Name : Diksha lamba

Budgeting
Meaning

Budget:
 A formal statement of the financial
resources set aside for carrying out specific
activities in a given period of time.· It helps to
co-ordinate the activities of the organization.
An example would be an advertising budget
or sales force budget.
Contd…

Budgetary control:
 A control technique whereby actual results
are compared with budgets.· Any differences
(variances) are made the responsibility of key
individuals who can either exercise control
action or revise the original budgets.
definition

 “According to Brown and Howard,

“Budgetary control is a system of controlling
costs which includes the preparation of
budgets, coordinating the departments and
establishing responsibilities, comparing
actual performance with the budgeted and
acting upon results to achieve maximum
profitability.” 
Zero base budgeting

 Zero Based Budgeting is a reverse approach

of traditional planning and decision
making with respect to budgeting.
 In traditional budgeting, managers begin by
reviewing the budget of the previous year
and make corrections (in revenue and
expenditures) based on performance
expectations.
Contd…
 Zero-based budgeting (ZBB) is a method of budgeting in
which all expenses must be justified for each new period.

The process of zero-based budgeting starts from a "zero

base," and every function within an organization is analyzed
for its needs and costs.

 Zero Based Budgeting, also called ZBB, is the process of

creating a budget from nothing without using the prior year’s
budget or spending numbers. No activities are assumed to
be untouchable. All expenses are judged and must be
justified in order to remain in the budget.
Definition of ZBB

 Devid Heminger has also explained ZBB as

  “a management tool which provides a
systematic method for evaluating all
operations and programme, current or new,
allows for budget reductions and expansions in
a rational manner and allows re-allocation of
resources from low to high priority
programmes”.
Advantages of ZBB

Zero Base Budgeting has some distinct advantages,

some of them are outlined below:
  The proposals for funds are strictly considered on merit
basis and funds are allocated on the basis of priority.

 This technique motivates managers to evolve cost

effective ways of performing jobs. New ideas also
emerge.

 Obsolete operations and wastages are identified and

eliminated.
Contd…

 Managers become aware of the value of inputs

helping them to identify priorities.

 Zero Base Budgeting is particularly useful in areas like

service departments where it is often difficult to identify
and quantity output.

 ZBB is useful especially for service departments where it

may be difficult to identify output.
ZBB (Advantages)

 This approach detects inflated budgets.

 Decision packages improve coordination

within the firm and strengthen communi­
cation between different departments
Contd…
 This approach increases the communication and
coordination within the organization about certain
decisions.

 This approach identifies opportunities for

outsourcing.
 This approach forces cost centres to link their
mission to the related organizational objectives.
Disadvantages of ZBB

  It is very expensive because the costs involved in

preparing a vast number of decision packages in a
large firm are very high.
 Since more managers are involved in this process
administration and communication of ZBB process
may turn complicated.
 Managers develop fear and feel threatened by
ZBB and, therefore, may oppose new ideas and
changes.
Contd…

 It involves a large amount of paper work and is

very time consuming.
 The ranking of decision packages and allocation of
resources is subjective to a certain degree that may
lead to departmental conflict.
Based on time

 Long-term Budget: The budget designed by

the management for a long-term, i.e. three
to ten years is called as long-term budget.
 Short-term Budget: As the name suggests,
the budget which is prepared for a period
ranging from 1 to 2 years, is called short-term
budget.
Based on capacity

 Fixed Budget: The budget created for a fixed

activity level, i.e. the budget remains
constant regardless of the level of activity, is
called as fixed budget.
 Flexible Budget: The budget which changes
with the change in the level of activity is a
flexible budget. It identifies the fixed cost,
semi-variable cost and variable cost, to show
the expected results at different volumes.
Based on scope

 Functional Budget: The budget which is

concerned with the business functions is
called as functional budget. It can be further
classified as:
▪ Sales Budget: Sales budget is used to determine the
quantity of anticipated sales and the expected selling
price per unit.
▪ Production Budget: It is prepared to indicate the
production for the specified period and is expressed in
the units of outputs produced.
Contd…

 Materials Budget: The budget prepared to

show the quantities of direct material and
raw material required to manufacture the
finished product.
 Purchase Budget: Purchase budget is
designed to estimate the quantity and value
of different items to be bought at different
points of time, considering the production
schedule and inventory required
Contd…

 Cash budget:
The budget highlights the cash
needed by the business in a specified period,
taking into account all the receipts and
payments of the business.
Contd…

 Master Budget: Once all the functional

budgets are created, then the financial officer
will prepare a master budget. It is an
integrated budget that reflects the estimated
profit and loss and financial position using
Budgeted Profit & Loss Account and
Budgeted Balance Sheet of the concern.
Based on Receipts and Expenditure

 Capital Budget: The budget takes into

account the estimated capital receipts and
expenditure of the business for a specified
period.

 Revenue Budget: The budget that covers all

the revenue receipts and expenses of a
particular financial year is a revenue budget.
Budgeting process