Traditional Techniques of Controlling


  • Budgeting (or Budgetary Control System) 

(a) Introductory observations

A budget is both – a method of planning and an instrument (or device) for controlling. It is a plan in so far as the numerical expression of the standards of performance (i.e. anticipated results) is concerned. However, when the actual operational performance is judged against these standards; the budget assumes the role of a control technique. As such, a budget is properly called a budgetary control; the suffix ‘control’ usually being omitted. 

(b) The concept of ‘budget’

A budget might be defined as the expression of a management plan into numerical terms (financial, quantitative or time); being a statement of anticipated results expected of the working of a particular aspect of organizational operational life, for a specific future period of time, say a month, a quarter, a half year, a year or so.

(c) Types of business budgets

Some important types of business budgets are described below:

(i) Sales Budget

One most important aspect of the revenue budgets of business enterprises is the sales budget.

A sales budget is a statement of an expected volume of sales, flowing to a business enterprise over a specific future period of time.

(ii) Production Budget

An important budget concerning the operational life of a business enterprise is the production budget.

A production budget is a statement of anticipated production to be done by an industrial enterprise during a specific future period of time; in view of the resource availability for production purposes.

Production budget might be expressed in terms of- 

Man-hours; where most of production work is done by manual labor.

or Machine-hours ; where production activities are mechanized.

(iii) Production-facilities budgets

Based on the need and requirements of the overall production budget; budgets for various productions facilities are prepared – as branches of the production budget. ‘ Some of such ancillary budgets are as follows:

(a)    Materials budgets i.e. a budget for direct material needed for the budgeted output.

(b)   Labor budget i.e. a budget for direct labor needed for the budgeted output.

(c)    Factory overheads budget i.e. a budget for factory overheads likely to be incurred, during the production process, to produce the targeted output.

(d)   Administrative (or office) overheads budget i.e. a budget for office overheads likely to be incurred, during the handling of the targeted output, at the ‘office-stage’; in the industrial enterprise.

(e)    Selling and distribution overheads budget, i.e. a budget for selling and distribution overheads likely to be incurred, at ‘the selling and delivery stage’, during the budget period.

(iv)Cash Budget

A cash budget is an important branch of the overall Finance Budget. This budget assumes great significance in the operational life of any business enterprises; as cash is needed for various purposes, quite off and on.

A cash budget is a statement of anticipated cash receipts and cash disbursements; occurring during a specific future period of time – to find out the likely surplus or shortage of cash, during that period.

(v) Capital Expenditure Budgets

A major aspect of financial budgeting concerns with designing capital expenditure budgets, for items like plants, machines, equipments, furniture, etc.

(vi) Balance-sheet budgets

Balance-sheet budgets are statements of forecast of capital account, liabilities and assets.

In fact, sources of changes in Balance Sheet items are the outcome of the functioning of budgetary control system, as a whole. Hence, Balance Sheet budgets prove the accuracy of all other budgets.

(d) The Budget Organization

For the best designing and functioning of the budgetary control systems, there is the need for a separate ‘budget-organization’.

The ‘budget-organization’ implies the formulation of a Budget Committee extended into various sub-committees. The main task of the budget committee is to finalize and co-ordinate the planning and implementation of the budgetary control system.

The Budget Committee, headed by the Chief Executive, consists of various functional heads like the Production Manager, the Purchase Manager, the Finance Manager, the Marketing Manager, the Personnel Manager, the Engineer, the Accountant, the Cost Accountant and other functional experts. In this Budget Committee, there is a usually a provision for a ‘budget-officer’ who acts as the secretary of the committee; and makes preparations for arranging the meetings of the Budget Committee.

(e) Advantages of the Budgetary Control System

Some important advantages of the budgetary control system are as follows:

(i) Expression of planning in definite terms

Since budgets are a numerical expression of business plans; the budgetary control system – built around the concept of budgeting – expresses plans in definite terms. This way, it is easier for managers to communicate plans more precisely to subordinates and operators. Further, people understand plans in a better manner, and can easily take actions for the realization of plans.

(ii) Comprehensive managerial technique

Budgetary control system is a comprehensive managerial technique of managing an enterprise. It is both, a method of planning and an instrument of controlling. Planning and controlling are two extremes of budgetary control; and other managerial functions viz. organizing, staffing, direction naturally fit into the budgetary control structure at their appropriate places.

(iii) Communication of jobs (or duties) though budgets

The budgetary control system is the mouthpiece of management; as budgets convey to people what jobs are assigned to them or what role they are supposed to play, in the organizational life.

(iv) Instrument of co-ordination

Budgetary control system is an instrument of co-ordination. Through budgets, the functioning of functional departments, management levels and actions of individuals throughout the enterprise are all endeavored to be co-ordinated.

(v) Profit-maximization attempted through cost-control

Through emphasizing on cost minimization and expenditure control; the budgetary control system helps management to strive for the profit-maximization goals in a legitimate manner.

(iv) Fixation of responsibility facilitated

Budgetary control system judges the organizational operational efficiency; by locating the spots where weaknesses are occurring. Thus, responsibility for weaknesses or shortfalls in performance can be easily fixed through the budgetary control system.

(f) Limitations of the Budgetary Control system

Budgetary control system is a rose, full of thorns. Some significant limitations of this system can be stated as follows:

(i) Not comprehensive .

Budgetary control system is a lop-sided managerial device; in as much as the qualitative aspects of managing cannot be fully and precisely made a part of it. In fact, despite intelligent quantification of qualitative aspects; the real intentions of these aspects cannot be incorporated into the budgetary control system.

(ii) Difficulty in setting rational standards

Usually, while devising a budgetary control system, it is difficult to set rational standards of performance. Despite the adoption of the best scientific approaches to setting rational standards; prejudices, bias and personal opinions of managers enter the budgetary control system, through the back door.

(iii) Danger of over-budgeting

Regulating the organizational operational life through the budgetary control system, might carry a danger of over-budgeting i.e. too much emphasis on details of minor items and light emphasis on major heads, requiring strict-control.

(iv) Lack of departmental co-operation and co-ordination

There might be a lack of departmental co-operation and co-ordination, while designing and implementing the budgetary control system. In fact, some managers might not be willing to co-operate with one another into the making of the system; due to personal differences and conflicting approaches. As such, departmental co-ordination, which is the heart of the budgetary control system, might be unavailable or unobtainable, because of lack of co-operation among departmental managers. As a result, the budgetary control system becomes faulty or misleading, and a mere theoretical exercise in managing.

(v) Umbrella for inefficiency

Budgetary control system may become an umbrella for hiding organizational inefficiency; as many people might act within budgets – though remaining highly inefficient otherwise.

26.1.2 Non-Budgetary control techniques

Some of the non-budgetary control techniques are described below:

(i) Direct personal observation and supervision

Direct personal observation and supervision by a manager is, perhaps, the oldest techniques of controlling. In this technique, control is exercised by a manager through a face-to-face contact with employees; by directly observing their performance e.g. by taking rounds in the plant where workers are performing or in any other manner.

This technique of controlling has the obvious advantage that corrective action by the manager could be taken on the spot. Moreover, this technique of direct observation has psychological impact on workers; as they are motivated to work as per standards of performance due to the fear of the manager.

However, direct personal observation and supervision technique of controlling has certain disadvantages, like the following:

(i)                           It is a time-consuming technique. The manager is left with little time for attending to his official duties.

(ii)                         Direct personal supervision cannot be exercised all the time over all the employees.

(iii)                       Due to this technique of controlling; there may be interference in the smooth flow of work of employees.

(iv)                       This technique has a negative impact on self-motivated and enlightened workers; and they often resist to it.

(ii) Written Reports

Under this technique of controlling; each manager prepares written reports on the performance of his subordinates; and submits these to higher authorities. Lower management submits reports to middle management to top management and the top management (i.e. Board of Directors) to the body of members.

The written report method of controlling has a psychological impact on workers. In fact, the fear of likely adverse remarks in the report makes workers discharge their duties efficiently.

However, this technique of controlling has certain limitations, as described below:

(i)                 This technique carries an element of subjectivity, in that a manager may deliberately favor or disfavor particular employees while drafting reports.

(ii)               It is an imperfect technique of controlling, as the manager may not include all aspects of workers’ performance, in his reports.

(iii)             Drafting of written reports is a time-consuming process.

(iv)             Some managers may not to competent enough to draft reports.


(iii) Statistical Reports and Analysis

Under this technique of controlling, a special staff of specialists prepares statistical reports and presents them in form of tables, ratios, percentages, correlation analysis, graphs, charts, etc. to higher management levels. Such reports are prepared in areas like production, sales, quality, inventory etc; and these reports usually become the basis of managerial decision-making and action.

(iv) Break-even analysis

Break-even analysis is a technique of Marginal costing. It is based on a classification of costs into fixed and variable categories. The key-concept in break-even analysis is that of contribution, defined as:

Contribution= Selling p1ice per unit- Variable cost per unit

With the help of this concept of contribution the management is first interested in a full recovery of fixed costs. After recovering the fixed costs fully; the business enterprise reaches a point of break-even i.e. a point at which there is neither a profit nor losses. Break-Even-Point (i.e. B.E.P.) is calculated as follows:

Suppose fixed costs                =$ 100000

Selling price per unit               =$20

Variable cost per unit              =$12

:. Contribution per unit           =$8 (i.e. 20-12)

B.E.P. =  Fixed costs / Contributed per unit= 100000/  8 = 12,500 units

A B.E.P. of 12,500 units indicates that if that business produces and sells 12,500 units; it will recover fixed costs fully; and will have neither profits nor losses.

After reaching B.E.P., business can earn a profit of $ 8 per unit (i.e. equal to contribution per unit); on selling each additional unit. (as fixed costs have already been recovered).

The technique of break-even analysis is helpful in profit planning and controlling – by predicting behavior of fixed and variable costs.

(v) Ratio analysis

Ratio-analysis is a tool of Financial Accounting and Management Accounting. Under this technique, the financial analyst analyses financial statements (i.e. the Income Statement and the Position Statement) by computing appropriate ratios.

In fact, figures do not speak. Ratios make them speak. The useful and meaningful accounting data give important clues to management for decision-making purposes- speaking through the media of accounting ratios.

Accounting ratios are usually divided into the following categories:

  • Liquidity ratios
  • Solvency ratios
  • Activity or performance ratios
  • Profitability ratios