Question

6) Describe some of the drawbacks of using the operating budget as a control device. 7) What is benchmarking, and how is it useful to a company?

Answer 1

Operational budget is tool to analyze the financial need of the organization and helps the organization to achieve sustainable growth , this budget is drafted by considering the revenue and surplus available to operate each department of the company

Drawbacks of Operating Budget :

1. Based on forecasting : Actual cost of each department may vary to the amount proposed under the initial operating budget. Its difficult to fix the responsibility, if price got changed due to inflation/depression in market

2. Based on estimates : As operating budget is based on estimate , so it will be difficult to project the actual need of market with the help of operating budget

3. Assumption based : While drafting the operational budget some assumptions are followed , project manager cant he held responsible if some of given assumptions are not fulfilled.

4. Liberal Budgeting : A budget, which allows liberal expenditure, can be used to hide inefficiency For example: if department will always be considered as efficient even though its expenses are above normal parameters

In short , we can conclude that Budgetary control in itself does not prevent deviation from appearing. It neither ensures satisfactory results nor control automatically in the organisation. a particular department should be appointed to ensure the effectiveness and efficiency of designed budget

Benchmarking : Benchmarking is process of comparing ABC derived activity cost of one department/segment of the company with other traditional based department/segment of the company, benchmarking is the last step of Total Quality management

Benefits

1. Define performance expectation
2. Define responsibility of Staff/managerial personnel
3. Develop the culture of continuous Improvement
4. Helps in comparing the performance with the company and outside the company with competitors
5. Focus on best practice from the competitors