BUDGETING AND BUDGETARY CONTROL

Introduction
 Budgeting is a short term planning and control technique. It is the process of producing
quantitative and/or financial plans called budgets. It converts strategic plans into action plans.
 The budgeting process produces budgets for the forthcoming period. It is a future oriented
aspect of cost and management accounting.
 A budget can be in the form of:
a) Quantities e.g. units of production, raw materials purchases, units to be sold,
etc
b) Financial i.e. in monetary values e.g. cash receipts and expenditures expected
c) Both quantitative and financial

Importance of budgeting
a) Co-ordination- budgets are prepared at all organizational levels and for all organizational
functions. The budgeting process ultimately leads to production of a master budget which
inter-relates all other budgets. This ensures co-ordination of activities throughout the
organization.
b) Communication- budgeting is an important way of communicating the organization’s
policies and objectives between the levels of management. Each manager is charged over a
given area and he is therefore responsible for achieving the objectives of that area.
 Each manager involved in implementing part of the overall plan is involved in budgeting.
This enhances communication up and down and across the organization structure.
c) Management by exception- budgeting enhances definition and clarification of individual
management responsibilities in the budgeting process. This enhances management by
exception.
 This is where a manager carries out activities as required in a plan. Only variations from
the plan are acted upon and reported to a higher level. Hence the top managers are left to
concentrate their efforts on exceptional items to the budget.
d) Control- the process of comparing actual results with the budget and reporting variations is
called budgetary control. This process helps to control expenditure and imposes financial
discipline in the organization.
e) Motivation- budgeting can be a motivating factor because it enhances the involvement of
lower and middle management in the establishment of clear targets.
 People are motivated when their views and opinions are sought and if they understand the
overall direction of the organization.
NB: budgeting and standard costing are generally referred to as responsibility accounting. Under
this type of accounting, managers focus attention on key aspects of the techniques whereby a
named manager is given the responsibility for a task together with the necessary funds.

The Master Budget

 The Master Budget is the summary of all the budgets in the organization.
 The master budget also incorporates the following:
a) Budgeting operating statement
b) Balance sheet of the organization.
 The preparation of the budget comprises two stages:
a) Budgetary Planning stage- the stage incorporates:
 Forecasting and quantity budgets
 Preparation of financial budgets
 Agreement between the budget holders and the top management
 Publication of the budget
b) The budgetary control stage- this stage is made to ensure that any deviations from the
budgeted forecasts are corrected. It involves the following:
 Recording of actual results upon performance
 Comparison between the actual figures and the budgeted figures
 Reporting variations
 Taking measures to correct the variations.

Human Factors in Budgeting

 The success of the budgeting process may depend on the human aspects of the organization.
 It is therefore paramount to incorporate the attitudes, aspirations and feelings of everyone
associated with budgeting in implementing the forecasts of the budgetary process.
 Employees, especially responsible officers for the key areas of the budget must be
encouraged to participate in each of the stages of budgeting.
 Budgets should not be seen as a threat or a policing tool by the employees. This is because
they may not co-operatively implement the budget and they will resist to the budgetary
provisions.
 Incorporating the human aspects in budgeting is important because of the following reasons:
1) It enhances communication within the organization
2) It boosts employees morale
3) Enhances co-ordination and organizational cohesiveness
4) Reduces resistance of the employees
5) Can be used as a motivational tool

Fixed Budgets
 A fixed budget is one that is prepared to suit one given level of volume or activity.
 It is usually not adjustable i.e. a single budget which cannot be adjusted to suit any other
level of activity.
 In most cases, the fixed budget is not used during normal operations but is useful at the
preliminary planning stage.
 As a result, fixed budgets are very rigid and not used in practice.

Limitations of a fixed budget

1. It does not provide for the implementation of alternative budgets, hence it ties down the
organization to only one alternative
2. It does not provide a relevant base for measuring actual performance when the activity differs
from the budgeted targets
3. It leads to less motivation, especially when the fixed budget provides for unattainable
budgets
4. It may promote a spending attitude among the managers who may not want to receive lesser
budgetary allocations in future. As a result, inefficiency emerges within the organization
5. Changes in the operating environment are bound to occur in the long run. Hence a fixed
budget becomes redundant in the long run.
Flexible Budgets
 The opposite of a fixed budget is a flexible budget. A flexible budget is one designed so that
it can suit the level of activity actually attained.
 To come up with a flexible budget, it is taken into account that there are various kinds of
costs:
i. Fixed costs
ii. Variable costs
iii. Semi-variable costs
 A given budget is usually adjusted to correspond to the actual activity. This is called flexing
the budget.
 Flexing of budgets depends on cost behaviour.

Importance of flexible Budgets

i. It is important for planning purposes by recognizing cost behaviour
ii. It is essential for control purposes since it can be adjusted to reflect variances from
expected budget. To provide useful information, actual costs for the actual activity
level should be compared with the expected costs for that level of activity.