Budget And Budgetary Control
Budgets. A budget is a financial and/or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective & must be approved.
An analysis of this definition will reveal the essential features of a budget namely that
- a budget may be expressed in terms of money or quantity, or both
- it should be developed prior to the period during which it is to operate,
- it is set for a definite period, and
- before its preparation, the objective to be attained and the policy to be pursued to achieve that objective and required to be laid down.
Budgeting lays emphasis on the necessity for advance decision on future course of action to be followed and points out the result which would accrue by following that course of action.
The objective of setting budgets may be summarised as follows :-
(a) A budget is a blue print of the desired plan of action or operation. Plans covering the entire organisation and all its functions like purchase, production, sales, financial management, research and development are expressed through budgets. The budget serves as a declaration of policies and also defines the objective for executives at all levels of management.
(b) Budgets provide a means of co-ordination of the business as a whole . In the process of establishing budgets, the various factors like production capacity, sales possibilities, and procurement of material, labour, etc. are balanced and co-ordinates so that all the activities proceed according to the objective. Budgets inculcate team and are like putting so many heads together to solve a common problem.
(c) Budgets are means of communication. Complex plans laid down by the top management are passed on to those who are responsible for putting them into action.
(d) Budgets facilitate centralised control with delegated authority and responsibility. Grouped according to the responsibilities of different executive levels, they facilitate decentralisation of work. Budgets are instruments of managerial control by means of which the management can measure performances in every part of the concern and take corrective action as soon as any deviations from the budgets come to light.
Budgetary control is defined as
a. the establishment of budgets relating the responsibilities of executives to the requirements of a policy and
b. 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..
It follows that a budgetary control system secures control over performances and related costs in different parts of a business by
- establishing budgets,
- comparing actual attainments against the budgets, and
taking corrective action and remedial measures or revision of the budgets, if necessary.
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