Objectives of Budgetary Control: 6 Main Objectives

Everything you need to know about objectives of budgetary control. The management of an organisation is primarily concerned with the realization of organisational objectives.

In its efforts to achieve these objectives, it has to manage the enterprise efficiently by optimising the use of resources and eliminating or minimising the wastes, if any.

Budgetary control is one of the important techniques which help the management in controlling business activities in a desired direction.

A budget is a numerical statement expressing the plans, policies and goals for a definite future period. Budgeting means the process of preparing budgets.

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Budgetary control is a system of controlling costs which includes the preparation of budgets, co-ordination the departments and establishing responsibilities, comparing actual performance with the budgeted; and acting upon results to achieve maximum profitability.

While defining a budget, the CIMA Official Terminology mentions that “a budget provides a focus for the organisation, aids the co-ordination of activities, and facilitates control.

Planning is achieved by means of a fixed master budget, whereas control is generally exercised through the comparison of actual costs with a flexible budget.”

Some of the objectives of budgetary control are as follows:-

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1. Planning 2. Co-Ordination 3. Communication 4. Motivation 5. Control 6. Performance Evaluation 7. Targets Setting 8. Approved Plan and a Few Others.

Objectives of Budgetary Control: Planning, Co-Ordination, Communication, Motivation, Control and a Few Other Objectives

Objectives of Budgetary Control – 6 Important Objectives: Planning, Co-Ordination, Communication, Motivation, Control and Performance Evaluation

While defining a budget, the CIMA Official Terminology mentions that “a budget provides a focus for the organisation, aids the co-ordination of activities, and facilitates control. Planning is achieved by means of a fixed master budget, whereas control is generally exercised through the comparison of actual costs with a flexible budget.”

The above observation lists out what a budget is intended for.

The various reasons for preparing budgets are:

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1. “To aid the planning of annual operations,

2. To co-ordinate the activities of the various parts of the organisation and to ensure that the parts are in harmony with each other,

3. To communicate plans to the various responsibility center managers,

4. To motivate managers to strive to achieve the organisational goals,

5. To control activities,

6. To evaluate the performance of managers.”

A brief reference to each of these objectives may be made as under:

Objective # 1. Planning:

Budget is a planning device. It is a plan in relation to planning. By means of planning, management looks ahead, anticipates eventualities, prepares for contingencies and provides for an orderly sequence for achieving the enterprise objectives. A budget presents the plan, objectives and policies of an enterprise and expresses them in numerical terms. It provides management with a plan of operation to be followed during a specified future period.

Budgets are prepared for every function or segment of an enterprise. Consequently, all levels of management are drawn into the budgetary planning process. Every manager is sufficiently informed in advance, of the objectives, goals, policies, rules, procedures and programme of his enterprise.

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Budgeting process encourages all managerial personnel to foresee problems even before they arise. Such knowledge about the future enables them to make reasoned judgments. Judgments made at the spur of the moment byway of expediency are minimised.

Objective # 2. Co-Ordination:

This term is defined as “the orderly arrangement of group effort to provide a unit of action in the pursuit of a common purpose.” In other words, it is the process by which each sub-division of a concern works towards the common goal or objective with due regard to all other sub-divisions.

It has already been pointed out that without any guidance of the nature of a budget, each manager, with authority to do so, may make his own decision thinking that the same is in the best interests of the concern. In point of fact, however, such a decision may come into conflict with the decision of another manager.

For instance, the production manager may make a decision with regard to the volume of production, keeping in view the stock level in respect of finished goods. The purchase manager, on the other hand, may make a decision to buy materials in large quantities to take advantage of bulk purchasing. These two decisions are quite conflicting.

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One of the objectives of budgeting is to avoid these conflicting decisions and guide every manager towards the common goal. What appears to be in the best interests of the segment of the organisation should be sacrificed in the larger interests of the concern as a whole.

Each manager should work for the attainment of the common goal or objective of the concern. Budgeting thus directs every manager to examine the relationship between his own sphere of activity and those of the other managers in the process of making decisions. The aim of budgeting is to reconcile individual differences for the good of the concern as a whole.

Objective # 3. Communication:

Effective coordination is dependent upon adequate communication. Every member of the organisation should know very clearly, the part that he has to play in accomplishing the target laid down in the budget. He should know, in advance, what is planned, how it is planned, and when and by whom it is to be accomplished.

An organisation is said to function smoothly and efficiently if definite and clear lines of communication are established. Only then it is possible for every member of the organisation to be kept informed of the plans and policies of the organisation to which it is expected to conform. It is only then that appropriate members of the organisation could be made accountable for implementing the budget.

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Budget is the means of communicating to lower levels of management, the expectations of the top management. It is a means of enabling all members of the organisation to know what the top management expects of them and thereby coordinate their activities in achieving the same. Thus, budgeting facilities effective communication.

Objective # 4. Motivation:

A budget is a very useful device in influencing the behaviour of managerial personnel, and motivating them to put forth their efforts in the attainment of organisational objectives. By laying down standard of achievement, a budget acts as a challenge to the managerial personnel in the accomplishment of the standard set.

Having had the opportunity to participate in the preparation of the budget and thereby laying down standards of achievement, the very managerial personnel are made responsible for attainment of the standards. A budget is thus a strong motivational force and a challenge to managers.

Objective # 5. Control:

Nothing can be achieved by merely laying down the objectives and hoping that the desired organisational objectives will be accomplished. Planning also generates the need for control. In fact, the implementation of budget is, in itself, a control function.

A budget places the responsibility of achieving the target on the shoulders of those who participated in the budgetary planning function. By relating the budget to individual responsibility, the performance of the department for which the individual is responsible, is continually measured against the pre-determined targets. If there is any variation between the budgeted performance and the actual performance, the same becomes subject to investigation, analysis and corrective action.

A comprehensive budgetary control programme makes control possible by the principle of exception. According to the CIMA Official Terminology, Management by Exception is “the practice of focusing on activities which require attention and ignoring those which appear to be conforming to expectations.”

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Accordingly, control is sought to be exercised only on significant deviations from the expected results. By investigating into the reasons for such deviations and analysing the same, management may be able to identify weaknesses or inefficiencies in the organisation. Efforts may, later on be put forth for removing or correcting the inefficiencies.

Objective # 6. Performance Evaluation:

Evaluation of managerial performance is made on the basis of a manager’s achievement of the target laid down for his segment. A budget is thus a means of knowing as well as informing the managers how well they are performing in meeting the targets which they have themselves helped in setting.

Objectives of Budgetary Control – Top 4 Objectives

The following are the objectives of budgetary control:

1. To state clearly and unambiguously the targets for different Budget Centres and also for the whole company. That means, the Budgets have to state explicitly what the firm expects to achieve during the Budget Period from different Budget Centres,

2. To communicate to the heads of Budget Centres about what they are required to achieve during the Budget Period. This is necessary to avoid confusion and to ensure the accomplishment of the target results,

3. To provide a comprehensive plan of action in the form of guidance to departmental heads to achieve the budgeted results, and

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4. To provide a means for evaluating the performance of different Budget Centres. This can be done by comparing the actuals with the budgeted results. On the basis of this comparison, necessary corrective measures may be suggested.

In brief, the Budgets aim at setting the targets and achieve these targets by putting the maximum effort, and utilizing the available resources more productively, profitably and judiciously.

Objectives of Budgetary Control – 8 Main Objectives: Targets Setting, Responsibilities of Executives and a Few Others

The following are the objectives of a budgetary control:

(i) Targets setting – Identify the overall aims and objectives of the business and determining targets of performance for each section or department of the business.

(ii) Responsibilities of executives – Laying down the responsibilities of each of the executives and other personnel so that everyone knows what is expected of him and how he will be evaluated. Budgetary control is one of the few ways in which an objective assessment of executives and departments is possible.

(iii) Basis for comparison and investigation of variations – Providing a basis for the comparison of actual performance with predetermined targets and investigation of variations, if any, between the budgeted targets and the actual. This helps in adopting corrective measures.

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(iv) Best use of resources – Ensuring the best use of all available resources to maximise profit or production, subject to the limiting factors. Since proper preparation of budgets requires consideration of all aspects, there is usually good coordination when a system of budgetary control exists.

(v) Co-ordination of various activities – Co-coordinating the various activities of the business, and centralising control and yet enabling management to decentralise responsibility and delegate authority in the overall interest of the business.

(vi) Forethought – Creating a spirit of careful forethought, assessment of what is possible and an attempt to achieve it.

(vii) Basis for revision of future plans – Providing a basis for revision of current and future policies.

(viii) Drawing long range plans – Drawing long range plans with a fair measure of accuracy.

Objectives of Budgetary Control – 6 Important Objectives: Planning, Communication, Coordination, Motivation and a Few Others

Objective # 1. Planning:

Planning is an important managerial function. It helps to decide in advance, what to do, how to do it, when to do it and who is to do it. Planning, thus, helps the managers to anticipate eventualities, prepare for contingencies for achieving the ultimate goals. Budget preparation drives the managers to plan ahead.

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Managers express their operational plans for anticipated business conditions. Without a formal procedure of budgetary control, many operating managers will not find the time to plan ahead. Thus, budgeting is an important planning device.

Objective # 2. Communication:

The employees of an organisation should know organisational aims, objectives of sub-units (budget centres) and the part that they have to play for their attainment. Budgets effectively communicate this information to employees. Besides, budgets keep different sections of the organisation informed about the contribution of different sub-units in the attainment of overall organisational objectives.

Objective # 3. Coordination:

To coordinate is to harmonise all the activities of a company so as to facilitate its working and its success.

Coordination will lead to following results:

i. Each department will work in harmony with others,

ii. Each department will know the specific role that it has to play in the accomplishment of overall organisational objectives, and

iii. The sequential arrangement of activities of different departments is so governed that overlapping of activities and wastage of time and labour is avoided.

A comprehensive system of budgeting helps to coordinate different functional budgets. In other words, a budget will preclude the production department from producing more than the sales department can sell.

Objective # 4. Motivation:

If employees have actively participated in budget preparation and if they are convinced that their personal interests are closely associated with the success of organizational plan, budgets provide motivation in the form of goals to be achieved. The budgets will motivate the workers, depends purely on how the workers have been mentally and physically involved with the process of budgeting.

Objective # 5. Control:

Under the system of budgetary control, budget forecast is thoroughly discussed and reviewed to be finally approved as functional budgets. Thereafter a lot of ‘cuts’ and ‘adjustments’ are made to make functional budgets fit in the organisational objectives.

Then budget formation is followed by a feedback system to pinpoint the extent of variation between actual level of performance and budgeted level of performance. Thus, the inbuilt mechanism of the routine of budgetary control is bound to precipitate to an operational control.

Objective # 6. Approved Plan:

A master budget provides an approved summary of results to be expected from proposed plan of operations. It concerns all functions of organisation and serves as a guide to executives and departmental heads responsible for various departmental objectives.

Objectives of Budgetary Control

1. Cost Control – The main aim of budgetary control is to control the production and other costs with maximum output.

2. Coordination – Establishing coordination amongst various department is primary objective of budgetary control.

3. Control on Various Activities – Various activities are controlled through budgetary control for the attainment of budget estimates.

4. Help to Administrators – Budgetary control helps administrations in smooth running of the business. It can be used in production, administration, sales and in estimating financial requirements.

5. Targets – Targets for various departments are ascertained through budgetary control. Proper steps can be taken against those persons who are not in a position to attain their targets.

6. Determination of Policies – Business policies are determined through budgetary control, which shows the path for the future growth of the organisation.

7. Motivation – Work progress of every person is examined and efforts are made to achieve the targets. Persons are motivated through increase in the salary packages, promotion etc.

8. Planning – Business activities are presented in planned manner in the form of practical budgets. Work are forecasted, which may be helpful in the growth of the organisation.

Objectives of Budgetary Control – 3 General Objectives: Planning, Co-Ordination and Control

The general objectives of a budgetary control are:

Objective # 1. Planning:

A budget is a plan of action which provides a detailed plan over a definite period of time. By planning in advance a business can anticipate many problems much before they arise and solutions can be sought through a careful study. In other wards it compels the management to think ahead to anticipate and prepare for the future possibilities.

Objective # 2. Co-Ordination:

Co-ordination is the process where by different divisions of a concern work in harmony to achieve the objectives of a business. Effective planning contributes in achieving co-ordination among the various departments. A comprehensive budgetary control requires that these plans be formally laid down in the budget and copies to be circulated among the different departments for proper information and functioning.

Objective # 3. Control:

Control is the action necessary to ensure that the plans and objectives being achieved. It is a systematic effort to keep the management informed of whether planned performance is being achieved. It is possible to control to compare the actual performance against pre-determined plans and reporting the difference to the management for taking corrective action.

Objectives of Budgetary Control – 8 Main Objectives

(i) Facilitation of centralised control with delegated authority and responsibility.

(ii) Reducing losses and wastages to the maximum extent possible.

(iii) Installation of a coordinated system as preparation of budgets as well as execution of control according to them requires it.

(iv) Taking remedial action wherever variations of actual performance and budgeted targets are located.

(v) Establishment of synchronisation among sales, production, purchase of materials and incurrence of labour and overhead costs etc.

(vi) Ensuing adequacy of cash and other resources for successful functioning of the business.

(vii) Helping management in optimising profitability by planning incomes and expenditures, leading to value addition.

(viii) Ensuring optimal utilisation of available physical and monetary resources (men. machines, material and money). Resources are always scarce, whether they are manpower, electric power, financial or relating to space, materials, capacity, skill etc.

The difference between budget, budgeting and budgetary control has been stated thus – “Budgets are the individual objectives of a department, etc., whereas Budgeting may be said to be the act of building budgets. Budgetary Control embraces all this and in addition includes the science of planning the budgets themselves and the utilisation of such budgets to effect an overall management tool for the business planning and control.”

Objectives of a Budgetary Control – Top 8 Objectives: Targets Setting, Responsibilities of Executives, Basis for Comparison and Investigation of Variations and a Few Others

The following are the objectives of a budgetary control:

Objective # 1. Targets Setting:

Identify the overall aims and objectives of the business and determining targets of performance for each section or department of the business.

Objective # 2. Responsibilities of Executives:

Laying down the responsibilities of each of the executives and other personnel so that everyone knows what is expected of him and how he will be evaluated. Budgetary control is one of the few ways in which an objective assessment of executives and departments is possible.

Objective # 3. Basis for Comparison and Investigation of Variations:

Providing a basis for the comparison of actual performance with predetermined targets and investigation of variations, if any, between the budgeted targets and the actual. This helps in adopting corrective measures.

Objective # 4. Best use of Resources:

Ensuring the best use of all available resources to maximise profit or production, subject to the limiting factors. Since proper preparation of budgets requires consideration of all aspects, there is usually good co-ordination when a system of budgetary control exists.

Objective # 5. Co-Ordination of Various Activities:

Co-coordinating the various activities of the business, and centralising control and yet enabling management to decentralise responsibility and delegate authority in the overall interest of the business.

Objective # 6. Forethought:

Creating a spirit of careful forethought, assessment of what is possible and an attempt to achieve it.

Objective # 7. Basis for Revision of Future Plans:

Providing a basis for revision of current and future policies.

Objective # 8. Drawing Long Range Plans:

Drawing long range plans with a fair measure of accuracy.

Objectives of Budgetary Control – 6 Important Objectives: Planning, Coordination, Communication, Motivation, Control and Performance Evaluation

The following are the objectives of a budgetary control:

1. Planning:

A budget is a detailed plan of action regarding the policies to be pursued over the budget period. Budgeting makes it mandatory for the management at all levels to plan the future activities in advance. Many problems are anticipated well in advance before they arise at the time of preparing the detailed plans relating to the different functional areas of management. The solutions for these anticipated problems can be found in advance.

2. Coordination:

One of the prerequisite for the effective budgeting is the coordination among the different departments within the organization. It is the coordinated effort of all the divisions that a budget can be prepared. For example, in the preparation of a materials purchase budget, the information regarding budgeted sales, budgeted production, and budgeted usage of the material in the production activities is required. A coordinated effort of all the concerned departments will only ensure the correct materials purchase budget. Therefore, budgeting will ensure that all the individuals and departments work as a team in the attainment of the common goals.

3. Communication:

A budget is an effective means of communication between the top-level management and the operative level. Generally, these budgets become an important source of information regarding policies to be implemented in the attainment of organizational goals. It brings clarity to the middle and lower levels of management regarding the policies to be pursued.

4. Motivation:

An active involvement of the staff in the preparation of the budgets will increase its acceptability among the staff. It works as a strong motivation for them in achieving the set goals.

5. Control:

Budgetary control technique is based on the premises that the actual performance should be compared with the budgeted performance and the deviations found, should be reported to the top-level management for their action. A continuous monitoring and comparison of the performance ensures a stricter control in the organization.

6. Performance Evaluation:

The performance of the individual can be rated on the basis of their actual performance in comparison with the budgets set. This performance evaluation becomes the basis for many HR decisions relating to transfers, promotions, and bonuses.

Objectives of Budgetary Control – 5 Main Objectives

The management of an organisation is primarily concerned with the realization of organisational objectives. In its efforts to achieve these objectives, it has to manage the enterprise efficiently by optimising the use of resources and eliminating or minimising the wastes, if any. Budgetary control is one of the important techniques which help the management in controlling business activities in a desired direction.

It serves the following objectives in an enterprise:

1. Formalise Business Objectives – The business objectives are formalised in the form of different types of budgets which sets targets in physical and/or monetary values.

2. Coordination and Balanced Efforts – Budgeting seeks to achieve coordination between departments. Budgets for different departments are prepared only after taking into account their inter-dependence. For example, production budget is influenced by the sales budget and the available production facilities. The coordination which is an essential element in management becomes effective when budgets are rightly drawn and implemented.

3. Communication – Budgeting fills the communication gap between management and employees through departmental budgets which are used as a vehicle to communicate the targets in explicit terms to various levels of management. Since budgeting accomplish the task of communicating goals and targets, the top management is not required to tell and guide the departmental heads about their areas of responsibilities.

4. Control – Controlling of various types of activities is the prime objective of budgeting. Budgets serve as an index of efficiency expected of the employees. The comparison of actual performance with the budget specifications sharply tells the difference. Management action is needed in case the actual performance is less than the desired performance. Thus budgeting fulfills the objective of control which is always desirable for smooth functioning of an enterprise.

5. Delegation of Authority – Budgeting aims at effective delegation of authority and decentralization of responsibility. This objective is achieved by communicating the functional budgets to different levels of management.

Objectives of Budgetary Control

The following are the important objectives or purposes of budgetary control:

3. To provide a comprehensive plan of action in the form of guidance to departmental heads to achieve the budgeted results, and

In brief, the Budgets aim at setting the targets and achieve these targets by putting the maximum effort, and utilizing the available resources more productively, profitably and judiciously.