Module No 5; Budgetary Control

Introduction
Budget

A budget is quantitative expression of business plans and policies to be pursued in the future
period of time. It is also called as estimation of income and expenditure for a given period of
time. According to CIMA “ A budget is financial or quantitative statement prepared prior to a
defined period of time , of the policy to be pursued during that period for the purpose of
attaining a given objectives.”

Budgeting

Budgeting is a technique for formulating budgets. It is the process of financial documents that
estimates incomes and expenses of for a given period.

Budgetary control

Budgetary control is the process of determining various budgeted figures for the organization
for the future period and then comparing the budgeted figures with the actual performance for
calculating variances. According to Brown and Howard budgetary control is a system of
controlling costs which includes the preparation of budgets, coordinating the department and
establishing responsibilities, comparing actual performance with the budgeted and acting upon
results to achieve maximum profitability.

Objectives of budgetary control

1. To ensure planning for future by setting up various budgets

2. To co-ordinate the activities of different departments
3. To operate various cost centers and departments with efficiency and economy
4. To eliminate the wastage and increase Profit ability
5. To anticipate capital expenditure for future
6. To centralise the control system
7. To correct the deviations from the established standards
8. fixation of responsibility of various individuals in the organization.

Essentials of budgetary control

1. Organisation for budgetary control; the proper organization is essential for successful
preparation, maintenance and administration of budgets.
2. budget centers; is that part of the organisation for which the budget is prepared it may be
a department section of a department or any other part of the department,
3. budget manual- it is a document which gives or a contains the duties and their
responsibilities of the various executives concerned with the budget
4. Budget officer - is the chief executive who is at the top of the organization.
5. budget committee the accountant is made responsible for preparation and
implementation of budgets in the organization
6. budget period it is the length of time for which budget is prepared normally one financial
period
7. Determination of key factors -these budget are interdependent and interrelated. the
proper coordination is essential for its success. factor which influences all other budgets is
known as key factor.

Advantages of budgetary control

1. Maximization of profit ,
2. Coordination
3. Tool for measuring performance
4. Economy
5. Determining weaknesses
6. Corrective action
7. Consciousness
8. Reduces cost
9. Introduction of incentive schemes

Limitations of budgetary control

1.Uncertain future
2. budgetary revisions required
3. Discourages efficient person
4.Problems of coordination
5. Conflict among different departments
6. Depends upon support of top management

Classification and types of budget

A. Classification according to time

1. long term budget –these budgets are prepared to depict long term planning of the
business. the period varies between 5 to 10 years
 2. Short term budget- these budgets are for one or two years period and are in the
form of monetary terms
3. Current budgets -the period of current budget is generally of months and weeks
These budgets relate to the current activities of the business
B. Classification on the basis of functions
1. Operating budget -.this budgets relate to the different activities or operations of a
firm it includes sales budget, production budget, production cost budget, purchase
budget, raw material budget, labour budget, plant utilization budget ,works over
head budget ,administrative and selling expenses budget
2. Financial budget- it's concerned with cash receipts and disbursements working
capital, capital expenditure financial position and result of business operations.It
includes cash budget ,working capital budget ,capital expenditure budget ,income
statement budget, statement of retained earning budget, budgeted balance sheet
3. master budget- various functional budgets integrated into main budget called
Master budget .The master budget is the summary budget incorporating its
functional budget
C Classification on the basis of flexibility
1. fixed budget- Fixed budget are prepared for a given level of activity . this is a budget
which is designed to remain unchanged irrespective of the level of activity actually
attained.
2.flexible budget -it consist of series of budget for different level of activity . It there for
varies with the level of activity attained.
Cash budget-It is an estimate of cash receipts and payments. During a future period of time. It
is an analysis of flow of cash in a business over a future , short or long period of time.

Problems

1. From the following information prepare a cash budget for 3 months ending 30/09/2021

Months sales purchase wages expenses

June 200000 130000 20000 10000
July 150000 140000 30000 10000
August 250000 160000 20000 15000
september 220000 180000 15000 15000
Additional information
1,Opening cash balance on 1 st July is rupees 60000
2 Debtors ( credit sales) pays in the month of following the month of sale
3 Creditors( purchases) are paid in the month following a month of purchase
4 expenses are paid in the same month assumed that wages are paid on the monthly basis
on the first of very next month

2. ABC company Limited wishes to arrange overdraft facilities with its bankers during the
period April to June 2021 when it will be manufacturing mostly for tax .prepare a cash
 budget for the above period from the following data in indicating the extent of the bank
facilities the company will be requiring at the end of each month.

Particulars 2021 Sales Purchase wages

Feb 180000 124800 12000
March 192000 144000 14000
April 108000 243000 11000
May 174000 246000 10000
June 126000 268000 15000

Additional information
1. 50% of credit sale are realised in the month following sales and the remaining 50% in the
second month following
2. Creditors are paid in the month following the month of purchase
3. Estimation of cash at Bank on 1/4/21 is rupees 50000

3 A newly formed company desire to prepare a cash budget for 4 months from March to June .
the following information is available.

Months sales purchases wages overheads

Jan 20000 20000 4000 4000
Feb 22000 14000 4400 4200
March 28000 14000 4600 4300
April 36000 22000 4600 4500
May 30000 20000 4000 4100
June 40000 25000 5000 4800
Additional information
1.Cash balance on 1/3/2021 Rs 10000
2 New machinery is to be installed at a cost of rupees 20000 in the month of February which is
to be paid in 2 equal installments in March and April
3. Rs 12000 is to be collected in March as second call money
4.Period of credit allowed by creditors is 2 months and allowed to customer is one month
5. 50% of sales and purchase are for cash
6. Delay in payment of wages 1/2 month
7. Overheads are paid in the same manner.