Wednesday, January 16, 2008

Discuss the Limitations of Budgetary Control

Modern business world is full of competition, uncertainty and exposed to different types of risks. This complexity of managerial problems has led to the development of various managerial tools, techniques and procedures useful for the management in managing the business successfully. Budgeting is the most common, useful and widely used standard device of planning and control. The budgetary control has now become an essential tool of the management for controlling costs and maximizing profit. Costs can be reduced, wastage can be prevented and proper relationship between costs and incomes can be established only when the various factors of production are combined in profitable way. The resources of a business can be effectively utilized by efficient conduct of its operation. This requires careful working out of proper plans in advance, co-ordination and control of activities on the part of management.

Limitation of Budgetary Control:

Budgetary control is a sound technique of control. But it is not a perfect tool. Despite the appreciation, it has its own limitations which are as follows:

1. Budgets deal with future. Forecasting is necessary for budgeting. Forecasts and estimates are rarely cent per cent accurate. The success largely depends upon the degree of accuracy of the estimates.

2. Budgeting is time-consuming process. During the preparation period, the business conditions may change and estimates may go wrogn by that time.

3. The Successful operation and execution of budgets depends upon the efficiency of the executive personnel.

4. Budgetary control is essentially a tool of decision-making and it helps the management in taking sound decisions. But it cannot replace the management.

5. Budgeting necessitates the employment of specialized staff and this involves expenditure which small concerns may not afford.

6. A budget programme should be dynamic, capable of being adapted to changing conditions. But when budgets are prepared with pre-determined targets, there is a feeling rigid.

7. the success of the budgetary control largely depends upon willing co-operation or team work of all concerned. If there is no co-operation, the whole system collapses.


The following are the essentials for a sound system of budgetary control:

1. Chart:

There must be an organizational chart to show the authority and responsibility of each executive of the firm. This will enable him to know his relationship with other executives. The budget director derives power from the chief executive, helps in co-ordination and drawing up of all budgets and suggests changes, if necessary. The sales manager, production manager, purchasing manager, personnel manager and accountant will prepare their budgets.

2. Budget Centre:

For the purpose of effective budgetary control, budget centres are defined. A budget centre may be a department of a section of the undertaking. Separate budgets are prepared for each department and the departmental head is responsible for carrying out budgets. Departmental heads should have effective control over the execution of the budget, to prevent unfavorable variation.

3. Budget:

In small firms, the chief accountant prepares the budgets and co-ordinates various activities. In big concerns, a Committee is appointed for this task. The Committee consists of various section heads, the chief executive and the budget controller. The budgets are prepared by section heads and submitted to the Committee for approval; changes are made, if necessary, and approved.

4. Budget Manual:

It is a document which sets out the responsibilities of persons engaged in the routine work. Budget manual lays down the objectives of the organization, responsibilities of all executives and the procedure to be followed for budgetary control. Duties, authorities, powers of each official of the different departments are clearly defined, so as to avoid conflicts amount the personnel. It also specifies different forms and records to be used for the purpose of budgetary control.

5. Key-Factor:

Key factor is also known as “Limiting factor” of “Governing Factor” which means this is the factor, the extent of whose influence must first be assessed, in order to ensure that the functional budgets are reasonably capable of fulfillment. The key factor may be , shortage of raw materials, non-availability of labour, limited sales, government restrictions etc. the key-factor is a limitation of production or sales. First locate the key-factor, before preparing the budget, as it influences all other budgets. For example, shortage of power supply leads to under-utilization of plant capacity. Therefore, the concern will have to first prepare a budget for plant utilization and later the other budgets say sales will be prepared.

Master Budget: A Master Budget is the summary budget. For the entire enterprise and embodies the summarized figures for various activities. This is also known as summary budget or finalized profit plan. This budget includes the budgeted position of the profit and loss as well as balance sheet. Master budget is prepared by the Committee and becomes a target for the company.

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