meaning of budget 1

8/6/2019 Meaning of Budget 1

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Meaning of Budget

A budget is a detailed plan of operations for

some specific future period. It is an

estimate prepared in advance of the period to

which it applies. It acts as a business

barometer as it is complete programme of

activities of the business for the period

covered.


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According to Gordon and Shilling law budget may be

defined as "a predetermined detailed plan of action

developed and distributed as a guide to current

operations and as a partial basis for the subsequent

evaluation of performance".


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The Chartered Institute of Management Accountants,

London defines a budget as "a financial and/orquantitative 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 .


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The following are the essentials of a budget :

(a) It is prepared in advance and is based on a futureplan of actions.

(b) It relates to a future period and is based on

objectives to be attained.

(c) It is a statement expressed in monetary and/or

physical units prepared for the implementation of

policy formulated by the management.


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Meaning of Control

Control means, "some sort of systematic effort to

compare current performance to a predetermined

plan or objective, presumably in order to take only

remedial action required". This is a very generaldefinition of the term. However, as a management

function, it has been defined as "the process by

which managers assure that resources are obtained

and used effectively and efficiently in theaccomplishment of the organisation's goals".


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Management control process involves two separate

but closely related activities :planning and control. Planning means deciding what is

to be done and how it is to be done. Control is

assuring that desired results are attained. Budget is

imply a plan of action hence the technique ofBudgetary Control is an important tool of

management control.


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MEANING OF BUDGETARY CONTROL

According to W.W. Bigg, "The term 'budgetary

control' applies to a system of management and

accounting control by which all operations and

output are forecast as far as ahead as possible andthe actual results, when known, are compared with

the budget estimates." Thus, the term 'budgetary

control' is designed to evaluate the performance in

terms of goals budgeted through budget reports.


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According to J. Batty, "Budgetary control is a system

which uses budgets as a means of planning andcontrolling all aspects of producing and/or selling

commodities or services." Budgetary control consists

of the following :

(a) Determination of the objective to be achieved.The objective may be higher profits, better financial

position, better position in the market etc.

(b) Knowing the steps necessary to achieve the

objective, that is to say laying down an exact and

detailed course of action, month by month and over

the whole period.


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(c) Translation of the course of action intoquantitative and monetary terms.

This means drawing up budgets.

(d) Constant comparison of the actual with

the budget (again both physical achievement and money values involved),

noting discrepancies and their reasons

and taking steps to remove causes ofshortcoming, wastages, losses etc., and to

consolidate reasons leading to good results.


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ADVANTAGES OF BUDGETARY CONTROL

1. Economy in working : It brings efficiency and

economy in the working of

the business enterprise. Even though a monetary

reward is not offered, the budget becomes a game

a goal to achieve or a target to shoot at and hence

it is more likely to be achieved or hit than if there

was no predetermined goals or target. "The budget is

an impersonal policeman that maintains ordered

effort and brings about efficiency in results".


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2. Buck-passing avoided : It establishes

divisional and departmental

responsibility. It thus prevents alibis and "buck-passing" when the budget figures are not met.

3. Establishes coordination : It coordinates thevarious divisions of a

business, namely, the production, marketing, financial

and administrative divisions. It "forces executivesto think, and think as a group". This results insmoother operation of the entire plant.


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4. Acts as a safety signal : It acts as a safety signal

for the management. It

shows when to proceed cautiously and when

manufacturing or merchandising expansion can be

safety undertaken. It serves as an automatic check

on the judgement of the executives as losses arerevealed in time which is a caution to the

management to stop wastage.

5. Adoption of uniform policy : Uniform policy without

the disadvantage ofmilitary type of business organisation can be pursued

by all divisions of the business by means of

centralisation of budgetary control.


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6. Decrease in production costs : Seasonal variations

in production can be

reduced by developing new "fill in" products. This

results in decreasing the cost of production by

increasing volume of output.

7. Adoption of standard costing principles : The useof budget figures as

measures of operating performance and financial

position makes possible the adoption of the standard

costing principles in divisions other than theproduction division.


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8. Optimum mix : It helps management in obtaining

the most profitablecombination of different factors of production. This

results in a more economical use of capital.

9. Favour with credit agencies : Managements who

have developed a well

ordered budget plan and who operate accordingly,

receive greater favour from credit agencies.


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LIMITATIONS OF BUDGETARY CONTROL

1. Based on estimates : The strength or weakness ofthe budgetary programme

depends to a large degree on the accuracy with which

the basic estimates are made. The estimates must

be based on all available facts and good judgement.

The forecasting of sales and expenses cannot be an

exact science. However, there are numerous

statistical and Other techniques that may be

efficiently applied to the problem. These tempered

with sound reasoning and judgement produce

satisfactory results in most cases.


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2. Need for continuous adaptation : A budgetaryprogramme cannot beinstalled and perfected in a short time. Budgettechniques must be continuously adapted not only foreach particular concern but for changing conditionswithin the concern.

3. No automatic execution of the budget : Once thebudget is complete, it

will be effective only if all responsible executives getbehind it and exert continuous and aggressive efforts

towards its achievement. Departmental heads must feelthe responsibility for achieving and betteringdepartment goals laid down in the budget.


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4. Only a tool of the management : The budget should

be regarded not as a master but as a servant. It is one of the best tools yet

devised for advancing the affairs of a company and

the individuals in their various areas of managerial

activity.


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REQUIREMENTS OF A SOUND BUDGETARY SYSTEM

1. Support of top management : The budget shouldbe sponsored by management and it should have

the active and whole-hearted support of top

management.

2. Built-up by responsibility centres : For soundbudgetary system, it is also necessary that it should

be built-up by responsibility centres and should show

the controllable costs in each responsibility centre.

3. Participation by responsible supervisors : Theresponsible supervisors should participate in the

process of setting the budget figures and should

agree that the budget goals are reasonable.


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If they are not consulted, their attitude towards the

budget is likely to be one of indifference and

resentment. In other words, budget targets should

not be imposed by the management rather they

should emanate from the organization itself.


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4. Clear-cut organizational structure : A successful

budgetary program presupposes a clear allocation of

authority, duties and responsibilities in the organisation. Everybody in the organization should

know who is responsible to whom.

5. Continuous budget education : If the budget is to

be effective, all responsible supervisors must be

actively interested in it. This requires that the

responsible supervisors are aware of the entire

budgeting process. The best way to assure this

is a program of continuous budget education through

manuals, meetings, etc. To discuss the preparation of

budget and actual results achieved.


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6. Reasonably attainable targets : The targets laid

down in the budget should be reasonably attainable.

Too high a target will be frustrating and too low a

target will encourage complacency.

7. Thorough review of budget estimates : The reviewof budget estimates by higher levels of management

should be thorough. Casual review is a signal that

management is really not much interested in the

budget process.

meaning of budget 1

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