MEANING AND NEED FOR BUDGET
A budget is prepared to have effective utilisation of funds and for the realisation of objectives as efficiently as possible. Budgeting is a powerful tool to the management for performing its functions efficiently.
The Chartered Institute of Management Accountants, ENGLAND defines budget as under, 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.
Thus a budget fixes a target in terms of rupees or quantities against which the actual performance is measured. A budget can, therefore, be taken as document which is closely related to both the management function as well as the accounting function of an organisation.
Budgetary control is applied to a system of management and accounting control by which all operations and output are forecasted as far ahead as possible and actual results when known are compared with budget estimates.CIMA,Londen defines budgetary control as-The establishment of the budgets relating to the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted result either to secure by individual action the objectives of that policy or to provide a firm basis for its revision.
OBJECTIVES OF BUDGETARY CONTROL
It is planned to assist the management in the allocation of responsibilities and authority to aid in making estimates and plans for future, to assist in analysis of variations between estimated and actual results and to develop basis of measurements or standards with which to evaluate the efficiency of operations. The general objectives of budgetary control are as follows:
1. Planning: A budget is a plan of policy to be pursued during the defined period of time to attain a given objective. It will force management at all levels to plan in time all the activities to be done during the future periods.
2. Co-ordination: The budgetary control co-ordinates the various activities of the firm and secures co-operation of all concerned so that the common objective of the firm may be successfully achieved. It forces executives to think and think as a group. It co-ordinates the broader economic trends and the economic position of an undertaking.
3. Control: Control consists of the action necessary to ensure that the performance of the organisation conforms to the plans and objectives. Control of performance is possible with predetermined standards which are laid down in a budget. It makes control possible by continuous comparison of actual performance with that of the budget so as to report the variations from the budget to the management of corrective action.
PRELIMINARIES FOR THE ADOPTION OF A SYSTEM OF BUDGETARY CONTROL
1. Organisation Chart: A concern must have an organisation chart in order to have a clear idea of authority and responsibilities of each executive so that there may be no conflict among functional executives for shirking responsibilities and blaming others for poor performance. 2. The business objectives, plans, policies, scope of budgetary control should be clearly defined. 3. The budgeted output should be stated in clear terms.
4. The budget or key factor, if any must be indicated before starting the preparations of the budgets. 5. There must be efficient system of accounting.
6. Budget committee should be set up.
7. There should be a proper system of communication and reporting between the various levels of management. 8. Budget centres should be established for cost control and all budgets should be related to cost centres. 9. There should be a budget manual to indicate charter of programme. It contains all the details...