CHAPTER 2

BUDGETING AND
BUDGETARY CONTROL
Q.1. What is budgeting? Explain its advantages and limitations.
Ans. Meaning of budgeting. Budgeting is the process of preparing budgets. A
budget is "a predetermined statement of management policy during a given period
which provides a standard for comparison with the results actually achieved".
Advantages of budgeting, Budgetary control system provides the following
advantages:
() Budgetary control is a very effective and useful technique of control.
(i) It increases production efficiencies and aims at maximisation of profits
through planning and control.
(tin) It points out efficiency or, otherwise in respect of various business
activities.
(iv) Budgets provide yardsticks against which actual results are compared.
() Budgetary control makes useof the managerial principle of exception.
(vi) Budgeting coordinates the activities of various departments and sections
of the business.
(oii) Budgets perform the motivation function as a budget gives incentives to
staff for achieving budgeted resuits.
(viii) Budgetary control creates necessary conditions for successful operation
of standard costing system.
(ix) Budgeting creates the habit of planning in the minds of the employees.
(x) Budgeting ensures that the required cash and working capital is available
for smooth running of the business.
(xi) Budgetary control helps in formulating a balnced programme for
utilisation of available resources.
(xit) Budget serves as a communication device in the organisation as it
furnishes information to all the staff members.
Limitations of budgeting. Budgeting is a very effective tool of control used by
the management. But at the same time, it suffers from certain limitations, which
are:
() Budgets are based on estimates which are always subject to errors.
(22) Budgets are not panacea of all the ills of a business. Budgetary control
system plays only a limited role in controlling business activities.
9
10 Shiv Das [B.Com. (Prog.) CBCS]
DELHI
(i0) Budget is only a tool of UNIVERSITY SERIES
ment. Its usefulness
management
depends
persons using this techrique. upon .the not a substandituto
It is Chapter 2: BUDGETING
& BUDGETARY CONTROL
[2011
11

(iv) Budgetary efficiency objectives of budgetary control. budgets

(o) Budget system

control systen
organization. They may resistiayitsnotintroduction.
is an expenSIve
be accepted by all the
ment integi y Ans. Basic
describe any
Q.4. Brieflyobjectives
five
or functions
managerial
of Budgetary control.
functions:
perform the following first and the foremost function of a
Business
business budget is
detailed plans
business units. technique and is not affordsl. () Planning. The
planning the business activities. The budget draws up etc. With the
overheads
0. 2. Enumerate the purchases, labour,
steps involved in Budgetary relating to sales, production,performance, a business isable to implement
Ans. Steps in Budgetary Control: Control., implementation of planned
efforts of all the sections of
business.
(1) In the first step budgets are its policies by collective management through which
established for Coordination is a function of achievement of a common
each (ii) Coordination.
company.
(ii) Actual performance of eaacch department
department is compared with the
all sections of a business
goal. It is a process
Work towards the
whereby each subdivision works
as a harmonious
implies
of budgeting effective
performance. Planning function foundation
unit of the organisation.
(ii) The next step is to analyse the reasons for
and budgeted performance. the budge
difference between actua
coordination because planning
coordination.
function lays the for

budgets. Controi
widely known use of business
(iv) Suitable action is taken toremedy so that it (iüi) Control. This is the most budgeting implies systematic efforts aimed at
(o) Budgets are revised in view of the changes indoes not reoccrin future function in the context of
informed of predetermined plans and policies.
Q.3. Briefly explain the essentials of an effective
actual conditions keeping the managementfor corrective action to be taken wherever
there
budgetary control sysstem. It provides a mechanism from the planned performance. To
is a deviation of actual performance by exception'
Ans. Essentials of an Effective Budgetary Control System. In order to2007havea) exercise more effective control, principle of
'management
successful system of budgetary control, there must exist certain essentl is applied. of the
motivates the managers to achieve the goals
prerequisites. These are as follows: (iv) Motivation. A budget Company may give incentives for
() Support of top management. The entire budgetary system should have business laid down in the budget.
achieving the budgeted goals.
the support of the top m£nagemernt ike Board of directors, managing comparing actual performance against
director etc. (u) Performance evaluation. By of each emplovee can be
budgeted performance, the performance against those emnplovees
(t) Clear objectives. It is essential that the objectives to be achieved through evaluated. Corrective Action may be taken
may be motivated, coaxed to
budgets should be clearly stated. whose performance is poor and they
budgeted goals may be achieved.
(i) Participation by managers. Management should encourage partiipatton improve their performance so that success of Budgetary Control
for the
of all those who are affected by budgets ánd those who execute buag Q. 5. Discuss the steps necessary
(0) Realistic goals. Budgeted goals should be realisticand should represenit System in an organisation. of Budgetary Control System:
reasonably attainable targets. Ans. Steps for the success centre is a part of the
created. A budget
(v) Budget education. There should be a system of continuous education of (i) First of all, budget centres are
organisation for which a separate budget is prepared.
staff about the objectives and techniques of prepared to show the authority and
(vi) Cost of budgetary control system. The costbudgeting.
of the budget systemshould (i) Then an organisation chart ismembers dealing in budgets.
responsibilities of various staff
not be nore than the benefits received from the committees headed by the financial
system.
(vin) Maximisation of profit. Budgetary control system should be designed ()) Next step is to establish budget
controller as the budgetDirector.
help in achieving the objective of profit maximisation for the company. sets the responsibilities of
structure of (iv) Then budget manual is prepared which and budget policies.
(vii) Appropriate organisation structure. The procedures
persons engaged in the budgetngperiod i.e., the length of time for which
company must be clearly defined so thatorganisation
maximum
benefits canbe
(0) Next step is to decide the budget
derived from the budget various budgets will be prepared.
(ix) Regular reporting. Theresystem.
between factor i.e., which is the first
should be continuous comparison reguar (oi) The last step is to decide the principal budget
budgeted and actual data and variances should be reported on budget to be prepared.
budgeting and programme
basis. SYslem is Q. 6. Differentiate between pertormance 2013
(x) Coordination with
Standard Costing. Where preparedin budgeting
costing
also being used, the standard be
coordination with standardbudget
costs. programme
should
 12 Shiv Das [B.Com. (Prog.) CBCS] DELHIUNIVERSITY SERIES
Ans. Performance Budgeting. The tern performance budgeting was first used
by Hoover Commission in 1949 in the United States of America. Sometimes the
terms Programme Budget and Performance Budget are used synonymously.
Performance budgeting involves evaluation of the performance of a business in
terms of overallobjectives of the organisation. It is a programme of action for a
budget period specifying the tasksand the means of accomplishing these tasks. Jt
shows budgeted expenses classified by functions and activities. Performance
budgeting is based on prospective approach focussing on situation expected to
prevail during the budget period. It focuses on purposes, targets and products,
and lays nore emphasis on achievement of physical targets. Source of finance
dealing with each activity are also specified and budget report is required to be
submitted on the progress of physical work.
Performance budgeting is more often used in Government budgeting for the
purpose of development work. For example, a municipal authority may have a
programme of providing electricity or drinking water in a city. In performance
budgeting, evaluation will be done in terms of not only the amount-spent to
achieve these goals, but also the physical targets in terms of area covered by
electricity and drinking water during the budget period. Corrective action is
required to be taken if targets are not achieved.
Programme budgeting was introduced in the department of Defence in USA in
the year 1961. Programme budgeting is also known by the name of Planning
Programming Budgeting System (PPBS). It isa system to analyse expenditure
with reference toa particular objective but not by functions such as production,
sales, purchase etc. The system of PPBS is specially devised to effectively utilize
public funds by improved allocation of funds.
The main points of distinction between Programme budgeting and Performance
budgeting are:
(1) Programme budgeting is more relevant to the problems of top level
management while performance budgeting is relevant to the problems of
lower and middle level management.
(i1) Programme budgeting is concerned with the purpose of work while
performance budget is concerned with the process of work.
(iii) Programme bådgeting is basically concerned with planning while
performance budget is concerned with the measurement of performance.
0.7. What is a Budget Manual? What matters are included in it? (2014
Ans. Budget Manual. C.IM.A. London has defined a budget manual as "a
document which sets out the responsibilities for the persons engaged in the routine of and
this definition it is clear
the forms and records required for budgetary control". Fromduties and responsibilities
that a budget manual i_ a document which sets out the
budgetary control and also lays down the
of the managers in relation to
procedures and programmes of various budget activities.
What is included in a budget manual?
A budget manual includes the following matters:
() Various objectives of budget laid down. preparation
(ii) Various forms and procedures used in relation to budget
and control.
Chapter 2: BUDGETING & BUDGETARY CONTROL I 13
(ii) Duties and responsibilities of various staff members in relation to
budgetary control.
(iv) Time schedule of various budget activities and reporting time.
(u) Accounting methods to be used in relation to budgets.
(vl) Feedback and follow up procedures.
Q. 8. Distinguish between fixed and flexible budgets. 12010
Or
"Elexible budgets are more realistic and useful than fixed budgets." Do you
agree? Explain. [2007 (R)
Ans. Fixed Budget. Budgets are generally prepared keeping in mind a certain
level of activity as the goal. Furthe, all the functional budgets are also based on
this very planned level of activity. However, the actual level of activity is either
lower or higher than the budgeted figures and it becomes is quite meaningless
since these budgets refer to the two different levels of activity. So the budgeted
figures should also be adjusted or revised in accordance with the actual level of
activity.
Flexible budget. As opposed to a fixed budget, aflexible budget is a budget
which is designed to change in accordance with the level of activity actually
attained. This type of budget is more elastic, useful and practical. Such budgets
are very helpful for control purposes.
Preparation of aflexible budget is based on classification of the costs into fixed
and variable. First of all, a budget is prepared for a major level of activity. When
the actual level of activity is known, the allovwed cost is found by interpolating
between budgets of activity level on either side. For this purpose, it should be
noted that fixed costs remain constant at all levels of activity whereas variable
costs vary in direct proportion to the level of activity attained. Semi-fixed costs
for this purpose are also segregated into fixed and variable segments.
Q. 9. What is meant by Zero based budgeting? What are the essentials of
introducing a system of zero based budgeting? Explain in brief about the
drawbacks of this system. [2012
Ans. Zero Based Budgeting (ZBB). Zero Based Budgeting (ZBB) is an
alternative budget system in which while preparing budgets, previous year's
budget is not taken as base. Conventional budgeting in any organisation is mostly
done in such a way that each year, all departments are given a maximum amount
tospend. No justification is required on the part of any department for spending
the budgeted amount. This may be because the amount spènt might be equal to
last year's budget. The main disadvantage of such budgeting is that the
inefficiencies of the previous years creep into this year's budget. In such a
budget, justification is to be given only for new or additional funds required.
In ZBB, each item in the budget is required to be justified each year. In
presenting the budget, the manager of each department is asked to justify the
needs of the department according to his perception. The budget committee
considers the requests of all the departments and makes budget allocations
according to the available sources, A ZBB may be defined as a system whereby
each budget item, whether it is new or existing, has to be justified in its entirety,
each time anew budget is prepared. ZBB discards the attitude of accepting the
existing position blindly in tavour of questioning and challenging each itenm of
14 Shiv Das B.Com. (Prog.) CBCSI DELHI UNVERSITY SERIES Chapter 2: BUDGETING & BUDGETARY CONTROL 15
the budget. However, ZBB is a costly system of budgeting as requires high 0. 12. What are Business budgets? Discuss their functions.
volume of paper work. Ans, Numerous definitions of a budget have been given. Common to all the
Essentials of ZBB: definitions is the essential idea that the budget is a written plan covering
) Each budget is prepared afresh and historical date is not considered. projected activities of a firm for a definite period of time, expressed in
(i) Budgets are zero, unless a manager makes the case tor resources. This guantitative terms. According to, The Institute of Cost and Works Accountants of
means whole of the budget allocation has to be justified. Éngland "A budget is a financial and/or quantitative statement prepared prior to a
(ii) Departmental objectives are linked to corporate goals. defined period of time of the policy to be pursued during that period for the purpose of
(io) Each activity is questioned as if it were new þefore any resources are attaining a given objective".
allocated to it. An analysis of this definition will reveal the following features of a budget.
(v) A detailed cost benefit analysis of each budget programme is undertaken A budget may be expressed in terms of money or quantity or both.
and each programme has to compete for scarce resources. Abudget should be developed prior to the period during which it is to
(vi) ZBB are designed to prevent budget creeping up each year with inflation. operate.
Drawbacks of ZBB. t is prepared for a definite period.
() ZBB is a complex and time-consuming process. Before preparing a budget the objectives to be attained and the policy to
(a) ZBB leads to tremendous increase in paperwork and results in higher be pursued to achieve those objectives are required to be definitely laid
down.
cost of budgeting. Thus, we can say that budgeting lays emphasis on the necessity for advance
(un) In ZBB, short term benefits may be emphasized to the detriment of long decision on the future course of action to be followed, and it points out the result
term planning. which will accrue by following aparticular course of action.
(io) For preparing ZBB, there needs to be arn expert budget director and Functions of Budgets:
departmental managers who prepare the budgets need to be given () Planning. The first and the foremost function of a business budget is
proper training and education regarding the new concepts of ZBB. plan'ing the business activities. The budget draws up detailed plans
(o) An organisation may be affected by internal politics and it may result in relating to sales,production, purchases, labour,overheads etc. With the
annual conflicts over budget allocation. implementation of planned performance, a business is able to implement
Q. 10. Write short notes on Master Budget. [2013 (Nov.) its policies by collective efforts of all the sections of business.
Ans. Master Budget. This budget is prepared when sales budget, purchase (i1) Coordination. Coordination is afunction of management through which
budget, production budget and all other departmental budgets, have been. all sections of abusiness work towards the achievement of a comnon goal.
prepared. AIl these departmental budgets are prepared into a summary and such It is a process whereby each subdivision works as a harmonious unit of the
a summary is called a Master Budget. Amaster budget is defined as a summary organisation. Plarining function of budgeting implies coordination
because planning function lays the foundation for effective coordination.
budget, incorporating all its functional budgets, which is finally approved and (iii) Control. This is the most widely known use of business budgets. Control
adopted. Such a budget is not a detailed budget but contains the basic data function in thecontext of budgeting implies systematic efforts aimed at
relating to each of the budgets ike sales budget, material purchase budget, keeping the managemernt informed of predetermined plans and policies. It
production budget, production cost budget, cash budget etc. Once a master provides a mechanism for corrective action to be taken wherever there is a
budget is prepared, it is approved by the Budget Committee and put into deviation of actual performance from the planned performance. To
operation. exercise more effective control, principle of management by exception' is
Q. 11. Distinguish between Budget and Forecast. applied.
Ans. Difference between Budget and Forecast (iv) Motivation, A budget motivates the managers to achieve the goals of the
Budget Forecast business laid down in the budget. Company may gìve incentives tor
1. Budget is a plan of action. 1. Forecast is a prediction. achieving the budgeted goals.
(v) Performance evaluation. By comparing actual performance against
2. Only the authorised management 2. Anybody can make a forecast budgeted perfornmance, the perfornmance of each enplovee can be
-of the company can prepare about a company's performance. evaluated, Actions may be taken against those employees whose
budget of the company. performance is poor and they may be warned to improve their
3. Budget is expressed in terms of 3. Forecast is not always expressed in performance so that budgeted goals may be achieved.
amount to money or quantities. terms of amount of money or Q. 13. Write short note on Sales Budget.
quantities. Ans, Sales Budget. A sales budget of an enterprise is one of the various
functional budgets prepared by it. But a sales budget is so important that it is
 UNIVERSITY SERIES
16 Shiv Das (B.Com. (Prog.) CBCS] DELHI
o.,
called the foundation of almost all the other functional budgets. Much
success of the other budgets depends on the accuracy of the sales budget. The
sales budget forecasts what the enterprise expects to sell, say in terms of quant
and value during the forthcoming budget period. Actually, preparation of t
product
sales budget is a very difficult process. Sales budgets are prepared
area-wise or salesman or territory-wise or customer-wise.
It is usually the Sales Manager who is responsible for the preparation of th
Sales Budget. The past sales, market conditions, advertisement campaigne
budgets.
salesmanship, etc. are the factors which affect the sales
Q. 14. What is a Cash Budget? What are its objectives?
Ans. Meaning of a Cash budget. A cash budget is an estimate of anticipated
shows thel
cash receipts and cash payments during a given future period. It also budget is
estimated cash balance or shortage at the end of the period. Cash
cash
generally prepared on monthly basis because it is very difficult to estimate
a short
receipts and payments on a long-term basis. Therefore, cash budget is
term budget..
Objectives of a Cash budget:
(i) This budget ensures that cash is available to meet all the obligations of
the company in time.
(ii) A company, which is expecting a shortage of cash, can arrange cash loans
in advance.
(i) A company, which is expecting cash surplus, can plan to invest thel
amount in some profitable channels.
(io) Cash budget provides a support to the financialmanagement.
(o) On the basis of cash budget, a company may be in position to know
whether capital expenditure can be financed internally or not.
Q. 15. Write short note on Performance Budgeting.
Ans. Performance Budgeting, The term performance budgeting was first used
by Hoover Commission in 1949 in the United States of America. Sometimes the
terms Programme Budget and Performance Budget are used synonymously
Performance budgeting involves evaluation of the performance of a business in
terms of overall objectives of the organisation. It is a programme of action for
budget period specifying the tasks and the means of accomplishing these tasks.
shows budgeted expenses classified by functions and activities. Performance
budgeting is based on prospective approach focussing on situation expected to
prevail during the budget period. It focuses on purpose, targets and products
and lays more emphasis on achievement of physical targets. Sources of finance
dealing with each activity are also specified and budget report is required to be
submitted on the progress of physical work.
Performance budgeting is more often used in Government for the purpose ol
development work. For example, a municipal authority may have a programnme o
providing electricity or drinking water in a city. In performance budgeting
evaluation will be done in terms of not onlythe amount spent to achieve these
goals, but also the physical targets in terms of area covered by electricity and
drinking water during the budget period. Corrective action is required to b
taken if targets are not achieved.