Budget

By Debayan Ray
 What is budget?
• It’s a plan covering all phases of operations for
definite periods in the future.
• It is a formal expression of plan, policies,
objective and goals laid down in advance by
the top management for the concern as a
whole.
FORECAST AND BUDGET
 Budgetary control
• This process involve use of budgets and
budgetary reports throughout the periods of
budgets to co-ordinate evaluate and control
day to day operation in accordance with the
goals specified by the budgets.
• It involves constant checking and evaluation of
actual results compared with the budgetary
goals.
Definition of budget and budgeting
 Difference between budget and
budgeting and budgetary control
• Budgets are individual objectives of a
departments.
• Budgeting may be defined as a act of setting
budgets
• Budgetary control include all and include the
science of planning the budgets themselves
and utilization of such budgets as a overall and
wider management tool for the business
planning and control.
 Objective of budgetary control
• To compare with planning
• To communicate idea and planning
• To co-ordinate the activities
• To establish a system of control
• To motivate employee
• To communicate with all
• To control whole activity
 Advantage of budgetary control
• It defines the objective of a organization as a whole
and within this overall framework it defines the results
which each departments should achieve.
• It reveals that the extent by which actual result have
exceed or fallen short of the budgets.
• It provide some centralized control in an organization
• It indicate the efficiency with which the various
activities of a org have been co-ordinate.
• As a result of reporting on actual performance along
with variances and other performances, it provide
basis of guidelines for execution actions to correct
adverse trends.
Advantage of budgetary control
 Limitation of budgetary control
• Danger of inaccurate estimates
• Expensive
• Human factor
• Time consuming
• No substitute for efficient management
• Danger of over budgeting
• Hide Inefficiencies
 Essentials of effective budget
• 1) Support of top management:
• 2) Team Work:
• 3) Realistic Objectives:
• 5) Structure of Budget team:
• 6) Well defined Business Policies:
• 7) Integration with Standard Costing System:
• 8) Inspirational Approach:
An organizational chart is a statement defining functional
representatives of executives responsible for accomplishment
of organizational objectives.
Classification of Budget
Classification of Budget
 Rolling budgets
• A rolling budget is a twelve month budget which is
prepared several times each year (say once each
quarter). The purpose of a rolling budget is to give
management the chance to revise its plans, but
more importantly, to make more accurate
forecasts and plans for the next few months.
When rolling budgets are used, the extra
administration costs and effort of producing
several budgets instead of just one, should be
balanced with more accurate forecasting and
planning.
 The advantages associated with the
use of rolling budgets are
• Budgets are reassessed regularly and thus
should be more realistic and accurate.
• Because rolling budgets are revised regularly,
uncertainty is reduced
• Planning and control is based on a recent
updated plan.
• The budget is continuous and will always
extend a number of months ahead.
 The disadvantages are
• Rolling budgets are time consuming and
expensive as a number of budgets must be
produced during the year.
• The volume of work required with each
reassessment of the budget can be off putting
for managers.
• Each revised budget may require revision of
standards or stock valuations which is time
consuming.
Classification of Budget on the basis of function
Cash Budget
 Different terms in budget

• Budget Center – It’s a department in a

organization identified and separated from rest of
the organization for budgetary control and it have
responsibility to prepare budgets for coming years.
• Budget Manual – It’s a document which assists
everyone engaged in budgeting and budgetary
control.
 Different terms in budgets
• Budget Committee – It’s a committee which
frequently established for coordinating and
reviewing budgets program me.
• Budget Period: “the period for which a budget is
prepared and used, which may then be sub-divided
into control periods”.
• Budget Key Factor- a factor which will limit the
activities of an undertaking and which is taken into
account in preparing budgets”
• Budget Reports: - In brief, a budget report is a
comparison of the actual with the budgets both for
the month and cumulative up to the current month.
Format of budget report
 Zero Base Budgeting:
• The ‘Zero-Base’ refers to a ‘nil-budget’ as the
starting point. It starts with a presumption that
the budget for the next period is ‘zero’ until the
demand for a function, process, or project is not
justified for single penny. The assumption is that
without such justification, no expenditure will be
allowed. In effect, each manager or functional
head is required to carry out cost-benefit analysis
of each of the activities, etc. under his control and
for which he is responsible.
• The method of ZBB suggests that the business
should not only make decision about the
proposed new programmed but it should also,
regularly, review the suitability of the existing
programmed. This approach of preparing a
budget is called incremental budgeting since the
budget process is concerned mainly with the
increases or changes in operations that are likely
to occur during the budget period.
• This method for the first time was used by the
Department of Agriculture, U.S.A. in the 19th
century.
 Definition of ZBB
• "ZBB is a management tool, which provides a
systematic method for evaluating all
operations and programmes, current or new,
allows for budget reductions and expansions
in a rational manner and allows re-allocation
of sources from low to high priority program-
mes."
• ZBB is a planning, resource allocation and control
tool. It, however, presupposes that
(a) There is an efficient budgeting system within
the enterprise
(b) Managers can develop quantitative measures
for use in performance evaluation.
(c) Among the new suggestions and programmes,
along with old ones are put to a strict scrutiny.
(d) Funds are diverted from low-priority
suggestions to high priority suggestions.
Procedure of Zero-base Budgeting:
• Determination of the objective:
• Degree at the ZBB is to be introduced:
• Growth of Decision units:
• Growth of Decision packages:
• Assessment and Grading of decision packages:
• Allotment of money through Budgets:
 Advantages:
• ZBB rejects the attitude of accepting the current
position in support of an attitude of inquiring and
testing each item of budget.
• It helps improve financial planning and management
information system through various techniques.
• It is an educational process and can promote a
management team of talented and skillful people
who tend to promptly respond to changes in the
business environment.
• It facilities recognition of inefficient and unnecessary
activities and avoid wasteful expenditure.
• Cost behavior patterns are more closely examined.
• Management has better elasticity in reallocating
funds for optimum utilization of the funds.
 Disadvantages:
• 9 It is an expensive method as ZBB incurs a huge cost
every in its preparation..
• It also requires high volume of paper work, hence
sometimes it becomes a tedious job.
• In ZBB there is a danger of emphasizing short-term
benefits at the expenses of long term ones.
• This is not a new method for evaluating various
alternatives, and cost-benefit analysis.
• The psychological effects can also not be ignored. It
holds out high hopes as a modern technique,
claiming to raise the profitability and efficiency of the
business.
 Type of budgets
• Master budgets – The master budgets is
summary budgets incorporating its
components functional budgets.
• Functional budgets – it’s a budgets which
relates to specific function of the business.
• Financial Budgets – It’s a budgets which
summaries the total package of a begets in
terms of money.
 Type of functional budgets
• Sales budgets
• Selling expenses budgets
• Distribution expenses budgets
• Purchase budgets
• Marketing budgets
• R and D budgets
• Production budgets
 Type of financial budgets
• Cash Budgets
• Budgets profit and loss
• Budgeted balance sheet
• Budgeted fund flow and cash flow statement
• Capital Budgets
Example of production Budget
Illustration – 1 - From the following particulars prepare a
purchase budget for the year 2001 when the estimated price
per kg of material is : A – Rs. 1, B – Rs 2, and C – Rs. 3
Materials Estimated consumption of material (in Kg)
A 2,00,000
B 3,00,000
C 4,00,000

Estimated stock (in Kg)

On 1.1.2001 On 31.12.2001
A 20,000 25,000
B 40,000 30,000
C 50,000 40,000
Solution – Production Budget for material for the year
ending on 31.12.2001

Materials
Particulars
A KG B KG C KG

Estimated consumption 2,00,000 3,00,000 4,00,000

Add: Closing stock of materials 25,000 30,000 40,000
2,25,000 3,30,000 4,40,000
Less Opening stock of material 20,000 40,000 50,000
Purchase of raw material 205,000 2,90,000 3,90,000
Estimated price per KG 1 2 3
Budgeted purchase ( quantity X Price 2,05,000 5,80,000 11,70,000
per KG)
 Practical Problems in budgets
2. Sales director of a manufacturing company reports that next year he
expect to sale 58000 unit of a certain product. The production
manager consult the store keeper and cast its figure as follows:
Two kind of raw material A and B required for manufacturing the
product. Each unit of unit of the product required 2 units of A and 3
units of B. The estimated opening balance in the commencement of
the year
Finished product 10,000 Units.
A 12,000 Units.
B 15,000 Units.
The desirable closing balance at the end of the next year are :
Finished product 10,000 Units
A 13,000 Units
B 16,000 Units
Draw a quantitative chart showing the material purchased budget for
the next year.
 Material Purchase budget for the year
Solution - Material A Material B
(Units) (Units)
Material Required :
A (58,000x2) 1,16,000
B (58,000x3) 1,74,000
Closing balance 13,000 16,000
1,29,000 1,90,000
Opening Stock (12,000) (15,000)
Budgeted Purchase (In Units) 1,17,000 1,75,000
P – 3 Prepare a production budget for each month and a
summaries production cost budgets for the six months ending 31 st
December 2016 From the following data of product “X”
The units to be sold for different months are as follows:
Months Units
July 2017 1,100 October 2017 1,900
August 2017 1,100 November 2017 2,500
September 2017 1,700 December 2017 2,300
January 2018 2,000

• There will be no work in progress at the end of the month

• Finished unit equal to half of sales for the next month will be in
stock at the end of the each month (including, 2016)
• Budgeted production and production cost for the year ending
2016 are as follows
• Production (Units) - 22,000
• Direct Material Per Units 10/ unit
• Direct Wages Per Units – 4 / unit
• Total Factory overhead Apportioned to product - 88,000
Solution - Production budgets (In Units ) for 6 month ended 31st December 2016
July August Sept Oct Nov Dec Total
Sales 1100 1100 1700 1900 2500 2300 10600
Closing stock 550 850 950 1250 1150 1000 1000
Total 1650 1950 2650 3150 3650 3300 11600
Opening stock (550) (550) (850) (950) (1250) (1150) (550)
Production (In Unit) 1100 1400 1800 2200 2400 2150 11050

Summaries production cost budgets for next 6 months ended 31st Dec 2016
Production (units) 11,050
Unit Cost Total Cost
Direct Material 10.00 1,10,500
Direct Wages 4.00 44,200
Factory Overhead 4.00 44,200
Illustration - 4
Illustration - 5
Note -
 Problem Cash Budget
• Prepare Cash Budget of a Company for April, May and June 2019 in a
columnar form using the following information:
• You are further informed that:
(a) 10% of purchase and 20% of Sale are for
cash
(b) The average collection period of the Co. is
1/2 month and credit purchase is paid off
regularly after one month
(c) Wages are paid half monthly and the rent
of $500 excluded in expense is paid monthly
(d) Cash and Bank Balance on April 1, was
$15,000 and the company wants to keep it on
end of every month below this figure, the
excess cash being put in fixed deposits.
Solution - Cash Budget – 2019:
 Illustration – 6
Prepare a cash budget of M/s Novan Television & Co.
on the basis of the following information for the first
six months of 2014:
• (a) Cost and prices unchanged.
• (b) Cash sales - 25% and credit sales - 75%.
• (c) 60% of credit sales are collected in the month
after sales, 30% in the second month and 10% in the
third. No bad debts are anticipated.
Sum continued
Sum continued
Note: It is assumed that the company will maintain cash balance of 4,00,000 as in the
beginning of the budget period, resorting to borrowing, if necessary. The company
could also place substantial amounts on short duration deposits, of 15 to 30 days
during the first three months.
Solution
Illustration 7
Sum continued
Problem - From the following information prepare a monthly
cash budget for the three months ending 31st Dec.2019.
Additional information :
(i) Credit terms are:
(a) Sales — 3 months to debtors. 10% of sales are on cash. On an average,
50% of credit sales are paid on the due dates while the other 50% are
paid in the month following
(b) Creditors for material — 2 months.
(ii) Lag in payment: Wages. 1/4 month, overheads — 1/2 month.
(iii) Cash and Bank Balance on 1st Oct. expected $1,500.
(iv) Other information
(a) Plant and Machinery to be installed in Aug. at a cost of $24,000. It
will be paid for by monthly installments of $5,00 each from 1st Oct.;
(b) Preference share dividend @ 5% on $50,000 are to be paid on 1st
Dec.
(c) Calls on 250 equity shares @ $2 per share expected on 1st
November;
(d) Dividends from investments amounting to $250 are expected on 31st
Dec.;
Working Note
 Working Note

• Wages Calculation
• 1/4 wages of September and 3/4 wages of
Oct. Thus,
• (1/4 x 750) = 187.50
3/4 x 800 = 600
Total = 787.50
• The wages of other months will be calculated
on the same pattern.
Illustration – Production budget (in units ) and purchase budget ( in unit
and cost )
Estimates of a company for 8 months ending 31st December, 2011 are as
follows :
Months April May June July August September October November

Estimated 16,000 20,000 24,000 16,000 14,000 20,000 26,000 30,000

Sales

As a matter of policy company maintained closing balance of finished goods

and raw material as follows
Closing stock of finished goods - 50% of estimated sales for the next
month
Raw material estimated consumption for the next month. Every unit of
production require 2 KG of materials costing Rs 10 per kg.
Prepare :
I) Production Budget ( in Units)
II) Raw material purchase budget ( in units and cost) of the company for the
period ending 30 September, 2011.
 Solution
Months(1) Sales Closing Balance = 50% of Opening Production
(Units) the estimated sales in the stock(4) 5= 2+3-4
(2) next month (3)
2011
April 16,000 50% of 20,000 = 10,000 8,000 18,000
May 20,000 50% of 24,000 = 12,000 10,000 22,000
June 24,000 50% of 16,000 = 8,000 12,000 20,000
July 16,000 50% of 14,000 = 7,000 8,000 15,000
August 14,000 50% of 20,000 = 10,000 7,000 17,000
September 20,000 50% of 26,000 = 13,000 10,000 23,000

Please note that

i) Opening stock of April = Closing stock of March = 50% sales of next
month (i.e. April ) = 50% of 16,000 = 8000 Units

ii) Closing stock of any month = Opening stock of next month

 Raw material purchase budget for 6
months ending 30.6.2011
Months Unit of Consumption Closing Opening Purchase Rate Amount
production balance balance
1 2 3 4 5 (3+4-5) 7 8

April 18,000 18,000 x 2= 36,000 44,000 36,000 44,000 10 4.40.000

May 22,000 22,000 x 2 =44,000 40,000 44,000 40,000 10 4.00.000
June 20,000 20,000 x 2= 40,000 30,000 40,000 30,000 10 3.00.000
July 15,000 15,000 x 2 = 30,000 34,000 30,000 34,000 10 3.40.000
August 17,000 17,000 x 2 = 34,000 46,000 34,000 46,000 10 4.60.000
September 23,000 23,000 x 2 = 46,000 46,000 46,000 46,000 10 4.60.000
24,00,000

Note - Production for October

= 26,000 + 50% of 30,000-13,000
= 28,000
Consumption = 33,000 x 2 = 66,000