Budgetary Control

Budgetary Control is establishment of budgets and the continuous comparison of actual results with the planned results. It computes the variances and after that management takes necessary actions to maintain favourable variations, through revision of the budgets.

Following are the requirements for the successful implementation of Budgetary Control:

-First a Budget Centre which is that section of the organisation for which the budget will be prepared should be clearly defined.

-Budget Period or the time period for which the budget will be prepared and operated should be decided carefully. It should neither be too long nor too short.

-An efficient and proper system of accounting should be established so that the information required for the proper implementation for the budgetary control can be available on time.

-A proper organisational chart should be prepared properly, clearly depicting the responsibilities and duties of each level of executive.

-A budget manual, an important document in relation to the budgetary control. It should be well written, indexed and divided into sections. It should include principles and objectives of budgetary control, duties and responsibilities of each executive in the organisation, accounts codes, budget diagrams, etc.

-A budget key factor should be assessed before preparing other functional budgets to ensure that other functional budgets are capable of fulfilment.

A budget is a financial document or an action plan which is prepared and used to project future income and expenses. It outlines an organisation’s financial and operational goals. It can also include non- monetary information with the monetary information. They need to be made and approved in advance of the year in which they are to be used or implemented.

Following are the characteristics of a good budget:

-It is expressed in quantitative or monetary terms.

- It is prepared for a fixed period of time It is prepared before the period in which it commences.

-Practical to implement.

-It spells out the objects and the policies to be pursued in order to achieve the objective of the organisation.

-Many people are involved in drawing up a budget.

-Flexible enough to allow changes in the changing environment.

-Prepared on the basis of established standards of performance.

-Analysis of cost and revenues.

-On the basis of budget report performance of the organisation is constantly monitored.

Following are the pre-requisites to implement Budgetary Control:

-First a Budget Centre which is that section of the organisation for which the budget will be prepared should be clearly defined.

-Budget Period or the time period for which the budget will be prepared and operated should be decided carefully. It should neither be too long nor too short.

-An efficient and proper system of accounting should be established so that the information required for the proper implementation for the budgetary control can be available on time.

-A proper organisational chart should be prepared properly, clearly depicting the responsibilities and duties of each level of executive.

-A budget manual, an important document in relation to the budgetary control. It should be well written, indexed and divided into sections. It should include principles and objectives of budgetary control, duties and responsibilities of each executive in the organisation, accounts codes, budget diagrams, etc.

-A budget key factor should be assessed before preparing other functional budgets to ensure that other functional budgets are capable of fulfilment.

Production budget is a forecast of production for the budget period. It is prepared from two angles: In terms of quantity and in terms of money. Following budgets are prepared under the production budget:

-Material Budget to estimate the material cost

-Direct Labour Cost Budget to estimate the labour cost which are required to product the quantity as specified in the production budget.

-Overhead Budget to estimate production overheads.

Production budget is prepared after taking various budgets into consideration. For a proper estimation of various costs associated with the production process makes it important to prepare production budget for the period in which production will take place.

Cash budget is the budget which is prepared under the finance budget. It is an estimation of the expected cash receipts and cash payments during the budget period. By preparing cash budget it becomes possible for the organisation to predict whether at any point of time there will be excess or shortage of cash. Two main points should be remembered before preparing cash budget: Time period of the cash budget and the items to be included in the cash budget.

Following methods are used to prepare cash budget:

-Receipts and payments method: This method is useful for short term estimations. Under this method items should be categorised in two ways- Operating Cash Flows and Non Operating Cash Flows

-Balance Sheet method: This method is useful for long term estimations.

-Adjusted Profits/Losses Method: This method is useful for long term estimations.

There are major four categories under which budgets are divided:

Sales/Marketing Budget:

- Sales Budget

- Selling and Distribution Cost Budget

- Advertising Cost Budget

Production Budget:

- Production Budget

- Purchases Budget

Finance Cash budget is the budget which is prepared under this functional area. It is an estimation of the expected cash receipts and cash payments during the budget period.

Personnel budget - The budget which is prepared under this area takes the form of a personnel budget, which indicates the requirement of personnel or labour force to conform to the production budget.

Miscellaneous

-Overheads Cost Budget

-Capital Expenditure Budget

Budgetary Control is a methodical control technique whereby budgets are prepared relating the responsibilities of budget holders. It is a continuous comparison of actual results with budgeted results, to ensure that the objectives of the company’s policy are achieved; or to provide a basis for the change of those objectives. In simple terms, it is the analysis of the plans which the organisation has made; what was the result when those plans were implemented practically. After practical implementation of the budget if any variation is seen in the actual result to the budget result then the reasons for the variations are fount out and corrective actions are taken to correct variations.

Advantages of Budgetary Control:

- It is a powerful tool for the purpose of cost control and profit maximization.

- It enables the management to maximise the use of available resources in a most profitable manner.

- As a budgetary control is based on a budget which sets the plan of action in respect of various functional areas of operations. Thus, it acts as a means of declaration of the policies of the management.

- It acts as means of communication.

- It acts as a means of improving co-ordination by developing team spirit in the organisation.

- It enables the management to take proper actions in regard to the adverse variations in the actual and budgeted results.

- It enables the delegation of authority.

- It is a powerful tool with the management for performance appraisal.

- It also provides a basis for the establishment of the incentive systems