Budgetary Control Process
: A budget is an expression in financial terms of the plans required to meet the strategic objectives. Normally the budgets are made for short terms. The budgets are made usually on an annual basis. The budget also facilitates the delegation of responsibility to various managers in the divisions and departments. In the budgetary control process for each department a budget is prepared and the responsibility to meet the budget is fixed on the departmental manager to strictly follow the budgeted expenses. Steps in the Budgetary Control Process:
Before we can install a budgetary control process for XYZ Co (the identified organisation) it is necessary that the following steps are involved in preparing the company for the initiation of the budgetary control process. These steps are: 1. A detailed sales budget showing the expected volume of sales over the next budget period in different products has to be prepared by the company. The sales budget should be prepared on the basis of quantities as well as values. The sales department of XYZ Co has to provide the detailed information for the preparation of sales budget.
2. The next step is the preparation of the production budgets based on the sales budgets already prepared. Based on the sales estimates given by the sales department, the production quantities for different periods can be determined and the production budgets prepared. 3. Based on the sales and production budgets the finance department of XYZ co has to prepare the budgets for administrative and other expenses. The historical details of expenses incurred during the past period can be taken into account while making the administrative expense budget.
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4. Capital expenditure budgets detailing the projects that will be undertaken in the next year along with the amount of capital expenditure will also be prepared along with the revenue budgets. 5. The cash budgets detailing the expenses to be incurred in cash will also be prepared along with the expense budgets. 6. All the above budgets will be combined to make an overall budget, and also a budgeted profit and loss account and a budgeted balance sheet and a cash flow.
The company intends to prepare the budget for a period of one year which will be broken down to quarterly and monthly budgets for follow up by the various departments. The company intends to hold a budget review meeting at the end of every month to review the performance of each of the departments against the budgets. The normal and abnormal variations will be analysed to find out the reasons for variations so that necessary corrective actions can be taken for improvement in the working of the individual departments. Organising the Budget Process:
The initiation of the budget process will be done by the Board of Directors of the company. The board will specify broad policies in relation to the estimated sales and other assumptions which will be achieved over the next 12 months period which will form the basis for the preparation of the budget. The company also intends to form a ‘budget committee’. The budget committee will consists of the finance director of the company as the representative from the board of directors and also other functional and departmental managers as members.
The overall policies pronounced by the board will be taken as the base for the preparation of an outline for the departmental budgets by the functional and departmental managers. Benefits: The company expects to derive the following benefits from the proposed budgetary control process: 1. There will be a close coordination of all the departments of the company. For instance the production department has to work very closely with the sales department and vice versa to ensure that the budgets of both the departments are met without variations.
By planning ahead of the budgetary period the mangers have to necessarily take into account all the necessary details and information required to complete the budgetary process. This enables the managers to think and plan ahead by not omitting any material things which may affect the performance at a later stage. 3. An effective budgetary system always provides for a feedback on the performance of the managers and hence it becomes possible for the managers to learn from their mistakes, 4. The budgets provide the managers the necessary motivation to achieve the budgets.
The targets once established as realistic and acceptable ensure that the managers take them seriously and work towards the achievement of the targets fixed. 5. The budgets ensure that there is an effective communication between the managers at the same level as well as between the managers and their subordinates to get the required information for preparation and monitoring of the budgets. Since targets need to be communicated down the line for achieving the same there should be an effective communication established between the managers and the subordinates.