Establishing a System of Budgetary Control
Successful Implementation of a Budgetary Control System Step # 1. Organisation for Budgetary Control:
The proper organisation is essential for the successful preparation, maintenance and administration of budgets. A Budgetary Committee is formed which comprises the departmental heads of various departments. All the functional heads are entrusted with the responsibility of ensuring proper implementation of their respective departmental budgets.
An organisation chart for budgetary control is give below:
The Chief Executive is the overall in charge of budgetary system. He constitutes a budget committee for preparing realistic budgets. A budget officer is the convener of the budget committee who co-ordinates the budgets of different departments. The managers of different departments are made responsible for their departmental budgets.
Successful Implementation of a Budgetary Control System Step # 2. Budget Centres:
A budget centre is that part of the organisation for which the budget is prepared. A budget centre may be a department, section of a department or any other part of the department. The establishment of budget centres is essential for covering all parts of the organisation. The budget centres are also necessary for cost control purposes. The appraisal of performance of different parts of the organisation becomes easy when different centres are established.
Successful Implementation of a Budgetary Control System Step # 3. Budget Manual:
A budget manual is a document which spells out the duties and the also the responsibilities of the various executives concerned with the budgets. It specifies the relations among various functionaries.
A budget manual covers the following matters:
(i) A budget manual clearly defines the objectives of budgetary control system. It also gives the benefits and principles of this system.
(ii) The duties and responsibilities of various persons dealing with preparation and execution of budgets are also given in a budget manual. It enables the management to know of persons dealing with various aspects of budgets and clarify their duties and responsibilities.
(iii) It gives information about the sanctioning authorities of various budgets. The financial powers of different managers are given in the manual for enabling the spending of amount on various expenses.
(iv) A proper table for budgets including the sending of performance reports is drawn so that every work starts in time and a systematic control is exercised.
(v) The specimen forms and number of copies to be used for preparing budget reports will also be stated. Budget centres involved should be clearly stated.
(vi) The length of various budget periods and control points is clearly given.
(vi) The procedure to be followed in the entire system should be clearly stated.
(viii) A method of accounting to be used for various expenditures should also be stated in the manual.
A budget manual helps in knowing in writing the role of every employee, his duties, responsibilities, the ways of undertaking various tasks etc. it also helps in avoiding ambiguity of any time.
Successful Implementation of a Budgetary Control System Step # 4. Budget Officer:
The Chief Executive who is at the top of the organisation, appoints some person as Budget Officer, The budget officer is empowered to scrutinize the budgets prepared by different functional heads and to make changes in them, if the situation so demands. The actual performance of different departments is communicated to the Budget Officer.
He determines the deviations in the budgets and takes necessary steps to rectify the deficiencies, if any. He works as a coordinator among different departments and monitors the relevant information. He also informs the top management about the performance of different departments. The budget officer will be able to carry out his work fully well only if he is conversant with the working of all the departments.
Successful Implementation of a Budgetary Control System Step # 5. Budget Committee:
In small scale concerns, the accountant is made responsible for preparation and implementation of budgets. In large scale concerns a committee known as Budget Committee is formed. The heads of all the important departments are made members of this committee. The committee is responsible for preparation and execution of budgets. The members of this committee put up the case of their respective departments and help the committee to take collective decisions, if necessary. The Budget Officer acts as coordinator of this committee.
Successful Implementation of a Budgetary Control System Step # 6. Budget Period:
A budget period is the length of time for which a budget is prepared. The budget period depends upon a number of factors. It may be different for different industries or even it may be different in the same industry or business.
The budget period depends upon the following considerations:
(a) The type of budget i.e., sales budget, production budget, raw materials purchase budget, capital expenditure budget. A capital expenditure budget may be for a longer period i.e., 3 to 5 years: purchase, sale budgets may be for one year.
(b) The nature of demand for the products.
(c) The timings for the availability of the finances.
(d) The economic situation of the cycles.
(e) The length of trade cycles.
All the above mentioned factors are taken into account while fixing the period of budgets.
Successful Implementation of a Budgetary Control System Step # 7. Determination of Key Factor:
The budgets are prepared for all functional areas. These budgets are inter-dependent and inter-related. A proper co-ordination among different budgets is necessary for making the budgetary control a success. The constraints on some budgets may have an effect on other budgets too. A factor which influences all other budgets is known as Key Factor or Principal Factor.
There may be a limitation on the quantity of goods a concern may self In this case, sales will be a key factor and all other budgets will be prepared by keeping in view the amount of goods the concern will be able to sell. The raw material supply may be limited; so production, sales and cash budgets will be decided according to raw materials budget. Similarly, plant capacity may be a key factor if the supply of other factors is easily available.
The key factor may not necessarily remain the same. The raw material supply may be limited at one time but it may be easily available at another time. The sales may be increased by adding more sales staff, etc. Similarly, other factors may also improve at different times. They key factor also highlights the limitations of the enterprise. This will enable the management to improve the working of those departments where scope for improvement exists.