Budget and Budgetary Control:
Meaning of a Budget
A budget is the financial or/and quantitative expression of the business strategies and policies that will be implemented over the coming years. The term budgeting is used for preparing budgets and other procedures for planning, coordination and control of the business enterprise.
Budgetary control is the process of determining various budgeted figures for the enterprises for the future and then comparing the budgeted figures with the actual performance for calculating variances, if any.
Objectives of Budgetary Control
Planning and managing policies require effective budgetary control. It also serves as a tool for coordination. The following are the primary goals of budgetary control:
- To secure future planning by creating diverse budgets. The enterprise’s needs and predicted performance are anticipated.
- Coordinate the activities of different departments.
- To efficiently and economically run a variety of cost centres and departments.
- Elimination of waste and increase in profitability.
- To anticipate capital expenditures for the future.
- To centralize the control system.
- Correction of deviations from the established standards.
- Determination of each person’s specific area of duty within the company.
Characteristics of Good Budgeting
- A good budgeting system should involve people at different levels while preparing the budgets. There shouldn’t be a sense of imposing anything on the subordinates.
- There should be a proper fixation on authority and responsibility. Authority should only be delegated in a suitable manner.
- Realistic goals should be set for the budget because people won’t be motivated to work towards them if they are too challenging to reach.
- A good system of accounting is also essential to make budgeting successful.
- The budgeting system should have the wholehearted support of the top management.
- The employees should be imparted budgeting education. There should be meeting and discussions and the targets should be explained to the employees concerned.
- Introduce a suitable reporting mechanism, and promptly disclose the actual outcomes to enable performance evaluation.
Requisites for a Successful Budgetary Control System
- Clarifying Objectives
- Proper Delegation of Authority and Responsibility
- Proper Communication System
- Budget Education
- Participation of all employees
Advantages of Budgetary Control
- Maximization of Profit
- Specific Aims
- Tool and Measuring Performance
- Determining Weaknesses
- Corrective Action
- Reduces Costs
- Introduction of Incentive Schemes.
Limitations of Budgetary Control
- Uncertain future
- Budgetary Revisions Required
- Discourages Efficient Persons
- Problem of Co-ordination
- Conflict among Different Departments
- Depends upon the Support of Top Management.
Classification and Types of Budget
- Classification According to Time
- Classification on the Basis of Functions
- Classification on the Basis of Flexibility.
Classification According to Time
- Long-Term Budgets: The budget is prepared to depict long terms planning of the business. Long-term budgets typically have a lifespan of five to ten years. The top-level management does the long-term planning; it is not generally known to lower levels of management. For various areas of concern, such as capital spending, research, and development, long-term financing, etc., long-term budgets are prepared. These budgets are beneficial for those businesses, such as machinery, power, engineering, etc., where the gestation period is lengthy.
- Short-term Budgets: These budgets are generally for one or two years and are in monetary terms. Short-term budgets are used by the consumer products industry, including sugar, cotton, textiles, etc.
- Current Budgets: The period of current budgets is generally months and weeks. These budgets relate to the everyday activities of the business.
Classification on the Basis of Functions
- Operating Budgets: These budgets are related to the many business operations and activities. The quantity of these budgets varies according to the size and kind of the company. The commonly used operating budgets are
A company’s operating budget may be created in terms of programmes or responsibility areas, and as a result, may include:
i) Programme Budget, and
ii) Responsibility Budget.
- Programme Budget: It consists of anticipated sales and expenses for numerous projects or items that are referred to as the company’s primary programmes. A budget of this kind can be created for each project or product, detailing revenues, expenses, and the relative profitability of the different programmes. Thus, programme budgets are helpful in identifying areas where efforts may be necessary to cut expenses and boost income. They are helpful in identifying programming imbalances and deficiencies so that future corrective action can be performed.
- Responsibility Budget: The term “responsibility budget” refers to a firm’s operating budget that is built around responsibility areas. Such a budget shows the plan in terms of the persons responsible for achieving them. The management employs it as a management tool to assess the effectiveness of executives in charge of various cost centres. Their performance is compared to the goals (budgets) that were established for them, and the appropriate steps are made for unfavourable outcomes, if any. The size, nature, and organisational structure of corporate activities all affect the types of responsibility zones. However, there are three general categories into which responsibility zones might be divided:
- Cost/Expenses Centre.
- Profit Centre.