Budgeting & Budget Control Concept

Budget control deals with comparing reporting data with results.

Budgetary control is a business tool operating on the assumption that the better your department does, the more money you will receive. The budgets are usually decided by the executives running the department, and they make their case as to how they arrived at the budget numbers they provide.

Budget

In simple terms, the budget is how much a department needs to do what it has to do for a company. It's usually a formal statement, and it helps to provide a financial overview of an entire organization. For example, if you're the director of the advertising department, you would make your case as to how much money you would need in order to achieve the company goals, and you would project the advertising costs of print, online and broadcast. At the same time, your budget might include an "encumbrance," which is a future expense that needs to have money set aside to cover expected costs.

Control

In order to make certain that departments are meeting their goals and company objectives, budgetary control compares previous data to current data. Doing this makes certain that if an area isn't meeting its goals, the budget can be adjusted as needed. In some cases, the budget is increased and in some cases, the budget is decreased. In order for budget control to function properly, there needs to be a periodic system of reporting set up. For example, if you're in charge of the labor budget, you might want to report weekly on labor costs. That way, if you find that too much overtime is being paid out, you can plan shifts accordingly or you can increase the labor budget.

Advantages

Advantages with budget control are manifold. It's an effective communication tool for both management and the workforce, especially in the planning stages of the budget. It also focuses attention on the future, making management and decision makers to determine what the financial outlay for each division and department will be. Responsibility is another advantage, since the periodic reporting process allows management to find out what areas are not staying on budget and address the issues.

Flexibility

There needs to be a certain level of flexibility built into the budget control concept. For example, if the shipping department has had an increase in items being delivered due to increased sales, it might be necessary to increase the budget for the shipping department to compensate for the increase. On the other hand, if there is a decrease in shipping, you might cut the budget for shipping for that quarter.

References

• Food and Agriculture Organization of the United Nations: Budgetary Control; Copyright 2011 FAO.org
• Faculty at Texas Wesleyan University: Budgetary Control and Responsibility Accounting; Copyright 2011 Texas Wesleyan University
• Principles of Accounting: Chapter 21: Budgeting: Planning for Success; Copyright 2010 principlesofaccounting.com