Accounting-Budgetary Control Systems

Introduction

For successful implementation of a budgetary control system, certain conditions must be fulfilled, including:

a statement of goals and objectives; creating budget centres; developing accounting controls; communication; coordination; and budget administration.

Statement of goals and objectives

All resources have an economic cost and are also scarce. As a result, the organization has to give some thought to prioritizingthe allocation of resources. The organization should be very clear in describing the long-term objectives of the organization,which in turn decide these priorities. A clear statement of goalsand objectives provides direction and motivation to individuals and groups in channelling their efforts towards a common goal. Itis important that the short-term objectives are realistic and should consider all variables, such as availability of faculty, research staff, administrative support, etc. Whenever there is a change' in these variables, they must be incorporated into the plans and budgets.

Creating budget centres

One objective of preparing the budget is to see that goals are achieved in a coordinated and efficient manner. To accomplish this, the organization has to create a sound structure by defining in clear terms the authority and responsibility of each departmental head. The activity and performance of each head is evaluated in terms of assigned authority and responsibility. The organization could use several criteria to define a budget centre, including:

a designated departmental head is responsible for attaining results in relation to the operations within that centre;

the outputs by way of services and inputs required are clearly defined; or

each budget centre is distinct from one another.

For instance, NIFR could create the following budget centres:

Research programme Training and consultancy services Library Computer centre Central stores Maintenance and estate

Telephone and despatch Extension, including Publications

Departmental heads should be asked to submit a budget for their activities planned during the coming year. While creating such responsibility, each department or budget centre could be treatedas a cost centre. Cost centres are responsibility centres, for which inputs or costs are measured in terms of monetary units, but for which outputs are not measured in monetary terms. The basic objective of creating such cost centres is to control the activities of the organization.

It would be useful to understand the nature of costs. Costs are of two types: engineered costs and discretionary costs. Engineered costs include items for which estimates can be obtained with a reasonable degree of reliability. For example, cost associated with the use of fertilizers is an example of engineered cost. On the other hand, discretionary costs are thosefor which estimates cannot be arrived at. They generally depend upon management's judgment.

Each departmental head should be responsible for costs or expenses incurred by his or her department. Cost information is important in planning and control. Performance should be evaluated by comparing actual costs with budgeted costs, and is called analysis of variance. This technique is discussed in the next section.

It is very important that management educates staff regarding responsibility centres, the usefulness of the budgetary control system, and the role it plays in achieving objectives. The involvement and cooperation of the employees is sought and developed through the education process.

Developing accounting controls

The recording of transactions should not be just for the purpose of preparing financial statements but should be so developed thatsignificant information for planning and control is produced simultaneously. Accounting controls are an integral part of the budgetary control system. The controls ensure that transactions are implemented only by those authorized to do so by management. Records are maintained; they also describe the accountability of resources, a physical examination and count of organization resources to make it sure that accounts and records are correct, and access to resources is through documented management authority. The effectiveness of a budgetary control system depends on timely availability and supply of information, and good accounting controls ensure this availability.

Development of accounting controls will revolve closely around creating responsibility accounting centres. The system should produce an accounting report for each centre and the data should be useful in the planning and control process.

Communication

It goes without saying that there should be top management support in making the budgetary control system successful. Top management should not only educate all involved concerning the usefulness of the system, but also communicate the goals, objectives, means of implementing the budget, and responsibilities of each departmental head. The success of the budgetary control system depends very much on the kind of information which forms the input to the whole process. Management should take care that it creates an atmosphere which leads to a flow of correct and relevant information. The people involved in the process should be encouraged to discuss and draw attention to all facts relevant to the given situation.

One problem which management faces is the accuracy of informationsupplied by various departments. This problem relates to the needto assess accurately the predictability of future outcomes. This problem is implicit in all planning systems, and can be minimizedby emphasizing a reasonable degree of accuracy in prediction. Another problem is related to the kind of interdepartmental conflicts which may arise during the budgeting process. These conflicts generally originate in resource allocation. Through effective communication, the organization can resolve some resource allocation conflicts. The follow-up procedure -to ensurethat there is effective implementation of the budget - is also a part of communication.

Coordination

The development of a budgetary control system is an activity which requires coordinated efforts from different departments andat various levels. To ensure that staff become involved and participate in a useful and meaningful manner, all efforts need to be coordinated. Since different departments are involved, conflicts are likely to arise. The organization should develop mechanisms to resolve such conflicts without affecting the basic objectives. Management must also ensure that people actively

participate in the budgeting process. It is only through active participation that staff feel committed, motivated and encouragedto work towards the common goals and objectives.

Budget administration

The complexities involved in preparing the budget and implementing the budgetary control system are many. Management has to put in an effort to ensure that the basic objectives of budgeting are achieved. As discussed earlier, a joint effort on the part of all departmental heads is required in preparing the budget. Management must provide an opportunity to all members to participate in deciding goals and objectives, setting priorities,developing future action plans and formulating general and specific policies. To achieve this, the organization needs to develop some formal mechanisms. One mechanism is to constitute a Budget or Planning and Policy Committee. Management can delegate the task of budget administration to this committee. Budget administration should include setting of priorities, preparing the budgets and follow up. All budget centre heads should be members of this committee. Management should also appoint one coordinator to the committee. The major functions of this committee would be to:

provide general guidelines for preparing the budget and offer technical advice;

receive and review budgets from each budget centre, suggest changes, reconcile differences and resolve conflicts, if there are any;

coordinate all budgetary activities;

approve budgets; and

initiate follow-up action.

Through the budget committee system, management ensures that the heads of activities prepare budgets in a coordinated manner and that control mechanisms are effectively implemented. The budget committee should also ensure that there is no conflict among the different activity heads, and should resolve them if there are any.

The budget committee should draw a detailed time schedule for budget preparation, submission, discussion, modification and final approval. These schedules should be strictly adhered to; this will ensure that the budgetary control system is effectivelyimplemented. Sharing of information is an important activity of the budget committee system. Carefully designed formats for preparing the budget and reporting budget performance will highlight actual versus planned levels of activities. The budget committee should also decide about the frequency of submitting reports on actual performance; primarily this depends upon how critical is a particular activity.

The department or cost centre should be required to submit a detailed budget, indicating establishment expenses and other expenses (Figure 3). Establishment expenses would generally include salaries, wages and other staff-related costs. Each cost centre would indicate both plan and non-plan expenditure: non-plan expenditure is incurred on ongoing activities and programmesand is generally recurring, while plan expenditure is on new activities and programmes. Total plan expenditure is what is spent on capital and revenue items. Details of plan expenditure for new activities and programmes are discussed in the next session. Once departmental budgets are obtained, the information can be conformed and collated to provide the basis for the institute budget.

ALTERNATIVE CONDITIONS FOR EFFECTIVE CONTROL SYSTEM

A sound and clearly defined organization with managers’ responsibilities clearly defined

Effective accounting records and procedures that are clearly understood and applied

Support and commitment of top management for the system of budgetary control

Education/training of managers in the development, interpretation and use of budgets

Revision of budgets where amendments are needed to make them appropriate and useful Recognition that budgetary control is amanagement activity and not an accounting exercise

Participation of managers in the budgetary control system

An information system that provides data for managers so they can makerealistic predictions

Correct integration of budgets and their effective communication to managers

Setting of budgets that are reasonable and achievable

ALTERNATIVE

Budgetary Control is establishment of budgets and the continuous comparison of actual results with the planned results. It computes thevariances and after that management takes necessary actions to maintain favourable variations, through revision of the budgets.

Following are the requirements for the successful implementation of Budgetary Control:

-First a Budget Centre which is that section of the organisation for which the budget will be prepared should be clearly defined.

-Budget Period or the time period for which the budget will be

prepared and operated should be decided carefully. It should neither be too long nor too short.

-An efficient and proper system of accounting should be established sothat the information required for the proper implementation for the budgetary control can be available on time.

-A proper organisational chart should be prepared properly, clearly depicting the responsibilities and duties of each level of executive.

-A budget manual, an important document in relation to the budgetary control. It should be well written, indexed and divided into sections.It should include principles and objectives of budgetary control, duties and responsibilities of each executive in the organisation, accounts codes, budget diagrams, etc.

-A budget key factor should be assessed before preparing other functional budgets to ensure that other functional budgets are capableof fulfilment.

BUDGETARY CONTROL CONDITIONS

“There are certain steps, which are necessary for the successful implementation of budgetary control system. The proper organization is essential for preparation, maintenance and administration of budgets”

There are certain steps, which are necessary for the successful implementation of budgetary control system.

First of all, is organization for budgetary control. The proper organization is essential for preparation, maintenance and administration of budgets. A Budgetary Committee is formed, whichcomprises of the departmental heads of various departments. All the functional heads re entrusted with responsibility of ensuringproper implementation of their respective departmental budgets. The chief executive of the enterprise is the over all in charge.

Secondly, place in budgetary control system is of Budget center. This part of the organization may be a department, section of a department or another part of the department. Actually budget is being prepared only for this part of the e organization. The establishment of budget centers is required for covering all parts of the organization.

TERMINOLOGY

(a)

Responsibility Accounting

Responsibility Accounting may be defined as a system of control where a responsibility is assigned to different executives of a concern for control of cost or increase of revenue. It is one of the basic components of a good control system. In this system, an executive is held responsible only for those activities for which he/she has been delegated a responsibility.

(b)

A division of a business or business division (sometimes[1] called a business sector[2]) is one of the large parts into which a business organization or company is divided.[3] The divisions are distinct parts of that business. If these divisions are all part of the same company,then that company is legally responsible for all of the obligations and debts of the divisions. However in a large organisation, various parts of the business may be run by different subsidiaries, and a business division may include one or many subsidiaries. Each subsidiary is a separate legal entity owned by the primary business orby another subsidiary in the hierarchy. Often a division operates under a separate name and is the equivalent of a corporation or limited liability company obtaining a fictitious name or "doing

business as" certificate and operating a business under that fictitious name.

(c)

Business function

A process or operation that is performed routinely to carry out apart of the mission of an organization .

The functions of a business are the key specialisms that it is divided up into such as marketing, accounts, production, etc. In the past many businesses were divided up on functional lines and this is still the case today in many organisations where it makessense to create distinct departments in this way.Many manufacturing organisations are divided up on functional lines. Clearly the most important department in a manufacturing company is often the production department. In individual factories there may be a works or factory manager with overall responsibility for organising and

managing the production function.Then there may be production managers for each of the product lines e.g. biscuits, chocolates etc. However, in addition to the production function there will be other functional specialisms such as the advertising and sales department, the finance and accounts departments, the administration department, the personnel (or human resources) department etc.Organisations are organised on functional lines when it is felt that this is the best way of communicating and organising the organisation. Specialists are able to focus on their specialism under the supervision of specialist managers.

(d)

Profit CenterProfits are the excess of revenue over the total expenses. Therefore, the manager of a profit center is held accountable for the revenues,

costs, and profits of the center. A profit center is a responsibility center in which inputs are measured in terms of expenses and outputs are measured in terms of revenues.

(e)

Investment CenterThe manger of investment center is held accountable for the division'sprofit and the invested capital used by the center to generate its profits. Investment centers consider not only costs and

(f)

Cost CenterA cost center is an organizational sub-unit such as department or division, whose manager is held accountable for the costs incurred in that division. For example, a Power and Airco Department can can be defined as a cost center within the Operation and Maintenance Department in United Telecommunication Company. Manager of a cost center is responsible for controllable costs incurred in the department, but is not responsible for revenue, profit or investment in that center. A cost center is a responsibility center in which inputs, but not outputs are measured in monetary value.

(g)

Pure (or basic) research

Basic research is conducted to expand knowledge and understanding by either developing or testing theory. Its focus is knowledge for knowedge's sake. It is typically what we think of when we think of scientific research.

(h)

Applied Research

Applied research is research conducted to further the developmentof effective policies and programs. It collects and analyzes empirical data to provide knowledge that can be used to develop new policies and programs or evaluate existing ones.

Types of applied research.

Needs assessment.

Program evaluation and outcome assessment.

Client, patient, employee, and product satisfaction research.

Cost-benefit analysis.

Social impact assessment.

Action research.

Operations research and organizational analysis.

Market research and utilization studies.

Public opinion and political polling.

Quality assurance research.

(i)

Development

Development has been defined in various forms and ways by variousindividuals or bodies. Some of which are listed below:

1. The systematic use of scientific and technical knowledge to meet specific objectives or requirements.

2. An extension of the theoretical or practical aspects of a concept, design, discovery, or invention.

3. The process of economic and social transformation that is based on complex cultural and environmental factors and their interactions.

4. The process of adding improvements to a parcel of land, such as grading, subdivisions, drainage, access, roads, utilities.

(j)

Budget

A budget is plan for some specific future period. It is an estimate,expressed in monetary terms in advance. The terminology of CIMA defines a budget as, “a plan quantified in monetary terms prepared andapproved prior to a defined period of time usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective”.

(k)

Budgetary Control

Budgetary Control is establishment of budgets and the continuous comparison of actual results with the planned results. It computes thevariances and after that management takes necessary actions to maintain favourable variations, through revision of the budgets.

Question 2.

Research and research development

Question 4.

BUDGETARY CONTROL CONDITIONS

“There are certain steps, which are necessary for the successful implementation of budgetary control system. The proper organization is essential for preparation, maintenance and administration of budgets”

There are certain steps, which are necessary for the successful implementation of budgetary control system.

First is organization for budgetary control. The proper organization is essential for preparation, maintenance and administration of budgets. A Budgetary Committee is formed, whichcomprises of the departmental heads of various departments. All the functional heads re entrusted with responsibility of ensuringproper implementation of their respective departmental budgets. The chief executive of the enterprise is the over all in charge.

Second place in budgetary control system is of Budget center. This part of the organization may be a department, section of a department or another part of the department. Actually budget is being prepared only for this part of the e organization. The establishment of budget centers is required for covering all parts of the organization.

Third part of budgetary control system is Budget Manual. It is a document, which spells out the duties and also responsibilities of various executives concerned with the budget. It specifies relation amongst various functionaries.

Fourth part of budgetary control system is Budget Officer who is appointed by the chief executive. Budget Officer is empowered to scrutinize the budget prepared by different departments and to make change in them, if situations so demand. The actual performance of different departments is communicated to Budget Officer. He determines the deviations in the budget and the actual performance and takes necessary steps to rectify the deficiencies, if any.

Fifth part of budgetary control system is Budget Committee. In small-scale concerns the accountant is made responsible for the preparation and implementation of the budget. In large-scale concerns a committee known as Budget Committee is formed. The members of this committee are the heads of all departments of an organization. It is responsible for preparation and execution of budget.

Sixth part; Budget Period is another important part of budgetary control system. It is the length of time for which budget is prepared. This period depends upon the nature of budget i.e. sales budget, production budget, raw material purchase budget andthe economic situation of the country, the length of trade cycle and the nature of demand for the product. The budget is prepared for all functional areas.

Seventh part of budgetary control system is Determination of Key Factor. Budget formation is an inter-departmental and inter-related activity. A proper coordination is necessary amongst

different departments for the success of budgetary control system. A factor, which influences all other budgets, is known asprincipal factor or key factor.

ADVANTAGES OF BUDGETARY CONTROL

There are a number of advantages to budgeting and budgetary control:

Compels management to think about the future, which is probablythe most important feature of a budgetary planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction.

Promotes coordination and communication.

Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.

Provides a basis for performance appraisal (variance analysis).A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllablefactors.

Enables remedial action to be taken as variances emerge.

Motivates employees by participating in the setting of budgets.

Improves the allocation of scarce resources.

Economises management time by using the management by exceptionprinciple.

The Role of Budgeting in the Nonprofit Sector

Every nonprofit organization has a crucial mission and an important purpose in the community. But it may never be able to achieve its lofty objectives without a well-defined action plan, including timelines for implementation and a budget.

Some nonprofits ask why they need to have a budget. After all, if theyhave held a strategic planning retreat, they know what they want to achieve. They believe they are all set to move forward and they are unsure of the additional advantages of going through the process of developing a budget. Further, they may have some concerns over being constrained by the numbers and the formality of the process or fear ofbeing held accountable by the results of “actual” versus “budgeted” data.

Those groups that do not want to be accountable, that do not believe that working within the limitations of a formal budget; are the very groups that struggle to stay afloat, especially when times are tough. What they may not realize is that having a budget gives structure and substance to the organization’s plans. The budget makes a strong statement about the group’s intentions as it indicates what the nonprofit expects to tackle in the coming year, or years. As importantly, it provides a way to monitor progress. When an item is accounted for in the budget, it becomes a tangible representation of the organization’s goals and an acknowledgment that resources will be expended to support it. It demonstrates a proactive, thoughtful,

deliberate approach to critical decision-making instead of a less formalized process that is forced to react to every new idea without the benefit of having planned for the circumstance.

By going through the process of writing a budget, the organization will be faced with making some tough decisions. As a result of drafting the budget, the leadership will be expected to make educated assertions regarding the costs of its programming and services, especially recognizing the real limits that exist on staff and volunteer availability, special skills, and other necessary resources.The budget plays a key role, forcing the organization to prioritize its activities so as to determine those that are most critical for fulfilling its mission. In addition to deciding on how to spend their revenue, a budget provides the documentation that helps nonprofits choose the most efficient measures for raising money.

Without a budget there can be chaos because there is no other way to reasonably decide in advance which ideas or programs will be pursued and how much will be allocated to promote them.

Without a budget there is no way to determine if the financial benchmarks are being met.

Without a budget to follow, overspending or under spending is likely to occur with potential serious consequences.

The budget should not be written in isolation, but rather, it will be more effective if taken into consideration along with other planning tools and management information. Some nonprofits, much like for-profit entities, get so immersed in drafting the budget that they losesight of what the process is all about! Instead of seeing the budget as a financial instrument that can help to manage operations and predict income, they see it as a project to be completed, which, once finalized, can be stored in a drawer until year-end rolls around.

Nothing could be further from the truth. The budget is a constantly changing document, and one that must be referred to, and reflected on,regularly. It is a good approach to be as flexible as possible. Ratherthan abandon a sound budget plan when an unforeseen situation arises, the organization should instead be able to handle the change within the structure of the budget.

To be realistic it will have to be reviewed, and perhaps amended, as the situation requires. This year’s golf outing may not produce the targeted number of key sponsors as in the past, while the Gala attracts an unprecedented record crowd. Programs and services that drew few users/participants last year may become necessities in today’s tougher economy. Whatever the issue, the role the budget plays is to serve as a guideline - but one that requires fine tuning and flexibility along the way.

It is a good idea to always remain flexible. The one thing that is constant is change, and sometimes budgets must be changed when expectations are not met. Rather than abandon a sound budget plan, when an emergency or opportunity arises, an organization should be able to handle the change in an orderly fashion.

Additional Benefits of Budgetary Control are:

1.Helps you gain control over finances.Budgeting helps you to acquire control over indispensable and unnecessary expenditures whether they are at a huge business level or family levels. It is the most effective means of getting rid of debts.Budgeting helps you to adjust your expenses according to the needs andcircumstances.

2.Keeps you informed.Personal budgeting helps you to know the exact amount of money you possess. It is a self-education tool that keeps you informed about theallocation of your funds. A well made and kept budget helps you to continuously remind of your plans and your gap with your goals.

3.Improves financial communication.Budgeting helps to open communication between members of a family or partners in joint business when they sit together to discuss financial

issues through budgeting. Both for married couples and members of organizations, who share financial resources and allocations, budgeting helps to make decisions regarding areas where money has to be spent. All members thus gain control over finances.

4.Profitable tool.Accurate knowledge about personal monetary affairs provides so much control in your hands that, you can take advantage of those opportunities that you might have missed otherwise.

5.Helps you achieve definite objectivesA budget supports you in moving towards financial goals. The most important thing to be considered before any budgeting is the cause forcreating a budget. This will help you to make a focused effort towardsachieving your tasks. A few of these tasks include; buying a house or luxury car for yourself or opting for voluntary retirement when you feel the need of doing so.

Budgeting will help to organize your finances in such a way that you will readily have any information whenever and wherever it is desired.Make budgeting, a part of your life and keep financial worries at bay.