MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

8. BUDGETARY CONTROL
1. DEFINE THE TERM BUDGET.

Definition: Budget is a financial and /or quantitative statement, prepared and approved prior to a defined Period of time of the
policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital.

Feature :

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inancial and/or !uantitative "tatement. uturistic prepared and approved prior to a defined period of time. %oal &riented for the purpose of attaining a given objective. (omponents Income, )xpenditure and )mployment of (apital.

!. "HAT ARE THE OB#ECTI$E% OF BUDGETING&'ERFORMANCE BUDGETING( T)e o*+e,ti-e of Bu./etin/ are

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*o encourage selfstudy in all aspects of a (ompany+s operations. *o get all members of management to ,put their heads- to the basic question of ho. the business should be run, to ma/e them of a coordinated team operating in unison to.ards clearly defined objectives. *o promote the planning process and provide a sense of direction to every member of the organi0ation. *o force a definition and crystalli0ation of (ompany policies and aims. *o increase the effectiveness .ith .hich people and capital are employed. *o disclose areas of potential improvement in the (ompany3s operations. *o stimulate study of relationship of the (ompany to its external economic environment for improving the effectiveness of its direction. *o direct and coordinate business activities and units to achieve stated targets of performance. *o facilitate the control process, by comparing actual results .ith plan, and provide feedbac/ to the employees about their performance.

0. DEFINE THE TERM BUDGETARY CONTROL. "HAT ARE IT% %ALIENT FEATURE%( 1. Definition7 Budgetary (ontrol is defined as 8the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual .ith budgeted results either to secure by individual action the objective of that policy or to provide a base for its revision.

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%a1ient feature :

a. b. c. d. e.

O*+e,ti-e : 9etermining the objectives to be achieved, over the budget period, and the policy :ies; that might be adopted for the achievement of these ends. A,ti-itie : 9etermining the variety of activities that should be underta/en for achievement of the objectives. '1an : 9ra.ing up a plan or a scheme of operation in respect of each class of activity, in physical a .ell as monetary terms for the full budget period and its parts. 'erfor2an,e E-a1uation: <aying out a system of comparison of actual performance by each person section or department .ith the relevant budget and determination of causes for the discrepancies, if any. Contro1 A,tion: )nsuring that .hen the plans are not achieved, corrective action are ta/en= and .hen corrective actions are not possible, ensuring that the plans are revised and objective achieved

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MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

3. "HAT ARE THE OB#ECTI$E% OF BUDGETARY CONTROL %Y%TEM( T)e o*+e,ti-e of a Bu./etar4 Contro1 %4 te2 are

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Definition of Goa1 : Portraying .ith precision, the overall aims of the business and determining targets of performance for each section or department of the business. Definin/ Re 5on i*i1itie : <aying do.n the responsibilities of each individual so that everyone /no.s .hat is expected of him and ho. he .ill be judged. Ba i for 'erfor2an,e E-a1uation: Providing basis for the comparison of actual performance .ith the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures. It helps to ta/e timely corrective measures. O5ti2u2 u e of Re our,e : )nsuring the best use of all available resources to maximi0e profit or production, subject to the limiting factors. Coor.ination: (oordinating the various activities of the business and centrali0ing control, but also ma/ing a facility for the >anagement to decentrali0e responsibility and delegate authority. '1anne. a,tion: )ngendering a spirit of careful forethought, assessment of .hat is possible and an attempt at it. It leads to dynamism .ithout rec/lessness. It also helps to dra. up long range plans .ith a fair measure of accuracy. Ba i for 5o1i,4: Providing a basis for revision of current and future policies.

6. "HAT ARE THE DI%AD$ANTAGE%&LIMITATION% OF THE BUDGETARY CONTROL %Y%TEM(

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E ti2ate : Budgets may or may not be true, as they are based on estimates. *he assumptions about future events may or may not actually happen. Ri/i.it4: Budgets are considered as rigid document. *oo much emphasis on budgets may affect daytoday operations and ignores the dynamic state of organi0ational functioning. Fa1 e %en e of %e,urit4: >ere budgeting cannot lead to profitability. Budgets cannot be executed automatically. It may create a false sense of security that everything has been ta/en care of in the budgets.
La,7 of ,oor.ination: "taff cooperation is usually not available during Budgetary (ontrol exercise.

Ti2e an. Co t: *he introduction and implementation of the system may be expensive.
"HAT ARE THE DIFFERENT TY'E% OF BUDGET%( DI%TINGUI%H BET"EEN FI8ED AND FLE8IBLE BUDGET%.

Budgets may be classified on the follo.ing bases ? 1. Ti2e'erio. a . * . <ongterm Budget @ "hortterm Budget a . * . !. Con.ition Basic Budget and (urrent Budget a . * . 0. Ca5a,it4 ixed Budget and lexible Budget a . * . 3. Co-era/e unctional Budget and >aster Budget

1. BA%ED ON TIME 'ERIOD: Lon/ Ter2 Bu./et a . * . Budgets .hich are prepared for periods longer than a year are called <ong*erm Budgets. "uch Budgets are helpful in business forecasting and for.ard planning. a . %)ort Ter2 Bu./et Budgets .hich are prepared for periods less than a year are /no.n as "hort*erm Budgets.

*. "uch Budgets are prepared in cases .here a specific action has to be immediately ta/en

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E9a251e : (apital )xpenditure Budget and A@9 Budget. , .

to bring any variation under control. E9a251e: (ash Budget.

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MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

!. BA%ED ON CONDITION: Ba i, Bu./et B Budget, .hich remains unaltered over a long period of time, is called Basic Budget. 0. BA%ED ON CA'ACITY: Current Bu./et B Budget, .hich is established for use over a short period of time and is related to the current conditions, is called (urrent Budget.

'arti,u1ar

Fi9e. Bu./et

F1e9i*1e Bu./et It is a Budget, .hich by recogni0ing the difference

It is a Budget designed to remain a . 9efinition unchanged irrespective of the level of activity actually attained. bet.een fixed, semivariable and i variable costs s designed to change in relation to level of activity attained. It does not change .ith actual volum e of activity achieved. *hus Aigidity it is /no.n as a Aigid or Inflexible budge t. It operates on one level of activity and under one set of conditions. It <evel of Bctivity assumes that there .ill be no chang i e n the prevailing conditions, .hich is unrealistic. Cariance Bnalysis does not give useful information as all (osts a n :fixed, variable d semivariable; are related to only one level of activit y. If the budgeted and actual activity diffe levels r significantly, then aspect cos s li/e t ascertainment and price fixation do not give a correct picture. (omparison of actual performance .i budgeted target .ill be th s It consists of various budgets for different levels of activity *hus it is not rigid. It can be recasted on the basis t b of activity level o e achieved.

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)ffect of variance analysis

Cariance Bnalysis provides useful information as each cost is analysed according to its behaviour.

If facilitates the ascertainment of cost, fixation of selling price and submission of quotations.

e .

Dse for 9ecision ma/ing

f .

Performance

It provides a meaningful basis of comparison o t actual f h e

meaningless, )valuation

especially

.hen

performance targets.

.ith

th e

budgeted

there is a difference bet.een t.o activity levels. 3. BA%ED ON CO$ERAGE: Fun,tiona1 Budgets, .hich relate Bu./et t o the

Ma ter Bu./et individual It is a consolidated summary of the various functiona l budgets. It serves as the basis upon .hich budgeted Profit @ <oss Bccount and forecasted Balance "heet are built up.

functions in an organi0ation, are /no.n as unctional Budgets, e.g. purchase Budget, "ales Budget, Production Budget, plant Dtili0ation Budget and (ash Budget.

:. "HAT ARE THE AD$ANTAGE% OF THE BUDGETARY CONTROL %Y%TEM(

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*he use of budgetary control system enables the management of a business concern to conduct its business activities in the efficient manner. It is a po.erful instrument used by business houses for the control of their expenditure. It infact provides a yardstic/ for measuring and evaluating the performance of individuals and their departments. It reveals the deviations to management, from the budgeted figures after ma/ing a comparison .ith actual figures.

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