A budget estimates the income and expenditure for any activity or project. Budgets are drawn up with some future aim or objective in mind.
For instance, governments create annual budgets and these formal documents contain itemized details of the revenue and expenditure targets for the government. Similarly, corporations prepare their many different budgets.
The sales budget, for instance, is prepared with a set sales target for the period in mind. The sales have not occurred yet but the assumption while making the budget is that the target amount of sales will occur.
The target budget then becomes the objective.
What is a Control Measure?
A control measure refers to the process of ensuring that the activities being carried out are in line with the stated objective and goal of the task being undertaken.
Therefore for a “control activity or measure” to exist there must first be an activity or a task with a stated goal or objective.
Since budgets are prepared with a set goal or objective they must, therefore, have control measures to ensure that the stated objectives of a budget are met and this takes us to the concept of budget control.
What is Budget Control?
Since a budget is an estimate created with a future objective in mind, control refers to ensuring that the activities carried out are in line with the stated objective, budgetary control.
Therefore, it refers to comparing and contrasting actual figures with the budgeted figures and then taking action to ensure that the activities are being carried out following the stated objective.
In simplest terms, budgetary control can be defined as managing income and expenditure while keeping in line with the budget.
The concept of budgetary control however is not just confined to analyzing the budgeted and actual figures, it is a wide concept that encompasses coordinating both the costs and work done.
This means that budgetary control requires fixing responsibility. Why is the fixing of responsibility necessary?
Individuals and individuals create budgets and execute them. Therefore if the actual results deviate from the budgeted figures, the management needs to determine the reason behind this deviance.
Deviation from the budgeted figures can be due to a number of reasons
- Due to unrealistic budgetary targets
- Due to events beyond the control
- Due to ineffective management
Once the cause of deviation has been determined, it becomes necessary to determine the responsibility.
If the finance department sets unrealistic targets, they should be tasked to revise the budget so that it reflects realistic targets.
If events beyond control cause the budget to deviate, then the management can take preventive actions for the future.
If the deviation in the budget was because of management mistakes and inefficiency, then corrective action should be taken so that it doesn’t repeat in the future.
A responsibility center therefore analyses and determines the reason for the deviation and fixes the responsibility so that it does not repeat in the future.
This is why budgeting control requires looking at the costs and the work done. Looking at costs simply shows what is wrong whereas the work done shows how the mistake occurred and thus how it can be rectified and corrected.
Objectives of Budgetary Control:
As mentioned above, budgetary control is a process and every process must have some objectives that must be achieved thus the key objectives of budgetary control are as follows.
- Planning: Budgetary controls help keep the plans on track.
- Coordination: Budgets and budgetary controls effectively establish coordination among departments. For instance, preparing a budget requires finance, purchase, production, sales, and departments to coordinate and share information so that the budget and budgetary controls can be as effective as possible.
- Control: Coordination among departments leads to greater control, thus improving the overall efficiency of operations.
- Cost Control: One of the key objectives of budgetary control is to keep costs under control. It is not uncommon for actual costs to exceed budgeted costs.
- Deviations: Determining, assessing, and correcting deviations is the primary objective of budgetary control.
- Profitability: Cost control logically leads to increased profitability, which can be considered the eventual outcome of budgetary control.
Importance of Budget Control
It has been established thus far that budget control is an essential feature of the budgeting process. The following points shed more light on the importance of budget control for an organization.
- Fixing responsibility: Since budget control mainly looks at the deviations between the budgeted and actual amounts, it is essential to fix the responsibility for various departments and personnel. It defines the cost centers and helps managers understand how the costs are allocated and incurred in different cost centers, thus helping in the variance analysis.
- Efficiency and Profitability: Cost control measures taken to keep the actual costs under accepted limits help increase efficiency and reduce wastage thereby increasing profitability and allowing an organization achieves economies of scale and a competitive edge in the market.
Budget control is therefore an extension of the budgeting process, no budget can be considered to be complete without an effective budget control process to make sure that the objectives have been met.