Discuss budgetary control as a technique of cost control
- 1. Discuss budgetary control as a technique of cost control. How does it differ from standard costing?<br />In every business planning is the most important function to perform. Planning of different firms depends upon so many factors. Planning is done for comparing the actual performance with standard performance. Budgets are also prepared in advance. Budgets are prepared to check the availability of finance according to the demand of project. So budgetary control is also essential tool of management to control cost and maximizes profits.<br />Meaning of budget: A budget is a detail plan of operations for a specific period of time. In the present era everyone is with the term budget because it essential in life. A budget is prepared for the effective utilization of resources, which will help in achieving the set objectives. Budgets are also very important in individual life as it is important in business firms. The following are the essential of budget:<br />It is prepared in advance and is based on future plan of action.<br />It relates to a future period and is based on objectives to be attained.<br />It is a statement expressed in monetary or physical unit prepared for the formulation of policy.<br />Meaning of budgeting: budgeting is basically implementation of budgets. <br />Meaning of budgetary control: Every business firms have main objective to maximize the profits and to minimize the cost. An organization cannot run properly without a good budgetary system. Budgetary control system is very helpful in bringing economy in business. Budgetary control is applied to a system of management and accounting control by which all the operations and output are forecasted in a proper manner to achieve the best possible profits.<br />The essential of budgetary control:<br />Establishment of budgets.<br />Executing responsibilities in order to perform the specific tasks to attain the objectives.<br />Continuous comparison of actual performance with standard performance.<br />Taking corrective actions if there is any deviation.<br />Revision of budgets.<br />Steps in installation of a system of budgetary control:<br />A system of budgetary control in firm should be installed after taking care of following requisites of budgeting.<br />What is likely to happen?<br />What are the objectives to achieve?<br />How to minimize the cost?<br />What is the allotted time to complete the production?<br />In order to make an effective system of budgetary control following steps should take under care:<br />Organization chart: An organization should have a proper chart from where authority and responsibility of each executive get clear. If organization chart is not clear then there may be conflicts among the employees. If duties are clear among the workers then every person will be answerable for his performance. Nobody can blame to other for the poor performance. <br />Determination of objectives: it is very important that the objectives should be very clear to all the executives in the organization. Having determined the objectives of budgetary control the following future problems will have to be sorted out:<br />Laying down a plan for the implementation of the firm’s objectives.<br />Coordination of the activities of the different departments.<br />Controlling each function to get best possible results.<br />Budget manual: The budget should be in writing. It should be like a rulebook in which objectives should be clear. Following of the some important matters covered in budget manual.<br />A statement regarding the objective that how that objective can be achieved.<br />Functions and responsibilities should be clear.<br />Timetable for all stages of budgeting. <br />Reports, statement and other records to be maintained.<br />Responsibility for budgeting:<br />Budget controller: there should be someone budget controller. Chief executive should be responsible in the form of budget controller for budget programme. Budget controller should be technically sound person.<br /> Budget committee: budget controller by his own may not be successful in all the process. There should be a proper to assist him all the time. There should be members from all the departments of the organization like production, finance, sales etc. each head of the department will have his own subcommittee and person will be responsible to his respective head.<br />Fixation of budget period: By budget period we mean the period for which we are going to prepare a budget. Period of budget depends on so many factors as (i) nature and size of business (ii) the controlling techniques applied. A seasonal nature business need short term budget and for a regular nature business we can opt a long-term budget plan.<br />Determination of key factors: key factors always very important for every organisation. Budgetary control system should be capable of using key factors in a proper manner. Key factors may b the raw material, labour, finance etc. budgetary control system must give guidance to select a profitable unit among more than one option if any.<br />Motivation: budgetary control should be motivating to the employees. The system should be applicable to those only ho are responsible about their duty.<br />The budget should cover all the phases.<br />Making of forecasts: after studying all the steps then forecast should start for the future. There should be alternative forecast for the future. The best forecast should send to top management for converting that forecast in budget. <br />Approval from top management: The top management should approve the final budget. Without the approval of top authorities budget controller cannot pass the budget.<br />Standard costing: standard costing is a predetermined cost. It is a determination of cost of a product before production. In standard costing production cost is compared with the set standards. So standard costing is the preparation of standard costs and applying them to measure the variations from actual costs analyzing the cause of variations with a view to maintain maximum efficiency in production. It is a technique, which uses standard for costs and revenues for the purpose of control through variance analysis.<br />Difference of budgetary control and standard costing.<br />1. Standards are based on technical assessments whereas budgets are based on past actual adjusted to future trends.<br />2. Budgetary control deals with the operations of the firm as a whole and standard costing is applied to manufacturing of a product.<br />3. Standards are basically set for production and budgetary control is for all the incomes and expenditures of the business.<br />4. Budgets set for the upper limit of expenses, which a firm can make for actual expenditure and standards are set for the targets to achieve.<br />5. Budgets are expected costs to be forecasted for the requirement of material, cash and other resources and standard costs are not to tell the expected cost but rather what the costs should be under specific conditions.<br />