Advantages of Budgetary Control

Everything you need to know about advantages of budgetary control. Budgetary control offers many advantages.

It may be conceived as one of the supreme examples of rationality in management. It is a useful management tool for comparing the current items with pre-planned items with a view to attain equilibrium between ends and means, output and effort.

Budgetary control has assumed a special significance in almost every organisation. There is hardly any enterprise and government department in which budgeting is not done.

The budgetary control system enables the management to enhance over-all efficiency for the achievements of organisational objectives.

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Budgetary control is a systematic and formalized approach for accomplishing the planning, coordination, and control responsibilities of management.

As defined by the Terminology of CIMA, ‘Budgetary control is the establishment of budgets relating the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy, or to provide a basis for its revision.’

The advantages of budgetary control are as follows:-

1. Planning 2. Coordination 3. Control 4. Simplicity 5. Ensures Economy in Working 6. Avoids Buck-Passing 7. Establishes Co-Ordination among Divisions 8. Ensures Economy in Working

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9. Avoids Buck-Passing 10. Establishes Co-Ordination among Divisions 11. Management by Exception (MBE) 12. Optimum Utilization of Resources 13. Continuous Review of Performance 14. Efficiency 15. Advance Thinking 16. Prevents Buck-Passing and a Few Others.

Advantages of Budgetary Control: Planning, Coordination, Control, Simplicity, Help to Administrators and a Few Others

Advantages of Budgetary Control – 3 Main Advantages: Planning, Coordination and Control

Budgetary control makes all the difference between drifting in an uncharted sea and following a well-planned course towards predetermined destination. It serves as an invaluable aid to management through planning, coordination and control –

Advantage # 1. Planning:

i. Habit of thinking ahead – Budgetary control forces management to follow the principle ‘look before you leap’. It compels management to make an early study of problems and outline ways of tackling the same.

ii. Pooled judgement and experience – It reflects the combined efforts of best brains in the organisation. The combined judgement, experience of executives can be used to determine the most profitable course of action for future use.

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iii. Realistic goals and policies – It gives planning a reality and sense. It helps the enterprise to clarify the goals and policies to be pursued in operational and realistic terms.

iv. Planned way to secure economy – There is a planned approach to expenditure and financing of the business so that economy is achieved in the use of resources. The resources are used to the best advantage. It directs enterprise activity towards maximisation of efficiency, productivity and profitability.

v. Reduces Uncertainty – Uncertainty is reduce to minimum. It forces executives to map out future courses of action clearly. These are periodically examined, restated and reformulated in the light of changed circumstances. This helps an organisation to face future challenges with confidence.

Advantage # 2. Coordination:

i. Establishes coordination – Budgetary control forces executives to think as a group. All the departments in an organisation to move in a well- coordinated manner, trying to implement the planned courses of action in a systematic way. There is very little room for internal friction.

ii. Relates business activity with general economic trend – Budgetary control helps management to coordinate the activities of the business to the signals of high and low economic trends. The danger signals in the economy are promptly taken care of. The entire organisational machinery is kept ready to overcome environmental and competitive challenges.

Advantage # 3. Control:

i. Indicates weaknesses – It establishes divisional and departmental responsibility. As a result executives cannot seek shelter behind a mountain of rules and regulations for their inefficiency. They cannot indulge in ‘buck- passing when budget figures are not met. By pin-pointing responsibility for inefficient performance, budgeting helps management trace weak spots early and take remedial steps.

ii. Prevents waste – Budgeting wages a continuous war against wastages of all kinds. It conducts a searching analysis of all items of expenditure and keeps them under check. There is a conscious attempt to channel activities through profitable channels. Capital is put to profitable use.

iii. Facilitates standard costing – The use of performance standard especially in operational activities and financial matters help the adoption of standard costing technique.

iv. Management by exception – Budgetary control helps in finding out deviations from pre-planned courses action. Management can probe into the causes and concentrate on important factors causing the trouble.

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v. Motivates people – The method of evaluating performance against standards rest in advance, enables employees to find out their strengths and weaknesses. It makes them work for assigned goals show performance and obtain the rewards. In other words, they are made to earn their rewards by showing superior performance.

Advantages of Budgetary Control – 8 Main Advantages: Simplicity, Coordination, Help to Administrators, Maximum Utilisation of Resources and a Few Others

1. Simplicity – It becomes simple to control cost by application of budgetary control. Standard are fixed in budget and efforts are made to control them. Every department tries to control waste expenditure and to complete the work in budgeted amount.

2. Coordination – Budgetary control establishes coordination amongst various department and the work becomes very simple. Complete business organisation function as a single unit and work targets are achieved.

3. Help to Administrators – Budgetary control is helpful in ascertainment of various policies of the organisation.

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4. Maximum Utilisation of Resources – Budgeting control brings maximum utilisation of resources and they provide maximum profits to the organisation.

5. Work Efficiency – Targets are fixed for every department and efforts are made to achieve these targets. It increases the efficiency of every department and of every person.

6. Advantage of Planning – The amount and kind of work to be done by each department is ascertained through budget. If any work is performed according to the pre-determined plan, its brings increases in production.

7. Sense of Responsibility – Responsibility to achieve the targets is fixed through budget. Department make maximum efforts to achieve these targets. It develops sense of responsibility amongst departments.

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8. Knowledge of Weaknesses – Working capacity is fixed in budgets and it is compared with the actual performance. If there is any difference, reasons are found out and efforts are made to remove the defects.

Advantages of Budgetary Control – 6 Important Advantages: Ensures Economy in Working, Avoids Buck-Passing, Establishes Co-Ordination among Divisions and a Few Others

Budgetary Control System is being viewed by the corporate society as an effective management tool for both minimizing cost, and maximizing revenue and profits. As opined by Dr. S. N. Maheshwari, it acts as a friend, philosopher and guide to the management. It begins with the establishment of Budgets for various departments and functions, and ends with the comparison of actuals with the budgeted identifying the variations and reasons, and suggesting remedial measures.

In the light of this, the important advantages of Budgetary Control System to the company and to the management are presented below:

Advantage # 1. Ensures Economy in Working:

Since Budgetary Control System clearly spells out the responsibilities of heads of various Budget Centres, the entire company conducts its operation in the most economical manner. Because, each one aims at utilizing the resources at his disposal more effectively and productively. This results in both the minimization of waste, loss, etc., and maximization of productivity.

Van Sickle has therefore opined, 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 pre-determined goal or target. The budget is an impersonal policeman that maintains ordered effort and brings about efficiency in results.

Advantage # 2. Avoids Buck-Passing:

Budgetary Control clearly defines the responsibilities of each of the executives and supported by the delegation of authority commensurate with the responsibility. Therefore, everyone working in the organization knows very well what he has to do and achieve. This fixation of divisional responsibility, of course in consultation with the heads of the divisions or Budget Centres, prevents buck-passing when the targets or goals are not achieved.

Advantage # 3. Establishes Co-Ordination among Divisions:

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Since the success of the scheme (viz., Budgetary Control System) depends upon the team work, Budgetary Control System co-ordinates the various divisions, departments, functions, etc., of a company such as production, purchase, personnel, sales, finance, etc. Because, the work of one division depends upon the others and vice versa.

Further, the Budgets are prepared and finalized after consulting different levels of management and therefore, the approved Budget represents the collective opinion. It (i.e., Budgetary Control), therefore, establishes proper co-ordination among various divisions of the company.

Advantage # 4. Management by Exception (MBE):

When the actuals are compared with the budgeted, some deviations or variations can be found. Comparison of actual performance with the targets reveals the root of inefficiency and therefore, the management can concentrate only on the divisions which are not working according to plan and leaving the others. This enables the management to devote its time and effort to improve the performance of the divisions which have failed to achieve their targets.

Advantage # 5. Optimum Utilization of Resources:

Since the Budgetary Control System creates a healthy competition among divisional managers, it ensures the optimum utilization of available resources to achieve the goals.

Advantage # 6. Continuous Review of Performance:

Budgetary Control System helps the management to review the performance of different Budget Centres – both continuously and periodically. Consequently, it is possible for the management to exercise proper control over the activities on time as the deviations are revealed in time. This helps to achieve the overall objective set in the Budget.

The other benefits which accrue to the company from Budgetary Control System are as follows:

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i. It helps to adopt the principles of Standard Costing.

ii. It helps to receive greater favour from the credit agencies.

iii. It facilitates the avoidance of both under- and over-capitalization.

iv. Budgetary Control System facilitates the adoption of uniform policy.

Advantages of Budgetary Control – 9 Major Advantages: Efficiency, Advance Thinking, Prevent Buck- Passing, Team Work and a Few Others

Advantage # 1. Efficiency:

Budgetary control system enables the management to conduct business in the most efficient manner. It acts as an impersonal policeman that maintains order and brings efficiency in operations.

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Advantage # 2. Advance Thinking:

Budgetary control system involves planning and policy formulation. It clearly defines the objectives and policy of the organisation. This requires advance thinking which is essential for the success of any venture.

Advantage # 3. Prevents Buck-Passing:

Budgetary control is a powerful tool to control expenditure. Budgets provide a yardstick to evaluate actual performance of departments and persons working in the organisation. It lays emphasis on proper staff organisation and prevents buck passing when the budgeted results are not achieved. At the same time delegation of authority, assignment of responsibility and coordination among the activities of various personal and departments is made possible.

Advantage # 4. Team Work:

Budgetary control ensures team work because, finally, approved budgets represent the judgement of the entire organisation. It gives an opportunity to people at all levels to participate in the budgeting process. Lower level also get educated about the objectives and the policy of the organisation.

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Advantage # 5. Makes Management by Exception Possible:

Only deficiencies revealed by comparison between budgeted and actual performances can be looked into and rectified.

Advantage # 6. Effective Utilisation of Resources:

Effective utilisation of men, materials, machines and money is possible as production is planned according to the availability of resources.

Advantage # 7. Review of Current Trend:

Budgetary control helps in reviewing current trends. Future policies can be determined accordingly.

Advantage # 8. Facilitates Introduction of Standard Costing:

Budgetary control creates conditions for setting up a system of standard costing in the organisation.

Advantage # 9. Cost Consciousness:

Budgetary control helps in promoting a feeling of cost consciousness among workers. It helps in avoiding wasteful expenditure since any expenditure beyond the budgeted figures generally requires prior approval of a competent authority.

Besides the above advantages, the budgetary control system facilitates centralised control of various functions, probes into the reason for deviations and encourages a healthy competition among various departments and units of the organisation.

Advantages of Budgetary Control

1. A budget programme forces the managers to plan ahead.

2. It forces early consideration of basic policies.

3. All members of top management participate in budget committee. For this reason even planning at departmental level gels benefit of experience of seasoned executives.

4. All functional heads are compelled to make plans in harmony with the plans of other departments.

5. Management is forced to put down in cold figures, what it means by satisfactory results.

6. It demands the most economical use of labour, materials, facilities and capital.

7. It inculcates a habit of timely, careful, adequate consideration of all factors before reaching important decisions.

8. The use of budgets removes clouds of uncertainties for lower levels of management regarding basic policies and objectives.

9. The use of budgets promotes undemanding of the problems of co-workers.

10. It facilitates periodic self-analysis of the organisation.

11. It aids in obtaining bank credit.

12. Management is forced to give timely and adequate attention to the effect of changing business conditions.

Advantages of Budgetary Control – 10 Main Advantages

1. Budgetary control provides planned approach to business affairs in expenditure and financing activities.

2. It directs capital expenditure in most profitable channel.

3. It co-ordinates activities of various departments by setting goals.

4. Increases efficiency, eliminates wastes and control costs.

5. Fixes responsibilities of each individual.

6. Ensures efficient use of resources of business.

7. Motivates employees to attain the given goals.

8. Provides incentives when set results are achieved.

9. Compels management to plan economically and carefully.

10. Creates necessary condition for introduction of standard costing.

11. Provides yardstick against which actual results can be compared.

12. It assists in delegation of authority and assignment of responsibility.

Advantages of Budgetary Control

Budgetary control offers many advantages. It may be conceived as one of the supreme examples of rationality in management. It is a useful management tool for comparing the current items with pre-planned items with a view to attain equilibrium between ends and means, output and effort.

It corrects the deviations from preplanned path through the media of observation, research, planning, control and decision making and thus helps in performance of future activities in an orderly way. It uncovers the uneconomies in operations, weaknesses in the organisational structure and minimises wasteful spending. It acts as a friend, philosopher and guide to the management.

Its advantages can be summarised as follows:

1. Efficiency and Economy – It brings efficiency and economy in the working of the business enterprises. “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 results.”

2. Establishment of responsibility – It establishes divisional and departmental responsibility. It thus prevents alibis and “buck-passing” when the budget figures are not met.

3. Co-ordination – It co-ordinates the various divisions of a business, namely, the production, marketing, financial and administrative divisions. It “forces executives to think, and think as a group.” This results in smoother operation of the entire plant.

4. Safeguard against over-optimism – It guards against undue optimism leading to over-expansion because the targets are fixed by the executives after cool and careful thought.

5. Safety Signal – It acts as a safety signal for the management. It shows when to proceed cautiously and when manufacturing or merchandising expansion can be safely undertaken. It serves as an automatic check on the judgement of the executives as losses are revealed in time which is a caution to the management to stop wastages.

6. Uniformity – Uniform policy without the disadvantage of a military type of business organisation can be pursued by all divisions of the business by means of centralisation of budgetary control.

7. Reducing seasonal variations – Seasonal variations in production can be reduced by developing new “fill in” products. This results in decreasing the cost of production by increasing volume of output.

8. Use of standard costing – The use of budget figures as measures of operating performance and financial position makes possible the adoption of the standard cost principle in divisions other than the production division.

9. Economical use of capital – It helps management in obtaining the most profitable combination of different factors of production. This results in a more economical use of capital.

10. Favour of Credit Agencies – Managements which have developed a well-ordered budget plan and which operate accordingly, receive greater favour from Credit Agencies.

11. Pre-determination of Financing – It is the only means of predetermining when and to what extent financing will be necessary avoiding the possibility of both over and under-capitalisation.

Advantages of Budgetary Control – 6 Most Important Advantages: Ensures Economy in Working, Establishes Co-Ordination among Divisions and a Few Others

Budgetary Control System is being viewed by the corporate society as an effective management tool for both minimizing cost, and maximizing revenue and profits. As opined by Dr. S.N. Maheshwari, it acts as a friend, philosopher and guide to the management. It begins with the establishment of Budgets for various departments and functions, and ends with the comparison of actuals with the budgeted identifying the variations and reasons, and suggesting remedial measures.

In the light of this, the important advantages of Budgetary Control System to the company and to the management are presented below:

Advantage # 1. Ensures Economy in Working:

Advantage # 2. Avoids Buck-Passing:

Advantage # 3. Establishes Co-Ordination among Divisions:

Advantage # 4. Management by Exception (MBE):

Advantage # 5. Optimum Utilization of Resources:

Since the Budgetary Control System creates a healthy competition among divisional managers, it ensures the optimum utilization of available resources to achieve the goals.

Advantage # 6. Continuous Review of Performance:

Budgetary Control System helps the management to review the performance of different Budget Centres — both continuously and periodically. Consequently, it is possible for the management to exercise proper control over the activities on time as the deviations are revealed in time. This helps to achieve the overall objective set in the Budget.

The other benefits which accrue to the company from Budgetary Control System are as follows:

1. It helps to adopt the principles of Standard Costing.

2. It helps to receive greater favour from the credit agencies.

3. It facilitates the avoidance of both under- and over-capitalization.

4. Budgetary Control System facilitates the adoption of uniform policy.

Advantages of Budgetary Control System – Top 8 Advantages

Budgetary control system which is forward looking allows to identify the short term problems well in advance. It gives enough time to managers to explore the different methods to overcome those problems. However, like any other system, it also suffers from certain limitations.

Advantages of budgetary control system are explained in the following ~~section~~:

1. The use of budgetary control system enables the management of a business concern to conduct its business activities in the efficient manner.

2. It ensures the effective utilization of the resources as the plans are made keeping in mind those resources.

3. It reports the significant deviations to the top-level management and thus, follows the principle of Management by Exception.

4. It is an effective tool for cost control.

5. It helps in the review of the current trends and in making the policies for the future.

6. It creates suitable environment and conditions for the implementation of the standard costing system in the organization.

7. It inculcates the feeling of cost consciousness among the workers.

8. The companies following the budgetary control system and which operate accordingly find favour from the credit agencies.

Advantages of Budgetary Control – 12 Main Advantages

Budgetary control has assumed a special significance in almost every organisation. There is hardly any enterprise and government department in which budgeting is not done. The budgetary control system enables the management to enhance over-all efficiency for the achievements of organisational objectives.

It contributes in the development of an undertaking in the following manner:

1. Budgetary control provides an action plan which is prepared after a great deal of exercise on various issues which might affect the execution of the plan. With the adoption of formal budgets, everybody in the organisation knows and understands his responsibilities which prevents all sorts of confusions as regards authority and responsibility.

2. With a prior knowledge of work to be done the management can develop an appropriate strategy for the achievements of the targets set out in the budgets.

3. Budgeting develops a sense of responsibility among the employees who are required to do a particular work in a given period of time. The powers can be delegated without much fear of its being misused.

4. Budgetary control provides for the preparation of variance report which contains a comparatives study of actual and budgeted figures with variances. An adverse variance, i.e. actual performance falling short of budgeted performance, is brought to the knowledge of top management which finally takes corrective action to avoid such a situation in the next budget period. In this manner control becomes more effective.

5. Budgeting helps in the coordination of business activities without which an enterprise cannot run in perfect harmony. For example, production budget is drawn in accordance with the expected sales as set out in Sales budget. Similarly, purchase budget is prepared according to quantity production as shown in production budget.

6. Budget serves as a medium of written communication. It ensures better understanding and harmonious relation between top management, managers and workers.

7. Delay in the implementation of the business programmes is avoided by the preparation and implementation of budgets well in time.

8. Overheads budget sets limit to expenditure on various items. Any expenditure beyond the limit specified can be incurred only with the prior sanction of the competent authority. Thus there is opportunity to scrutinize the expenditure before it is actually incurred. Thus over-spending of overheads can be checked and scarce financial resources put to proper use.

9. Budgets, if properly drawn economise the use of resources. For example, if the budget for inventories is rightly drawn up, it will reduce the requirements of the money to be tied up in inventories.

10. Budgets suggest the arrangement the facilities well in advance for maintaining the operational efficiency of any enterprise. For instance, Cash budget clearly indicates the deficit/surplus cash position at different timings and accordingly additional working capital may be procured or surplus cash invested for effective working of the organisation.

11. Budgetary control provides a basis for rewarding the employees who perform better. It is generally not used as a punitive measure.

12. A sound budgetary control system can contribute in the set up the standard costing which can act a complementary to budgeting.