, as and when necessary. in order to fit them with the changing business
conditions.

References By Dr. M.C. Garg

Key Difference Budget vs Budgetary Control

The key difference between budget and budgetary control is that budget is an estimation of
revenues and costs for a period whereas budgetary control is the systematic process
where management uses the budgets prepared at the beginning of the accounting period
to compare and analyze the actual results at the end of the accounting period and to set
improvement measures for the next accounting year.