Budgetary Control in financial management

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Budgetary Control


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Budget

A budget is the monetary expression of businessplans and policies to be pursued in the futureperiod of time.

Budgeting is an estimate prepares in advance ofthe period to which it applies.

A budget is prepared to have eective utilizationof funds and for the realization of objectives as

eciently as possible.Budgeting is a powerful tool to the managementfor performing its functions eciently.


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Budget

The hartered !nstitute of "anagementAccountants# $ngland de%nes a Budgetas & A plan 'uanti%ed in monetary

terms prepared and approved prior to ade%ned period of time usually showingplanned income to be generated and (

or expenditure to be incurred during theperiod and the capital to be employedto attain a given objective.)


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$stimate# *orecast and Budget

An $stimate is predetermination of future eventseither on the basis of simple guess wor+ orfollowing scienti%c principles.

*orecast is an assessment of probable futureevents. *orecasting precedes preparation of abudget as it is an essential part of the budgetingprocess.

A Budget is a detailed statement of forecastresulting from joint action of a number ofplanned operations conducted with normaleciency.


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Budgetary ontrol

The hartered !nstitute of "anagement Accountants#$ngland de%nes Budgetary Control as#& theestablishment of budgets relating to their responsibilitiesof executives to the re'uirements of a policy# and the

continuous comparison of actual with budgeted results#either to secure by individual action the objective of thatpolicy or to provide a basis for its revision.)

Budgetary ontrol is applied to a system of managementand accounting control by which all operations and

output are forecasted as far as possible and actualresults when +nown are compared with budgetestimates.


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$ssentials of Budgetaryontrol

$stablishment of budgets

ontinuous comparison of actual

with budgets for achievements oftargets and placing theresponsibility for failure to

achieve the budget %gures,evision of budgets in the light

of changed circumstances


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Budget "anual

The budget manual is a written documentor boo+let which speci%es the objective ofthe budgeting organization and procedures.

The hartered !nstitute of "anagementAccountants# $ngland de%nes a BudgetManual as# &a document schedule whichsets out# inter alia# the responsibilities of

the persons engaged in the routine of andthe forms and records re'uired forbudgetary control).


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Types of Budget

Budget

Coverage Capacity

Condition Period

Functional Fixed Budgets Basic

Long term

Master Flexible Budgets Current

Short term


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Types of Budget

Functional Budgets

-ales budget

roduction budget

"aterials budget

/irect 0abour budget

"anufacturing overheads

Administrative cost budgets

lant utilization budgetsapital expenditure budgets

,esearch and development cost budget

ash budget


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erformance Budgeting

!n conventional system of budgeting# moneyconcept was given more performance i.e.#estimating or projecting rupee value for variousaccounting heads or classi%cation of revenue or

cost.

These days# budgets are established in such a wayso that each item of expenditure is related tospeci%c responsibility centre and is closely lin+ed

with the performance of that standard.Thus in performance budget classi%cation ofexpenditure there are three pattern i.e.# function#programme and activity. erformance or production

goals in physical and %nancial terms are establishedin accordance with this new classi%cation and actual


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1ero Base Budgeting

This techni'ue was introduced by ex2president 3immy carter of 4-A# as a means tocontrolling state expenditure.

-ince early 56789s# it is gaining acceptancein the business world because it is proving itsutility as a tool integrating the managerialfunction of planning and control.

1BB is the best used as managerial control inactivities which are directly related to the%nal output of these activities.


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1ero Base Budgeting

!"A de%ned # :9as a method of budgeting whereby allactivities are revalued each time a budget is set./iscrete levels of each activity are valued and acombination chosen to match funds available.

A planning and budgeting process which re'uires eachmanager to justify his entire budget re'uest in detailfrom scratch and shift the burden of proof to eachmanager to justify why he should spend any money atall.

The approach re'uires that all activities be analyzed indecision pac+ages which are evaluated by systematicanalysis and ran+ed in order of importance.


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,esponsibility Accounting

According to erti%ed !nstitute of "anagementAccounting# 0ondon# &,esponsibility accounting isa system of "anagement Accounting under whichaccountability is established according to theresponsibility delegated to various levels ofmanagement and management information andreporting system instituted to give ade'uate feed2bac+ in terms of the delegated responsibility.4nder this system divisions or units of an

organization under speci%ed authority in a personare developed as a responsibility centre andevaluated individually for their performance. Agood system of transfer pricing is essential to

establish the performance and results of each


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,esponsibility Accounting

,esponsibility accounting %xes responsibility for costcontrol purposes.

!t is method of accounting in which costs andrevenues are identi%ed with persons who are

responsible for their control rather than with productsor functions.

This method classi%es costs and revenues accordingto the responsibility centres that are responsible for

incurring the costs and generating the revenues.,esponsibility centres can be broadly classi%ed intothree categories i.e.# ost centres# ro%t centres and!nvestment centres


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Documents

Budgetary Control in financial management