Meaning and scope of Management Control System

Budgeting

1. Introduction2. Process of budge preparation3. Classification of budget4. Sales budget5. Sales overhead budget6. Cash budget7. Factory overhead budget8. Flexible budget9. Zero base budgeting10. Behavioral Aspects of budgeting

Budget:-

According to ICMA, England, a budget is “ a financial and /or quantitative statement prepared and approved prior to a defined period of time , of the policy to be pursued during the period for the purpose of attaining a given objective.”

In other words:- “ a detailed plan of action of the business for a definite period of time.

Thus the essential of budget are:-1. It is prepared in advance and is based on future plan of action2. It relates to a future period and is based on objective to be attained.3. It is a statement expressed in monetary and/ or physical units prepared for the

implementation of policy formulated by the management.

Budgetary control:-Methodical control of an organization's operations through establishment of standards and targets regarding income and expenditure, and a continuous monitoring and adjustment of performance against them.

The Chartered Institute of Management Accountants, London, defines budgetary control as “the establishment of budgets relating to the responsibilities of executives to the requirements of a policy , and t he continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision.

Thus the budgetary control involves:-1. Establishment of budgets2. Continuous comparison of actual with budget for achievement of targets and

placing the responsibility for failure to achieve the budget figures.3. Revision of budges in the light of changed circumstances.

The difference between budget, budgeting and budgetary control:-

• 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 utilization of such budgets to effect an overall management tool for the business planning and control.

Steps for budget Formulation and Administration:-The budget formulation consist of a series of activities. These activities are :-1. Creating a budget department or appoint a budget controller2. Developing guidelines for budget preparation3. Developing budget proposal at the department / business unit level4. Developing the budget for the entire organization 5. Determining the budget period and key budget factors6. Benchmarking the budget7. Reviewing and approving the budget8. Monitoring and revising the budget

Benchmarking the budget

Creating a budget department or appoint a budget controller

Developing guidelines for budget preparation

Developing budget proposal at the department / business unit level

Developing the budget for the entire organization

Determining the budget period and key budget factors

Reviewing and approving the budget

Monitoring and revising the budget

Benchmarking the budget

Steps for budget Formulation and Administration:-

1. Creating a budget department or appoint a budget controller :- it is a very specialized process. Large organizations generally have a budget department while small ones may have just an individual budget controller. The budget department / controller is responsible for issuing the guidelines for budget preparation and for making sure that this information is properly communicated throughout the organization. When the proposal from the departments/business units reaches the budget department / controller it is their responsibility to analyze the projected budget and suggest changes wherever necessary. They are also responsible for the proper coordination of budget related work with the departments/business unit and for periodical revisions of the budget.

2. Developing guidelines for budget preparation:- the guidelines for budget

preparation are formulated by the budget department/controller and approved by the top management are also consulted while formulating these guidelines . Once the guidelines are approved , the budget department or the controller sets a timeframe for the budget preparation process for the entire organization.

3. Developing budget proposal at the department / business unit level:-the heads of different departments/business units propose their budget taking into consideration the existing facilities, employees , objectives etc. generally the revenue center first prepare the budget as other business units are dependent on the revenue generated in these business units for their resource requirement.

4. Developing the budget for the entire organization :- after the individual heads set the budgets for their respective department/business units, these departmental budgets are combined to generate a budget for the entire organization . The budget should be complete with a pro forma income statement , budget for projected cash, capital investments etc. in addition to the functional budget like the human resource budget. The combined budget should conform to the organization’s strategic plan. The budget department or controller has to communicate the final approved budget to the respective departments/ business units. They should also let the business units know the way in which the performance will be measured for the current year.

5. Determining the budget period and key budget factors:-the budget period is the time for which a budget is set. Budgets are generally annual. The period of budget varies based on the type of industry , the production cycle of the organization etc. for example the organization operating in dynamic, fast changing markets will have shorter budget periods than those operating in slow growth or saturated markets.

the factors like material , working capital, labor, plant capacity and the top management approach play a crucial role in the success of the budgets. These are considered as key budget factors that should be assessed in order to ensure that the budget achieve their targets. If these key factors are not taken into consideration when the budget is prepared it becomes difficult to achieve the targeted budget figures.

6. Benchmarking the budget:-an organization may use different types of budget. A benchmarking exercise helps it to know the standard budgeting practices followed by other organization in the industry. This exercise also helps the organization to identify the weakness that need to be addressed or the strength which can be enhanced in its budgeting approach. Even if the type of budget differ among organizations , certain things are common across industries.