Chapter 25, Problem 1Q

To determine

Budget: Budget is an effective tool to present the estimated actions for future time period. It includes the financial data for various accounts usually, income or expenses to be incurred in future.

To explain: (a) Budgetary control and (b) steps included in budgetary control.

Explanation of Solution

 (a)

The use of appropriate budgets in order to systematize the operations of organization is called as budgetary control. It measures the performance of various budgets.

• Budget is prepared for the coming period by taking financial data of the current period. Budget is prepared for every department in the organization.
• Budgetary control is a tool to measure the actual performance with set targets and objectives.
• It takes information from the appropriate budgets and controls the performance of budget.
• Budgetary control amalgamates the reports of various budgets to compare the actual performance with the planned one.

Thus, budgetary control is an effective tool to measure the performance of budgets

(b)

Steps to describe budgetary control are,

• Inculcate a target of performance or organization of budgeting.
• Record the actual performance.
• Compare the performance with the target performance.
• Analyzing the differences and taking appropriate decision to control the difference.

The steps in budgetary control are:

• Inculcate a target of performance: The first step in budgetary control is to set a target of performance. Setting of definite or fixed plan should be first step. The responsibility of each person should be made clear before executing any budget so that a target of performance is set for every person related to the organization.
• Record the actual performance: Recording of actual performance is necessary to measure the planned action with the actual one. Information from each department should be taken so that proper projection of the actual performance of budget can be done. Identifying the total frequency of individual budget is the second step.
• Compare the performance with the target performance: The objective of budget must be clearly stated and communicated well to all the concerned people in order to compare the actual performance with the target performance.
• Analyzing differences and taking appropriate decision: If there is any difference in the actual performance of budget as compared to planned performance, the difference must be analyzed properly to control the situation.

Thus, comparing the actual performance of budget and analyzing the differences to take necessary actions are the main step of budgetary control.