BUDGETING

Dr. P K
Samanta
 Defining Budget
 In the words of Crown and Howard, “A budget is
a pre-determined statement of management
policy during a given period which provides a
standard for comparison with the results actually
achieved.”

 “A budget is a financial and/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
objective.”
 Characteristics of Good Budgeting
 A good budgeting system should involve persons at
different levels while preparing the budgets.
 There should be a proper fixation of authority and
responsibility.
 The targets of the budgets should be realistic.
 A good system of accounting is essential.
 It should have a whole-hearted support of the top
management.
 There should be meetings and discussions and the
targets should be explained to the employees
concerned.
 A proper reporting system should be introduced,
the actual results should be promptly reported so
that performance appraisal is undertaken.
 Budgeting VS. Forecasting
 Forecasts are merely well-educated estimates or
inferences about the future probable events,
whereas budgets relates to planned events and is
the quantitative expression of business plans and
policies to be pursued in future.
 Budgeting begins where forecasting ends.
Forecasting provides the logical basis for
preparing the budgets.
 A budget provides a standard for comparison with
the results actually achieved and thus is an
important control device for the management,
while a forecast represents merely a probable
event over which no control can be exercised.
 Classification and Types of Budget
 Classification According to Time
 Long-term budget
 Short-term budget
 Current budget
 Classification on the basis of Functions
 Operating budget
 Financial budget
 Master budget
 Classification on the basis of flexibility
 Fixed budget
 Flexible budget
 Operating Budgets
 Sales budget
 Production budget
 Production cost budget
 Purchase budget
 Raw materials budget
 Labor budget
 Plant utilization budget
 Manufacturing expenses or works overhead
budget
 Administrative and selling expenses budget
 Financial Budgets

 Cash budgets

 Working capital budget

 Capital expenditure budget

 Income statement budget

 Statement of retained earnings budget

 Budgeted balance sheet or position statement budget

 Master Budget

 It is the summary of various functional budgets.

 It is prepared by integrating various budgets into

one consolidated budget so as to represent the
budgeted profit and loss account and the
budgeted balance sheet as at the end of the
budget period.

 It is prepared by the budget officer and requires

the approval of the budget committee before it is
put into operation.
 Fixed Budget

 According to ICWA London, “Fixed budget is a

budget which is designed to remain unchanged
irrespective of the level of activity actually
attained.”

 Fixed budgets are suitable under static

conditions.

 If sales, expenses and costs can be forecasted

with greater accuracy then this budget can be
advantageously used.
 Flexible Budgets

 A flexible budget is a budget which by recognizing

the difference between fixed, semi-fixed and
variable cost is designed to change in relation to
the level of activity.

 It consists of a series of budgets for different level

of activity and therefore varies with the level of
activity attained.

 It is prepared after taking into consideration

unforeseen changes in the conditions of the
business.
 Cash Budget
 A cash budget is an estimate of cash receipts and
disbursements 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.
 It is a forecast of expected cash intake and outlay.
 Cash forecasts will include all possible sources from
which cash will be received and the channels in
which payments are to be made so that a
consolidated cash position is determined.
 The estimated cash collections for sales, debts, bills
receivables, interests, dividends and other incomes
and sale of investments and other assets will be
taken into account.
 Sales Budget
 A sales budget is an estimate of expected sales
during a budget period.
 It lays down a comprehensive plan and program for
sales department.
 The sales manager is made responsible for preparing
sales budget.

 Factors to be considered while preparing sales budget

 Past sales figures
 Assessment and reports by salesmen
 Availability of raw materials
 Seasonal fluctuations
 Availability of finances
 Plant capacity
 Production Budget
 It is a forecast of the production for the budget
period.
 It is prepared for the number of units to be
produced and also for the cost to be incurred on
materials, labor and factory overhead.

 The preparation of production budget involves

the following steps:
 Production planning
 Consideration of plant capacity
 Stock quantity to be held
 Considering sales budget
 Performance Budgeting
 It is defined as “budget based on functions,
activities and projects.”

 Performance budgeting involves

 Development of performance criteria for various
programs.
 Assessment of performance of each program and by
each responsibility unit.
 Comparison of the actual performance with the
budget.
 Undertaking periodic review of the program with a
view to make modifications as required.
 Zero-Base Budgeting
 “A planning and budgeting process which
requires each manager to justify his entire
budget request in detail from scratch and
shifts the burden of proof to each manager to
justify why he should spend money at all.”

 The former President of America, Jimmy

Carter used this technique when he was the
Governor of Gorgia for controlling state
expenditure in 1962.
 Benefits of Zero-Base Budgeting
 It enables management to allocate funds
according to the jurisdiction of the program. The
priority can be fixed for various activities and
their implementation will be in the same order.
 ZBB improves efficiency of the management.
Every manager will have to justify the demand
for resources.
 ZBB will help in identifying economical and
wasteful areas. Emphasis will be given to
economical activities and alternative courses of
action will also be studied.
 The management will be able to make optimum
use of resources on the basis of cost-benefit
analysis and priorities.
 Limitations of ZBB
 Computation of cost benefit analysis, which is
essential for ZBB, is not possible in respect of
non-financial matters.

 Difficulties in formulation and ranking of

decision as every manager may not have the
necessary expertise.

 The system ZBB has no scope to adjust for the

changes and, thus flexible budgeting is not
possible.

 It involves a lot of time and cost of operating

 Budget, Budgeting & Budgetary Control
 “A budget is a blue print of a plan expressed in
quantities terms”
 “Budgeting is technique for formulating
budgets”
 “Budgetary control refers to the principles,
procedures and practices of achieving given
objectives through budgets”

 According to Rowland and William:

 “Budgets are the individual objectives of a
department, etc.”
 ‘Budgeting may be said to be the act of
building budgets’
 Objectives of Budgetary Control
 To ensure planning for future by setting up
various budgets
 To co-ordinates the activities of different
departments
 To operate various cost centers and
departments with efficiency and economy
 Elimination of wastes and increase in
profitability
 To anticipate capital expenditure for future
 To centralize the control system,
 Correction of deviations from the established
standards
 Fixation of responsibility of various individuals
Requisites for a Successful Budgetary Control system

 Clarifying Objectives
 Proper Delegation of Authority and
Responsibility
 Proper Communication System
 Budget Education
 Participation of All Employees
 Flexibility
 Motivation
 Essentials of Budgetary Control
 Organization for budgetary control
 Budget centers
 Budget Manual
 Budget Officer
 Budget Committee
 Budget Period
 Determination of Key Factor
 Advantages of Budgetary Control
 Maximization of Profit
 Co-ordination
 Specific Aims
 Tool for Measuring Performance
 Economy
 Determining Weaknesses
 Corrective Action
 Consciousness
 Reduces costs
 Introduction of Incentive Schemes
 Limitations of Budgetary Control
 Uncertain Future
 Budgetary Revisions Required
 Discourages Efficient Persons
 Problem of Co-ordination
 Conflict Among Different Departments
 Depends upon Support of Top Management
Thank You