Budget and budgetary control pdf
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Budgetary control is the process of determining various actual results with budgeted figures for the enterprise for the future period and standards set then comparing the budgeted figures with the actual performance for calculating variances, if any. First of all, budgets are prepared and then actual results are recorded. The comparison of budgeted and actual figures will enable the management to find out discrepancies and take remedial measures at a proper time. The budgetary control is a continuous process which helps in planning and co-ordination. It provides a method of control too.
Budgeting and Budgetary Control
Forecasting precedes preparation of a budget as it is an important part of the budgeting process. It is said that the budgetary process is more a test of forecasting skill than anything else. A budget is both a mechanism for profit planning and technique of operating cost control. In order to establish a budget it is essential to forecast various important variables like sales, selling prices, availability of materials, prices of materials, wage rates etc.
Difference between Forecast and BudgetBoth budgets and forecasts refer to the anticipated actions and events. But still there are wide differences between budgets and forecasts as given below: Forecasts 1 Forecasts is mainly concerned with anticipated or probable events 2 Forecasts may cover for longer period or years 3 Forecast is only a tentative estimate 4 Forecast results in planning 5 The function of forecast ends with the forecast of likely events 6 Forecast usually covers a specific business function 7 Forecasting does not act as a tool of controlling measurement.
Budgets 1 Budget is related to planned events 2 Budget is planned or prepared for a shorter period 3 Budget is a target fixed for a periOd. Accordingly, there cannot be budgetary control without budgets. Budgetary Control is a system which uses budgets as a means of planning and controlling. According to I. England Budgetary control is defined by Terminology as the establishment of budgets relating to the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with the budgeted results, either to secure by individual actions the objectives of that policy or to provide a basis for its revision.
Brown and Howard defines budgetary control is "a system of controlling costs which includes the preparation of budgets, co-ordinating the department and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability. Objectives of Budgetary ControlBudgetary Control is planned to assist the management for policy formulation, planning, controlling and co-ordinating the general objectives of budgetary control and can be stated in the following ways: 1 Planning: A budget is a plan of action.
Budgeting ensures a detailed plan of action for a business over a period of time. Control follows planning and co-ordination. No control performance is possible without predetermined standards. Thus, budgetary control makes control possible by continuous measures against predetermined targets. If there is any variation between the budgeted performance and the actual performance, the same is subject to analysis and corrective action.
Scope and Techniques of Standard Costing and Budgetary ControlScope: 1 Budgets are prepared for different functions of business such as production, sales etc. Actual results are compared with the budgets and control is exercised. Standards on the other hand are complied by classifying, recording and allocation of the expenses to cost units. Actual costs are compared with standard costs.
Each operation or process is divided into number of elements and standards are set for each such element. Standard costing is concerned with the requirements of each element of cost.
Technique: 1 Budgetary control is exercised by putting budgets and actuals side by side. Variances are not normally revealed in the accounts.
Standard costing variances are revealed through accounts. Standard costing is not put into operation in parts. Requisites for Effective Budgetary ControlThe following are the requisites for effective budgetary control : 1 Clear cut objectives and goals should be well defined.
It should also specify the time table for budget preparation for approval, details about responsibility, cost centers etc. Organization for Budgetary ControlIn order to introduce budgetary control system, the following are essential to be considered for a sound and efficient organization. The important aspects to be considered are : 1 Organisation Chart: For the purpose of effective budgetary control, it is imperative on the part of each entity to have definite "plan of organization.
The organization chart explaining clearly the position of each executive's authority and responsibility of the firm. All the functional heads are entrusted with the responsibility of ensuring proper implementation of their respective departmental budgets.
An organization chart for budgetary control is given showing clearly the type of budgets to be prepared by the functional heads. From the above chart we can observe that the chairman of the company is the overall in charge of the functions of the Budgeted Committee. A Budget Officer is the convener of the budget committee, who helps in co-ordination. He does not prepare the budget himself, but facilitates and co-ordinates the budgeting activity. He assists the individual departmental heads and the budget committee, and ensures that their decisions are communicated to the appropriate people.
The main objectives of this committee is to agree on all departmental budgets, normal standard hours and allocations. In small concerns, the Budget Officer may co-ordinate the work for preparation and implementation of budgets.
In large-scale concern a budget committee is setup for preparation of budgets and execution of budgetary control. It also specifies the time table for budget preparation to approval, details about responsibility, cost centers, constitution and organization of budget committee, duties and responsibilities of budget officer.
The budget period is the length of time for which a budget is prepared and employed. The period may depend upon the type of budget. There is no specific period as such. However, for the sake of convenience, the budget period may be fixed depending upon the following factors: 4 Limited sales due to insufficient sales promotion. Advantages of Budgetary ControlThe advantages of budgetary control may be summarized as follows : 1 It facilitates reduction of cost.
Limitations of Budgetary ControlBudgetary Control is an effective tool for management control. However, it has certain important limitations which are identified below: 1 The budget plan is based on estimates and forecasting. Forecasting cannot be considered to be an exact science.
If the budget plans are made on the basis of inaccurate forecasts then the budget progamme may not be accurate and ineffective. Lack of co-operation leads to inefficient performance. It is mere like a management tool.
Types of BudgetsAs budgets serve different purposes, different types of budgets have been developed. The following are the different classification of budgets developed on the basis of time, functions, and flexibility or capacity. A Classification on the basis of Time: 1. Long 1. Long-Term Budgets: Long-term budgets are prepared for a longer period varies between five to ten years. It is usually developed by the top level management. These budgets summarise the general plan of operations and its expected consequences.
Long-Term Budgets are prepared for important activities like composition of its capital expenditure, new product development and research, long-term finance etc.
Short-Term Budgets: These budgets are usually prepared for a period of one year. Sometimes they may be prepared for shorter period as for quarterly or half yearly. The scope of budgeting activity may vary considerably among different organization. Current Budgets: Current budgets are prepared for the current operations of the business. The planning period of a budget generally in months or weeks.
As per ICMA London, "Current budget is a budget which is established for use over a short period of time and related to current conditions. The ICMA England defines a Master Budget as the summary budget incorporating its functional budgets, which is finally approved, adopted and employed. C Classification on the Basis of Capacity 1.
Fixed Budget: A fixed budget is designed to remain unchanged irrespective of the level of activity actually attained. Flexible Budget: A flexible budget is a budget which is designed to change in accordance with the various level of activity actually attained. The flexible budget also called as Variable Budget or Sliding Scale Budget, takes both fixed, variable and semi fixed manufacturing costs into account. Control RatiosRatios are used by the management to determine whether performance of its activities is going on as per estimates or not.
The following are the ratios generally calculated for performance evaluation. Illustration: 1A company produces two articles A and B.
Each unit takes 4 hours for A and 10 hours for B as production time respectively. The budgeted production for April, is units of A and units for B. The actual production at the end of the months was units of A and units of B. Actual hours spent on this production was Also find out the Calendar Ratio if the actual working days during the month be 28 corresponding to 26 days in the budget. In a month 27 effective days of 8 hours a day.
The company employ 25 workers in the production department. The budgeted hours are 60, for the year. Solution:Standard Hours for Actual Production x x A Manufacturing company submits the following figures: Perfonnance of Budget has been defined as a "budget based on functions, activities and projects. Sales estimate is the commencement of budgeting may be made in quantitative terms. Sales budget is primarily concerned with forecasting of what products will be sold in what quantities and at what prices during the budget period.
Budget and Budgetary Control
Everything you need to know about objectives of budgetary control. The management of an organisation is primarily concerned with the realization of organisational objectives. In its efforts to achieve these objectives, it has to manage the enterprise efficiently by optimising the use of resources and eliminating or minimising the wastes, if any. Budgetary control is one of the important techniques which help the management in controlling business activities in a desired direction. A budget is a numerical statement expressing the plans, policies and goals for a definite future period. Budgeting means the process of preparing budgets. Budgetary control is a system of controlling costs which includes the preparation of budgets, co-ordination the departments and establishing responsibilities, comparing actual performance with the budgeted; and acting upon results to achieve maximum profitability.
Profit-planning or budgeting is a systematic approach for attaining effective management performance. A budget is a comprehensive and coordinated plan expressed in financial terms, for the operations and resources of an enterprise, for some specific period in future. To communicate expectations to all concerned. To help in making detailed plans. To provide a basis for measuring and controlling activities. Establish budget centers and form a committee. Prepare budget manual budget manual is procedures to be followed and forms to be used.
Show all documents Analysis of Revenue Budgets and Budgetary Control Policy The budgeting program should contain reasonable flexibility if the situation so demands. However, it should be noted that too much flexibility and too much tightness are both undesirable. Too much flexibility will weaken the cost control and the budget will become inoperative. If conditions have changed making the estimates and budgets inaccurate, the budgets should be revised, a budget is simply a tool to serve managements needs and not an irrevocable contract. Following the Griffiths report a number of pilot hospitals attempted to introduce management budgeting , but, despite a huge amount of spending on IT systems and associated staff costs, the experiment was widely regarded as a failure Preston et al. Cash Management Practices and the Financial Performance of Private Universities in Kenya On the basis of the findings and conclusions of the objectives of the study, the study recommend that the university management formulate guidelines that should be adopted in the cash budgeting process and all departments be involved as this will enhance budgetary control and the allocated cash used as planned and further ensure that all expenditures incurred are explained and justified.
Findings indicated that budget and budgetary control could serve as an avenue through which hospitality firms in Nigeria can be evaluated.
Objectives of Budgetary Control
Budgetary Control is a means of control in which the actual results are compared with the budgeted results so that appropriate action may be taken about any deviations between the two. Budgetary control is a system of controlling cost which includes preparation of Budgets coordinating the departments and establishing responsibilities comparing performance with budgeted and acting upon results to achieve the maximum profitable. There should be enough scope of flexible individual initiative and drive. Budgetary control is an important device for making the organization an important tool for controlling costs and achieving the overall objectives.
The budget is a vital part of planning and control and it represents as significant mechanism for performance evaluation. The budget is a document designed to assess income and expenditure over a time period usually the previous year and altered to accommodate any predictable variations. In universal terms, a budget is an assessment of the income and expenses over a specified future period of time. Concept of budget: According to CIMA, London, budget is described as financial and quantitative statement prepared and approved prior to defined period of time, of the policy to be pursued during that period for the purpose of accomplishing a given objective. It may include income, expenditure and employment of capital.