Budgetary Control Definition

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Budgetary Control - Budget Meaning Type - Budgeting - Management Accounting - BBA - apoiospcombr.webcindario.com - MBA

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Budgetary control is a continuous process which can help the business in planning and coordinating its activities. There are many objectives of a budgetary control function within a business. These objectives are listed below. First and foremost, the objective of budgetary control is to plan for the future of the business. Budgets act as a tool for forecasting the future of the business and preparing for any contingencies.

Budgets help remind the management of a business regarding the goals of a business. Therefore, it allows any plans made for the future of the business to be in line with the overall objective or mission of the business. Every department or function within a business operates under a budget. It allows managers of different departments within a business to come together and formulate a plan for the future of the business.

This allows the managers to make budgets for their respective departments that focus on achieving the overall goal of the business and avoiding budgetary slack. Once a budget is established, the goal of budgetary control becomes to control the performance of the business according to the budget. A business can plan its activities but without a robust control system, it cannot realize those plans. As discussed above, managers of different departments help in the preparation of budgets for their departments. The responsibility for the control of the performance of each department is delegated to its respective manager. The purpose of controlling is to identify any deviations from the plan on time.

Once any deviations are identified, these are communicated through the proper channels and promptly fixed. Furthermore, controlling the actual performance of a department may also identify any weaknesses within the budget of the business. In the absence of continuous monitoring and control, the budget of business will never realize. Another objective of budgetary control is to coordinate different departments and activities within a business. Businesses do not have infinite resources and are forced to work with limited resources. It is the objective of a budget to coordinate the use of these resources to ensure maximum efficiency is achieved. Through maximum efficiency, budgets also ensure that the profits of the business and, ultimately, the wealth of owners is maximized.

In the absence of a budget, many conflicts can arise within different departments of a business with regards to resource allocation. Therefore, budgets are made to ensure that not only are resources fairly allocated between different departments but also to ascertain that these conflicts are kept to a minimum. When allocating resources, while the needs of individual departments are considered, the goals are the business as a whole are prioritized.

Similarly, an objective of budgetary control is to promote communication within a business. Without proper communication within a business, a budget cannot be implemented. A good communication system within a business can also help with controlling and coordinating the activities of a business. Once a budget is prepared, it is communicated to the employees of the business. This can help each employee understand their role within the business and the budget. Similarly, the objective of budgetary control is to also establish a communication channel and define communication lines within a business.

Effective communication through the right channel and line can help a business run its processes smoothly and efficiently. This is because every employee within the business understands how and to whom they can communicate any issues related to the budgetary process of a business. One of the objectives of budgetary control is to motivate the employees of a business. However, for budgets to be motivational, they must be realistic. Unrealistic budgets can hurt the motivation of employees.

Generally, budgets should be specific, measurable, achievable, relevant and time-based. This ensures that employees get standards that they perceive to be realistic, thus, increasing their motivation. For managers, being involved in the budget-making process of a business is also motivational. When managers get to set their departmental budgets, they can use their knowledge to set goals for themselves that are challenging.

Managers can use budgets as targets to aim for. Similarly, budgets also allow businesses to reward employees and managers for achieving what is expected of them in the budget. This can motivate them even further in the pursuit of achieving their targets. As discussed above, managers of every department within a business contribute to the budget-making process of a business. Similarly, these managers are also responsible for the control of the actual performance of their departments against the budget.

Since the role of a manager is to not only set a budget for their department but also control it, budgets can be used as a performance evaluation tool to appraise the performance of the managers. This performance appraisal is based on how well a manager of a department achieved their budget. Higher-level management can use budgets to determine whether the targets that the departmental managers set for themselves were realistic.

Similarly, budgets can also be used to determine whether the departmental managers were successful in controlling the actual performance of their department against the prepared budget. To ensure an effective budgetary control process, the process must go through 5 essential steps. Each step depends on the proper completion of the previous step. The 5 steps of a budgetary control process are as below. The first step in a budgetary control process is establishing the current position of a business. This can be done through inspection of historical information of the business. This information is obtained from the management accounting reports of a business. This will include identifying the historical incomes and expenses of a business. This information can also be obtained from previous budgets of the business.

Similarly, once the historical information is obtained, the information is thoroughly checked and studied. This allows the business to understand how the business has performed in the past and adjust the budget for any expected changes. Information is also categorized according to its nature for easier comparisons in the future. Based on this information, the business can prepare its budgets. The process of making a budget may include tweaking the previous budget for expected changes such as inflation. The second step in the budgetary control process is to compare the actual performance of the business with the budget made in step 1.

As mentioned above, if the information is properly categorized in the previous step, it should allow for easier comparisons with actual performance. The actual performance of a business is compared with the budget to identify any variances or deviations from the plan. This process is also known as Variance Analysis. In step 2, all the variances between actual performance and budget are identified.

In this step, any variances found during the comparison are quantified. Only through good coordination and budget management will management be able to use the budget as a tool. In addition to the above three main objectives , the following are some of the objectives of budgetary control:. The responsibilities and duties of the staff and officers under budgetary control are specified and they are given the appropriate authority to perform the duties and responsibilities in order to achieve the set targets by formulating the budget.

In the budgetary control system, the standards of performance are set and the responsibilities of each staff, executive, and department are specified and they are supervised and monitored. As a result, every employee and executive officer tries to increase their work efficiency by performing their duties properly. The Institute of Cost and Works account of England and Wales outlines the following objectives of budgetary control:. The importance of budgetary control in management is immense. Budgetary control not only organizes the overall control system of the organization but also serves as the basis for planning.

It also plays an important role in coordinating within the organization by establishing links between the planning and control systems of different departments of the organization. The budgetary control system helps to lay the foundation for the financial planning of the organization. The programs adopted in the current financial plan are based on the information obtained from the methods adopted in the past. Budgetary control increases the overall efficiency of the organization and reduces waste through various criteria and the division of responsibilities and duties among employees and officials.

In the budgetary control system, the overall budget is prepared through the formulation of various functional departmental budgets. In the budgetary control system, authority is delegated along with the distribution of various responsibilities and duties among the employees and officials. As a result, it is possible to perform duties and responsibilities properly through full use of authority or power. In the budgetary control system, different work-based budgets are formulated for each department. Criteria are also set for the objectives of each budget. Deviations are made by comparing the actual work with the criteria and remedial action is taken.

As a result, overall control of the organization is possible under budgetary control. Increasing management efficiency and effective control in the budgetary control system results in minimizing expenditure, waste, and losses. In order to successfully implement a budgetary control system in an organization, some essential elements or prerequisites need to be considered. These essential elements or prerequisites are discussed below:. In order to successfully implement and introduce a budget control system in any organization, the top management has to take initiative first. Achieving other objectives including maximizing the profits of the organization requires the initiative of senior officials for formulating sound and practical plans, formulating budgets, comparing actual results with budgets, taking remedial measures, etc.

In order to make the budgetary control system successful, it is necessary to set realistic objectives and goals. If the objectives and goals are not realistic, it is not acceptable to the staff and officials. As a result, it is not possible to implement it. In order to introduce a budgetary control system, each department of the organization is considered a responsibility center. The responsibilities of the production department, sales department, purchasing department, investment department, accounting department, administration department, etc.