THE CONCEPT OF BUDGETARY CONTROL

UNIVERSITY OF MUMBAI
2013-14
PROJECT REPORT
ON

BUDGETARY CONTOL
SUBJECT:

COST & ACCOUNTING

BY

NAME OF STUDENT: GANESH NIKAM

COLLEGE SEAT NO :- 119
MASTER IN COMMERCE
( SEMESTER-I )

K.M.AGRAWAL COLLEGE
OF
ARTS,COMMERCE & SCIENCE
KALYAN (W).

THE CONCEPT OF BUDGETARY CONTROL

CERTIFICATE

K.M.AGRAWAL COLLEGE, KALYAN

THIS IS TO CERTIFY THAT MR. GANESH NIKAM HAS WORKED AND

COMPLETED HIS PROJECT WORK FOR THE DEGREE OF MASTER IN COMMERCE
IN THE FACULTY OF COMMERCE IN THE SUBJECT OF COST &ACCOUNTING ON
TITLE OF PROJECT WORK TO BE WRITTEN BUDGETARY CONTROL UNDER
MY SUPERVISION. IT IS HIS OWN WORK AND FACTS REPORTED BY HIS
PERSONAL FINDINGS AND INVESTIGATIONS.

NAME & SIGNATURE

OF
PROF.
(INTERNAL GUIDE)

PROF._______________
(EXTERNAL GUIDE)

PROF.
(PRINCIPAL)

THE CONCEPT OF BUDGETARY CONTROL

DECLARATION
I, GANESH NIKAM THE STUDENT OF K.M. AGRAWAL COLLEGE OF M.COM
(PART-1) HERE BY DECLARE THAT I HAVE COMPLETED THIS PROJECT ON IN
THE

BUDGETARY CONTOL
FOR THE ACADEMIC YEAR 2013-14.
THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL TO THE BEST OF
MY KNOWLEDGE.
I HERE BY FURTHER DECLARE THAT ALL INFORMATION OF THIS
DOCUMENT HAS BEEN OBTAINED AND PRESENTED IN ACCORDANCE WITH
ACEDAMIC RULES AND ETHICAL CONDUCT.
COLLEGE SEAT NO. :- 119
YEAR:- 2013-14
DATE :-

PLACE :NAME & SIGNATURE

THE CONCEPT OF BUDGETARY CONTROL

ACKNOWLEDGEMENT
I WOULD LIKE TO THANKS EVERYONE WHO HELPED ME IN THE
COMPILING OF MY DISSERTATION, FROM, INITIAL RESEARCH TO FINAL
DOCUMENTATION. SPECIALLY THANKS TOWARDS MY INTERNAL PROJECT
GUIDE PROF.

WHO SUPERVISED THIS STUDY AND GAVE

VALUABLE FEEDBACK AND ADVICE THROUGHOUT. AND ALSO I AM VERY

THANKS TO MY EXTERNAL GUIDE, PROF._________________.
I OWE MY INDEBTEDNESS TOWARDS ALL THE TEACHERS OF K.M.
AGRAWAL COLLEGE FOR THEIR COOPERATION AND ENCOURAGEMENT
EXTENDED TO ME DURING THE COURSE OF PRESENT STUDY.
I AM ALSO THANKFUL TO ALL MY FRIENDS WHO ARE THE CURIOUS
LEARNERS AND HAVE DEEPENED MY INTEREST IN THE SUBJECT MATTER
AND IN TURN, IT HAS HELPED ME TO IMPROVE MY KNOWLEDGE ON THE
THEME. FURTHER THANKS TO MY PARENTS AND MY FAMILY FOR THEIR
UNLIMITED AND SUPPORT DURING MY STUDY.

THE CONCEPT OF BUDGETARY CONTROL

TABLE OF CONTENTS

PARTICULARS
SR
NO.

PAGE
NO.

INTRODUCTON OF BUDGET

6-7

1.

CHARACTERISTICS OF A BUDGET.

7-8

2.

OBJECTIVES OF BUDGETING

PREPARATION OF BUDGET AND

BUDGETARY CONTROLS
THE CONCEPT OF BUDGETARY CONTROL

10-13

5.

OBJECTIVES OF A BUDGETARY CONTROL

SYSTEM

16

6.

ADVANTAGES AND LIMITATIONS OF

BUDGETARY CONTROL SYSTEM

17

7.

ORGANIZATION FOR BUDGETARY CONTROL

18-19

8.

TYPES OF BUDGETS

20-21

9.

CONTROL RATIOS

22-23

10.

SOME IMPORTANT FUCTIONAL BUDGETS

24-34

11.

CAPITAL EXPENDITURE BUDGET

35

12.

CONCLUSION

36

13.

REFERENCES

37

4.

14-15

THE CONCEPT OF BUDGETARY CONTROL

1. INTRODUCTON OF BUDGET
Over the past two decades, one word that has become the common currency in all
managers vocabulary is budgets. The budget is perhaps the most chosen course of action or
in action by the management and staff across all sectors. Management at all level within the
public, private and the third sector have used the budget as their shield or excuse when
confronted or challenged about any decision. Its not uncommon to hear variations of the
phrases the budget doesnt permit us to or its not our budget Frederick (2001) and he
defines budget as plan that is measurable and timely. Bruns and Waterhouse (1975) also define
budget as financial plans that provide the basis for directing and evaluating the performance of
individuals or segments of organizations. Merchant (1981) defines budgeting system as a
combination of information flows and administrative processes and procedures that are usually
integral part of the short-range planning and control system of an organisation.
Drury (2006) defines budget as a plan expressed in quantitative, usually monetary term
covering a specific period of time usually one year in other words a budget is a systematic plan
for the utilization of manpower and materials resources. In a business organisation a budget
represents an estimate of future costs and revenues.
Lucey (1996) defines budget as a plan expressed in money terms. It is prepared and
approved prior to the budget and may show income, expenditure and the capital to be
employed. It may be drawn up showing incremental effects of former budgeted or actual
figure, or be compiled by zero -based budgeting. Blocher et al (2002), argue that budgets help
to allocate resources, coordinate operations and provide a means for performance
measurement.
MMDAs like other organisations undertake various forms of policies, programmes and
activities covering economic, social, political etc. These activities entail financial counterpart
in the form of revenue and expenditure. MMDAs document these intensions and their related
financial implication in the form of a plan. Oduro (2006) mentions that such a plan backing the
local authorities are intended actions and a programme for the forthcoming period usually a
year. It is called a budget. A budget is a document that reflects the estimates of income and
expenditure of a government, local authority or a firm for a particular period of time, possibly,

THE CONCEPT OF BUDGETARY CONTROL

from 1st April to 31st March. Some objectives are realized in the short-term and some are
realized in the long- term in relation to multi-year programmes that have been adopted,
Erasmus and Visser (2000) state that an annual budget thus serves as an implementation tool
for long-term objectives.
Public sector budget, according to Oduro (Ibid) is a prospectus referring to expected
future revenue and expenditure activities of the government for the forthcoming period. It is
used as an instrument to allocate public resources toward achieving some public value.
Budgets, by definition, have to be prepared in advance and for this reason, they are
often referred to in terms of their being part of a feed forward system. Feedback is a term
frequently heard both in accounting and ordinary use. According to Hall (1996) feed forward,
on the other hand tends to be less frequently heard, yet this word incorporates the most
important aspect of budgeting. It means looking at situations in advance, thinking about the
impact and implications of things in advance, and attempting to take control of situations in
advance.
From the definition of budgets we distinguish three key components. First, we
recognize the planning aspect of budget. The plan is regarded as the statement of intent or goal
of the organisation. The second aspect is the measurability. This makes it possible to measure
the plan. The third component is time. It gives the possibility to say if the plan is achieved.
In summary, a budget is a statement setting out the monetary, numerical or non
quantitative aspects of an organisation's plans for the coming week, month or year. Budgetary
control is the analysis of what happened when those plans came to be put into practice, and
what the organisation did or did not do to correct for any variations from these plans.

THE CONCEPT OF BUDGETARY CONTROL

2. CHARACTERISTICS OF A BUDGET.
Gregory (2005) gives characteristics of a good budget. According to him, a good budget is
characterizes by the following:
1. PARTICIPATION involves many people as possible in drawing up a budget;
2. COMPREHENSIVENESS- embrace the whole organization;
3. STANDARDS base it on established standards of performance;
4. FLEXIBILITY allows for changing circumstances;
5. FEEDBACK constantly monitor performance;
6. ANALYSIS OF COSTS AND REVENUES this can be done on the basis of product
line, departments or cost centers.
7. OBJECTIVES: Determining the objectives to be achieved, over the budget period, and
the policies that might be adopted for the achievement of these ends.
8. ACTIVITIES: Determining the variety of activities that should be undertaken for
achievement of the objectives.
9. PLANS: Drawing up a plan or a scheme of operation in respect of each class of activity,
in physical a well as monetary terms for the full budget period and its parts.
10. PERFORMANCE EVALUATION: Laying out a system of comparison of actual
performance by each person section or department with the relevant budget and
determination of causes for the discrepancies, if any.
11. CONTROL ACTION: Ensuring that when the plans are not achieved, corrective action
are taken; and when corrective actions are not possible, ensuring that the plans are
revised and objective achieved.

THE CONCEPT OF BUDGETARY CONTROL

3. OBJECTIVES OF BUDGETING
1. To encourage self study in all aspects of a Company's operations.
2. To get all members of management to put their heads to the basic question of how the
business should be run, to make them of a coordinated team operating in unison towards
clearly defined objectives.
3. To promote the planning process and provide a sense of direction to every member of the
organization.
4. To force a definition and crystallization of Company policies and aims.
5. To increase the effectiveness with which people and capital are employed.
6. To disclose areas of potential improvement in the Companys operations.
7. To stimulate study of relationship of the Company to its external economic environment
for improving the effectiveness of its direction.
8. To direct and coordinate business activities and units to achieve stated targets of
performance.
9. To facilitate the control process, by comparing actual results with plan, and provide
feedback to the employees about their performance.

THE CONCEPT OF BUDGETARY CONTROL

4. PREPARATION OF BUDGET AND BUDGETARY

CONTROLS
Maitland (2001) mentions that the process of preparing and agreeing on a budget is a
means of translating the overall objectives of the organization into detailed, feasible plan of
action.
Based on this, Falk (1994) states that budgets are financial expressions of a countrys
plan for a period of time. It tells where and how the organisation will spend money and where
the money will come from to pay these expenses. He adds that budgets set limits. He says,
Imagine how chaotic an industry or country would be if everyone was allowed to spend as
much as they wished on whatever they wanted. Besides setting limits, Andrews and Hill
(2003) say that budgets also provides the assurance that the most important needs of a country
are met first and less important needs are deferred until there are sufficient funds in which to
pay for them.33
Even though budget preparation is not the sole thing that needs consideration in
budgeting, the basis of it is still needed in order to have at least close estimation.

4.1. THE BUDGET CYCLE

In both the private and public sectors, the budget is prepared by the budget committee
having regard to the organizations objectives. In a company, it is submitted to the board of
directors or chief executive for approval. When approved it becomes an executive order. At the
national level, the national budget is approved by both Cabinet and the Legislature before it
becomes operational. It would be easy to dismiss the budgeting process as beginning when the
first budget is prepared, and as being complete when the master budget is finalized. In reality,
the budgeting process begins for many organisations a long time before the budget period
begins and the process ends once the budget period has ended. This means that budgeting
process is a very lengthy process. Typically, for a large organisation, the pre- budgeting phase
can begin up to a year before the budget period starts Adu-Gyamfi (2008).

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THE CONCEPT OF BUDGETARY CONTROL

Jones and Pendlebury (1984) give some insight into the beginning of the budgeting
cycle when they present a timetable for preparation of detailed revenue budget and capital
programme for a local authority. They show that the process starts in June in the year
preceding the budget period with the draft budget manual being sent to Finance Officers, who
will discuss this draft with their departmental staff with a view to adoption or amendment. The
budgetary planning phase is completed in March and made ready for an April discussion when
the printed budget book is published and the approved estimates are put into the financial
control system.

4.2. THE BUDGET PERIOD

The budget period is the period for which a set of budgets is prepared. Typically,
according to Jones and Pendlebury (1984) the budget period is of one year's duration, and will
be designed to coincide with an organisation's or governments financial, or fiscal, year. There
is no reason why a budget period has to be one year, but typically it made so.
These authorities on the other hand, say that if we are dealing with a project, then the
budget will clearly be linked to that project. A three month project will have a budget covering
the whole project and will thus be a three months budget. Most organisations will divide their
budget period into calendar months or periods whereas others have thirteen period years all of
an equal four week period. In certain situations, the budget period will be analyzed according
to some particular feature of the work in that situation. For example, stockbrokers have their
year divided into "accounts" of two and three weeks' duration. Indeed, these divisions of a
budget period are control periods. In Ghana before 1999, government budget was prepared on
yearly basis but with the introduction of the medium term expenditure frame work (MTFF),
budget is prepared based on a three year rolling plan.

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THE CONCEPT OF BUDGETARY CONTROL

4.3. PURPOSES OF BUDGET PREPARATION

In the view of Williamson (1996) budgets should be prepared to serve the following purposes:
1. PLANNING
There is the likelihood that managers may be tempted not to plan for future operations
because of day to day pressures and operating challenges. The budgeting planning process
ensures that managers do plan for future operations, and that they consider how conditions in
the next year might change and what steps they should take now to respond to these changed
conditions.
2. CO-ORDINATION
This brings different parts of the budget together, reconciled into a common plan.
Budgets are not prepared for the benefit of individuals involved in the process but for the best
interest of the business or the stakeholders. Without guidance therefore, managers might make
their own decision that will work against the overall objective of the business.
3. COMMUNICATION
Everyone in the budget preparation chain must be aware of their input to the success of
the entitys financial plan. This will ensure that all are made accountable for the
implementation of the budget. This will also help in coordinating all budget activities for
smooth implementation of the plan.
4. MOTIVATION
The budget provides a standard which managers will evaluate their performance with.
If they meet their targets regularly, they may be motivated to go for a higher target. If budget
are dictated from above and imposed on those who are to implement the plan, it will rather not
motivate workers and may be resisted. It can also serve as a useful device for influencing
management behavior and motivating managers to perform in line with the organizational
objectives.

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THE CONCEPT OF BUDGETARY CONTROL

5. CONTROL
Planned activities can be compared to the actual so that effort will be concentrated on
ascertaining the reasons behind the differences. By investigating the reasons for the
differences, managers may be able to indentify inefficiencies such as the purchases of inferior
quality materials. Appropriate control action will then be taken when reasons for inefficiencies
have been found.
6. PERFORMANCE EVALUATION
As a manager you will like to evaluate your own performance even if you are not
assessed by your superior. However performance is often evaluated by measuring a managers
performance against budget and the ability to achieve the targets would lead to promotion or
bonus. The budget thus provides a very useful means of informing managers of how well they
are performing in meeting targets that they have previously helped to set.
Williamson (Ibid) shares the view that, budgets are simply exercises in calculation
unless they are used. When an organisation draws a budget it does so as part of a system of
budgetary control. The controls are some basic ideas of what the entity wants to do. It prepares
budgets to help to achieve those ideas; and then once that is done whatever it is that has to be
done, budgetary controls check to see if expenditures are on course

4.4. BUDGETARY CONTROL

Budgetary Control is the process of establishment of budgets relating to various
activities and comparing the budgeted figures with the actual performance for arriving at
deviations, if any. Accordingly, there cannot be budgetary control without budgets. Budgetary
Control is a system which uses budgets as a means of planning and controlling.

13

THE CONCEPT OF BUDGETARY CONTROL

5. THE CONCEPT OF BUDGETARY CONTROL

Budgetary Control is define by the Chartered of Management Accountants (CIMA)
(2007) as the establishment of
mechanism

authorizing

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 a policy
or to provide a basis for its
revision. Hoftsede (1998) defines budgetary controls as planning translated into monetary
terms. At the beginning, a budget is a plan and at the end it is a control device for
measurement. In the view of Slim (1994) budgetary Controls aims at providing a formal basis
for monitoring the progress of the organization as a whole and of its component parts towards
the achievement of the objectives specified in the budget. Budgetary controls predetermine
plans or standards of output and estimated incomes are compared with actual results and
necessary corrective action taken.
Otley (1990) mentions that budgetary control is the main integrative control method for
most business enterprises and the organization business plan can be represented financially by
the budget. The budget can thus be used as a monitor and control method for the complex
issues of the business plan. Lucey ( Ibid) argues that no system of planning can be successful
without having an effective and efficient system of control. Budgeting is closely connected
with control. The exercise of control in the organization with the help of the budget is known
as budgetary control.

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THE CONCEPT OF BUDGETARY CONTROL

Ashford (1989) posits that budgeting can be applied to virtually every situation. It does
not matter whether we work in the public or privates sector of the economy. We may work for
a profit making business or a non -profit making business. A company may be engaged in
trading, manufacturing, or providing a service. In all of these situations, budgeting and
budgetary control is utmost importance.
AduGyamfi (2008) notes that budgetary controls can be achieved in MMDAs through
many ways including the establishment of the following:
BUDGET COMMITTEE
PROJECT COMMITTEE
INVESTMENT COMMITTEE

Budgetary controls are also achieved through enforcement of internal controls in the form of:
internal audits;
internal checks within functions and activities;
administrative controls in terms of ensuring effective personnel policies, operational
rules, regulation, procedures and methods;
segregation of duties into initiation, approval ,authorizations, execution and recording
of transactions;
chart of accounts which indicate cost items, cost centers, cost levels and expenditure
boundaries;
maintenance of proper books of accounts which are books of prime entry, cash book,
journals and ledgers;
issuing accounting instructions in respect of purchase, stock and receipts, periodic
stock-taking and imp rest retirement and reimbursements;
issue of accounting manuals and adoption of accounting policies in respect of assets
disposals and depreciation

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THE CONCEPT OF BUDGETARY CONTROL

6. OBJECTIVES OF A BUDGETARY CONTROL SYSTEM

I. DEFINITION OF GOALS:
Portraying with precision, the overall aims of the business and determining targets of
performance for each section or department of the business.
II. DEFINING RESPONSIBILITIES:
Laying down the responsibilities of each individual so that everyone knows what is
expected of him and how he will be judged.
III. BASIS FOR PERFORMANCE EVALUATION:
Providing basis for the comparison of actual performance with the predetermined targets
and investigation of deviation, if any, of actual performance and expenses from the budgeted
figures. It helps to take timely corrective measures.
IV. OPTIMUM USE OF RESOURCES:
Ensuring the best use of all available resources to maximize profit or production, subject
to the limiting factors.
V. CO-ORDINATION:
Coordinating the various activities of the business and centralizing control, but also
making a facility for the Management to decentralize responsibility and delegate authority.
VI. PLANNED ACTION:
Engendering a spirit of careful forethought, assessment of what is possible and an attempt
at it. It leads to dynamism without recklessness. It also helps to draw up long range plans
with a fair measure of accuracy.
VII. BASIS FOR POLICY:
Providing a basis for revision of current and future policies.

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THE CONCEPT OF BUDGETARY CONTROL

7. ADVANTAGES AND LIMITATIONS OF BUDGETARY

CONTROL SYSTEM
7.1. ADVANTAGES: The use of budgetary control system enables the management of a business concern to
conduct its business activities in the efficient manner.
It is a powerful instrument used by business houses for the control of their expenditure. It
infact provides a yardstick for measuring and evaluating the performance of individuals
and their departments.
It reveals the deviations to management, from the budgeted figures after making a
comparison with actual figures.
Effective utilization of various resources like men, material, machinery and money is
made possible, as the production is planned after taking them into account.
It helps in the review of current trends and framing of future policies.
It creates suitable conditions for the implementation of standard costing system in a
business organization.
It inculcates the feeling of cost consciousness among workers.
7.2. LIMITATIONS: Estimates: Budgets may or may not be true, as they are based on estimates. The
assumptions about future events may or may not actually happen.
Rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may
affect day to day operations and ignores the dynamic state of organizational functioning.
False Sense of Security: Mere budgeting cannot lead to profitability. Budgets cannot be
executed automatically. It may create a false sense of security that everything has been
taken care of in the budgets.
Lack of coordination: Staff cooperation is usually not available during Budgetary
Control exercise.
Time and Cost: The introduction and implementation of the system may be expensive.

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THE CONCEPT OF BUDGETARY CONTROL

8. ORGANIZATION FOR BUDGETARY CONTROL

In order to introduce budgetary control system, the following are essential to be
considered for a sound and efficient organization. The important aspects to be considered are :

8.1. ORGANISATION CHART:

For the purpose of effective budgetary control, it is imperative on the part of each entity
to have definite "plan of organization." This plan of organization is embodied in the
organization chart. The organization chart explaining clearly the position of each executive's
authority and responsibility of the firm. All the functional heads are entrusted with the
responsibility of ensuring proper implementation of their respective departmental budgets. An
organization chart for budgetary control is given showing clearly the type of budgets to be
prepared by the functional heads.

8.2. BUDGET CENTER:

A Budget Center is defined by the terminology as "a section of the organization of an
undertaking defined for the purpose of budgetary control." For effective budgetary control
budget centre or departments should be established for each of which budget will be set with
the help of the head of the department concerned.

8.3. BUDGET OFFICER:

Budget Officer is usually some senior member of the accounting staff who controls the
budgetary process. He does not prepare the budget himself, but facilitates and co-ordinates the
budgeting activity. He assists the individual departmental heads and the budget committee, and
ensures that their decisions are communicated to the appropriate people.

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THE CONCEPT OF BUDGETARY CONTROL

8.4. BUDGET COMMITTEE:

Budget Committee comprising of the Managing Director, the Production Manager,
Sales Manager and Accountant. The main objectives of this committee is to agree on all
departmental budgets, normal standard hours and allocations. In small concerns, the Budget
Officer may co-ordinate the work for preparation and implementation of budgets. In large-scale
concern a budget committee is setup for preparation of budgets and execution of budgetary
control.

8.5. BUDGET MANUAL:

A Budget Manual has been defined as "a document which set out the responsibilities of
persons engaged in the routine of and the forms and records required for budgetary control." It
contains all details regarding the plan and procedures for its execution. It also specifies the
time table for budget preparation to approval, details about responsibility, cost centers,
constitution and organization of budget committee, duties and responsibilities of budget
officer.

8.6. BUDGET PERIOD:

A budget is always related to specified time period. The budget period is the length of
time for which a budget is prepared and employed. The period may depend upon the type of
budget. There is no specific period as such. However, for the sake of convenience, the budget
period may be fixed depending upon the following factors:
(a) Types of Business,
(b) Types of Budget,
(c) Nature of the demand of the product,
(d) Length of trade cycle,
(e) Economic factors,
(f) Availability of accounting period,
(g) Availability of finance,
(h) Control operation.

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THE CONCEPT OF BUDGETARY CONTROL

9. TYPES OF BUDGETS
As budgets serve different purposes, different types of budgets have been developed.
The following are the different classification of budgets developed on the basis of time,
functions, and flexibility or capacity.

(A) CLASSIFICATION ON THE BASIS OF TIME:

1. LONG-TERM BUDGETS:
Long-term budgets are prepared for a longer period varies between five to ten years. It
is usually developed by the top level management. These budgets summaries the general plan
of operations and its expected consequences. Long-Term Budgets are prepared for important
activities like composition of its capital expenditure, new product development and research,
long-term finance etc.
2. SHORT-TERM BUDGETS:
These budgets are usually prepared for a period of one year. Sometimes they may be
prepared for shorter period as for quarterly or half yearly. The scope of budgeting activity may
vary considerably among different organization.

3. CURRENT BUDGETS:
Current budgets are prepared for the current operations of the business. The planning
period of a budget generally in months or weeks. As per ICMA London, "Current budget is a
budget which is established for use over a short period of time and related to current
conditions."

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THE CONCEPT OF BUDGETARY CONTROL

(B) CLASSIFICATION ON THE BASIS OF FUNCTION

1. FUNCTIONAL BUDGET:
The functional budget is one which relates to any of the functions of an organization.
The number of functional budgets depend upon the size and nature of business. The following
are the commonly used:
(1) Sales Budget
(2) Purchase Budget
(3) Production Budget
(4) Selling and Distribution Cost Budget
(5) Labour Cost Budget
(6) Cash Budget
(7) Capital Expenditure Budget

2. MASTER BUDGET:
The Master Budget is a summary budget. This budget encompasses all the functional
activities into one harmonious unit. The ICMA England defines a Master Budget as the
summary budget incorporating its functional budgets, which is finally approved, adopted and
employed.

(C) CLASSIFICATION ON THE BASIS OF CAPACITY

1. FIXED BUDGET:
A fixed budget is designed to remain unchanged irrespective of the level of activity
actually attained.
2. FLEXIBLE BUDGET:
A flexible budget is a budget which is designed to change in accordance with the
various level of activity actually attained. The flexible budget also called as Variable Budget or
Sliding Scale Budget, takes both fixed, variable and semi fixed manufacturing costs into
account.

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THE CONCEPT OF BUDGETARY CONTROL

10.CONTROL RATIOS
Ratios are used by the management to determine whether performance of its activities
is going on as per estimates or not. If the ratio is 100 % or more, the performance is considered
as favourable and if the ratio is less than 100% the performance is considered as unsatisfactory.
The following are the ratios generally calculated for performance evaluation.
1. CAPACITY RATIO:
This ratio indicates the extent to which budgeted hours of activity is actually utilized.
Capacity Ratio=

Actual Hours Worked Production 100

Budget Hours

2. ACTIVITY RATIO:
This ratio is used to measure the level of activity attained during the budget
period.
Activity Ratio = Standard Hours for Actual Production 100
Budgeted Hours
3. EFFICIENCY RATIO:
This ratio shows the level of efficiency attained during the budget period.
Efficiency Ratio = Standard Hours for Actual Production 100
Actual Hours Worked
4. CALENDAR RATIO:
This ratio is used to measure the proportion of actual working days to budgeted
working days in a budget period.
Calendar Ratio = Number of Actual Working Days in a Period 100
Budgeted Working Days for the Period

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THE CONCEPT OF BUDGETARY CONTROL

ILLUSTRATION:
A company produces two articles A and B. Each unit takes 4 hours for A and 10 hours
for B as production time respectively. The budgeted production for April, 2003 is 400 units of
A and 800 units for B. The actual production at the end of the months was 320 units of A and
850 units of B. Actual hours spent on this production was 200. Find out the Capacity, Activity,
and Efficiency Ratios for April 2003.
Also find out the Calendar Ratio if the actual working days during the month be 28
corresponding to 26 days in the budget.
Solution :
Standard Budget Hours : A 400 4

100 Hours

B 800 10

80 Hours
180 Hours

Standard Hours For Actual Production : A 320 4

B 850 10

80 Hours

85 Hours
165 Hours

( 1) Capacity Ratio = Actual Hours Worked Production 100

Budget Hours
=
200 100
180
=
111.1%
(2) Activity Ratio = Standard Hours for Actual Production 100
Budgeted Hours
=
165100
180
=
91.66%
(3) Efficiency Ratio = Standard Hours for Actual Production 100
Actual Hours Worked
=
=

165100
200
82.5%

(4) Calendar Ratio = Number of Actual Working Days in a Period 100

Budgeted Working Days for the Period
=
28100
26
=
107.69%

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THE CONCEPT OF BUDGETARY CONTROL

11. SOME IMPORTANT FUCTIONAL BUDGETS

12.1. SALES BUDGET
Sales Budget is one of the important functional budget. Sales estimate is the
commencement of budgeting may be made in quantitative terms. Sales budget is primarily
concerned with forecasting of what products will be sold in what quantities and at what prices
during the budget period. Sales budget is prepared by the sales executives taking into account
number of relevant and influencing factors such as :
(1) Analysis of past sales (Product wise; Territory wise, quote wise).
(2) Key Factors.
(3) Market Conditions.
(4) Production Capacity.
(5) Government Restrictions.
(6) Competitor's Strength and Weakness.
(7) Advertisement, Publicity and Sales Promotion.
(8) Pricing Policy.
(9) Consumer Behavior.
(10) Nature of Business.
(11) Types of Product.
(12) Company Objectives.
(13) Salesmen's Report.
(14) Marketing Research's Reports.
(15) Product Life Cycle.

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THE CONCEPT OF BUDGETARY CONTROL

ILLUSTRATION:
Thomas Engineering Co. Ltd. Manufactures two articles X and Y. Its sales department
has three divisions: West, South and East. Preliminary sales budgets for the year ending 3151
December 2003. based on the assessments of the divisional executives:
Product X : West 40,000 units: South 1,00,000 units and East 20,000 units
Product Y : West 60,000 units: South 8,00,000 units and East Nil
Sales Price X Rs. 2 and Y Rs. 3 in all areas.
Arrangements are made for the extensive advertising of product X and Y and it is
estimated that West division sales will increase by 20,000 units. Arrangements are also made
to advertise and distribute product Y in the Eastern area in the second half of 2003 when sales
are expected to be 1,00,000 units.
Since the estimated sales of the South division represented an unsatisfactory target, it is
agreed to increase both the estimates by 10 %.
Prepare a sales budget for the year to 31" December 2012.

Solution :
Sales Budget for the year 2012
PRODUCT X
DIVISION

WEST
SOUTH
EAST
TOTAL

QTY.
RS.

PRODUCTY

PRICE
RS.

VALUE
RS.

QTY.
RS.

60,000

1,20,000

80,000

2,40,000

3,60,000

1,10,000

2,20,000

88,000

2,64,000

4,84,000

20,000

40,000 1,00,000

3,00,000

3,40,000

8,04,000

11,84,000

1,90,000

3,80,000

2,68,000

25

PRICE VALUE
RS.
RS.

TOTAL
RS.

THE CONCEPT OF BUDGETARY CONTROL

12.2. PRODUCTION BUDGET

Production budget is usually prepared on the basis of sales budget. But it also takes into
account the stock levels desired to be maintained. The estimated output of business firm during
a budget period will be forecast in production budget. The production budget determines the
level of activity of the produce business and facilities planning of production so as to
maximum efficiency. The production budget is
prepared by the chief executives of the production department. While preparing the production
budget, the factors like estimated sales, availability of raw materials, plant capacity,
availability of labour, budgeted stock requirements etc. are carefully considered.

COST OF PRODUCTION BUDGET

After Preparation of production budget, this budget is prepared. Production Cost
Budgets show the cost of the production determined in the production budget. Cost of
Production Budget is grouped in to Material Cost Budget, Labour Cost Budget and Overhead
Cost Budget. Because it breaks up the cost of each product into three main elements material,
labour and overheads. Overheads may be further subdivided in to fixed, variable and semifixed overheads. Therefore separate budgets required for each item.
ILLUSTRATION:
From the following particulars prepare a production budget of product P and Q of
Nancy sales Corporation for the First Quarter of 2013:
PARTICULERS
Sales (in units):
January
February
March
Selling price per unit
Target for I* Quarter 2013:
Sales Quantity increase
Sales Price increase
Stock position I* Jan. 2013:
Stock position and Jan. 2013 Sales
Stock Position 31" Mar. 2013:
Stock Position end Jan. & Feb.

PRODUCT P

26

PRODUCT Q

PRODUCT R

20,000
15,000
25,000
5

15,000
20,000
25,000
10

5,000
5,000
5,000
20

10%
Nil

10%
10%

10%
20%

50%
10,000

50%
20,000

50%
5,000

THE CONCEPT OF BUDGETARY CONTROL

Percentage of subsequent month
sales

50%

50%

50%

Solution :
Production Budget (Units) of Product P and Q for the First Quarter of 2013
PRODUCT PARTICULARS APRIL
Expected sales
Add: closing stock

MAY

JUNE

TOTAL

22,000
8,250
30,250
11,000

16,500
13,750
30,250
8,250

27,500
10,000
37,500
13,750

66,000
10,000
76,000
10,000

Budgeted
Production (Units)

19,250

22,000

23,750

66,000

Expected sales
Add: closing stock

16,500
11,000
27,500
13,750

22,000
13,750
35,750
17,875

27,500
20,000
47,500
23,750

66,000
20,000
86,000
13,750

13,750

17,875

23,750

72,250

Less: opening stock

Q
Less: opening stock
Budgeted
Production (Units)

12.3. MATERIAL PURCHASE BUDGET

The different level of material stock are based on planned out. Once the production
budget is prepared, it is necessary to considered the requirement of materials to carryout the
production activities. Material Purchase Budget is concerned with purchase and requirement of
direct materials to be made during the budget period. While preparing the materials purchase
budget, the following factors to be considered carefully:
27

THE CONCEPT OF BUDGETARY CONTROL

(1) Estimated sales and production.
(2) Requirement of materials during budget period.
(3) Expected changes in the prices of raw materials.
(4) Different stock levels, EOQ etc.
(5) Availability of raw materials, i.e., seasonal or otherwise.
(6) Availability of financial resources
(7) Price trend in the market.
(8) Company's stock policy etc.
ILLUSTRATION:
Draw up a material purchase budget from the following information :
Estimated sales of a product is 30,000 units. Two kinds of raw materials A and B are
required for manufacturing the product. Each unit of the product requires 3 units of A and 4
units of B. The estimated opening balance in the beginning of the next year: finished goods
5,000 units; A, 6,000 units; B, 10,000 units. The desirable closing balance at the end of the
next year: finished product, 8,000 units; A, 10,000 units; B 12,000 units.

Solution:
Estimated Production = Expected Sales + Desired Closing Stock of Finished Goods
- Estimated Opening Stock of Finished Goods
=

30,000 + 8,000 - 5,000

33,000 units.

Material Purchase Budget for the year

Particulars

Material A
Units

Material Required To Meet Production Target

Material A
Material B
Add: Desired Closing Stock At The End Of
Next Year

Material B
Units

99,000
1,32,000
10,000

28

12,000

THE CONCEPT OF BUDGETARY CONTROL

Less : Expected Stock At The Commencement
Of Next Year (Opening Balance)
Quantity Of Materials To Be Purchased

1,09,000

1,44,000

6,000

10,000

1,03,000

1,34,000

12.4. CASH BUDGET

This budget represent the anticipated receipts and payment of cash during the budget
period. The cash budget also called as Functional Budget. Cash budget is the most important of
all the functional budget because, cash is required for the purpose to meeting its current cash
obligations. If at any time, a concern fails to meet its obligations, it will be technically
insolvent. Therefore, this budget is prepared on the basis of detailed cash receipts and cash
payments.
The Estimated Cash Receipts Include:
(1) Cash Sales
(2) Credit Sales
(3) Collection from Sundry Debtors
(4) Bills Receivable
(5) Interest Received
(6) Income from Sale of Investment
(7) Commission Received
(8) Dividend Received
(9) Income from Non-Trading Operations etc.
The Estimated Cash Payments Include The Following :
(1) Cash Purchase
(2) Payment to Creditors

29

THE CONCEPT OF BUDGETARY CONTROL

(3) Payment of Wages
(4) Payments relate to Production Expenses
(5) Payments relate to Office and Administrative Expenses
(6) Payments relate to Selling and Distribution Expenses
(7) Any other payments relate to Revenue and Capital Expenditure
(8) Income Tax Payable, Dividend Payable etc.

ILLUSTRATION:
A company is expecting to have Rs. 25,000 cash in hand on 1st April 2003 and it
requires you to prepare an estimate of cash position in respect of three months from April to
June 2003, from the information given below :
Months
Sales Rs.
Purchase Rs.
Wages Rs.
Expenses Rs.
February
70,000
40,000
8,000
6,000
March
80,000
50,000
8,000
7,000
April
92,000
52,000
9,000
7,000
May
1,00,000
60,000
10,000
8,000
June
1,20,000
55,000
12,000
9,000
Additional Information :
(a) Period of credit allowed by suppliers - two months.
(b) 25 % of sale is for cash and the period of credit allowed to customer for credit sale one
month.
(c) Delay in payment of wages and expenses one month.
(d) Income Tax Rs. 25,000 is to be paid in June 2003.
Solution:
Cash Budget
Particulars
Opening Balance Of Cash
Cash Receipts:
Cash Sales
Debtors
Total Cash Receipts (1)

April Rs.

May Rs.

June Rs.

Total Rs.

25,000

53,000

81000

1,59,000

23,000
60,000
1,08,000

25,000
69,000
147000

30,000
75,000
1,86,000

78,000
2,04,000
4,41,000

30

THE CONCEPT OF BUDGETARY CONTROL

Cash Payment :
Creditors
Wages
Expenses
Income Tax
Total Payment (2)
Closing Balance Of Cash

40,000
8,000
7,000
----55,000

50,000
9,000
7,000
----66,000

52,000
10,000
8,000
25,000
95,000

1,42,000
27,000
22,000
25,000
216,000

53,000

81,000

91,000

2,25,000

12.5. MASTER BUDGET

When the functional budgets have been completed, the budget committee will prepare a
Master Budget for the target of the concern. Accordingly a budget which is prepared
incorporating the summaries of all functional budgets. It comprises of budgeted profit and loss
account, budgeted balance sheet, budgeted production, sales and costs. The ICMA England
defines a Master Budget as "the summary budget incorporating its functional budgets, which is
finally approved, adopted and employed." The Master Budget represents the activities of a
business during a profit plan.
ILLUSTRATION:
Pushpack & Co., a glass manufacturing company requires you to calculate and present
the budget for the next year from the following information :
Toughened Glass

Rs. 2,00,000

Bent Toughened Glass

Rs. 3,00,000

Direct Material

Cost60% of Sales

Direct Wages

10 workers @ Rs. 100 per month

Factory Overheads
Work Manager

Rs. 300 Per month

Foreman

Rs. 200 Per month

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THE CONCEPT OF BUDGETARY CONTROL

Stores and Spares

2% on Sales

Depreciation on Machinery

Rs.6,000

Light and Power

Rs. 2,000

Repairs and Maintenance

Rs.4,000

Other Sundries

10% on direct Wages

Solution:
Master Budget for the Year Ending 2012-13
Particulars

Amount

Amount

Sales (As Per Sales Budget) :

Toughened Glass

2,00,000

Bent Toughened Glass

3,00,000
5,00,000

Less: Cost Of Production

3,00,000

Direct Materials

12,000

Direct Wages

3,12,000

Prime Cost

Add : Factory Overheads

Variable: Stores And Spares

Rs.10,000

Lights And Power

Rs. 2,000

Repairs And Maintenance

Rs. 4,000

Fixed: Work Manager Salary

Rs. 3,600

Foreman Salary

Rs. 2,400

Depreciation

Rs. 6,000

32

16,000

THE CONCEPT OF BUDGETARY CONTROL

Sundries

Rs. 1,200

13,200

3,41,200

Works Cost
Gross Profit
Less : Administration, Selling And Distribution Overheads

Net Profit

3,41,200
1,58,800
7,000
1.51,800

12. CAPITAL EXPENDITURE BUDGET

33

THE CONCEPT OF BUDGETARY CONTROL

12.1. FIXED BUDGET

A budget is drawn for a particular level of activity is called 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 budget is usually prepared before the beginning
of the financial year. This type of budget is not going to highlight the cost variances due to the
difference in the levels of activity. Fixed Budgets are suitable under static conditions.

12.2. FLEXIBLE BUDGET

Flexible Budget is also called Variable or Sliding Scale budget, "takes both the fixed
and manufacturing costs into account. Flexible budget is the opposite of static budget showing
the expected cost at a single level of activity. According to ICMA, England defined Flexible
Budget is a budget which is designed to change in accordance with the level of activity actually
attained."
According to the principles that guide the preparation of the flexible budget a series of
fixed budgets are drawn for different levels of activity. A flexible budget often shows the
budgeted expenses against each item of cost corresponding to the different levels of activity.
This budget has come into use for solving the problems caused by the application of the fixed
budget.
ADVANTAGES OF FLEXIBLE BUGJET
1) In flexible budget, all possible volume of output or level of activity can be covered.
2) Overhead costs are analysed into fixed variable and semi-variable costs.
3) Expenditure can be forecasted at different levels of activity.
4) It facilitates at all times related factor can be compared. which are essential for intelligent
decision making.
5) A flexible budget can be prepared with standard costing or without standard costing
depending upon What the Company opts for.
6) Flexible budget facilitates ascertainment of costs at different levels of activity, price
fixation, placing tenders and Quotations.
7) It helps in assessing the performance of all departmental heads as the same can be judged
by terms of the level of activity attained by the business.
Method of Preparing Flexible Budget

34

THE CONCEPT OF BUDGETARY CONTROL

The following methods are used in preparing a flexible budget:
(1) Multi-Activity Method.
(2) Ratio Method.
(3) Charting Method.
1) Multi-Activity Method:
This method involves preparing a budget in response to different level of activity. The
different level of activity or capacity levels are shown in Horizontal Columns, and the
budgeted figures against such levels are placed in the Vertical Columns. The expenses
involved in production as per budget are grouped as fixed, variable and semi variable.

2) Ratio Method:
According to this method, the budget is prepared first showing the expected normal level
of activity and the estimated variable cost per unit at the side expected level of activity in
addition to the fixed cost as estimated. Therefore, the expenses as per budget, allowed for a
particular level of activity attained, will be calculated on the basis of the following formula :
Budgeted fixed cost + (Variable cost per unit of activity x Actual unit of activity).

3) Charting Method:
Under this method total expenses required for any level of activity, are estimated having
classified into three categories, viz., Variable. Semi Variable and Fixed. These figures are
plotted on a graph. The expenses are plotted on the Y-axis and the levels of activity are
plotted on X-axis. The graph will thus, help in ascertaining the quantum of budgeted
expenses corresponding to the level of activity attained with the help of this chart.

35

THE CONCEPT OF BUDGETARY CONTROL

13 CONCLUSION
In this chapter, efforts have been made to explain the principles and practices of
budgeting and budgetary control. Various definitions and explanatory notes were used to make
the meaning and significance of budgets very clear to the readers. The budgeting framework
and budgetary control process have been described. The general purposes of budgets, their
limiting factors and the roles of budget committee and budget officer have also been discussed.
Three different ways of differentiating budgets - time, activity and quantitative perspectives
have been explained. Budgetary improvement techniques like Incremental Budgeting (IB),
Zero-Base Budgeting (ZBB), Rolling (Continuous) Budgeting (CB) and Planning,
Programming, Budgeting System (PPBS) were discussed as to their underlying assumptions,
major steps, advantages, disadvantages and similarities and differences. Finally, the way to
prepare companys functional and master budget have been illustrated, using some standard
questions.
Budgeting and Budgetary controls are management tools of MMDAs for enhancing
financial management specially AKDA, this assertion is made because the Assembly prepares
budgets, check if expenditures are on course, assigns responsibilities and compares actual
results with budgeted results.
The Assembly prepares annual, medium -term and long term plans through rigorous
processes and procedures which indicate that it attaches importance to planning and
budgeting;.
Budgeting is one of the fundamental decision making process at AKDA as it serves
numerous purposes, as it aids planning, co-ordination , communication, control and
performance evaluation. During budget formulation targets are set for each department of the
Assembly and the resources required to achieve these targets are estimated.

36

THE CONCEPT OF BUDGETARY CONTROL

14. REFERENCES:There have been many good books on THE COCEPT OF BUDGETARY
CONTROL written over the years. Some of those that have inspired the writing of this are
listed:1) MY INTERNAL GUIDE HELPS TO THE IMPOVE THIS PROJECT WORK UNDER
ITS ROOF.
2) INTERNET WEBSITES.
3) ADVANCE COST ACCOUNTING REFERENCE BOOKS.
A. BUDGERTARY CONTROL- James Oscar Mckinsey.
B. BUDGETARY CONTROL AND COST ANALYSIS Lawrence M. Matthews,
Industrial And Commercial Techniques LTD.

37