Effectiveness of the Budgetary Control - Case Study Example

Management Introduction An organisation that is managed by only one manager can create an effective control system, since management is able to participate in each of the decision. The management controls the activities, taking place in the organisation, as soon as it arises. However, in a larger unit, it is not possible for a single person to monitor the huge number of issues of a vast organization. So, it is essential for that organisation to establish methods of controlling management issues and also, to ensure an efficient functioning of the management. The management control process is the one with which the top management controls and coordinates the undertaking and analyses the present position of an organisation. To control the working of an organisation, financial transactions that are taking place are of high importance. The financial transactions are reflected in budgets, which are prepared before execution of any plan. The budget can be referred to as the detailed plan of operation, with a specific period of time, within which the same is valid. It is basically an estimate that is prepared in advance of the period in which it will be applied. Budget is regarded as a business barometer, given that all activities are programmed for a certain period of time. It is also referred to as the quantitative or financial statement, which is prepared in accordance with the policies pursued during a period, for attainment of a given objective. It includes income, employment of capital and expenditure. Budgetary control refers to the accounting control and system of management through which all outputs and operations are forecasted, prior to execution of the actual activities. When the plan is executed, actual results are compared with the budgetary ones. Thus, budgetary control is approved for evaluation of the performance of goals that are budgeted. The paper, thus, elaborates effectiveness of the budgetary control in the dynamic world of management. Budgetary control Budgetary control is defined as a system that controls management as well as accounting of an organisation. The operations are forecasted and planned in financial terms. The actual result, when compared with budgetary results, provides with an idea regarding the degree of fluctuation in the actual result from the latter. It also aims at comparing actual results with the standard of performance and henceforth, necessary actions are taken with respect to the significant deviation, which is recognised in the budget. Therefore, budgetary control helps the management to take corrective actions, when required, by comparing budgeted results with the actual ones (Albrecht, 2011). Budgetary control requires the establishment of budgets and whether they are prepared in accordance with the accounting policies. The budget in prepared by following accounting principles, which are followed by the organisation (for example, IFRS or GAAP). Comparison of results provides the organisation with a base for revision of the whole budget or even indicates the need to take actions, which are relevant to the situation for accomplishment of the organisational goals. The communication of the budgets results to respective persons is very vital for an organisation, so as to make significant changes in their course of action. The budgets are prepared in a manner that includes future expenses and revenue. The budget is based on an assumption that the organisation will incur loss or profit in the next year. However, these budgeted results may not tally with the actual ones, since situations can always change in the dynamic world. The changes are in form of unpredictable situations, which have the ability to cause substantial damage to the normal functioning of an organization (Zimmerman, 2003). So, organisations need to budget its finance in such a way that uncertain situations can be dealt with easily. To cope up with changing situations, effective budgetary control processes are chosen. To prepare a budget, the authority has to abide by rules of the budget. The responses from their subordinates are also taken into consideration, while preparing the same. When actual results are very close to the budgeted ones, the budget is said to be effective for the plan of action, thereby indicating the fact that the responses has been appropriate for preparation of the same. One of the important functions of budgetary control is to establish the budget goal. The accuracy of the budgetary goal depends on difference between the actual and budgeted results. Example: A participative budgeting is prepared for increasing the identification of an individual’s effort with respect to budget goals. The persons, who are responsible for the performance of profit centres and cost, should participate in planning the predicted performance. When members of an organization are involved in the preparation process, they become aware of the goals that are set to incorporate effectiveness. Thus, preparation of the participative budget is regarded as the control mechanism, since it emphasises on recognising goals of the budget (Warren, 2009) The procedure, which influences the identification of goals of the budget, had its existence in the evaluation of the performance. The conventional control has provided the basis for formulation of the corrective actions. Hence, the process of evaluation bears the concept of control function, which influences individuals to take actions that suit the whole system. Example: A performance report is regarded as a vital stimulus for good performance for a person, whose performance is evaluated. There are certain procedures, which lead to the identification of individual’s goals as well as budgeted goals (Lucey, 2003). Effectiveness of Budgetary control A copy of the budgets is provided to the functional as well as departmental heads, which is related to their respective activities. Every month, they have to follow the budget that is provided to them. The budget also covers the area, where they have over-spent or under-spent and this in turn helps them to take corrective actions for future period of operation. It is known that the functional or departmental heads need to explain the variance that takes place in the budget. This variance is to be handled in order to prevent future occurrences of adverse situations. Thus, budgetary control will help in analysing the situation and making decisions relevant to the occurrences, so that organisational operation is not hampered (Nally, 2002). Example: It has been observed that when actual sales are compared to the budgeted one, the result has always indicated a particular variance. The variance is, however, realistic and can be explained. The revision of figures is not allowed, since it may affect the budget in future. So, it is noted that preparation of budgets and controlling them are very important, in times of uncertainty, since it may affect the financial status of an organization. The effectiveness of budgetary control lies in the fact that an organisation has prepared an appropriate budget with a small variance with the actual results. In times of uncertainty, an organisation has to face number of changes that can make their operation slower and inefficient. The uncertainties are to be dealt with prior caution and budgets are to be prepared in a way that includes all the costs, which can arise out of these situations. The contingency cost is very important for an organisation, as it is the one that actually saves the system, in case of adverse situations. Thus, the budgetary control helps in controlling the cost and its effects on the total budget structure of an organisation. The sales budget is not always accurate for an organisation as figures may not tally with the actual results of the sale. This occurs due to the demand of any product of an organisation. The demand of a product is dependent on many vital factors, which may affect sales of the product. If the price of a product increases, then demand of the same might decrease, thereby affecting sales of the product. Thus, budgets, those are prepared prior to the action plan, shows huge variance from the actual one (Atkinson, 2009) Conclusion It can be concluded that effectiveness of the budgetary control, at times of adverse situation, is required for successful running of an organisation. The budgetary control will be effective, only when the variance between the actual and budgeted result will decrease. When variance is on the higher side, the budget is said to be inappropriate for the current situation and hence, revision is required to support the changes. The modification is required in order to handle the situation appropriately. Therefore, budgetary control is an essential part of every management accounting system, which helps the internal management to get a clear picture of the financial status of an organisation. Reference List Albrecht, W., 2011. Financial accounting. New York: South-Western Cengage Learning. Atkinson, A., 2009. Management accounting. New Delhi: Pearson Education. Lucey, T., 2003. Management accounting. New York: Continnum. Nally, M., 2002. The Annual Budgeting Process. Accountancy Ireland, 34 (1), pp. 10-12. Warren, C., 2009. Financial accounting. New York: South-Western Cengage Learning. Zimmerman, L. 2003. Accounting for Decision Making and Control. , New York: McGraw-Hill. Read More