Budgeting And

Budgetary
Control System
 Budgeting
• A financial and/or quantitative statement,
prepared and approved prior to a defined
period of time, of the policy to be pursued
during that period for the purpose of
attaining a give objective. It may include
income, and the employment of capital.
 Budgeting
• One of the primary objectives of management
accounting is to provide useful information to
management for planning and control.
• Budgeting acts as a tool for both planning and control.
• Budgeting is a formal process of financial planning
using estimated financial and accounting data.
• Forecasting is a process of predicting or estimating
future happening.
• Forecasting is an essential part of the budgeting
process.
 Features Of A Budget
• One-year Duration
• Estimation of Business Unit’s Profit Potential
• Appraisal of Performance
• Monetary Terms
• Alteration of Approved Budget Under Specific
Conditions
• Review and Approval by Higher Authority
• Managerial Committee
 Role Of A Budget Officer
The Budget Committee acts through the Budget
Officer whose responsibilities include the
following: 
• Functional Budget Preparation
• Communication to Responsibility Centres
• Co-ordination
• Follow-up
• Budget Committee Review
• Board Review
 Steps Involved In
Preparation Of Budgets
• Definition of Objectives
• Identification of Key Factor
• Budget committee and controller
• Budget Manual
• Budget Period
• Standard of Activity
Elements Of Successful Budgeting Plan
• Forecasting is an integral part of budgeting
process
– Accurate Forecasting of Business Activities
– Coordinating Business Activities
– Communicating the Budgets
– Acceptance and Cooperation
– Reasonable Flexibility
– Providing a Framework for Evaluation
 Budget Centres
• An organization is usually broken down into
different budget centres for administrative
and control purposes.
• CIMA’s definition ‘a section of the
organization of an undertaking defined for the
purposes of budgetary control.’
• Separate budgets are prepared for each
section of the organization.
 Budget Manual
• Budget manual is a document of schedules
which shows in written form the procedures
to be followed for budgeting activities.
• A copy of the manual is given to each
departmental head for guidance.
 Fixed Budgeting
• A fixed budget is the budget which is designed to
remain unchanged irrespective of the level of
activity actually attained.
• It is based on a single level of activity.
• A fixed budget performance report compares
data from actual operations with the single level
of activity reflected in the budget.
• However, in practice, fixed budgeting is rarely
used.
• The main reason is that actual output is often
significantly different from the budgeted control.
 Flexible Budgeting
• It is a budget, which by recognizing the
difference between fixed, semi-variable, and
variable costs, is designed to change in
relation to the level of activity.
• A flexible budget is prepared for a range, i.e.
for more than one level of activity.
• It is a set of alternative budgets to different
expected levels of activity.
Characteristics Of Flexible Budgets
• Cover a range of activity
• Dynamic in nature
• Facilitate performance measurement
 Functional Or Operating Budget
• Broad Categorization
– Physical Budgets
– Cost Budgets
– Profit Budgets
– Financial Budgets
• Budgets provide information in terms of
physical units and cost information
 Functional Or Operating Budget
• Commonly Used
– Sales Budget
– Production Budget
– Plant Utilization Budget
– Direct Material Usage Budget
– Purchase Budget
– Direct Labour Budget
– Selling Costs Budget
– R & D Budget
– Capital Expenditure Budget
 Steps Involved In Preparation
Of Operating Budgets
• Sales Budget
• Production Budget
• Direct Labour Budget
• Direct materials usage budget
• Direct materials purchase budget
• Factory overhead budget
• Inventory budget
• Cost of goods sold budget
• Budgeted profit and loss statement
• Budgeted balance sheet
 Rolling Budget
• A rolling budget is a budget which is
continuously updated by adding a further
period, say a month or a quarter, and
deducting the earliest period.
• It is also known as continuous budgeting.
• The environment is full of risk and
uncertainty. Rolling Budgets help to overcome
this problem.
 Cash Budget
• Cash budgets are a tool for forecasting short-
term cash requirements of a firm.
• They provide a blueprint of the cash inflows
and outflows that are expected to occur in the
immediate future.
• They assist the management in determining
the surplus or shortage of funds.
 Budgetary Control System
• Budgetary control is a systematic and formalized
approach for accomplishing the planning,
coordination, and control responsibilities of
management.
• CIMA, - ‘Budgetary control is the establishment
of budgets relating the responsibilities of
executives to the requirements of a policy and
the continuous comparison of actual with
budgeted results either to secure by individual
action the objective of that policy, or to provide a
basis for its revision.’
 Prerequisites
• Top Management Support
• Proper Organizational Structure
• Realistic Nature of Goals
• Flexibility
• Participative Process
• Conducive Environment
 Features
• Objectives
• Activities
• Plans
• Performance Evaluation
• Control Action
 Objectives
• Definition of Goals
• Defining Responsibilities
• Basis for Performance Evaluation
• Optimum use of Resources
• Co-ordination
• Planned Action
• Basis for Policy
 Advantages
• Efficiency
• Cost Control
• Performance Evaluation
• Standard Costing and Variance Analysis
• Policy Formulation
 Limitations
• Estimates
• Rigidity
• False sense of Security
• Lack of Co-ordination
• Time and Cost
 Zero-Base Budgeting
• Zero-base budgeting (ZBB) is an expenditure
control device where each divisional head has
to justify the requirement of funds for each
head of expenditure and prepare the budget
accordingly, without reference to the past
budget or achievements.
 Features
• Holistic
• Analytical
• Priority Based
• Review Based
• Rational
 Modus Operandi
• Objectives
• Coverage
• Decision Areas
• Ranking
• Budgeting
 Advantages
• Priority Allocation
• Maximum Efficiency
• Cost-Benefit Analysis
• Goal Congruence
• Management by Objective
 Limitations
• Lack of Co-ordination
• Old-is-gold Attitude
• Time Consuming
 Activity-Based Budgeting
• Activity-based budgeting applies activity-based
costing principles to budgeting.
• It focuses on the numerous activities necessary
to produce and market goods and services.
• Activity-based budgeting is a useful anticipatory
control device, because it estimates the usage
and costing rates of drivers before costs are
locked in.
• Activity-based budgeting is a planning and
control system which seeks to support the
objective of continuous improvement.
 Life-Cycle Budgeting
• Life-cycle budgeting adopts a life-cycle cost approach.
• Life-cycle budgeting emphasizes the relationships
among costs incurred at different value-chain stages.
• Accordingly, whole-life cost is a concept closely
associated with life-cycle cost.
• Whole-life cost equals the life-cycle cost plus after-
purchase costs.
• Attention to the reduction of all elements of whole-life
costs through analysis and management of all value-
chain activities is a powerful competitive tool.
• Life-cycle and whole-life cost concepts are associated
with target costing and target pricing.
 Kaizen Budgeting
• The Japanese term kaizen means continuous
improvement, and kaizen budgeting assumes the
continuous improvement of products and
processes, usually by way of many small
innovations rather than major changes.
• Kaizen budgeting is based not on the existing
system but on changes yet to be made, and
budget targets cannot be reached unless those
improvements occur.
• A kaizen budget may also relate to the product
life cycle concept.
 Planning, Programming And
Budgeting System
• PPBS is used in nonprofit or non-commercial
organizations to enable them to make more
informed decisions about resource allocation.
• PPBS differs from traditional non-profit and
non-manufacturing budgets
• In PPBS, budgets for line or functional items
for whole department are not presented.
Instead, the expenses associated with specific
programmes are detailed.
 Stages
• Identify and define the objectives of
programme.
• Select performance or output measures.
• Identify and evaluate alternative methods of
achieving the objectives
• Select the appropriate programmes on the
basis of cost-benefit
• Implement the selected alternative and
monitor its performance
 Advantages
• Leads to more effective allocation of
resources
• Compels the management for evaluation
• Provides adequate information to
management
• Helps management to consider long-term
perspective
 Government Budgeting
• Governmental budgeting differs from private-
sector budgeting.
• A governmental budget is a legal document
adopted in accordance with procedures
specified by applicable laws.
• A governmental budget must be complied by
the administrators of the governmental unit
for which the budget is prepared.