BUDGETING

BUDGET

• “A budget is a financial statement prepared prior

to a predetermined period of time of the policy

to be perused during that period for the purpose
of attaining a given objective.”

-I.C.M.A., London
 Features of Budget

• Prepared for a definite future period.

• Quantitative terms

• definite objective or target.

• States the plans and policies of the

management
• Measuring the success of actual results.
 Budgeting

Budgeting is a part of management process which includes

 preparation of budget,

 budget control,

 budget co-ordination and all those activities that are

related with budget.

 Budgetary control

 Budgetary control is a system which uses budgets as a

means of planning and controlling all aspects of producing
and/or selling commodities or services.
 Objectives of Budgetary Control

 Policy formulation on the basis of proper and reliable

data.

 Planning for future by setting up various budgets.

 To determine short-term and long-term financial and

physical targets.

 To operate various cost centers and departments with

efficiency and economy.

 To help administration as under this system,

executives perform their functions according to

pre-determined budgets.
 To anticipate capital requirements and to make

necessary arrangement for it.

 To make cost accounting more reliable and
systematic.
 Advantages of Budgetary Control
 Control on cost of production

 Control on Liquidity

 Control on capital expenditure

 Effective utilization of resources

 Standard for measuring performance

 Feeling of cost consciousness

 Limitations
– Budgets are based on Plan Estimates

– Budgeting is not a substitute of management

– Operation of the Budget plan is not automatic

– Time effect

– Effects of changing conditions

Types of Budgets
On the basis of Period:
• Long-term Budget:
 long-term planning of the business.
 five to ten years.
• Short-term budget:
 one to five years.
• Current budget:
 One month to twelve months.
 On the basis of Flexibility
Fixed Budget:

 ‘Static Budget’.

 Single level of activity and single set of business

conditions.

Flexible Budget:

 presents costs, revenues and profits at various levels of

business activity, i.e., various volumes of output and sales .

 On the basis of Functions

• Master Budget:

 consolidated summary of the various functional

budgets.

• Functional Budgets:

 ‘Departmental Budgets’ or ‘Subsidiary Budgets’.

 prepared either on the basis of functions or
departments in a business concern.
• Sales budget

 A forecast of sales during budget period.

 It presents the sales projections in terms
of quantity, value, period, sales area, product,
etc
• Cash Budget:
 estimate of the anticipated receipts and
payments of cash during budget period.
Production Budget:

 estimates of output of various products to be

produced during budget period.

Capital Expenditure Budget:

 Amount of capital that may be required for
purchasing fixed assets needed for fulfilling
production requirements
• Cost budget:

After determination of the volume of output in

production budget ,an estimate of cost of output
planned for a budget

Cost Budget are sub divided into:

Direct Materials Budget:

 requirement and procurement of direct materials.

Direct Labour Budget:

 anestimate of the requirements of direct labour essential
to meet the production targets fixed in production budget.
Manufacturing overhead Budget
 an estimate of works or manufacturing
overhead expenses to be Incurred in a budget
period to achieve the production targets.

Plant Utilization Budget

 lays down the level of plant capacity to
carry out the production as per production budget.
Essentials of an effective budgetary system
 Support of Top Management
 Efficient organization
 Sound forecasting
 Accurate accounting system
 Complete and Well-devised Cost Accounting
 Availability of statistical information
 Constant vigilance
 Budget period
 Knowledge of the uses and limitations of budgeting
 Co-ordination among different budgets
 Proper incentives
 Reasonably attainable targets