BUDGETARY CONTROL – Advantages and Disadvantages

A budget– is a formal expression of income and expenditure for a given future period.

Budgeting– refers to the mechanism of preparing budgets.

Budgetary control – refers to the process of comparing actual results with budgeted results and analyzing the causes of any variances so as to provide the basis for managerial planning and control.

Advantages of budgetary control

1. It ensures the achievement of organizations objectives.
2. It compels planning i.e. the management is forced to look ahead and set out a detailed plan for achieving the targets.
3. It communicates the ideas and plans in a formal system that ensures that each person affected by the plan is aware of his responsibility in the budget process.
4. A formal budget may act as a formal authorization to budget managers to incur expenditure.
5. It helps to establish a system of control.
6. It provides a means of performance evaluation.
7. It motivates employees to improve their performance.
8. Leads to economy in operations
9. Gives motivation to workers
10. Serves as a medium of communication i.e. translates goals and targets of the organization in quantitative and monetary terms.
11. Encourages management by exception (MBE) i.e. The management can concentrate only on the areas where performance is below the targets.

Disadvantages of budgetary control

1. Are prepared using estimated figures which may not be accurate
2. Installation and operation of a budgetary control system is expensive since it requires technical and qualified staff
3. Opposition by staff i.e. budgets provide a „yard stick‟ against which the workers performance may be measured. Inefficient workers may create difficulties in the operation of the budgetary control systems.
4. It’s simply a tool of management and cannot replace the management.