Budgeting: Meaning of A Budgeting

BUDGETING
A systematic Approach to Profit Planning. It is well recognized that an enterprise should

be managed effectively and efficiently managing, infect, implies coordination and control
of the total enterprise efforts to achieve the organizational objectives. The Process of
Managing is facilitated when management charts its course of action in advance. The
function of Management also includes decision making facilitated by various managerial
techniques, procedures and by utilizing the individual and group efforts in a coordinated
and rational way.
One systematic approach for attaining effective management performance is

profit planning or budgeting. Profit plan or budgeting is an internal part of Management.
The controller would be particularly interested in profit planning since it helps to
regulated flows of funds which is his Primary concern.
Meaning of a Budgeting
Before we discuss the purposes of the budget or budgeting, let us define a budget
in a more specific way.
A budget is a comprehensive and coordinated plan, expressed in financial terms

for the operations and resources of an enterprise for some specific period in the future.
(i) It is a comprehensive and coordinated Plan.

(ii) It is expressed in financial terms.
(iii) It is a plan for the firm’s operations and resources.
(iv) It is a future plan for a specified period.
A budget is the plan of the firm’s expectations in the future. Planning involves
the control and manipulation of relevant variables – controllable and non-controllable and
reduces the impact of uncertainty. It makes management active to influence the
environment active to influence the environment in the interest of the enterprise.
A budget express the plan in formal terms and helps to realize the firm’s expectations.
Purposes of Budgeting.
The major purposes of budgets (or) budgeting are :
(I) To state the firm’s expectations ( goals in clear, formal terms to avoid confusion
and to facilitate their attainability)
( II ) To communicate expectations to all concerned with the management of the firm so

that they are understood, supported and implemented.
( III ) To provide a detailed plan of action for reducing uncertainty and for the proper
direction of individual and group efforts to achieve goals.
(IV) To coordinate the activities and efforts in such a way that the use of resources is
maximized.
Objectives of Budgeting:
Budgeting is forward planning. A planned activity has better chances of success

than an unplanned one. The objectives of planning and hence budgeting are:
(i) To forecast the future and plan to avoid losses but more positively to
maximize profits.
(ii) To bring about coordination between different functions of an enterprise
which is essential for the success of any enterprise: and
(iii) To ensure that actions are in tune with targets ( to take suitable correctives
there of)
Needless to say, the whole budging exercise will mean that the organization must
devote careful thought to its long-term and immediate goals.
Merits and limitations of Budgeting:
Merits:
(I) Budgeting leads to maximum utilization of resources with a view to ensuring

maximum return.
( II ) It creates a sense of awareness at all levels of management in the process of

fulfillment of targets.
( III ) Budgeting leads to better coordination and hence understanding between different
functions.
Limitations:
(I) Forecasting planning or budgeting is not an exact science and a certain amount of
judgment is present in any budgeting plan.
( II ) Budgeting should be followed up by effective control action : this is often lacking

in many organizations, which defeats the very purposes of budgeting.
( III ) The installation of a budgeting system is an elaborate process and it takes time.
Types of Budget:-
The budget may be classified on the basis of scope. Though budgets can be classified
according to carious points of view, the following basis of classification are generally
followed in practice.
A Functional classification.
B Classification on the basis of time factor.
C Classification on the basis of flexibility.
A. Functional classification :-
A master budget is the summary budget for the entire enterprise and embodies the
summarized figures for various activities, It is the consolidation of all functional budgets.
The following are the principal functional budgets.
a) Sales Budgets :- the sales budget is a forecast of total sales expressed in terms
of money and quantity.
b) Production Budget:- It is a forecast of the production for the budget period. It

may be expressed in units or standard hours. While preparing the production
budget, the production executive will take in to account the physical facilities like
plant, power, factory space, materials for the period.
c) Materials Budget:- It shows the details of raw materials to be consumed. It is

expressed in terms of physical quantities and valves of materials. This budget
provides that right materials
d) Labour Budget:- It shows the details of labour requirement in quantity, with

estimated costs. This budget gives detailed information relating to the number of
Employees, rates of wages and cost of labour hours to be employed.
e) Research and Development Budget :- this budget lists all the research and
development activities together with their likely costs.
f) Cash Budget:- It is prepared after all the financial budgets are prepared by the
chief accountant either on a monthly or weekly basis. It shows the sum total of
the requirements of cash in respect of various functional budget.
g) Capital expenditure Budget:- This budget shows the estimated expenditure on
fixed assets like plant, land, machinery, building etc. It is a long-term budget,
usually set for three tot five years. The following are the advantages of capital
expenditure Budget.
1. It estimates the capital expenditure requirements and accordingly provides or

arranges for it.
2. It serves as a tool of controlling capital expenditure.
B. Classification on the basis of time factor:-
In terms of time factor budgets are broadly of the following three types.
a) Long term Budgets:- They are concerned with planning the operations of a
firm
over a perspective of five to ten years. They are usually in terms of physical
quantities.
b) Short term Budgets:- They are usually for a period of a year or two and are in
the nature of production plan in monetary terms.
c) Current Budgets:- They cover a period of month or so and they will be
adjusted
to current conditions or prevailing circumstances.
C. Budgets based on Flexibility:-

On the basis of flexibility budgets may be classified into
a) Fixed b) Flexible budgets.
Fixed Budget:- Fixed budget is a budget in which targets are rigidly fixed, such
budgets are usually prepared from one to three months in advance of the fiscal year
to which they are applicable. It smacks of rigidity and artificially.
Flexible Budget:- Flexible budget or variable budget is one which provides

estimates for different levels of activities. It is a budget which, by recognizing the
differences between fixed and variable cost in output or turnover is designed to
change appropriately with such fluctuations.

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BUDGETING

A systematic Approach to Profit Planning. It is well recognized that an enterprise should

One systematic approach for attaining effective management performance is

A budget is a comprehensive and coordinated plan, expressed in financial terms

(i) It is a comprehensive and coordinated Plan.

The major purposes of budgets (or) budgeting are :

( II ) To communicate expectations to all concerned with the management of the firm so

Budgeting is forward planning. A planned activity has better chances of success

(I) Budgeting leads to maximum utilization of resources with a view to ensuring

( II ) It creates a sense of awareness at all levels of management in the process of

( II ) Budgeting should be followed up by effective control action : this is often lacking

The following are the principal functional budgets.

b) Production Budget:- It is a forecast of the production for the budget period. It

c) Materials Budget:- It shows the details of raw materials to be consumed. It is

d) Labour Budget:- It shows the details of labour requirement in quantity, with

1. It estimates the capital expenditure requirements and accordingly provides or

B. Classification on the basis of time factor:-

C. Budgets based on Flexibility:-

Flexible Budget:- Flexible budget or variable budget is one which provides

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