BUDGETARY CONTROL

Budgetary Control

          The procedures for preparing plan in respect of future financial and physical requirements are generally called “Budgeting”. It is a forward planning exercise. 
            It involves the preparation in advance of the quantitative as well as the financial statements to indicate the intention of the management in respect of the various aspects of the business. 

Budgetary Control

It is applied to a system of management accounting control by which all operations and output are forecasted far ahead as possible and actual results when known are compared with the budget estimates.

Objectives

Budgeting is a forward planning. It basically serves as a tool for management control. The objectives of budgeting may be taken as:

• To forecast and plan for future to avoid losses and to maximize profits.
• To help the concern in planning the activities both physical and financial.
• To bring about coordination between different functions of the enterprise.
• To control; actual actions by ensuring that actual are in tune with targets.

Budgeting and Planning: The planning normally deals with long term and short goals and operations. The goals can be for the entire organization or department-wise or group wise or segment wise to achieve the maximum results and operational efficiency.

Budgeting and Control: When one relates control function to budget, we find a system what is generally termed as budgetary control. Control signifies such systematic efforts which help the management to know whether actual performance is in line with predetermined goal, policy and plans. It is basically a measurement tool.

Formation of Budget Committee: A budget committee is a group of representatives of various important departments in an organization.

The functions of committee should be specified clearly. The committee plays a vital role in the preparation and execution of budget estimated. It brings coordination among other departments. It aids in the finalization of policies and programs. Non-financial activities are also considered to make it a wholesome affair.

Steps in Budgetary Control

The procedure to be followed in the preparation and control of budget may differ from business to business. 

The steps are as follows:

• Formulation of policies: The business policies are the foundation stone of budget construction. Function policies should be formulated in advance. Long-range policies with short term projections should be made for the functional areas such as sales, production, inventory, cash management, capital expenditure.
  
  
• Preparation of forecasts: Based on the formulated policies, forecast should be made in respect of each function. Activity based concepts should be introduced at the micro level for each function Forecasts should not be considered as a mere estimates.

Types of Budgets

The budgets are normally classified according to their nature. They are:

(a) Fixed budget. 

(b) Flexible Budget. 

(c) Functional Budget

Fixed Budget: It is also known as static budgets. It is prepared for a fixed or standard volume of activity. They do not change with change in the volume of activity. They are prepared well in advance Due to this, there are bound to be variances at the time of comparison. Hence, the budget targets become unsuitable for the purpose of comparison. Wide deviations are noticed due to changes in the volume of activity.

Flexible Budget: It is prepared with a view to take into account the periodic changes in the level of activity attained. In this case, the revenues and costs targets are set in respect of different levels of activity even from zero to 100 % of product ion volume.

Such mechanism helps to change revenues and cost targets for the actual level of activity and thus makes the comparison more logical and scientific.

Cash Budget :

       
       Cash budgeting is the process of forecasting the expected receipts known as cash inflows, and expected payments known as cash outflows to meet the future obligations. The written statement of receipts and payments form the cash budget. 
             
          It is a crystal ball which enables one to observe the future movements in cash position. It is a mere forecast of cash position of an undertaking for a definite period of time. The period may be daily, weekly, monthly, quarterly, semi-annually, or annually. The major two components of cash budget would be forecast first the cash receipts and then second forecasting the cash disbursements.