Advantages of
Budgetary Control:
A budget is a blue print of a plan expressed in quantitative terms.
Budgeting is technique for formulating budgets. Budgetary Control, on the other hand, refers to the principles, procedures and practices of achieving given objectives through budgets. Here are the some Advantages of Budgetary Control:
a)
Maximization of
Profit: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and
co-ordination of different functions is undertaken. There is proper control
over various capital and revenue expenditures. The resources are put to the
best possible use.
b)
Efficiency: It enables the management to conduct its business
activities in an efficient manner. Effective utilization of scarce resources,
i.e. men, material, machinery, methods and money - is made possible.
c)
Specific Aims: The plans, policies and goals are decided by the top management.
All efforts are put together to reach the common goal of the organization.
Every department is given a target to be achieved. The efforts are directed towards achieving come specific aims. If there is
no definite aim then the efforts will be wasted in pursuing different aims.
d)
Performance evaluation: It provides a yardstick for measuring and
evaluating the performance of individuals and their departments.
e)
Economy: The planning of expenditure will be systematic and there will be
economy in spending. The finances will be put to optimum use. The benefits
derived for the concern will ultimately extend to industry and then to national
economy. The national resources will be used economically and wastage will be
eliminated.
f)
Standard Costing and Variance analysis: It creates suitable
conditions for the implementation of standard costing system in a business organization.
It reveals the deviations to management from the budgeted figures after making
a comparison with actual figures.
g)
Corrective Action: The management will be able to take corrective measures whenever
there is a discrepancy in performance. The deviations will be regularly
reported so that necessary action is taken at the earliest. In the absence of a
budgetary control system the deviation can determined only at the end of the
financial period.
h)
Consciousness: It creates budget consciousness among the employees.
By fixing targets for the employees, they are made conscious of their
responsibility. Everybody knows what he is expected to do and he continues with
his work uninterrupted.
i)
Reduces Costs: In the present day competitive world budgetary control has a
significant role to play. Every businessman tries to reduce the cost of
production for increasing sales. He tries to have those combinations of
products where profitability is more.
j)
Policy formulation: It helps in the review of current trends and
framing of future policies.
Limitations of
Budgetary Control System
The
list of advantages given above is impressive, but a budget is not a cure all
for organisational ills. Budgetary control system suffers from certain
limitations and those using the system should be fully aware of them.
a)
The budget plan is based on estimates: Budgets are based on
forecasting cannot be an exact science. Absolute accuracy, therefore, is not
possible in forecasting and budgeting. The strength or weakness of the
budgetary control system depends to a large extent, on the accuracy with which
estimates are made. Thus, while using the system, the fact that budget is based
on estimates must be kept in view.
b)
Danger of rigidity: Budgets are considered as rigid document. Too
much emphasis on budgets may affect day-to-day operations and ignores the
dynamic state of organization functioning.
c)
Budgeting is only a tool of management: Budgeting cannot take the
place of management but is only a tool of management. ‘The budget should be regarded
not as a master, but as a servant.’ Sometimes it is believed that introduction
of a budget programme alone is sufficient to ensure its success. Execution of a
budget will not occur automatically. It is necessary that the entire
organisation must participate enthusiastically in the programme for the
realisation of the budgetary goals.
d)
False Sense of Security: Mere budgeting cannot lead to
profitability. Budgets cannot be executed automatically. It may create a false
sense of security that everything has been taken care of in the budgets.
e)
Lack of coordination: Staff co-operation is usually not available
during budgetary control exercise.
f)
Expensive Technique: The installation and operation of a budgetary
control system is a costly affair as it requires the employment of specialized
staff and involves other expenditure which small concerns may find difficult to
incur. However, it is essential that the cost of introducing and operating a
budgetary control system should not exceed the benefits derived there from.