define ‘budget’ and ‘budgetary control’. give a description of two important budgets.
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Budget and Budgetary Control
Learn about the objectives of budgeting and budgetary control, why they are important to organizations, and how they work in practice. Read on!
Budget and Budgetary Control
Written by True Tamplin, BSc, CEPF®
Reviewed by Editorial Team
Updated on March 08, 2023
Modern business is marked by instability and uncertainty. Due to competition, government policies, new regulations, new production techniques, and changing consumer behavior, businesses must adapt to survive.
Due to these issues, all organizations have started to use budgetary techniques. The technique of budgetary control is used to compare actual expenditures and budgeted expenditures, as well as to analyze and correct variations.
Budget and Budgetary Control: Definitions
A budget is a financial plan for a corporation that covers a specific future period. It is an expression of income and expenditures over a certain period. Budgets are plans that cover all functional areas of a business for a specific future period.
A budget is a system that is related to plan and control. Therefore, budgets also include budgetary control.
In a nutshell, a budget is concerned with policy framing whereas control is the budgetary implementation of the policy.
In a narrow sense, budgetary control is a cost control technique wherein actual cost is compared to budgeted cost, and thus is aimed at profit.
The main definitions of the budget are summarized as follows:Brown and Howard: "The budget is a predetermined statement of management policy during a given period which provides a standard for comparison with the results actually achieved."George R. Terry: "A budget is an estimate of future needs arranged according to an orderly basis covering some or all the activities of an enterprise for a definite period of time."Harry L. Wyllie: "Budgets are finished products...They are formal programs of future operations and expected results. Budgets result from forward thinking and planning."Sanders: "The essence of a budget is a detailed plan of operations for some specific future period, followed by a system of records which serves as a check upon plan."H. J. Weldon: "A budget is thus a standard with which to measure the actual achievement of people, departments, etc."Hemass C. Heiser: "A budget is an overall blueprint of a comprehensive plan of operations and actions expressed in financial terms."
Budgetary control does not merely involve the matching of estimated expenses to actual expenses. In addition, it involves placing responsibility for failures.
The periodic checking up of income, costs, and expenses related to the administration of the budget is known as budgetary control.
Objectives, Importance, and Functions of Budgetary Control
The main objectives of budgetary control are as follows:1. Production efficiency. Budgetary control is a technique marked by advanced planning for the effective use of materials. Thus, it leads to smooth production chains.2. Success of costing records. Budgetary control improves the utility of cost accounts, which provides knowledge about future costs. Hence, cost variations can be minimized.3. Future planning. Every producer plans a definite output for a specific period for which it is possible to use budgets to estimate the required amount of finance, materials, labor, and other expenditures.4. Cost control. Budgetary control is useful for cost control because the production process rotates around predetermined targets. Here, actual costs are compared to budgeted costs, and any variations are corrected by the management.5. Helpful in policy framing. Budgeting provides a tool through which basic policies are periodically examined, restated, and established as guidelines for the entire organization.6. Budgets are solutions to basic problems. Budgeting obliges management to make an early study of its basic problems. It is useful in making rational decisions.7. Control on income and expenditure. In modern times budgeting is used to direct capital and energy into the most profitable channels. Every producer classifies expenditures, and fixed expenses and variable expenses are useful to learn the break-even points for output and sales.8. Knowledge of required capital. Budgetary control provides information about the amount of capital required for the smooth running of the organization.9. Knowledge of potential for expansion. Every business leader aims to expand their business. Budgetary control provides helpful information about how much extra capital, labor, and risk will be needed for expansion efforts.10. Administrative usefulness. Budgetary control is the eye of the managerial staff. No other form of management control reveals weaknesses in an organization as quickly as the orderly procedure needed for systematic budgeting.11. Helpful to the nation. When proper budgeting is undertaken in nearly every enterprise, it can bolster the national economy by providing stable employment, economical use of tools, and effective prevention of waste.
Budget and Budgetary Control FAQs
Budgetary control helps to direct capital and energy into the most profitable channels by classifying expenditure and fixed expenses and variable expenses. This allows businesses to learn the break-even points for output and sales.
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Chapter 4 - Budgetary control
Structure of the chapter
Budgetary control methods
Management action and cost control
Zero base budgeting (ZBB)
There are two types of control, namely budgetary and financial. This chapter concentrates on budgetary control only. This is because financial control was covered in detail in chapters one and two. Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) 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".
This chapter is intended to provide:
· An indication and explanation of the importance of budgetary control in marketing as a key marketing control technique
· An overview of the advantages and disadvantages of budgeting
· An introduction to the methods for preparing budgets
· An appreciation of the uses of budgets.
Structure of the chapter
Of all business activities, budgeting is one of the most important and, therefore, requires detailed attention. The chapter looks at the concept of responsibility centres, and the advantages and disadvantages of budgetary control. It then goes on to look at the detail of budget construction and the use to which budgets can be put. Like all management tools, the chapter highlights the need for detailed information, if the technique is to be used to its fullest advantage.
Budgetary control methods
· A formal statement of the financial resources set aside for carrying out specific activities in a given period of time.
· It helps to co-ordinate the activities of the organisation.
An example would be an advertising budget or sales force budget.b) Budgetary control:
· A control technique whereby actual results are compared with budgets.
· Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.Budgetary control and responsibility centres;
These enable managers to monitor organisational functions.A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit.
There are four types of responsibility centres:
Organisational units in which outputs are measured in monetary terms but are not directly compared to input costs.
Units where inputs are measured in monetary terms but outputs are not.
Where performance is measured by the difference between revenues (outputs) and expenditure (inputs). Inter-departmental sales are often made using "transfer prices".
Where outputs are compared with the assets employed in producing them, i.e. ROI.Advantages of budgeting and budgetary control
There are a number of advantages to budgeting and budgetary control:
· Compels 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 (ideally) each manager, to anticipate and give the organisation 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 (variance analysis). 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
Whilst 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.Characteristics of a budget
A good budget is characterised by the following:
Budgeting and Budgetary control.pdf
View Budgeting and Budgetary control.pdf from ACCOUNTING PM at Assoc. of Chartered Certified Accountants. Budgeting and Budgetary controlBudget is a plan quantified in monetary terms prepared and appr
Budgeting and Budgetary control.pdf
1 Budgeting and Budgetary control Budget is a plan quantified in monetary terms prepared and approved prior to a defined period of time usually showing planned income to be generated and /or expenditure to be incurred during that period and the capital to be employed to attain a given objective. it can formally be defined as a quantitative statement for a defined period of time which include planned revenues, expenses, assets, liabilities and cash flows. A budget provides a focus for the organization, aids the co-ordination of activities and facilitates control. Planning is achieved by means of a fixed master budget, whereas control is generally exercised through the comparison of actual costs with a flexible budget. It is a short term tactical planning usually prepared to cover a period of one year for the functions, actions and departments of an organization thus, converting the long term corporate plan into action. In general plans are developed using physical values, for example, the number of units to be produced, the number of hours to be worked, the amount of materials to be consumed and so on. When monetary values are attached, the plan becomes a budget. Benefits/Functions of Budgeting Budgeting provides positive and significant benefits and they are as shown below: 1. Co-ordination: Budgeting process provides for the co-ordination of the activities, departments and functions of the organization so that each aspect of the operation contributes to the overall plan. This is expressed in the form of Master budget which summarizes all the supporting budgets. 2. Planning: Budget helps to highlight the plan of the organization in the next one year i.e. what the organisation aims to achieve. 3. Clarification of authority and responsibility: The process of budgeting, particularly for the control aspects, makes it necessary for the organization to be organized into responsibility or budget centres with clear statements of the responsibilities of each manager who has a budget. This is where a subordinate is given a clearly defined role with the requisite authority and resources to carry out that part of the overall plans assigned to him and if activities do not proceed according to plan, the variations are reported to a higher authority. 4. Communication: The full budgetary process involves liaison and discussion between all levels of management. It is an important, formal avenue of communication between top and lower levels of management regarding the organization’s long term objectives and the practical problems of implementing those objectives. 5. Control: Budget serves as a control mechanism whereby the actual result is compared with the budget to identify variances. 6. Motivation and goal congruence: A well organised budgeting system which encourages the genuine participation and involvement of operating management in the preparation of budgets and the establishment of agreed performance levels has been found to have a motivating effect. The success of a budgeting system should be judged by the extent to which it encourages goal congruence by the budget holders. 7. Performance evaluation: A manager’s performance is often judged partly by his ability to meet budgets. When considering a manager for promotion or for a salary increase or for other form of recognition, a manager’s budget record and his ability to meet the targets incorporated in the budgets is often an important factor. 8. Management by exception: Budget usually identifies areas that are not conforming to plans thereby directing the attention of management to those areas. Principal Budget Factor The principal budget factor (or limiting factor or key factor) is a factor which at any given time, is an overriding planning limitation on the activities of the organization. The principal budget factor may be production capacity, shortage of labour, materials, finance or, commonly, the level of demand for the goods or services. Because such a constraint will have a pervasive effect on all operational plans and budgets, the limiting factor for the planning period must be identified so that the various budgets can be developed having regard to the expected limitations. Limitations of Budget No matter how good a budget is, it must have its limitations especially if it is not properly implemented. The following are the possible limitations of a budget: 1) No budgeting system can replace the need for supervisory executive ability in major decisions.
2 2) Volatile environment i.e. frequent changes in the level of technology. 3) It places a great demand on management time. 4) It can encourage inter-departmental conflict. 5) It may take away management flexibility. 6) Persistent increase in the level of inflation is also a limitation as it may render a budget unattainable. 7) It may involve considerable costs. 8) Lack of adequate and realistic data for proper budgeting. Preparation of Budget The overall budget of an organization is usually prepared by a budget committee. Budget Committee: This is a committee set by management. They meet at regular intervals and would be serviced by a budget officer, usually the accountant. The function of the budget officer is to administer the budget when agreed and to provide technical assistance and data during the budget preparation. The membership of budget committee varies between organisations but usually comprises people from various functions of the company. The committee’s task is to co-ordinate and review the budget programs, establish procedures and time tables, produce and update a budget manual explaining objectives, role and procedures involved in the budgetary system. Simply put, they see to the administration of the whole budget process. However, it is not the committee’s task to prepare individual budgets for particular departments or functions. The duties of the committee can further be highlighted as follows: a) Issues guidelines on the preparation of budget. b) Issues time lines regarding preparation and submission of budget by departments. c) Receives budget from departments and consider them in relation to the objective of the organization. d) To arrange the defence of budget. e) Suggests and consider the review of the budget. f) Prepares budget manual. g) Publish the agreed budget. h) Developing solutions to problems revealed by budgetary control. Budgeting Process The following are the possible steps usually adopted in the preparation of budget. 1. A budget committee issues guidelines on the preparation of budget. This guideline usually contains the planned policy programmes of the organization in the next one year. It also include the dead line on the submission and defence of the budget. 2. Based on the guidelines, the departments, divisions or units prepare the budget estimate. 3. The budgets are forwarded to the budget committee. 4. The budget committee scrutinizes and modify the budget to be in line with the guidelines and policy of the organization in the next one year. 5. Defence of budget where the various departments or units are made to appear before the management to defend the various aspect of the budget. 6. The budget is forwarded to the chief executive or the chairman of the board of director for approval. 7. The chairman approves the budget and return it to the various departments or units for implementation. 8. Full implementation of the budget by the divisions and departments then commence 9. Monitoring of budget performance by the budget committee 10. Report to management on key variances. Budget manual Budget manual is a document which contains instruction/information about the way budgeting operates in a particular organization and the reason for having budgeting. It is a document which improves communication and it is produced so that everyone in the organization can refer to it for guidance and information about the budgetary process. It does not contain the actual budget of the organisation for the period. Budgetary Control Budgetary control is an example of management by exception where attention is directed to few items, which are not progressing according to plan. The aim of budgetary control is to provide a formal basis for monitoring the progress of
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