Budgetary control is derived from the concept and use of budgets. Budget is the financial expression of various organisational operations and the way in which budgets are prepared as tools for planning. Thus, budgetary control is a system which uses budgets as a means for planning and controlling entire aspects of organisational activities or parts thereof. Terry has defined budgetary control as follows:
“Budgetary control is a process of comparing the actual results with the corresponding budget data in order to approve accomplishments or to remedy differences by either adjusting the budget estimates or correcting the cause of the difference.”
Some people treat budgetary control only as a technique of cost control. For example, Brown and Howard have defined budgetary control as follows:
“Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibility, comparing actual performance with budgeted and acting upon results to achieve maximum profitability.”
However, the scope of budgetary control extends beyond cost control with the introduction of several types of budgeting.
Features of Budgetary Control
- Budgetary control establishes a plan or target of performance which becomes the basis of measuring progression of activities in the organization.
- It tries to measure the outcomes of activities in quantified terms so that actual performance can be compared with budgeted performance.
- It tries to focus attention of the management on deviation between what is planned and what is being achieved so that necessary actions are taken to correct the situation and to achieve the objectives of the activities. Thus, it does not control the activities directly but points out where control and corrective actions are required.
Benefits of Budgetary Control: Budget and budgetary control leads to maximum utilization of resources with a view to ensure maximum returns because it provides aid to managerial planning and control. Besides, it also helps in coordination. Thus, budgetary control can play three roles in an organisation. These are: budgetary control as a tool for planning, budgetary control as a tool for control, and budgetary control as an aid to coordination. Let us see how budgetary control performs these three roles.
Budgetary Control as a Tool for Planning: The system of budgetary control, by preparing budgets before the activities are actually undertaken, facilitates the planning function of management in the following ways:
Budgetary control forces managers to plan their activities. Since budget allocation is based on the nature of activities undertaken in a department or section, the managers have to define what activities they plan for future. Thus, planning becomes an integral part of total managerial functions.
- Since budgetary control is duly concerned with concrete numerical goals, it does not leave any ambiguity regarding the targets. Thus, every manager in the organisation is sure about what he is expected to do. This offers the opportunity of objective appraisal of performance, self-examination and even self-criticism.
- It leads to a cautious utilization of resources since it keeps a rigid check over activities in the organisation. This system acts both ways. It spurs efforts to achieve the goals and yet keeps them within the well defined boundaries. It focuses on rational use of organisational resources so as to promote a higher standard of performance and efficiency.
- It also contributes indirectly to the managerial planning at higher levels. Budgetary control provides an effective means by which management can delegate authority without sacrificing overall control. The budget limits the area of activities to be trodden by the manager on their own. Thus, managers at higher levels can delegate the authority to their subordinates for the performance of assigned activities and they will be free for strategic thinking and planning.
Budgetary Control as a Tool for Control
Budgetary control acts as a tool of control in the following ways:
- Budgetary control, as a control device, is very exact, accurate, and precise. A budget provides standards against which control activities are undertaken. Thus, managers can keep a watch whether their efforts are proceeding in the right direction.
- Budgetary control pinpoints any deviation between budgeted standards and actual achievement. This is communicated very quickly and managers can take suitable actions to overcome the deviations so as to achieve organizational objectives.
- Budgetary control system also points out the reasons which may be responsible for deviation between budgets and actual. Thus, it provides direction for necessary control actions.
Thus, it can be seen that with the constant help of the budgetary control system, attempts can be made to keep performance parallel with the estimated one.
Budgetary Control as an Aid to Coordination
Budgetary control system provides aid in coordination in the organization. It helps to achieve coordination in the following ways:
- Budgetary control system promotes cooperation among various sub-units in the organization. Since it is an instrument of planning, it brings activities of various departments under overall perspective. This inspires team spirit and promotes cooperation. For example, the well- planned sales and production budgets lead to better purchasing and the labour requirement for timely recruitment by personnel department, etc.
- The system encourages exchange of information among various units of the organization. The preparation of specific functional budget inevitably needs the free flow of information among the various departments of the organization. This free flow of information helps in achieving coordination.
- The system promotes balanced activities in the organization. Volume of each activity depends upon the objectives of the organization. Therefore, each activity should be performed in proportion to other activities. Thus, estimates of operations like sales, production, purchasing, etc., can be well checked against each other and likewise, the activities can be programmed.
Thus, budgetary control system is a vital and important device for planning, controlling and coordinating the activities in an organisation thereby contributes to attain higher standard of performance and efficiency.
Problems in Budgetary Control: Though budgetary control helps a lot the managers in planning, controlling and coordinating the activities of an organisation, it is not a fool-proof system. It has its own limitations. There- fore, managers should be well aware about these problems so as to take adequate precautions to minimize the impact of these. Problems in budgetary control system emerge from two sources: problems because of planning limitations and operational problems.
Planning Problems: As seen earlier, planning activity has its own limitations since budget is an outcome of planning activity, it cannot remain free from the limitations of planning. In this context, following problems are likely to emerge:
The biggest problem in budgetary control comes because of uncertainty of future. It is a well-known fact that budgets are prepared on the assumptions of future happenings in a certain way. But due to change in situations, budgets do not remain reliable and meaningful and do not help in achieving control.
- Budgetary control, sometimes, may jeopardize the basic and important functions in the organisation. Once budgets are prepared, they become the basis for further course of action. The budgets of future years are prepared on the basis of previous budgets. Meanwhile, situations may change to such an extent, that many functions unimportant few years ago may become very important but budgets may not reflect that. This problem, however, can be overcome by periodic review of importance of various activities and incorporating their importance in budgeting. Zero-base budgeting does this to a very great extent.
- The role of budgetary control system in the planning function is sometimes over-emphasized. Budgets become end in themselves and any deviation from budgeted figures is looked upon with contempt. This inflexibility contributes negatively to the organisational objectives. For example, in government departments, substantial portion of amount is spent in the last month of the financial year so as to keep the budget intact. This may result into avoidable inefficiency.