Definition Of Budgetary Control

Consequently, managers make predictions about the future based on past data and current happening. Such predictions or probable events are known as ‘forecasts’. All upward revisions to cost allowances must be approved by higher levels of management. The procedure to revise the upward cost allowance may be laid down in budget manual. They are a plan and plan can be changed, as new and better opportunities arise. A comparison of actual results with budgeted results is an important facet of control.

Lack of real-time access to budget data for managers. Budgetary control implies a system that involves an ongoing comparison of the actual performance with the budgets and taking remedial steps immediately, to ensure adherence to the plan. The difference between budgeted performance and actual performance helps the management to identify its weak areas. This budget control compares the forecasted cash inflows and cash outflows from various sources to the actual inflows and outflows of cash. This provides an important control in the organization since it ensures that the organization has enough cash to meet its requirements and obligations. Cash budget control also involves investing the excess cash available thereby making profits out of idle cash. 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.

Budget involves a heavy expenditure which small business concerns cannot afford. Budgetary control facilitates centralized control with decentralized activity. Fixing the responsibility of various individuals in the enterprise.

At the same time budget officer should be sensitive to manager’s problems as well. If budget follow-up work is done properly, it will offer not a threat but still another service to operating managers. Wrong cost benefit analysis may hamper the future growth of the organisation. For example, cutting of present advertisement costs may affect future sales. Funding involves the allocation of available resources of the organisation to various decision units keeping in mind the alternative which has been selected and approved through ranking process. The performance of the departments need to be captured and presented in terms of tables, charts and graphs from time to time for periodic assessment and review.

What Is A Budget Lapsing Organization?

It is a new approach to budgeting which lays emphasis on work done or services rendered. It focuses attention on the physical aspects of achievement.

• Cost analysis – Costs are not classified on the basis of variability.
• Budget control helps the organization to understand its strengths and weaknesses simply by measuring the performance of departments, cost centres, etc., over a period of time.
• The figures in the budget are expressed in mon­etary terms.
• It ensures efficient allocation of scarce resources and reduction in cost.
• Departments are so intermingled and interdependent that it is usually impossible to draw distinct responsibility lines.
• To prepare a budget, managers must know all of their department’s expenses, both operational and capital, as well as anticipated income.

For your financial plan type’s planning amounts, you can choose from Cost, Revenue, or Cost and Revenue. You can adjust certain financial plan type components relating to general information and budget options, such as Plan Class, Planning Amounts, and Budgetary Control.

Elements And Characteristics Of A Budget

If you only require budget vs. actual expenditures reports intermittently, this will not call for implementing either Budgetary Control or Encumbrance Accounting. An encumbrance refers to funds that are put in reserve after a requisition has been finalized. The purpose of encumbrance accounting is to avoid spending over your budgeted amount.

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 a limiting factor cannot be avoided by any means, then all the functional budgets will have to be built around that factor. The budget committee is composed of the representatives of various departments e.g., Sales, Production, Purchases and Works Engineering etc. The responsibility for operating the system of budgetary control is undertaken by the Budget Officer who is a senior member of the Accounting Department. The preparation of various budgets for the purpose of budgetary control, requires the provision of adequate accounting records. As such, it is necessary that accounting system should be able to provide the required information in an analytical form. An organisation is broken down into a number of budget centres to facilitate the control of planned activities.

The Sales Or Revenue Budget

For the success of the budgetary control system, it is necessary that all concerned should extend their full cooperation. For this, it is necessary that they get an opportunity to offer their views freely and have the right to criticise the proposed budget. If it is not done, the cooperation of the various departments and persons may not be forthcoming. There should be a budget officer or controller to coordinate the work connected with budgeting. He should be equal in rank to other departmental managers. He plays a very important role in the success of the system of budgetary control.

PQ represents the fixed cost and QR is the straight line, which shows fixed cost. QS represent the total costs which is the combination of variable cost and fixed costs. Variable costs are related to production and change with the production level. For example material costs, labour costs, maintenance and replacement of the parts costs etc. Budgeted estimates in the organisation are generally based on the price level at a particular period of time. These estimates may become useless when there is either inflation or depression in the market.

The difference between budgets, budgeting and budgetary control can be sited. Continuous comparison of actual with budgets for achievement of targets and placing the responsibility for failure to achieve the budget figures. Regardless, prepare your budgets based on the shortest possible period of time that allows for maximum utility, flexibility, and accuracy in the financial forecast. Budgetary Control aims at prescribing in exact terms what should be done, how it is to be done in future and ensuring that actual performance is in tandem with the budgets.

For example, recession leads to decrease in costs of input, managerial actions for effective cost control leads to improved profit margins and so on. Thus, revision of budgetary figures may be in both the directions-upward revision of costs or vice versa, similarly upward revision of sales and profits or vice versa. The revenue centre is the smallest segment of activity or an area of responsibility for which only revenues are accumulated. A revenue centre is a part of that organisation whose manager has the primary responsibility of generating sales revenues. A revenue centre manager has no control over the investment in assets or the cost of manufac­turing a product, but may have control over some of the expenses of marketing the product. The basic theme of this approach is that a manager should be held responsible for those activities, which are under his or her direct control.

Planergy

While preparing budgets employees should be given role in participation so their interest to achieve goals can be build up. Actually budgetary control is the outcome of employees’ participation culture.

The desired co-ordination is brought about by means of a budget. A budget is thus, a plan of action for a future period. A budget is essentially a statement of the intention of management. Budgeting refers to the management action of formulating budgets. Preparation of budgets involves study of business situations and understanding of management objectives as also the capacity of the enterprise. It includes the entire processing of making the budget plans.

He has also noticed that some food processing plants/breweries do not use strategic maintenance budgets. Thus, for example, procurement could be one activity, production another as could be marketing and after sales service. This information is then used to decide how much resource needs to be allocated to each activity for a given volume of sales. In other words, ABB is budgeting by activities rather than by individual cost elements. ABB augments, rather than replaces, existing budgeting processes. Every producer plans a definite output for a specific period for which it is possible to use budgets to estimate the required amount of finance, materials, labor, and other expenditures. The periodic checking up of income, costs, and expenses related to the administration of the budget is known as budgetary control.

Participation By Users In Budget Preparation

They are the expenses that the organization incurs whether it is in operation or not. Salaries of managers may be an example of such a cost. Hence it serves the purpose of overall control to ensure that other budgets mesh properly and yield results that are in the best interests of the organization. It forecasts what the organization’s balance sheet will look like if all other budgets are met. This type of financial budget concentrates on major assets such as a new plant, land or machinery. Organizations often acquire such assets by borrowing significant amounts through, say, long-term bonds or securities. An effective budgeting system plays a crucial role in the success of a business organization.

Only relevant informations are to be sent to the related executives. Giving unwanted information leads to waste of time of the top executives. There are many industries, which due to their seasonal character, have seasonal peak sales directly attributable to the weather conditions. For example, if the summer is intense, the demand for ice, aerated water and ice-cream, etc., rises. They lead to planned actions in place of haphazard work. Since everything is done in a planned manner, wastage and losses are reduced or minimised. It should represent goals that are reasonably attainable.

Semi-variable overheads and segregated into fixed and variable elements. Only variable costs will undergo change while fixed costs remain unaltered. The more common and, thus, more troublesome, budgeting problems are those caused by changes in operating conditions. Such chan­ges, often, require budget revision either upward or downward in the sales forecast or the cost allowance. The operating manager must accept the parts that budget officer has to play. The real advantages of budgetary control will materialise when budget preparation is followed by a feed-back system. Reporting through well designed performance report is an integral part of budgetary control.

It is prepared for a particular activity level and it does not change with actual activity level being higher or lower than budgeted activity level. In other words, this budget does not highlight the ‘activity variance’, i.e., the change accountable for actual activity level being different from budgeted activity level. It shows the planned operations for the future period and includes all the functional budgets. It includes production cost budget, budgeted profit and loss statement and budgeted balance sheet.

• It even ensures that there are fewer chances of tax evasion and avoidance by the taxpayers.
• Control is exercised by comparing actual figures with budgeted figures.
• This figure can be compared with the actual cost of producing personal computers to help evaluate the performance of the personal computer production managers and employees who produce personal computers.
• The heads of all the important departments are made members of this committee.
• A Budget is a plan expressed in qualitative and monetary terms.
• Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments.

Any budget cannot be prepared in isolation and therefore coordination among various departments is facilitated automatically. Budgeting is a coordinated exercise and hence combines the ideas of different levels of management in the preparation of the same. Budgeting facilitates the planning of various activities and ensures that the working of the organization is systematic and smooth.

3 The Budgeting Procedure

Designate a budget officer to lead a master budget committee made up of experienced top management . This committee is responsible for defining the overall approach to budgeting, the establishment of budgets, and performing variance analysis in order to compare budgeted figures with actual results. The primary objectives of budgetary control are compliance, performance, and ensuring a strategic and plentiful allocation of resources without creating needless costs, waste, or redundancies. Bridging this gap between budget owners and the finance team begins with effective processes and transparent, comprehensive access to spend data in real time.

A Business organisation in order to survive, needs future planning to ensure effective functioning. The world of business today is very competitive and exposed to a number of risks.

Most of the sales offices, for example, are considered revenue centres. CIMA defines revenue centre as a centre devoted to raising revenue with no responsibility for production e.g., a sales centre. Performance reports for each responsibility centre should be prepared highlight­ing variances, the items requiring management’s attention. Budgeting necessitates employment of specialised staff. This involves expenditure which small concerns may not afford. Even in the case of large concerns, the utility of budgetary control should be viewed from the point of cost. The cost of installing and operating a budgetary control system should be commensurate with the benefits derived therefrom.

The likelihood of errors will increase with increase in the size of organisation. Control is the process of ensuring that the activities of an organisation conform define budgetary control to its plans and its objectives are achieved. According to Peter Drucker, controls are different from control. The former are a means to an and the end is control.