Question

What are the main requirements of a good budgetary system, and what steps are needed for budget installation?

Answer

The following factors are required for budgetary control:

1. Objectives

The first requirement for the budget is clear-cut objectives. These should be based on the organizational system through which the responsibilities are fixed.

2. Cooperation of Top Management

The success of the budgetary system depends on the active cooperation and understanding of top management. Budgeting is a form of planning that depends on business policies, which are the sole jurisdiction of top management.

3. Assigning Responsibilities

The success of a good budget requires an explicit demarcation of responsibilities across the organization’s employees. When responsibilities are not specified, effective control of the business activities is not possible.

4. Cooperation of Employees and Management

This is an essential factor for budgetary control. Furthermore, the merits of cooperation should be explained to employees.

5. Active and Continuous Checking of Activities

The purpose of budgetary control is to control activities. This depends on constantly checking and monitoring activities.

6. Determining the Budget Period

The budget period established depends on the nature of the business. When the nature of the business is seasonal, a seasonal sales budget is desirable. In general, the budget period is one year.

7. Availability of Information for Business Forecasting

Suitable budgets rely on forecasting, which itself relies on up-to-date information. Budgets cannot be implemented when the required information is not available.

8. Formation of Budget Committee

Effective budgets require the full cooperation of all executives. The direction and execution of all budget procedures are generally delegated to a budget committee.

The main areas of operation for a budget committee are:

  • Receive and review individual budget estimates
  • Suggest revisions
  • Decide on general policies
  • Approve budgets and later revisions
  • Receive and analyze budget reports
  • Recommend action for correction and efficiency

Steps in Budget Installation

Careful planning is required for budget installation. The following steps should be taken to install the budgetary system:

1. Budget centers: These are centers dedicated to budgetary control. Budget centers should be formed for each budget for which budgets are prepared, and they should be set with the active cooperation of respective departments.
2. Availability of accounting data: The key requirement for a budgetary control system is that all relevant accounting information should be easily available.
3. Organizational chart: An organizational chart should be prepared to assign the functional responsibilities of each member of the organization. This chart will depend on the size and nature of the business.
4. Budget committee: In a large organization, a budget committee is formed that formulates the policies, procedures, and general program to be followed by the concerned organization.

The organization will work according to these procedures. The budget committee is composed of various departmental heads, including the Sales Manager, Production Manager, Chief Engineer, Treasurer, and so on.
5. Formation of budget manual: The budget manual is a document that sets out the responsibilities of the employees who are charged with undertaking the desired work. The budget manual contains the following information.

  • Budget period
  • Date of receipt of budget estimates from the different departments
  • Date of review, revisions, and instructions received from top management
  • Accounting methodology to be followed
  • Budget formats
  • Procedure for preparing financial statements
  • Procedure for reporting to the top management

6. Budget factors: These are also known as the key factors or limiting factors. Budget factors have vital importance because they determine the priorities in functional budgets.
7. Budget period: The budget period is the specific time for which budgets are prepared and employed. The budget period may be short or long depending on the nature and size of the business.

Frequently Asked Questions

What are the main requirements of a good budgetary system?

The main requirements of a good budgetary system are:- objectives- cooperation of top management- assigning responsibilities- cooperation of employees and management- active and continuous checking of activities- determining the budget period- availability of information for business forecasting- formation of budget committee

In what way can budgets be prepared?

Budgets can be prepared by a number of different methods. The basic steps in the preparation of budgets are:- identifying the objectives and policies of the organization- assigning responsibilities- preparing an organizational chart- allocating resources for each responsibility area

What is meant by budgetary control?

Budgetary control is a planned and organized process of checking the progress of a business in achieving its goals. Budgetary control is an essential tool for management to achieve conformity between plans, operation results, and actual performance.

What are the steps involved in budgetary control?

The main steps involved in budgetary control are: - receiving, analyzing, and checking budgets- taking necessary corrective action when deviations are found- reporting the deviations to the concerned authority for further action

What is meant by budget centers?

Budget centers are centers that have all relevant information on the performance of the operation and responsibility for providing reports to other units or departments involved. The budget center is responsible for taking corrective action when needed.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.