BUDGETING

Saty Anand.V

Meaning of Budget

• “A budget is a financial statement prepared prior to a predetermined period of time of the policy to be persued during that period for the purpose of attaining a given objective.” -I.C.M.A., London

• “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.” -Brown and Howard

• “Budget is an estimate of future needs arranged according to an orderly basis covering some or all the activities of an enterprise for a definite period of time.” -George R. Terry

Features of Budget• It is prepared for a definite future period.• It is a special form of statement expressed in quantitative

terms which may be in the form of monetary value or physical units.

• It is prepared with a view to attain a definite objective or target.

• It expresses the plans and policies of the management to be pursued in future.

• It provides abase for measuring the success of actual results.

• It is approved by management for implementation.• It usually shows the planned income to be generated and

expenditure to be incurred.

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.

Some of its definitions are as follows:– “Budgeting is a kind of future tense accounting in

which the problems of future are met on paper before the transactions actually occur.” –William J. Batty

Budgetary control• “The term ‘Budgetary Control’ is applied to a system of management and

accounting control by which all operations and output are forecasted as far as possible and the actual results, when known, are compared with the budget estimates.” –W. W. Bigg

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

• “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.” –J. Batty

Objectives of Budgeting

Policy relating objectives:– To express the policies and objectives of the firm

in quantitative terms.– To prepare base for appraisal of work-

performance.– To co-ordinate administrative, managerial and

organizational units of the firm.– To develop a system of regular appraisal of

policies and objectives of the firm.

Administrative objectives:• To determine responsibilities of various

departments and sub-departments of the firm.• To establish balance between available funds and

estimated expenditures.• To develop a system of internal control so as to

ensure efficiency and economy.• To establish the system of decentralization of

authority.

Others

• To clarify business planning.• To forecast in respect of sales, cost of

production, cash flow, etc.• To make arrangement for measurement of

efficiency and capacity of various departments.

• To make effective control in stock, cost of production and cash of the firm.

Objectives of Budgetary Control• To assist in policy formulation on the basis of proper and reliable

data.• To ensure planning for future by setting up various budgets.• To determine short-term and long-term financial and physical

targets.• To operate various cost centres and departments with efficiency

and economy.• To classify expenses according to their nature such as direct and

indirect expenses; fixed, variable and semi-variable expenses, etc.• 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 Budget

• Action on the basis of Well Decided Plan• Mechanism for Policy Implementation• Work on the basis of best option• Communication• Objectivity

Advantages of Budgeting– Co-ordination in budget preparation– Co ordination in working– Communication and Co ordination

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– Prohibitive cost– Effects of changing conditions– Constraints on managerial initiative– Conflicts among functional executives

Types of BudgetOn the basis of Period:• Long-term Budget: long-term budgets are

related with the long-term planning of the business. The period of such budgets varies between five to ten years.

• Short-term budget: short-term budget is that budget which is prepared generally for a period of one to five years.

• Current budget: these budgets are in fact a kind of short-term budgets and their period extends from one month to twelve months.

On the basis of Flexibility:

• Fixed Budget: fixed budget is also known as ‘Static Budget’. It is prepared for single level of activity and single set of business conditions.

• Flexible Budget: flexible budget is that budget which 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:

The master budget is a consolidated summary of the various functional budgets. According to some experts, Budgeted Profit and Loss Account and Budgeted Balance Sheet may be treated as Master Budget.

• Functional Budgets: There are also known as ‘Departmental Budgets’ or ‘Subsidiary Budgets’. All those budgets are placed in these categories which are prepared either on the basis of functions or departments in a business concern.

• Sales budget:Sales budget is a forecast of sales during budget period. It presents the sales projections in terms of quantity, value, period, sales area, product, etc. it should be noted that sales budget is a starting point of budgetary system

• Cash Budget: Cash budget is a statement which gives an estimate of the anticipated receipts and payments of cash during budget period.

• Production Budget: Production budget is a forecast of total output of the whole organization broken down into estimates of output of various products to be produced during budget period.

• Capital Expenditure Budget: This budget gives an estimate of the amount of capital that may be required for purchasing fixed assets needed for fulfilling production requirements as specified in the production budget.

• Cost budget: This budget prepared after determination of the volume of output in production budget and it presents an estimate of cost of output planned for a budgetCost Budget are sub divided into:

– Direct Materials Budget: this budget deals with the requirement and procurement of direct materials

– Direct Labour Budget: this budget presents an estimate of the requirements of direct labour essential to meet the production targets fixed in production budget.

– Manufacturing overhead Budget: this budget gives an estimate of works or manufacturing overhead expenses to be Incurred in a budget period to achieve the production targets.

– Plant Utilization Budget: this 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 organisation– 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: