Budgetary Control Systems

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Budgetary Control Systems

Budgetary control

Budgetary control is always followed by budget preparation. Budget needs not only top management assistance but also the control is supported by “participation of budgets holders into the investigation of solution to the problems which arise”

Budgeting acts as a service function because these did not put back management. Organizations draw budgets to achieve excellence and meet strategic business plans to avoid from any failure in future. These strategic business plans are divided into midterm and short term plans for cost minimization and profit maximization. This is a benchmark to measure the results of planned budgets. Reynolds told that budget planning is a source for the endurance of organizations in these highly competitive and challenging organizations.

A case study “Budgeting and budgeting control in business organization” written by Chika Agu (2006) defined that Budgetary control is the deployment of budget as a tool which regulates and guides the business activities and operations. The case study showed that budget is a measuring tool to administratively control operations and to determine whether planned goals are achieved on desired time or not?

Budgeting control system controls cost through budgets. It compares actual results with budgeted one by keeping in view whether obtained outcome matches with planned results. If any divergence from budgeted results is obtained, corrective measures proposal is established to achieve actual performance that matches with planned budget. Core objectives of budgetary control system are comprised of planning, synchronization and control. All these functions are interconnected (Arora, 1995).

Budget meets two fundamental prerequisites in the entire control procedure:

Feed forward

It provides fundamental control which can better help in decision making process in initial phase. These budgetary controls should be made whether the desired goals are rationale or not? Amendments should be made if budget is found irrational.

Feedback

Feedback provides foundations to measure the effectiveness and efficiency once point of action has been taken into account. This helps to improve previously committed mistakes and unmanageable impediments.

Budgetary control system has following functions:

Planning

Planning being an important part of budgetary control system encompasses long term, strategic and short term planning as well. Further, he stressed upon short term budgeting that must admit current environment, tangible, human and financial resources which is available in the organization. (Sizer, 1989). Planning is made by selecting goal and ways to attain them. It has a strong association with budgeting due to similarity in nature. Top management primarily focus upon the importance of planning and they plan where to invest, how to finance and how to increase market share keeping customers loyalty towards their brand. It is also certain that only planning and budgeting are the key survival for an organization.

Participative Budgeting

Research publications by various authors have substantial concern for participative budgeting despite of contradictory findings. Cherrington & Cherington (1973) found that negative relationship exists between budget participation and performance. Merchant (1987) and Brownell (1982) found positive relationship. Participative budgeting is utilized mostly when lower management has immense knowledge than middle management.

Monitoring

Budgetary monitoring and control approach is systematic and unremitting which is simplified by different steps: Establish departmental target performance of each organization by establishing goals to be attained so as to improve overall monitoring and performance of each organization. Communicate detailed budgetary strategy to entire stakeholders to greet and admire established goals and objectives. It boosts ownership of the consequences obtained at the end. Monitoring of real revenues data is evaluated by comparison of actual performance with the budgeted performance; thereby, reporting differences to the concerned officers on continual basis. The reason for variation in achieved data can be sort out and recommendation can be made (Drury, 2006).

Control

Control is set by comparing actual performances with planned and differences are addressed to management for intriguing corrective acts. Control is impossible without planning and it facilitates to maintain expenditures within planned perimeters. (Alesina and Perotti, 1996).

Achievement and accomplishment of the anticipated output data and results, their monitoring and assessments is compulsory. Both monitoring and evolution sustains steadily environment irrespective of various challenging forces; therefore, it is significant to local government effectiveness as well. It is also found that monitoring and evaluation need just raw data for test purpose and consumes a lot of time to scrutinize performance. Therefore, a valuable control system is needed for organizational development and continuous improvement with significant growth.

Budgetary Control Systems
Budgetary Control Systems

Performance Measurement

Horvath & Seither (2009) stated that performance measurement is a continuous process which quantifies the effectiveness and efficiency of each action, being a versatile concept; it also tells use of technology can better improve business functions. It is comprises of entire management planning, controlling and leading concept. Performance measurement could vary from business to business i.e. service sector and manufacturing sector but overall concept remains the same. In case of financial sector, budget performance can be quantified which helps to learn from mistake and perform better in the future.

Performance Indicators

Performance indicators include input, output, efficiency, effectiveness, cause and effects and outcomes as well. Input can be defines as all the necessary efforts required to keep on a project i.e. land labor, capital, raw material and money to meet necessary expenses. While, output is the outcome of input efforts and these are end results. Example may include budgeted overhead in production department which are calculated by costing department.

Outcomes and organization’s mission are closely related with each other. Outcome measures and evaluation of effectiveness defines the degree, the firm is attains its missions and objectives.

Disadvantages

  • Budget is totally based upon estimations and there is always uncertainty and ambiguity as future is uncertain.
  • Budget assumptions may or may not actually happen in real life. Many organizations face bankruptcy and insolvency problem due to poor liquidity.
  • We cannot blindly focus on it and it may affect long term planning and organizations nay face profitability issues.

References

Arora, M.M (1995). Cost Accounting, Principles and Practice (4th ed.) Vikas Publishing.

Sizer, J. (1989). An insight into Management accounting (3rd ed). Penguin Books Limited.

D.J. & Cherington, J.O. (1973). Appropriate reinforcement contingencies in the budgeting process. Journal of Accounting Research.17 (2), 225-253

Brownell, P., Dunk, A.S. (1991). Task Uncertainty and Its Interaction with Budgetary Participation and Budget Emphasis: Some Methodological Issues and Empirical Investigation. Accounting, Organization & Society.16 (8), 693-703

Drury, C. (2006), Cost and Management Accounting (6th ed). Boston Irwin. McGraw-Hill, 422-471

Alesina, A. & Perotti, R. (1996). Reducing Budget Deficits. Swedish Economic Policy Review, 3(1)

Horvath, P. & Seiter M. (2009). Performance Measurement. Die Betriebswirtschaft, 69 (3), 393-413

Agu Chika E., (2006) Budgeting and Budgetary Control in Business organization. (A case study of Emenite Nigeria Limited Emene Enugu Branch)

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