Budgeting

Objectives And Limitations of Budgeting In an Organization

 

One of the main objectives of every business house is to earn a satisfactory return on investment. It requires the production and selling a sufficient quantity of merchandise at costs and prices which will yield the desired profit. To remove the uncertainty element from the efforts and read future as exactly as possible, the management of every business house makes forecasts and formulates budgets.

Objectives of Budgetary Control :

The objectives of a system of Budgetary Control are as follows :

1. Portraying with precision the overall aims of the business and determining targets of performance for each section or department of the organization.

2. Laying down the responsibilities of each of the executive and other personnel so that every one knows what is expected of him and how he will be judged. Budgetary control is one of the few ways in which an objective assessment of executives or departments is possible.

3. Providing a basis for the comparison of actual performance with the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures. This naturally helps in adopting corrective measures.

4. Ensuring the best use of all available resources to maximize profit or production, subject to the limiting factors. Since budgets cannot be properly drawn up without considering all aspects, usually there is good co-ordination when a system of budgetary control operates.

5. Coordinating the various activities of the business, and centralizing control and yet enabling management to decentralize responsibility and delegate authority in the overall interest of the business. Engendering a spirit of careful forethought, assessment of what is possible and an attempt to achieve it. It leads to dynamic without recklessness. Of course, much depends on the objectives of the firm and the vigor of its management.

7. Providing a basis for revision and improvement of current and future policies.

8. Drawing up long range plans with a fair measure of accuracy.

9. Controlling the operations of the lower level of management am workers while staining the effective control of the enterprise with top management.

Limitations of Budgetary Control

Budgets are used as a device for making and coordinating plans, for communicating these plans to those who are responsible for carrying them out for motivating managers at all levels and as a standard with which actual performance subsequently can be compared. But the budgeting system and budgetary control system suffer from the following limitations also

(1) Budgets are only estimates – Budgets are only estimates so absolute accuracy is not possible in this system. Absoluteness is never possible in the process of estimation. The reliability, the adequacy and accuracy all depend to a large extent on the accuracy with which the estimates are made. These estimates are based on certain assumptions and it is not possible always chat these assumption will hold good in future. So, their limitation should always be kept in mind while interpreting the results thereof.

(2) Rigid Approach – Another limitation of budgeting is the is Lends to bring about rigidity in the process of control. Forecasts once made become irrevocable. Deviation due to changed circumstances which are beyond the control of management, are not generally allowed. Moreover, there is tendency to attach some sort of finality to budget figures. Hence, management too does not allow any change in the budgeted figures. It also hampers growth and progress of the enterprise and restricts the usefulness of this system.

(3) Impersonal Approach to the System of Control : Budgeting is not the only way sufficient to control the operations of the conceal as it is sometimes assumed. After the preparation of budgets, necessary supplementary tools of control like standard costing, cost-volume-profit analysis should also be developed and used. Moreover, the tool of budgetary control is not a substitute for sound management and administration. It can be effectively used, by the sound management only.

(4) Lack of Co-ordination : Budgeting system can be Lethal only then when there is a proper coordination and co-operation between the various department of a concern. Inter-departmental rivalries and conflicts are problems which the top-management has to resolve first if any good results is to be obtained from the budgeting.

(5) Costly system : The introduction of budgetary control system is expensive also. The cost of employing specialized staff for budgeting on a large scale is often quite high arid small organizations cannot afford it. However, it is very essential that there must be some correlation between the cost of the system and the benefits obtained from it.

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