Role of Budget in Cost Control

4 Feb 2023

Budgeting is one of the ways of controlling cost in amanufacturing organization. Cost control is a systematic review of the resources a company uses to achieve its primary objective of profitability; therefore, it can also be referred to as cost management. For cost to remain within reasons, it is desirable to compare expenses against industry benchmark which is a good indicator of competitive standing.  
The profit which could also be termed a fair return on the capital invested which an organization is supposed to earn and achieve is increasingly difficult to achieve because of the dynamic and complexity nature of business activities and it's environment. Budgeting and budgetary control have for some time been a method of interest to management accountants, business experts, and financial evaluators. Budgeting and budgetary control have been conventionally accepted by Experts. Budgeting and budgetary control are fundamental basis for profit planning and cost control in an organization.
The thorough plan of action of a business entity over a specified period is provided for by budgeting. Through the use of budgeting, problems can be anticipated before they arise and solutions could be sought through careful study. The processes required to plan a budget is to ensure that managers have made plans and are also prepared for future operations.
A budget has been defined by the Chartered Institute of Management Accountants (CIMA), as “a financial or qualitative statement prepared and approved before a defined period to attain a given objective. It includes income, expenditure, and the employment of capital”. One of the benefits of cost control is the ability of a company to keep cash flow at necessary levels of operations, that is, with cost control, excessive amount of cash isnot too tied up in inventory, it prevents over supply of stock or over staffed departments and this keeps cash available for other purposes including navigating economic waves, expansion needs or repairs and maintenance of equipment. Many manufacturing companies use outside assessments to analyze their efficiency including the result of cost control effort, this does not only bring new viewpoints to the process, but also provide important internal review. Sometimes it is difficult to be objective when you deal with management of a business on a day-to-day basis, but professional analysts can bring a broader scope to operations resulting in improved cost.
Budget requires coordination throughout the organization. Each department or unit within the organization is responsible to prepare its part of the budget, which is then coordinated with the overall company budget. Budget assigns responsibility to the management in each unit. Budgeting is an integral part of planning process. Successful companies plan for their futures through the discipline of preparing an annual business plan, stipulating their financial and quantitative goals and strategies. 
Howard and Brown (1998) see budgetary control as “a system of controlling cost which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with budgeted and acting upon results to achieve maximum profitability”. This definition given by Howard and Brown simply identifies that planning and control are aided by budgeting.
Cost is any monetary sacrifice made to secure the benefit. Without cost, there can be no productive activity that will generate the profitability objectives of the firm. Empirical results have shown that in many organizations, operating costs are unnecessarily high, thereby robbing the organization of the profit that would have been made (Yoshikawa, Innes, Mitchell, & Tanaka, 1993). To ensure that costs are brought to the barest minimum, there is a need for cost control.
Cost control is a continuous process that begins with the annual budget. As the fiscal year progresses, management compares actual result to those projected in the budget and incorporates into the new plan the lessons learnt from the evaluation of current operations. Through the standard costing and budgeting process of cost control, management establishes overall objectives, defines responsibility centers and defines specific objectives for each responsibility centers and design procedures and standards for reporting and evaluation. For cost control to be effective, management has to construct budget because it lays out a road map to guide management’s effort in accessing the effect of cost control techniques on revenue expected. It also states the number of assumptions about the relationship and interaction among the economy, market dynamism, the ability of its sales force and its capacity to provide the proper quantity and quality of products demanded. The need for the efficiency and effectiveness in the allocation of the resources of an organization gave rise to the need to make a budget. A budget can be defined as a qualitative statement prepared and approved prior to the period of time of the policy to be pursued for the purpose of achieving a given objective. 
Ukpai (1999) was on the position that the actions of cost control should lead to a reduction in excessive spending, for example, when material wastage is higher than budget or productivity level is higher than standard. A cost reduction program, however, can be directed towards reducing the expected cost level by cutting costs to below the current standard level by purchasing new equipment, changing methods and techniques of production, and so on. However, standards reflect current cost and conditions and not necessarily the cost and conditions which will minimize costs (Ukposido, 2002).
Techniques such as inventory control, standard costing, budgetary control, labour cost control, material cost control, etc,are used to exercise cost control. The competitiveness and profitability of an organization is improved through the help of cost control. Cost control is indispensable for achieving greater productivity. Cost control may also help a firm in reducing its costs and thus reduce its prices and in the absence of cost control, profits may be drastically reduced, despite a large and increasing sales volume. High sales and employment of the workforce can be maintained If the prices of the products are reasonable.

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