Budget and Budgetary control
UNIT – IV
Q1. What is Budget and Budgetary
control?
Ans: Budget: A budget is the monetary
or/and quantitative expression of business plans and policies to be pursued in
the future period of time. The term budgeting is used for preparing budgets and
other procedures for planning, co-ordination and control of business
enterprise. According to ICMA, “A budget is a financial and/or quantitative
statement prepared prior to defined period of time, of the policy to be pursued
during that period for the purpose of attaining a given objective.” In the
words of Crown and Howard, “A budget is a pre-determined statement of
management policy during a given period which provides a standard for
comparison with the results actually achieved.”
Budgetary control: Budgetary control is the
process of determining various budgeted figures for the enterprises for the
future period and then comparing the budgeted figures with the actual
performance for calculating variances, if any. First of all budgets are
prepared and then actual results are recorded. The comparison of budgeted and
actual figures will enable the management to find out discrepancies and take
remedial measures at a proper time. The Budgetary control is a continuous
process which helps in planning and co-ordination. A budget is a means and
budgetary control is the end-result.
According to Brown and Howard,
“Budgetary control is a system of controlling costs which includes the
preparation of budgets, co-coordinating the department and establishing
responsibilities, comparing actual performance with the budgeted and acting
upon results to achieve maximum profitability.” Wheldon characterizes budgetary
control as ‘planning in advance of the various functions of a business so that
the business as a whole is controlled.’
Q2. What are the objectives of budgetary
control?
Ans: Budgetary control is essential for policy
planning and control. It also acts as an instrument of coordination. The main
objectives of budgetary control are as follows:
1. To ensure planning for future by
setting up various budgets. The requirements and expected performance of the
enterprise are anticipated.
2. To co-ordinate the activities of
different departments.
3. To operate various cost centers and
departments with efficiency and economy.
4. Elimination of wastes and increase in
profitability.
5. To anticipate capital expenditures
for future.
6. To centralize the control system.
7. Correction of deviations from the
established standards.
8. Fixation of responsibility of various
individuals in the organization.
Q3. What are the advantages and
disadvantages of Budgetary control?
Ans: Advantages of Budgetary control
The budgetary control system helps in
fixing the goals for the organization as a whole and concerted efforts are made
for its achievements. Some of the advantages of budgetary control are:
1. Maximization of profit: The budgetary
control aims at maximization of profits of the enterprise. To achieve this aim,
a proper planning and co-ordination of different function is undertaken. There
is a proper control over various capital and revenue expenditures. The
resources are put to the best possible use.
2. Co-ordination: The working of
different departments and sectors is properly co-ordinated. 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.
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.
5. Determining weakness: The deviations
in budgeted and actual performance will enable the determination of weak
sports. Efforts are concentrated on those aspects where performance is less
than the stipulated.
6. 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.
7. Consciousness: 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.
8. Introduction of incentive scheme:
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.
Following are the disadvantages of budgetary control:
1. Uncertain Future: The budgets are
prepared for the future period. Despites best estimates made for the future,
the predictions may not always come true. The future is always uncertain and
the situation which is presumed to prevail in future may change.
2. Budgetary revisions required: Budgets
are prepared on the assumptions that certain conditions will prevail. Because
of future uncertainties, assumed conditions may not prevail necessitating the
revision of budgetary targets. The frequent revision of targets will reduce the
value of budgets and revisions involve huge expenditures too.
3. Correlation and co-ordination of
various budgets is expensive: Maintaining correlation and co-ordination among
the various budgets is an expensive matter which may not be possible to afford
by small firms. Hence, the system may not be employed by small firms.
4. Conflict among different departments:
Budgetary control may lead to conflicts among functional departments. Every
departmental head worries for his department goals without thinking of business
goal. Every department tries to get maximum allocations of funds and this
raises a conflict among different departments.
5. Depends upon support of top
management: Budgetary control system depends upon the support of top
management. The management should be enthusiastic for the success of this
system and should give full support for it. If at any time there is a lack of
support from top management then this system will collapse.
Q4. Write short notes on:
1. Performance budgeting: The
performance budget is a budget based on functions, activities and projects
which focus attention on the accomplishment, the general and relative
importance of the work to be done and the service to be rendered rather than
upon the means of accomplishments such as personnel, service, supplies,
equipment etc. Under this system, the functions of various organizational units
would be split into programmes of activities, sub-programmes and component
schemes, etc. and estimates would be presented for each.
Performance budgeting involves:
a. Development of performance criteria
for various programmes;
b. Assessment of performance of each
programme and by each responsibility unit;
c. Comparison of the actual performance
with the budget;
d. Undertaking periodic review of the
programme with a view to make modifications as required.
2. Production Budget: A production budget is a forecast of the total output of an organization. Production budget is prepared for the number of units to be produced and also for the cost to be incurred on materials, labor and factory overheads. Two important considerations are involved in the preparation of production budget:
What is to be produced?
When
is it to be prepared?
The preparation of production budget
involves the following stages:
a. Production planning: A proper
production planning schedule is essential for preparing production budget. The
number of physical units to be produced is determined. Production planning will
ensure a smooth production schedule.
b. Consideration of plant capacity: The
number of units of different products to be produced should be determined and
the capacity which the plant will be able to work throughout the budgeted
period should be decided.
c. Stock quantity to be held: The
quantity of finished goods to be carried forward should be decided. This
quantity will depend upon a number of factors like sales potential, storage
facilities available and cost of the stock.
d. Considering sales budget: The
production budget is fixed with reference to sales budget. The sales budget
will provide a guideline for production planning. If both budgets are not
co-ordinated then there may arise problems of either selling the whole stock or
of producing it. In case the sales are not undertaken as per schedule then
production should be reduced or vice-versa.
3. Zero-base budgeting: Zero base budgeting is the latest technique of budgeting and it has an increased use as a managerial tool. In zero base budgeting every year is taken as a new year and previous year is not taken as a base. The budget for this year will have to be justified according to present situation. Zero is taken as a base and likely future activities are decided according to the present situations.
Process or steps involved in zero base
budgeting:
a. The objective of budgeting should be
determined. When the objective is clear, than efforts will be made to achieve
that objective.
b. The extent to which zero base
budgeting is to be applied should be decided. Whether it should be used for all
operational areas or it should be applied in some areas only should be decided
beforehand.
c. The next step in zero base budgeting
is developing of decision packages. A decision package is a document that
identifies a specific activity in such a manner that management can evaluate
and rank it against other activities competing for limited resources, and
decide whether to approve or disapprove it.
d. Cost and benefits analysis should be
undertaken. We should consider the cost involved and the likely benefits to
accrue.
e. The final step involved in zero base
budgeting is concerned with selecting, approving decision packages and
finalizing the budgets.
4. Cash budget: A cash budget is an
estimate of cash receipts and disbursements during a future period of time. It
proceeds various other budgets like materials budgets and research and
development budget. “The cash budget is an analysis of flow of cash in a
business over a future, short or long period of time. It is a forecast of
expected cash intake and outlet”.
The cash receipts from various sources
are anticipated. The estimated cash collections for sales, debts, bills
receivables, interests, dividends and other incomes and sale of investments and
other assets will be taken into account. The amounts to be spent on purchase of
materials, payment to creditors and meeting various other revenue and capital
expenditure needs should be considered. Cash forecasts will include all
possible sources from which cash will be received and the channels in which
payments are to be made so that a consolidated cash position is determined.
