HSNC University , Mumbai

H.R COLLEGE OF COMMERCE AND ECONOMICS

CHURCHGATE , MUMBAI

NAME : ROHAN ORDIA

ROLL NO : HFPMCAA044
CLASS : M.COM (ACCOUNTANCY)
SEMESTER – I
TOPIC : BUDGETARY AND BUDGETARY
CONTROL IN MINIMIZING THE COST AND
INCREASING ORGANIZATIONAL
EFFECTIVENESS
 INDEX

SERIAL NO. TOPIC

1. Abstract
2. Introduction
3. Objectives
4. Methodology
5. Process of budgeting
6. Budgetary control
7. Case study
8. Conclusion
 ABSTRACT
The budgetary control helps to understand the goals of the concern whether it may be short or
long term goal.
As the budget is playing an important role in any organiation which helps to compare the
actual performance with the budgeted performance . The concept of the budget and way of
adaptability, which creates new challenges to sector in this current competitive edge . It
indicates the progress of the concern by way of its sales or profits, market shares , process of
the concern etc .
 INTRODUCTION
A budget is an estimation of revenue and expenses over a specified future period of time and
is usually compiled and re-evaluated on a periodic basis. Budgets can be made for a person,
a group of people, a business, a government, or just about anything else that makes and
spends money.

To manage your monthly expenses, prepare for life's unpredictable events, and be able to
afford big-ticket items without going into debt, budgeting is important. Keeping track of
how much you earn and spend doesn't have to be drudgery, doesn't require you to be good at
math, and doesn't mean you can't buy the things you want. It just means that you'll know
where your money goes, you'll have greater control over your finances.

It must be remembered that budgeting is not forecasting. It is true that budgeting does involve
some sort of forecasting particularly in the area of sales budget. But the process is physically
one of detailed analyses and planning not merely prognosticating future results.

Forecasting is a process of predicting the future state of world, in connection with those
aspects of the world which are relevant to and likely to affect on future activities.

Any organized business cannot avoid anticipating or calculating future conditions and trends
for the framing of its future policy and decision. Forecasting is concerned with probable
events whereas budgeting relates to planned events. Budgeting should be preceded by
forecasting, but forecasting may be done for purpose other than budgeting.

Thus, in forecasting an estimate of what is likely to happen is made whereas budgeting is the
process of stating policy and programme to be followed in future. Further, forecasting does
not connote any sense of control while budgeting is a tool of control since it represents
actions which can be shaped according to sweet will so that it can be suited to the conditions
which may or may not happen.

OBJECTIVES
Budgeting is a forward planning. It serves basically as a tool for management control; it is
rather a pivot of any effective scheme of control. The objectives of budgeting may be
summarized as follows:

1. Planning: Planning has been defined as the design of a desired future position for an entity
and it rests on the belief that the future position can be attained by uninterrupted management
action. By planning many problems estimated long before they arise and solution can be
thought of through careful study.

2. Co‐ordination: Budgeting plays a significant role in establishing and maintaining

coordination. Budgeting assists managers in coordinating their efforts so that problems of the
business are solved in harmony with the objectives of its divisions. Efficient planning and
business contribute a lot in achieving the targets Thus, co‐ordination is required at all vertical
as well as horizontal levels.

3. Motivation: Budget is always considered a useful tool for encouraging managers to

complete things in line with the business objectives. If individuals have intensely participated
in the preparation of budgets, it acts as a strong motivating force to achieve the goals.

4. Communication: A budget serves as a means of communicating information within a

firm. The standard budget copies are distributed to all management people provide not only
sufficient understanding and knowledge of the programmes and guidelines to be followed but
also give knowledge about the restrictions to be adhered to.

METHODOLOGY
The data used here is secondary data which is collect from various sources like annual reports
, news articles , journals , different websites .

PROCESS OF BUDGETING
The budgeting process usually begins when managers receive top management’s forecasts
and marketing project objectives for the coming year, along-with a time-table stating when
budgets must be completed. The forecasts and objectives provided by the top management
represent guidelines within which departments budgets are prepared.

Usually, the work on budgeting begins with the task of estimating sales because the total
activity of a firm depends on the sales. Preparation of sales estimate demands assessment of
the existing market situation and projection of one’s ideas as to what would be the market
position in the ensuing period for which the budget is proposed. Several internal as well as
external factors are taken into consideration.

The sales estimate prepared by the marketing manager is then submitted to the budget
committee for consideration. The budget committee comprising of the top management
carefully considers the forecast in the light of the past results and the estimates of the future
as recommended by economists and statisticians and wherever necessary recommends for
changes in estimate or if necessary asks for complete restudy and revision.

Upon the recommendation of the budget committee, the President of the organization accords
his approval to the sales estimate which then becomes sales budget of the organization. The
sales budget is accompanied by budget covering selling and distribution expenses. The two
budgets together give the net sales revenue expected to arrive in the coming year.

After the preparation of the sales budget and selling and distribution cost budget, Production
Budget of the firm is prepared. The production budget is based on the production forecasts
which are made after taking into consideration sales budget, the maximum and minimum
stock of finished goods to be maintained, the plant capacity and availability of various factors
of production.

When targeted production for the budget period has been decided, the production budget
(expressed in quantities to be produced) can be converted into a Production Cost Budget.
Production Cost budget is composed of Materials Cost Budget, Labour Cost Budget and
Overheads Budgets.
Materials cost budget shows expected cost of materials required for budgeted production
and sales purpose. Determination of material cost involves quantities to be used and the rate
per unit. The task of determining the quantities required is that of the production engineering
department while the purchasing department has the responsibility of deciding the rate.

Labour Cost Budget prognosticates the direct labour cost expected to be spent on carrying
into effect the targeted production. Preparation of this budget requires information regarding
the time required to do one unit of work and the wages to be paid for it.

Overheads Budget is a statement of expected overheads (comprising fixed and variable

overheads) which the firm will have to incur during the budget period. This budget is
prepared on the basis of overhead forecasts of all the departments of the firm.

Once materials cost budget, labour cost budget and overheads budget are prepared, a full
production cost budget can be drawn. This budget is generally presented in the form of a cost
sheet.

In order to achieve competitive edge over its rivals on sustainable basis, an organization will
have to develop new products or new processes for producing existing products at minimum
cost. Thus, the organization has to incur expenditure on research and development effort.

BUDGETARY CONTROL
Budgetary control is a system of controlling cost which includes preparation of Budgets
coordinating the departments and establishing responsibilities comparing performance with
budgeted and acting upon results to achieve the maximum profitable. Budgetary Control is
the process of establishment of budgets relating to various activities and comparing the
budgeted figures with the actual performance for arriving at deviations, if any. Accordingly,
there cannot be budgetary control without budgets.

According to I. C. M. A, England, Budgetary control is defined by terminology as the

establishment of budget relating to the responsibilities of executives to the requirements of a
policy and the continuous comparison of actual with the budgeted results, either to secure by
individual actions the objectives o

The process of budgetary control includes:

 Preparation of various budgets.

 Continuous comparison of actual performance with budgetary performance.
 Revision of budgets in the light of changed circumstances.

A system of budgetary control should not become rigid.

There should be enough scope of flexible individual initiative and drive. Budgetary control is
an important device for making the organization an important tool for controlling costs and
achieving the overall objectives.

Budgetary control serves 4 control purposes:

1. They help the manager’s co-ordinate resources;

2. They help define the standards needed in all control systems;
3. They provide clear and unambiguous guidelines about the organization’s resources
and expectations, and
4. They facilitate performance evaluations of managers and units.

Essentials of Effective Budgeting:   

 1) Support of top management: If the budget structure is to be made successful, the
consideration by every member of the management not only is fully supported but
also the impulsion and direction should alsocome from the top management. No
control system can be effective unless the organization is convinced that the
management considers the system to be important.

2) Team Work: This is an essential requirement, if the budgets are ready from “the
bottom up” in a grass root manner. The top management must understand and give
enthusiastic support to the system. In fact, it requires education and participation at all
levels. The benefits of budgeting need to be sold to all.  

3) Realistic Objectives: The budget figures should be realistic and represent logically
attainable goals. The responsible executives should agree that the budget goals are
reasonable and attainable.

4) Excellent Reporting System: 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 expected. An effective budgeting system
also requires the presence of a proper feed‐back system.  

5) Structure of Budget team: This team receives the forecasts and targets of each
department as well as periodic reports and confirms the final acceptable targets in
form of Master Budget. The team also approves the departmental budgets.    

  6) Well defined Business Policies: All budgetsreveal that the business policies
formulated by the higher level management. In other words, budgets should always be
aftertaking into account the policies set for particular department or function. But for
this purpose, policies should be precise and clearly defined as well as free from any
ambiguity.  

7) Integration with Standard Costing System: Where standard costing system is

also used, it should be completely integrated with the budget programme, in respect of
both budget preparation and variance analysis.

Advantages of Budgetary control:

These are the advantages of budgetary control. But this tool offer many other advantages as
follows:  

1. This system provides basic policies for initiatives.  

2. It enables the management to perform business in the most professional manner

because budgets are prepared to get the optimum use of resources and the objectives
framed.

3. It ensures team work and thus encourages the spirit of support and mutual
understanding among the staff.

4. It increases production efficiency, eliminates waste and controls the costs.

5. It shows to the management where action is needed to remedy a position.

6. Budgeting also aids in obtaining bank credit.

7. It reviews the present situation and pinpoints the changes which are necessary.

8. With its help, tasks such as like planning, coordination and control happen
effectively and efficiently.

9. It involves an advance planning which is looked upon with support by many credit
agencies as a marker of sound management.
Limitations of Budgetary control:

1. It tends to bring about rigidity in operation, which is harmful. As budget estimates

are quantitative expression of all relevant data, there is a tendency to attach some sort
of rigidity or finality to them.  

2. It being expensive is beyond the capacity of small undertakings. The mechanism of

budgeting system is a detailed process involving too much time and costs.  

3. Budgeting cannot take the position of management but it is only an instrument of

management. ‘The budget should be considered not as a master, but as a servant.’ It is
totally misconception to think that the introduction of budgeting alone is enough to
ensure success and to security of future profits.

  4. It sometimes leads to produce conflicts among the managers as each of them tries
to take credit to achieve the budget targets.

5. Simple preparation of budget will not ensure its proper implementation. If it is not
implemented properly, it may lower morale.

6. The installation and function of a budgetary control system is a costly affair as it

requires employing the specialized staff and involves other expenditure which small
companies may find difficult to incur.  
CASE STUDY –

This section discusses the budgetary control system of the company. Budgeting and
budgetary control is an important tool for managerial efficiency especially now that there is
economic depression in India. Central Coalfields LTD being a manufacturing organization
has different departments of which a separate department is responsible for budget
preparation and strategy formulation. The Budget department is headed by the finance
Director (a chartered Accountant) while the strategy department is headed by the branch
manager. All other members of the budget department are Accountants (Production,
Engineering etc.). Proposals from different departments are reviewed by the budget
committee composed by all heads of departments and budget officers. The committee
considers the limiting factors such as market demand, plant capacity, availability of labour
therefore modifications are made where necessary. This is sent to the Managing Directors’
committee that will take decision after which it receives the approval of the board of
directors. When finally approved it becomes the operating plan of the organization for the
period it covers,.

Budget provides the standard by which performance would be judged and this is an important
feature of the budget control system. The organization does not adopt Zero base Budgeting
(ZBB) technique.

Instead, it uses the previous years as a base to project the current years i.e. the incremental
budgeting system. The manager also made mention that IT system is of great importance in
the budgeting and planning process but the extent of its use in the organization is low. This is
because not all employees involved in the budgeting and planning process have the know-
how required in the use of IT system (e.g. software etc). This is of handicap to the
organization since IT would have helped to minimize mistakes, integrate and disseminate
information about the organization’s activities.

The company is currently arranging training workshop and program to help in developing
employee’s skill on the use of software and IT related equipments.
Hence, they are trying as much as possible to encourage such by having periodical meetings
between the management and the rest of the employees in order to get their points of view on
the issues of the organization. In this way employees become more engaged in the execution
of their various functions since these stand as a challenge to them.

However, in order to ensure that actual result confirms to budget, the organization adopts
departmental monitoring on a month to month basis and through variance reporting,
corrective measures are taken immediately. Allocation of resources in this organization is
based on:

1. Volume of production

2. Basis of needs, and

3. Manpower to manage the resources.

COST CONTROL

Compelling actual cost was to conform to planned cost. This involves the following:

A). Cost plans (examples: annual operating profit)

B). Comparison of actual cost with planned.

C). Action to correct cost divergences.

In Central Coalfields LTD, the cost plans are made through annual operating plan, using the
budgeted control system which enables its operation to be planned in advance over a fixed
period by preparing estimates of fixed and variable expenses, sales, working capital etc. for
the forthcoming year. Firstly, it involves preparing estimates of future sales of individual
product based on market surveys salesmen’s estimates and so on.

In Central Coalfields LTD , the cost were divided into two financial reporting arrangements
as follows:

1). Variance cost (Production statement)

2). Fixed cost (expenditure summary)

Variance helps to identify and direct attention to areas most in need of investigation. Analysis
of this variance is conducted so as to carry out any necessary corrective action i.e. to improve
the implementation of a given decision noted or decided on whether to change the model.
Therefore said, the company adopts the following control measures such as external Control
and management control, auditing, performance, evaluation, variance reporting, and
supervision etc. These serve as a means of feedback to management and managers who are
responsible for various departments or a “cost center”. This would enhance the
implementation of the control measures. Budgeting control shouldn’t be viewed as a
mathematical exercise rather it is a method of approach which incorporates within its
structures. This means of educating personnel in making the most effective use of facilities at
minimum, cost to achieve the company’s objectives.
 CONCLUSION

From this study we have been able to describe the budgeting practice in Central Coalfields
LTD and it is clear how firms seek competitiveness by adopting appropriate management
control system. Literatures as well as data from our case have proven a positive relationship
between firm’s management control system and performance. That’s, designing management
control system in the light of strategic issues (pattern, mission, position) should enhance
competitiveness which when attained is translated as high performance.

It is clear from the analysis how budget could facilitate the creating and sustaining of
competitive advantage by enabling the following management functions: forecasting and
planning; communication and coordination; motivational device; evaluation and control; and
decision making. Also, we presented a model which in our opinion will help the management
of Central Coalfields LTD.

This model as we earlier said could be valid for all manufacturing operating in India. To
round up the conclusion, it is worth pointing out that the company’s budgetary practice is up
to date though there are lacking issues such as: its low use of IT system and its practice of
using previous year as the base to project the current years.