by Budgetary control is a systematic process of planning, controlling, and coordinating business activities by establishing budgets, comparing actual results with the budgeted ones, analyzing variations and taking corrective actions. It involves the use of budgets as a tool for planning, coordination, and control of activities within an organization.
In simple terms, budgetary control is a technique that involves creating budgets for each department or activity within an organization and then comparing actual performance against the budget. This helps managers to identify areas where there are deviations from the plan and take corrective actions to get back on track. The primary aim of budgetary control is to ensure that an organization’s resources are used efficiently and effectively to achieve the desired objectives.
Budgetary Control Features
- Planning: Budgetary control involves the preparation of budgets for different activities and departments of an organization. The budgets help in planning the activities and resources required for achieving the organizational objectives.
- Coordination: Budgetary control requires coordination between different departments and activities to ensure that the resources are utilized effectively and efficiently. This helps in avoiding duplication of efforts and wastage of resources.
- Communication: Budgetary control involves communicating the budgeted targets and objectives to the managers and employees of the organization. This helps in ensuring that everyone is aware of their roles and responsibilities in achieving the organizational objectives.
- Motivation: Budgetary control helps in motivating the employees to achieve the budgeted targets and objectives. This is done by setting challenging targets and rewarding the employees for achieving them.
- Control: Budgetary control involves monitoring the actual performance of the organization against the budgeted targets and taking corrective action if there are any deviations. This helps in ensuring that the organization is on track to achieve its objectives.
- Review: Budgetary control involves periodic review of the budgets and actual performance of the organization. This helps in identifying the areas where improvements can be made and taking corrective action for the future.
Budgetary Control Technique
There are several techniques used in budgetary control, including:
- Variance analysis: This technique involves analyzing the difference between actual and budgeted results to identify areas of concern. The formula for variance analysis is:
Variance = Actual result – Budgeted result
- Zero-based budgeting: In this technique, all expenses must be justified for each new period, regardless of whether they were included in the previous budget. The formula for zero-based budgeting is:
Budgeted cost = Sum of expenses required to achieve a specific objective
- Rolling budgets: This technique involves continuously updating the budget based on the most recent information available. The formula for rolling budgets is:
Current period budget = Previous period budget + (Actual results – Previous period budget)
- Activity-based budgeting: In this technique, budgets are developed based on the specific activities required to achieve the desired outcomes. The formula for activity-based budgeting is:
Budgeted cost = (Cost driver rate x Activity level) + Fixed cost
Advantages of Budgetary Control
There are several advantages of budgetary control, including:
- Goal setting: Budgetary control helps organizations to set clear goals and objectives that are specific, measurable, achievable, relevant, and time-bound. This ensures that everyone in the organization is working towards a common goal.
- Resource allocation: Budgetary control helps to allocate resources in a more effective and efficient manner. By creating budgets for each department or activity, managers can ensure that resources are allocated to the areas that need them the most.
- Cost control: Budgetary control helps to control costs by identifying areas where expenditures are higher than planned and taking corrective actions to reduce them.
- Improved decision making: Budgetary control provides managers with the information they need to make informed decisions. By comparing actual results with budgeted ones, managers can identify areas where changes need to be made.
- Performance evaluation: Budgetary control provides a basis for evaluating the performance of departments, managers, and employees. By comparing actual results with budgeted ones, managers can identify areas where improvements need to be made.
- Motivation: Budgetary control can motivate employees to achieve their goals and objectives. By involving employees in the budgeting process and linking their performance to budget targets, managers can encourage them to work harder and be more productive.
- Financial planning: Budgetary control helps to plan for the future by providing a framework for financial planning. By creating budgets for future periods, managers can anticipate future financial requirements and plan accordingly.
Disadvantages of Budgetary Control
- Time-consuming: Budgetary control requires a lot of time and effort to prepare, monitor and control the budget. This can be a significant burden for companies that do not have the necessary resources or expertise.
- Rigidity: Budgets are usually prepared for a specific period and are inflexible, which makes it difficult to respond to changes in the business environment. This can limit the company’s ability to take advantage of new opportunities or to deal with unexpected challenges.
- Unrealistic targets: Sometimes, budgets may be set based on unrealistic or overly optimistic assumptions. This can lead to frustration and demotivation among employees who are unable to achieve the targets, and can even result in unethical behavior such as falsifying financial records.
- Resistance to change: Budgets can become entrenched in an organization’s culture, making it difficult to change or update them. This can lead to a reluctance to embrace new ideas or approaches, and can hinder innovation and growth.
- Costly: Budgetary control systems can be expensive to implement and maintain, particularly if they require specialized software or personnel. This can be a significant burden for small or medium-sized businesses.
Essentials of Effective Budgetary Control
Effective budgetary control requires several essentials, some of which are:
- Clear Goals and Objectives: The goals and objectives should be specific, measurable, achievable, relevant, and time-bound. The budget should be aligned with these goals and objectives.
- Proper Planning: The budget should be prepared based on proper planning. The plan should be flexible and should take into account any changes in the external environment.
- Participation of All Stakeholders: The budget should be prepared with the participation of all stakeholders. This will help in obtaining their commitment to achieving the budgeted goals.
- Adequate Information: Adequate information should be available for preparing the budget. The information should be accurate, timely, and relevant.
- Effective Communication: The budget should be communicated effectively to all stakeholders. This will help in obtaining their commitment to achieving the budgeted goals.
- Periodic Review: The budget should be reviewed periodically to check if it is on track. Any deviations should be identified and corrective action should be taken.
- Motivation and Incentives: Motivation and incentives should be provided to employees to achieve the budgeted goals. This will help in improving their performance.
- Cost-Effective: The budget should be cost-effective. The benefits of achieving the budgeted goals should be more than the costs incurred in achieving them.
Budgetary Control technique question with solution
Question:
ABC Company is preparing its budget for the upcoming year. The company expects to sell 100,000 units of its product with a selling price of $10 per unit. The company’s fixed costs are $100,000, and its variable costs are $5 per unit. The company’s budgeted income is $50,000. Calculate the budgeted cost, budgeted revenue, and budgeted profit.
Solution:
First, let’s calculate the budgeted cost:
Budgeted cost = Fixed cost + Variable cost
Budgeted cost = $100,000 + ($5 per unit x 100,000 units)
Budgeted cost = $600,000
Next, let’s calculate the budgeted revenue:
Budgeted revenue = Selling price per unit x Expected unit sales
Budgeted revenue = $10 per unit x 100,000 units
Budgeted revenue = $1,000,000
Finally, let’s calculate the budgeted profit:
Budgeted profit = Budgeted revenue – Budgeted cost
Budgeted profit = $1,000,000 – $600,000
Budgeted profit = $400,000
Therefore, the budgeted cost is $600,000, the budgeted revenue is $1,000,000, and the budgeted profit is $400,000.
