The Importance of Budgetary Control in Management Accounting

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The Importance of Budgetary Control in Management Accounting
Budgeting helps senior leaders control operating costs. (still life with calculator image by Astroid from Fotolia.com)

A company needs to manage production costs and administrative expenses adequately to maximise profit levels in the short-term and long-term. Senior managers often use budgets as cost-control tools.

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Definition of Control

A control is a set of instructions that top leadership puts into place to prevent losses resulting from theft, fraud and technological malfunction. These instructions also help management ensure that expenses remain within budgetary limits.

Budgeting Defined

Budgeting is a business process in which senior executives and department heads set spending limits and cost thresholds for each business unit. At the end of each month or quarter, segment managers compare actual data with budget amounts and make adjustments.

Management Accounting Function

Management accounting provides insight into a firm's cost structure and revenue processes. Cost structure refers to corporate manufacturing costs and administrative expenses, such as salaries, rent and utilities.

Budgetary Control Importance

A budgetary control is a mechanism that helps senior managers ensure that spending limits are adequate. This control is important because spending excesses have an unfavourable impact on corporate profits.

Budgetary Control and Income Statement

A budgetary control helps corporate leaders monitor revenue and expense levels in operating activities. Revenue is income that a firm generates by selling goods or providing services. An expense is a cost incurred through operations.

Budgetary Control and Cash Flows

A budgetary control also ensures that corporate cash outflows (payments) and inflows (receipts) remain at adequate levels. A statement of cash flows indicates cash flows from operating activities, investing activities and financing activities.

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