The Strengths of Budget Control - Essay Example

BUDGETARY CONTROL By Date Introduction Budgetary control refers to a process through which managers responsible for the preparation of budgets exercise financial control over the usage of revenues and expenditures for each functional unit of the organisation in advance of its fiscal year (Van der Stede, 2001). Moreover, the Cost & Management Accountants (CIMA) Institute defines budgetary control as “The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision” (Cimaglobal.Com, n.d.). Therefore, the primary function of budgetary control is provide a benchmark for making continuous comparison of the budgeted activity with the actual performance to ensure that the budgeted results are achieved or an appropriate action is taken when there are deviations in performance. This paper examines the strengths and weaknesses of budgetary control to a business (Libby & Lindsay, 2010). Strengths of Budgetary Control One of the most important strengths of budget control is that it is based on numerical data from the financial statements and existing budgets of the company (Van der Stede, 2001). Therefore, this ensures there is consistent with decision making by following trends and previous periods performance. Moreover, in event that the data used in establishing the budgets is correct, managers will be able to make sound decisions for their units, which will eventually, translate to better performance of the business as a whole (Frow, Marginson & Ogden, 2010). That notwithstanding, budgetary control is based on budgets that are time bound. Budgets are usually prepared for a given financial period. Therefore, they enable managers to monitor actual performance by comparing it continuously with budgeted results for that period (Montana and Charnov, 2000). For instance, the production manager can compare the sales units quarterly with the production units to determine if there are deviations in terms of sales units and units produced so that an appropriate action is taken (Dunk, 2011). If for example, the production manager realizes that the units produced are much more than the demanded units, he/she can take action by reducing the units produced and noting the necessary adjustment to be made in the product budget. Therefore, this provides a benchmark for determining the validity of the numerical data and reports used in the preparation of the budgets for the purpose of budgetary control (Rajani, n.d.). Another important strength of budgetary control is that it facilitates coordination and cooperation between the different units of the organisation as noted above Conboy, 2010). In addition, budgetary control obligates managers looking ahead, to set out elaborate plans for attaining departmental targets, operations, in addition to, giving the organisation direction and purpose (Barnet, n.d.). Thus, because managers are made responsible for attaining the budgeted results for their units, they feel obligated and accountable for their decisions since their performance will be gauged based on their ability to attain the targets stipulated in the budgets. Conversely, budgetary controls provide a yardstick upon which actual performance is measured (Bhattacharyya, 2011). By providing the basis for making continuous comparison between the budgeted and actual results, budgetary control enables managers to monitor their performance and if deviations are found an appropriate cause of action is taken. Moreover, budget control enables managers to categorize controllable and non-controllable components, which cause deviations to occur from the budgeted results (Edwards, Boyns & Matthews, 2002). Weaknesses of Budgetary Control Budgetary control is a costly process. For instance, budgetary control involves the analysing of budgets and compiling of data in establishing budgets (Van der Stede, 2001). Thus, unlike other corporate control forms, which rely on the judgment and opinions of top level management, budgetary control seeks to avoid such human biased views by taking a quantitative perspective, which is more costly in determining and evaluating (Bhimani, 2012). For example, it is less expensive when a company uses its financial statements and budgets in performing budgetary control unlike when it commissions new financial reports from outside that demand hiring of new staff to help in the accounting unit (Libby & Lindsay, 2010). In addition, budgetary control relies heavily on data of a numerical nature, sometimes disregarding other important information. For instance, a departmental manager operating within his budget in a given quarter of the financial year may seem to be successful in budgetary control (Lucey, 2003). However, if such a manager laid off redundant employees in the department, he would be able to make savings from the wages and salaries of such redundant staff, thus generally profiting the whole company. Therefore, from the example above it is evident that decisions made based on budgetary control can fail to recognize long-term factors outside a budgets scope, which could otherwise have a more tangible effect on the success of the company by confining managers to the budgeted results (Frow, Marginson & Ogden, 2010). Moreover, budgetary control is based on budgets that are prepared from estimates. Therefore, in event that the estimates are incorrect and far from the actual performance, managers can be forced to make wrong decisions for their units, which would have a negative impact on their units and the business as a whole and especially, where top management impose the budgets to the departmental managers without consultation (Neely and Mike, 2000). Further, budgetary control is a time consuming and tedious exercise because it demands that financial reports and the existing budgets of the business have to be analysed to prepare the budgeted results to be used for continuous comparison to the actual performance in the current financial year (Dunk, 2011). That notwithstanding, budget control requires teamwork and cooperation between the staff and the functional units (Rajani, n.d.). However, workers cooperation during budgetary control is usually unavailable. Conclusion In conclusion, from the illustrations above it is evident that budget control is both beneficial and detrimental to the operation of the business. However, it is imperative to note that budgetary control has more benefits to companies than disadvantages because it provides the basis for making continuous comparison between the budgeted and actual performance. Moreover, it is evident that managers who are using budgetary control are able to exercise financial control over the organisation’s revenues and expenses unlike managers who do not use budgetary control. Therefore, organisations that use budgetary control in their operations are likely to be more successful in managing their resources, production activities and demand levels compared to those organisation, which are not using budgetary control. References Barnet, R., n.d. Strategic Management: Advantages and Disadvantages of Budget Control. 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