Budget & Budgetary Control

• The literary meaning of the word Budget is a statement

of income and expenditure of a certain period.
• In principle, the meaning is same in the context of
business also. An individual will have his own budget, a
family, a local authority, state and country etc. All will
have their respective budgets. So also the business
concern must have its budget so as to attain their
objectives.
• CIMA defines a budget as, “A budget is a 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 objective.”
 Features of Budget
• A Budget must be expressed either in quantitative
form i.e., the number of units of different products or
it may be expressed in rupees of each product or it
may be quantitative and financial form i.e., the
number of units and rupees of each product etc.
• Budget must be prepared for a definite period.
• Budget must be prepared in accordance with the
policies of the business enterprise.
• Budgets are prepared normally for attaining
organisational objectives, because policies are
formulated to achieve the objectives and those are
translated into quantitative and financial form.
 Objectives of the Budget
• A budget is a blue print for the desired plan of
action. Since budgets are prepared in accordance
with the policies of various functions of the
organisation such as purchase, production sales
etc., these will be helpful as plan of action to
discharge the above functions.
• Budgets are useful for forecasting the operating
activities and financial position of a business
enterprise.
• Budgets are helpful in establishing divisional and
departmental responsibilities.
• Budgets provide a means of coordination for the
business as a whole. When the budgets are
established various factors such as production
capacity, sales responsibilities, procurement of
material, deployment of labour etc., are balanced
and synchronised so that all the activities are
processed according to the objective. Thereby
Budgets are very much useful in coordination of
factors and functions.
• Budget ensures good business practice because
they plan for future.
• Budgets are devised to obtain more economical
use of capital and all other inputs.
• Budgets are means of communication. The complex
plans that are laid down by the top management are to
be passed on to the operative personnel, those who
actually put the plans into action. Budgets are very
much helpful in processing such information to the
lowest personnel in the organisation.
• Budgets are more definite assurance of earning of the
proper return on capital invested.
• Budgets facilitate centralised control with delegated
responsibilities and authorities. Budgets are
instruments of managerial control by means of which
the management can measure the performances in
every part of the business concerns and corrective
action can be taken soon after deviations are found out.
 Limitations of Budgets
• Budgets fail if estimates are not accurate:
Budgets mainly depend upon the accuracy of the
estimates. So estimates should be made on the basis of
all the information available. Thus accurate estimates
can be made by using advanced statistical techniques.
• Risk of Rigidity: Budgeting process creates a sense
of rigidity in the minds of people who are working in
the organisation. But in the modern business world,
which is more dynamic in nature, such rigidity will
create problems. Therefore budgeting process should
also be dynamic in nature, so that it can be updated
according to the situation.
• Budgeting is an expensive process: The installation and
implementation of the budgeting process involves too much time
and costs. Therefore small organisations can not afford to it. Even
for large organisations cost benefit analysis should be conducted
before installing such a system.

• Budgeting is not a substitute for management: It is only a

misconception to think that the introduction of budgeting is alone
sufficient to ensure success and to guarantee future profits. It is
only a means for achieving the end.

• Continuous monitoring is required: Installation of budgeting

system does not imply that it is effectively implemented.
Management must continuously monitor the operating system
how far the plans and budgets are helpful in achieving the goals
of the organisation.
 Budgetary Control

Budgetary control is defined as “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
objective of that policy or to provide a basis for its
revision.”
 Steps for Budgetary Control
• Establishment of Budgets: Budgetary control primarily
aims at preparation of various budgets such as sales
Budget, production budget, overhead expenses budget,
cash budget etc.,
• Responsibilities of executives: The budgetary control
system is designed to fix responsibilities on executives
through preparation of budgets.
• Policy making: The established policies of the
organisation are designed as budgets so as to fix
responsibility on executives.
• Comparison of actuals with budgets: After establishing
the budgets, the actuals are compared with them and any
deviations, if any are called variances.
• Achieving the desired result: The desired result
of the budgetary control system is comparison of
actuals with the budgeted results and the causes
of variances, if any, are analysed.
• Reporting to Top Management: After the
causes of Variances are analysed, the variances
and their causes are reported to top management
so that the remedial action can be taken.
 Advantages of Budgetary Control
• Budgetary control aims at maximisation of profits
through optimum utilisation of resources.
• It is a technique for continuous monitoring of policies
and objectives of the organisation.
• It helps in reducing the costs, thereby helps in better
utilisation of funds of the organisation.
• All the departments of the organisation are closely
coordinated through establishment of plans resulting
in smooth functioning of the organisation.
• Since budgets fix the responsibilities of the
executives, they act as a plan of action for them there
by reducing some of their work.
• It facilitates analysis of variances, thereby
identifying the areas where deficiencies occur
and proper remedial action can be taken.
• It facilitates the management by exception.
• Budgets act as a motivating force to achieve the
desired objective of the organisation.
• It assists delegation of authority and is a powerful
tool of responsibility accounting.
• It helps in stabilizing the conditions in industries
which face seasonal fluctuations.
• It helps as a basis for internal audit.
• It provides a suitable basis for introducing the
payment by results system.
• It ensures adequacy of working capital to the
organisation.
• It aids in performance analysis and performance
reporting system.
• It aids in obtaining bank credit.
• Budgets are forerunners of standard costs in the
sense that they create necessary conditions to suit
setting up of standard costs.
 Responsibility Accounting
• One of the recent developments in the field of
management accounting is the responsibility
accounting, which is helpful in exercising cost
control.
• It is a system in which the person holding the
supervisory posts as president, function head,
foreman, etc are given a report showing the
performance of the company or department or
section as the case may be. The report will show the
data relating to operational results of the area and
the items of which he is responsible for control.
• It follows the basic principles of any system of cost
control like budgetary control and standard costing. It
differs only in the sense that it lays emphasis on human
beings and fixes responsibilities for individuals. It is
based on the belief that control can be exercised by human
beings, so responsibilities should be fixed for individuals.
Principles of responsibility accounting are as follows:
• A target is fixed for each department or responsibility
center.
• Actual performance is compared with the target.
• The variances from plan are analysed so as to fix the
responsibility.
• Corrective action is taken by higher management and is
communicated.
 Performance Budgeting
Performance Budgeting is synonymous with
Responsibility Accounting which means thus the
responsibility of various levels of management is
predetermined in terms of output or result keeping
in view the authority vested with them.
Features of Performance Budgeting
• It is based on a classification of managerial level
for the purpose of establishing a budget for each
level. The individual in charge of that level should
be made responsible and held accountable for its
performance over a given period of time.
• The starting point of the performance budgeting
system rests with the organisation chart in which
the spheres of jurisdiction have been determined.
Authority leads to the responsibility for certain
costs and expenses which are forecast or present in
the budget with the knowledge of the manager
concerned.
• The costs in each individual’s or department’s
budget should be limited to the cost controllable by
him.
• The person concerned should have the authority to
bear the responsibility.
Thanks