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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.
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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
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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.
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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.
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