Advantages, Limitations, Essentials of Budgetary Control | Cost Accounting - B Com PDF Download

Advantages of Budgetary control

In the light of above discussion one can see that, coordination and control help the planning.

These are the advantages of budgetary control. But this tool offer many other advantages as

follows:

1. This system establishes fundamental guidelines for initiatives.
2. It empowers management to conduct business in a highly professional manner, as budgets are crafted to optimize resource utilization and achieve set objectives.
3. It fosters teamwork, promoting a sense of collaboration and mutual understanding among staff members.
4. It enhances production efficiency, minimizes waste, and exercises control over costs.
5. It informs management about areas that require corrective action.
6. Budgeting also facilitates the acquisition of bank credit.
7. It assesses the current situation and identifies necessary changes.
8. With its assistance, tasks such as planning, coordination, and control are executed effectively and efficiently.
9. It involves proactive planning, viewed favorably by many credit agencies as an indicator of sound management.

Limitations of Budgetary control

1. It tends to introduce operational inflexibility, which can be detrimental. Since budget estimates represent a quantitative expression of all pertinent data, there is a tendency to impart a degree of rigidity or finality to them.

2. The expense involved makes it unfeasible for small enterprises. The budgeting system is a meticulous process that demands considerable time and incurs substantial costs.

3. Budgeting cannot replace management; it is merely a tool for management. "The budget should be viewed not as a master, but as a servant." It is a misconception to believe that the introduction of budgeting alone is sufficient to guarantee success and future profit security.

4. It may occasionally lead to conflicts among managers, as each strives to claim credit for achieving budget targets.

5. Simply preparing a budget does not guarantee its proper implementation. Inadequate implementation may adversely impact morale.

6. The implementation and operation of a budgetary control system entail significant costs, including the employment of specialized staff and other expenses that may be challenging for small companies to bear.

Essentials of Effective Budgeting

1. Endorsement from top management: For the budget structure to be successful, it is crucial that every member of the management not only fully supports it but also receives motivation and guidance from the top management. No control system can be effective unless the organization is convinced that the management views the system as important.

2. Collaborative Effort: This is a fundamental requirement, especially when budgets are prepared "from the bottom up" in a grassroots manner. The top management must comprehend and enthusiastically endorse the system. This necessitates education and participation at all levels, with the benefits of budgeting being communicated to everyone.

3. Pragmatic Objectives: The budget figures should be realistic and represent logically achievable goals. Responsible executives should agree that the budget goals are sensible and attainable.

4. Robust Reporting System: Reports comparing budget and actual results should be promptly generated, with special attention given to significant exceptions—figures that deviate significantly from expectations. An effective budgeting system also requires a proper feedback mechanism.

5. Composition of Budget Team: This team receives forecasts and targets from each department, along with periodic reports, and confirms the final acceptable targets in the form of the Master Budget. The team also approves departmental budgets.

6. Well-Defined Business Policies: All budgets should reflect business policies formulated by higher-level management. In other words, budgets should always align with the policies established for specific departments or functions. For this purpose, policies should be precise, clearly defined, and free from ambiguity.

7. Integration with Standard Costing System: When a standard costing system is in use, it should be seamlessly integrated with the budget program, encompassing both budget preparation and variance analysis.

8. Inspirational Approach: All employees or staff, apart from executives, should be strongly and effectively motivated towards the budgeting system. Human beings, by nature, resist pressure and are averse to anything forced upon them; therefore, a motivational approach is essential.