Essentials of Budgetary Control

Budgetary control is not only an accounting exercise, but also a tool of management at all levels. In organizing a budgetary control system, it is essential to obtain the full co-operation of each member of the management team. A number of preliminaries will be necessary for the implementation of a budgetary control system:

1. Organization For Budgetary Control

The proper organization is essential for the successful preparation, maintenance and administration of budgets. A budgetary committee is formed which comprises the departmental heads of various departments. All the functional heads are entrusted with the responsibility of ensuring proper implementation of their respective departmental budgets. The chief executive in the overall charge of budgetary system. He constitutes a budget committee for preparing realistic budgets. A budget officer is the convener of the budget committee who co-ordinates the budgets of different departments. The managers of different departments are made responsible for their Departmental budgets.

2. Budget Officer

The chief executive appoints budget officer. Such budget officer also called is “Budget Controller or Budget Director”. His rank should be equal to other functional managers. The Budget officer does not have the direct responsibility of preparing the budgets. The various functional managers prepare the budgets. His role is that of a supervisor. The budget officer has the specific duty of administering the budget. He is responsible for timely completion of budgeting activity by various departments and for co-ordination between them so that there is a proper link between them. He is empowered to scrutinize the budgets prepared” by different functional heads and to make changes in them, if the situation so demands.

The budget officer works as a coordinator among different departments. He continuously monitors the actual performance of different departments. He determines the deviations in the budgets and takes necessary steps to rectify the deficiencies, if any. He also informs the top management about the performance of different departments. The budget officer will be able to can out his work only if he is conversant with the working of all the departments. He must have technical knowledge of the business and should also possess accounting knowledge.

3. Budget Committee

A budget committee is formed to assist the Budget Officer. The Budget Officer acts as coordinator of this committee. The heads of all the important departments are made members of this committee. The committee is responsible for preparation and execution of budgets. The members of this committee put up the case of their respective departments and help the committee to take collective decisions, if necessary. The budget committee is responsible for reviewing the budgets prepared by various functional heads.

4. Budget Centers

A budget center is that part of the organization for which the budget is prepared. A budget center may be a department, section of a department, or any other part of the department. Ideally, the head of every center should be a member of the Budget Committee. However, it must be ensured that each budget center at least has an indirect representation in the Budget Committee. The establishment of budget centers is essential for covering all parts of the organization becomes easy when different centers are established. The budget centers are also necessary for cost control purposes.

5. Budget Manual

A budget manual is a document that spells out the duties and responsibilities of the various executives concerned with it specialties among various functional areas. A  budget  manual covers the following  matters:

  1. A budget manual clearly defines the objectives of budgetary control system. It also gives the benefits and principles of this system.
  2. The duties and   responsibilities of various persons dealing with preparation and execution of budgets arc also given in a budget manual. It enables the management to know the persons dealing with various aspects to budgets and provides clarity on their duties and responsibilities;
  3. It gives information about the sanctioning authorities of various budgets. The financial powers of different managers   are   given   in the   manual   for  enabling   the   spending amount on various expenses.
  4. A proper table for budgets including the sending of performance reports is drawn so that every work starts in time and a systematic control is exercised.
  5. The specimen forms and number of copies to be used for ore oaring budget reports is also stated. Budget centers involved should be clearly stated.
  6. The length of various budget periods and control points is clearly given.
  7. The problem to be followed in the entire system is clearly stated.
  8. A method of accounting to be used for various expenditures is also staled in the manual.

6. Budget Period

A budget period is the length of time for which a budget is prepared. There is no “right” period for any budget. Budget periods may be short term long term. If business experiences seasonal fluctuations, the budget period probably, extend over one seasonal cycle. If this cycle covers say two or three years, the long-term budget would cover that period, while the short-term budgets would, perhaps be prepared on a monthly basis for control purposes. Short-term budgeting is usually costly to prepare and operate, while long-term budgeting may be considerably affected by unforeseen conditions. Budget periods frequently used in industry vary between one-month and one year, the latter probably being the most commonly used as it fits in with the normally accepted accounting period. However, forecasts of much longer periods than a year may be used In the case of capital expenditure budgets, for example, which must be planned well in advance. A common practice in industry is to have a series of budget periods. Thus, the sales budget may cover the next five- years, while production and cost budgets may cover only one year. These yearly budgets will be broken down into quarterly or even monthly periods. Where long-term budgets arc operated it is usual to supplement them with short terms ones.

7. Key Factor

The budgets are prepared for all functional areas. These budgets are interring dependent and inter-related. A proper co-ordination among different budgets is necessary for budgetary control to be successful. The constraints on some budgets may have an effect on other budgets too. A factor, which influences all other budgets, is known as “key factor or principal factor”. The key factor may not necessity remain the same. The key factor highlights the limitations of the enterprise. This will enable the management to improve the working of those departments where scope for improvement exists. The factor, which is most often, the key factor in industry is probably the sales demand. Very often the success or otherwise of budgetary control rests on the forecast of sales during the budget period. If the sales figure proves to be inaccurate, most of the budgets will be affected.

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