Effective Budgetary Control as an Instrument for Organizational Survival

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Budgetary control is the process of ensuring the accomplishment of budgetary plans by applying the needed corrective measures to deviation i.e. moving away from the original plans it is also a process of assigning responsibilities for the achievement of budget targets measuring actual performance and comparing actual with planned performance budgetary control is therefore as essential as the making of budget.

All survival conscious organization both public and private have objectives or goals which they try to attain with resources available to them. These objectives or goals include survival in a hostile and competitive business world.

Maximizing of profit as well as attaining a certificate level of social responsibility to the community in which they operate. Resources for the attainment of these objectives are limited hence the need for planning.

How the Budget is used as an Instrument of Control?
What are the Essentials of an Effective Budgetary Control System?
What is the Process of Budgetary Control?
Pros and Cons of Budgetary Control
What are the Key Principles of Budgetary Control?
What are the Objectives of Budgetary Control?
Why is budgetary control important in business?
What are the Tools of Control?
How Can Effective Budgetary Control be Achieved?
What Budgetary Control is Vital to The Success of The Organization?
What Are The Budgetary Control Techniques?
What Are The Benefits of Budgetary Control?

How the Budget is used as an Instrument of Control?

The budgeting process usually uses a combination of both the top-down approach, where the top management decides the budget and passes it on to the lower levels of management, and bottom-up approach, wherein the lower levels of management set the budget and present it to the top management who review it and suggest the required changes before implementation. Participative budgeting helps in increasing the communication between the top management and the employees.

Traditional budgets are generally set at the beginning of every financial year and are followed till the end of the year, even if the information used becomes outdated.

On the other hand, ‘rolling budgets’ or ‘rolling forecasts’ are developed at regular intervals, say after every three months, and forecast performance for a specified time period, say next twelve to eighteen months. Rolling budgets help organizations to control inaccuracies regarding projections and in turn minimize the discrepancies between the standards and the actuals.

Budgets influence employee behavior. For example, the attainability of budget goals has a significant impact on the behavior of the employees who are required to achieve these goals. Easily attainable budget goals will not trigger enough effort from the employees and managers toward performance.

On the other hand, if the budget goals are too demanding, there are chances that the employees and managers may resort to unscrupulous means to achieve these goals. Budgets should therefore be challenging but attainable.

Budgetary slack refers to the amount that is budgeted in excess of the actual requirement. Slack is sometimes beneficial as it may help improve creativity, help solve goal conflicts, and also help the management in retaining people. On the other hand, it also has negative effects as it represents managerial inefficiency and self-interest.

National cultures also influence the way in which budgets are prepared. The four dimensions of national culture are power distance, uncertainty avoidance, individualism/collectivism, and masculinity/femininity.

Participative budgeting is not usually employed in a culture that rates high on power distance, uncertainty avoidance, or masculinity. Budgeting is an internal process and hence lack of cultural similarities will pose a problem in the budget being communicated across subsidiaries of the organization.

When the compensation is linked to the budgets, there is a general tendency for functional units to set lower than expected budgetary goals and targets for themselves and also to use means that may not be in the interests of the organization to achieve these budgetary goals and targets.

The different types of budgets used by organizations are appropriation budget, flexible budgets, capital budgets, and the master budget. Master budgets form the basis of the control systems of the organizations. The master budget has two components: the operating budget and the financial budget.

The operating budget includes budgets for sales, production, direct materials, direct labor, factory overhead, ending inventory, cost of goods sold, selling & administrative costs, and income statement. The financial budget includes the capital budget, the cash budget, and the budgeted balance sheet.

In Zero-Based Budgeting (ZBB), the budget is devised as for a new venture. In ZBB, the responsibility centers are called decision units and the process and activities involved in each decision unit are called decision packages.

The ZBB process involves the following steps: decision unit identification; decision package development; evaluation and grading of decision packages; and resource allocation.

The assumption in ZBB that the next year’s budget is zero helps managers in carrying out the cost benefit analysis of individual activities of their respective decision units. ZBB is designed to evaluate the whole spectrum of functional activity so that areas that are inefficient and of little value are identified.

What are the Essentials of an Effective Budgetary Control System?

1. Sound forecasting

The estimates for the future needs of business should be precise and accurate. A scientific forecasting system gives adequate and reliable data for budgeting.

2. Goal orientation

Budgets must directly flow from objectives of the enterprise, and goals of budgetary control must be clearly defined.

3. Proper recording system

Sound accounting procedures should be allowed for proper recording of actual operations. Unless the actual performance is accurately recorded and quickly reported; the whole structure of budgeting will fall. Budgeting is greatly helped if there is also the system of standard costing in use.

4. Participation

All individuals responsible for achieving results should be consulted in the formulation of budgets. No system of budgetary control can succeed without the mutual understanding of superiors and subordinates. Participation assures full co-operation and commitment for making budgets successful. Participation also makes budgets realistic and workable.

5. Top Management support

Since budgeting highlights inefficiencies there is bound to be resistance. This makes it more necessary that top management should believe in the importance of budgetary control. Thus the overall budgets must be set and approved at the chief executive level.

6. Flexibility

Budgets should be flexible. If actual business conditions differ from what was expected, it should be possible to recast the budget quickly.

7. Enforce timeliness

Budgets must be prepared so as to be ready before the period to which they relate. Moreover sufficient time should be allowed for the budget programme to develop and reach near perfection.

8. Efficient organization

A good organisation structure is necessary for success in budgeting. There should be fixed responsibility centres, budget committee and budget controller.

9. Proper Co-ordination

The budget plans must be properly co-ordinated in order to eliminate bottlenecks. Individual budgets should be co-ordinated with one another.

10. Sound administration

Budgets cannot replace good management. Budgets should be administered efficiently by responsible executives.

11. Constant Review

Constant review of the budgets is necessary so as to prevent them from degenerating into license for spending the full budgeted amount even though it may not be necessary.

12. Reward and punishment

The concerned employees should be suitably rewarded for performance as per the budget. But slack employees should not be allowed to go unpunished.

13. Results take time

Budgetary control is an efficient tool to control performance. But it requires time to show results. Those who administer budgetary control should have high degree of knowledge and experience in the field.

What is the Process of Budgetary Control?

To ensure effective budgetary control, budgets must be effectively monitored and managed. Although the difference between monitoring and managing budgets is not clearly defined, there are certain characteristics that set them apart.

The budgetary control process ensures funds are being utilised in accordance with the required level and quality of output from the allocated resources.

Step 1 – Establish Actual Position

All organisations have some form of an accounting system which records their income and expenditure. Depending on the system, budgets will be identified by some form of budget code. Income and expenditure is then recorded against the budget code. This enables budget holders to identify their actual budget position at any point in time.

This information is normally provided in the financial management report. The style and content of the report will vary from one organisation to another and will be dependent on the financial system used.

To establish the actual position, the budget holder will need to examine and understand the financial information available. They will need to know how current the information is and adjust it for any outstanding transactions.

These may include debtors and creditors. The budget holder will also need to know if any part of their budget has been “committed” – i.e. if goods and services have been ordered but not yet received.

Therefore, depending on the organisation, establishing the actual position may require information from several different sources.

Step 2 – Compare Actual with Budget

After completing Step 1, the information gathered needs be compared to the budgeted figures set at the beginning of the financial year. This comparison should be simple if the actual income and expenditure headings match those that were originally set.

The difference between the actual income and expenditure and the budgeted income and expenditure is called a “variance”. Variance analysis is an important technique in the budgetary control process.

Step 3 – Calculating Variances

In the context of budgetary control, the term variance refers to the difference between actual and budget (planned) income and expenditure. An example of a variance is shown as follows:

Month 6
Budget heading	Budget to date(Expected spend)	Actual to date(Actual spend)	Variance+/(-)
Salaries	£120,000	£132,000	(£12,000)

The above example shows that by month six the budgeted expenditure on salaries was set at £120,000. However, the actual spending on salaries in those six months totalled £132,000. The difference between these two figures is £12,000. This represents the variance from the budget. In this case the variance is negative. The brackets represent over spending.

The “budget to date” column shows the amount of budget that should have been spent by month 6. Ideally, the budget would be “profiled” to reflect the pattern of expenditure over the year. Therefore, when the actual expenditure for that period is compared with the budget, the true variance can be calculated.

There are other variance calculations methods that can be used in assisting the budget holder to control the budget. As mentioned in Step 2, we have other resources that discuss this topic in further detail.

Step 4 – Establish Reasons for Variances

There are several reasons that can account for differences found between the budgeted and actual expenditure. The reasons for all variances needs to be identified. This process is critical to effective budgetary control, as the budget holder needs to know when it is appropriate to take corrective action.

Variances can be both positive and negative, reflecting excess spending or underspending, or over/underperformance on income. All require investigation.

The reasons for variances may include:

Error	Incorrect figures entered on the accounting system
Delays	Delays in entering information on the accounting system
Profiling	Often incorrect budget profiles are entered, which bear no relevance to the pattern of actual expenditure and income (e.g. no account taken of seasonal fluctuations)
Poor budgeting	Little consideration given to initial budget preparation
Unplanned changes	For example, increases and decreases in demand for services, or introduction of new legislation

Step 5 – Take Action

Budgets can only be controlled if corrective action is taken in response to the variances. Sometimes the explanation for the variance results in no action being required. For example, timing differences.

This is where the variance will diminish over time as the actual income and expenditure figures naturally match up with the budget. Variances that arise because of fundamental changes, such as an increase in demand for a service, require action. This is necessary to regain budgetary control.

Examples of the type of action that can be implemented are given below:

Reduce or halt expenditure in areas where expenditure is controllable
Increase income
Make virements (moving money from one budget to another)
Use contingency funds
Delay activities
Redefine objectives
Redefine eligibility criteria
Change the nature of the service and how it is delivered
Cease or reduce services

Pros and Cons of Budgetary Control

The budgetary control system help in fixing the goals for the organization as whole and concerted efforts are made for its achievements. It enables ‘economies in the enterprise.

Some of the advantages of budgetary control are:

1. Maximization of Profits

The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and co ordination of different functions is undertaken. There is a proper control over various capital and revenue expenditures. The resources are put to the best possible use.

2. Co-ordination

The working of different departments and sectors is properly coordinated. The budgets of different departments have a bearing on one another. The co-ordination of various executives and subordinates is necessary for achieving budgeted targets.

3. Specific Aims

The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal, of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving some specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.

4. Tool for Measuring Performance

By providing targets to various departments, budgetary control provides a tool for measuring managerial performance. The budgeted targets are compared to actual results and deviations are determined. The performance of each department is reported to the top management. This system enables the introduction of management by exception.

5. Economy

The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.

6. Determining Weaknesses

The deviations in budgeted and actual performance will enable the determination of weak spots. Efforts are concentrated on those aspects where performance is less than the stipulated.

7. Corrective Action

The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system the deviations can be determined only at the end of the financial period.

8. Consciousness

It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.

9. Reduces Costs

In the present day competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more.

10. Introduction of Incentive Schemes

The budgetary control system also enables the introduction of incentive schemes of remuneration. The comparison of budgeted and actual performance will enable the use of such schemes.

What are the Key Principles of Budgetary Control?

So as to ensure that budget serves as an effective technique of managerial decision making, certain cardinal principles must be kept in view.

These principles are:

1. Management Support

Top management’s support and cooperation is essential for successful implementation of the budget. It should take interest not only in setting the targets and finalising the budgets but also constantly monitoring the actual performance to find out the deviations if any and take curative steps, motivate the personnel and reward the good performers.

2. Employees Involvement

The budget should be established on the highest possible level of motivation. All levels of management should participate in setting targets and preparing budget. This will result in defining realistic targets.

Participation of employees in budgeting process will not only make them carefully think about the likely development in the forthcoming period and prepare budget accordingly, but will also motivate them to strive hard to achieve budget levels of efficiency and activity.

3. Statement of Organizational Goal

The organizational goal should be quantified and clearly stated. These goals should be set within the framework of corporate objectives and strategies. A well defined corporate policy and strategy is a pre-requisite for budgeting.

4. Responsibility Accounting

Individual employees should be informed about expectations of the management. Only those costs over which an individual has predominant control should be used in evaluating performance of that individual. Responsibility reports often contain budget to actual comparisons.

5. Organizational Structure

There should be well-planned organizational structure with clearly defined authority and responsibility of different levels of management. Role and responsibilities of Budget Committee and its President must be made known to the people in the organization.

6. Flexibility

If the basic assumptions underlying the budget change during the year, the budget should be restated. This will enable the management to compare the actual level of operations with the expected performance at that level.

7. Communication of Results

Proper communications systems should be established for management reporting and information service so that information pertaining to actual performance is presented to the concerned manager timely and accurately so that remedial action is taken wherever necessary.

8. Sound Accounting System

The organization should have a good accounting system so as to generate precise, accurate, reliable, and prompt information that is essential for the successful implementation of the budget system.

What are the Objectives of Budgetary Control?

1. Planning

Budget is a planning device. It is a plan in relation to planning. By means of planning, management looks ahead, anticipates eventualities, prepares for contingencies and provides for an orderly sequence for achieving the enterprise objectives.

A budget presents the plan, objectives and policies of an enterprise and expresses them in numerical terms. It provides management with a plan of operation to be followed during a specified future period.

Budgets are prepared for every function or segment of an enterprise. Consequently, all levels of management are drawn into the budgetary planning process. Every manager is sufficiently informed in advance, of the objectives, goals, policies, rules, procedures and programme of his enterprise.

Budgeting process encourages all managerial personnel to foresee problems even before they arise. Such knowledge about the future enables them to make reasoned judgments. Judgments made at the spur of the moment byway of expediency are minimised.

2. Co-Ordination

This term is defined as “the orderly arrangement of group effort to provide a unit of action in the pursuit of a common purpose.” In other words, it is the process by which each sub-division of a concern works towards the common goal or objective with due regard to all other sub-divisions.

It has already been pointed out that without any guidance of the nature of a budget, each manager, with authority to do so, may make his own decision thinking that the same is in the best interests of the concern. In point of fact, however, such a decision may come into conflict with the decision of another manager.

For instance, the production manager may make a decision with regard to the volume of production, keeping in view the stock level in respect of finished goods. The purchase manager, on the other hand, may make a decision to buy materials in large quantities to take advantage of bulk purchasing. These two decisions are quite conflicting.

One of the objectives of budgeting is to avoid these conflicting decisions and guide every manager towards the common goal. What appears to be in the best interests of the segment of the organisation should be sacrificed in the larger interests of the concern as a whole.

Each manager should work for the attainment of the common goal or objective of the concern. Budgeting thus directs every manager to examine the relationship between his own sphere of activity and those of the other managers in the process of making decisions. The aim of budgeting is to reconcile individual differences for the good of the concern as a whole.

3. Communication

Effective coordination is dependent upon adequate communication. Every member of the organization should know very clearly, the part that he has to play in accomplishing the target laid down in the budget. He should know, in advance, what is planned, how it is planned, and when and by whom it is to be accomplished.

An organisation is said to function smoothly and efficiently if definite and clear lines of communication are established. Only then it is possible for every member of the organisation to be kept informed of the plans and policies of the organisation to which it is expected to conform. It is only then that appropriate members of the organisation could be made accountable for implementing the budget.

Budget is the means of communicating to lower levels of management, the expectations of the top management. It is a means of enabling all members of the organisation to know what the top management expects of them and thereby coordinate their activities in achieving the same. Thus, budgeting facilities effective communication.

4. Motivation

A budget is a very useful device in influencing the behaviour of managerial personnel, and motivating them to put forth their efforts in the attainment of organisational objectives. By laying down standard of achievement, a budget acts as a challenge to the managerial personnel in the accomplishment of the standard set.

Having had the opportunity to participate in the preparation of the budget and thereby laying down standards of achievement, the very managerial personnel are made responsible for attainment of the standards. A budget is thus a strong motivational force and a challenge to managers.

5. Control

Nothing can be achieved by merely laying down the objectives and hoping that the desired organisational objectives will be accomplished. Planning also generates the need for control. In fact, the implementation of budget is, in itself, a control function.

A budget places the responsibility of achieving the target on the shoulders of those who participated in the budgetary planning function. By relating the budget to individual responsibility, the performance of the department for which the individual is responsible, is continually measured against the pre-determined targets. If there is any variation between the budgeted performance and the actual performance, the same becomes subject to investigation, analysis and corrective action.

A comprehensive budgetary control programme makes control possible by the principle of exception. According to the CIMA Official Terminology, Management by Exception is “the practice of focusing on activities which require attention and ignoring those which appear to be conforming to expectations.”

Accordingly, control is sought to be exercised only on significant deviations from the expected results. By investigating into the reasons for such deviations and analysing the same, management may be able to identify weaknesses or inefficiencies in the organisation. Efforts may, later on be put forth for removing or correcting the inefficiencies.

6. Performance Evaluation

Evaluation of managerial performance is made on the basis of a manager’s achievement of the target laid down for his segment. A budget is thus a means of knowing as well as informing the managers how well they are performing in meeting the targets which they have themselves helped in the setting.

Why is Budgetary Control Important in Business?

1. Definite planning

Budgets are based on the well-defined plans. Budgets enable the different heads to know what is expected of them.

They know the amount that they are entitled to spend and the income they are expected to earn. Thus, budgeting introduces an element of definiteness in planning.

2. Enhanced efficiency

Budgeting is an effective way of controlling costs and eliminating wastage. It promotes economy and efficiency.

3. Proper communication

Budgets are constructed taking into consideration feedback information supplied by lower levels of management. Every department frames its own budget in consultation with the departmental staff. Thus, it makes two-way communication in the organisation.

4. Control

Budgets make management by exception possible. The comparison of actual and budgeted performance will show up weak spots where management attention is needed the most. Thus, budgeting is an important technique of control.

5. Co-ordination

It promotes co-ordination between different departments or divisions of the enterprise. It facilitates centralised regulation of diversified operations. The budget committee acts as a coordinator of production, sales and other departments.

6. Delegation of authority

Budgeting encourages delegation of authority. It fixes the limits within which delegated authority can be used. Subordinates and executives can exercise initiative and judgment within the budgetary limits.

7. Motivation

Budgets act as a strong incentive to employees by fixing targets of performance.

8. Maximisation of profit

It aims at the maximisation of profit of the enterprise. To achieve this aim planning and co- ordination of different functions is undertaken. There is control over costs, revenue and capital expenditures. The resources are put to optimum use.

9. Forecasting credit needs

The budgets of cash expenditure and cash receipts make it possible for the financial manager to forecast their need for credit and arrange for it in advance.

10. Uniform policy

The centralization of budgetary control over all divisions and departments help in carrying out a uniform policy without the disadvantages of an authoritarian type of business organization.

What are the Tools of Control?

1. Financial Controls

Budgets, financial analysis of the organization, accounting statements, and the use of break-even analysis are the primary tools of the financial control system. Each can make major contributions to the control process.

Budgets represent the goals and objectives of the organisations. It is a financial plan listing in details the resources of funds assigned to a particular product, division, or project. Inherent in the budget is control through timely feedback.

Financial analysis is the use of the specific techniques to study a firm’s financial documents and control the flow of funds, products and services both within and outside organisation. These statements provide the means for controlling die liquidity, profitability and general financial conditions of the organisation.

Break-even analysis is a method of determining the minimum sales volume needed to cover all costs at a certain price level. This analysis is useful in providing managers with profit or loss estimate at different levels of sales and at different cost estimates. It can also approximate the effect of a change in selling prices of the firm.

2. Production Control

Production controls are the second general type of control. It is generally concerned with the scheduling, timing and routing of a product or project. Production control employs such tools as Gantt Charts, Programme Evaluation and Review Technique. (PERT) and Critical Path Methods (CPM) in monitoring actual performance and comparing it with expected results.

3. Organizational Control

Organisational control includes both the control exerted by the organisational structure and its planning systems and the control of organisational members. Programmes such as Management by objectives serve as important means of control to synchronise the performance of the organisational members with the structure dictated. Another critical organisational control tool is an effective Management Information System.

4. Inventory Control

Inventory control, the fourth type of control is concerned with the amount of assets that should be held in inventory; raw materials, work in progress and finished goods. A number of sophisticated methods have been developed for determining the optimum levels of inventory for different kinds of organisations.

5. Quality Control

Quality Control deals with maintaining the quality of a firm’s goods or services. In an organization where quality level requirements are high, an individual inspection of each unit of output will be conducted. Whereas in some other firms only a sample percentage of the output alone will be subjected to inspection.

How Can Effective Budgetary Control be Achieved?

A good budgetary control system depends upon the following conditions:

1. Support from top management

The effective implementation of the budgetary control system depends upon the attitude and perception of management towards it.

If the top executive takes the budgeting as a mere routine job and does not take any interest in its implementation, it will be a futile exercise.

2. Quantification of organizational goal

The goal of the organization should be clearly expressed and quantified. There should not be any misconception and confusion in the minds of employees regarding goals to be attained.

3. Creation of responsibility center

The entire organization should be divided into sections and subsection with clear assignment of duties and responsibilities for each of them.

4. The split of organizations’ goals

The goals of each department or responsibility center should be spelled out towards the attainment of the overall goals of the organization. The functional goals should be compatible with the organizational goal.

5. Realistic

The target to be set in the budget should be fairly attainable.

If it is set at a level beyond the capacity of employees, they will lose their interest in its implementation, on the other hand, if it is set at a very low level, it will be meaningless as the job, in any case, will be done.

6. Participation

All the key employees should be made involved in the preparation of the budget. Participation brings in commitment. Commitment enhances the efficiency and productivity of employees.

7. Good accounting system

The accounting system should be designed in such a way that c the actual performance of various responsibility centers can be readily available for comparison with the target.

8. Coverage

To reap the benefit of a budgetary control system it should cover all the areas organization. It should not be partially applied.

9. Creation of environment conducive to budgetary control

A proper environment should be developed in the organization for the successful implementation of budgetary control. The employees should be educated about the utility of the system.

They should be convinced that it is not a tool of pressurization upon them to work more but a way to the prosperity of the organization which will ultimately benefit them.

So seminar, lecture, executive development program, etc. should be held for this purpose.

10. Coordination

Co-ordination is an important requirement” of budgetary control. It brings in common thinking, mutual trust, and confidence amongst various departments.

11. Flexibility

A budget should be amenable to change if the changing situation so warrants.

12. Reporting system

The success of budgetary control depends upon a good reporting system. The actual performance vis-a-vis the target should be continuously reported to the management to enable them to take corrective action in the areas which are not performing well.

What Budgetary Control is Vital to The Success of The Organization?

Budgeting is a significant part of both planning and the controlling processes and is widely used by managers to plan, monitor and control various activities at every level of the organization.

Thus budgets can be highly useful and functional. Some of the functional benefits of preparing and using budgets as control techniques are given by D.T. Otley. These are as follows:

1. Budgets help managers in integrating personnel efforts within the organization towards a common goal. By properly appropriating adequate budgets to different activities within the organization, all activities can be synchronized and all efforts can be coordinated to achieve the organizational objectives.

2. Budgets act as controlling devices to correct any deviations. If the expenditures for a given activity exceed the allotted budget at any point in time, this will signal a deviation from the prescribed course, requiring attention and action by the management.

If for example, a departmental manager is given a budget of $ 500 per month for specified supplies, he would be in a position to monitor and control the expenses for supplies.

3. Budgets help in the just measurement of performance. Due to quantification of budgets, the measurement of performance becomes more objective in nature thus eliminating biases that might be introduced due to subjective evaluations.

4. The budgeting process helps management learn from past experience. The management can critically look at the success or failure of the past budgets and isolate errors and analyze their causes and establish steps to be taken to avoid repetition of such errors.

5. The budgeting process induces the management to shift attention to the future operations. Since budgets are a part of the planning process, they force managers to anticipate and forecast the trends and changes in the external environment. For example, the airline industry, when allocating budgets, must keep in mind the future changes in the price of fuel that would affect the aviation industry.

6. Budgets facilitate communications throughout the organization. Budgets are the blueprints for the company’s plans of operations and can only be coordinated through proper communication at all levels and these budgets are especially helpful to lower-level managers who are responsible for implementing the budgets and the plans.

They let these managers know how their operations relate to other units or departments within the organization. This improved communication reduces the risk of failure due to any misunderstanding.

Budgets help new people and lower-level managers see where the organization is going and where they fit in the organization. Such budgets assist the junior managers to be acquainted with the organizational goals and priorities and their own responsibilities and how their operations relate to other units or departments within the organization.

What Are The Budgetary Control Techniques?

For the purpose of budgetary control, various techniques are used which are briefly explained as follows

1. Variance Analysis

In the following analysis, a Budget is prepared for each and every department. Further, a comparison is made between the actual and estimated accounting figures. With the help of this technique, variances are found. The variances are further divided into Favourable and Unfavourable Variances.

For instance, the difference between actual production cost and estimated production cost will be denoted by production variance.

This technique helps in reducing cost and is commonly used for budgetary control.

2. Responsibility Accounting

It is considered to be a good technique for budgetary control. In this, 3 centres namely Cost Centre, Profit Centre and Investment Centre is created. All these centres are like the department of the organisation and employees are classified on the basis of these centres.

The performance of the employees in manually recorded and their accountability is fixed regarding certain goals that might be quantitative or qualitative. This technique helps to take decision regarding promotion or demotion based on employee’s performance.

3. Adjustment of funds

Under this technique, Top management takes decisions regarding adjustment of funds from one project to another.

For instance, if a new project started by an organisation needs money and there is surplus money allocated to an already existing project, then the surplus funds can be adjusted against new project for its initial setup. This technique facilitates proper allocation and adjustment of funds and prevents misuse.

4. Zero Based Budgeting

Another technique that is immensely popular these days is zero-based budgeting. Under this technique, the budget of next year is considered as nil which can be only possible if estimated revenue is equal to estimated expenses.

At that time, the difference between estimated revenue and estimated expenses will be zero. Any excess amount of money will be adjusted. This technique helps in having control over each and every amount of money spent during the year.

What Are The Benefits of Budgetary Control?

The importance or benefits of budgetary control are: 1. definite planning 2. enhanced efficiency 3. proper communication 4. control 5. co-ordination 6. delegation of authority 7. motivation 8. maximisation of profit 9. forecasting credit needs and 10. uniform policy.

1. Definite planning: