Difference Between Budget and Budgetary Control

Key Difference – Budget vs Budgetary Control
 

The key difference between budget and budgetary control is that budget is an estimation of revenues and costs for a period whereas budgetary control is the systematic process where management uses the budgets prepared at the beginning of the accounting period to compare and analyze the actual results at the end of the accounting period and to set improvement measures for the next accounting year.

CONTENTS
1. Overview and Key Difference
2. What is Budget
3. What is Budgetary Control
4. Side by Side Comparison – Budget vs Budgetary Control
5. Summary

What is a Budget?

A budget is simply an estimate of incomes and expenses for a period of time. Organizations prepare five main types of budgets that assist them in making a number of decisions.

Master Budget

This is a financial forecast of all elements in the business for the accounting year. This is usually a collection of many sub-budgets which are interrelated to each other.

Operational Budgets

Operational budgets prepare forecasts for routine aspects such as incomes and expenses. While budgeted annually, operating budgets are usually broken down into smaller reporting periods, such as weekly or monthly.

Cash Flow Budget

This budget projects the expected cash inflows and outflows of the business for the upcoming year. The main purpose of this budget is to ensure that sufficient liquidity is guaranteed for the period

Financial Budget

Financial budget outlines how the company earns and spend funds at the corporate level. This includes capital expenditure (funds assigned to acquire and maintain fixed assets) and revenue forecasts from the core business activity

Static Budget

A static budget contains elements where expenditures remain unchanged with variations to sales levels. These are popular types of budgets in public and nonprofit sectors, where organizations or departments are funded largely by grants.

There are two main methods businesses use to prepared budget: incremental budget and zero-based approach.

Incremental Budget

An incremental budget is a budget prepared using the previous period’s budget or actual performance as a basis with incremental amounts added for the new budget.  The allocation of resources is based upon allocations from the previous accounting year. Here the management assumes that the levels of revenues and costs incurred during the current year will also be reflected during the next year. Accordingly, it will be assumed that revenues and costs incurred during the current year will be the starting point for estimations for the next year.

Zero-based Budget

When a zero-based Budget is a budget prepared, all revenues and costs must be justified for each new accounting year. Zero-based budgeting starts from a ‘zero base’ where every function within an organization is analyzed for its respective revenues and costs. These budgets may be higher or lower than the budget of the previous year. Zero-based Budgeting is ideal for small scale companies due to its detailed attention to cut costs and to invest scarce resources effectively.

What is Budgetary Control?

Budgetary Control is the systematic process where management uses the budgets prepared at the beginning of the accounting period to compare and analyze the actual results at the end of the accounting period and to set improvement measures for the next accounting year. This process consists of the following steps.

• Preparing the budget

Budget preparation is a time-consuming and lengthy process that often requires participation from different personnel representing their respective departments. Revenues and costs will be forecasted for the upcoming financial year with related justifications. Standard costing is used to make decisions regarding cost estimates. This refers to the practice of assigning a standard cost for units of material, labor and other costs of production for a pre-determined time period.

• Comparing and analyzing actual results with the budget

The actual results will be recorded as the business proceeds with trading, and these results will be compared against the budget. Variance analysis is an important analysis tool used here to calculate to what extent the actual results vary from the budgeted.

• Deciding on improvement measures on underperforming operations

The key objective of the budgetary control process is to enable a better decision-making platform to improve performance. Variances may be favorable or adverse, and the reasons for them should be investigated, and the actions for improvements should be taken.

• Start making plans for the next accounting period

This will be done based on the corrective and improvement actions decided upon based on the results of the current year. The results of the prevailing year will be used as the basis for budget preparation for the next year.

What is the difference between Budget and Budgetary Control?

Summary- Budget vs Budgetary Control

The difference between budget and budgetary control is that while budget is the tool used as an estimation of revenue and costs, budgetary control is the process used to evaluate the budgeted results. Thus, budgets allow better resource allocation and budgetary control facilitates cost control and effective target setting. However while useful, budgets are heavily dependent on forecasts, which may or may not be predictable. Further, both budget preparation and budgetary control are time-consuming and costly to implement. Situations such as unforeseen changes in demand and sudden rise in raw material prices can make the estimations less productive.

Reference
1.”Budget.” Investopedia. N.p., 25 Nov. 2003. Web. 24 Mar. 2017.
2.”Five Types of Budgets in Managerial Accounting.” Chron.com. Chron.com, 12 July 2012. Web. 24 Mar. 2017.
3.”Budgeting: Zero vs Incremental method.” Budgeting: Zero vs Incremental method | MamaYe. N.p., n.d. Web. 24 Mar. 2017.
4.”Standard Costing.” AccountingTools. N.p., n.d. Web. 24 Mar. 2017.