The following points highlight the top ten requisites for operation of a budgetary control. The requisites are: 1. Well Planned Organization 2. Separate Departments to be Established 3. Accounting Records 4. General Instruction 5. Preparation of an Organisation Chart 6. Budget Committee 7. Budget Manual 8. Budget Periods should be Ascertained 9. The Key Factor 10. Level of Activity.
Operation of a Budgetary Control: Requisite # 1.
Well Planned Organization:
There should be a well planned organisation set up with authority and responsibility clearly defined.
Operation of a Budgetary Control: Requisite # 2.
Separate Departments to be Established:
Centres or departments should be established for each of which budget will be set with the help of the head of department concerned.
Operation of a Budgetary Control: Requisite # 3.
Adequate accounting records are to be introduced. It is essential that the accounting system should be able to record and analyst the information required for the preparation of budgets.
Operation of a Budgetary Control: Requisite # 4.
General instruction in technique of all concerned department should be given in operating the system. Each person must know the budget of his department, its objectives and how he fits into the plan. The person must feel that he is capable of carrying out the budgeted programmes efficiently and effectively.
Operation of a Budgetary Control: Requisite # 5.
Preparation of an Organisation Chart:
An organisation chart is to be prepared organisation chart defines the functional responsibilities of each member of management and ensures that he knows his position in the organisation and his relationship to other members. It should be noted that in the preparation of each of the budget the accountant will play a big role, especially those involving costs.
Operation of a Budgetary Control: Requisite # 6.
A budget committee should be established to formulate a general programme for preparing budgets and exercising overall control.
The functions of budget committee will be:
(a) To provide the historical information to help managers in forecasting.
(b) To issue instructions regarding budget requirements, dates for the receipt of budgets.
(c) To define the general policies of the management in relation to budgets.
(d) To advise the managers involved in preparation of budgets.
(e) To suggest revisions and amendments to budgets as and when required.
(f) To see that budgets are prepared and submitted in due time.
(g) To coordinate the budget programme.
(h) To approve the Master Budgets after the functional budgets have been approved.
(i) To identify the weak areas after making comparison of budgeted and actual results.
(j) To recommend corrective actions where necessary.
(k) The finalization of the functional budgets and their compilation into the Master Budget.
Operation of a Budgetary Control: Requisite # 7.
Budget manual is to be prepared “Budget manual is a document that sets out, the responsibilities of the persons engaged in, the routine of and the forms and records required for budgetary control”. —ICMA
The main idea, behind the budget manual is to inform line executives before hand about procedures to be followed.
Operation of a Budgetary Control: Requisite # 8.
Budget Periods should be Ascertained:
Budget periods vary between short-term and long-term. If the business experiences seasonal fluctuation the budget period may extend over one seasonal cycle. In that situation long-term budgets should be prepared.
In determining the length of the budget period, the following factors should be reasoned:
(a) The budget period should be long enough to complete production of various products.
(b) The budget period should coincide with the financial accounting period to reconcile actual results with the budgeted estimates.
(c) For a business of seasonal nature the budget period should cover at least one entire seasonal cycle.
(d) In the case of capital expenditure budgets forecasts for a much longer periods than a year may be used,
Operation of a Budgetary Control: Requisite # 9.
The Key Factor:
This is the factor the extent of whose influence must first be assessed in order to ensure that functional budgets are reasonable capable of fulfilment. The key factor is also known as ‘limiting’ or ‘governing’ or ‘principal budget’ factor. It is of vital importance. The key factor determines priorities in functional budgets.
The key factors that may affect budgeting are the following:
(i) Availability of supply;
(ii) Restrictions imposed by licences, quotas etc.
(i) General shortage;
(ii) Shortage in certain key process.
(i) Insufficient capacity due to lack of capital;
(ii) Or lack of space;
(iii) Or lack of markets;
(iv) Bottlenecks in certain key process.
(i) Low market demand;
(ii) Shortage of experienced salesmen;
(iii) Insufficient advertisement due to lack of money.
Probably, the sales demand is the most important key factor in industry. The success or otherwise of budgetary control rests on the forecast of sales during the budget period. Most of the budgets will be affected if sales figure proves to be inaccurate.
Operation of a Budgetary Control: Requisite # 10.
Level of Activity:
It will be necessary to establish the normal level of activity, i.e. the level the company can reasonably be expected to achieve. This level is important in forecasting, for example, material and labour requirements and particularly production overhead budgets.