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Budgetary Control System

BUDGETARY CONTROL SYSTEM
Structure 13.0 13.1 13.2 13.3 13.4 13.4.1 13.4.2 13.5 13.6 13.6.1 13.6.2 13.7 13.8 13.9 13.10 13.11 13.0 Objectives Introduction Budgetary Control System Need for Budgetary Control System Budgeting and Budgetary Control in Service-oriented and Not-for-profit Qrganizations Characteristics of Service-Oriented and Not-for-Profit Organizations Problems of Output Measurement Budgetary Control Process in Information Centres Advantages and Limitations of Budgetary Control System Advantages of Budgetary Control System Limitations of Budgetary Control System Flexible Budgetary Control Summary Answers to Self Check Exercises Key Words References and Further Reading OBJECTIVES

After reading this Unit, you will be able to understand • what a budgetary control system is; • why is it needed; • how it operates in information centres; • what are its advantages and limitations; and • the circumstances under which the budgetary control system has to operate in serviceoriented and not-for-profit organizations and the characteristics of a flexible budgetary system. 13.1 INTRODUCTION

In the preceding Unit you have learnt about the budgeting process and various types of budgets for an information centre. Further, you are also familiar with different monitoring and evaluation techniques of the systems analysis (Biock-2) and you know that controlling is one of the management functions (Unit-2, Block-I). In this Unit you will learn what a budgetary control system is, and why it is required in information centres, how is it operated and what are its advantages and disadvantages. Preparing a budget as well as setting up of a budgetary control system for an information centre depend on cost analysis and costing techniques which you are going to study in the succeeding units of this block. In other words, this Unit and the succeeding two Units deal with the last phase of financial management, namely, financial control and accounting. 13.2 BUDGETARY CONTRQL SYSTEM

Budgeting is a planning process in which expenditure and revenue of the organization over a specific time period are accounted for. ‘Budget’ is a plan document and a financial statement,

M S Sridhar

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In more simple terms. journals. fees and service charges.Budgetary Control System which provides details of the proposed revenues and their utilization for expenditure for a specific period. highlight variations from the plan and show the need for corrective actions to put the operation back on track. It consists of four elements: (i) a measuring device called detector (ii) a device for assessing the significance of what is happening by comparing with a standard or expectation i. a tool in the hands of an information centre manager. operational control and management control are the three broad categories of planning and control activities in organizations. ii) measuring and comparing actual results against standards and iii) taking corrective actions. iv) building. the budgeting is the process of quantifying all the plans of an operation to determine whether they will achieve the desired results and to adjust accordingly where they will not achieve the desired results. Strategic planning. week-to-week. control systems in organizations are more complicated. etc). Nobody gets money without justifying its requirements. Some important sources of finance for an information centre include: i) regular and ad hoc grants from parent organization and/or governments. Budgetary control is one of the oldest and traditional control techniques used by managers. which are quite simple. and a device for evaluating results. It is not a past-oriented or post-action control but a future-oriented control system. Budget is a quantitative expression of a plan of action. serves as an instrument of financial control. In other words. Budgetary control is the process of comparing what was planned with what has been accomplished during the budget period. control. A control system is a system whose purpose is to maintain a desired state or condition. Important heads of expenditure of information centre are: i) collection building and updating (books. the monetary and evaluation techniques of system analysis) as well as a widely recognized control function of the management. selector (iii) a device for altering behaviour (if needed) called effector (iv) a means of communication among devices. It is not a post-mortem type assessment but a continuous examination of the progress made and comparing it with the cost standards and time lapsed so that the manager is able to make adjustments in the operation on a day-to-day. “Management control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organizations”. or month-to-month basis for rest of the period of the budget. Budgeting need not be just confined to money. iii) furniture and equipment. a road map to guide management actions towards the destination. reports. usually an year. But it is a practice (and it is the strength of the budget) that it is expressed with a common denominator called Rupee. ii) ad hoc grants or subsidies from endowments and other agencies interested in this promotion of information dissemination and iii) revenues earned in the form of fines. and a tracking device to measure progress.e. Nobody has the luxury of working without financial restrictions. aims at highlighting the variations between the standards set and performance and then to take necessary steps to prevent the occurrence of such variations in future. Above all one should be prepared to face both sudden windfalls as well as severe cuts in budgets. It can be expressed both in financial and nonfinancial terms. Unlike biological and physical control systems. Control is the process through which managers assure that actual activities conform to planned activities and it involves i) identifying and establishing standards for key result areas. v) salaries and M S Sridhar 2 . as one of the important functions of management.. budget aids orderly and progressive planning coordination and implementation. It is a means of check and control on what money should have been received and how they are to be spent. ii) binding and other maintenance costs. Budgetary control system is an example of a system (particularly. Hence.

e. As budget is only a futuristic plan how far the actual operations of the information centre have conformed to the budgeted programme will be known only after completion of the budgeted period (i. to uncover deviations. the causes for deviations and ways to rectify deviations within a week or a month will be of immense help. Though a budget is prepared once in a year. Allocation has to be done to all heads as explained above and by type of material (i. etc. We have already noted that a control system is required to measure progress made towards attainment of goals stated in plans. fortnight-to-fortnight. Hence.. to indicate corrective actions and to affect corrections to the organization before the deviations become serious. Self-Check Exercise 2) Why do we need a budgetary control system? Note: i) Write your answer in the space given below. Budgeting and budgetary control in such organizations are more important than in profit-oriented organizations.Budgetary Control System wages. etc.). 13. financial year). size of the information centre and nature of its parent organization. reports. Check your answer with the answers given at the end of this Unit. ii) Check your answer with the answers given at the end of this Unit. week-to-week. the budgetary control process is a day-to-day. Continuous review of the situation is done taking into account the actual as well as committed expenditure till date so that the goals are reached by the end of the year rather than leaving it to chance. continuously monitoring the operations to examine how the operations are carried out. service-oriented and not-for-profit organizations. Self-Check Exercise What are the elements of control process? Note: i) ii) 13. postage. the complexity of budget and budgetary control system may vary from a simple fairly fixed (constant) voted grant of budget for books. month-to-month and quarterly-to-quarterly activity for a check on all revenues and expenditures budgeted and stated before hand. These sources of finance may have several restrictions in their deployment. journals. subjects.e. whether there are any deviations. if any. journals from parent organization and other reading materials to a most complex situation where grants are received from parent institution and other agencies in addition to certain revenues earned. The parent institution normally decides the budgeting method used by an information centre. or departments and so on. like discussing the ways of avoiding an accident after the accident has occurred. let us try to understand the need for budgetary control system. Knowing post-facto how much deviation or under spending or ineffective utilization of resources has taken place is.3 Write your answer in the space given below. vi) stationery. NEED FOR BUDGETARY CONTROL SYSTEM Having known what a budgetary control system is. books.4 BUDGETING AND BUDGETARY CONTROL IN SERVICE-ORIENTED AND NOT-FOR-PROFIT ORGANIZATIONS Information centres are paternalistic. The operating manager of profit-oriented organization can safely be allowed to M S Sridhar 3 . An effective budgeting system can display endless varieties.. Depending on the.

budgeting becomes the most important part of management control where the annual revenue is almost fixed. Market forces play a less significant role in service-oriented and not-for-profit organizations. most of the service organizations are relatively smaller and operate on a single location.1 Characteristics of Service-oriented’ and Not-for-Profit Organizations i) Compared to profit-oriented organizations.e. profit-oriented) companies and hence less applicability to service-oriented and not-for-profit organizations.2 Problems of Output Measurement Apart from other disadvantages of budgetary control system (to be discussed later). ii) iii) iv) v) vi) vii) viii) ix) x) 13.Budgetary Control System modify plans provided that the revision plan promises to increase profits. The problem becomes acute if budgets of such institutions are not planned as part of planning of parent body and if they worry more about accounting than planning. “The absence of a single.4. Multiple objectives. Money management in service-oriented and not-for-profit organization involves systematic planning. there appears to be lack of a profit measure. operating managers of such institutions are expected to strictly adhere to plans as expressed in the budget. their success should be measured by how much they contribute to the public welfare. getting funds. judicious spending of funds and meticulous accounting. There will be dominance of professionals in service oriented and not-for-profit organizations.e. Lastly. The characteristics of such institutions and the difficulties in budgetary control are discussed below. In other words. Further. The quality of service cannot be inspected and measured in advance i.. lack of relation between cost and. they are essentially fixed assets. Generally there is no single criterion to measure success of such organizations. benefits and difficulties in measuring performance and comparing performance of different units of the same organization are some peculiarities of such organizations. before rendering the service. Such organizations are normally labour intensive organizations. In other words. There are certain difficulties in budgetary control of service-oriented and not-for-profit organizations. There will be difficulty in measuring the quantity and quality of services. The success of these organizations is measured primarily by how much service and how well they render it. 13. inadequate management control has become a tradition in such institutions. the revenue from those unsold services are lost for ever. the absence of profit measure is quite typical to service-oriented and not-for-profit organizations. service-oriented and not-for-profit organizations will not have inventory and if there are any resources available for sale. services cannot be stored and if they are not sold.. In other words.4. there appears to be differences in ownership and power. Historically the cost accounting and other control techniques were developed for manufacturing (i. Due to lack of shareholders. They exist primarily to render a service and hence tend to be service organizations. Consequently there is a tendency for service-oriented and not-for-profit organizations to be political organizations. In view of (iv) and (v) above. satisfactory and overall measure of performance that is comparable to the M S Sridhar 4 . As such.

Information centres have not given adequate attention to their pricing policies. It is not relevant here to discuss or debate on the merits and demerits of charging for information services. Profit-oriented organizations measure their output by the amount of revenue earned based on prices charged for goods and services sold. The management control process is further facilitated if price is set prior to the performance of the service (prospective pricing). iii) Social indicators: A social indicator is only a rough indicator of accomplishment of an organization and it is affected by any uncontrolled extraneous factors. Generally. if charges are introduced on information services and suitable pricing policies are developed. There is a clear difficulty in measuring the performance of service-oriented and not-for-profit organizations. Further. It is an ends-oriented. They are identified based on what they intend to measure. often there is no clear cut objective function that can in turn be used in analyzing proposed alternative courses of action. The general rule should be that prices are equal to full cost (Full cost pricing). i) Result measures: A results measure tries to express output in terms that are supposedly related to an organization’s objectives. Process measures measure efficiency but not effectiveness and are most useful to measure current and short-term performance. discrete or scalar.Budgetary Control System profit measure is the most serious management control problem in a not-for-profit organization”. it becomes easy to measure the efficiency and effectiveness of information centre and its responsibility as a cost centres. due to dissimilar functions. “the smaller and more specified the unit of service that is priced. little affected by current programme effort and susceptible to external influences and hence of little value in day-to-day management. there are three important categories of non-monetary output measures. the information centre becomes profit-oriented organizations. Service-oriented and not-for-profit organizations either should device similar monetary measures of output or rely on nonmonetary measures. If the price is below full cost. which is means-oriented. Since service-oriented and not-for-profit organizations have multiple goals and these goals usually cannot be expressed in quantitative terms. surrogate or proxy measure and tells directly the impact of the organization on the outside world. Secondly. Secondly. difficult to obtain on a current basis. M S Sridhar 5 . the better the basis for decisions about the allocation of resources and more accurate the measure of output for management control purposes” provided the cost of paper work does not overweigh the benefits and the pricing policy is consistent with the overall policy of the organization. They are nebulous. relates to an activity carried on by the organization and measures the output of a responsibility centre or an individual. ii) Process measures: A process measure. there is no plausible way of estimating the relationship between inputs and outputs. quantitative or qualitative. Social indicators take into account the result of the work of the organization and they are useful for long-range analysis of strategic problems. The transfer-pricing concept should be adopted to measure the output of any responsibility/cost centre within the information centre. If price exceeds its cost. The non-monetary output measures could be classified in many ways. There is an implicit assumption that what the responsibility centre does is congruent to the objectives of the organization. it results in misallocation of resources in the economy. For individual profit centres. revenue is measured by transfer prices. There appears to be no direct relationship between costs and benefits. They can be subjective or objective. the organizational units cannot be compared in service-oriented and not-for-profit organizations.

inputs themselves are used as proxy output measures with the assumption that inputs are often a better measure of output than no measure at all. equipment. Self-Check Exercise 3) Enumerate Characteristics of service-oriented and not-for-profit organizations.5 BUDGETARY CONTROL PROCESS IN INFORMATION CENTRES The three basic steps in the control process are establishing standards. differential publication rate and inflation rate. If budgeted expenses are in excess of revenue then it may lead to undesirable actions of drawing down endowment or other capital funds that are intended to provide services to future generations. The starting point for budgetary control process in information centres is the income derived from known funding sources. Note: i) Write your answer in the space given below. As the budget for library and information centre is essentially the expenditure-oriented budget. Preparation of budgets is nothing but establishing cost standard. the budget document does not specify the exact dates on which the revenue and expenditure are incurred during the year. Most of the practitioners are much concerned and are more serious about the phases of actual use of funds. This phase in itself involves allocation of funds as envisaged in the budget. by groups of users. furniture. the expenditure has to be divided by subjects. level of demand. month-by-month. building. Both revenue and expenditure have to be monitored as proposed in the budget document. In other words. The classical example is the money spent on research projects is used as proxy output measure. by formats. auditing and financial control.Budgetary Control System Lastly. If budgeted expenses are lower than the expected revenue then the quantity of service cannot be provided to those who have provided revenue and have a right to expect service. Based on the programme for the year and costing analysis. Unlike profit-oriented organizations where budget for marketing expenses can influence the amount of revenue. Often. comparing results with standards and taking corrective action. The expenses planned should be approximately equal to the revenue. target for each period (week or fortnight or month) has to be fixed in advance. Allocation of funds might have been based on past practices and performances. encumbering funds tinder each head. by languages. in practice. accounting. ii) Check your answer with the answers given at the end of this Unit. 13. quarter-by-quarter. by departments. avoid reliance on such measures. the service-oriented and not-for-profit organizations should have a different kind of simple matching of revenue and expenses. One should be careful and as far as possible. budgetary control process is a day-by-day. fortnight-byfortnight. This process begins with top management setting goals and objectives and the lower level managers developing budgets for their units and the same successively reviewed and integrated at each higher level. fund accounting and financial audit. week-by-week. by type of reading materials in case of collection development and other usual heads like maintenance and service charges. As stated earlier. The prudent course of action usually is to reduce expenses rather than to anticipate that revenue can be increased. The next step is to budget expenses that equal this amount of revenue. wages and salaries etc. the process of budgeting and budgetary control starts with estimating the amount of revenue that the information centre is likely to receive for operating purpose for the year. year-round process. actual use and the total M S Sridhar 6 .

departments and other heads either manually or with the help of a computer.Budgetary Control System programme of the information centre. The goods or services may or may not have been received by the library. Thirdly. if the budget contains identification of foreign exchange (FE) component of the expenditure. matching the needs and monies available becomes complicated. there are some uncertainties about funds left unencumbered. Lastly. Actual allocation could be by departments / units. In addition to such ineffectiveness. Normally the bill register of the information centre provides the actual expenditure. by language or by format. M S Sridhar 7 . committed expenditures are worked out by maintaining a separate record regarding the value of orders released and these records have to be updated for adding information on new orders and deleting part or complete supply of items of outstanding orders. by subjects. The process of encumbering funds is difficult and complicated for various reasons. Statements relating to commitments and actual expenditure should he regularly checked and continuously reviewed to control the budget. Further. for each item of expenditure the total expenditure amount budgeted. moving ‘monies’ back and forth by encumbering and disencumbering in a manual system can lead to errors. Committed expenditure refers to the outstanding expenditures for goods and services. it may be noted that such formal allocation of funds may not be necessary in a small library. Firstly. the actual expenditure and the commitments (encumbering of funds) made both during the period as well as till the end of the week or month have to be shown. The total actual expenditure for a given week or month has to be broken down and distributed to various subjects. A model called corporate financial model should be designed incorporating budget and financial data to report on what has happened and to project what might happen assuming certain changes. In the weekly or monthly budget report. The most difficult task in budgetary control process in information centres is encumbering funds. Unexpected and inevitable increases should be absorbed by reallocation of funds from other heads with the approval of a competent authority. blanket and standing order plans as well as development of reference. the total expenditure till date is arrived at by adding the actual expenditure to that portion of committed expenditure. In addition. Secondly. Generally there is no automatic cancellation of unbilled orders and hence no discounts and handling charges of documents as well as exchange rates for foreign currencies keep changing frequently causing variation in the value of funds encumbered. by users. Here. particularly for collection development. Such reporting and budgetary control should cover the capital expenditures also. Any anticipated increase in expenditure over and above the amount identified in the budget must be offset by a decrease in expenditure in that area during the rest of the period. Information centres make several orders for documents under many heads in a given financial year and supplies are received continuously at non-fixed intervals. approval. there are uncertainties about supplies (delayed supplies and non-supplies). However. Such an allocation of funds provide better control and more effective way to monitor funds and has the best chances to achieve a fair balance in development of programmes and services. At times. general and special collections may not fit into any heads. the same should also be provided. a rigid allocation. may lead to difficulty in transferring funds from one account to another and consequently under spending in some cases may occur even when the other heads starve for funds. which is expected to fructify during the financial year. it is common that there will be under spending and overspending in some heads. the actual expenditure refers to the expenditure amounts for goods and services received and for which invoices or bills have been received and paid for. which have been ordered but not yet paid for. However. time consuming and it may be difficult to develop models even after massive efforts. Usually. Encumbering funds is a complex process that allows one to set aside monies to pay for ordered items. by type of material.

the financial audit part of the process enables meticulous but sample scrutiny of financial transactions to have proper control over irregular. Fund accounting system should allow for verification of the transactions and providing accurate report. Unrestricted funds allow flexibility in use of funds whereas restricted funds like grants for specific purposes cannot be used for purposes other than that specified. who usually look into loss of reading materials. Information centres normally have post-audit by external/central/statutory auditors. the unit heads may have data on daily or weekly basis throughout the year to facilitate operational control and the same need not be sent to the head of the information centre. The major part of the fund in an information centre is operating fund. inappropriate and wasteful expenditures. These statements should form part of the management information system (MIS) used to control the performance of information centre against the budget plan. The cardinal principle of fund accounting is that every financial transaction is charged to some account and a record exists of what the transaction involved. irregularities in procurement processes and outstanding advance payments and supplies. Though there are differences in the degree of details to be provided to management through budgetary control system. operating statements have to be prepared for each of the budget centres (or heads or items) involved. Budgetary control system often raises fear or apprehension among professionals who are responsible for the budgets. Proper fund accounting by allowing one to know how much money is spent. Self-Check Exercise 4) What are the factors to be considered in preparing an operating statement for the budget of an information centre? Note: i) Write your answer in the space given below.Budgetary Control System In the actual practice of budgetary control system. aids the budgetary control process and enables continuous checking and reviewing of the situation and examining the need for reallocation or reappropriation of funds. it may suffice to have monthly reporting in the beginning of a financial year and changing it to fortnightly during later part of the year.6 ADVANTAGES AND LIMITATIONS OF BUDGETARY CONTROL SYSTEM We have already seen the need for a budgetary control system. For fund accounting purposes it can be divided into two categories i) restricted funds and ii) unrestricted funds. it may be better to breakdown the operating statements into ‘controllable’ and ‘uncontrollable’ variations. Lastly. In practice. In this section let us know about M S Sridhar 8 . Head of the information centres may have to clear these doubts and fears by clarifying and emphasizing that establishing budget. A good budgetary control system should follow the theory of ‘management by exception’ and focus its attention on matters that are adverse or that show an unusual favourable variance in addition to providing full details of budget statements. However. how much is left and how much is encumbered or committed. monitoring and controlling it are essential activities in the modern management of an information centre. One may even develop skepticism or mistrust for having taken up measuring his or her performance based on standards. Each individual centre may decide on the frequency or interval at which data is best controlled. The purpose of fund accounting or financial accounting for not-for-profit organization is to assure proper use of monies provided and to make it possible to track expenditures. ii) Check your answer with the answers given at the end of this Unit. 13.

It promotes overall perspective. the organization is bestowed with the collective wisdom.1 Advantages of Budgetary Control System It is necessary for a manager of an information centre to understand the strengths and weaknesses of budgetary system in general. If the standards themselves are erroneous. It defines the objectives of an organization as a whole and in financial terms.6. If a control system fails to identify only deviations and exceptions and report it to appropriate persons. For having detected the deviations from the predetermined standards. 13. cooperation and team spirit among the employees as it brings together the activities of various divisions.6. Further. and budgetary control system in particular. Use of a single common denominator for a great many diverse actions and things. For example.Budgetary Control System the problems of the control process. i) The greatest strength of budgeting lies in its use of Rupee language i. Since managers of different levels are involved in setting budgets. which is the main concern to every organization. It facilitates centralized control with delegated responsibility. Workers concerned may perceive the control system as a tool to exert pressure on them and as an unwanted check on them. i) Budgetary control system in service-oriented and not-for-profit organizations may lead to unhealthy emphasis on easily observable factors ignoring more important areas like services. the advantages and limitations of the budgetary control system. Budgetary system helps managers to learn from past experience. A control system is normally designed to handle a certain magnitude of change or deviations and hence if there is dramatic change the control system may not be appropriate. Budgeting is a good stimulant to many good management practices. in order to make good budgeting.e.2 Limitations of Budgetary Control System We have already seen some of the limitations of a control system. to enable him to use it as a proper tool of management. Budget deals directly with efficiency. It provides yardsticks to measure efficiency of various units of the organization. Budgeting helps to have improved communication. 9 M S Sridhar . the formal organization should be clear. the whole purpose of control system is defeated. Now let us look at the limitations of a budgetary control system. the department or unit should have clear financial responsibilities and accounts and planning should be highly specific and must be done well in advance. Delays or time lags in providing feedback may slow down the adaptive process and increase the time required for control system to respond. budgeting may become the basis for long range planning. it provides a guide for corrective action and hence minimizes wastage and losses. Some of the basic limitations and problems of control system itself are as follows. there could be a flood of information on everybody’s table causing sickening out of ‘information overload’. Budgetary control system reveals the extent by which actual results have varied from defined objectives. ii) iii) iv) v) vi) vii) viii) ix) 13.. Budget under various functional units indicates the limits for expenses and results to be achieved.

In such situation a good manager is discouraged from taking initiative and undertaking new activities for which provision has not been made in the budget and a bad manager can hide his inefficiency behind the budget. etc.7 FLEXIBLE BUDGETARY CONTROL The budgets are. time consuming and unduly expensive and require additional efforts. This can be seen in setting standards.Budgetary Control System ii) iii) iv) v) vi) vii) viii) ix) x) xi) xii) xiii) Budget and budgetary control systems tend to create internal conflicts and pressures among different departments or units. As such budgets may not help in solving day-to-day problems of supervisors but help to analyze the past performance and projecting the possible future. Note: i) Write your answer in the space given below. Budgetary control system tries tying everything to Rupees and ignores the quality of services and hence poses serious problems to service-oriented and not-for-profit institutions like libraries and information centres. Budgets have a way of growing from precedent. costs and manpower to perform. Inefficient employees may feel suspicious of budgetary control system that it is used to evaluate the results or consider it as a way of implementing cost reduction programmes and hence fail to cooperate wholeheartedly. The actual expenditures may not differ much from budgeted expenditure but the department would have performed little constructive work. Another limitation of budgetary control system is that by involving itself in a number game. Not all expenditures can be controlled by way of a budget. The budget is increasingly being used as a control device in both profit oriented as well as service oriented and not-for-profit organizations. calling for an arbitrary cut in expenses. The process may become routine with complacency of paper work and little notice or action taken. ii) Check your answer with the answers given at the end of this Unit. A budgetary control system may sometimes become very cumbersome. estimates based on the result of intelligent judgments and hence are alterable. like any other enterprise. Budgetary control system may open up the way for dictatorial behaviour on the part of the top management. the organization might go through the process of budgetary control without giving any real thought as to how the operations might be improved. An amount once spent becomes a floor for future budgets. In case of line item type budget. Self-Check Exercise 5) Enumerate the drawbacks of budgetary control system. 13. Sometimes the budgetary control system may turnout to be ineffective if budget estimates turnout to be grossly inaccurate. Budget standards may not be revised as frequently as required. Reports of budgetary control do not and should not be expected to reveal the real cause of any difficulty. it may treat symptoms rather than the basic problems. An information centre. Budgets are mostly inflexible and rigid and do not respond to internal or external environmental changes. after all. is a dynamic entity required to adjust to changing environmental factors and M S Sridhar 10 .

to know the causes for deviations and hence to avoid leaving things to happen as they happen. then to that extent he should be relieved from the responsibility. Such uncontrolled variances can occur due to variations in prices.8 SUMMARY While budget is a financial statement. budgets should not be rigid.. 13. then they have to be suitably rectified by either adjusting in subsequent periods or by reappropriation of funds from other heads. They should be sufficiently flexible to meet rapid shifts in the needs. as required for monitoring (he expenses. Such a self-adjusting budget is known as the flexible budget. As actual conditions may not match with the conditions assumed while preparing a budget. the flexible budgetary control is introduced in business. Budget and budgetary control system have many merits like use of the Rupee as a common M S Sridhar 11 .Budgetary Control System economic forces.oriented organizations. to initiate corrective actions. which provides details of the proposed revenues and their utilization for expenditure for a specific period. One of the basic principles of budgetary control is to fix responsibility to the manager for costs over which he has control. to uncover deviations. The major difficulty is the problem of measuring the outputs in order to set standards for budgets. followed by planning the expenses that equal revenues and then trying to prepare time schedule for both revenues (grants) and expenses with all the restrictions relating to allocation and use of funds with provision for reallocation. the budgetary control is the process of comparing what was planned with what has been accomplished during the period. ii) Check your answer with the answers given at the end of this Unit. To mitigate the situation. etc. A budgetary control system helps to measure the progress made towards goals. Flexible budgeting is thus extremely useful for getting behind the causes for variances. As such the budget of an information centre should be self-adjusting to reflect the new conditions of operations.. It is not a passive approach to budgeting and it justifies change provided the relationship of expenses is maintained rather than force a change in the composition of capital and labour to achieve a more efficient product curve (or level of production). In other words. head of account etc. The process of budgetary control system in an information centre starts with estimating the revenues expected for the year. the flexible budget is one of the best control devices available to management. there could be differences between actual costs and budgeted costs. Nevertheless. This statement is used as a monitoring tool to check the noticeable variations in the expenses. If the variance in costs are due to factors on which be has no control. Flexible budgetary control may be less relevant to information centres which do not earn substantial revenue from their services. It is an effective tool provided it does not attempt to measure radical changes from normal operating levels. but responsive to political and economic changes as well as changes in needs of the customers. Information centres have certain peculiarities as service-oriented and not-for-profit organizations and hence implementation of budgetary control system in each institution is more difficult than in profit . An operating statement with time targets is prepared by giving detailed breakup of revenues and expenses by departments subjects. volume. It is a marginal approach to allocating resources and incorporates all the disadvantages and difficulties associated with marginal analysis. If variations are serious. Self-Check Exercise 6) What is a flexible budget? Note: i) Write your answer in the space given below.

x) They are relatively small and operate usually on a single location basis. which takes into account changes in environmental factors and economic forces and does not hold a manager responsible for variations due to changes on which he has no control. leading to ineffectiveness where estimates are erroneous. A relatively new flexible budgetary system is put forth as an alternative selfadjusting budget. iv) a means of communication among devices. not responding to environmental changes. time consuming and unduly expensive affair. lack of relation between costs and benefits and difficulties in measuring performance and comparing performance of different units of the same organization’s are some peculiarities of service-oriented organizations. Instead of knowing whether actual performance varies from the budgeted target after the budget period. M S Sridhar 12 . iii) a device for altering behaviour (if needed) called effector. etc. 2) Budget is a futuristic plan.. ii) They are labour intensive organizations. They are as follows: i) Services cannot be stored and hence there is no ‘inventory’ in service-oriented organizations. stimulating good management practices. overemphasis on observable factors and number games. the control process involves identifying and establishing standards for key result areas. suggesting corrective actions. detecting deviations. facilitating centralized control and availing collective wisdom of people involved At the same time budgetary control system suffers from drawbacks like creating conflicts and pressures among departments.9 ANSWERS TO SELF CHECK EXERCISES 1) A control system or process consists of four elements. 13.e.: i) a measuring device called detector ii) a device for assessing the significance of what is happening by comparing with standard or expectation i. ix) Inadequate management controls have become tradition in such organizations as cost accounting and other control techniques are believed to be for profit-oriented organizations. ignoring the quality of services. namely. It is exactly for this purpose that a budgetary control system is needed. in other words. selector. Multiple objectives. it is better to periodically monitor and know the deviations from the set budget so that wherever possible necessary adjustments can be effected during the subsequent periods to make actual performance come close to budgeted targets.Budgetary Control System denominator. The only resources available for sale are fixed assets of the organizations. vi) There is no single criterion (like profit) to measure success of service-oriented organization. vii) Market forces plays less significant role in service-oriented organizations. Success of these organizations is based on how much service is rendered and how well it is rendered. v) Quality of service cannot be inspected and measured before rendering. creating suspicion among inefficient employees. dealing directly with efficiency of the organization. complacency of paper work. iv) Service-oriented organizations face the difficulty of measuring the quantity and quality of services rendered. Actual performance may or may not conform to the budget due to various reasons. possibility of becoming a cumbersome. iii) There is a dominance of professionals in such organizations. possibility of dictatorial behaviour of top management. viii) Service-oriented organizations tend to become political organizations due to lack of shareholders and differences in ownership and power. measuring and comparing actual results against standards and taking corrective actions. 3) Service-oriented and not-for-profit organizations have certain characteristics distinct from those of profit-oriented organizations. Services unsold are services lost.

anticipating increases in expenditure and offsetting them by decreasing expenditure in other areas. x) Turning to be ineffective if budget estimates are grossly inaccurate. It M S Sridhar 13 . 5) Budgetary control system is not free from limitations. calling for arbitrary cuts in expenses. A model has to be designed incorporating budget and financial data to report on what has happened and to project what might happen assuming certain changes. absorbing unexpected and inevitable increases. xii) Budgets have a way of growing from precedent. iii) Leading to number game and treating symptoms rather than the basic problems. Operating statement helps regular checking and reviewing of the budget. Before implementing. Though there are differences in the degree of details to be provided to management through budgetary control system. Standards may not he revised as frequently as required. xi) Budgets are mostly inflexible anti rigid and do not respond to internal or external environmental changes. Each individual information centre may decide on the frequency or interval at which the date is best controlled. As such budgets may not help to solve day-to-day problems of supervisors but to analyze the part and projecting the future. ix) The process may become routine with complacency of paper work and little notice or action taken. operating statements have to be prepared for each of the budget centres (or heads or items) involved. The actual expenditures may not differ much from budgeted expenditure but the department would have performed little constructive work. vi) Tying everything to Rupee and ignoring the quality of services. time consuming and unduly expensive exercises involving enormous additional efforts. xiii) Not all expenditures can he controlled by way of a budget. 6) A flexible budget is a self-adjusting budget which takes into account the changing environmental factors and economic forces and based on marginal approach to allocating resources. budgetary control system has to take note of these limitations: i) Likely unhealthy emphasis on easily observable factors and ignoring more important areas like services. Such reporting and budgetary control should cover the capital expenditure also. A good budgetary control system should follow the theory of ‘management by exception’ and focus its attention on matters that are adverse or that show a usual favourable variance is addition to providing full details of budget statements. v) Not giving any real thought as to how to improve the operations. iv) Opening up the way for dictatorial behaviour on the part of top management in setting standards. etc. In such circumstances a good manager is discouraged from taking initiative and undertaking new activities for which provision has not been made in the budget and a bad manager can hide his inefficiency behind the budget. An amount once spent becomes a floor for future budgets. The flexible budget is one of the best control devices available to management. viii) Inefficient employees may feel suspicious of budgetary control system that it is used to evaluate the results or consider it as a way of implementing cost reduction programmes and hence fail to cooperate whole heartedly.Budgetary Control System 4) In the actual practice of budgetary control system. ii) Creating internal conflict and pressure among different departments or units. costs and manpower. vii) Making cumbersome. it is better to breakdown the operating statements into ‘controllable’ and ‘uncontrollable’ variations. and reallocation of funds with the approval of a competent authority. These statements should form part of the management information system (MIS) used to control the performance of information centre against the budget plan.

of the revenues Statement and profit margins) of the whole or part of the activities of an enterprise for a given period. 13. other eases being dealt with according to laid down procedures in a routine matter. or a group of these in or connected with an undertaking in relation to which costs may be ascertained and used for the purposes of cost control or product costing. Profit Centre A form of responsibility centre in which a manager is held responsible for both revenues and costs. which takes into account all types of costs i.e. tre Restricted Funds Restricted funds do not allow flexibility in use of funds. Flexible budgeting is extremely useful for getting behind the causes for variances. Full Costing Pricing system. where appropriate. They Information System are composed of both formal and informal subsystems A portion of the (MIS) formal subsystem may be computerized. Knowledge of the reaction of individual costs (i. fixed costs. and hence for the resultant level of profit. standard Exception or budget) are referred to management.e.. Management The process where by resources are obtained and used effectively and Control efficiently in the accomplishment of the organization objectives.e. Prospective Pricing Setting price prior to the performance of the service is called prospective pricing. Management Reporting networks within an organization used for decision making. provided it does not attempt to measure radical changes from normal operating levels. an intra-organization pricing system is established. variable and semi variable costs) and expenses to change in the volume of activity. restricted funds cannot be used for purposes other than that specified. Intra-organization Where investment centres or profit centres exist and one centre provides Pricing products or services for another centre. Like grants for specific purposes.10 Budget KEY WORDS A financial 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. Pricing variable costs and semi variable costs. Management by The process by which only significant variations from plan (i.. A section of the organization of the undertaking defined for the purpose of budgetary control. Budget Centre Cost Analysis (Analysis of Cost Behaviour) Cost Centre A location or person or item of equipment. Operating A summary of the operating costs (and. Methods used to determine ‘transfer price’ of products.Budgetary Control System is an effective tool. fixed. Transfer Pricing Where responsibility centres or profit centres exist and one centre provides products or services to another centre.. Flexible Budget A budget that recognizes the difference in behaviour pattern of fixed and variable costs and which is designed to change in relation to the level of activity actually attained. Responsibility A personalized group of cost centres under the control of a ‘responsible’ Cen individual. an intra-organization pricing is M S Sridhar 14 .

Sridhar has published 4 books. PN. made over 25 seminar presentations and contributed 5 chapters to books. sridhar@isac. PC and Reddy. 22 conferences papers. Moore. 88 research articles. 2nd ed. Bangalore. England: Gower. New Delhi: Tata McGraw Hill. Jack B. vol. 2 ed. John. (1983) Financial Management Handbook. Newton. Management Handbook: Operating Guidelines.gov. mirlesridhar@gmail. Fax: 91-80-25084476. Phone: 9180-25084451. 13. (1970). Indian Institute of Management (Bangalore) and University of Mysore. Paul ed. (1990). New York: Marcel Dekker. Techniques and Practices. p1313-1328. Tripathi.com. Unrestricted funds allow flexibility in use of funds and reallocation of funds from one head to another. (1976). Dr. (1981).3. Broyles.in . “Budgeting for Supervisors”. Encyclopedia of Library and Information Science. New York: AMA. Robert N and Dearden.al. he is heading the Library and Documentation Division of ISRO Satellite Centre. Allen and Lancour.Budgetary Control System Unrestricted Funds established and transfer price of such products or services is determined based on i) full cost ii) variable cost iii) market price or iv) a negotiated price. He is in the profession for last 37 years. Russell F. AMA Management Handbook. M. Management Control Systems: Text and cases Illinois: Richard D Irwin Inc. E-mail: sridharmirle@yahoo. Since 1978.com. et. Harold eds. written 19 course materials for BLIS and MLIS. eds. New York: John Wiley and Sons. G. About the Author Dr. Kent. (1970). ed. Effective Library and Information Centre Management. (1976). Bryson. Sridhar is a post graduate in Mathematics and Business Management and a Doctorate in Library and Information Science. In: Mali. Edward. Management Techniques for Libraries. Jack. Earlier he has worked in the libraries of National Aeronautical Laboratory (Bangalore). Transfer pricing is to measure the revenue of the responsibility centre that furnishes the product and the cost of the unit that receives the product in a way that aids management decisions and that motivates responsibility centre managers to work in the best interests of the organization. I I. Evan.11 REFERENCES AND FURTHER READING Anthony. S. M S Sridhar 15 . Principles of Management. England: Gower. New York: Academic Press. Jo.

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