Budgetary Control and Costing Processes - Essay Example

Managing Finance Introduction Is budgeting an exercise in futile? Those who do not budget also achieve success or failures in varying degrees like those who budget their future activities. Budgeting has almost become a necessary exercise with those who plan their future? Budgetary control is described as future planning exercise for a business or individualistic activities. Some consider budget exercises as waste of resources, particularly when budgeted circumstances do not prevail and actual performances are compared with budgeted standards to compute variances. For them budgeting is an unconstructive activity. Then why plan or budget for the future over which you do not have control? To find out answers to these ambiguities, an in depth researched study has been undertaken in this paper to gauge the importance, if any of budgeting. Relevance of budgeting The objective of any business activity is to earn maximum profit. Budgetary control is an exercise or a business tool that helps in maximization of business profits. Budgeting is not only planning of future activities but also a review exercise to adjudge shortcomings or gains, technically called variances. “When budgeting activity begins each year, part of the task is to consider the long term policies of the business as expressed in its corporate plan, and to fit the annual budget into that plan. This review will of course identify future opportunities and alternatives open to the business.”(Alan Pizzey, page 188)i This part of budgeting exercise is certainly constructive as it combines planning with objectivity of the business. Every big business makes its strategic plans for longer period. During short periods those strategies are converted into time bound standards to be implemented in their pursuit to long term goals. These short term objectives are often converted into cash flow and profitability targets for the coming accounting period. “Key objectives of organization are often related to cash flow and profits and many organizations spend a considerable amount of time and effort in planning how cash flow and profit targets will be achieved. If an organization has identified and agreed a profit objective for the coming period and a plan for achieving this objective, then a budgeted profit and loss account will provide the detail of expected revenue that will be generated and the expenditure that will be incurred. A budget is a quantification of plan for a defined period of time.” (Bruce Bowhill, page 155)ii Budgetary control and costing processes have been combined to compute variance between budgetary standards and the actual performances. The basic idea is to make adjustments, rectifications, and additions to budgetary control process to attain the set standards and objectivities. “Variance analysis fulfills this role within organizations. In combined standard costing and budgetary control system, variances can be calculated on either an absorption costing basis or marginal costing basis.”(Michael Broadbent and others, page 151)iii . Variance analysis is the most important feature of budgetary control, and it is this process that establishes the creditability of the budgeting system. Technically speaking, budgeting plays the role of internal controls that have been made compulsory to install and evaluate under statues like Sarbanes Oxley Act in US in the aftermath of accounting scandals like Enron. Therefore, budgetary controls are not only strategically important for an organization, but also socially and morally important for safeguarding the interests of stakeholders. Critical analysis Budgets motivate the organizational system to achieve the laid down objectives. Budgetary control is a constructive exercise to create motivation in the organization. In fact “the motivation of a budgetee (a manager working in a budget system) is split into two components: the relevance of budget standards to the budgetee’s task, and the attitude of the budgetee towards the system.”(G.H.Hofstede, page 3)iv Budgetary control activities are the result of constructive management planning and execution those plans by the executives of the organization. From this point of view the budgetary control comprises the planning, coordination, and control activities. These activities promote healthy management atmosphere in an organization. That way budgetary control renders following management services: “Combining the ideas of all levels of management in the preparation of different operational budget. Coordinating all activities of the concern. Helping to centralize control and decentralize responsibilities. Planning and controlling income and expenditure to achieve maximum profitability. Acting as a guide for management decision. Providing a yardstick against which actual results are compared. Pointing out the areas where management action is necessary to remedy a situation, and Helping to appraise a capital expenditure and also providing sufficient working capital.”(Bhabatosh Banjerjee, page 552)v Normally fixed budgets are used to render services for one level of sales activity. But when flexible budgets are employed, many add on facilities and benefits are derived for changing the levels of activity. “In flexible budgeting, the cost behavior pattern of each item is recognized by revising the original (unfixed) budget in the light of activity attained. For the purpose of cost control, this provides a meaningful comparison between actual cost and the budget allowances, which are now, based the same level of activity.”(Open University Course Team, page 70)vi Conclusion In ever progressing business atmosphere budgets play vital role under modern business mechanism. Establishment of budgetary standards and comparisons of actual performances with budgeted standards provide proper directions to business resources to achieve the strategic goals of the entity. Resources that are utilized for budgetary control activities are more constructively utilized than those utilized for production and promotional activities. Budgets promote and safeguard the valuable interests of stakeholders by reducing the wastage of resources. Therefore budgets are compulsory business and management tools for 21st centuary. Word Count: 1015 References Read More