Page 116 - DCOM206_COST_ACCOUNTING_II

Unit 6: Budgetary Control

6.3 Meaning of Budgetary Control Notes

Budgetary control is a system of planning and controlling costs. It has been defined as the
establishment of budgets relating the responsibilities of executives to the requirements of a
policy, and the continuous comparison of actual with budgeted results, either to secure by
individual action the objective of that policy or to provide a basis for its revision. In other
words, budgetary control is applied to a system of management and accounting control by
which all operations and output are forecasted as far ahead as possible and actual results when
known are compared with budget estimates.
According to Wheldon, “Budgetary control is the planning in advance of the various function of
a business, so that business as a whole can be controlled.”

In the words of Niles, “budgetary control is an important tool of management. It is fact a tool of
planning which reaches through coordination into control and ties the three aspects firmly
together. It stimulates thinking in advance by requiring specific planning and the anticipation
of operating problems.”
J. A. Scott has defined budgetary control as, “the term budgetary control is applied to the system
of management control and accounting in which all operations are forecast and so far as possible
planned ahead, and the actual results compared with the forecast and planned ones.”
In view of the above, the following steps are involved in budgetary control:

(i) Preparation of budgets for each function of the organisation.
(ii) Measurement of actual performance at the end of the budget period.
(iii) Calculation of the variances and analysing the reasons for them.
(iv) Revision of budgets in the light of changed circumstances, and
(v) Taking suitable or prompt action to achieve the desired objective.
Budgetary control may be shown as under:

Figure 6.1: Budgetary Control

Suitable or
Budgets Measurement of Calculation of the Revision of prompt
actual performance variances budgets action

6.3.1 Objectives of Budgetary Control

After defining the term budgetary control, it is necessary to explain the objectives of it. The main
objectives of a budgetary control can be stated in the following way:
(i) To incorporate the ideas of all levels of management in preparing a budget.
(ii) To lay down a plan to implement the policy of the organisation.
(iii) To coordinate the activities of the departments of an organisation.

(iv) To provide sufficient working capital for effective operation of the organisation.
(v) To control direct and indirect expenses of the organisation.
(vi) To execute capital expenditures in the most profitable manner.
(vii) To control on output cost, production cost and economy.

(viii) To ensure maximum profitability in output of organisation.

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