Budgetary Control System
Plans, performance and corrective action need to be expressed in some common, quantitative form, the most obvious one being financial in nature. A financial budget provides the means to set out the parameters of a chosen course of action, the guidelines against which to compare actual performance and the basis upon which to modify the initial plan if necessary. A budget thus provides the means to report on the performance of all aspects of an organization’s activity on a regular basis which in turn allows the systematic review of all areas of activity (1992). The information which it provides allows line management to make the decisions which are necessary to realize the objectives set for them by their senior management. It is in this way that management accounting provides the necessary financial information for managers faced with the task of decision-making, planning and control ( 1992).
The identification of management accounting with the development and operation of effective budgetary control systems may initially appear to portray only one, albeit a major, aspect of this branch of accounting. In most texts equal attention is paid to product and variable costing and invariably the study of budgeting is shared with standard costing and variance analysis. Then there are the more advanced topics: opportunity costing, performance measurement, transfer pricing and those associated with the information economics approach to decision-making. Research too has traditionally covered a much wider range of topics. But in the last analysis most texts begin by stressing the significance of management accounting for decision-making, planning and control, thereby emphasizing the management control/budgetary control linkage, explicitly or otherwise ( 1992). In the sphere of practice, management accountancy and the development, implementation and operation of budgetary control systems have traditionally been synonymous for many of those involved. It is also the connection which provides part of the explanation of why a growing number of management accounting researchers have become increasingly interested in sociological ideas during the past decade (1992).
In regulating the amount of expenditure spent in the public relations department of a public utility company, a budgetary control system cam be used. The budgetary control system of the public utility company contains two parts. The first part contains the resources of funds. The company gets its funds from the allocation of the government. It also gathers funds by having its own stocks from private companies. The second part contains the expenses of the company. The expenses of the company involve the different payments done on rents and the different salaries of the personnel. The total expenditure of the company is $200.000.00 and the total number of staff is 20. It is anticipated that the amount of expenditure spent by the Public Relations department is roughly proportional to the turnover of the company. This means that a as the company earns additional expenses it is forced to have opportunity in making the best use of the turnover.
Importance of budgeting
Like any other client group, businesses must pay market interest rates to raise funds. However, in contrast to other client groups, large corporations are less likely to face limits on the amounts of funds they can raise. Large businesses can usually raise funds quite readily so long as they can show financiers that proposed expenditure plans are likely to prove profitable. Nevertheless, even large firms may find fund raising difficult if they are entering new lines of business and financiers are not fully familiar with their proposed projects (1998). The time periods needed for financiers to become familiar with new types of business can be relatively long and during that time funds may be either expensive or limited when viewed from the perspective of the business trying to raise the funds. Different sources and different terms of borrowing can sometimes serve as substitutes (1998).
In such cases, especially if long term borrowing rates are also judged to be high, management may use internal financing with the hope of later raising external funds on more favorable terms. In other instances a project may be deferred in the hope that subsequently external financing will be available at lower effective rates (1998). The public utility company has to make use of different kinds of fund raising techniques if it wants to sustain its longevity in its industry, if the public relations department doesn’t want to generate its own income it must ensure that it will maintain a precise expenditure and it has to make sure that the budget will be strictly followed.
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