BUDGETORY CONTROL

INTRODUCTION
The efficiency of a management depends upon the attainment of the objectives of the enterprise. It is effective
when it achieves the objectives with minimum effort and cost. This requires proper planning and therefore,
management must chart out its course of action in advance. One systematic approach for attaining effective
management performance is profit planning and control or budgeting. Profit planning or budgeting is an
integral part of management. Budgeting is an important control technique of cost control. This is the process of
pre-estimation of cost, revenue, profit and other figures for the next year or period and on that basis, actual
expenses incurred, revenue generated/earned. Afterwards budget is used as a standard for measuring actual
performance. The deviations are found out and responsibility fixed for deviations. Thus, this is indirectly
management control process, which involves planning, control, coordination, communication, etc. In this unit
you will study about the basic concept of budgeting, establishment of a system of budgeting and classification
of budgets. 1
 MEANING OF BUDGETING

In our daily life, we use to prepare budgets for matching the expenses with income; and
available funds can be invested in a profitable manner. Similarly in business, budgets
are prepared on the basis of future estimated production and sales in order to find out the
profit in a specified period. A budget is in the nature of an estimate and is a quantified
plan for future activities to coordinate and control the use of resources for a specified
period. Thus budget is a quantitative statement of management plans and policies for a
given period and is used as a guide for the purpose of attaining the given objectives. It
is also used as standard with which actual performance is measured. Budgets must be
prepared with full knowledge and acceptance by the executives whose performance is to
be measured against the budget. Different types of budgets are prepared for different
purposes.

Budgeting may be defined as the process of preparing plans for future activities of a
business enterprise after considering and involving the objectives of the said
organization. This also provides process/steps of collection and comparison of data, by
which deviations from the plan, either favourable or adverse, can be measured. This
analysis is helpful in performance analysis, cost estimation, minimizing wastage and
better utilisation of resources of the organisation.

DEFINITION OF BUDGET AND BUDGETARY CONTROL

Budgeting is a process, which includes two important functions: Budget and Budgetary control. Budget is a
planning function and budgetary control is a controlling system or technique. A manager looks to the future,
searches for alternative courses of action and predetermines a course of action to be taken in relation to known
events and the possibilities of future problems. Thus, the budget will do this work for the activities of a business
enterprise. I.C.M.A., London defines the budget as “Budget is financial and/or quantitative statement, prepared
prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a
given object”.

At the same time, controlling is the process of measuring current performances and guiding them towards some
predetermined goals. The essence of control lies in checking existing actions against some desired results
determined in the planning process. Thus, the budgetary control is a tool of control to achieve the budgeted
goals. I.C.M.A., London defines budgetary control as, “Budgetary control is the establishment of budgets
relating to the responsibilities of executives to the requirement 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
basis for its revision.”

In nutshell, Budgetary control is a system and a technique which uses budgets as a means of controlling all
aspects of the business and is designed to assist management in the allocation of responsibility and authority, in
the measurement of actual performance, in the analysis of variations between budgeted and actual results and to
develop basis of measurement, in the light of experience gained and results achieved, with which to evaluate
performance and efficiency of the operations. Thus, a budget is a means and budgetary control is the end
result.
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OBJECTIVES OF BUDGETING

It is a well known fact that a planned activity has better chances of success than an
unplanned one. The budgeting is a forward planning and effective control tool. Thus,
the objectives of the budgeting are:
To control the cost and increase revenue and thereby maximise profit, so as to know
profit at different level of production and best production level.
To run production activities in efficient manner by lay behind the chances of
interruption in production process due to lack of material, labour etc.
To bring about coordination between different functions of an enterprise, which is
essential for the success of any enterprise.
To incorporate measures of calculation of deviations from budgeted results and
analysis of the same, whereby responsibility can be fixed and controlling
measures/action can be taken.
To ensure that actions taken are in accordance with the targets and if required, to take
suitable corrective action.
To predict short-term and long-term financial positions for better financial position and
management of working capital in better manner.

ADVANTAGES OF BUDGETING

The following are the advantages of budgeting:

Budgeting leads to maximum utilisation of resources with a view to ensuring
maximum return.
Budgeting increases the awareness about business enterprise at all levels of
management in the process of fulfillment of targets.
Budgeting is helpful in better co-ordination between different functions/activities of
business/organisation and hence, better understanding between different functions.
Budgeting is a process of self-examination and self-criticism which is essential for the
success of any organisation.
Budgeting makes a path for active participation and support of top management
Budgeting enables the organisation to prefix its goals and push up the forces towards
their achievements.
Budgeting stimulates the effective use of resources and creates an attitude of cost
consciousness throughout the organisation.
It creates the bases for measuring performances of different departments as well as
different functions of the production activities.

LIMITATIONS OF BUDGETING

Inspite of the above advantages, budgeting has the following limitations:

Forecasting, planning or budgeting is not an exact science and a certain amount of
judgement is present in any budgeting plan.
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The basic mentioned. There must be perfect co-ordination among different functions as well as
requirement for participation of responsible managers / supervisors in the decision making process.
the success of Thus, the main essentials of effective budgeting may be as follows:
budgeting is the There should be well-planned organisational set-up, authority and responsibility clearly
absolute support defined, budget committee should be formed consisting of all top executives.
and enthusian There should be a good accounting system which provides accurate and timely
provided by the information.
top management. Variations should be reported promptly and clearly to the appropriate levels of
If it is lacking at management.
any time, the Budgets have no meaning unless they lead to control action as a consequence of
whole system feedback provided.
will collapse. The whole system should enjoy the support and co-operation of top management.
Budgeting should Staff should be strongly and properly motivated towards the systems.
be followed up by Budgets should be prepared on the basis of clearly defined business policies after
effective control discussion held with the head of individual department so that they may provide their
action, this is suggestions in this regard.
often lacking in
many ESTABLISHING A BUDGETING SYSTEM
organisations,
which defeats the
very purpose of For preparing an efficient budget, there is an urgent need of well-versed system for
budgeting. preparing the budget. This process is required an efficient system of implementation
The installation within the organisation. The main essentials of establishment of system of budgeting
of budgeting are:
system is an Budget Centres
elaborate process Budget Committee
and it takes time. Budget Officer
It is only a source Budget Manual
and not a target
and hence, can
not take the place
of management,
while it is only a
tool of
management.
Thus, the budget
should be
regarded not as a
master, but as a
servant.
It requires the
experienced man-
power, technical
staff, analysis,
control etc,
hence, it is costly
affair.

ESSENTIALS
OF EFFECTIVE
BUDGETING

A good budgeting
system requires
good
organisational
system with lines
of authority and
responsibility
clearly
Budget Period
Budget Key Factor or Determining Principal Budget Factor
Forecasting
Determining Level of Activity
Preparation of Budget
Let us study each one of the above in detail.
Budget Centres: Budget centre are defined as different sections of an undertaking or
an organisation, where budgetary control measures are to be applied and for the
purpose, separate budgets are to be prepared with the help of head of these centres so
that these may be implemented more efficiently.
Budget Committee: The budget committee is a group of representatives of various
functions in an organisation, e.g. Sales Manager, Production Manager, R&D Manager,
Materials Manager, etc. As all functions are interrelated and any change in one’s target
will have its impact on that of the others. Therefore, it is necessary to discuss the
targets so that a mutually agreed programme can be determined. This is really the co-
ordination in budget making. It is powerful force in knitting together the various
activities of the business and enforcing real control over operations. The principle
functions of a Budget Committee are:
To provide departmental managers past data regarding performance, costs etc. thus,
helping them to prepare their respective budgets.
To co-ordinate, receive, review the functional budgets in the light of general policies
and objective of the organisation.
To approve the functional budgets after making necessary changes.
To prepare and present the Master Budget on the basis of functional budgets, so
developed and approved for final considerations and approval of the Board of
Directors.
To recommend action to be taken on the basis of variance analysis.

Budget Officer: To link up or co-ordinate the various functions, to bring them

together and to co-ordinate their efforts in the matter of preparation of target figures,
there should be a person called Budget Officer or Budget Controller. He is enable to
provide ready data relating to all the functions. He is more or less the Secretary to the
Budget Committee. His duties will comprise mainly:
Helping in preparation of the various budgets and their co-ordinations and compilation
into the master budget.
Compiling information about actual performance on a continuous basis, comparing it
against the budget figures, ascertaining causes of deviation and preparing reports
based thereon and sending them to the appropriate executives.
Bringing to the notice of the management the need for revision of budgets and
assisting them in the task, and
Compiling information of all types for the purpose of efficient preparation of budgets
and proper reporting.
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6
Budget Manual: fixed, and the manner in which each category is to be estimated and dealt with.
Budget manual is The manner of scrutiny and the personnel to carry it out.
defined as a The matter which must be settled only with the consent of the managing director,
document which departmental manager, etc.
sets outstanding The finalisation of the functional budgets and their compilation into the Master
instructions, the Budget.
responsibility of The form in which the various reports are to be made out, their periodicity and dates,
the persons the persons to whom these and their copies are to be sent.
engaged in, and The reporting of the remedial actions.
the procedures, The manner in which budgets, after acceptance and issuance, are to be revised or
forms and records amended, and
relating to the The matters to be included in budgets, on which action may be taken only with the
preparation and approval of top management.
use of budgets. Budget Period: This is the period for which forecasts can reasonably be made and
Thus budget budgets can be formulated. Budget periods vary between short-term and long-term
manual is a and no specific period can be laid down for all budgets. Normally, a detailed budget
booklet of budget for each responsibility centre is prepared for one year. In fact, the length of the
policies which budget period depends on the type of the business, the length of the manufacturing
lays down the cycle from raw material to finished products, the ease or difficulty of forecasting
details of the future market conditions and other factors. It should be kept in mind that the budget
organisational set period should be long enough to allow for the financing of production well in
up with duties advance of actual needs and also coincide with the financial accounting period to
and compare actual results with budgeted estimates.
responsibilities of Budget Key Factor or Determining Principal Budget Factor: The key factor is
executives also known as limiting factor, governing factor, etc. and may be defined as the factor
including the which at a particular time or over a period will limit the activities of an undertaking.
budget committee The limiting factor is, usually, the level of demand for the products or services of the
and budget undertaking, but it could be a shortage of one of the productive resources, e.g. skilled
officer and labour, raw material, or machine capacity etc.. In order to ensure that the functional
procedures to be budgets are reasonably capable of fulfillment, the extent of the influence of this
followed for factor must be assessed.
developing The key factor is normally temporary in nature and is a constraint at a particular
budget in respect point of time. In the long run, they can be overcome by proper planning and
of various management action.
activities.
The following are
some of the
important matters
dealt with in the
budget manual:
The dates by
which
preliminary
forecasts and
plans are to be
submitted.
The forms in
which these are to
be submitted and
the person to
whom these are
to be forwarded.
The important
factors that must
be considered for
each forecast or
plan
The
categorisation of
expenses, e.g.,
variable and
The principal budget factor which will influence the targets may be : (i) customer
demand, (ii) plant capacity, (iii) availability of raw materials, (iv) availability of skilled
labour, (v) availability of adequate capital, (vi) storage capacity of raw material and
finished goods, (vii) space for plant installation, and (viii)
Classification of Budgets

  
Time Function Flexibility
l Long-term l Sales l Fixed
l Short-term l Production l Flexible
l Current l Cost of Production
l Purchase
l Personnel
l Research
l Capital Expenditure
l Cash
l Master
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Classification term budgets adjusted to current conditions or prevailing circumstances.
According to Classification According to Function
Time Budgets can be classified on the basis of functions, they are meant to perform. Different
The budget, on types of budgets under this head are as follows:
the basis of time, Sales Budget : This is the most important budget on which all other budgets are based.
may be classified The sales manager is responsible for preparation and execution of the budget. The
as : budget forecasts total sales in terms of quantity, value, items, periods, areas etc.
Long-term Production Budget :The budget is basically based on sales budget. It forecasts quantity
budget, of production in terms of items, periods, areas, etc. The works manger is responsible for
Short-term the preparation of overall production budget and departmental works manager is
budget, and responsible for departmental production budgets.
Current budget. Cost of Production Budget : It forecasts the cost of production. Separate budgets are
Long-Term prepared for different elements of costs such as direct materials budget, direct labour
Budget : A budget, factory overheads budget, office overheads budget, selling and distribution
budget designed overhead budget, etc.
for a long period Purchase Budget : The budget forecasts the quantity and value of purchases required
is termed as a for production. It gives quantity-wise and period-wise information about the materials
Long-term to be purchased. It correlates with sales forecast and production planning.
budget. The Personnel Budget : The budget anticipates the quantity of personnel required during a
period generally period for production activity. This may be further split up between direct and indirect
is of 5 to 10 personnel budgets.
years. These Research Budget : The budget relates to the research work to be done for improvement
budgets are in quality of the products or research for new products.
concerned with Capital Expenditure Budget : The budget provides a guidance regarding the amount
planning of the of capital that may be required for procurement of capital assets during the budget
operations of a period.
firm over a Cash Budgets : The budget is a forecast of the cash position, for a specific duration of
considerably long time for different time periods. It states the estimated amount of cash receipts and cash
period of time. payments and the likely balance of cash in hand at the end of different periods.
They are
generally
prepared in terms
of physical
quantities.
Short-Term
Budget : The
budget prepared
for a period of
less than 5 years
is a short-term
budget. Generally
short-term
budgets are
prepared for a
period of one to
two years. They
are generally
prepared in terms
of physical as
well as in
monetary units.
Current
Budget : The
budget prepared
for a period of a
week, a month, or
a quarter is
termed as a
current budget.
They are
essentially short-
Master Budget : It is a summary budget incorporating all functional budgets in a
capsule form. It interprets different functional budgets and covers within its range the
preparation of projected income statement and projected balance sheet.
Classification According to Flexibility
Budget can also be classified in the following categories:
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. If the output and sales do not fluctuate from year to year or if an accurate
prediction of the same can be made, a fixed budget can be prepared.
Flexible Budget : A budget designed in a manner so as to give the budgeted cost of
any level of activity is termed as a flexible budget. Such a budget is prepared after
considering the fixed and variable elements of cost and the changes that may be
expected for each item at various levels of operation.