Budgetary control

From CEOpedia | Management online

Budgetary control is a method of company control in which actual results (incomes and spendings) are compared with planned values. The reason for planning is to predict future changes on the market, supply, demand, company performance, prices and optimize operation of the company to get the best results. The budgetary control system identifies whether plans are followed and where deviations can be found.

Budgetary control can be used in order to analyze formed periods (made after end of the period). If any deviations (positive or negative) occur, top management can modify strategy and define new planned values or new route to achieve them. In modern economy budgetary control after the period ends is not enough. Most of management information systems used today is able to show results live or 1-2 days later. That enables managers to act quickly, before major problems arise. That approach is also known as continuous budgeting.

Budgetary control includes all starting for the science of planning the budgets and utilisation of such budgets as an general management tool for the business planning and control.

Objectives of budgetary control are:

  • To Compel Planning - this is the most important feature of budgetary control, since direction is affected to look ahead, anticipate problems, set targets and give the organisation objective and course
  • To communicate ideas and plans to everyone affected by them - it is necessary, because everyone must knows what happen in company
  • To have an official system - to make sure that each person is conscious of what he is alleged to be doing
  • To Co-ordinate the Activities of different departments or sub-units of the organisation - this concept of co-ordination suggest for example, that the purchasing department should lean its budget on production needs and that the production budget should in turn be based on sales expectances
  • To Establish a System of Control - this is realised by having a plan against which real results can be progressively liken
  • To Motivate Employees - this is will provide to improve their performance (Pandit A. 2016, p. 193-194).

Adventages and Limitations of Budgetary Control

The advantages of a budgetary control system are as follows:

  • It defines the goals of the organisation as a full and within this general framework, it defines the results which each department should reach
  • It reveals the extent by which actual effect have crossed or fallen short of the budget
  • It indicates, with divergences or other measures of performance the reasons why actual effects differ from those budgeted and set up the value of the differences
  • As a result of reporting on actual realizations along with variances and other performance measures, it secures a basis for guiding manager action to correct disadvantageous trends
  • It provides a basis for the examination of the current budget or for the preparation of future budgets
  • It provides a system whereby the stocks of the company are used in the most efficient way passable
  • It indicates the efficiency with which the different activities of the system have been coordinate
  • It supplies some centralizing control where activities and amenabilities are decentralised
  • Where the activities of a company are surrender to seasonal variations, it provides a resources of stabilizing the systems activities
  • It sets up a basis for internal audit by means of regular test of departmental results
  • It enables norm costs to be used
  • It provides a fundamental for measuring productive productivity with a view to paying a bonus to employees

The mainly limitations of budgetary control are:

  • Valuations are used as a fundamental for the budget plan
  • A budgetary programme must be continually adapted to fit changing conditions
  • Execution of a budget plan does not come automatically, because all levels of the management must take part in the programme
  • No budgetary control system will eliminate the inevitability of having a management and administration, it does not take the sace of management, but is rather an instrument of the management (Pandit A. 2016, p. 194).

When we are decide on budgetary control we can estimated degree of budgetary control. Degree of budgetary control can be measured with a results oriented climb, meaning that divergences in expense, revenues and the net of profits and expenditures. Can serve as a measure of budgetary control and is compatible with the factors that are most influential in budgetary control. However, fixing whether the degree of budgetary control is efficient is more difficult to ascertain (Callahan Carolyn M. & Waymire Tammy R. 2007, p. 13).

Examples of Budgetary control

  • Using Variance Analysis: Variance analysis is a tool used in budget control. It is used to compare actual performance with budgeted performance. Companies compare their actual budget and performance with the budget plan to identify areas where performance is not meeting the goals. They can then take corrective measures to bring performance back on track.
  • Implementing Performance Targets: Performance targets are used by companies to measure progress against the budget. Performance targets are specific, measurable goals that serve as a benchmark for performance. They help companies track performance against their budget, measure how well they are meeting their goals, and identify areas where performance needs to be improved.
  • Monitoring Cash Flow: Companies use budget control to monitor their cash flow. They track their cash flow and compare it to their budget to ensure they are staying within their budget. Companies also use budget control to identify any unexpected costs and to adjust their budget accordingly.
  • Implementing Cost Control Measures: Companies use budget control to identify areas where costs can be reduced. They look for areas where costs can be reduced, such as production costs, overhead costs, and other expenses. Companies can then take steps to reduce costs and stay within their budget.
  • Creating and Managing Budgets: A company's budget is an essential part of budget control. Companies create and manage budgets to ensure they are staying within their budget and meeting their financial goals. Budgets are also used to identify areas where costs can be reduced and performance improved.

Advantages of Budgetary control

Budgetary control has many advantages, including:

  • Improved planning and decision making: Budgetary control enables businesses to plan their finances accurately and make effective decisions by taking into account the potential risks and opportunities that are likely to affect their operations.
  • Enhanced coordination: Budgetary control ensures that all departments in an organization work together in order to achieve the same objectives.
  • Improved efficiency: Budgetary control helps to identify areas of waste and inefficiency, allowing businesses to take corrective measures to improve their operations and reduce costs.
  • Increased accountability: Budgetary control helps to ensure that employees are held accountable for their performance and that any discrepancies are identified and addressed quickly.
  • Strengthened control: The budgeting process helps to provide a framework for monitoring and controlling expenses and ensuring that the business is being run in a cost-effective manner.

Other approaches related to Budgetary control

  • Introduction: Besides budgetary control there are several other approaches that help companies monitor their performance and optimize their operations.
  • Target costing: Target costing is a strategic approach to cost management, where companies set a target cost for a product and work backward to develop the product accordingly.
  • Kaizen costing: Kaizen costing is a cost reduction strategy that focuses on continuous improvement. It involves identifying areas of waste, inefficiencies, and other opportunities for cost savings, and implementing small changes over time to achieve greater savings.
  • Activity-based costing: Activity-based costing is a system that assigns costs to activities or processes in order to better understand the cost of producing products or services.
  • Performance budgeting: Performance budgeting is a budgeting process that focuses on the performance of programs or projects. It is used to evaluate the cost-effectiveness of programs and make decisions about resource allocations.
  • Zero-based budgeting: Zero-based budgeting is a budgeting process that requires managers to justify all spending. It starts from a "zero base," meaning all budgets must be justified each year and not just adjusted from the previous year's budget.

In summary, budgetary control is just one approach among many to help companies monitor their performance and optimize their operations. Other approaches include target costing, kaizen costing, activity-based costing, performance budgeting, and zero-based budgeting. Each approach has its own unique benefits and can be used to help the company achieve its goals.

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Author: Paulina Pietroń