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  Preparation for Budgetary Control

Introduction to Preparation for Budgetary Control

A budgetary control is very useful for planning and controlling as explained above. Therefore, for getting these advantages, sufficient preparation should be made. For absolute success, a solid foundation should be set down and in view of this the following aspects are of vital significance.

a. Budget Committee:

For successful execution of budgetary control system, there is a requirement of a budget committee. In small or medium size organizations, the budget associated work might be carried out by the chief Accountant himself. Because of the size of the organization, there might not be so many problems in implementation of the budgetary control system. Though, in large size organization, there is a requirement of a budget committee consisting of the chief executive, budget officer and heads of main departments in the organization. The major functions of the budget committee are to get the budgets ready and then scrutinize similar, to set down broad policies concerning to the preparation of budgets, to approve the budgets, to suggest for revision, to supervise the implementation and to suggest the action to be taken in a given condition.

b. Budget Centers:

Establishment of budget centers is other significant pre-requisite of a sound budgetary control system. A budget center is a section or a group of activities of the organization for which budget can be developed. For instance, manpower planning budget, production and production cost budget, labor hour budget, research and development cost budget and so on. Budget centers should be described clearly so that preparation becomes easy.

c. Budget Period:

A budget is all the time prepared prior to a specific period of time. The meaning of this is that the period for which a budget is ready is decided in advance. So a budget might be ready for three years, one year, six months, one month or even for one week. The point is that the period for which the budget is ready should be specific and decided in advance. Usually it can be said that the functional budgets such as sales, purchase, production etc. are ready for one year and then broken down on monthly basis. Budgets such as capital expenditure are usually prepared for a period from 1 year to 3 years. So depending upon the type of budget, the period of the same is determined and it is significant that it is decided well in advance.

d. Preparation of an Organization Chart:

There should be an organization chart that depicts clearly described authorities and responsibilities of several executives. The organization chart will described clearly the functions to be performed through each executive associated to the budget preparation and his relationship with other executives. The organization chart might have to be adjusted to make sure that each budget center is controlled through a suitable member of the staff.

e. Budget Manual:

A budget manual is described by ICMA as 'a document that sets out the responsibilities of the person occupied in, the routine of and the forms and records needed for budgetary control'. So, the budget manual is a schedule, document or booklet that consists of different forms to be employed, procedures to be followed, budgeting organization information, and set of instructions to be followed in the budgeting system. It also lists out information of the responsibilities of dissimilar persons and the managers included in the process. A classic budget manual consists of the following.

Ø   Managerial policies and Objectives of the business concern.

Ø   Internal lines of authorities and responsibilities.

Ø   Functions of the budget committee involving the role of budget officer.

Ø   Budget period

Ø   Principal budget factor

Ø   Detailed program of budget preparation

Ø   Accounting codes and numbering

Ø   Follow up procedures.

 

f. Principal Budget Factor or Key Factor:

A key factor or a principal budget factor [also known as constraint] is that factor the extent of whose affect must first be assessed in order to ready the functional budgets. Generally sales are the key factor or principal budget factor but another factor such as production, purchase, and skilled labour might also be the key factors. For instance, a company has production capacity to generate 30,000 tonnes per year but if the sales forecast informs that the market can absorb just 20,000 units, there is no point in producing 30,000 units. So the sale is the key factor in this case. Alternatively, if the company has capacity to generate 30,000 units and the market has the capacity to absorb the entire production that means that sales is not the key factor but if raw material is existing in limited quantity so that only 25,000 units can be created, the raw material will turn into the key factor. The key factor puts limitations on the other functions and therefore it must be considered carefully in advance. Thus, continuous assessment of the business situation becomes essential. In all circumstances the key factor is the starting point in the process of preparation of budgets. A classic list of some of the key factors is described as follow:

Ø   Sales: Consumer demand, shortage of sales staff, inadequate advertising

Ø   Material: restrictions on import,  Availability of supply,

Ø   Labor: Shortage of labor

Ø   Plant: Availability of capacity, blocks in key processes

Ø   Management: shortage of efficient executives, Lack of capital, pricing policy, lack of know- how

Ø  Faulty design of the product etc.

g. Establishment of Adequate Accounting Records:

It is essential that the accounting system should be capable to record and analyze the transactions included. A chart of accounts or accounts code should be kept that may correspond with the budget centers for establishment of budgets and finally control by budgets.

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