Techniques of Controlling
Business concerns have been using a number of devices for the purpose of controlling. Broadly, all the devices of control can be classified into (a) budgetary control devices and (b) non-budgetary control devices. Budgetary control devices include budgets such as production budget, cash budget, capital budget, sales budget etc., while non-budgetary control devices consist of managerial statistics, break-even analysis, internal audit, cost accounting, etc. A brief explanation of these devices is as follows.
Budgeting or Budgetary control
A budget is a financial or quantitative statement prepared for a definite period of time. It states the policy to be pursued during that period for the purpose of attaining a given objective. It provides standards for comparison with the results actually achieved. According to George R. Terry, "Budget is an estimate of future needs, arranged to an orderly basis, covering some or all of the activities of an enterprise for a definite period of time". In the words of Professor Larders, "the essence of a budget is a detailed plan of preparations for some specified future period, followed by a system of records which will serve as a check upon the plan".
Budgeting is the process of preparing budgets whereas budgetary control is a device or technique of managerial control through budgets. According to J.Batty, "Budgetory control is a system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities or services". Thus, budgetary control is planning in advance of the various aspects of business can be controlled. The important characteristics of budgetary control are: planning of activities of each department, co-ordination among various departmental plans, recording of actual performance, comparison between budgets standards and actual performance, determining the deviations, if any, finding out the reasons for deviations and taking of follow-up action.
Essentials of Effective Budgetary control
(1) Effective Organisation: The concern should be effectively organised and the responsibilities of each departmental managers are clearly defined and the line of authority sharply drawn.
(2) Quick reporting: The subordinates must send reports on performance without any delay. The managers on their part must analyse the report and take necessary action immediately.
(3) Support of top management: The top management must have a clear idea of the objectives of budgetary control and should implement the budgetary control programme seriously in order to infuse a sense of seriousness among the subordinates.
(4) Reward and Punishment: The employees whose performance is according to the budget plans should be suitably rewarded and the employees whose performance is not as per budget should not go unpunished.
(5) Appropriate Authority: The employees who are entrusted with the responsibilities of implementation of budgetary control should also be given appropriate authority to do so. If a person lacks authority to enforce his decision, it is difficult for him to fulfill his responsibilities
(6) Flexibility: If the circumstances warrant, the management should not hesitate to alter the budget figures. But at the same time, care must be taken to see that the budget figures are not altered too much or too often.
Classification of Budgets
Budgets may be classified on the basis of purposes for which they are prepared. On this basis, we have the following types of budgets.
(1) Cash budget: Cash budget gives the estimated receipts and payments for the budget period and indicates the position of cash arising from it. It shows the cash requirements at various times of the budget period and helps the management in planning and arranging cash for the business concern. Thus, it ensures that a business concern never suffers from a shortage of funds. In additions, the cash budget helps the management in controlling and coordinating the activities concerned with receipts and payments.
(2) Capital Budget: Capital budget gives the estimates in respect of the capital resources of the business concern. It also states the plans with the estimated cost for investment, expansion, replacement, etc. Thus the budget serves as a device for planning capital expenditure.
(3) Sales Budget: Sales budget gives a comprehensive sales programme and plans for a specific period. It states the sales potential in terms of quantity, values, period, product, etc. Sales budget is one of the important budgets because it is the basis for preparing other types of budgets. Generally, the sales manager prepares the sales budget with the assistance of sales supervisor, salesman, market research officers and other connected with sales. For preparing the sales budget, factors such as the price trend of the product, population trend, customer's purchasing power, extent of advertising, past sales, nature of competition, economic situation in the country etc. are considered.
(4) Selling and Distribution Cost Budget: This budget gives the cost of selling and distribution of the products during the budget period. It includes costs of selling and distribution such as cost of insurance, packing, storing, transport, advertisement, sales commission, market research etc. Generally, the sales manager, advertising manager and distribution manager take responsibility to prepare the budget.
(5) Production Budget: This budget is also known as output budget and is based on sales budget. It indicates the quantity of units to be produced during the budget period. This budget helps in maintaining optimum balance between production, sales inventory position of the firm. This budget is prepared by the production manager.
(6) Production Cost Budget: Production cost budget which is based on the production budget, lays down the estimated cost of carrying out the plans relating to production. Production cost budget is sub-divided in to various sub-budgets like labour budgets, raw material budget, production overhead budget, etc.
(7) Labour Budget: Labour budget gives the estimated requirements of labour for carrying out the estimated production during the budget period. It may state both direct and indirect labour requirements. Generally, the personnel department prepares the labour budget in coordination with other concerned departments.
(8) Raw Material Budget: This budget which is prepared by the production department gives the estimated requirements of raw materials of different types for carrying out production during the budget period.
(9) Production Overhead Budget: This budget lays down the estimates of all production overheads to be incurred for carrying out the estimated production during the budget period. It breaks up the production overheads into fixed overheads, variable overheads and semi-variable overheads.
(10) Master Budget: Master budget is summary of all functional budgets and indicates how they affect the business as a whole. A master budget generally includes particulars regarding sales, production, cash position, fixed assets, labour, factory overhead, administration overhead, and selling and distribution overhead, major financial ratios and profit.