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Budgetary control is defined by the chartered Institute of Management Accountants (CIMA) as: "The establishment of budgets relating the responsibilities of executives to the requirements 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".

The budgeting system of every organization provides those saddled with the responsibilities of managing such organization the basis to determine how to source, allocate and utilize funds to support logical decision making and achieve organizational goals.

Salient Features of Budgetary Control-

1. To determine the objectives to be achieved , over the budget period , and the policy or policies that might be adopted for the achievement of these ends.

2. To determine the variety of activities that should be undertaken for the achievement of the objective.

3. To Draw up a plan or a scheme of operation in respect of each class of activity.

4. To find out a system of comparison of actual performance by each department with the relevant budget and determination of causes for the discrepancies, if any.

5. To Ensure that corrective action will be taken where the plan is not being achieved .

Advantages of Budgeting and Budgetary Control

1. Budgets are based on the well defined plans.

2.  It is an effective way of controlling costs. It promotes economy and efficiency.

3. Promotes coordination and communication.

4. Budget make management by exception possible.

5. It promotes co-ordination between various departments.

6. Budgets act as strong incentive to employees by fixing targets of performance.

7. Motivates employees by participating in the setting of budgets.

8.  Budget Improves the allocation of scarce resources.

9. Budget encourage deligation of authority.

Problems in Budget

1. Budgets can be seen as pressure devices imposed by management, thus resulting in bad labour relations.

2. Budget control based on estimates.

3. It is difficult to reconcile personal and corporate goals.

4. This is often coupled with "empire building" in order to enhance the prestige of a department.

5. Managers may overestimate costs so that they will not be blamed in the future should they overspend.

Different Type of Budgets

Budgets may be classified by: Capacity, Coverage they encompass, periods which they cover and conditions on which they are based.  

Budget  

Capacity		Coverage		Period			Conditions
Fixed  Budgets	Flexible Budgets	Functional Budgets	Master  Budgets	Long term Budgets	Short term Budgets	Basic Budgets	Current Budgets

Fixed Budgets- A fixed budgets, is a budgets designed to remained unchanged irrespective of the level of activity attained. The budget is remains fixed over a given period and does not change with the change in the volume of production or level of activity attained. Normally, Such a budget is a suitable for fixed expenses.

Flexible Budgets- A budget which, by recognising the difference in behavior between fixed and variable costs in relation to fluctuation in output or turnover , is designed to change appropriately with such fluctuations. A flexible budget changes according to the levels of activity.

Functional Budgets- Budget which relate to the individual functions in an organization are known as functional budget. For example , purchase budget; sales budget; production budget; plant utilization budget and cash budgets.

Master Budget- It is a consolidated summary of the various functional budgets. It serves as the basis upon which budgeted P & L A/c and forecasted Balance Sheet are built up.

Long-term budgets- The budgets which are prepared for the periods  longer than a year are called long-term budgets. Such budgets are helpful in business forecasting and forward planning. Capital expenditure budget and research and Development budget are examples of long-term-budgets.

Short-term budget- Budgets which are prepared for periods less than a year are known as short-term budgets. Cash budget is the an example of short-term budget. Such type of budgets are prepared in cases where specific action has to be immediately taken to bring any variation under control, as in cash budgets.

Basic budgets- A budget which remains unaltered over a long period of time is called basic budget.

Current budgets- A budget which is established for use over a short period of time and is related to the current conditions is called current budget.

New Developments in Budgets

These days many new and useful concepts have come in the area of budgeting. With the advent of computers, it is very easy to prepare flexible budgets and do sensitivity analysis. We can also prepare financial planning models based on sophisticated mathematical formulae.

Another emerging concept in budgeting is the Kaizen budgeting. This follows from the concept of “kaizen” or continuous improvement. In this the budget takes into account expected reduction in costs, which are planned rather than taking into account costs based on current practices.

With the widespread use of Activity Based Costing ,activity based budgeting is also gaining ground. This is used more as a means of planning for activity based management. These techniques can be used to enhance the utility of the current budgeting techniques.    

Point to Ponder in Preparation of the Budgets

The starting point of any budget is the sales forecast. From there, each item of expense has been budgeted. We need to have certain standards.

If we look at the various items , in a budget, we can identify the items witch are controllable and non-controllable. For some items , the cost can be controlled both by controlling the usage (that is the units used up per unit of output) as well as the cost per unit . For example,  If the travelling expenses is to be controlled , then we can control the same either by undertaking less of travel or by travelling in a lower class.

Steps in Preparation of A Budgets   

1. Determination of objective.

2. Formation of Budget Committee.

3. Collection of adequate cost information.

4. Decide on the variable that will go into the budget.

5. Finalize the function which will be used to arrive at the budgeted figures.

6. Determine the capital expenditure to be incurred and the items on which this is to be incurred .

7. DO a ”what-if ? analysis for all the figures.

8. Consult  with the various line managers and finalize the budget.

9. Ensure there is no soft targeting or hard targeting.

10. Conduct a variance analysis at the end of the year and determine the reasons or variations.

Checklist for use in Organisations

1. Various aspects of budgets and budgetary control system have been covered in the section above. ·The main purpose of this paper was to give a framework  for the managers to make their budgetary exercise more useful. For this purpose , a checklist is suggested below :

2. Is there a formal system of budgeting in your organization ? If yes , is it top down or bottom up approach?

3. Do you prepare a flexible budget at the beginning of the year?

4. What are the various parameters used in your budget ?

5. Is the budget used for performance appraisal ?

6. Are the targets same as the budgeted figures?

7. Is the budget used to give financial powers for expenses?

8. Is the budget prepared for sales forecasting ?

9. Do you have expense budgets for every department?

10. Do you have expense budget for every function as well as item ?

11. Does your organization perform a formal variance analysis exercise?

12. Do you have set standards for various expenses ? If yes, how often are these standards revised ?

Once the answer to the above question have been obtained, then the manager can start analyzing the strength and weakness of their budgetary process. After a thorough analysis of the strengths and weakness further improvement can be made.

1 V.K. Saxenaand C.D.Vashist-Cost & nbsp 2. Principles of Management Accounting– Dr. S.N. Maheshwari 3. Jaurnal of ICAI 4. Journal of ICWAI 5. Study Material of ICAI 6. Study Material of ICWAI 7. Internet Sources