What is Budgetary control?

Budgetary control is the process by which budgets are prepared for

the future period and are compared with the actual performance for
finding out variances, if any. The comparison of budgeted figures with
actual figures will help the management to find out variances and take
corrective actions without any delay.

Objectives of Budgetary Control

1. Defining the objectives of the enterprise.

2. Providing plans for achieving the objectives so defined.

3. Coordinating the activities of various departments.

4. Operating various departments and cost centres economically and

efficiently.

5. Increasing the profitability by eliminating waste.

6. Centralizing the control system.

7. Correcting variances from standards.

8. Fixing the responsibility of various individuals in the enterprise.

Advantages of Budgetary Control

1. It defines the goals, plans and policies of the enterprise. If there is no

definite aim then the efforts will be wasted in achieving some other aims.

2. Budgetary control fixes targets. Each and every department is forced

to work efficiently to reach the target. Thus, it is an effective method of
controlling the activities of various departments of a business unit.

3. It secures better co-ordination among various departments.

4. In case the performance is below expectation, budgetary control

helps the management in finding up the responsibility.
5. It helps in reducing the cost of production by eliminating the wasteful
expenditure.

6. By promoting cost consciousness among the employees, budgetary

control brings in efficiency and economy.

Disadvantages or Limitations of Budgetary Control

1. It is really difficult to prepare the budgets accurately under

inflationary conditions.

2. Budget involves a heavy expenditure which small business concerns

cannot afford.

3. Budgets are prepared for the future period which is always uncertain.
In future, conditions may change which will upset the budgets. Thus,
future uncertainties minimize the utility of budgetary control system.

4. Budgetary control is only a management tool. It cannot replace

management in decision-making because it is not a substitute for
management.

5. The success of budgetary control depends upon the support of the top
management. If there is lack of support from top management, then this
will fail.

Economic Order Quantity (EOQ)

Meaning

It is the ideal order quantity a company should purchase to minimize

inventory costs such as holding costs, shortage costs, and order costs.
This production-scheduling model was developed in 1913 by Ford W.
Harris and has been refined over time. The formula assumes that
demand, ordering, and holding costs all remain constant.
KEY TAKEAWAYS

 The EOQ is a company's optimal order quantity that minimizes its

total costs related to ordering, receiving, and holding inventory.
 The EOQ formula is best applied in situations where demand,
ordering, and holding costs remain constant over time.

The goal of the EOQ formula is to identify the optimal number of

product units to order. If achieved, a company can minimize its costs for
buying, delivery, and storing units.

Assume, for example, a retail clothing shop carries a line of men’s jeans,
and the shop sells 1,000 pairs of jeans each year. It costs the company $5
per year to hold a pair of jeans in inventory, and the fixed cost to place an
order is $2.

Formula and Calculation of Economic Order Quantity (EOQ)

The formula for EOQ is:

H = Holding Cost (per unit,per year)

Limitations of Using EOQ

The EOQ formula assumes that consumer demand is constant. The

calculation also assumes that both ordering and holding costs remain
constant. This fact makes it difficult or impossible for the formula to
account for business events such as changing consumer demand,
seasonal changes in inventory costs, lost sales revenue due to inventory
shortages, or purchase discounts a company might realize for buying
inventory in larger quantities.

Other Techniques

Kaizen Costing

It is a technique of controlling the cost incurred over unproductive

activities and resources which does not add any value to the
organization.

It works on cost reduction instead of cost control.

5S

It is a system for organizing spaces so work can be performed efficiently,

effectively, and safely. This system focuses on putting everything where it
belongs and keeping the workplace clean, which makes it easier for
people to do their jobs without wasting time or risking injury.

The term 5S comes from five Japanese words:

 Seiri
 Seiton
 Seiso
 Seiketsu
 Shitsuke

In English, these words are often translated to:

 Sort
 Set in Order
 Shine
 Standardize
 Sustain
Each S represents one part of a five-step process that can improve the
overall function of a business.

Six Sigma

It is a continues improvement method0logy, is a method that provides

organizations tools to improve the capability of their business processes.
This increase in performance and decrease in process variation helps
lead to defect reduction and improvement in profits, employee morale,
and quality of products or services.

Just-in-time

JIT is an inventory management method whereby labour, material and

goods (to be used in manufacturing) are re-filled or scheduled to arrive
exactly when needed in the manufacturing process.

The goal is to reduce the carrying cost of inventory. Less inventory on

hand means you pay less in storage and insurance costs.

For example, a company that markets office furniture but does not manufacture it
may order the furniture from the manufacturer only when a customer makes a
purchase. The manufacturer delivers it directly to the customer.