Question & Answer On Budgetary Control

Question:You have joined an old established manufacturing business of medium size which has recently expanded rapidly beyond the capacity of its existing accounting system.Your immediate task as instructed by the board of director will be to prepare and introduce a system of budgetary control.You are required to set out clearly:

(a) the problems you are likely to face in carrying out this task

(b) the requirements which will have to be satisfied before the proposed budgeting system can operate successfully at the planning stage.

Answer to the above question

(a) Problems likely to face:-

  •  size and structure of the budget committee;
  • establishing and charting levels of responsibility and authority throughout the organization;
  • types of budgets to be prepared for each area, the frequency of reports and the information which is to be given to management;
  • the need to explain the purpose and objects of the budgetary control systems in order to obtain the co-operation and interest of staff and to avoid the resistance to change which may occur;
  • preparation of a timetable for introducing the various aspects of the new system and, for accounting purposes, the division of the year into calendar months, weekly, or four-weekly periods,etc;
  • design of forms, ordering of stationery and training of staff to operate the system.

(b) The requirements are

  • the decision on the composition of the committee so that the heads of the main departments are represented, as well as other officials with special responsibilities;
  • defining the functions of the committee and formulating a declaration of the policy of the company in respect of sales quantities, types of product and price ranges;
  • a statement on the service and production facilities available or to be made available in respect of labor, direct labor hours, machines and machine hours, also estimates on the future costs of materials, wages and overheads;
  • provision of working capital to meet the proposed programme;
  • determination of the key factor, which is the level of demand for the products or services of the undertaking, or a shortage of one of the productive resources-skilled labor, for instance.

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