BUDGETARY CONTROL

definition
Budget is a financial and /or a quantitative

statement, prepared and approved prior to a defined Period of time of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital.

definition
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 base for its revision.

Salient features:
Objectives: Determining the objectives to be achieved, over the

budget period, and the policy that might be adopted for the achievement of these ends.

Activities: Determining the variety of activities that should be undertaken for achievement of the objectives. Plans: Drawing up a plan or a scheme of operation in respect of each class of activity, in physical a well as monetary terms for the full budget period and its parts. actual performance by each person section or department with the relevant budget and determination of causes for the discrepancies, if any.

Performance Evaluation: Laying out a system of comparison of

Control Action: Ensuring that when the plans are not achieved,

corrective actions are taken and when corrective actions are not possible, ensuring that the plans are revised and objective achieved.

 The objectives of a Budgetary Control System are 1. Definition of Goals: Portraying with precision, the overall aims of the

business and determining targets of performance for each section or department of the business. 2. Defining Responsibilities: Laying down the responsibilities of each individual so that everyone knows what is expected of him and how he will be judged. 3. Basis for Performance Evaluation: Providing basis for the comparison of actual performance with the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures. It helps to take timely corrective measures. 4. Optimum use of Resources: Ensuring the best use of all available resources to maximize profit or production, subject to the limiting factors. 5. Coordination: Coordinating the various activities of the business and centralizing control, but also making a facility for the Management to decentralize responsibility and delegate authority. 6. Planned action: Engendering a spirit of careful forethought, assessment of what is possible and an attempt at it. It leads to dynamism without recklessness. It also helps to draw up long range plans with a fair measure of accuracy. 7. Basis for policy: Providing a basis for revision of current and future policies.

Types of budgets
Sales budget. It includes a forecast of total sales

during a period expressed in money and quantities. It relates total volume of sales. The responsibility for making sales budget lies with the sales manager. preparation of sales budget is the key factor in any business enterprise. Factors which are relevant for preparing the sales budget. General economic conditions; Competition; Government control and policy.

 Production and output budget. It includes forecast of

the output for a period analyzed according to products, manufacturing departments, period of production. It is generally based on the sales budget as it is responsibility of the production department to schedule its production according to sales forecast. Major factors taken into account for output budget. The sales budget. Plant capacity. Inventory policy. Availability of raw materials, etc.

 Material budget. It is based on the production

budget. Material requirement for a unit of production is determined and is multiplied by budgeted output to arrive at total quantity of direct material required. Material budget help in scheduling the purchase of materials to produce a given volume of output during a particular period to meet the requirement of customers during the period.

Labour budget. It reveals the estimates of direct labour requirements essential for carrying out the budgeted output. Labour of different grades required for a job or a product or a process is determined in terms of man-hours and is multiplied by wage rate per hour to determine the total expense in direct labour for budgeted production. Factory over head budget. It include the estimated costs of indirect materials, indirect labour and indirect factory expenses required during the budget period for the achievement of budgeted production targets. The budget is prepared on departmental basis for effective control over costs. Three categories .fixed, variable, and semi-variable expenses

 Personnel budget. It sets out manpower requirement of all departments for the budget period .it expresses labour requirement in terms of lobour hours. Cost and grade of workers. It helps the personnel transfers or by new appointments.
Administrative over head budget. It includes the estimate ion of administrative expenses like expenses of all offices and salaries of managerial personnel. Such expenses from a significant part

of the total cost production . Preparation of this budget will help in keeping the administrative costs under control.

 Selling and distribution expenses budget. This budget

includes the estimates of all items of expenditure and promotion, maintenance and distribution of finished products. The costs are divided into fixed, variables and semi-variables categories and estimated on the basis of past experiences. The various items of expenditure includes sales office rent salaries, advertising, commission bad debts. Cash Budgets: The cash budget is simply a forecast of cash receipts and disbursements against which actual cash "experience" is measured. The availability of cash to meet obligations as they fall due is the first requirement of existence, and handsome business profits do little good when tied up in inventory, machinery, or other noncash assets.

 Master budget: the master budget is to

prepared to incorporate all functional budgets. It projects a comprehensive picture of the proposed activates and anticipated results during the budget period. It must be approved by the top management of the enterprise

 (i) Fixed Budget. It is a Budget designed to

remain unchanged irrespective of the level of activity actually attained. It operates on one level of activity and less than one set of conditions. It assumes that there will be no change in the prevailing conditions, which is unrealistic. (ii) Flexible Budget. It is a Budget, which by recognizing the difference between fixed, semi variable and variable costs is designed to change in relation to level of activity attained. It consists of various budgets for different levels of activity

Zero-Base Budgeting The idea behind zero-base budgeting is to divide enterprise programs into packages composed of goals, activities and needed resources and then to calculate costs for each package from ground up. By starting the budget of each package from base zero, budgeters calculate costs afresh for each budget period; thus they avoid the common tendency in budgeting of looking only at changes from a previous period. This technique has generally been applied to so-called support areas, rather than to actual production areas like marketing, research and development, planning and finance. The various programs thought to be desirable are casted and reviewed in terms of their benefits to the enterprise and are then ranked in accordance with those benefits and selected on the basis of which package will yield the benefit desired. The principle advantage of this technique is, of course, the fact that it forces managers to plan each program package afresh.

advantage
There are a number of advantages of budgetary control: management to think about the future, which is probably the most important feature of a budgetary planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and each manager, to anticipate and give the organization purpose and direction. Promotes coordination and communication. Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.

 Provides a basis for performance appraisal. A budget is basically a yardstick against which

actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors. Enables remedial action to be taken as variances emerge. Motivates employees by participating in the setting of budgets. Improves the allocation of scarce resources. Economises management time by using the management by exception principle.

Problems in budgeting
While budgets may be an essential part of any marketing activity they do have a number of

disadvantages, particularly in perception terms. Budgets can be seen as pressure devices imposed by management, thus resulting in: a) bad labour relations b) inaccurate record-keeping. Departmental conflict arises due to: a) disputes over resource allocation b) departments blaming each other if targets are not attained.

 It is difficult to reconcile personal/individual

and corporate goals. Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is often coupled with "empire building" in order to enhance the prestige of a department. Responsibility versus controlling, i.e. some costs are under the influence of more than one person, e.g. power costs. Managers may overestimate costs so that they will not be blamed in the future should they overspend

 NON-BUDGETARY CONTROL TECHNIQUES There are, of course, many traditional control devices not

connected with budgets, although some may be related to, and used with, budgetary controls. Among the most important of these are: statistical data, special reports and analysis, analysis of break- even points, the operational audit, and the personal observation. purpose of managerial control. it may be presented in the form of statistical table, graphical charts. A report in the form of systematic presentation of information. The statistical data may arises out of factual data, thorough enquiry, investigation or experiment. It will help in knowing whether the policy of the management are being followed and if not, what step should be taken to implement them.

Statistical data:Statistical data are widely used for the

Marginal costing
According to the institution of cost and

management accountants, London, marginal Costing is the ascertainment of marginal cost and of the effect on profit of change in volume or type of output by differentiating between fixed and variable cost.Fixed cost remains unchanged up to certain level of production , but variable cost change with the change in the given volume of production.

Usefulness of marginal costing

It is important tool in the management for exercising cost control.

If the responsibility for controlling variable cost is assigned to various departments .it helps the management in evaluating the performance of individuals responsible for variable cost.
It helps the management to ensure better utilization of items which involve fixed

expenditure such as plant and machinery, furniture ,etc

Break even analysis

Break-even analysis determines the profit or loss at different levels of activity .it establishes the

relation among cost of production and volume of production, profit and sales, and that is why, it is also known as cost volume-profit analysis. The analysis of cost behavior in relation to changing volume of sale and its impact on profit is known as break-even analysis. The volume of sale at which there is no profit, no loss is known as break-even point.

Break-even point
break-even point is defined as that volume of sale at which revenue exactly equals total cost.

Break-even analysis helps the management in knowing the relationship between cost, volume of production and profits or losses. By dividing the total costs into fixed and variable, the management can determine the point upto which it must carry on production to cover fixed cost. it can exercise cost control at various levels of sales.

Management audit
Management audit may be defined as

comprehensive and constructive review of the performance of management team of organization .the chief objective of Management audit is to see whether these function are being performed efficiently or not

Advantage of Management audit

It would locate present and potential danger

spots. It would highlight possible opportunities. It would reduce costs by suggesting how to reduce unnecessary wastes and losses. It would evaluate the progress made by the enterprise through the introduction of new techniques and ideas

Program Evaluation and Review Technique (PERT)

This is developed by Special Project Office of the US Navy.

Major Features of the PERT This is a time-event network analysis system in which the various events in a program or project are identified, with a planned time established for each. These events are placed in a network showing the relationships of each event to the other events. Each circle represents an event supporting plan whose completion can be measured at a given time. The circles are numbered in an order in which the events occur. Each arrow represents an activity the time consuming element of a program, the effort that must be made between events. Activity time, represented by the numbers beside the arrows, is the elapsed time required to accomplish an event.

 This activity time, can be expressed all in optimistic time,

and estimate of the time required if everything goes exceptionally well; most likely time, an estimate based on the time the project engineer really believes is necessary for the job; and pessimistic time, a time estimate based on the assumption that some logically conceivable bad luck other than a major disaster will be encountered. These three estimates are required where; it is very difficult to estimate time accurately. The next step is to compute the critical path, that is, sequence of events which takes the longest time and which has zero (or the least) slack time. It is customary to identify several crucial paths in order of importance. Although the critical path has a way of changing as key events are delayed in other parts of the program, identifying it at the start makes possible close monitoring of this particular sequence of events to ensure that the total program is on schedule. When more than 200 to 300 events are involved, it is virtually impossible to handle the calculation without a computer.

Strength and Weaknesses of PERT There are five important advantages of PERT. 1. It forces managers to plan, because it is impossible to make a time event analysis without planning and seeing how the pieces fit together. 2. It forces planning all the way down the line, because each subordinate manager must plan the event for which he or she is responsible. 3. It concentrates attention on critical elements that may need correction. 4. It makes possible a kind of forward looking control; a delay will affect succeeding events and possibly the whole project if manager doesnt take appropriate action. 5. The network system with its subsystems enables managers to aim reports and pressure for action at the right spot and level in the organization structure at the right time.
Limitations of PERT 1. This technique is not useful when a program is nebulous and no reasonable guess-time of schedule can be made. 2. Major disadvantage of PERT is, it emphasis on time only, and not on cost. While this focus is suitable for programs in which time is of the essence or in which, as so often is the case, time and costs have a close, direct relationship. The tool is more useful when considerations other than time are introduced into the analysis.

Information Technology

Communication and the Management Information System (MIS) are the linkage that makes managing possible. At the outset one has to realize the distinction between data and information. Data are the row facts that may not be very useful until they become information, that is, they are processed and become meaningful and understandable by the receiver. Information technology encompasses a variety of technologies including various kinds of hardware, software, telecommunication, database management and others (like 3G or 4G). Information technology has prompted the development of the Management Information System (MIS).

 It is defined here as a formal system of gathering,

integrating, comparing, analyzing and dispersing information internal and external to the enterprise in a timely, effective and efficient manner to support managers in performing their jobs. MIS has to be tailored to specific needs and may include routine information, such as monthly reports; information that points out exceptions, especially at critical points and information necessary to predict the future. The computer can, with proper programming, process data toward logical conclusions, classify them, and make them readily available for a managers use. The data do not become information until they are processed into a usable form that informs.

 Expansion of Basic Data

Traditional accounting information, aimed at the calculation of profits, has been of limited value for control. Yet in many companies this has been virtually the only regularly collected and analyzed type of data. Managers need all kinds of non-accounting information about the external environment, such as social, economic, political and technical developments. In addition, managers need non-accounting information on internal operation. The information should be qualitative and quantitative. Information Indigestion and Intelligence Services Information indigestion means manager being buried under printouts, reports, projections and forecasts that they do not have time to read or cannot understand or which do not fill their particular needs. On attempt at solving the problem of information overload is the establishment of intelligence services and the development of a new profession of intelligence experts.

Management information system

It is designed to supply information required

for effective management of an organization. quality of the decision is will largely depends upon the nature and type of information provided for taking the decisions. Therefore, MIS is vital to supply information required for effective management of an organization.

Objective of MIS
To make the desired information available

information in the right form to the right person and at the right time. To supply the required information at a reasonable cost. To use the most efficient method of processing data. To keep the information up-to-date

Function of MIS
Data collection
The manner of data collection will depend upon the purpose

for which data is collected. After collection of data, irrelevant data should be filtered out and the relevant data should be properly classified and tabulated so that it can be used easily when needed. Processing operations, Storage of data Retrieval of data Evaluation Dissemination providing the required data in the right form at right time

Data management

Decision support system

According to Laudon and Laudon, a decision

support system is a computer system at the management level of an organization that combines data, sophisticated analytical tools and user-friendly software to support semistructured and unstructured decision making

 DSSs use computer to facilitates the decision

making process of semi structured tasks. These system are designed to make the decision making process more effective. It gives managers an important tool for decision making under their own control Features of DSSs Support to decision makers Semi structured decisions Great scope than MIS Sharp focus

Objective of DSSs
To support the management judgment rather

than replace it. To assist manager in making decision to solve semi structured problems. Application of DSSs Corporate planning and forecasting. Evaluating investments Pricing decision under various conditions Dispatching and routing transport