MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

8. BUDGETARY CONTROL
1. DEFINE THE TERM BUDGET.

Definition: Budget is a financial and /or quantitative statement, prepared and approved prior to a defined Period of time of the
policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital.

Feature :

1. #. $. '.

inancial and/or !uantitative "tatement. uturistic prepared and approved prior to a defined period of time. %oal &riented for the purpose of attaining a given objective. (omponents Income, )xpenditure and )mployment of (apital.

!. "HAT ARE THE OB#ECTI$E% OF BUDGETING&'ERFORMANCE BUDGETING( T)e o*+e,ti-e of Bu./etin/ are

1. #. $. '. 1. 2. 4. 5. 6.

*o encourage selfstudy in all aspects of a (ompany+s operations. *o get all members of management to ,put their heads- to the basic question of ho. the business should be run, to ma/e them of a coordinated team operating in unison to.ards clearly defined objectives. *o promote the planning process and provide a sense of direction to every member of the organi0ation. *o force a definition and crystalli0ation of (ompany policies and aims. *o increase the effectiveness .ith .hich people and capital are employed. *o disclose areas of potential improvement in the (ompany3s operations. *o stimulate study of relationship of the (ompany to its external economic environment for improving the effectiveness of its direction. *o direct and coordinate business activities and units to achieve stated targets of performance. *o facilitate the control process, by comparing actual results .ith plan, and provide feedbac/ to the employees about their performance.

0. DEFINE THE TERM BUDGETARY CONTROL. "HAT ARE IT% %ALIENT FEATURE%( 1. Definition7 Budgetary (ontrol is defined as 8the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual .ith budgeted results either to secure by individual action the objective of that policy or to provide a base for its revision.

#.

%a1ient feature :

a. b. c. d. e.

O*+e,ti-e : 9etermining the objectives to be achieved, over the budget period, and the policy :ies; that might be adopted for the achievement of these ends. A,ti-itie : 9etermining the variety of activities that should be underta/en for achievement of the objectives. '1an : 9ra.ing up a plan or a scheme of operation in respect of each class of activity, in physical a .ell as monetary terms for the full budget period and its parts. 'erfor2an,e E-a1uation: <aying out a system of comparison of actual performance by each person section or department .ith the relevant budget and determination of causes for the discrepancies, if any. Contro1 A,tion: )nsuring that .hen the plans are not achieved, corrective action are ta/en= and .hen corrective actions are not possible, ensuring that the plans are revised and objective achieved

Budgetary Control_____________________________________________8.1

6. It helps to ta/e timely corrective measures. 3.e : )nsuring the best use of all available resources to maximi0e profit or production. Con.ith a fair measure of accuracy. *oo much emphasis on budgets may affect daytoday operations and ignores the dynamic state of organi0ational functioning. Budgets may be classified on the follo. Ba i for 'erfor2an. E ti2ate : Budgets may or may not be true.QUALITY EDUCATION BEYOND YOUR IMAGINATION 3. * .it4: Budgets are considered as rigid document. O5ti2u2 u e of Re our. Coor. La. * .MASTER MINDS .ill be judged. Ti2e'erio. Ca5a.7 of .ing bases ? 1. 4. Definin/ Re 5on i*i1itie : <aying do. "uch Budgets are helpful in business forecasting and for. 2.ination: "taff cooperation is usually not available during Budgetary (ontrol exercise. Co t: *he introduction and implementation of the system may be expensive. Ba i for 5o1i.ti-e of a Bu. '. <ongterm Budget @ "hortterm Budget a . !. assessment of . It leads to dynamism . but also ma/ing a facility for the >anagement to decentrali0e responsibility and delegate authority. a .it4 ixed Budget and lexible Budget a . '. *. 0. Budgets . * . #. 2. he . a .oor. BA%ED ON TIME 'ERIOD: Lon/ Ter2 Bu. a.ith the predetermined targets and investigation of deviation.urit4: >ere budgeting cannot lead to profitability. * .hich are prepared for periods longer than a year are called <ong*erm Budgets. of actual performance and expenses from the budgeted figures.tion: )ngendering a spirit of careful forethought.ith precision. 1. if any. "HAT ARE THE DIFFERENT TY'E% OF BUDGET%( DI%TINGUI%H BET"EEN FI8ED AND FLE8IBLE BUDGET%. Ti2e an.ithout rec/lessness.here a specific action has to be immediately ta/en . $./et Budgets ./et a ./etar4 Contro1 %4 te2 are 1. It may create a false sense of security that everything has been ta/en care of in the budgets. Budgets cannot be executed automatically. the overall aims of the business and determining targets of performance for each section or department of the business. "HAT ARE THE OB#ECTI$E% OF BUDGETARY CONTROL %Y%TEM( T)e o*+e.4: Providing a basis for revision of current and future policies.s . as they are based on estimates. $. * .ard planning. up long range plans . Fa1 e %en e of %e.n as "hort*erm Budgets. Ri/i. It also helps to dra.ition Basic Budget and (urrent Budget a .hat is expected of him and ho.hat is possible and an attempt at it.hich are prepared for periods less than a year are /no. %)ort Ter2 Bu. subject to the limiting factors. "uch Budgets are prepared in cases . '1anne. 1. #. Definition of Goa1 : Portraying .e E-a1uation: Providing basis for the comparison of actual performance . "HAT ARE THE DI%AD$ANTAGE%&LIMITATION% OF THE BUDGETARY CONTROL %Y%TEM( 1. *he assumptions about future events may or may not actually happen.n the responsibilities of each individual so that everyone /no. Co-era/e unctional Budget and >aster Budget 1.ination: (oordinating the various activities of the business and centrali0ing control.

. . to bring any variation under control.2 . E9a251e : (apital )xpenditure Budget and A@9 Budget. E9a251e: (ash Budget. Budgetary Control_____________________________________________8. ..

0.een fixed.ill be th s It consists of various budgets for different levels of activity *hus it is not rigid. .hich remains unaltered over a long period of time.ith actual volum e of activity achieved. (omparison of actual performance . . is called (urrent Budget. )ffect of variance analysis Cariance Bnalysis provides useful information as each cost is analysed according to its behaviour.i budgeted target .hich is unrealistic. If the budgeted and actual activity diffe levels r significantly.hich by recogni0ing the difference It is a Budget designed to remain a . It operates on one level of activity and under one set of conditions. . Bu.MASTER MINDS . semivariable and i variable costs s designed to change in relation to level of activity attained./et F1e9i*1e Bu. then aspect cos s li/e t ascertainment and price fixation do not give a correct picture. BA%ED ON CA'ACITY: Current Bu. 'arti.ill be no chang i e n the prevailing conditions. It does not change . variable d semivariable. .hich is established for use over a short period of time and is related to the current conditions. Bu. is called Basic Budget.QUALITY EDUCATION BEYOND YOUR IMAGINATION !. Cariance Bnalysis does not give useful information as all (osts a n :fixed.u1ar Fi9e. It <evel of Bctivity assumes that there . * . fixation of selling price and submission of quotations. e ./et It is a Budget. Performance It provides a meaningful basis of comparison o t actual f h e . . *hus Aigidity it is /no.n as a Aigid or Inflexible budge t. It can be recasted on the basis t b of activity level o e achieved. . bet./et B Budget. . If facilitates the ascertainment of cost. . are related to only one level of activit y. Dse for 9ecision ma/ing f ./et B Budget. 9efinition unchanged irrespective of the level of activity actually attained. BA%ED ON CONDITION: Ba i.

It serves as the basis upon . :. from the budgeted figures after ma/ing a comparison . 3.o activity levels. "HAT ARE THE AD$ANTAGE% OF THE BUDGETARY CONTROL %Y%TEM( 1.g.hich relate Bu. are /no.meaningless.erful instrument used by business houses for the control of their expenditure.ith actual figures. BA%ED ON CO$ERAGE: Fun. e.hich budgeted Profit @ <oss Bccount and forecasted Balance "heet are built up. It infact provides a yardstic/ for measuring and evaluating the performance of individuals and their departments. $.hen performance targets.een t. )valuation especially . functions in an organi0ation. ./et individual It is a consolidated summary of the various functiona l budgets. Production Budget. "ales Budget. . It reveals the deviations to management./et t o the Ma ter Bu. It is a po.n as unctional Budgets. plant Dtili0ation Budget and (ash Budget.tiona1 Budgets. purchase Budget. Budgetary Control_____________________________________________8. #. *he use of budgetary control system enables the management of a business concern to conduct its business activities in the efficient manner.3 .ith th e budgeted there is a difference bet.