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).
- Abhijit Pandit. (2016). Budgets and Budgetary Control Journal of Business Management & Social Sciences Research, No. 6, p. 193-199.
- Callahan Carolyn M. & Waymire Tammy R. (2007). An Examination of the Effects of Budgetary Control on Performance: Evidence from the Cities AAA 2008 MAS Meeting Paper, p. 1-42.
- Frow N., Marginson D. & Ogden S. (2010). “Continuous” budgeting: Reconciling budget flexibility with budgetary control Accounting, Organizations and Society, 35(4), 444-461.
- Özer Gökhan & Yilmaz Emine. (2011). Effects of Procedural Justice Perception, Budgetary Control Effectiveness and Ethical Work Climate on Propensity to Create Budgetary Slack Business and Economics Research Journal, No. 4, p. 1-18.
Author: Paulina Pietroń