Budget:

A plan which for a definite period, covers, all phases of operations in the future is known as a business budget. Policies,
plans, objectives & goals are formally expressed by it & are laid down in advance for the concern as a whole & for each of its
sub-divisions by the top management. Thus an overall budget will be there for the concern composed of several sub-budgets
which are in the form of departmental budgets. Expense limitations are expressed by the budget in the expense budgets & in
the sales budget, revenue goals are expressed & for the purpose of realizing the desired profit objective, these must be
attained. Besides, plans relating to items such as levels of inventory, additions to capital assets, plans of production, plans of
purchasing, requirements of labour, requirements of cash etc. are expressed by the budget. Thus, for a given period, budget
is a formal management plans’ & policies’ statement which can be used in that period as a guide or blue print.

The basic elements of a budget are:

 For a specified period of time, it’s a future plan of activity,

 Budget can be expressed in monetary or physical units or in both,
 Before the period during which the budget is supposed to operate, it is prepared i.e. it is prepared in advance.
 Before the preparation of the budget, it is necessary to lay down the objectives which are required to be attained &
the policies which are required to be pursued for the achievement of those objectives.

Budgetary Control:

Throughout the budget period, the use of budgets & budgetary reports for the purpose of coordinating, evaluating &
controlling day-to-day operations according to the goals which are specified by the budget is involved by budgetary control.
The mere presentation of budget doesn’t have much value, its real value lies in the aspects of the planning & its utilization
during the period for the purposes of control & coordination. Under budgetary control, actual results are constantly checked
& evaluated & comparison of actual result is made with the budgeted goals & wherever indicated, corrective action should be
undertaken. The following steps are involved in the process of budgetary control:

(a) The objectives which are required to be achieved by the business should be defined & specified by budgetary
control.
(b) For the purpose of ensuring that the desired objectives are accomplished, business plans are needed to be
prepared by budgetary control.
(c) Budgetary control translates the plans into budgets & relates to particular sections of the budget, the
responsibilities of individual executives & managers.
(d) Budgetary control constantly compares the actual results with the budget & the differences between the actual
& budgeted performance are calculated.
(e) For the purpose of establishing the causes, the major differences are investigated by budgetary control.
(f) In a suitable form, budgetary control presents the information to the management, relating to variances to
individual responsibility.
(g) In order to avoid a repetition of any over-expenditure or wastage, management takes corrective actions.
Alternatively, where due to the change in circumstances, the budgeted targets cannot be achieved, the budget
is revised.

Difference between Budget, Budgeting & Budgetary control:

Individual objectives of a department etc. are indicated by budget, whereas the act of setting the budgets is known
as budgeting. All are embraced by budgetary control & also the science of planning the budgets themselves & as an overall
management tool, the utilization of such budgets, for the purpose of business planning & control are included in budgetary
control. Thus, the term by budgetary control is wider in meaning & both budget & budgeting are included in by budgetary
control.

Objectives of Budgetary Control:

The objectives of budgetary control are:

(1)Compel for planning: As management is forced to look ahead, responsible for setting of targets, anticipating
of problems & giving purpose & direction to the organization, this feature is the most important feature of budgetary
control.
 (2)Communication of ideas & plans: Communication of ideas & plans to everyone is effected by budgetary
control. In order to make sure that each person is aware of what he is supposed to do, it is necessary that there is
a formal system.

(3)Coordinating the activities: The budgetary control coordinates the activities of different departments or sub-
units of the organization. The coordination concept implies, for example, on production requirements, the
purchasing department should base its budget & similarly, on sales expectations, the production budget should in
turn be4 based.

(4) Establishing a system of control: A system of control can be established by having a plan against which
progressive comparison can be made of actual results.

(5) Motivating employees: Employees are motivated for improving their performances by budgetary control.

Requisites of an effective system of budgetary control:

 There should be a clearly defined organizational structure where are area of responsibility is emphasized.

Within the budgeting process, the employees should participate.

 For the purpose of relying the measurement of performance, there should be adequate accounting records &
procedures.

Budgetary control needs to be flexible, so that the plans & objectives may be revised.

An awareness of the uses of the budgetary control system should be spread by the management.

An awareness regarding the problems of budgetary control & especially the individual’s reactions to budgets
should be spread by the top management.

Advantages of Budgetary control:

The advantages of budgetary control system are as follows:

 The objectives of the organization as a whole & the result which should be achieved by each department
within this overall framework are defined by the budgetary control.
 When there is a difference between actual results & budget, then the extent by which actual results have
exceeded or fallen short of the budget is revealed by the budgetary control.
 The variances or other measures of performance along with the reasons of difference between the actual
results with those from budgeted is indicated by the budgetary control. Also, the magnitude of differences
is established by it.
 As the budgetary control reports on actual performance along with variances & other measures of
performance; for correcting adverse trends, a basis for guiding executive action is provided by it.
 A basis by which future budget can be prepared or the current budget can be revised is provided by the
budgetary control.
 A system whereby in the most efficient way possible the resources of the organization are being used is
provided by the budgetary control.
 The budgetary control indicates how efficiently the various departments of the organization are being
coordinated.
 Situations where activities & responsibilities are decentralized, some centralizing control is provided by the
budgetary control.
 The budgetary control provides means by which the activities of the organization can be stabilized, where
the organization’s activities are subject to seasonal variations.
 By regularly examining the departmental results, a basis for internal audit is established by the budgetary
control.The standard costs which are to be used are provided by it.
 For the purpose of paying a bonus to employees, a basis by which the productive efficiency can be
measured is provided by the budgetary control.
Limitations of Budgetary Control:

The main limitations of budgetary control are:

(1) It used the estimates as a basis for the budget plan.

(2) In order to fit with the changing circumstances, the budgetary programme must be continually adapted.
Normally for attaining a reasonably good budgetary programme, it takes several years.
(3) A budget plan cannot be executed automatically. Enthusiastic participation is required by all levels of
management in the programme.
(4) The necessity of having a management & administration will not be eliminated by any budgetary control system.
The place of the management is not taken by it; rather it is a tool of the management.