BUDGETING AND BUDGETARY CONTROL

GROUP 8

DEFINITION AND MEANING OF BUDGETARY SYSTEM

Plans are made by every organization They all attempt to consider how to confront risks and opportunities which lie in front of them

This is when they prepare annual budgets and monitor performance against those budgets

 Budget:
Its a plan quantified in monetary terms, prepared annually Usually shows planned income to be generated or expenditure to be incurred during that period and capital to be employed so as to achieve an objective
Expressed mainly in financial terms

Plan of future activities

 Budgeting:
Its a process of designing, implementing and operating budgets It is a short term tool used for planning and controlling Involves the provision of resources to support plans which are being implemented

 Budgetary Control:
The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a firm basis of its revision

DIFFERENCE BETWEEN FORECAST AND BUDGET

FORECAST 1. Its a statement of probable events which are likely to happen during a specified period of time. BUDGET 1. Its a statement prepared under planned conditions that show the policy and programmes to be followed during a specified period of time. 2. It is a tool of control as it shows what must be achieved and

2. Since it relates to the future, isnt a tool of control.

FORECAST 3. Forecasts are made for purposed other than budgeting. 4. It is not used for evaluating the performance.

BUDGET 3. Budgeting should be preceded by forecasting.

4. It is always used for evaluating performance by comparing with actual.

ESSENTIALS OF A SOUND BUDGETING SYSTEM

Clear lines of authority and responsibility should be established for different levels of management, departmental executives and throughout the organization as well.

Goals of the organization should be clearly stated. As far as possible in quantitative terms. All levels of management should participate in setting budgets.

 Creating a cost awareness atmosphere to effectively implement the budget.

Top management should be involved in the budget process. This will ensure successful implementation.

ADVANTAGES OF BUDGETING
Serves as an internal audit by regularly evaluating departmental results. People are made responsible for items of costs and revenue as areas of responsibility are clearly defined. Areas of efficiency and inefficiency are identifies.

All employees feel a part of the organization as all are allowed to participate in setting of budgets.

DISADVANTAGES OF BUDGETING
Budgets are perceived by work force as pressure devices imposed by top management. Can have adverse effects on labour relations. Uncertainities can occur in the system eg. Uncertainty over demand, inflation, competition, weather, etc Difficulty in aligning individual and corporate goals.
Budgets are based on estimates. Assumptions are made about the future events which may or may not happen.