Budgetary control system: No system of planning can be successful without having an effective and efficient system of control. Budgeting is closely connected with control. The exercise of control in the organisation with the help of budgets is known as budgetary control. The process of budgetary control includes
(i) Preparation of various budgets
(ii) Continuous comparison of actual performance with budgetary performance and
(iii) Revision of budgets in the light of changed circumstances.
A system of budgetary control should not become rigid. There should be enough scope for flexibility to provide for individual initiative and drive. Budgetary control is an important device for making the organisation more efficient on all fronts. It is an important tool for controlling costs and achieving the overall objectives.
Installing A Budgetary Control System: Having understood the meaning and significance of budgetary control in an organisation, it will be useful for you to know how a budgetary control system can be installed in the organisation. This requires first of all, finding answers to the following questions in the context of an organisation:
What is likely to happen?
What can be made to happen?
What are the objectives to be achieved?
What are the constraints and to what extent their effects can be minimised?
Having found answers to the above questions, the following steps may be taken for installing an effective system of budgetary control in an organisation.
Organisation for Budgeting: The setting up of a definite plan of organisation is the first step towards installing budgetary control system in an organisation. A, Budget Manual should be prepared giving details of the powers, duties, responsibilities and areas of operation of each executive in the organisation.
Responsibility for Budgeting: The responsibility for preparation and implementation of the budgets may be fixed as under:
Budget Controller: Although the Chief Executive is finally responsible for the budget programme, it is better if a large part of the supervisory responsibility is delegated to an official designated as Budget Controller or Budget Director. Such a person should have knowledge of the technical details of the business and should report directly to the President of the Chief Executive of the organisation.
Budget Committee: The Budget Controller is assisted in his work by the Budget Committee. The Committee may consist of Heads of various departments, viz., Production, Sales Finance, Personnel, Purchase, etc. with the Budget Controller as its Chairman. It is generally the responsibility of the Budget Committee to submit, discuss and finally approve the budget figures. Each head of the department should have his own Sub-committee with executives working under him as its members.
Fixation of the Budget Period: `Budget period' means the period for which a budget is prepared and employed. the budget period depends upon the nature of the business and the control techniques. For example, a seasonal industry will budget for each season, while an industry requiring long periods to complete work will budget for four, five or even larger number of years. However, it is necessary for control purposes to prepare budgets both for long as well as short periods.
Budget Procedures: Having established the budget organisation and fixed the budget period, the actual work or budgetary control can be taken upon the following pattern:
Key Factor: It is also termed as limiting factor. The extent of influence of this factor must first be assessed in order to ensure that the budget targets are met. It would be desirable to prepare first the budget relating to this particular factor, and then prepare the other budgets. We are giving below an illustrative list of key factors in certain industries. 69 Budgeting and Budgetary Control
| Industry | Key factor |
| Motor Car | Sales demand |
| Aluminium | Power |
| Petroleum Refinery | Supply of crude oil |
| Electro-optics | Skilled technicians |
| Hydra power generation | Monsoon |
The key factors should be correctly identified and examined. The key factors need not be of a permanent nature. In the long run, the management may overcome the key factors by introducing new products, by changing material mix or by working overtime or extra shifts etc.
Making a Forecast: A forecast is an estimate of the future financial conditions or operating results. Any estimation is based on consideration of probabilities. An estimate differs from a budget in that the latter embodies an operating plan of an organisation. A budget envisages a commitment to certain objectives or targets, which the management seeks to attain on the basis of the forecasts prepared. A forecast on the other hand is an estimate based on probabilities of an event. A forecast may be prepared in financial or physical terms for sales, production cost, or other resources required for business. Instead of just one forecast a number of alternative forecasts may be considered with a view to obtaining the most realistic, overall plan.
Preparing Budgets: After the forecasts have been finalised the preparation of budgets follows. The budget activity starts with the preparation of the sales budget. Then production budget is prepared on the basis of sales budget and the production capacity avail-able. Financial budget (i.e. cash or working capital budget) will be prepared on the basis of sales forecast and production budget. All these budgets are combined and coordinated into a master budget. The budgets may be revised in the course of the financial period if it becomes necessary to do so, in view of the unexpected developments, which have already taken place or are likely to take place. Choice between Fixed and Flexible Budgets: A budget may be fixed or flexible. A fixed budget is based on a fixed volume of activity. It may lose its effectiveness in planning and controlling if the actual capacity utilisation is different from what was planned for any particular unit or time e.g. a month or a quarter, The flexible budget is more useful for changing levels of activity as it considers fixed and variable costs separately. Fixed costs, as you are aware, remain unchanged over a certain range of output. Such costs change when there is a change in capacity level. The variable costs change in direct pro-portion to output. If flexible budgeting approach is adopted, the budget controller can analyse the variance between actual costs and budgeted costs depending upon the actual level of activity attained during a period of time. This will be explained in detail a little later.
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