IntroductionBudgeting is a method used by businesses to financially plan for future (Riahi-Belkaoui, 2002). Main areas of the business usually have budgets prepared for them. A budget is a formal statement that sets aside financial resources for undertaking specified activities in a specified period of time. it is essential for coordinating the firm’s activities. Such areas include sales, purchases, labor, production, creditors, cash and debtors (Bowhill, 2008). These budgets provide detailed plans of the business for the next twelve, six or three months. Large businesses often have formal budgets (Jones and Merricks, 1994).
Budgets are usually classified as short term (1 year), medium term (1 to 3 years), and long term. Short term budgets are more detailed that long and medium term budgets. The type of budget employed in RDBS is short term since it extends for one year (Drury, 2008). A budgetary control is a technique that compares the budget with actual results. Any variations noted are made the responsibility of main players who can either exercise control action or revise the original budgets. Benefits of a budgetary control systemBudgetary control has several advantages to the firm in question.
First, it allows profit maximization. This is attained via good planning and coordination of different functional departments in the firm. Profit maximization is also attained via appropriate controlling of various capital and revenue expenditures (Riahi-Belkaoui, 2002). Thus, the scarce resources of the firm are placed to the best possible use. Budgetary control enhances coordination in a firm. This is because various working departments and sectors are properly coordinated when resources are being allocated via budgeting (Bowhill, 2008). Since budgeting of each section impacts on one another, budgeted targets can only be attained via coordination of different executives and subordinates. Budgetary control also enables a firm to have specific aims.
This is because the goals, plans and policies are made by the top management. Thus, all efforts are synchronized to realize the firm’s goals. To attain this, each department is given a specified target to attain (Jones and Merricks, 1994). Thus, the efforts of each department are directed toward attaining a specified target to reduce scenarios where efforts are wasted through pursuance of various aims.
Moreover, budgetary control acts as a performance measurement tool. It provides targets to different departments and hence acts as a tool for performance measurement of managers (Walker, 2009). It allows comparison to be made between these targets and actual results to determine any deviations (Riahi-Belkaoui, 2002). Thus, the top management gets a report on the performance of each department. Therefore, this budgetary control system allows introduction of management by exception principle (Bowhill, 2008). Furthermore, the system is essential for economical expenditure. This is because expenditure is planned systematically. As such the benefits realized from this can extend to the entire industry and then to national economy.
Thus, there is elimination of wastage and hence national resources are utilized economically. In addition, the system is essential in the determination of weak spots of the firm (Bowhill, 2008). This is attained via establishing differences in anticipated targets and actual performance (Collier and Agyei-Ampomah, 2007). Once such weak spots are established, the firm can concentrate on areas where performance deviates significantly from actual targets (Banerjee, 2006).