Budgetary control


Budgeting is a management tool used for shorter-term planning and control. Traditionally, budgets have been employed as devices to limit expenditure, but a much more useful and constructive view is to treat the budgeting process as a means for obtaining the most productive and profitable use of the Company’s resources via planning and control.

Briefly, the budgeting process consists of establishing objectives for every area of activity, comparing actual results with planned results, and the taking of corrective action on the basis of significant variations from planned results.

In compiling a comprehensive budgetary plan it is vitally important that all dimensions of a company’s operations be considered. Each activity has an impact of raw materials, the quantity of acceptable finished goods, the level of piecework earnings etc. Budgeting can be seen as a major aid to communication, and the process should enable each manager to see how his area of activity fits in and contributes to the whole. In this way management is put into a position whereby it can anticipate change (at least to some extent) and thereby be prepared to meet it.
A production manager’s decision to alter the level of work-in-progress stocks, or a marketing manager’s decision to change the terms under which a particular product is sold, can be traced through the entire budgeting system to show the effects of such decisions on the operations of other departments and on the company’s overall results.

1. Budgetary Planning- The predetermination of a course of action in such detail that every responsible unit can be guided by it.
2. Budgetary control-the converse of planning, by which results are compared with desired standards of performance and any necessary action taken accordingly in relation to significant deviations.

A company will have a Master Budget which will have the following constituents.

Sales budget: This should show sales by item, by region, by channel of distribution, and (on a quota basis) by salesman, in a fully reconciled manner. The physical quantities can be extended in accordance with the proposed price list to show revenue by product line, sales territory, and so forth.

Selling expense budget: Included within this heading will be salesmen’s salaries, commissions, expenses, and related administrative costs.

Distribution budget: Transportation, freight charges, stock control, warehousing, wages, expenses, and related administration costs make up this budget. The level of activity and the level of service must both be specified in advance.

Marketing budget: Apart from details of all advertising, promotional activities, public, relations, marketing research, customer services and so forth, the marketing budget can also include a summary of the sales, selling expenses, and distribution budgets.

R&D budget: This will cover materials, equipment and supplies, salaries, expenses and other costs relating to design, development, and technical research projects.

Production budget: The aim of the production function will presumably be to supply finished goods of a specified quality to meet marketing demands. The distribution budget will specify finished goods stock levels, and this can be related to the sales budget to give detailed production requirement.
Following from the above main budgets, it is necessary to consider a series of subsidiary budgets:

1. Raw materials budget: paying appropriate attention to desired stock levels.

2. Labor budget: ensuring that the plan will make the required number of employees of relevant grades and suitable skills available at the right times.

3. Maintenance budget: involving a decision between preventive or remedial maintenance.

4. Quality control: whilst not a production responsibility, must be budgeted in accordance with production plans to ensure its adequacy.

5. Manufacturing overheads budget: covering items such as consumable materials and waste disposal.

Manpower Budget: This must take an overall view of the organization’s need for manpower for all areas of activity-sales, manufacturing administrative, executive, and so on-for a period of years. It leads to two further budgets:

1. Personnel budget: catering for recruitment costs, canteen facilities, first aid, house journals, etc.

2. Training budget: covering all aspects of personnel development from apprentices on the shop floor to management development programs.

Purchasing budget: Raw materials, consumable items, office supplies and equipment, and the whole range of an organization’s requirement, must be considered, along with the questions when, where, at what price, and how often to buy.

Company secretarial budget: This will include registration expenses, legal fees, pension, fund, insurance, reception facilities etc.

Services budget: Various odd services required inside the plant must not be overlooked. Like boiler house, gate-keeping, night watchmen, security, gardening, and similar activities.

Administration budget: Apart from the administrative items included in the secretary’s budget, others must be covered as well. EDP, executive salaries, typing pool, and any other expenses should be dealt with in this budget.

Financial budget: As we have already seen, this is made up of five individual budgets

1. Cash budget: concerned with liquidity, must reflect changes between opening and closing debtor balances, and between opening and closing creditor balances, as well as focusing attention on other inflows and outflows of cash(such as those stemming from share issues, or the retirement of debt, or the payment of dividends to shareholders).

2. Budget profit and loss account: concerned with profitability. This merely reflects the matching of revenues received during a period with costs incurred during that same period. Nevertheless, it is largely on the basis of this budget that a company forecasts its dividend policy, and determines its ability to obtain debt funding.

3. Budgeted balance sheet concern with the structure of assets and the pattern of liabilities.

4. Budgeted funds statement: concerned with the sources of funds and their implications in the organization’s objectives-striving endeavors.

5. Capital budget: concerned with questions of capacity and strategic direction. This must deal with the evaluation of alternate dispositions of capital funds as well as choice of the best capital structure.

Periodically a Budget and actual comparison statement should be prepared with the objective of finding out the reasons for variance. For example if the actual expenditure on coal exceeds the budget, it may mean an excess of coal (arising from Boiler inefficiency or bad coal) or excess cost of coal or both. Variance can be analyzed in terms of quantity and cost variance.