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HRD 104 Quantitative Skilles 1 Notes on Budgeting and Budgetary Control

Institution: Moi University

Course: Bsc in Actuarial Science

Content Category: class notes

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Summary

TOPIC TWO:
BUDGETING AND BUDGETARY CONTROL
Definition
A budget is defined as a plan expressed in money. It is prepared and approved prior to the budget
period and may show income, expenditure, and the capital to be employed.
Importance of Budgeting
i) A budget estimates the profit potential of the business unit.
ii) It is stated in monetary terms although the monetary amounts may be backed up by nonmonetary amounts (e.g., units sold or produced).
iii) It generally covers a period of one year. In businesses that are strongly influenced by
seasonal factors, there may be two budgets per year- for example; apparel companies
typically have a full budget and a spring budget.
iv) It is a management commitment; managers agree to accept responsibility for attaining
the budgeted objectives.
v) The budget proposal is reviewed and approved by an authority higher than the budgeter.
vi) Once approved, the budget can be changed only under specified conditions.
vii)Periodically, actual financial performance is compared to budget, and variances are
analyzed and explained.
Limitations of Budgeting
i. Estimates are used as basis for budget plan and estimates are based, mostly on available
facts and best managerial judgment. Since a lot of human element is involved in
exercising managerial judgment, it is but natural to give some allowance in interpretation
and utilization of estimated results. Budgeting based on inaccurate forecasts is useless as
a yardstick for measuring the actual performance.
ii. The circumstances are constantly changing and, therefore, budgets and budgetary
techniques will not be useful, till they are continually adapted.
iii. In order that a system may be successful, adequate budget education should be imparted
at least through the formative period. Sufficient training programmes should be arranged
to make employees give positive response to budgetary activities.
iv. Execution of budgetary control will not automatically occur. A continuous budget
consciousness throughout the organization is needed for achievement of this objective.
v. Budgetary control cannot reduce the manageria1 function to a formula. It is only a
managerial tool which measures effectiveness of managerial control.
vi. The use of budget may lead to restricted use of resources. Budgets are often taken as
limits. Effort may, therefore, not be made to exceed the performance beyond the
budgeted targets, even though it may be physically possible.
vii. Frequent changes may be called for in budgets due to fast changing industrial climate. It
may be difficult for a company to keep pace with these fast changes, because revision of
budgets is an expensive exercise.
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