BUDGETARY CONTROL

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Presented By: MONIKA CHAUHAN (84) AAKANKSHA KAPOOR (1) ABHITOSH VATSAL (6) ADITYA MEHTA (9)
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CONTROL
Control means some sort of systematic

effort to compare current performance to a predetermined plan or objective, presumably in order to take any remedial action required.

As a management function, it has been

defined as the process by which managers assure that resources are obtained and used effectively in the accomplishment of the organization's goals.
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BUDGET AND BUDGETARY CONTROL

Budget is simply a plan of action.

Hence the technique of budgetary control is an important tool of managing control.

The chartered institute of management accountants, London, defines budgetary control as the establishment of budgets relating to 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 4/8/12 or to provide a basis for its revision.

Thus, budgetary control involves the following:

Establishment of budgets.

Continuous comparison of actuals with

budgets for achievement of targets.

Revision of budgets in the light of changed

circumstances.

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BUDGETARY CONTROL AS A MANAGEMENT TOOL

It

has become an essential tool of management for controlling costs and maximizing profits . is a useful management tool for comparing the current performance with pre planned performance with pre planned performance with a view to attain equilibrium between ends and means, output and effort. uncovers uneconomies in operations,
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It

It

Its advantages to management are as follows:

BRINGS ECONOMY IN WORKING

It brings efficiency and economy in the working of the business enterprise. The budget is an impersonal policeman that maintains ordered effort and brings about efficiency in results.
ESTABLISHES COORDINATION

It coordinates the various divisions of a business, namely, the production, marketing, 4/8/12 financial and administrative divisions. It forces

 ACTS AS A SAFETY SIGNAL ADOPTION OF

UNIFORM POLICY It acts as a safety signal for the management. It shows when to proceed cautiously and when manufacturing or merchandising expansion can be safely undertaken.
DECREASE IN PRODUCTION COSTS

Seasonal variations in production can be reduced by developing new fill in products. This results in decreasing the cost of production by increasing volume of output.
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 MANAGEMENT BY EXCEPTION

Budgetary control reveals variations of actual performance from budgeted performance. The variations point to the root of inefficiencies and thus enabling management to consider only items that do not go according to plan and leave the others, i.e., to concentrate on exceptions.
OPTIMUM MIX

It helps management in obtaining the most profitable combination of different factors of production. This results in a more economical use of capital.
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 OPTIMUM CAPITALIZATION

It is the only means of predetermining when and to what extent financing will be necessary avoiding the possibility of both over and under capitalization.
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 principles in divisions other than the production division.
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INSTALLATION OF BUDGETARY CONTROL SYSTEM

A system of budgetary control in an organization

should be installed after taking not of essential requisites of budgeting. A careful estimate of the following has to be made: What is likely to happen? What can be made to happen?

i. ii.

iii. What are the objectives to be achieved? iv. What are the constraints all the time and to what

extent their effects could be minimized? Thus, in order to have an effective system of budgetary 4/8/12 control, it will be appropriate to take the following steps:

1.

Determination Of The Objectives

Introduction

of a system of budgetary control requires a clear perspective of the objectives that are sought to be achieved. The objective in most cases is to achieve the desired/ greater profits. Having determined the objective(s) of budgetary control the following problems will have to be sorted out:

a) Laying down of a plan for the implementation of the

firms objectives. departments.

b) Coordination

of the activities of the different

4/8/12 c) Controlling each function so that best possible

results can be achieved.

2.

Organization For Budgeting

The

setting up of a definite plan of organization is the second step to be taken prior to beginning the real work of installing budgetary control. Responsibility of each executive must be clearly defined and there should be no un certainty regarding the point where the jurisdiction of one ends and the other begins.

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3. Budget Manual
The budget manual is a written document

or booklet which specifies the objectives of the budgeting organization & procedures.

CIMA, London,

defines it as document which sets out, inter alia, the responsibilities of the ,persons engaged, in the routine of, and the forms and the records required for the budgetary control. Some of the important matters covered in a budget manual are:
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i.

Statement regarding the objectives of the organization & how can they be achieved through budgetary control. Statement regarding the functions & responsibilities of each executive by designation both regarding preparation & execution of budgets.

ii.

iii. Time- tables for all stages of budgeting. iv. Reports, statements, forms and other records to

be maintained.

v.

The accounts classification to be employed. It is necessary that the framework within which the 4/8/12 costs, revenues and other financial amounts are

4.

Responsibility For Budgeting

Budget Controller: the chief executive is ultimately

responsible for the budget programme but it will be better if the large part of the supervisory responsibility is delegated to an official as Budget Controller who should have the knowledge of the technical side of the business and should report direct to the President.

Budget Committee: the Budget Controller will be

assisted in his work by the Budget Committee. The Budget Committee will consist of heads of various departments as Production, Sales, Finance, etc., 4/8/12 with Budget Controller as its Chairman. It will be

5.

Fixation Of The Budget Period

Budget Period means the period for which a

budget is prepared and employed. The budget period will depend upon
a) Nature of business b) The control techniques to be applied

For example, a seasonal industry will budget for each season. Whereas, an industry requiring long periods to complete work will budget for 3-5 years.
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6. Budget Procedure
The

procedure followed in designing and operating a budgetary control system largely depends upon the nature of the business. However the usual pattern is as follows: Determination of the Key factor Making of the forecasts forecasts.

i. ii.

iii. Consideration of alternative combinations of iv. Preparation of budgets v.

Choice between fixed and flexible budget

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Budgets can be classified into different categories from different points of view i.e.
ACCORDING TO TIME

ACCORDING TO FUNCTION

ACCORDING TO FLEXIBILITY
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 LONG TERM BUDGET

A budget designed for a period for a long period of (5 to 10 years) is termed as long term budget. These budget are concerned with planning of operations of a firm.
SHORT TERM BUDGET

According To Time

These budget are designed for a period generally not exceeding 5 years.
CURRENT BUDGET

These budget cover a very short period say a month or a quarter .

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According To Function
PURCHASE BUDGET

It forecasts the quantity and value purchases required for production.

SALES BUDGET

of

It forecasts total sales in terms of quantity, value, items, periods, areas etc.
PRODUCTION BUDGET

It is based on sales budget. It forecasts quantity of production in terms of items, periods, areas etc.
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 CASH BUDGET

cash budget sets out the expected cash/bank receipts and payments, usually on a month by-month basis, for the next three, six or twelve months, in order to show the estimated bank balance at the end of each month throughout the period. From the cash budget, the managers of a business can decide what action to take when a surplus of cash is shown to be available or, as is more likely, when a bank overdraft needs to be arranged.
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Cash budget consists of three main sections:

Receipts For The Month Payments For The Month Summary Of Bank Account

Receipts are analysed to show the amount of money that is expected to be received from cash sales, debtors, sale of fixed assets, capital introduced/issue of shares, loans received etc. Payments show how much money is expected to be paid in respect of cash 4/8/12 purchases, creditors, expenses (often

The summary of the bank account at the bottom of the cash budget shows net cash flow (total receipts less total payments) added to the bank balance at the beginning of the month, and resulting in the estimated closing bank balance at the end of the month. The main difficulty in the preparation of cash budgets lies in the timing of receipts and payments
for example, debtors may pay two months

after date of sale, or creditors 4/8/12 be paid may by the business one month after date of

According To Flexibility
FIXED BUDGET

A budget prepared on the basis of a standard or a fixed level of activity is called a fixed budget. It does not change with the change in the level of activity.
FLEXIBLE BUDGET

A budget designed in a manner so as to give the budgeted cost of any level of activity is 4/8/12 termed as a flexible budget.

Thank you

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