Budgetary Control in Performance Management - Essay Example

?Running head: Budgetary Control in Performance Management Budgetary Control in Performance Management Insert Insert Grade Insert Name 16 February 2012 Budgetary Control in Performance Management Introduction Performance management has advanced its use of organizational budgets to control its operations to a more integrative control mechanism. This is with regards to the fact that budgeting is among the most important aspects of an organization’s operations. Budgetary control is basically driven by responsibility centers, with clear emphasis on budget construction details for effective control of the organization performance. A budget is a formal statement of financial resources that have been set aside to finance specific activities over a given time period. Through a budget, managers can be able to coordinate organizational activities with it being a point of reference. Integrative Budgetary Control Integrative organizational budgetary control is a technique in which actual results of activities are compared to those specified in a budget and corrective actions undertaken. Differences that exist between actual and planned activities in the budget result in budgetary control measures where responsibility centers are charged with the responsibility of exercising organizational control action or revising the specific budget plans. Through responsibility centers, organization managers can monitor functions of the organizations and make necessary corrections to deviation from plans (Singla, 2009, p.117). A responsibility centre is basically a functional unit in an organization being headed by a hierarchical manager charged unit performance. Responsibility centers may include expense centers, revenue centers and investments centers. Budgetary control with regards to revenue centers involves comparison of actual outputs with budget outputs to ascertain necessary control measures. However, there is no doubt that budgetary control as tool for management control has its limitations, more so with regards to changing external environments that the organization has no control over. Overall, budgetary control remains among the best organizational control tools as long as clear responsibility hierarchical centers along with environmental variations keep changing (Emmanuel, Otley & Merchant, 2004, p.103). Basically, there is no planning system that can be used successfully in performance management without having an efficient and effective control system. Budget formulation is closely attached to control aspects where executives exercise organization control through budgetary control. Integrated organizational budgetary control involves preparation of a broad variety of budgets, continuous comparison of performance plans with actual performance and budget revision in the light of existing variances. Budget revision requires that a budgetary control system should be able to provide enough flexibility scope for particular initiative and revision measures. Performance management budgetary control is therefore an important device used by executives to control organization in achieving goals and controlling costs more efficiently Budgetary control compels the management of a particular organization to think about the ideal expectations for the future and what measures should be put in place with regards to existing shortcomings. The control process forces individuals charged with managerial responsibility to look ahead and manage the organization towards a purpose and direction be setting out detailed plans to achieving the relevant targets. Through this, the management is able to promote communication and coordination within the organization. The process also defines clearly the areas of responsibility, as it requires managers of responsibility centers to be accountable to deviations or underachievement of budget targets. Integrative budgetary control uses a budget as a basis for appraising organizational performance at a departmental level. Organizational performance variance from planned performance is established with the use of a budget as a yardstick against which responsibility centers must undertake corrective measures. Budgetary control is undertaken by comparing budget plans with actual results after which organizational deviations from the budget are thoroughly investigated. The reasons for the actual and planned differences may however be controllable or non-controllable and would therefore compel the organization to limited control. This would enable remedial corrective actions as variances emerge while motivating employees involving them in setting of budgetary control benchmarks. Although non-controllable factors may limit control measures, allocation of scarce resources can be improved with management time being economized governance by principle of exception (Lal, 2009, p.888-892). Budgetary control is carried out with respect to organization hierarchy and is not limited to one hierarchy level. Organizational budgetary control however can be linked to top hierarchies such as the top management staff due to the fact that control efficiency goes along with authoritative positions (Hofstede, 1968, p.9). However, although budgetary control process is an effective detailed means of achieving organizational control, particular disadvantages may exist with the use of budgets to exercise control of the organizations. Most importantly is the fact that budgets may be seen as constraints imposed by hierarchical authorities to exert pressure on their tasks. These negative budgetary perceptions may bring about bad employer to employee relations alongside inaccurate keeping of records. More so, departmental conflict may arise with regards to resource allocation disputes and blame game of unattained budget targets. Budgetary control may also result in responsibility centre wastage where individuals accountable for achieving organizational goals may decide to spend unnecessarily. Managers may inappropriately spend funds to enhance departmental prestige rather losing the allocated resources alongside recording planned and actual differences. This is with respect to the fact that it is difficult to reconcile corporate goals with actual achievements and progress. Performance management is in line with responsibility and controlling capabilities where particular costs are place under the influence of authoritative costs. For effective organizational budgetary control, the management needs to come with solutions such as involving operational staff when setting budgets to increase staff involvement and motivation towards effective organizational control (Norton, 2008, pp.405-408). A budget being the central device to integrative budgetary control, a budget should be formulated with the participation of all members involved in the organization operation. It also needs to be comprehensive where it covers established performance standards of the organization as a whole. More so, the budget should be flexible to accommodate the corrective measures incase of deviation with an integrated feedback that monitors performance and correction needs on a regular basis. Budgetary organization performance control requires corrective and budget revision capabilities for effective control. Integrated budget control mechanism requires an ideal budget whose preparation involves determination of the key budget factors as a limiting basis for organizational operations. The key budget factor puts into consideration available resources and output needs to limit the extent to which finances will be managed. Budget may be a cash budget, raw materials, sales, production, or labor budget. Sales budget is a realistic forecast for sales, which is prepared in sales value alongside units of each product. Production budget is geared to the sales budget although it is expressed in quantitative terms. Raw materials budget on the other hand is expressed in materials usage quantities while Labor budget is both financial and quantitative (Cave & Wilkinson, 1990, p. 38) Management control comes in when specific items included in the budgetary plan have not resulted as expected. This is in consideration of the fact that departmental plans agreed upon are embodied in a budget and for effective control to take place, specific items deviated from the planned agreements are corrected. The integrative budgetary control system enables management to correct current activity and operations activities with respect to the system’s feedback (Terence Lucey, 2003, p.189).Of more importance to performance control is the cash budget, which summarizes periodic payments and receipts, while highlighting deficits and surpluses of actual cash and the reasons for the mismatch. Managers particularly use cash budget to control an organization's requirements of cash and enable it to take advanced corrective and precautionary measures. Organizations installing budgetary control systems need to find out what is likely to happen, target objectives and the existing constraints to performance management. Prior to undertaking budgetary control, organizations set up a definite organization plan and budget manuals to give details duties, powers and responsibilities to responsibility center managers. Through this, performance control procedures are standardized to synchronize the mechanism efforts towards integrated organizational control. However, the ultimate organizational performance control is done by the chief executive with the larger part of supervisory responsibility being performed a budget controller with technical details and professionalism. It is through the budget controller that the chief executive controls the organization’s performance towards its goals and objectives (Ghosh, 2005, p.84). Budgetary control therefore entails the process where budgeting is organized with regards to the budget manual and organizational goal theory. The budget manual regards the organizational objectives and the means through which they can be achieved by controlling the budget. The budget manual defines the functions and responsibilities of departmental managers with regards to performance management through standardized budgetary control procedures and methods. Cash budget being a vital tool in budgetary control, sales budgetary control also remains a critical aspect of organization performance management. Past sales trends and figures can be used to come up with sales estimates and plans to enable sales performance control. However, the other aspects such as trade cycles, seasonal fluctuations, and market growth considerations in sales budget can be effectively used in controlling actual and planned sales performance. More to, sales performance controls, varied measures such as discounts can be put in place to enable executives and responsibility centers to influence organization wide performance. Sales budgetary performance control generally depends on the organizations capacity, general trade prospects, availability of materials, financial capabilities alongside seasonal variations and market potentials. Conclusion Roles that budgetary control processes in performance management have developed into a more integrated mechanism, which puts into consideration various control aspects to both controllable and non-controllable factors. Integrated budgetary control mechanism not only assists managers in assure organizational performance but also puts into consideration a number of the growing efficacy criticisms such as external environment non-controllable factors. Initial budgetary control in performance management could only focus on solutions to controllable factors but since its strategy advancement, two distinct control process approaches have come into play. The approaches include the incremental budgetary control process improvement in terms of both specific organization’s planning system and operational requirements, and the process of accommodating rapid change issues and budget revision with respect to external environment non-controllable factors. Reference List Singla, R.K., 2009. Business Management. V.K. India Enterprises. Hofstede, G.H., 1968. The Game of Budget Control. Tavistock Publications Limited. Ghosh, N., 2005. Management Control Systems. New Delhi: Prentice Hall India Pvt., Limited. Cave, E. & Wilkinson, C., 2009. Local Management of Schools: Some Practical Issues. Ernie Cave and Cyril Wilkinson. Lucey, T., 2003. Management Accounting. New York: Cengage Learning. Lal, J., 2009. Cost Accounting. New Delhi: Tata McGraw-Hill Publishing Company Limited. Norton, A., 2008. CIMA Official Learning System Integrated Management. NY: Elsevier Ltd. Emmanuel, C.R., Otley, D.T., & Merchant, K.A., 2004. Accounting for Management Control. NY: Thompson Learning. Read More