Limitations of Budgetary Control

Every business firms have main objective to maximize the profits and to minimize the costs. No organisation can survive in this competitive market without the minimization of costs. Budgetary control system is very helpful in bringing economy in the business. Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as, “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 objective of that policy, or to provide a basis for its revision”.

Management must consider the following limitations of budgetary control as a device to solve managerial problems:

  1. Budgeting is not an exact science; its success depends upon the precision of estimates. Estimates are based on facts and managerial judgment. Managerial judgment can suffer from subjectivity and personal biases. The efficiency of budgeting thus depends upon the quality of managerial judgment.
  2. A perfect system of budgeting cannot be organized in a short period. Business conditions change rapidly. Therefore, the budgeting system should be continuously adapted to changing circumstances. Budgeting has to be a continuous expertise; it is a dynamic process. Management should not lose patient it should go on trying various techniques and procedures in developing and the budgeting system.
  3. Any prepared budget system will not by itself  improve the enterprise unless it is properly implemented. For the success of the system, it is essential that all understands it, and put efforts for accomplishing the budget goals.  All persons in the enterprise must be fully involved in the preparation and execution of but it’s otherwise being not be effective.
  4. Budgeting is a management tool, a way of managers not the management. The presence of a  budgetary  system  should not make management complacent. To get the best results, management should use budgeting with, intelligence and foresight, as long with other control systems.
  5. Budgeting will be ineffective and expensive if it is unnecessarily detailed and complicated. A budget should be precise in format and to understand; it should be flexible in application.
  6. The purpose of budgeting  will be defeated  if the budget goals are set carelessly. Budget goals are the definite targets to achieve the overall objectives of the enterprise. They must be in harmony with the aims in the enterprise.
  7. Budgeting will hide inefficiencies instead of revitalize them if there is no evaluation system. Here should be, continuous evaluation of the actual performance and the standards should also be re-examined regularly.
  8. Budgeting will lower the morale and productivity of the personnel if unrealistic targets are set and if it is used as a pressure tool. To some extent budding may be used a pressure device but its effect must be carefully determined.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]

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