Steps in budgetary control:

1) Organisation for budgeting

The setting up of a definite plan of organisation is the first step to be taken prior to
beginning the real work of installing budgetary control. The responsibility of each
executive must be clearly defined. There should be no uncertainty regarding the
point where the jurisdiction of one executive ends and that of another begins.

2) Budget manual
The budget manual is a written document or booklet which specifies the
objectives of the budgeting organisation and procedures. The chartered institute of
management accountants, London defines it as “a document which sets out, the
responsibilities of the persons engaged in, the routine of, and the forms and
records required for, budgetary control.” Following are some important matters
covered in a budget manual:
1) A statement regarding the objectives of the organisation and how they can
be achieved through budgetary control.
2) A statement regarding the functions and responsibilities of each executive
by designation both regarding preparation and execution of budgets.
3) Procedures to be followed for obtaining the necessary approval of budgets.
The authority of granting approval should be stated in explicit terms.
Whether one, two or more signatures are to be required on each document
should also be clearly stated.
4) Time-tables for all stages of budgeting.
5) Reports, statements, forms and other records to be maintained.
6) The accounts classification to be employed. It is necessary that the
framework within which the costs, revenues and other financial accounts
are classified must be identical both in the accounts and the budget
departments.
There are many advantages attached to the use of budget manual. It is a formal
record defining the functions and responsibilities of each executive. The
methods and procedures of budgetary control are standardised. There is
synchronisation. There is synchronisation of the efforts of all which results in
maximisation of the profits of the organisation.

3) Responsibility for budgeting

1) Budget controller- the chief executive is ultimately responsible for the
budget programme but it will be better if the large part of the supervisory
responsibility is delegated as budget controller or director. The budget
controller or director should have knowledge of the technical side of the
business and should report directly to the president.
2) Budget committee- the budget controller will be assisted in his work by the
budget committee. The budget committee will consist of heads of the various
departments such as production, sales, finance etc. with budget controller as
its chairman. It will be the duty of the department will have his own sub-
committee with executives working under him as its members.
 3) Fixation of the budget period-“budget period” means the period for which a
budget is prepared and employed. The budget period will depend upon (i) the
nature of the business and (ii) the costing techniques to be applied .for
example, in case of continuous or mass production industries it is necessary to
compare continuously the actual with budgets, and , therefore ,the budget
period should be short one. Similar is the case of a garment manufacturer as
his business depends on the vagaries of taste and fashion. But in case of a
structural or heavy engineering works, a longer budget period will be suitable.

4) Budget procedure
After the establishment of budget organisation and fixation of the budget period the
actual work of budgetary control begins. The procedure followed in designing and
operating a budgetary control system largely depends upon the nature of the business.
However, the usual pattern is as follows:
1) Determination of key factor – key factor is that factor the extent of whose
influence must first be assessed in order to ensure that functional budgets are
reasonably capable of fulfilment. This is also termed as ‘principal budget’ or
‘limiting’ or ‘governing’ factor. It is essential to consider this factor before
preparing the budgets. In some concerns the key factor may be sales; while
governs the whole process of materials, labour, machinery or capital. This
most important factor which governs the whole process of preparation of
budgets should be predetermined. The budget relating to this particular
factor should be prepared first and other budgets should be base upon it. Co-
ordinated plans should be finally approved.
The following is a list of principal budget factors, which can be one or more in any
organisation:

Internal

(a) Materials 1) Non-availability of supply in terms of quality

2) Non-availability of supply in terms of
quantity due to restrictions imposed by licences,
quotas, prolonged strike by transporters, import
restrictions etc.

(b) Labour 1) Non-availability of skilled labour

2) Problem of high labour turnover
3) Non-availability of labouring required
quantity.

(c) Plant capacity 1) Constrains of finance

2) Constrains of space

(d) Sales 1) Low demand due to tough competition.

2) Shortage of trained sales personnel.
External
General business conditions, government policy, fiscal measures, change in
fashions and buying behaviour of consumers, purchasing power of
consumers etc.
The key factors shall be correctly identified and diagnosed.
These factors are not of a permanent nature and they can be overcome by the
management in the long run if an effort is made in this direction by selecting
optimum level of production, dealing in more profitable products,
introducing new methods, changing material mix etc.

DIFFERENCE BETWEEN FORECAST AND BUDGET

FORECAST BUDGET

1) Mere estimate- Forecast is a mere 1) Planned event- Budget shows the

estimate of what is likely to happen. It
is a statement of probable events which
are likely to happen under anticipated
conditions during a specified period of
time.
policy and programme to be
followed in a future period under
planned conditions.

2) No sense of control - Forecasts, 2) Tool of control- A budget is a tool

being statements of future events, does
not denote any sense of control.
of control since it represents
actions which can be shaped
according to will so that it can be
suited to the conditions which may
or may not happen.

3) Preliminary step- Forecasting is a 3) Later step- It begins when

preliminary step for budgeting. It ends forecasting ends. Forecasts are
with the forecast of likely events. converted into budgets.

4) Wider scope- Forecasts can be made

in those spheres also where budgets 4) Limited scope- Budgets can be
can’t interfare. made of only that phenomenon
which are capable of being
expressed quantitatively.
Types of budgets:

1) Capacity- As per capacity, the budgets may be fixed budgets and flexible
budgets.
2) Conditions- As per conditions, budgets may be classified as basic budgets and
current budgets. The budget remaining unaffected by length of time is a basic
budget; while a budget relating to current conditions and established for use
over a shot span of time is termed as current budget.
3) Period- According to periodicity, the budgets can be prepared for long-term
and short-term periods. if the period of preparation is one year or less, the
budget is a short-term budget; whereas if the period is more than one year, the
budget is a long-term one. Both have their respective utilities and sphere of
operation.
4) Coverage- According to coverage, the budgets can be functional budgets and
master budget. Business policy for a defined period is represented by the
master budget. Details of master budget are contained in a number of budgets
relating to individual functions in an organisation. The same are called
functional budgets. These can be further grouped as under:
a) Physical budgets- Budgets containing targets of production, sales,
materials, labour etc in terms of physical units are known as physical
budgets.
b) Cash budgets- Budgets comprising information about the cost e.g.
material cost, labour cost, overhead cost-manufacturing, office, selling
etc are cost budgets. Material and labour budgets can be both in terms
of physical units and costs.
c) Profit budgets- Budgets enabling profit ascertainment can be
designated as profit budget. Sales budget, profit and loss budget are
examples of such budgets.
d) Financial budgets- Budgets which direct the financial position are
financial budgets such as cash budget, capital expenditure budget and
budgeted balance sheet.
 FIXED BUDGET
1) Rigidity- It is inflexible and remains
the same irrespective of the volume
of business activity.
2) Static conditions- It assumes that
conditions would remain same.
3) Cost classification- Costs are not
classified according to fixed,
variable, semi-variable.
4) False comparisons- Actual and
budgeted performances can’t be
correctly compared if the volume of
output differs.
5) Forecasting difficult- Accurate
forecasting of results is difficult.
6) Unrealistic expectation- All
conditions will remain unaltered is an
unrealistic expectation on the part of
management.
7) Cost non-ascertainable- Cost cannot
be ascertained if there is a change in
the circumstances.
FLEXIBLE BUDGET
1) Adaptability-It can be suitably
recast quickly to suit changed
conditions.
2) Dynamic conditions- It is
designed to change according to
a change in the level of activity.
3) Behavioural classification of
costs- Costs are classified
according to the nature of the
variability.
4) Realistic comparisons-
Comparisons are realistic since
the changed plan figures are
placed against actual ones.
5) Easy forecasting- Flexible
budget clearly shows the impact
of various expenses on the
operational aspect of the
business.
6) Several fixed budgets- Under
flexible budgeting series of fixed
budgets are prepared for different
levels of activity.
7) Cost ascertainment possible-
Costs can easily be ascertained at
different levels of activity. The
task of fixing prices becomes
smooth.