Budgetary Control Meaning

Budgetary control is known as setting up a particular budget by management to know the variation
between the company’s actual performance and budgeted performance. It also helps managers utilize
these budgets to monitor and control various costs within a particular accounting period.

It is a process of planning and controlling all the functions of an organization through comparison and
analysis of budgeted numbers to actual results. Comparing the budgeted numbers with actual results
identifies the areas that need improvement and where cost reduction is feasible or budgeted numbers
need to be revised.

Table of contents

Budgetary Control Meaning

Budgetary Control Types

#1 – Operational Control

#2 – Cash Flow Control

#3 – Capex Control

How is the Budget Prepared?

Advantages and Disadvantages of Budgetary Control

Advantages

Disadvantages

Limitations

Important Points to Note

Conclusion

Recommended Articles

Budgetary Control Types

There are various types of control an organization can implement –

Budgetary Control

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#1 – Operational Control

It covers the revenue and operating expenses

, which are essential to running a day-to-day business. The actual numbers to a budget are compared
monthly in most cases. It helps achieve control over EBITDA

– Earnings before interest, taxes, depreciation, and amortization.

#2 – Cash Flow Control

This is an important budget that controls the working capital requirement and cash management

. Therefore, cash crunches could be detrimental to everyday functioning, which is an important aspect.

#3 – Capex Control

It covers capital expenditures

, like buying machinery or constructing a building. Because it involves a huge amount of money, the
control here helps eliminate waste and reduce costs.

How is the Budget Prepared?

The budget is prepared based on previous expenses and considers any foreseeable expenses that are
bound to occur. Nowadays, in a computerized environment, financial statements are prepared in excel
sheets. We have the option of selecting the quarterly average or yearly average.

For example – if we want to prepare the budget for July 2019 based on Q2 results, it will look like this –
budgetary control example 1.1

Here, July Budget Formula = (April + May + June)/3, i.e., the average of April, May, and June.

Based on April, May, and June actual results in the above table, we expect the sales to be $6,250 and the
net profit to be $383 for July.

Now let’s assume that we got actual results for July and compare them with the July Budget to get the
difference –

budgetary control example 1.2

In this case, the actual sales for July have exceeded the budget by $150. This could be because more
quantities were sold or the sales price per unit has increased slightly. If the sales price per unit remained
constant in July, it means that the sales team has performed better than average, which is why sales
have increased.

Further analysis will show which region and which product the sale has increased. In the same way, the
operating cost has gone up by $33, which could be due to an increased cost of any input material or
incidental to extra sales.

Advantages and Disadvantages of Budgetary Control

Advantages

An effective tool for performance measurement of departments, individuals, and cost centers

Identification of areas for reduction and efficiency improvement;

Increased efficiency and cost reduction result in profit maximization;

It also helps in introducing incentive schemes based on performance.

Cost reduction is always the primary target.

Improves coordination between departments as the results and costs are interrelated.

It provides insight for in-depth analysis and any corrective action.

Helpful in achieving an organization’s long-term goal.

Disadvantages

Budgeted numbers often need revision as future prediction is difficult.

Time-consuming and costly process, need people and resources Budgetary control processes.

This process sometimes requires coordination between various departments and is a difficult task.

This process requires approval and support from top senior management.

Always comparing the actuals with a budget is detrimental to employees’ motivation.

Limitations

The future is unpredictable, so a budget always does not guarantee a smooth future for an organization.

Mostly usage of past recorded numbers

Ignores demographics and many other economic factors

Government policies and tax reforms

are not always predictable

Natural events like rain, monsoon, drought and other uncontrollable factors affect an organization’s
actual performance, which cannot be considered for the budget.

Important Points to Note

Any foreseeable revenue or expenses not included previously should be included in the budget.

The control functions should not be extreme to put personnel under pressure. If it is, a change is
needed.

The standards need revision periodically.

Any change must be informed to all the stakeholders immediately or in advance.

The change in production, sales, or any function within the organization will impact the control
functions.

The basis of cost allocation

becomes important at micro-level analysis, so if there is a change in the basis of cost allocation, it
should be analyzed fully before putting it in place.

Conclusion
Budgetary control is an important aspect of an organization’s day-to-day activities and long-term
prospects. When placed carefully, it helps in controlling cost and helps in efficiency improvement. There
are other things like standard costing, which is also a part of it.

We can calculate the cost, efficiency, yield or mix variances, etc. So, it identifies the exact reason behind
any variance when we compare the one-period activity to another. Because in today’s cut-throat
competition, the organizations are always striving for excellence and best practices, and budgetary
control helps identify and attain those policies and practices.

It identifies if there is any issue or chance of improvement with input material procurement, the desired
output from the material, any processing issue, or sales team administration. So, to understand the
business functions completely and root causes analysis

of various outcomes, budgetary control is one important tool in the hands of parties associated with the
organization.

Recommended Articles

This has guided what Budgetary Control is, and its meaning and definition. Here we discuss various types
of Budgetary controls with their advantages and disadvantages. You can learn more about budgeting
from the following articles –

Meaning of Standard Costing

Methods of Capital Budgeting

Master Budget

What is Traditional Budgeting?

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