BUDGETARY CONTROL | ACCOUNTANCY &AUDITING|L-6|

What is Budgeting?

Budgeting is the process of making a plan to spend money. Making this spending plan helps the companies to determine whether they have enough money to do the things they need or would like to do. If your expenses exceed your spending, you can use the planning process to prioritize the more essential things. It involves making a comprehensive list of expenditures or focusing on a few categories. Some companies use to prepare budgets using spreadsheets, while others use budgeting apps. Budgetary is the cost control technique wherein the actual cost is compared to the budgeted cost and thus is aimed at profit. 

What is Budgetary Control?

Budgetary control in management accounting is a procedure that ensures that organizations’ actual revenue and expenditure adhere to the financial plans or not. This system controls budgets by coordinating with various departments and establishing and comparing them with the actual results. It implies regularly comparing actual expenses with the planned income and expenses. Preparing aims to ensure corrective measures in case of any variances. 

Example of Budgetary Control in Management Accounting

Let’s say a company sets a budget for a project, allocating $10,000 for various expenses like materials, labour, and marketing. As the project progresses, the company closely monitors its spending, keeping track of every cost incurred. At the end of the project, they compare the actual expenses with the budgeted amount. If the company spent $9,000, it successfully controlled its budget.

However, if they spent $12,000, they exceeded the budget, prompting them to analyze the reasons for the overspending and make necessary adjustments for future projects. Monitoring and comparing actual expenses with the budget is budgetary control, helping companies maintain financial discipline and make informed decisions to ensure profitability.

Steps in the Budgetary Control Process

Setting Financial Objectives: The first step in the budgetary control process is determining the organization’s financial objectives. This might include increasing revenue, reducing costs, improving cash flow, or increasing profit margins.

Developing the Budget: The next step is to develop a comprehensive budget that outlines expected income and expenditures for a specific period. This might include creating separate budgets for different departments, products, or projects.

Implementing the Budget: Once the budget has been developed, it must be implemented within the organization. This might involve communicating the budget to employees, creating systems to monitor and control expenditures, and making necessary changes based on employee feedback.

Monitoring Performance Against the Budget: The final step in the budgetary control process is monitoring performance against the budget. This might involve comparing actual expenditures and revenues to budgeted amounts, tracking cash flow, and reviewing financial reports.

Taking Corrective Action: If the organization is not meeting its budgeted targets, it may be necessary to take corrective action. This might involve reducing expenditures, increasing revenue, or changing the budget itself.