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