Page 187 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 5. Budgets are meant to deal with business conditions which are constantly changing.
Therefore, budgets estimates lose much of their usefulness under changing conditions
because of their rigidity. It is necessary that budgetary control system should be kept
adequately flexible.
6. The system of budgetary control is based on quantitative data and represents only an
impersonal appraisal to the conduct of business activity, unless it is supported by proper
management of personal administration.

7. It has often been found that in practice, the organisation of budgetary control system
become too heavy and, therefore, costly specially from the point of view of small concern.
8. Budgets and budgetary control have given rise to a very unhealthy tendency to be regarded
as the solvent of all business problems. This has resulted in a very lukeworm human effort
to deal with such problems and ultimately results in failure of budgetary control system.

9. It is a part of human nature that all controls are resented. Budgetary control, which places
restrictions on the authority of the executive, is also resented by the employees.
10. Budgeting involves heavy expenditure, which small concerns cannot afford.

11. There will be active and passive resistance to budgetary control as it points out the efficiency
or inefficiency of individuals.
12. The success of budgetary control depends upon willing co-operation and teamwork. This
is often lacking.

9.3 Installation of Budgetary Control

The following steps should be considered in detail for sound budgets and for successful
implementation of the budgetary control system:
1. Forecast: Forecast is a statement that contains the facts which are likely to happen at a
future date. These facts may not occur as per the estimate. There will be an element of
variation. It is only a statement of probable events. Forecast acts as a basis for the
formulation of budgets. The degree of accuracy of forecasts is judged only after comparing
it with the actual performance.
2. Organisation Chart: There should be a well defined organisation chart for budgetary
control. This will show the authority and responsibility of each executive.
Functional responsibility of a particular executive:
(i) Delegation of authority to various levels.
(ii) Relative position of a functional head with heads of other functions.

3. Budget Chart: Budget Chart is a structural chart showing the flow of authority and power.
It identifies levels in the management hierarchy, shows authority and power enjoyed by
each level and the responsibility to be discharged. The volume and nature of the business
determines the structure of the chart. This chart helps in preparing the master budget,
functional and sub-functional budgets. The following “Budget Charts” tell us as to who
will prepare what budget.

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