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Chapter: Principles of Management : Controlling

Budgetary Control Techniques

The various types of budgets are as follows



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.






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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