Budget and Budgetary Control Overview

What is Budget?

• A plan for all operational phases over specific future periods.
• Formalizes plans, policies, objectives, and goals set by upper management

Forecast and Budget

• Budgetary control uses budgets & reports to coordinate, evaluate, and manage daily operations based on budget goals.
• It involves constant comparison of actual results vs. budgeted goals.

Definition of Budget and Budgeting

• Budget refers to individual departmental objectives.
• Budgeting is the act of setting budgets.
• Budgetary control includes both budget planning and using them as management tools for business planning and control.

Objective of Budgetary Control

• Compare actual outcomes to plans.
• Communicate planning ideas.
• Coordinate activities across the organization.
• Establish a control system.
• Motivate employees.
• Communicate with all stakeholders.
• Control overall activities of the organization.

Advantages of Budgetary Control

• Defines overall organizational goals and sets departmental targets.
• Reveals performance deviations from budgeted goals.
• Provides centralized control within the organization.
• Indicates the efficiency of coordinating various departmental activities.
• Provides a basis for corrective actions to counteract negative trends based on performance reports.

Limitations of Budgetary Control

• Potential for inaccurate estimates.
• Can be expensive to implement.
• Human factors can influence outcomes.
• Time-consuming process.
• Not a substitute for effective management.
• Risk of over budgeting.
• Can mask inefficiencies.

Essentials of Effective Budget

• Support of top management: Upper management buy-in is critical.
• Team Work: Effective collaboration across departments.
• Realistic Objectives: Goals should be achievable and relevant.
• Well defined Business Policies: Clear company guidelines.
• Structure of Budget team: A dedicated team with specific roles.
• Integration with Standard Costing System: Integrate with existing costing frameworks.
• Inspirational Approach: Motivate individuals and teams to achieve goals.

Classification of Budget

• Rolling Budget: A continuous 12-month budget revised periodically.
  • Aims to improve forecasting accuracy.
  • Reduced uncertainty due to regular updates.
  • Provides a continuously updated plan for managing business operations.
• Disadvantages: Time and resource intensive to update frequently.

Budget Center

• A department designated for budgetary control, responsible for preparing budgets.

Budget Manual

• A document providing guidelines for budgeting and budgetary control.

Budget Committee

• A group tasked with coordinating and reviewing budget programs.

Budget Period

• The duration for which a budget is developed and used.

Budget Key Factor

• A limiting factor for operations that is considered when preparing budgets.

Budget Reports

• Compare actual performance to budgeted goals for a specific period.

Zero Base Budgeting

• Focuses on evaluating and justifying each expense from scratch.
• Requires a comprehensive review of all organizational expenses.