BUDGETARY CONTROL NOTES
QUESTION: What are the advantages of Budgetary Control?
Budgetary control is the process by which budgets are prepared for the future period and are compared with the actual performance for finding out variances, if any. The comparison of budgeted figures with actual figures will help the management to find out variances and take corrective actions without any delay.
ACCORDING TO BROWN AND HOWARD
“Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.”
ACCORDING TO J BATTY
“Budgetary control is a system which uses budgets as a means of planning and controlling all aspects of producing and / or selling commodities or services.”
The exercise of Budgetary Control involves:
Establishment of budgets for each section or department of the organisation.
The measurement of actual performance.
The continuous comparison of actual performances with budgeted performances so as to determine the variances or deviations.
The ascertainment of reasons for such variance and taking suitable actions to remedy the defects in order to achieve the objective under the original policy or to provide a basis for its revision.
ADVANTAGES OF BUDGETARY CONTROL
The budgetary control system help in fixing the goals for the organization as whole and concerted efforts are made for its achievements. It enables economies in the enterprise.
Some of the advantages of budgetary control are:
1. MAXIMIZATION OF PROFITS
The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and co ordination of different functions is undertaken. There is a proper control over various capital and revenue expenditures. The resources are put to the best possible use.
The working of different departments and sectors is properly coordinated. The budgets of different departments have a bearing on one another. The co-ordination of various executives and subordinates is necessary for achieving budgeted targets.
3. SPECIFIC AIMS
The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal, of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving some specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.
4. TOOL FOR MEASURING PERFORMANCE
By providing targets to various departments, budgetary control provides a tool for measuring managerial performance. The budgeted targets are compared to actual results and deviations are determined. The performance of each department is reported to the top management. This system enables the introduction of management by exception.
The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.
6. DETERMINING WEAKNESSES
The deviations in budgeted and actual performance will enable the determination of weak spots. Efforts are concentrated on those aspects where performance is less than the stipulated.
7. CORRECTIVE ACTION
The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system the deviations can be determined only at the end of the financial period.
It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.
9. REDUCES COSTS
In the present day competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more.
10. INTRODUCTION OF INCENTIVE SCHEMES
Budgetary control system also enables the introduction of incentive schemes of remuneration. The comparison of budgeted and actual performance will enable the use of such schemes.
11. SHUTTING DOWN OF UNPROFITABLE PRODUCTS AND ACTIVITIES
Budgetary control reveals inefficiencies in products, processes and departments. This is helpful in closing down of loss making divisions to improve the overall profitability.