Define budgetary control and explain the merits and limitations of budgetary control
Answers
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.Important advantages of a budgetary control can be summed up as follows:
MERITS-
1. The most important advantage of a budgetary control is to enable management to conduct business in the most efficient manner because budgets are prepared to get the effective utilisation of resources and the realisation of objectives as efficiently as possible.
2. It lays down an objective for the business as a whole. Even though a monetary reward is not offered the budget becomes a game—a goal to achieve or a target to shoot at—and hence it is more likely to be achieved or hit than if there was no predetermined goal or target. The budget is an impersonal policeman that maintains ordered effort and brings about efficiency in result.
3. Everyone working in the concern knows what exactly to do because budgetary control lay emphasis on the staff organisation. It ensures that individual responsibilities are clearly defined and that the required authority commensurate with the responsibility is delegated so that buck passing may be prevented when the budgeted results are not achieved.
4. Budgetary control takes the help of different levels of management in the preparation of the budget. Budget finally approved represents the judgment of the entire organisation and not merely that of an individual or a group of individuals. Thus, it ensures team work.
Limitations of Budgetary Control:
Budgetary control as a management control device suffers from the following limitations:
1. It may be impossible to achieve the budgeted targets as estimates and forecasts relating to the future made in the budget can never be perfectly accurate for the simple reason that future is unpredictable.
2. In rapidly changing conditions it may not be possible to achieve the budgeted targets. Budgets may have to be revised from time to time, but frequent revisions may prove to be a costly affair.
3. Budgets may serve as constraints on managerial initiative because every executive tries to achieve the budgeted targets. It tends to bring about rigidity in control.
4. Correlation and coordination of various budgets is expensive; so small organisations cannot afford the employment of budgetary control as a cost control technique.