Advantages and Limitations of Budgetary Control
Advantages of Budgetary Control:
Important advantages of a budgetary control can be summed up as follows:
- The most important advantage of a budgetary control is to enable management to conduct business in the most efficient manner because budgets are prepared to get the effective utilisation of resources and the realisation of objectives as efficiently as possible.
- It lays down an objective for the business as a whole. Even though a monetary reward is not offered the budget becomes a game—a goal to achieve or a target to shoot at—and hence it is more likely to be achieved or hit than if there was no predetermined goal or target. The budget is an impersonal policeman that maintains ordered effort and brings about efficiency in result.
- Everyone working in the concern knows what exactly to do because budgetary control lay emphasis on the staff organisation. It ensures that individual responsibilities are clearly defined and that the required authority commensurate with the responsibility is delegated so that buck passing may be prevented when the budgeted results are not achieved.
- Budgetary control takes the help of different levels of management in the preparation of the budget. Budget finally approved represents the judgment of the entire organisation and not merely that of an individual or a group of individuals. Thus, it ensures team work.
- Management by exception is possible because the comparison of actual and budgeted results points out weak spots so that remedial action is taken against weak spots which are not in conformity with the budgeted performance.
- It ensures effective utilisation of men, materials, machines and money because production is planned according to the availability of these items.
- It is helpful in reviewing current trends in the business and in determining further policy of the business because current and future trends are studied in the preparation of the budget.
- Budget acts as a measure of efficiency of departments and persons working in the organisation because budgets provide a yardstick against which actual performance of departments and employees can be compared.
- Budgetary control creates conditions for setting up a system of standard costing.
- It helps in promoting a feeling of cost consciousness and in restricting expenditure to the minimum. Thus, wasteful expenditure is avoided and expenditure beyond budgeted figure is not incurred without prior approval of the higher authority.
- It enhances the standing and credit of the undertaking with the government and the banks because an efficient technique of cost control is used.
- Functions of planning, co-ordination and control can be better performed with the help of the budgetary control.
Limitations of Budgetary Control:
Budgetary control as a management control device suffers from the following
- It may be impossible to achieve the budgeted targets as estimates and forecasts relating to the future made in the budget can never be perfectly accurate for the simple reason that future is unpredictable.
- In rapidly changing conditions it may not be possible to achieve the budgeted targets. Budgets may have to be revised from time to time, but frequent revisions may prove to be a costly affair.
- Budgets may serve as constraints on managerial initiative because every executive tries to achieve the budgeted targets. It tends to bring about rigidity in control.
- Correlation and coordination of various budgets is expensive; so small organisations cannot afford the employment of budgetary control as a cost control technique.
- Budgetary control may lead to conflicts among functional executives because every executive may try to get a larger share of budgetary allocation, shirk responsibility and blame others for pitfalls. The success of budgetary control depends upon the team work which may be lacking in the organisation.
- Budget is only a tool of the management and is not a substitute of management.
- Badly handled budgetary control system with undue pressure and lack of regard to behavioural aspects may cause antagonism and may lower morale of the employees.
- Budgets may be developed keeping in view existing organisation structure which may be inappropriate for current conditions.