Controlling in Management

INTRODUCTION

The final task of management is control. If other management tasks are carried out well, the controlling role won’t be essential. Control will be required if there is any discrepancy between the planned performance and the actual performance. The regulating function corrects the deviations.

This feature guarantees the intended outcomes. Activities are identified by planning, and they are regulated by regulating. The outcome of controlling’s success or failure determines whether planning will be successful or unsuccessful.

DEFINITION

Control, according to Earnest Dale, “envisages a system that not only provides a historical record of what has occurred to the business as a whole but also pinpoints the reasons why it has occurred and provides data that enables the chief executive on the departmental head to take corrective steps if he finds he is on the wrong track.”

In order to guarantee appropriate progress and good performance, E.F.L. Brech advises “control verifying current performance against pre-determined standards included in the plans, as well as documenting the experience obtained from the functioning of these plans as a reference to prospective operations.”

Theodore E. Goetz, “Management control aims to force outcomes to match expectations.”

“Controlling is the measuring of achievement against the standards and the adjustment of deviations to ensure attainment of goals in accordance with plans,” writes Knootz and O’Donnel.“

Richard Fayol, “Control involves ensuring that everything happens in accordance with the accepted plans, the directions given, and the established principles. Its goal must be to identify flaws and mistakes so that they may be fixed and won’t happen again.”

Terry, George R. “Controlling is deciding what is completed, that is, reviewing the performance and, if required, using corrective measures so that the performance takes place in accordance with plans,” according to the definition of the word.

Ronald n. Antonio “The method by which managers ensure that resources are acquired and utilised effectively and efficiently in the attainment of an organization’s goals is known as management control.”

Elizabeth Cushing Niles, Planning sets the course to the desired courses or to a well altered one, while control is an element and projection of planning.

Massie and Haynes, “Any procedure that directs activity toward a certain objective is called control. Determining if the action is producing the expected outcomes is the key to the notion.”

According to J.K. Rosen, “Control is that system function that offers guidance in performing the plans.”

“The existence of the force that directs a corporation toward a predetermined goal through predetermined rules and actions, according to Dalton E. Mc Farland.”

Areas or Scope of Control

All business concern actions are referred to as being under control. The following are the primary regions under control:

1. Authority over the company’s policies.
2. Authority over the organisation.
3. Command over the people that work for an organisation.
4. Management of the money accessible to the business.
5. Command over capital investments.
6. Command over the creation.
7. Control over employee compensation, including wages and salaries.
8. Management of manufacturing costs.
9. Management of public relations
10. Power over development and research.
11. Possession of equipment and tools.
12. General command.

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Steps in Control Process

Control highlights the plan’s deviations and offers corrective action to make future plans better. Due to human limits, some of the techniques need to be discovered to be flawed. Control is thus required, and it involves the following steps:

1)Setting standards: To get the desired outcomes, it is vital to establish standards. Setting standards is a really helpful thing to do. If it is not, effective control cannot be exercised. There are both quantitative and qualitative standards. The majority of standards are quantified when they are articulated.

Quantitative standards include, among other things, the number of units produced, the number of personnel, the number of hours worked, the total cost spent, the amount of income realised, the amount of investments, etc. Standards will be represented in qualitative words, such as goodwill, staff morale, motivation, etc., if it is not feasible to articulate them in numeric terms.

The standards need to have a few qualities to result in efficient performance. Time, money, effort, focus on results, use of quantitative language, accuracy, regular review, and other factors might be among the traits.

2) Assessing performance: The results should be evaluated in light of the set criteria. Therefore, the relevant data on the performance should be gathered. The relevant information, such as performance details, is provided through an efficient management information system. It is possible to gather quantitative data if standards are defined in numerical terms.

In other words, information that is qualitative may be gathered if criteria are described in qualitative terms. The management uses a variety of methods to gauge performance.

3) Comparison of actual with Standards: Actual performance is compared to standards, and the management is informed of any differences whenever this happens. The management may then determine the severity of deviations and pinpoint their causes.

When standards are presented in terms of amount, comparison is fairly simple. Personal observation will be employed to determine the degree of departure if the findings are qualitative or intangible.

There is no need for further action if the actual performances meet the requirements. This step marks the completion of the control procedure. However, the management must choose the kind of corrective action if the standards are not met.

It’s not necessary to notify every variance to management. Deviations that go beyond what is considered reasonable must be notified to upper management. Control by exception or management by exception are terms used to describe this. The causes of deviations are then examined.

The factors could be within your control or not. Only when the reasons are within management’s control must remedial action be taken. If the reasons are uncontrolled, the management will not be required to take remedial action.

4) Taking remedial action: Before taking corrective action, management must ascertain the reasons for the divergence. The reasons for deviations may be due to poor and insufficient communication, flawed salary payment systems, flawed employee selection processes, inadequate training, a lack of desire, poor supervision, and other factors. Depending on the nature of the reasons of the deviations, the management must take the required corrective action.

Essentials of an effective control system

Effective control systems must meet specific criteria. Below is a quick explanation of them:

1. Feedback: Adapting future actions based on knowledge of previous performance is known as feedback. The control procedure will be relatively simple if management practises feedback.
2. Objective: Controlling must be unbiased. It implies that there is a guarantee of control. For the control to be assured, the performance must be objectively evaluated.
3. Appropriateness: The control mechanism must be compatible with the type of deviations. If necessary, the control approach may be used.
4. Timely reporting: Any deviations from the norm should be immediately reported. Trying to exercise control will be useless if a delay is produced.
5. Forward Looking: A control system that is effective must concentrate on how future actions will conform to planned. To put it another way, the control system need to help with planning.
6. Highlighting anomalies: The control system highlights the deviations. However, not all deviations have an equal effect. The control system should pay close attention to deviations with a high impact. The management can then take corrective action at that point.
7. Flexible: The requirements or standards should occasionally be changed. The reason is that the standards should conform to the present requirements. Hence, the control system should be flexible in accordance with the changed standards or criteria.
8. Economy: The benefits derived from the control system should be more than the cost of exercising such a control system.
9. Intelligble: The control system should not be a complicated one. The control system should be easily understood by an ordinary layman of the organisation.
10. Suggest remedial action: The effective control system should disclose the places of failure, persons for failure and how they have been dealt with.
11. Motivation: A good control system should be employee centred. The control is designed to secure positive reactions from employees. If large deviations are found, the employees will be properly directed and guided instead of being punished. The very purpose of control is prevention and not punishing.

Techniques of Control

Various methods are used by the management for controlling the various deviations in the organisation. Let us study them briefly. The nature and use of managerial control techniques are discussed below.

1) Statistical control reports: These type of reports are prepared and used in large organisations. Reports are prepared in quantitative terms. Then, the variations from standards are easily measured. In this way, control is exercised by the management. A periodical report of sales volume is an example of statistical control reports.

2) Personal observation: Using this technique, the manager personally observes the operations in the work place. The manager corrects the operations whenever the need arises. This is the oldest method of control. Employees work cautiously to get better performance. The reason is that they are personally observed by their supervisor.

Personal observation is a time-consuming technique and the supervisor does not have enough time to afford personal observation. Personal observation technique is disliked by the honest and efficient employee. The observer may be biassed in performance evaluation.

3) Cost accounting and cost control: Profit of any business depends upon the cost incurred to run a business. Profit is maximised by reducing the cost of operation or production, so, the business concern gives much importance to the cost accounting and cost control.

Management uses a number of systems for determining the cost of products and services. The cost accounting procedures and methods differ from one industry to another according to the nature of industry. They are used for effective cost control and cost reduction.

4) Break-even analysis: It is otherwise called as ‘cost volume profit analysis.’ It analyses relationship among cost of production, volume of production, volume of sales and profits. Here, total costs are divided into two i.e., fixed cost and variable cost. Fixed cost will never change according to the changes in the volume of production. Variable cost varies according to the volume of production.

This analysis helps in determining the volume of production or sales and the total cost which is equal to the revenue. The excess of revenue over total cost is termed as profit. The point at which sales is equal to the total cost is known as ‘Break Even Point’ (BEP) (BEP). In other words, the break-even point is the point at which there is no profit or loss.The break-even point analysis helps in managerial control in several ways.

5. Special control reports: This report may or may not contain statistical data. Using this technique, a particular operation is investigated at a specified time for a particular purpose. This is done according to the requirements of management but not in regular basis.

The deviations from standards are paid additional attention and corrective action is taken. Handling complaints of damage is an example of this type of control technique.

6) Management audit: Management audit is an independent process. It aims at pointing out the inefficiency in the performance of management functions such as planning, organising, staffing, directing, controlling and suggesting possible improvements. It helps the management to handle the operations in an effective manner. Management audit is not a compulsory audit and not enforced by law.

7) Standard costing: Standard costing is used to control the cost. The following are the steps involved in standard costing:

A. Determination of cost standards for various components such as material, labour and overhead.

B. Measurement of actual performance.

C. Comparison of actual cost with standard cost to find variations.

D. Finding the causes of variations.

E. Taking measures to avoid the variations in future.

8) Return on investments: Return on investment is also known as return on the capital employed. Using this technique, the rate of profitability is identified by the management. The amount of profits earned by the company is different from the rate of profitability of the company.

The difference between the cost and revenue is profit. The rate of profitability is the earning capacity of the company. Return on investments is calculated by dividing the net profit with the total investment or capital employed in the business organisation.

9) Internal audit: Internal audit report is prepared at regular intervals, normally by months. It covers all the area of operations. This report is sent to the top management. The management takes steps to control the performance on the basis of the report. Internal audit report emphasises the degree of deviations from the expectations. It is really beneficial to reach the targets on timely basis.

10) Responsibility accounting: The degree to which different individuals have accomplished pre-established goals is used to evaluate their performance. The goals are laid out in terms of sections, departments, and divisions, and they are all evaluated identically.

Instead of allocating costs based on products, it does so by departments. Each division, segment, or department is designated as a centre of responsibility. An person in a certain sector, department, or division is accountable for his or her operational area.

11) Managing statistics: A manager may identify the reasons for changes by comparing previous and present outcomes using managerial statistics. These are incredibly helpful to management when formulating future plans and decisions.

Managerial statistics “deal with data and procedures which are valuable to management executives in planning and managing of organisation operations,” according to Kenit O. Hauson.

Performance evaluation and review technique (PERT): This method is used to address issues that only arise sometimes. It is useless for dealing with issues that keep cropping up.

The three companies Booz, Allen, and Hamiltan created the PERT. This method was used in the Polaris Submarine Project, which was supported by the US Navy. The PERT method is particularly helpful for building projects, book publishing, etc.

13) Critical path method (CPM): This approach likewise adheres to the PERT tenets. Technique focuses more on price than on time. According to CPM, y activity’s duration is constant. Each action is given a time estimate. A group of DU de Nemours employees invented the CPM technique.

14) Gantt milestone chart: This method was formerly popular but is no longer used. The explanation is because this method simply emphasises production schedule and ignores duct quality. Henry I. Gantt proposed using this method.

15) Production control: A smooth organization’s operation depends on the production control approach. Production planning, determining the amount of raw materials and finished items in stock, choosing a production method, choosing production equipment, etc. are all included in production control.

“Production control is the process of planning in advance of operations, establishing the exact route of each individual item, part assembly, setting, starting and finishing dates for each important item, assembly, and the Finished product, and releasing the necessary orders as well as launching the required follow-up to effectuate the smooth operation of the enterprise,” claims Spreigel.”

16) Management information system: All those who must make choices are given access to pertinent information that has been gathered. The development of a communication system allows all levels of people to be updated on the organization’s development. The responsible person always takes corrective or control action when a deviation is discovered.

The management information system emphasizes the need of having enough information at hand in order to make the optimal choice. By providing the appropriate information at the appropriate time and in the appropriate format, management information systems assist management in making managerial decisions.

17) External audit control: All joint stock firms subject to statutory supervision are required to conduct an external audit. Therefore, it is often referred to as statutory audit control. The interests of the company’s creditors and shareholders are safeguarded by this kind of audit.

The external auditor attests that all books of accounts are maintained in accordance with legal standards, provides all information required for the audit, and ensures that the balance sheet depicts a truthful and fair picture. The trained auditor carries out the external audit. The Central Government sets the requirements for this sort of auditor.

18) Zerobase budgeting: Zerobase budgeting is a novel strategy that has quickly gained popularity. It is a novel method of budgeting. Zerobase budgets are created without taking into account data from the prior year.

To determine which organisational tasks should be deleted, scaled down, or raised using this method, all activities must be recalculated. The money is projected to cover existing needs, in other words. It entails determining how much money is required to finish a current project.

19) Standing orders: A standing order is a set of rules and guidelines that govern behaviour, process, and other things. The needs of administration are taken into account while drafting rules and regulations. For instance, no employee should leave the workplace before office hours without first obtaining written consent.

20) Budgetary control: One of the management’s control strategies is the creation of a budget. The next pages in this chapter include a comprehensive explanation of this method.

PERT/CPM

Program Evaluation and Review Technique (PERT), Project Evaluation and Review Technique (PERT), or Performance Evaluation Review Technique are all abbreviations for PERT. the Critical Path Method, or CPM. PERT was created by Booz, Allen and Hamilton Inc from the Gantt Chart. in response to the U.S. Navy’s request in 1957–1958 on the Polaris Weapons System. Engineers of the Du Pont Company in the USA created CPM.

Though they both use the same premise, PERT and CPM have several fundamental differences. The main distinction is that PERT focuses on time alone whereas CPM concentrates on cost and time. PERT and CPM are both used as control tools to keep track of how long it takes to complete a project.

PERT is used as a controlling and planning tool. PERT is used as a planning tool to determine how long it will take to finish a project in its entirety and to identify bottleneck activities that may cause a delay in the project’s completion date.

As a management tool, PERT assists in carefully monitoring the overall performance of a project to identify any deviations, if any. PERT/CPM represents all events and actions as well as how they relate to one another. The overall time needed to finish a project may be calculated by determining the optimal time for each event and activity.

Suitability of PERT/CPM

PERT/CPM is a crucial project management control approach. The projects listed below are the ones for which this method works best.

1. A powerful arsenal
2. Ship construction.
3. Building or constructing an Olympic venue.
4. Strengthening weakdam
5. Making plans for and starting a new project.
6. Building housing airport facilities.
7. Computer system installation.
8. Introducing fresh items.
9. Construction of road infrastructure
10. Development of a model community or hamlet.
11. Construction of a picnic area.
12. Establishing a colony.

Benefits / Advantages of PERT/CPM

The following benefits result from the use of PERT/CPM Control methods. 1)Ensures Planning: PERT guarantees real planning, which is number one. Under PERT, a manager is required to create a plan. He is asked to research all significant actions and occurrences.

The manager should also note the order of events and activities as well as their connections. Managers should choose the most probable time by taking into account all potential outcomes, uncertainties, and dangers.

2) Finding advantageous factors: Estimating the most probable time prevents unforeseen events and waste. This aids management in early identification of the favourable conditions necessary for the project’s successful conclusion.

3) Cost and time savings: CPM concentrates on the events that need the most attention. It results in time and money savings.

4) Implementing preventative or corrective measures: PERT/CPM made the bottlenecks and probable problem locations known well in advance. It is sufficient to take some preventative or remedial steps.

5) Focus on critical tasks: Important attention can be given to crucial tasks, and these tasks can be accelerated.

6) Everything at Right: This emphasises taking the proper action at the appropriate time to complete a job.

7) Raising awareness of obligations: It makes every management completely conscious of his obligations. By comprehending how one work relates to other works, it is feasible.

8) Ensuring Cooperation: Based on input, the PERT/CPM is continuously evaluated and modified. The management benefits from having the cooperation of all departments.

9) Makes decision-making easier: Instead of carrying out pricey activities, management may analyse the consequences of several alternative options. It enables better decision-making.

10) Improved Communication: Better communication thanks to the visual representation of each critical route and its sub-critical pathways. The visual representation allows each employee (designers, contractors, project manager, etc.) to understand their specific position in the proposed project. It leads to better communication.

11) Simultaneous performance of works: It guarantees that various components of the work are performed simultaneously. The whole project is broken down into several distinct work components. Different people do each task independently.

12) Forward-thinking control action: PERT/CPM reveals how a delay in one activity impacts all subsequent actions. The management benefits when a control measure is taken far in advance.

13) Timely project completion: The management might choose to focus on any crucial activity to ensure that the whole project is finished on schedule.

Limitations of PERT/CPM

The PERT/CPM has certain limitations also. They are given below.

1. Error in estimation of time and cost: Future is uncertainty. Three times are estimated i.e. optimistic pessimistic and normal. Eventhough, it is very difficult to estimate accurate time required to complete a project. So, PERT is an unreliable as a control aid.

2. Application: PERT has to be applied only to one-time non-repetitive projects. It does not help the management to exercise control on continuous performing work.

3. Time consuming and expensive: A lot of data have been collected to prepare PERT net work. It requires a lot of time and consume some amount of expenses also before implementation of a project.

Distinction between PERT and CPM

The basic principles and steps involved in both PERT and CPM are one and the same. Eventhough, there are some differences between PERT and CPM. They are briefly discussed below.

1. Three time estimates are made for each activity.

The duration of each activity is constant. So, only one time estimate is made for each activity.

2. PERT gives importance on time.

CPM gives importance on cost.

3. PERT is suitable where activity timings are not known.

CPM is suitable where times are well known.

4. PERT is event oriented

CPM is activity oriented.

Thus, PERT/CPM is used as a best control technique applied by the management over a period of time. Events and activities are the basic building blocks of a PERT network. Each event is numbered and connected by activities.

The connection of activity with an event disclose the fact of preceding and succeeding events very clearly. A typical PERT network may help the management a lot to exercise control over the project implementation.

CHARACTERISTICS OR FEATURES OF CONTROL

 The main characteristics or the features of control are briefly discussed:

1. Controlling process: Controlling is also a continuous process just like other functions of management. The superior has continuous watch over the entire operations. Besides, he ensures that all the efforts are made to achieve the desired objectives and if not, necessary control action will be taken to correct them.

According to Koontz and O’Donnell, “just as the navigator continually takes reading to ascertain whether he is relative to a planned course, so should the business manager continually take reading to assure that his enterprise or department is on course”.

2. Universal: Control is applied at all levels of management and irrespective of the organisation. The manager of business and non-business concern uses control to regulate the on-going activities to obtain desired goals. The nature, scope and limit of control exercised by the manager vary according to the levels of management.

3. Forward looking: Control has links with future. How? Past cannot be controlled. But, the future activities may be controlled on the basis of past experience. The presence of control reduces the wastages, losses and deviation from standards.

4. Dynamic process: The control technique is changed according to the nature of deviations. The same technique is not followed throughout the year or a particular period. Besides, the control results in changes in the performance of other functions of management.

5. Control involves management: Control recommends the future course of action on the basis of evaluation and measurement. Evaluation and measurement are the eyes of the control process.

6. Influencing factor: The behaviour of a responsible person is influenced by the control process for the effective performance of activities. Control avoids the undesirable happenings and shapes the future plan. Control influences the people to conform to the norms and standards in performance.

7. An essence of action: The corrective action should be taken by the management on the basis of information available. If it does not do so, the purpose of control will not be achieved. The corrective action will be taken if there is any deviation from the standards.

NEED OF CONTROL

Control is necessary as other functions of management. The control is necessary on account of the following reasons:

1. Judging the accuracy of standards: The actual performance should be compared with the fully accurate standards. But, it is very difficult for a large and complex organisation to establish the fully accurate standards because of the lack of timely information. In such a case, the control is necessary to judge the accuracy of standards.

2. Minimise dishonest behaviour: A honest person may tempt to misbehave in the absence of control. Only an efficient control minimises the dishonest behaviours or maintains honest behaviour on the part of employees.

3. Better performance: Employees will become lazy in the absence of control. Control facilitates to get better performance and regulate the efforts of the employees.

Advantages of Control

A good control system gives the following benefits to the management:

1. Adjustments in operation: Every organisation has certain objectives. These objectives are achieved only when the plans are properly implemented. If it is not done so, objectives cannot be achieved.

Control provides a clue to find whether the plans are properly implemented to achieve the objectives. The deviations from standards are corrected immediately. Thus control makes necessary adjustments in operation.

2. Verification of policy: The management frames the policies and plans to help the organisation function smoothly. The organisational performance is reviewed in the light of these policies. The organisational performance might deviate from the plans (standard) on account of many internal and external factors.

These factors may force the organisation to deviate from the original plans. Constant review of plans helps to revise and update them. Thus, the management can verify the policy through the control process.

3. Managerial accountability: Managerial personnel are assigned responsibilities from top to bottom. A superior may delegate his authority to his subordinates. But the superior is responsible (or accountable) for the performance of his subordinates even after the delegation. It is quite natural that the superior has control over his subordinates.

Besides, it is specified that the superiors should not misuse their authority. Control flows throughout the organisation from top to bottom as the existence of relationship between the superior and subordinates. Everyone, whether superior or subordinate, has responsibility for the work assigned to him.

4. Psychological pressure: Better performance is obtained by the management through the control process. It is achieved psychologically. The reason is that each person’s performance is evaluated and linked with rewards. So, the employees will work hard to achieve the standard set for them.

5. Maintaining morality: Control creates an atmosphere of discipline in the organisation. Everybody is responsible for the work assigned to him. The workers are expected to make best efforts to complete the work and to the satisfaction of the management. These are not possible in the absence of control.

6. Co-ordination: Control gives unity of direction. Proper performance of all managerial functions is necessary to achieve co-ordination. A manager has to co-ordinate the activities of his subordinates with the help of control. Control helps to maintain an equilibrium between means and ends.

7. Efficiency: As responsibility is fixed for each individual, effective performance is possible. Control indirectly induces the employees to perform the work efficiently. They are well aware that defective performance is linked with punishment.

Limitations of Control

Control process has some limitations. They are briefly explained below:

1. Absence of perfect standards: Standards cannot be fixed in all the cases. In some areas, quantitative standards cannot be expressed. In the absence of quantitative standards, the performance cannot be measured accurately. This indicates the ineffectiveness of control process.

2. Uncontrollable factors: Some of the factors cannot be controlled by the management or organisation. Changes of government policy, strategy of competitors, introduction of new substitute products in the market, technology changes, consumer preference changes could not be controlled by the organisation or management. These are external factors of organisation.

3. Difficulty in fixing responsibility: Normally, control reduces the freedom of employees. So, the employees resist the exercise of control. Then the control loses its effectiveness. Thus, the management has to face the difficulty of fixing responsibility.

4. Expensive process: The control process has several stages. They are (i) collecting information for fixing standards; (ii) actual fixation of standards; (iii) measuring the actual performance; (iv) finding deviations; and (v) taking corrective or control actions. These processes involve much paper work and are time consuming. A small organisation cannot afford these expenses.

Types of Managerial Control

1. Standardising control: Controls are used to standardise performance for increasing efficiency. Costs may be reduced by time and motion studies, inspections and work schedules.

2. Preserving control: Company assets are protected or preserved through the allocation of responsibilities. Proper accounts are maintained for assets and usage of assets are controlled and put under strict supervision.

3. Delegation of authority control: Control puts some limits to the usage or delegation of authority. The approval of the top management is necessary to use the delegation of authority. Policy manual, procedure manual and internal audits are some of the techniques included in this control.

4. Measurement control: Controls are used to measure the job performance. Performance is measured through special reports, budgets, standard cost and production per hour or per employee.

5. Motivating control: Controls are designed to motivate the employees of organisation. Motivation includes promotions, rewards for best opinions and operation, profit sharing and the like.

BUDGET

The term, Budget’ is derived from the French word ‘Budgette’ which means small leather bag. Budget is not only looking forward as planning but also expresses what should be the future course of action in quantitative terms. Budget is prepared with the help of past experience.

The past is the parent of the present as the present is the parent of future. This principle is followed in budget preparation. In simple words, budget is a control tool used by the management in planning its future activities. Thus, a budget may be said to be an instrument of planning, laying down the results desired to be achieved within a given period.

Definition of Budget

Institute of Costs and Works Accountant of England said that, “Budget is a financial and/or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective.”

Hary L. Wlise, “Budgets are finished products – they are formal programmes of future operations and expected results. Budgets result from forward thinking and planning.”

G.R. Terry, “A budget is a plan for income or outgo or both, of money, personnel, purchased items, sales items, or any other entity about which the manager believes that determining the future course of action will assist in the managerial efforts.”

Professor Landers, “The essence of a budget is a detailed plan of operations for some specified future period followed by a system of records which will serve as a check upon the plan.”

Brown and Howard, “A budget is a pre-determined statement of management policy during a given period which provides a standard for comparison with the results annually achieved.”

Wneldon, “A budget is thus a standard with which to measure the actual achievements of people, departments, etc.”

Knootz and O’Donnel, “Budgeting is the foundation of plans for a given future period in numerical terms. As such, budgets are statements of anticipated results, in financial terms as in budgets – as in revenue and expenses and capital budgets or in non-financial terms of direct labour hours, materials, physical sales volume, or units of production.”

Bartizal, “A budget is a forecast in detail, of the results of an officially recognised programme of operations based on the highest reasonable expectation of operating efficiency.”

Prof. Saunders, “The essence of budget is a detailed plan of operations for some specific future period, followed by a system of records which will serve as a check upon plan.”

Clearance L.Von Sickle, “The budget is an estimate prepared in advance of the period to which it applies.”

Budgetary Control

Budgetary control is a tool used by the management to obtain the objectives expressed as in the form of budget. The actual results are compared with the budgeted figures. If there cause of are any deviation, they can be remedied by either adjusting or correcting difference.

Budget is concerned with policy making whereas budgetary control results from the implementation of such a policy. Budgetary control is a continuous process but budget is an end process. The preparation of budget is finished within a stipulated time. Budgetary control starts only after preparing the budget.

Definition of Budgetary

G.R. Terry, “Budgetary controlling is a process of finding out what is being done and comparing these results with the corresponding budget data in order to approve accomplishment or to remedy differences by either adjusting the budget estimates or correcting the cause of the difference.”

J. Betty, “Budgetary control is a system which uses budgets as a means of planning and controlling all aspects of producing and/ or selling commodities or services.”

R.C. Davis, “Budgetary control is an important means of establishing accountability for a satisfactory discharge of this responsibility for expenses. Budgetary control depends on budgetary planning.”

Institute of Cost and Management Accountant, London, “Budgetary control is the establishment of budget relating to the responsibilities of executives to the requirements of a policy and the 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.”

Gien A. Welsch, “Budgetary control involves the use of budgets and budgetary reports throughout the period to co-ordinate, evaluate and control day-to-day operations in accordance with the goals specified by the budget.”

Brown and Howard, “Budgetary control is a system of controlling costs which includes the preparation of budgets co-ordinating the departments and establishing responsibility, comparing actual performance with budgeted and acting upon results to achieve maximum profitability.”

Marry Cushing Niles, “Budgetary control is an important tool of management. It is, in fact, a tool in the hands of planning which reaches through co-ordination into control and ties the three aspects firmly together. It stimulates thinking in advance by requiring specific planning and the anticipation of operating problems.”

Walter W. Bigg, “The term budgetary control is applied to a system of management and accounting control by which all operations and output are forecast as far ahead as possible and the actual results when known are compared with the budget estimates.”

Objectives of Budgetary Control

Budgetary control is a tool of management. It’s very purpose is the estimation of the development of organisation activities and watching whether the present performance confirms to the budgeted figures. If there are any deviations, the causes will be identified and corrective action recommended.

The corrective actions are taken not only to rectify the present deviations but also to avoid the occurrence of such deviations in future. The main objectives are discussed below:

1. Fixation of the income and expenditure department-wise.

2. Defining the goals or objectives of the organisation for a stipulated period. 

3. Helping the decentralisation work. Sometimes, budgets are prepared departmentwise.

4. It establishes a measure of performance for each division or section of the organisation.

5. Co-ordination of the work of various departments or sections of the organisation. 

6. Assisting in terms of data, the top management for policy determination.

7. Forecasting the financial position of the company.

8. Eliminate departmental accumulation of cost and performance data for control purposes.

9. Increasing the efficiency of the employees and minimising the expenses at every level of the organisation.

10. Determining the capital expenditure of the company.

11. Helping the preparation of fund flow and cash flow statements.

12. Indicating the area where action is necessary to take corrective action. 

13. Checking the over-capitalisation or under-capitalisation of the company departmentwise or section-wise.

14. Centralising the management control. Budgets are prepared department-wise but control vests with the top manage-ment.

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Characteristics of Budgetary Control

The various characteristics of Budgetary control are explained below:

1. The activities of the organisation are presented department-wise or section-wise.

2. Budgets give the extent of expenditure through which cost control is achieved. 3. The co-ordination of various departmental activities helps to prepare the master budget.

4. The future is planned on the basis of past experience.

5. Recording the present performance for comparing purposes with the predetermined standards.

6. Clear-cut and specific requirements of the organisation are expressed in quantitative terms.

7. Determines the deviations by comparisons and identifies the causes of such deviations.

8. Recommends and implements the corrective actions whenever necessary.

Advantages of Budgetary Control

The activities of the organisation are pre-planned in monetary terms as the preparation of budget. The actual achievements are compared with pre-planning. Budgetary control helps the management to achieve the pre-plan. Some of the advantages of Budgetary control are discussed below:

1. Tool for planning the activities: Budgets are prepared department-wise or section-wise, following which the department managers will know their activities. Thus, each a plan of its future course of action.

2. Thinking in advance: A budget is prepared, normally, for a year in advance. The top management people could develop forward looking strategies and thinking with the help of budgets. They, think in advance as to how to market the product, how to solve production difficulties and the like.

3. Co-ordination of efforts: Policies and objectives provide a basis for the preparation of a budget. Each department personnel are well aware of the link of the policy with the budget. Then, the top management may easily co-ordinate the efforts of various departments.

4. Control of expenditure: The expenditure of various departments are clearly fixed in the budget. So unnecessary expenditures are avoided.

5. Solving financial difficulties: The budget forecasts the probable cash receipts and expenses. Temporary financial accommodation is arranged with the financial institutions or with banks. In this way, financial difficulties of the enterprises are solved.

6. Delegation of authority and responsibility: There is an automatic sanction of work whenever the budget is prepared. There is no need of getting permission from the top management for the second time. Delegation of authority and responsibilities become easier.

7. Better utilisation of resources: The term resources includes money and raw materials. Adequate amount is allocated to buy the raw materials, make salary payment, purchase fixed assets and the like. Economic order quantity principle is followed in buying the raw materials. Proper control is exercised over the usage of raw materials in the production place.

8. Promotion of efficiency: Production per hour, production per day and production per man are fixed with the Budgetary control technique. It encourages the employees to increase their efficiency.

According to Mr. Blocker, “Budgetary control is planned to assist management in the allocation of responsibility and authority, to aid in making estimates and plans for the future, to assist in the analysis of the variations between estimated and actual results and to develop bases of measurement of standards with which to evaluate the efficiency of operations.”

9. Achievement of goals: Under budgetary control system, each person can know what he is expected to do. This offers an opportunity to the management to achieve the goals or objectives.

10. Criteria of self-examination: Budgetary control system points out the deviations and causes of such deviations. These are very well known to the employees. In this way, Budgetary control acts as a criteria of self-examination.

11. Promoters balanced activities: A department activity is correlated with another department activity. One department’s results are the basis of other department’s functioning. Balanced activities of different departments are possible under the budgetary control system.

For example, production department’s activities are based on those of sales department. Likewise, the purchase department’s activities are based on those of production department.

12. Budgetary control system discovers the areas of operation where improvements can be suggested.

13. Ensures proper communication: Management’s policy and the objectives of preparing the budgets are communicated to all the managers. Again, the managers are requested to send the report of actual performance against budget. The managers are informed of the type action to be taken to correct deviations. Thus, budgetary control ensures proper communication.

14. Fixation of responsibility: Responsibility of deviations can be fixed easily. Sales budget fixes the responsibility of sales department. Likewise, the production budget fixes the responsibility of the production department.

15. Encourages exchange of information: Functional budgets are prepared by the enterprise normally. It requires the free flow of information from one department to another department. Purchase budget cannot be prepared unless production figures are available.

DISADVANTAGES, LIMITATIONS OR PROBLEMS OF BUDGETARY CONTROL

Budgetary control facilitates planning, controlling and co-ordination. Yet it has some limitations, and they are given below:

1. Inaccuracy: Budget figures are expressed in monetary terms. So, a budget is based on the price level at a particular point of time, and inflation or deflation leads to inaccuracy of budget. Besides, future is uncertain. The standards are fixed on the basis of past experience. So, the budget may go wrong.

2. Personal bias: The preparation of budget is subject to imperfection in human judgement and shortcomings.

3. Non-availability of co-operation: Inefficient employees hesitate to extend their co-operation to implement budgetary control. The reason is that the deviations occur on account of inefficient employees.

4. Rigidity: An enterprise is running on certain conditions and circumstances. These conditions and circumstances are static at a certain time and flexible at another time. Under such situations, budgetary control cannot be implemented effectively. It means that, it is very difficult to attain flexibility in budget preparation.

5. Results are not attainable: Adequate information is necessary to prepare and implement the budget. At the same time, the available data should be properly interpreted and evaluated. The budgeted results may not be attainable because of defective analysis of data.

6. Consistency: The budgets are not prepared afresh every year. The new budgets are prepared by adjusting figures in the previous budget. It may happen that an important event of the past would not be considered important for future budget.

7. Time consuming process: Initially, management constitutes a budget committee and prepares the budget manual. The budget committee receives the data from all the employees of the organisation and consults all the departmental heads. Then the committee prepares the budget. It requires much time.

8. Ineffective budgetary control: Proper arrangements should be made for adequate supervision and administration. These are not possible at all times. In such circumstances, budgetary control will be an ineffective one.

9. Discourage the initiative: The departmental heads are discouraged from doing extra activities for which a provision has not been made in the budget. It automatically minimises the initiative of the employees of the organisation.

10. More paperwork: The implementation of budgetary control involves more paperwork. The paperwork includes receiving information from the employees, preparation of budget manual, setting up of standards, the actual preparation of budget, recording of actual performance and taking corrective actions, if any. So, maximum managerial work suffers because of much paperwork.

Inspite of the above mentioned limitations and problems, budgetary control is the best tool of management for planning and controlling and so, the management should take necessary steps to make the budgetary control system more effective.

Essentials of Effective Budgeting System

A sound budgetary control system is necessary for effective managerial control. The essentials of effective budgeting system are discussed below:

1. Efficient organisation: The effective organisation depends upon the proper fixation of responsibility and clearly defined authority. An efficient organisation alone can adopt effective budgeting systems.

2. Preparing master budget: Normally, the budgets are prepared department-wise or section-wise. These budgets should be assembled and integrated in the form of master budgets.

3. Quick reporting: The actual performance reports should be prepared by the subordinates and sent to the top management without any delay. It will help the top management executives to analyse the report and take necessary action immediately.

4. Flexible: The budgets should be flexible as far as possible. The reason is that future is uncertain and the budgets regulate the future course of action. Sometimes, the management may prepare a flexible budget which has flexibility to some extent.

5. Support of top management: The adoption of budgetary control system should be supported by the top management. If it does not do so, there will be no seriousness on the part of subordinates. It will weaken managerial control.

6. Based on reasonable assumptions: Budgets forecast the sales, production, purchase, profit, expenditure and the like. On the basis of some of the assumptions, these are forecast. So, the assumptions should be reasonable and reliable ones.

7. Reward and punishment: The employees whose performances are according to the budget plans are rewarded. At the same time, the situation can be totally different.

8. Appropriate authority: Appropriate authority should be given to those employees who are responsible to implement the budgetary control system. These employees will not be able to fulfil their responsibilities if there is a lack of appropriate authority and they will not be in a position to take strong decisions.

Types of Budget

Budgets may be classified on the basis of the purpose for which they are prepared. Some of the budgets which are classified on the basis of purpose are described below:

1. Master budget: Master budget has detailed planning of the entire business in one budget. Most of the business organisations involve themselves in the preparation of the master budget. Master budget shows how each department budget promotes the business as a whole. Other budgets are subsidiary budgets of master budget.

2. Sales budget: Sales budget is the first of the subsidiary budgets. Without preparing the sales budget, no budget can be prepared by the business organisation. Sales budget is prepared on the basis of data available from market research. Population trends, consumer’s taste, consumers’ purchasing power, competitors trend and production capacity are considered while preparing the sales budget.

Sales budget may be prepared area-wise or product-wise. If the company sells more than one product, the sales budget will be prepared product-wise and area-wise. If it is not so, sales budget will be prepared only area-wise.

3. Cash budget: Cash budget discloses the probable cash receipts and cash payments for a specific period. Cash budget helps the management to arrange the finance accomodation from financial institutions and/or commerical banks if need arises. In this way, it avoids the lack of finance.

In other words, the amount is received from the concerned party at the appropriate time. It minimises the bad debts. It is otherwise called financial budget and revenue and expenses budget.

4. Production budget: Production budget is prepared on the basis of sales budget. In addition to that, the company considers the production capacity, number of skilled employees available, availability of power and space and warehouse facility while preparing the production budget. A great degree of co-ordination is required in the sales programmes and production budget.

Production budget helps to produce the goods of a desired quality at minimum cost. Production budget shows the production in quantitative terms. In simple words, the production budget aims at maximising the utilisation of available resources.

5. Physical property budget: The term physical property includes building, machinery, furniture and fitting, plant and inventories and equipments. These have permanent investment. This budget indicates the amount required to replace the existing physical property and to make additions during the budget period.

Sometimes, this additional amount is raised without paying any dividends as ploughing back or sale of additional stock or bonds. These budgets are usually tied with long-range planning. It is otherwise called capital expenditure budget.

6. Time and material budget: Most of the budgets are expressed in monetary terms and few in quantitative or physical terms. In the next stage, the physical terms are converted into monetary terms. Here, the budget figures are expressed as direct labour hours, machine hours or units or material required to produce a product.

7. Selling and distribution cost budget: This budget includes the selling and distribution cost such as packaging expenses, storage, insurance, transportation, advertisement expenses, sales commission, marketing research expenses and the like. Selling and distribution cost budget is prepared by the sales department manager. It helps the management to control the costs of selling and distribution.

8. Balance sheet budget: Balance sheet budget is prepared to utilise the working capital. Working capital is nothing but the excess of current assets over current liabilities. This budget indicates how the current assets can be utilised to pay-off the current liabilities.

9. Supplies budget: The term ‘supplies’ does not represent the raw materials. Raw materials are formed as part of the finished product. But, the supplies do not form a part of the finished product but are consumed in manufacturing operations. These are of small value, but these are necessary in production process. So, the management should prepare a separate budget for supplies and ensure continuous supplies.

10. Production cost budget: Production budget provides a basis for preparing the production cost budget. Production cost budget indicates the expenses to be incurred in the production process during budget period. Production cost budget may be sub-divided into raw materials budget, production overhead budget, etc.

11. Production overhead budget: Production overhead budget lays down all the production overheads to be incurred in production during the budget period. The overheads may be sub-divided into fixed overheads, variable overheads and semi-fixed or semi-variable overheads.

12. Research and development budget: This type of budget is prepared by the large organisations. Research is carried on to invent new products or to improve the existing products. It is necessary to survive in the market. Marketing risk may be reduced to some extent with the help of research. Research and development expenditure is in the nature of insurance.

Budgets may be classified on the basis of nature also. They are discussed below: 

1. Fixed budget: The budget figures remain unchanged irrespective of the level of activity. The level of activity is unknown obviously. The actual performance is more deviated from the standard.

2. Flexible budgets: A budget is prepared at various levels of activity in columnar form. The expenses are divided into three categories such as fixed, variables, or semi-fixed or semi-variable. This type of budget very useful to the management in taking corrective actions if there are any deviations.

PREPARATION OF A BUDGET

There are some steps involved in the preparation of budget. These steps are outlined below:

1. Sound forecasting: Every budget is prepared on the basis of forecast. Top executives of management must judge the future market and take decisions regarding financial requirement, purchase of machinery and inventories, advertising expenses and selling expenses in the light of their analysis. Then, they may use the statistical data with their assumptions. However, sound forecasting is necessary for a reliable budget.

2. Developed accounting system: Costing information is necessary for effective budget preparation. These costs are properly recorded in the well-developed accounting system. Only developed accounting system alone supplies the adequate and desired information to the top management executives. They can convert this information into reality as a budget.

3. Fixation of responsibility centres: The attainment of budget objectives lies with the departmental heads. So, there is no need for raising questions regarding the man who is responsible to fix the amount of expenditure and produce definite results. Adequate authority should be assigned to those who are responsible to complete the task assigned.

4. Formation of budget committee: The preparation of a budget is a group effort. An accountant will be enough to prepare the budgets in a small organisation, if he has close contact with the general manager and departmental heads. This is not possible in bigger organisations.

A budget committee is formed in bigger organisations. The budget committee consists of all the departmental heads and is headed by an experienced officer who may be designated as Budget Officer.

The budget committee will receive all the information from the various departments whose services are used in the preparation of the budgets. The budget committee has full responsibility to prepare all the departmental budgets. Periodical reports are collected by the budget committee.

The budget committee has to compare the actual performance with budgeted figures. If there is any deviation, the budget officer may consider revisions of budget to meet the changed business conditions.

5. Clear definition of business policies: The top management must clearly define the business policies and communicate them to the departmental heads. If it does not do so, the hard work of departmental heads will be a waste and the budget figures cannot be achieved. So, it is the duty of the top management to circulate the business policies to the heads before preparing the budgets.

6. Statistical information: Necessary information regarding each department must be available in the form of figures. Production budget is prepared with the help of sales budget. Purchase budget is prepared with the help of production budget. These budgeted figures are recorded in the accounting records with more details for sales and profit control.

7. Support of top management: The preparation of budgets require the support of the top management. There should be cordial relationship between the top management and various departmental heads.

8. Budget period: The period to be covered in the budget depends upon the type of business. Normally, the budget is prepared for one year. But, anyhow, the length of the budget period covers the seasonal fluctuations of business, production operations and financial implications. One year budget may be broken down into half-yearly, quarterly and monthly. These facilitate control. The budget must be prepared before the commencement of the year.

Budgets are prepared by all the business units. The objectives of business organisation are presented in quantitative terms as a budget. Then, the objectives are easily achieved. Besides, budget facilitates the control process.

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