Question

Jeremy, the Management Accountant, and Sanjay,the Production Manager of The Octopus Company were recently engaged in a discussion about the company's budgetary control system.

Sanjay's view of the system is that it is unnecessary and a waste of time as the actual results of the company always differs from the budgeted results. He has also noted that in the current volatile environment, costs and prices must be frequently updated and variance investigation is also a waste of time.

As the recently appointed assistant to Jeremy, you have been asked by your boss to draft a reply to Sanjay.

Your report should cover the following:

1. the reasons for a budgetary control system

2. the need for a budgetary control system in the presence of a volatile environment including the pros and cons of such a system

Please focus your answer to the scenario above as opposed to copying and pasting raw facts about a budgetary control system.

Answer 1

Reply to the Sanjay:

The company’s budgetary control system are the framing and compilation of individual objectives of a department and all departments budgets are being compiled in master budget towards the achievement of the company’s target. The reason why the budgetary control system should be installed in the company’s operation are:

a)The budgets are prepared in advance and are based on the company’s future plans.

b)It relates to future and independent objectives are complied into master budget to attain company’s objectives.

c)The budgets expresses the monetary and physical units prepared to implementation of the management plans and policies.

d)The master budget so forms by compilation of micro budgets includes all sales and other incomes, for manufacturing, marketing and other expenses, for the cash and all capital requirements and forecasting or estimation of profits.

The Budgetary control system under the present dynamic environment contains following pros and cons of the system:

Pros includes:

1)The system brings efficiency and economy in the working of the organization.

2)It provides estimate of the departmental responsibility and numerical objectives.

3)It merges all the functional departments and service departments like production, marketing, financial and administrative divisions.

4)It provides the beginning and ending points of each and every activity.

5)The budget formation will provides a path to the management for safe proceedings towards targets.

The cons of the Budgetary Control System are:

A)It provides limitation to the efficiency and strengths of various departments.

B)The actual figures are always differs to that of actual results.

C)It could not able to projects the future inflationary and changing Government policies.

D)It do not envisage the upcoming changes in the demands and restrictions on the input supplies.

E)The success of the Budgetary Control System depends on the coordination and teamwork, which hardly exists at constant position forever.

Thus, going through the pros and cons of the Budgetary Control System, we can conclude that the system is having net advantages for its existence in the business system of the organization.

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