The list of advantages given in the previous chapter is impressive, but a budget is not a cure all for organizational ills. Budgetary control system suffers from certain limitations and those using the system should be fully aware of them.
1. The budget plan is based on estimates. Budgets are based on forecasts and forecasting cannot be an exact science. Absolute accuracy, therefore, is riot possible in forecasting and budgeting. The strength -or weakness of the budgetary control system depends to a large extent, on the accuracy with which estimates are made. Thus, while using the system, the fact that budget is based on estimates must be kept in view.
2. Danger of rigidity. A budget programme should be dynamic and continuously deal with the changing business circumstances. Budgets will lose most of their usefulness if they obtain rigidity and are not revised with the altering circumstances.
3. Budgeting is only an instrument of management. Budgeting cannot take the place of management however only a device of management is. The budget needs to be regarded not like a master, but as a servant. Occasionally it is believed that launch of a budget programme alone is actually sufficient to ensure its good results. Execution of a budget will not take place automatically. It is required that the entire organizational should participate enthusiastically in the programme for that realization of the budgetary objectives.
4. Expensive technique. The operation and installation of a budgetary manage system is a costly affair as it needs the employment of specialist staff and involves additional expenditure which small concerns might find hard to incur. However, it is vital that the cost of introducing an operating a budgetary control system must not exceed the rewards derived therefrom.
Essentials of Effective Budgeting
A budgetary control system may prove successful only if certain attitudes and conditions are present absence of which will negate to a sizable extent the value of a budget system in different business such attitudes and conditions which are crucial for effective budgeting are as follows:
1. Support of top management. When the budget system is to be effective, it must be totally supported by each member of the management and the impetus and direction should come from the top management. No Control system may be effective unless the company is convinced how the top management considers the system to be essential.
2. Participation by responsible executives. Those entrusted with the efficiency of the budgets need to participate in the procedure of setting the budget figures. This will make sure proper implementation of budget programmes.
3. Reasonable goals. The budget figures needs to be realistic and represent reasonably achievable goals. The responsible executives must agree that the budget targets are attainable and reasonable.
4. Clearly defined organization. In order to derive highest benefits from the budget system, nicely defined responsibility centers ought to be built up within the company. The controllable costs for every responsibility centers should be individually shown.
5. Continuous budget education. The easiest way to make sure the active interest of the responsible supervisors is constant budget education in respect of goals, techniques and potentials of budgeting. This might be accomplished through written manuals, meetings and so on. actual results achieved etc. whereby preparation of budgets. may be discussed.
6. Adequate accounting system. There is close relationship between budgeting and accounting. For the preparation of budgets, one has to depend on the accounting department for reliable historical data which primarily forms the basis .for many estimates. The accounting system should be so designed so as to set up accounts in terms of areas of managerial responsibility. In other words, responsibility accounting is essential for successful budgetary control.
7. Constant vigilance. Reports comparing budget and actual results should be promptly prepared and special attention focused on significant exceptions i.e. figures that are significantly different from those expected.
8. Maximum profits. The ultimate object of realising the maximum profit should always be kept uppermost.
9. Cost of the system. The budget system must not cost more than it is worth. Since it is actually not practicable to calculate just what a budget system is worth, it simply implies a caution against including expensive refinements unless their worth clearly justifies them.
10. Integration with standard costing system. Where standard costing system can be used, it should be totally integrated with the budget programme, in regard of both variance analysis and budget preparation.
Standard Costing vs Budgetary Control
Standard costing and budgetary control have the common objective of cost control by establishing pie-determined targets. The actual performances are measured and compared with the pie-determined targets for control purposes. Both the techniques are of importance in their respective fields and are coinp1ementary to each other.
Points of Similarity
You can find certain basic principles that are common to both budgetary control and standard costing. These are:
1. The establishment of pie-determined targets of performance.
2. The measurement of actual performance.
3. The comparison of actual performance with the pie-determined targets.
4. The analysis of variances between the actual and the standard performance
5. To take corrective measures, where necessary.