Question

Briefly explain the limitations of budgetary control system

Answer 1

Budgetary control is the process by which budgets are prepared for the future period and are compared with the actual performance for finding out variances, if any. The comparison of budgeted figures with actual figures will help the management to find out variances and take corrective actions without any delay.

The main objectives of budgetary control are given below:

1. Defining the objectives of the enterprise.

2. Providing plans for achieving the objectives so defined.

3. Coordinating the activities of various departments.

4. Operating various departments and cost centres economically and efficiently.

:5. Increasing the profitability by eliminating waste.

6. Centralizing the control system.

7. Correcting variances from sit standards.

8. Fixing the responsibility of various individuals in the enterprise.

Refer this article for other objectives of budgetary control: General objectives of budgetary control

Advantages of Budgetary Control

Budgetary control has become an important tool of an organization to control costs and to maximize profits. Some of the advantages of budgetary control are:

1. It defines the goals, plans and policies of the enterprise. If there is no definite aim then the efforts will be wasted in achieving some other aims.

2. Budgetary control fixes targets. Each and every department is forced to work efficiently to reach the target. Thus, it is an effective method of controlling the activities of various departments of a business unit.

3. It secures better co-ordination among various departments.

4. In case the performance is below expectation, budgetary control helps the management in finding up the responsibility.

5. It helps in reducing the cost of production by eliminating the wasteful expenditure.

6. By promoting cost consciousness among the employees, budgetary control brings in efficiency and economy.

7. Budgetary control facilitates centralized control with decentralized activity.

8. As everything is planned and provided in advance, it helps in smooth running of business enterprise.

9. It tells the management as to where action is required for solving problems without delay.

Disadvantages or Limitations of Budgetary Control

The following are the limitations of budgetary control:

1. It is really difficult to prepare the budgets accurately under inflationary conditions.

2. Budget involves a heavy expenditure which small business concerns cannot afford.

3. Budgets are prepared for the future period which is always uncertain. In future, conditions may change which will upset the budgets. Thus, future uncertainties minimize the utility of budgetary control system.

4. Budgetary control is only a management tool. It cannot replace management in decision-making because it is not a substitute for management.

5. The success of budgetary control depends upon the support of the top management. If there is lack of support from top management, then this will fail.

Answer 2

Answer:

There are many limitations , some of them are mentioned briefly below:

Explanation:

The limitations of budgetary control system are :

• Co-ordination problem

The success of budgetary control is dependent on the coordination of several departments. The performance of one department has an impact on the outcomes of other departments. A Budgetary Officer is required to solve the coordination challenge. Every business cannot afford to hire a Budgetary Officer. Poor performance stems from a lack of coordination among several departments.

• The risk of faulty estimates:

Budgets are based on predictions and entail predicting of future occurrences, therefore there is a risk of erroneous estimates. The efficiency of a budgeting programme is heavily reliant on the precision with which estimates are created.

• Human factor is also one of them

Budgets require the willing cooperation and active participation of all employees. It is not always possible to obtain everyone's voluntary collaboration and support in the creation and implementation of budgets.

• Expensive factor

It necessitates a significant investment in terms of money, time, and effort. Learning efficient budgeting takes a significant amount of time. Budgets do not produce results overnight, and managers must be extremely patient. When immediate results are expected, management may lose interest and trust in budgeting.

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