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Introduction
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 Duugettng and Budaetary Contro! Management Accountng
2.3 2.4

budget, on the other hand, is a planned exercise to achieve a tarçet. It is based useful means ot inform1ng managets how wett
nd cons of a forecast. Forecasting thus precedes the on the pros 6. Performance evaluation. A budget p:ovides a helped to set. In many compaJiies
targets they have previously
preparation of budget. they are pertorming in meeting of their achieving the budget targets or
Thus the main points of distinction between the two are thås there is a practice of rewarding employees on the basis
record.
1. Budgets relate to 'planned events, i.e., policies and promotion of a manager may be linked to his budget achievemnent
programmes to be pursued. Forecast
concerned with 'probable events, i.e., events expected to happen under anticipated conditions.is Advantages of Budgetary Control
2. Budget, being a formal business plan, can be prepared only by the Budgetary control provides the following advantages :
anthorised management
but forecast can be made by anybody. anticipate and prepare for changing conditions.
3. Budget is a tool of control while the forecast is simply an
1. Budgeting compels manages to think ahead-to
various departments and functions of the business.
antiipation of events. 2. Budgeting co-ordinates the activities of
minates waste and controls the costs.
4. Forecasting is a pre-requisite for budgeting while budgeting is not a pre- requisite for 3. It increases production efficiency. elimin
forecasting. 4. It pinpoints efficiency or lack of it.
5. Budgetary contro aims at maximisation of profits through careful planning and control
5. Budqets relate to economic activities of business, enterprises, government or others. compared.
Forecast may relate togechomic as well as non economic activities, 6. It provides a yardstick against which actual resutts can bea situation.
e.q., weather 1. It shoWs management where action is needed to remedy
forecast, stock market orecast, etc. 8. It ensures that, working capital is available for the efficient operation of the business.
0bjectives of Budgetary Control 9. It directs capital expenditure in the. most profitable direction.
The
10. It instills into all levels of management a timely, careful'and adequate consideratiort of
following are the main objectives of a budgetary conttol system. all factors before reaching important decisions.
1. Planning. Abudget provides a detailed plan of action for a business over a definite period 11. A budget motivates executives to attain the given goals.
of time. Detailed plans are drawn up relating to production, sales, raw material 12. Budgetary control system creates necessary conditions for the introduction of standard
labour needs, advertising and sales promotion perfornance, research and requirements, costing technique.
development activities.
capital additions, etc. Planning helps in anticipating many problems long before
they may arise Budgeting also aids in obtaining bank credit.
and solutions. can be sought t rough careful study: Thus most business 14. A conttol system assists in delegation of authority and assiqnment of
emergencies can be tespons
avoided by planning. In brief, budgeting forces ntanagements to think ahead, to anticipate and
prepare for the situation 15. Budqeting creates cost consciousness and introduces an attitude of mind in which waste
and efficiency cannot thrive.
2. Co-ordination. Budgeting aids managers in co-ordinating their efforts so that objectives of
Limitations of Budgetary Control
the organisation as a whole harmonise with the objectives of its divisions. Effective planning and
organising contribute a lot in achieving co-ordination. There should be co-ordination in the The list of advantages given.above is impressive, but abudget is not a cure all for organisation
budgets of various departments. For example, the budget of sales should be in co-ordination with ills. Budgetary cont1ol system suffers from certain limitations and those using the system should
be fully aware of them,
the budget, of production. Similarly. the þroduction budget should be prepared in co-ordination
with the purchase budqet. and so on. The main limitations are :
1. The budget plan is based on estimates. Budgets are based on forecasts and forecasting
3. Communication. budget is a communication device. The approved budget copies are cannot be an exact science. Absolute accuracy. therefore, is not possible in forecasting and
distributed to all management personnel which provides not only adequate understanding and budqeting. The strength or weakness of the budgetary control system depends to a large extent,
Knowtedge of the programmes and policies to be followed but also alerts about the restrictions
to be on the accuracy with which estimates are made. Thus, while using the system, the fact that
adhered to.
budget is based on estimates must be kept in view.
It is not the budget itself that facilitates communication, but the vital information is 2. Danger of rigidity. Abudget pagrame must be dynamic and continuously deal with the
communicated
this act.
in the act of preparing budgets and participation of all sesponsible individuals in . changing usiness conditions. Budgets will.lose.much of their usefulness if they acquire rigidity
and are not revised with the changing cicumstances.
4. Motivation. A budget is a useful device foI motivating managers to pezfotm in ine with 3. Budgeting is only a tool of management. Budgeting cannot take the place of management
the company objectives. If individuals have actively participated in the preparation of budgets, but is only a toot uf management.-The budget should be regarded not as a master, but as a
it acts as a strong motivating force to achieve the servant." Sometimes it is believed that introduction of a budqet proqramme is alone suffcient
latgets.
5. Control, Cont:ol is necessary to ensure that plans and objectives as laid down in the to ensure its success. Execution of a budget will not occur automatically. It is necessary that the
budgets are being achieved. Control, as applied to budgetung. is a systematised effort to keep the entire otqanisation mst participate enthusiastically in the programme for the realisation of the
managemnent infotmed of whether the planned performançe is being achieved or not. Fo this budgetary goals.
purpose, à comparison is made between plans and actual performance. The difference betwéen the 4. Opposition from staft. Enployees may not like to be evaluated and thus oppose introduction
two is teported-to the tnanaqement fot taking cotrective action. of budgetary cont:ol system. As suct., inefficient managers may try to create difficulties in the
way of int:oducing and operating this system.
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organisation exceed
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accomplished responsibility
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The philosophy
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with unless what for for to In is
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should that setting bethe budget control small ofand
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system not budgetary manuals, ensure
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and objectives, built
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The. the maximum goals and of
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management Integration Cost Adequate Participation
organisation.
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potentials are with considers
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System
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2.6
preparationundertaking a
the organisation.
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The chart vigwi*w.
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Establishment 4. orqanisation Introduction be thereof.Creation
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Cost Cost Budget Sales organisation and centres bethe able suchn
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deledated and to centre
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classification
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in management accounting
revenues ADMINISTRATION BUDGET
2.1
Production]
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pesonnel the implementation
commiltes. Utilization Budget
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Fig
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Committee
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he should expenses of centue
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 Management Accounting
3udgeting and Budgetary Control
2.7 2.8
stati0rns
tinancil controlier is usually appointed to serve as the budqet director. He canital expenditure, the need for new power
ptepatnq budqet manual of instructions and accumulates the budget and actual
is incharqe of electncity companies which incur very heavy advance. Such long term budqets are supplemented by
fiqures for is forecast possibly five to ten vears in
teporting. 0thert members of the budqet committee usually comprise various heads of
functional short term ones
imiting
departstents. like sales manage.. plurchase manager. production manager, chief accountant. lactor or key factor. Also known as output.
as stown n the above o:qanisation chart. Each member prepares his own
etc 1. Determination of the principal budget means the factor which limits the size of It
departmental budget(s) factor, the key factor
which ate then considered by the committee for coordination, tactor or governing infuence must first be assessed in order to ensure
is defined as "the factor the extent of whose
of vital importance and affects
Functions: The main functions of à budget committee are as follows :
that functional budgets are capable of fulfilment" Such a factor is
ta) To provide histor:cal data to all departmental heads to heip them in all budgets to a large extent.
estimating. the preparation of budgets. For instance, when
tb) To 15Sue instructions ta departments regarding tequirements, dates of submission of The key factor serves as the starting point for
estimates, etc. sales potential is limited, sales is thekey factor. Therefore, sales budget should be prepared first.
Thus a key factor determines priorities
tc) To define the general policies of the management in relation to the budget
system. Production and other budgets will follow the sales budget.which affect budgeting are t.te following
(d) To recerve budget estimates irom various departments for consideration and review. in functional budgets. Among the various key factors
(e) To discuss diffhculties with departmental he ads and suggest possible revisions.
() To evaluate and revise the estimates before preparing the final budget. (a) Sales
ta) To make teconendations on budget matters where there is conflict between depatt1nents. (0 Low marketdemand
Jo prcpare budget sumaties (i) Shortage of experienced salesman.
) to pepare a niastet budget after functional budgets have been apgroved. (b) Materials
i To intotm departitiental heads of any tevisions made in their budgets by the committee.
k) fo caordinate all budqet wotk
(i) General shortage and seasonal shortage
(iü) Restrictions imposed by licences, quota,, etc.
) To analyse variances and recommend corrective action, where necessary. (c) Labour
5. Preparation of budget manual. A budget manual has been defined by C.I.M.A., London (0) General shortage
as ic docu ment which sets ou! the tesponstbilities for the persons engaged in the routine of and (n) Shortage of specialised labour in a particular process.
the forms and records required for budgetary control." Abudget manual is thus a statement of (d) Plant
budqet policies. It iays down the details of the organisational set up with duties and responsibilities
() Limited plant capacity
of executives including the budget committee and budget director and the procedures and (ii) Bottlenecks in certain key processes.
progtatmes to be followed for developng budgets for various activities. (e) Management
Contents: The contents of a bukukmanual are summarised as follows () Shortage of experienced executives
(a) Description of the budget system and its objectives. (ii) Pauçity of know-how.
(b) Procedure and forms to be used in budget preparation. In this age of competition, most often, sales is the key factor in industry.
the same time. Under such
te) Responsibilities of operational executives, budget committee and budget director. It is possible that mote than one key factor is operating
(d) Budget calendat. specfying definite dates for the completion of each part of the budget arnd conditions, the telative impact of such factors is considered in budget preparation. Moreover, key
submission of the reports. be provided with opportunities
factor is not necessarily a permanent factor. The management may plant
(e) Method of accounting and account codes in use. to overcome the limitations imposed by key factors. For example, capacity can be increased
4) Procedure to be adopted in opetàting the system. by the installaion of new and improved plant and machinery which may be financed by the issue
(a) Follow-up procedures. of new shares.
6. Budget period. Budget period is a length of time for which a budget is period
preparedcan and
be FUNCTIONAL BUDGETS
operated. Budget Peous
per Vary etween siort term and long term and no
specific
1aid doxn tor all varies aInong concerns and industries for several factors.
Afunctional budqet is one which relates to a particular function of the business,
e.q., Sales
Abudget is usually prepared for one year which cortesponds to the accounting year. It is then budget. Specific
"Budget, Production Budget, Purchase Budget, etc. These are components of masterorganisation.
to The
sub divided into quatters and in turn each quarter is broken dovwn into three separate months. functional budgets to be prepared in a business vary from organisation
are discussed here in brief
When a bustness experiences seasonal fluctuations, the budget period may be fixed to covet on common types of functional budgets for a manufacturing concern
seasonal cycle. If the seasonal cycle covers say two or three yeats, a long term budget should
be prer ired to cover that period. The long period may then be broken down into snallet periods Sales Budget
by preparinq short term budgets. In most companies, the sales budget is not only the most important but also the most difficult
is
Budgat fut capital expenditure are usually prepared on a long tern bacis. ior example, in budqet to prepare. The inportance of this budget arises from the fact that if sales fiqure
 Budgeting and Budgetary Control Management Accounting
2.9 2.10

incorrect, then practically all other budqets will be

affected. The difficulties in the prepatation of this Types of Functional Budgets The prinipat considerations involved in budgeting production are
budget arise because it is not easy to estimate (a) Sales budget. When sales is the principal budget factor, the production budget will b
1. Sales Budget.
consumer demand, particularly when a new product is 2. Production Budget. based on the volume of-sales forecast by the sales budge
introduced,. 3. Production Cost Budget. (b) Inventory policy. The management decision -regarding guantities needed in stock at all
The sales budqet is a statement of planned sales in 4. Raw M
Materials Budget. times to meet customer requirements is an important facto. In deciding on the inventory
terms of quantity and value. It forecasts what the 5. Purchases Budget. policy. factors like storage facilities, length of the production period, perishability of ptoduct.
company can reasonably expect to sell to its customers 6. Labour Budget. risk of price changes, etc. have to be given due consideration.
during the budget period. The sales budget can be 7. Production Overhead Budget. (c) Prodoction capacity. The production capacity of each depattment should be wotked out
prepared to show sales classified according to products 8. Selling and Distribution Cost Budget. and budget fiqures should be within these limits.
salesmen, customers, territories and periods, etc. 9. Administration Cost Budget However, when production capacity fatis short of sales requitements, the following altesnatives
Factors: The factors to be considered in forecasting 10. Cash Budqet. may be considered :
sales are the following: 11. Capital Erpenditure Budget. () Purchase of additional plant and machinery.
1. Past sales. Analysis of the past sates-shows the (i) Introductior of additional shift.
trends to date and anv seAsonal or cvclical fluctuatinns It ie therefore, not difficult to (i) Lntroduction of overtime working.
future trends from the analysis of the past sales.
suggest
(iv) Hirnng machinery.
2. Reports by salesmen. The salesman are in close touch with the market (v) Sub-contracting production of conponents.
and thus, they may
be required to prepare detailed estimates of sales that they are likely to make in their respective (d) Management policy. Production policy of the management plays an important tole in
areas during the budget period. The report of each salesman should be studied in- the light of
his past assessment and actual sales. budgeting production. For example, management may decide to buy a patticulat component patt
from outsidé instead of manufacturing it. This will influence production budget.
3. Company conditions. Any change in policies and methods of the company and their. effects
on sales should be considered. For example, additional spending on Production Cost Budget
k n g . introduction of
ne products. ete
new channels of distributions, introduction of hew all have some èffect of This budget shows the estimated cóst of production. The production budget (explained above)
a sales budget. intities ofof production are expressed in terms of cost
shows the quantities of production. These quantities
4. Business conditions. Any changes in economic conditions' and fhat in related business in production costbudet: The cost of production is shown in detail in respect of mateal cost.
activities and their effect on company sales should be considered. Information shoutd be obtained labou: cost 'ahd fattory overhead. Thus Production Cost Budget is based upon Production Budqet.
about competing industries to assess tàe strength of compettion and about the customer Material Cost Budget, Labour Cost Budget and Factory Overhead Budget.
requirement to determine their demand. lustration 2.i
5. Special condiions. In the preparation of sales forecast, my new external developments The following information has been made available from the tecotds of Precision Tools Ltd. fot
taking place should also be considered. For example, when an industry manufactures pYoducts for the six months. of 2017 (and the sales of January 2018) in tespect of product X;
another industry. it will be necessary to analyse the trend of sales in that industry. Atyre (i) The units to be sold in different months are :
manufacturer would estimate the sales of cars or scooters on which tyres are used. November. 2017
July 2017 1,100 4500
6. Market analysis. Some companies depend upon market analysis and research to measure 1,100 Decembe: 2017 2,300
the potential demand for their products. Such an analysis reports on the state of the market, August 2017
1,700 January 2018 2,000
fashion trends, the type of products design required, activities of the competitors and other September 2017
October 2017 1,900
factors which may have a bearing on the sales of the company.
(iü) There iwill be no work-in-piogress at the end of any month.
Production Budget (iD Finished'units equal to half the sales -of-the-next- month ill be in stock at the end ef
The production budget is a plan of production for the budget period. It is first drawn up in every month (inclucing June 2017).
quantities of each product and when the remaining budgets have been compiled and cost of (iv )Budgeted ptoduction and productioi cost fot the year ending 31st Dec. 2017 are thus:
Production (units) 22,000
production calculated, then the quantities of production cost are translated into money terms,
Direct materials per unit 10
what in effect becomes a production cost budget.
Direct waqes pet unit
The production budget is the initial step in budgeting manufacturing operations. In addition ? 88,000
to production budget, there are three other budgets relating to manufacturing activities of a Total factory overhead apportioned to production
company. These are raw materials budget, labcur budget and production-overhead budcet. You are tequired to p:epate
(a) Production Budget frr the siy r.orths of 2017, and
(6) Sumna:ed i:oduct.r Cost Budsat int the same period.
(B.Cem. Hons De huk
 folloWng:the thepurchase
detailed Purchase
Factors: budoot
The
companies. BudgetInditect
Cateful it
production Material
BudgetRaw
Solution8.tyetitg
(d) (c (b) (a) (c) (b) (a)period This *Factoy
Ptoduction
Total
Cost materials
ovethead
*Factoy,Ditect
WagesDtect
Opening
stock
Less
should (c) (b) (a) Closing
stockAdd
mancial
Economic
Maximum Üpening
and The The The
purchase
natetials budget
In planning of It It It Production Estimated
sales
to The ptovides demanded
assists ovechead
estimatedtiming
preparing quantities meet of be elps and
resoIces and purchase
budgetpurchases fot noted shows Budgetary
ordet of -and purchasing in
closing the data the pet
minimumn
quantities. stock purchases
cost of purchases offers supplies that bythe
a provides
each needs the unit
available. manager preparationfor estimated Control
stockspurchase of fthoer aw 1.100 1,650
material type of raw production
department ?
550 550 .100 Units July
details are
maternal 88,000- @4or
11.050
units @4
@10 for
to the material for
bbdhet! of penodshould
budget included quantities the
quantities. be gurases business.
taw of 1.950
the
maintained of onethe of budçet. ör Production
Budget
sIx Cost 1<00 1.100 Units Aua
budqet purchase
550 850
material be in 22,000
fot sIk
Production
Budget
the control.planning 11,050 months months
number a It
puschases
assiqned in
Raw allof
11,050-
the
generally unuts 1.600 2.650 1,700 Units
as indicates:
and andfor most budget. units units ending S50 950 Sep.endirng
2012Bec
it overhead material
the the
wil of other the
factots which significant purchases. raw
Dec.
submittingdirect deals 4. 3.150 1,250 1,900 Unuts
affect items materials
budget 200 Q50
cost 2017
must are
to tesponsi-bility with
material
ents.
tequit ateas of budget.
beplanned planthe serves 2,400 1.250 3.650 1,150 2.500 Unuts
bepurchased: only and Nov.
consideted. components
the (Production:
11,050
units)
saving
cost the
to following
purposes:
be thein for direct .150 1.1503.300 1.000 2.300 Units Dec
nade preparing 1.98,900 ,10,500
itcldine form of many in materials. needed 44,200
44.200
during 11.050
Total
for 2.11

2.12
next
Solution balances requires 1llustration
ofcertain of
aTequirements. like only. both
2.2 services
less: Ad Add: Estimated
Less: Draw raw The The The Purposes:
year Secondly,
quantities (c) (b) (a) U) (e)
production
materials sales purchase
Expected
production
Estimated Total
Desited Sales up at 2 advantageous.
respect Towhere
To Tobusiness
Policyduring
Purchase
yeatof DestedConsumption
A-54.000 Item
Quantities Expected
next B-54 are-Finished ka
athe manaqer facilitaterecord enable
production of product. The
dutng Materials end electricity
purchase andbudget of the
000 stock A A of asthe ordets
stock stock the the the main
stock units uuits of andmanaqer
and
the putchasing management distinct period
of atthe the of rupee
budqet material
at duig at quantity Puzchases P:oduct, 3 BMahindra differs purposes
materials al the @3 ( the
the Veat
next kaare and
budget management underplaced
the end consults
of costs, from
end kg kgthe
2
Purchase beqinning year required gas, period prices
commencement of durinig B. includes from department consideration.
tihose
of
regarding
before
to ofpet per yea! next Budqet are:10,000 The & etc. whereas
Co. a
be next unit unit the the and of on
Budget of yeat
the
Finishedestimated for Ltd while finance which purchase
purchased
outside.from the
purchased yeat units; storekeeper direct raw taw for
the yeat for manufactuing reports to materials budget
next the raw material shorter ofthe plan
for is A, material
and budget
not product, opening the plan period
the next 12,000 that material runs. its
year
given, and indirect business or
period budget tepresented purchases components
are
year. next budget against
14,000balances kg: the casts
Material A it includes
budget
.only as
000091 1.21,000 1,08,000 is B
product.. year materials, in by
12,000 13.000 kg...ss. units:15,000 his isthat defining
tollows
and
calculated he which
(B. atfiqures usually by enter to
Com. A, the expects the be
kg. Each finishedpurchase th e into manufact supplues
13.000 budqet Management
Accounting
as commencement
Hons. The as limited
under. unit to cash long
follows:
kindsTwo
sell
desirable
Delhi kg: of,the direct.materialqoods budget to
requirembased. is term ured l
Materic B B, 50,000
54,000 units 64,00
units10,00 units 14,00
units units
50,00 quautities
for withtie in be
1,63,000
15,00q
1,78,000 1,62000
J0016
ka Ad1pted)16,00 p.oduct specifies coitracts. teejved
closing of esale nts
units
kg. the in