Budgetary control is a process used for managing the revenues and expenditures of an organization. An effective budgetary control system enables managers to utilize budgeted figures for monitoring and controlling costs and operations in a specific accounting period.
By implementing budgetary control, managers can set financial and budgeted performance goals as per the budgets by comparing the actual results and adjusting performance. It is done by management, mainly when their incentives or performance evaluations are dependent on objectives met. It is a buffer made by management or lower-level managers to generate budget forecasts that are not difficult to complete.
According to CIMA, budgetary control is-
The establishment of budgets relating to the responsibilities of executives to the requirement of a policy, and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide a basis for its revision.
What Is Budgetary Control?
Definition: Budgetary control is defined as an accounting system or process that helps the accounting professionals or budget holders to prepare and monitor budgets, improve the utility and availability of accurate financial reporting, minimize cost overruns, prevent wastage, manage daily operations and provide financial guidance needed to accomplish organizational goals.
This is a typical practice in many businesses that defy budgeting. A proper budget must be honest and hold management responsible for the company’s overall financial goals.
Lower-level management and subordinates frequently do not want to be held to these stringent standards and financial constraints. Instead of communicating honestly about their departments’ planned income and costs, they fluff their statistics to provide breathing room and get around a restricted budget’s restrictions.
Definitions of Budgetary Control
As per J L Brown and L R Howard-
Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.
J Batty defines it as-
Budgetary Control is a system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities or services.
Features of Budgetary Control Process
Budget planning is a crucial goal. The presence of a budget compels managers to plan for the future, attempting to predict potential issues and their remedies. Another goal of the budget is coordination. Without coordination, department heads may take courses that are valuable to their departments but not to the organization.
For example, the purchasing manager may be interested in purchasing supplies in considerable quantities to take advantage of a favorable bargain. However, keeping an ample supply of supplies on hand can increase material loss, and the organization may suffer as a result. A budget’s third goal is to give a motivating drive. The budget may be an effective tool for encouraging managers to operate under the organization’s goals.
A budget is an effective tool for expressing plans to various management. The most common use of a budget is a tool for control. The actual cost or spending is compared to the projected cost to exercise control. Failure to fulfill budgeted objectives quickly indicates the need for remedial steps.
Some of the other notable features of the budgetary control system are-
- Suggests how a budget estimates each functional area of a budgeting process such as sales, purchase, production, policies, activities, etc
- Helps accounting department to record actual performance of each functional area.
- Assists in variance analysis and identifying the persons responsible
- Lets a budget be expressed in relation to Time – Short-term and Long-term Budget, Functions – Sales Budget, Cash Budget, Production Budget, and Behaviour – Fixed and Flexible Budget; etc.
- Determining targets/objectives be achieved during the budget period or future period
- Determining various activities and planning for each activity
Budgetary Control Process Objectives
Some of the most common budgetary control objectives are coordination, planning, Control, Responsibility Accounting, Optimum Employment of Capital, etc. In addition to these some other goals of budgetary control:
- Establishing the enterprise’s goals
- Providing plans for fulfilling the goals that have been established
- Coordination of various departments’ actions
- Managing numerous departments and cost centers cost-effectively and efficiently
- Increasing profitability by reducing waste
- The control system should be centralized
- Resolving deviations from set norms
- Defining the roles and responsibilities of various personnel inside the organization
The Benefits of Budgetary Control Process
Budgetary management has evolved into an essential instrument for a company to minimize expenses and optimize revenues. Some of the benefits of fiscal management include:
- It establishes the enterprise’s goals, strategy, and policies. If there is no clear goal, resources would be spent pursuing alternative goals
- Budgetary control establishes goals. Each department is compelled to work effectively to meet the deadline. As a result, it is an efficient means of monitoring the activity of many divisions within a business unit
- It ensures improved coordination across departments
- If performance falls short of expectations, budgetary control assists management in determining who is to blame
- It aids in lowering manufacturing costs by avoiding needless expenditure
- Budgetary control promotes efficiency and economy by instilling cost-consciousness in employees
- Budgetary control enables centralized control while allowing for dispersed action
Budgetary Control’s Limitations
Though budgetary control helps managers master budget management, it also has the following limitations-
- It is complicated to construct realistic budgets under inflationary situations
- Budgeting entails large expenditures that small businesses cannot afford
- Budgets are created for the future, which is inherently uncertain. Conditions may change in the future, causing budgets to be disrupted. As a result, future uncertainties reduce the value of the budgetary management system
- Budgetary control is only a tool for management. It cannot replace management in decision-making since it is not a management alternative
Examples of Budget Control
Budgetary control is a financial term that refers to managing revenue and spending. Most university departments, for example, have yearly chest allocations for general equipment.
A department can determine if a particular item can be funded by regularly comparing actual expenditure on this budget to projected expenditure. If the account is in deficit, the department must find another source of funds.
How does Budgetary Control work?
To begin, a budget must be developed. Simply described, a corporate performance budget is a set of financial targets that management wishes to attain. These might be revenue or expenditure targets.
Second, management must evaluate, analyze, and interpret actual performance outcomes concerning planned goals once the budget has been set. For this comparison, management often consults a budget report.
Third, after the comparison has been established, managers must improve the underperforming activities while developing the ones that are operating well.
Managers may readily focus on unfavorable operations using the budget report since all areas that meet the budget are marked with an F for favorable variance, and the places that perform badly are marked with a U for unfavorable variance.
The fourth and final phase is often completed at the end of an accounting period.
Budgetary Control in Oracle ERP
With the help of the Budgetary Control feature, Oracle Enterprise Resource Planning (ERP) offers a set of options and validation processes for validating budgets against consumption that will help you in preventing overspending.
Budgetary Control in Oracle ERP Cloud is also related to Encumbrance Accounting that assists in avoiding spending over your budgeted amount. Budgetary control helps in managing the spending control process on real-time transactions of a business. Different functions that Oracle ERP does are-
- Performing funds checks and funds reservations for determining if spending is allowed during a transaction’s submission or approval
- Maintaining budgetary control balances as per the budget calendar and controlling budget structure for budget, funds, and consumptions available functions
- Monitoring the company’s expenditures on a monthly or yearly basis
- Defining conditions for stopping or overriding transactions if they exceed a budgeted limit
You might enable Budgetary Control for the following-
- Business units (BU) assigned to a ledger
- Journal sources and categories
- Transaction types, such as purchase orders (PO) or requisitions
Budgetary Control Essentials
1. Budgetary Control Organization
Budget planning, upkeep, and governance are all dependent on competent organizations. A Budgetary Committee is formed, comprised of the heads of several departments. All functional heads are responsible for ensuring that their respective departmental budgets are correctly implemented.
2. Budget Centres
A budget center is the corporation’s portion that prepares the budget. A budget center might be a department, a sector of a department, or any other component of a department. Budget centers must be established to cover all aspects of the company.
3. Budget Manual
A budget manual is a document that outlines the tasks and responsibilities of various executives involved with budgeting. It defines the relationships between multiple officials.
4. Budget Officer
The Chief Executive, at the helm of the organization, appoints the Budget Officer. The budget officer has the power to analyze budgets provided by various functional heads and make necessary changes.
5. Budget Committee
In small businesses, the accountant is in charge of budget creation and implementation. A group known as the Budget Committee is constituted in large-scale enterprises.
6. Budget Period
A budget period is the amount of time a budget is designed and implemented. A lot of things influence the budget period. It might be a contrast for different industries or even within the same sector or firm.
7. Essential Factor Determination
Budgets have been established for each functional area. These budgets are interconnected and interdependent. For financial control to be successful, varied budgets must be well-coordinated. Budget constraints on specific budgets may affect other budgets as well. A Key Factor, also known as a Principal Factor, is a factor that influences all different budgets.
You have to spend money to make money, but without a proper budgetary control system, it might be difficult to get the most bang for your buck.
Businesses or organizations should always create and implement efficient budgetary control procedures. It is also important to invest in technology that offers clean, trustworthy data in real-time, as well as automation and analysis.
Businesses need to ensure that their team understands and participates in the budgeting and budgetary control procedures that support their department’s and organization’s goals.
When you do, you’ll have the flexibility and strategic insights needed to successfully establish, monitor, and manage all of your budgets—and guarantee that every dollar spent is spent on growing a successful business.
How effective do you consider a budgetary control process in the result-driven budget as well as finance management?