Friday, August 15, 2014

Management Accounting - Advantages and Limitations of Budgetary Control

Advantages of Budgetary Control:
A budget is a blue print of a plan expressed in quantitative terms. Budgeting is technique for formulating budgets. Budgetary Control, on the other hand, refers to the principles, procedures and practices of achieving given objectives through budgets. Here are the some Advantages of Budgetary Control:
a)      Maximization of Profit: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and co-ordination of different functions is undertaken. There is proper control over various capital and revenue expenditures. The resources are put to the best possible use.
 b)      Efficiency: It enables the management to conduct its business activities in an efficient manner. Effective utilization of scarce resources, i.e. men, material, machinery, methods and money - is made possible.
 c)       Specific Aims: The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving come specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.
d)      Performance evaluation: It provides a yardstick for measuring and evaluating the performance of individuals and their departments.

e)      Economy: The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.

f)       Standard Costing and Variance analysis: It creates suitable conditions for the implementation of standard costing system in a business organization. It reveals the deviations to management from the budgeted figures after making a comparison with actual figures.

g)      Corrective Action: The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system the deviation can determined only at the end of the financial period.

h)      Consciousness: It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.

i)        Reduces Costs: In the present day competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more.

j)        Policy formulation: It helps in the review of current trends and framing of future policies.

Limitations of Budgetary Control System:
The list of advantages given above is impressive, but a budget is not a cure all for organisational ills. Budgetary control system suffers from certain limitations and those using the system should be fully aware of them.
a)      The budget plan is based on estimates: Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is not possible in forecasting and budgeting. The strength or weakness of the budgetary control system depends to a large extent, on the accuracy with which estimates are made. Thus, while using the system, the fact that budget is based on estimates must be kept in view.

b)      Danger of rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may affect day-to-day operations and ignores the dynamic state of organization functioning.

c)       Budgeting is only a tool of management: Budgeting cannot take the place of management but is only a tool of management. ‘The budget should be regarded not as a master, but as a servant.’ Sometimes it is believed that introduction of a budget programme alone is sufficient to ensure its success. Execution of a budget will not occur automatically. It is necessary that the entire organisation must participate enthusiastically in the programme for the realisation of the budgetary goals.

d)      False Sense of Security: Mere budgeting cannot lead to profitability. Budgets cannot be executed automatically. It may create a false sense of security that everything has been taken care of in the budgets.

e)      Lack of coordination: Staff co-operation is usually not available during budgetary control exercise.

f)       Expensive Technique: The installation and operation of a budgetary control system is a costly affair as it requires the employment of specialized staff and involves other expenditure which small concerns may find difficult to incur. However, it is essential that the cost of introducing and operating a budgetary control system should not exceed the benefits derived there from.


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