Modern business is marked by instability and uncertainty. Due to competition, government policies, new regulations, new production techniques, and changing consumer behavior, businesses must adapt to survive.
Due to these issues, all organizations have started to use budgetary techniques. The technique of budgetary control is used to compare actual expenditures and budgeted expenditures, as well as to analyze and correct variations.
Budget and Budgetary Control: Definitions
A budget is a financial plan for a corporation that covers a specific future period. It is an expression of income and expenditures over a certain period. Budgets are plans that cover all functional areas of a business for a specific future period.
A budget is a system that is related to plan and control. Therefore, budgets also include budgetary control.
In a nutshell, a budget is concerned with policy framing whereas control is the budgetary implementation of the policy.
In a narrow sense, budgetary control is a cost control technique wherein actual cost is compared to budgeted cost, and thus is aimed at profit.
The main definitions of the budget are summarized as follows:
Brown and Howard: “The budget is a predetermined statement of management policy during a given period which provides a standard for comparison with the results actually achieved.”
George R. Terry: “A budget is an estimate of future needs arranged according to an orderly basis covering some or all the activities of an enterprise for a definite period of time.”
Harry L. Wyllie: “Budgets are finished products…They are formal programs of future operations and expected results. Budgets result from forward thinking and planning.”
Sanders: “The essence of a budget is a detailed plan of operations for some specific future period, followed by a system of records which serves as a check upon plan.”
H. J. Weldon: “A budget is thus a standard with which to measure the actual achievement of people, departments, etc.”
Hemass C. Heiser: “A budget is an overall blueprint of a comprehensive plan of operations and actions expressed in financial terms.”
Budgetary control does not merely involve the matching of estimated expenses to actual expenses. In addition, it involves placing responsibility for failures.
The periodic checking up of income, costs, and expenses related to the administration of the budget is known as budgetary control.
Objectives, Importance, and Functions of Budgetary Control
The main objectives of budgetary control are as follows:
1. Production efficiency. Budgetary control is a technique marked by advanced planning for the effective use of materials. Thus, it leads to smooth production chains.
2. Success of costing records. Budgetary control improves the utility of cost accounts, which provides knowledge about future costs. Hence, cost variations can be minimized.
3. Future planning. Every producer plans a definite output for a specific period for which it is possible to use budgets to estimate the required amount of finance, materials, labor, and other expenditures.
4. Cost control. Budgetary control is useful for cost control because the production process rotates around predetermined targets. Here, actual costs are compared to budgeted costs and any variations are corrected by the management.
5. Helpful in policy framing. Budgeting provides a tool through which basic policies are periodically examined, restated, and established as guidelines for the entire organization.
6. Budgets are solutions to basic problems. Budgeting obliges management to make an early study of its basic problems. It is useful in making rational decisions.
7. Control on income and expenditure. In modern times budgeting is used to direct capital and energy into the most profitable channels. Every producer classifies expenditure, and fixed expenses and variable expenses are useful to learn the break-even points for output and sales.
8. Knowledge of required capital. Budgetary control provides information about the amount of capital required for the smooth running of the organization.
9. Knowledge of potential for expansion. Every business leader aims to expand their business. Budgetary control provides helpful information about how much extra capital, labor, and risk will be needed for expansion efforts.
10. Administrative usefulness. Budgetary control is the eye of the managerial staff. No other form of management control reveals weaknesses in an organization as quickly as the orderly procedure needed for systematic budgeting.
11. Helpful to the nation. When proper budgeting is undertaken in nearly every enterprise, it can bolster the national economy by providing stable employment, economical use of tools, and effective prevention of waste.