Budgetary Control and Concepts of Budgeting - Essay Example

Budgetary control Contents Introduction 3 Discussion 3 Conclusion 7 References 9 Introduction Budgeting is one of the most important aspects of managing a business and is considered to be a control process of the management. The concept came into vogue in during the 1920s when it became the most useful tool for the management of the costs as well as the flow of cash into the organisation. This is beneficial especially for those organisations which are larger in size and have a large scale of operations. It is necessary for those organisations to have a planned budget that would help the organisations to survive in the long run. The estimation of the costs of the organisation and the related expenditures can be estimated by the organisation and hence a budget provides a directive to the organisation regarding what is to be done to run the organisation effectively and efficiently. Thus an organisation would be able to retain stability in the financial position and would be able to enlarge the potential for the delivery of the services with a proper budgeting process. The Budget acts as a financial standing based on which the difference measures regarding the operations, financing activities as well as investing activities can be undertaken. Hence in the issues regarding the financial as well as the overall performance of the organisation would depend on the efficiency of the budgeting process and how the control processes of the organisation are linked with the budget. Discussion During the 1960s the importance of the budget started growing immensely. The budgets at those times started to be formulated in such a way that it would provide a guideline for the managers about how to go about managing the resources and the process of production in an organisation. In the period of 1970s the performance of the organisations and the employees started being determined by the revenue that could be generated. Thus both the organisation and the employees had to meet specific financial objectives. The rigidities of the budgeting process started increasing between 1980 and the 1990 and therefore the organisations started spending less amount of money for the research and development activities in order to keep their budget limited. In had an adverse effect on the performance of the companies in terms of the service provided to the customers. The main motive of the companies became to meet the target of revenue. Therefore the focus was more on the quantity of production of the goods or service rather than the quality. This led to an ignorance of the perspectives of the customers which led to a decline in the service quality of the company. Over time the organisations across the world have experienced a shift from this approach of budgetary control to a more knowledge or service oriented approach in which the budgeting is aimed at enhancing the role of the individual employee in the organisation and his contribution to the benefit of the organisation. The budgetary control has impacted the way in which the operational control of the organisations is carried out. The managers are in the constant effort to improve the services that are provided to the beneficiaries of the company. This also includes the change in the process of service delivery. The skills of the employees at each level of the organisational hierarchy are enhanced in the process. Any organisation that works in an ethically sound framework would try to keep the process of budgeting and control a transparent process. The companies also have to be accountable to be the shareholders and should ensure that through the process of sound budgeting, the value for the investors is enhanced. Concepts of Budgeting The process of budgetary control involves the comparison of the actual expenditures with the planned expenditures and the various types of reporting processes that are necessary for the running of the organisation. This would include the variations in the reporting process that the organisations would experience. This is done with the intension of keeping the expenses of the company under a certain limit which would keep the unnecessary operations out of view. Thus the variation is the most important aspect of the budgetary control. Going by the conventional definition of the budgetary control it would include the aspect of scrutiny analysis of the costs along with the control. The main reason behind the formulation of a comprehensive budget is to achieve the targets of the organisation. Thus the future actions of the managers are manly governed by the estimations that are made in the budget for a particular period of time. The budgets are instrumental in the allocation of the resources in the different activities and departments of the organisation. Though the budgetary controls are mainly used in the context of accounting and finance process of the organisations, it is also considered to be one of the major tools for the control of the marketing, operations, human resources departments of an organisation. At the very basic units the budgets are for the evaluation of the performance of the business units. Control that is exercised by the management of an organisation ensures that there is proper coordination among the different units of the organisation. If the business is conducted in a harmonious manner then there would not be any clash of interest among the different departments which may have varied departmental objectives. The formulation of the budgets does not remain only with that of the finance and the control managers but is also circulated across the various departments of the organisation (Kramer, Ansari, and Bell, 1997, pp. 114-137). Along with the formulation and the implementation of a proper budget there is a need for a control mechanism that would ensure that the budget that is created is being followed at each of the levels and there is validity in the way the performances of the departments are measured. The need for a proper evaluation is mandatory in the post budgetary formulation period. The present environment under which the managers are working would be under the control of the managers if they have a clear perception of the forecasted expenses in the future period of time. The assistance that the managers get from the control of the budget helps them in the entire process of decision making. It is also a way in which the loopholes that are created in the activities and the processes can be identified and the divergence of the actual costs and expenditures from the planned ones can be estimated in a comprehensive manner. The importance of feedback arises in this context. In other words when the managers finds that by altering a certain control variable it is possible to bring drastic changes to the entire budget of the organisation then it would be possible for the managers to identify the main drawbacks or the limitations in the process of production or service delivery (Scott and Tiessen, 1999, pp. 263–286). Budgetary control is extensively used in the context of performance standard setting for the employees as well as the organisations. It is one of the useful tools for understanding the performance of a particular department or a manager concerned. When a particular department is able to meet the target that is set by the organisation, it gets some kind of recognition or reward for the performance. This increases the motivation level of the employees and hence adds to the growth of the organisation. A huge aspect of the performance of the organisation as well as the individual employees cannot be quantified. These performances may not be related to the financial performance of the organisation. The specifications of a particular budget may be extremely narrow. Therefore there is limited scope in the flexibility for the non financial performance measures. In today’s world the budgets are becoming more and more complex. Organisations experience a lot of issues which are related to the process of Budgeting for a particular phase of time. The time that is taken to prepare a budget is considerably huge. This leads to an exhaustion of resources and finances for the organisation. They may also act as major obstruction for the growth or the change of the company (Bhimani, Horngren, Foster and Rajan 2012, pp. 129-178). This is because the managers who were involved in the process of preparation of the budget generally try to keep it limited and make the expenses less. Hence there would be fewer amounts of funds that would be engaged for the financing of new projects or the research and development since the managers would be conservative and they would try to keep a favourable budget. The main reason behind this is that the focus of the budget is to reduce the cost for the employees and not any other activity that would increase the value for the organisation. Since the focus of every budget is a particular strategy to retain the control over the cost there are incidents when the budgets provide contradictory guidelines for the managers who would undertake the various kinds of activities based on the budget. The time that is required for the managers for the preparation of the budgets is much limited. As a result they get very little opportunity to prepare the budget under the variety of contingencies that may be available for the managers. One of the negative aspects of a budget is that is a lot dependent on the intuition of the managers and the prediction of the future events and forecasts. Thus there might be flaws related to the budgeting process. Budgeting process often places the different departments of an organisation in the antagonistic positions. Thus the scope of sharing of knowledge across the departments is restricted. Conclusion Thus from the above analysis it is clear that the organisations that have a well developed budgetary mechanism along with an efficient control mechanism. The organisations at the present day are experiencing a change in the cultural which is associated with the control system of the organisation. The shareholders of the company are becoming more and more influential at present and hence along with the financial performance the organisations have to be more and more aware of the ethical and the environmental aspects that would form essential parts of the business. Simultaneously, budgets should also focus on the research and development and have to incorporate the most updated technology to remain in the industry along with the competitors. There is also a requirement for the organisations to integrate the entire process of the activities so that the departments are encouraged to increase their productivity and can actually see their performances contributing to the success of the entire organisation. References Bhimani, A., Horngren, C.T., Foster, G. and Rajan M. V., 2012. Management and Cost Accounting. Harlow: Pearson Education. Klammer, T., Ansari, S. and Bell, J., 1997. Activity Based Budgeting. Boston, MA: McGraw-Hill/ Irwin. Scott, T. W., and Tiessen, P., 1999. Performance measurement and managerial teams. Accounting. Organizations and Society, Vol. 24 (3), pp. 263–286. Read More