budgetary control

Study Notes on Budgetary Control: Meaning, Advantages and Disadvantages

Meaning of Budgetary Control:

Management has in its armory a number of weapons which it uses according to its efficacy and necessity to control the business, particularly as a device for financial control. One of such weapons or tools—very effective as a controlling device — is the budgetary control so far as financial aspect is concerned.

A budget is a detailed plan of operations for some specified fu­ture period. In the words of Terry, budget is “an estimate of future needs arranged according to an orderly basis, covering some or all of the activities of an enterprise for a definite period of time” and bud­getary control is “a process of finding out what is being done and comparing actual result with the corresponding budget data in order to approve accomplishments or to remedy differences by either ad­justing the budget estimates or correcting the cause of differences.”

Budgetary control has been 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 provide a basis for its revision.”

Budgetary control involves the use of budgets and budgeting reports throughout the period to co­ordinate evaluate and control day-to-day operations in accordance with the goals specified in the budget. Budgets are prepared to con­trol operations so that established policies and objectives can be achieved. Budgeting serves to clarify the programme, measure effi­ciency and provide definite plans to interested parties.

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There are various types of budgets — Fixed, Variable, Revenue, Capital, Material, Cash, Labour, Sales, Production, Master budgets etc. to meet different objectives.

So, control through budgets should not be misconceived as a measure of control of financial matters only, but all types of budgets, in the real sense, control finance by eliminating the scope of wastage and securing efficiency through work according to plans.

Advantages of Budgetary Control:

Sound planning, effective co-ordination and dynamic control are not possible to the desirable extent without budgeting. A budget is a tool of planning as well as of control.

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A sound system of budgetary control ensures efficiency of an organisation in the following ways:

(i) Budgeting tends to make planning definite and coordinated:

A budget is more than a financial instrument and serves as a com­plete programme of business activities. A business with good budgetary control can anticipate and provide for contingencies rather than groping in the dark. Budgeting also helps in select­ing the most profitable course of action.

(ii) Budgetary control makes for unified action and co-ordination of individual efforts:

Budgeting is an excellent means of com­munication and motivation. It stimulates preventive action. Budgeting facilitates co-ordination by promoting team spirit. It makes possible the selection of the most desirable course of action.

(iii) Budgetary control helps management in delegating authority more freely over specified functions:

“Budgeting correlate planning and allow authority to be delegated without loss of control.” Budgeting improves organizational efficiency as ef­fective budgeting requires sound organization structure.

(iv) Budgets are the most important means of management control:

A budget serves as a yardstick with which performance of em­ployees can be evaluated and costs can be controlled. Budget­ing permits ‘control by exception’ thereby saving executive time and attention.

(v) Budgetary control promotes efficiency and minimizes waste:

Budgeting stimulates good management practices like proper planning, a sound organisation structure, adequate reporting system etc. It helps in the optimisation of resources.

(vi) Budgeting helps in fixing responsibility for results and in tak­ing corrective actions in time. The budget provides guideposts to efficient working.

In the words of Blocker:

“Budgetary control is planned to as­sist management in the allocation of responsibility and author­ity, to aid in making estimates and plans for the future, to assist in the analysis of the variations between estimated and actual results and to develop bases of measurement of standards with which to evaluate the efficiency of operation.”

Disadvantages of Budgetary Control:

(i) Since budgets are based on estimates, they cannot be cent per cent correct and accurate. They are as good as the data and forecasts on which they are based. Inflation and rapid changes in business-environment tend to distort budget data before they are put into operation.

(ii) An efficient system of budgeting can achieve little without ef­fective planning and control. Budget does not indicate the cor­rective action, neither is it a blueprint to be adhered to at all costs. A sound budget system requires effective supervision and administration.

(iii) People very often fail to adjust when required according to budget. Budgeting, therefore, entails danger of inflexibility. “The budget is not a straight—jacket but a measure of perfor­mance and a guide which should be adjusted to meet new situ­ations.”Budgeting is a nuisance rather than an aid to manage­ment where budgets are prepared mechanically without serious thought to the ways of improving operation.

(iv) Rigid adherence to budgets discourages initiative and creativi­ty. It may also lead to internal frictions and pressures.

(v) Budgeting is a time-consuming process and involves expenses. There is a tendency to go into excessive detail which restricts freedom of action.

(vi) Budgeting goals may lead people to supersede the enterprise goals. Budgets may be used to hide inefficiencies as past pre­cedents often become evidence for the present.

(vii) Success of budgeting depends on the motivation of people who are to install and use budgets. People cannot change their hab­its and attitudes overnight. To be effective, budgeting should be a gradual and co-operative exercise.

(viii) Too much should not be expected of budgetary control within a short period of time. Budgeting is not a cure to all nor is it a tool which provides rapid results when first installed.

(ix) it is opposed by all levels of management as it pin-points indi­vidual inefficiencies.

(x) It involves paper-work and technical persons always resent any paper-work.

(xi) It may take several years to attain a reasonably good budgetary programme.