Budgetary control is part of overall organisation control and is concerned primarily with the control of performance. The use of budgetary control in performance management has of late taken on greater importance especially as a more integrative control mechanism for the organisation. Discuss.

        1 - Introduction

Budgetary control is a determining factor of organizational control. It has become increasingly important especially as a more integrative control mechanism. Nevertheless, its use has brought many problems to light with respect to the capital market. This essay will therefore focus on the growing integration of corporation with the capital market and will attempt to provide a viable solution.

        2 - Framework - Organisational and Budgetary Control

Organisational control can be defined as a combination of control mechanisms so that employees will behave in ways consistent with the organisation’s goal (Malmi & Brown, 2008). Figure 2.1 illustrates such control mechanism by comparing it to a thermostat that controls a central heating system.

Control within an organisation works in a similar way. It is often said that control is a word with a multitude of meanings and connotations  (Otley, 2001). Nonetheless, a definition given by Webster’s Dictionary is good from a business perspective (Emmanuel, Otley, & Merchant, 1990). It states that control is the application of policies and procedures for directing, regulating and coordinating production, administration and other business activities to achieve the corporation’s goal (Emmanuel, Otley, & Merchant, 1990). Budgetary control is one of those management accounting system. “Planning and control are two sides of the same coin” (Emmanuel, Otley, & Merchant, 1990) and budgetary control effectively considers them together for a company to grow.

A budget is an important aspect of any organisation. They are used to plan, coordinate, communicate, motivate, control and evaluate the various actions of the firm (Drury, 1997). Budgets allow managers to determine how much money should be spent for generating certain levels of sales and income (Vitez, 2009). A master budget is most important to set out the plans and targets of the company. It is often very detailed and will therefore be produced on a yearly basis. On the other hand, the flexible budget tracks the cost variances from the production process and is therefore part of daily operations (Vitez, 2009). Variances can be either favourable (positive) or unfavourable (negative). Accountants will be comparing actual expenditure on materials, labour and overheads to the budgeted expenses allowing managers to change or correct their operations for cost overrun problems (Vitez, 2009).

Management accounting systems are vital because they are one of the few integrative mechanisms capable of summarising, in quantitive terms, the effect of an organisation’s action (Emmanuel, Otley, & Merchant, 1990). Budgetary control is described as the planning, controlling, co-ordination and motivation through money values and department within an organisation (Ryan, 2007). Figure 2.2, much related to figure 2.1, applies the elements of a mechanical control system to a budgetary control system (Drury, 1997).

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Implementing this type of mechanism enables effective control. Moreover, due to its accounting roots, the use of budgets is very effective for the control of the financial performance by comparing actual results to targeted results. This is important for motivational purposes because, as budgets are used as standards for performance evaluation, rewards are connected directly with budget achievement (Emmanuel, Otley, & Merchant, 1990). Managers are therefore motivated to perform well and meet budgeted targets.

The use of budgetary control has recently become increasingly important especially as a more integrative control mechanism for an organisation. It has become more ...

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