Chap 5 - Budgetary Control

8/13/2019 Chap 5 - Budgetary Control

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Budgetary Control


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IntroductionFor the effective running of the business, managementmust know:

Organisational ObjectivePlansCoordinationControl

Budgetary control is the device that a company uses for allthis purpose


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Budget!" plan e#pressed in money $t is prepared and approved

prior to the budget period and show income, e#penditureand the capital to be employed %ay be drawn up showingthe incremental effects on the former budgeted or actualfigures, or to be complied by &ero Base Budgeting '


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Budget and budgetary controlBudget

A budget is a plan which relates to adefinite period of time and which isexpressed in quantitative termsBudget is a tool in the hands of the

management which serves as a guideto all the employees in achieving theirgoals, objectives and target.


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Budgetary control is a means of controlin which the actual state affairs iscompared with the budget so thatappropriate action may be taken withregard to any deviation before it is toolate.

Budgetary control is concerned withplanning, co-ordination, communicationand control.


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Revision Of Budgets

Budgets are revised from time to time in order to checkdiscrepancies, if any(enerally, two procedures are followed for revising budgets:

Procedures that provide for a systematic updating of budgetsProcedures that allow revisions under specialcircumstances

" major aspect of the administration of budgets is the revisionof budgets, when not revising will significantly affect the

budget resultsBudgets are also revised when they become unrealistic


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Budgetary Control!Budgetary control is the establishment of budgets, relating theresponsibilities of e#ecutives to the re)uirements of a policy, andthe continuous comparison of actual with budgeted results, eitherto secure by individual action the objective of that policy or to

provide a basis for its revision !Budget is the *means+ and Budgetary Control is the *end result+Budgetary Controller


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Objective of Budgetary System-o plan the activities for the attainment of the goalsand enables to foresee the problems in advance

. -o co/ordinate the activities of the business so as tosecure integrated efforts

0 -o control each activity by comparing with thestandards


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Preliminaries required for the introduction

of Budgetary Control" clearly defined organi1ation defining responsibilitycenters

.2tating of polices and ade)uate accounting records to bechecked

0 Preparation of budget by the Budget Committee3 4efined organi1ation chart5 Preparation of the Budget %anual6 Fi#ation of the Budget Period7 4etermination of 8ey Factors


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Importance of Budgetary ControlPresentation of overall managerial view

. 9arrows down the gap between planning and performance0 Promotes division of work and speciali1ation3 Provides performance criteria budgeted performance is

generally a better criterion than the past performance5 Fosters coordination and integration

6 $t assist in obtaining credit from financial institutions7 ;ocate the inefficient area or persons in the business


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Importance of Budgetary Control

7 Provides a valuable means of controlling income ande#penditure of a business as it is a plan for spending

< "uthority can be delegated and hence responsibility can befi#ed

= "ctual results can be compared with the budgets so thatcorrective actions can be taken

> 4evelops an attitude of cost consciousness


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Limitations$t is a difficult task when business conditions andgovernment regulations are dynamic?stimates can go inaccurate due to personal judgmentsof the person formulating them-he cost of the system should compensate for the

benefits derived from it

4emands active interest from all the levels


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lassification of Budget!. "ime #actor

$ong-shot-current Budgets

!. #unctions!. sales-production-purchase-administration-

labour-%&'-cash-capital expenditure.

(. #lexibility!. #ixed or flexible


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!pense CenterBudgetary control refers to evaluating the e#penditure plan?#pense centers are responsibility centers for which input or

e#penses are measured in monetary terms, but for which outputsare not measured in monetary terms-here are two general types:

?ngineered e#pense center and4iscretionary e#pense center


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ngineered Cost " Budgetary Control-hese are the elements of cost for which the *right+ amount ofcosts can be estimated with a reasonable degree of reliability

$ndicates the cost of performing the operative budget4esigned to measure efficiency?g $n a manufacturing company the cost of direct raw materialand labour where input can be measured in monetary terms and

output in physical terms


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#iscretionary Cost " Budgetary Control

-he output of discretionary e#penses center cannot be measured inmonetary terms -hey include administration and support unitsresearch and development organi1ation and most marketing

activities4iscretionary cost budgets are not used to assess efficiency

because performance standards for discretionary e#penses aredifficult to devise

?g @A4 activitiesBudgetary control is ensured by the magnitude of the job thatshould be doneBudgeted incremental basis or on &BB basis


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Committed CostCommitted costs refers to the costs associated with establishingand maintaining the readiness to conduct business

For e#ample, the costs associated with the purchase of a franchiseor a patent, depreciation, key personnel salaries-hese costs are mainly fi#ed in terms of cost behavior and e#pireto become e#penses in the form of amorti1ation and depreciation

Budgetary control measured by its ability to add to readiness toconduct business


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$ero%Base Budgeting $BBOriginated in =63

"s the name signifies, starts with the premise that the budget for the ne#t period is !1ero', unless the demandfor a function, process, project or activity is justified foreach rupee

2tart each budget period afresh/not based on historicaldata


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$ero Base Budgeting

$t means that each activity is )uestioned as if it were new beforeany resources are allocated to it

?ach plan of action has to be justified in terms of total costinvolved and total benefit to accrue, with no reference to pastactivities

&BB are designed to prevent budgets creeping up each year withinflation


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)teps involved 9o previous year performance of inefficiencies are to be takenas adjustments in subse)uent year $dentification of activities in decision packages

4etermination of budgeting objectives to be attained?#tent to which 1ero base budgeting is to be applied?valuation of current and proposed e#penditure and placing themin order of priority"ssignment of task and allotment of sources on the basis of cost

benefit comparison@eview process of each activity e#amined afresh

eight/age should be given for alternative course if actions


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&dvantages of $BB

Forces budget setters to e#amine every item"llocation of resources linked to results and needs

4evelops a )uestioning attitudeastage and budget slack should be eliminated

Prevents creeping budgets based on previous year+s figures withan added on percentage

?ncourages managers to look for alternatives


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Limitations of $BB

$t a comple# time consuming process2hort term benefits may be emphasi1ed to the

detriment of long term planning"ffected by internal politics / can result in annualconflicts over budget allocation


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'han( )ou

Chap 5 - Budgetary Control

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