Using Budgets for Control

Budgets provide a means for planning the financial future and play a vital role for planning. Budgets simultaneously make managers construct and implement plans, contribute useful information for improved decision making, provide a standard to administer performance evaluation, and enhance organization and communication. An essential component of the budgeting system is control. Control periodically takes actual results and budgeted results and compares the two. It also allows for managers to frequently measure their performance from reports by providing performance evaluations. The master budget can be separated into operating and financial budgets, each made up of distinctly supporting schedules. Implementing budgets enables managers to create a formulated plan that allows for performance evaluation and improved control. Control involves the process of looking at the past, determining what really occurred and comparing it to previously projected results. Two processes which are significant to adjusting the budget are the control cycle and the planning cycle. Both are linked through feedback and in their final stage, involve budgets. Participative budgeting gives subordinate managers the opportunity to contribute considerable proposals for establishing budgets. A key factor in implementing participative budgeting is that each manager should only be held responsible for costs they can completely control. Any costs that are outside of their control that are included on their budgets need to be marked as non-controllable, and separated from those costs that can be controlled. Participative Budgeting also enables the manager with the chance to structure slack into the budget as a way to increase the probability that the manager will achieve the proposed budget and therefore decrease the risk they may incur. This requires upper level management to carefully review budget proposals from subordinate management in order to decrease the amount of slack