Budgetary Control

Budget is defined as "a plan quantified in monetary terms prepared and approved prior to a defined period of time usually showing planned income to be generated and/ or expenditure to be incurred during that period and the capital to be employed to attain a given objective".  An analysis of the definition will bring out the following features of a Budget:

• It is a plan expressed in monetary terms; but it also contains physical units;
• It is prepared prior to the period during which it will operate;
• It is approved by the management for implementation;
• It is related to a definite future period;
• It indicates planned income and expenditure including capital expenditure during the period, and
• It is prepared for the purpose of implementing the policy formulated by the management, and the objective to be achieved during the period.  A budget may be expressed in relation to time, viz. short-term and long-term budget, in relation to functions, viz. production budget, sales budget, cash budget, capital budget, etc. and in relation to behaviour, viz. fixed budget and flexible budget.  Budgetary control is the system of planning and accounting control through the use of budget.  It is defined as "the establishment of budgets relating 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” From the definition, the following features of budgetary control emerge :–
  • Establishment of budgets – Budgets are prepared for each function relating to the responsibilities of individual executives. The overall functional budgets are then coordinated with each other, so that an overall budget for the business may be prepared.
  • Executive responsibility – Executives have specific tasks to be performed and responsibilities to be discharged. These must be directed towards the attainment of the objectives of the enterprise.
  • Requirement of a policy – A budget is a policy statement. It indicates what the business plans to do, and how it proposes to do it.
  • Comparison of actuals with Budgets – Comparison is the foundation of control. Actual performance must be measured and periodically compared with the plans. Such comparisons will indicate deviations from the planned course of action which must be highlighted in time, so that remedial action can be taken to reach the preset goods.
  • Revision of policy – Sometimes the comparison of actual performance with the plans may indicate the need to change policies. If a change in policies is necessary to reach the goals of the organisation, then the policy change must be brought about. To that extent, policies must be flexible.