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A Study on Budget and Budgetary Control Prof. Mubina Shaikh Mumbai University, Mumbai, India International Journal of Commerce & Business Studies Volume 4, Issue 1, January-March, 2016, pp. 14-20 ISSN Online: 2347-2847, Print: 2347-8276, DOA: 07052016 © IASTER 2016, www.iaster.com ABSTRACT Budgetary control is a system in which income and spending are compared with a company's budget to make sure the plans are being followed. It allows companies to adjust their spending as necessary to make a profit. Every company has a budget, and at times, that budget needs to be revised to account for spending and an increase or decrease in income. In essence, budgetary control compares actual results with budgets. If discrepancies are found, key players within a company have two choices. They can either control the spending of the company or revise the original budgets. Budgetary control helps to coordinate and organize a company's financial activities. The study of budgetary control is very helpful for management of companies for control of their expenditure through a powerful instrument that the name is budget. In fact it will provide a yardstick for measuring and evaluating the performance of individuals and their departments. KEYWORDS: Budget, Budgetary Control, Cost, Financial Planning, Financial Performance, Performance Measurement, Monitoring, Evaluating, Motivation, Productivity. 1. INTRODUCTION Budgetary control refers to how well managers utilize budgets to monitor and control costs and operations in a given accounting period. In other words, budgetary control is a process for managers to set financial and performance goals with budgets, compare the actual results, and adjust performance, as it is needed. You can think of a budget like a report card in school. It shows how well you performed in that subject during the school year. The budget process does the same thing. Management can set goals and evaluate the progress. There are typically four steps in any budgetary control process that managers follow. First, a budget needs to be created. To put it simply, a company performance budget is really just a set of financial goals that management wants to achieve. These could be sales or spending goals. Second, after the budget is created, management needs to compare, analyze, and interpret the actual performance results with the budgeted goals. Management typically uses a report for this comparison. Third, after the comparison has been made, managers need to improve the under performing operations and continue to strengthen the favorable ones. The budget report easily allow managers to focus on unfavorable operations because all areas that meet the budget are marked with an F for favorable variance while the poorly performing areas are marked with a U for unfavorable variance. 14 International Journal of Commerce & Business Studies ISSN (O) 2347-2847 Volume-4, Issue-1, January-March, 2016, www.iaster.com (P) 2347-8276 The fourth and final step usually occurs at the end of an accounting period. After management has a chance to look over the entire last period, they can start making plans for the next year. For example, they will most likely review the original budget that was created and why certain goals were set. Then they will compare the actual with the budgeted performance over the entire period. Lastly, management will focus on how they tried to correct the problem operations and develop a plan to fix them in the next period. 1.1 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. 1.2. DEFINITION OF BUDGETARY CONTROL The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a firm basis of its revision. Or in simple words, budgetary control is implementing budgets and making managers responsible for implementing it. “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.” 1.3. OBJECTIVES OF BUDGETARY CONTROL The main objectives of budgetary control are given below: 1. Defining the objectives of the enterprise. 2. Providing plans for achieving the objectives so defined. 3. Coordinating the activities of various departments. 4. Operating various departments and cost centre’s economically and efficiently. 5. Increasing the profitability by eliminating waste. 6. Centralizing the control system. 7. Correcting variances from sit standards. 8. Fixing the responsibility of various individuals in the enterprise. 1.4. ESSENTIAL OF BUDGETARY CONTROL Essentials of effective budgetary control are: 1. Sound forecasting 2. Goal orientation 3. Proper recording system 4. Participation 15 International Journal of Commerce & Business Studies ISSN (O) 2347-2847 Volume-4, Issue-1, January-March, 2016, www.iaster.com (P) 2347-8276 5. Top management support 6. Flexibility 7. Enforce timeliness 8. Efficient organization 9. Proper co-ordination 10. Sound administration 11. Constant review 12. Reward and punishment and 13. Results take time! 1. Sound Forecasting The estimates for the future needs of business should be precise and accurate. A scientific forecasting system gives adequate and reliable data for budgeting. 2. Goal Orientation Budgets must directly flow from objectives of the enterprise, and goals of budgetary control must be clearly defined. 3. Proper Recording System Sound accounting procedures should be allowed for proper recording of actual operations. Unless the actual performance is accurately recorded and quickly reported; the whole structure of budgeting will fall. Budgeting is greatly helped if there is also the system of standard costing in use. 4. Participation All individuals responsible for achieving results should be consulted in the formulation of budgets. No system of budgetary control can succeed without the mutual understanding of superiors and subordinates. Participation assures full co-operation and commitment for making budgets successful. Participation also makes budgets realistic and workable. 5. Top Management Support Since budgeting highlights inefficiencies there is bound to be resistance. This makes it more necessary that top management should believe in the importance of budgetary control. Thus the overall budgets must be set and approved at the chief executive level. 6. Flexibility Budgets should be flexible. If actual business conditions differ from what was expected, it should be possible to recast the budget quickly. 7. Enforce Timeliness Budgets must be prepared so as to be ready before the period to which they relate. Moreover sufficient time should be allowed for the budget programme to develop and reach near perfection. 8. Efficient Organization A good organisation structure is necessary for success in budgeting. There should be fixed responsibility centre’s, budget committee and budget controller. 16 International Journal of Commerce & Business Studies ISSN (O) 2347-2847 Volume-4, Issue-1, January-March, 2016, www.iaster.com (P) 2347-8276 9. Proper Co-ordination The budget plans must be properly co-ordinate in order to eliminate bottlenecks. Individual budgets should be co-ordinate with one another. 10. Sound Administration Budgets cannot replace good management. Budgets should be administered efficiently by responsible executives. 11. Constant Review Constant review of the budgets is necessary so as to prevent them from degenerating into license for spending the full budgeted amount even though it may not be necessary. 12. Reward and Punishment The concerned employees should be suitably rewarded for performance as per the budget. But slack employees should not be allowed to go unpunished. 13. Results Take Time The budgetary control is an efficient tool to control performance. But it requires time to show results. Those who administer budgetary control should have high degree of knowledge and experience in the field. 1.5. ADVANTAGES OF BUDGETARY CONTROL Budgetary control has become an important tool of an organization to control costs and to maximize profits. Some of the advantages of budgetary control are :- 1) It defines the goals, plans and policies of the enterprise. If there is no definite aim then the efforts will be wasted in achieving some other aims. 2) Budgetary control fixes targets. Each and every department is forced to work efficiently to reach the target. Thus, it is an effective method of controlling the activities of various departments of a business unit. 3) It secures better co-ordination among various departments. 4) In case the performance is below expectation, budgetary control helps the management in finding up the responsibility. 5) It helps in reducing the cost of production by eliminating the wasteful expenditure. 6) By promoting cost consciousness among the employees, budgetary control brings in efficiency and economy. 7) Budgetary control facilitates centralized control with decentralized activity. 8) As everything is planned and provided in advance, it helps in smooth running of business enterprise. 9) It tells the management as to where action is required for solving problems without delay. 1.6. LIMITATIONS OF BUDGETARY CONTROL Despite of many good points of budgetary control there are some limitations of this system. The following are the limitations of budgetary control: 1) It is really difficult to prepare the budgets accurately under inflationary conditions. 2) Budget involves a heavy expenditure which small business concerns cannot afford. 17
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