BUDGETARY CONTROL TECHNIQUES
The
various types of budgets are as follows
i) Revenue and Expense Budgets:
The most
common budgets spell out plans for revenues and operating expenses in rupee
terms. The most basic of revenue budget is the sales budget which is a formal
and detailed expression of the sales forecast. The revenue from sales of
products or services furnishes the principal income to pay operating expenses
and yield profits. Expense budgets may deal with individual items of expense,
such as travel, data processing, entertainment, advertising, telephone, and
insurance.
ii) Time, Space, Material, and Product Budgets:
Many budgets are better expressed in quantities rather than in monetary
terms. e.g. direct-labor-hours, machine-hours, units of materials, square feet
allocated, and units produced. The Rupee cost would not accurately measure the
resources used or the results intended.
iii) Capital Expenditure Budgets:
Capital expenditure budgets outline specifically capital expenditures
for plant, machinery, equipment, inventories, and other items. These budgets
require care because they give definite form to plans for spending the funds of
an enterprise. Since a business takes a long time to recover its investment in
plant and equipment, (Payback period or gestation period) capital expenditure
budgets should usually be tied in with fairly long-range planning.
iv) Cash Budgets:
The cash budget is simply a forecast of cash receipts and disbursements
against which actual cash "experience" is measured. The availability
of cash to meet obligations as they fall due is the first requirement of
existence, and handsome business profits do little good when tied up in
inventory, machinery, or other noncash assets.
v) Variable Budget:
The variable budget is based on an analysis of expense items to
determine how individual costs should vary with volume of output.
Some costs do not vary with volume, particularly in so short a period as
1 month, 6 months, or a year. Among these are depreciation, property taxes and
insurance, maintenance of plant and equipment, and costs of keeping a minimum
staff of supervisory and other key personnel. Costs that vary with volume of
output range from those that are completely variable to those that are only
slightly variable.
The task
of variable budgeting involves selecting some unit of measure that reflects
volume; inspecting the various categories of costs (usually by reference to the
chart of accounts); and, by statistical studies, methods of engineering
analyses, and other means, determining how these costs should vary with volume
of output.
vi) Zero Based Budget:
The idea behind this technique is to divide enterprise programs into
"packages" composed of goals, activities, and needed resources and
then to calculate costs for each package from the ground up. By starting the
budget of each package from base zero, budgeters calculate costs afresh for
each budget period; thus they avoid the common tendency in budgeting of looking
only at changes from a previous period.
Advantages
There are
a number of advantages of budgetary control:
Compels management to think about the future,
which is probably the most important feature of a budgetary planning and
control system. Forces management to look ahead, to set out detailed plans for
achieving the targets for each department, operation and (ideally) each
manager, to anticipate and give the organization purpose and direction.
Promotes coordination and communication.
Clearly defines areas of responsibility.
Requires managers of budget centre’s to be made responsible for the achievement
of budget targets for the operations under their personal control.
Provides a basis for performance appraisal
(variance analysis). A budget is basically a yardstick against which actual
performance is measured and assessed. Control is provided by comparisons of
actual results against budget plan. Departures from budget can then be
investigated and the reasons for the differences can be divided into
controllable and non-controllable factors.
Enables remedial action to be taken as variances
emerge.
Motivates employees by participating in the
setting of budgets.
Improves the allocation of scarce resources.
Economises management time by using the
management by exception principle.
Problems in budgeting
Whilst budgets may be an essential part of any marketing activity they
do have a number of disadvantages, particularly in perception terms.
Budgets can be seen as pressure devices imposed
by management, thus resulting in:
bad labour
relations
inaccurate
record-keeping.
Departmental conflict arises due to:
disputes
over resource allocation
departments
blaming each other if targets are not attained.
It is difficult to reconcile personal/individual
and corporate goals.
Waste may arise as managers adopt the view,
"we had better spend it or we will lose it". This is often coupled
with "empire building" in order to enhance the prestige of a
department.
Responsibility versus controlling, i.e. some
costs are under the influence of more than one person, e.g. power costs.
Managers may overestimate costs so that they
will not be blamed in the future should they overspend.
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