Unit 5 Budget

BUDGETARY CONTROL
Definition: Budgetary Control is defined as "the establishment of budgets, relating the

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 that policy or to provide a base for its revision.
Salient features:
a. Objectives: Determining the objectives to be achieved, over the budget period, and the
policy(ies) that might be adopted for the achievement of these ends.

b. Activities: Determining the variety of activities that should be undertaken for
achievement of the objectives.
c. 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.
d. 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.
e. Control Action: Ensuring that when the plans are not achieved, corrective actions are
taken; and when corrective actions are not possible, ensuring that the plans are revised
and objective achieved
CLASSIFICATION OF BUDGETS
Budgets may be classified on the following bases –
a) BASED ON TIME PERIOD:

(i) Long Term Budget
Budgets which are prepared for periods longer than a year are called
LongTerm Budgets. Such Budgets are helpful in business forecasting and
forward planning.
Eg: Capital Expenditure Budget and R&D Budget.
(ii) Short Term Budget
Budgets which are prepared for periods less than a year are known as
ShortTerm Budgets. Such Budgets are prepared in cases where a specific action
has to be immediately taken to bring any variation under control.
Eg: Cash Budget.
b) BASED ON CONDITION:
(i) Basic Budget
A Budget, which remains unaltered over a long period of time, is called Basic
Budget.
(ii) Current Budget

A Budget, which is established for use over a short period of time and is related
to the current conditions, is called Current Budget.
c) BASED ON CAPACITY:
(i) Fixed Budget
It is a Budget designed to remain unchanged irrespective of the level of activity
actually attained. It operates on one level of activity and less than one set of
conditions. It assumes that there will be no change in the prevailing conditions,
which is unrealistic.
(ii) Flexible Budget
It is a Budget, which by recognizing the difference between fixed, semi
variable and variable costs is designed to change in relation to level of activity
attained. It consists of various budgets for different levels of activity
d) BASED ON COVERAGE:
(i) Functional Budget
Budgets, which relate to the individual functions in an organization, are known
as Functional Budgets, e.g. purchase Budget, Sales Budget, Production Budget,
plant Utilization Budget and Cash Budget.
(ii) Master Budget
It is a consolidated summary of the various functional budgets. It serves as the
basis upon which budgeted Profit & Loss Account and forecasted Balance
Sheet are built up.
BUDGETARYCONTROLTECHNIQUES
The various types of budgets are as follows
i) Revenue and Expense Budgets:
The most common budgets spell out plans for revenues and operating expenses in
rupee terms. The most basic of revenue budget is the sales budget which is a formal
and
detailed expression of the sales forecast. The revenue from sales of products or services
furnishes the principal income to pay operating expenses and yield profits. Expense
budgets may deal with individual items of expense, such as travel, data processing,
entertainment, advertising, telephone, and insurance.
ii) Time, Space, Material, and Product Budgets:
Many budgets are better expressed in quantities rather than in monetary terms. e.g.
direct-labor-hours, machine-hours, units of materials, square feet allocated, and units
produced. The Rupee cost would not accurately measure the resources used or the results
intended.
iii) Capital Expenditure Budgets:
Capital expenditure budgets outline specifically capital expenditures for
plant,machinery, equipment, inventories, and other items. These budgets require care because
they give definite form to plans for spending the funds of an enterprise. Since a business takes a
long time to recover its investment in plant and equipment, (Payback period or gestation period)
capital expenditure budgets should usually be tied in with fairly long-range planning.
iv) Cash Budgets:
The cash budget is simply a forecast of cash receipts and disbursements against
which actual cash "experience" is measured. The availability of cash to meet obligations
as they fall due is the first requirement of existence, and handsome business profits do
little good when tied up in inventory, machinery, or other noncash assets.
v) Variable Budget:
The variable budget is based on an analysis of expense items to determine how
individual costs should vary with volume of output.
Some costs do not vary with volume, particularly in so short a period as 1 month, 6
months, or a year. Among these are depreciation, property taxes and insurance,
maintenance of plant and equipment, and costs of keeping a minimum staff of supervisory
and other key personnel. Costs that vary with volume of output range from those that are
completely variable to those that are only slightly variable.
The task of variable budgeting involves selecting some unit of measure that
reflects volume; inspecting the various categories of costs (usually by reference to the
chart of accounts); and, by statistical studies, methods of engineering analyses, and other
means, determining how these costs should vary with volume of output.
vi) Zero Based Budget:
The idea behind this technique is to divide enterprise programs into "packages"
composed of goals, activities, and needed resources and then to calculate costs for each
package from the ground up. By starting the budget of each package from base zero,
budgeters calculate costs afresh for each budget period; thus they avoid the common
tendency in budgeting of looking only at changes from a previous period.
Advantages
There are a number of advantages of budgetary control:
• Compels management to think about the future, which is probably the most
important feature of a budgetary planning and control system. Forces management
to look ahead, to set out detailed plans for achieving the targets for each
department, operation and (ideally) each manager, to anticipate and give the
organization purpose and direction.
• Promotes coordination and communication.
• Clearly defines areas of responsibility. Requires managers of budget centre’s to be
made responsible for the achievement of budget targets for the operations under
their personal control.
• Provides a basis for performance appraisal (variance analysis). A budget
is basically a yardstick against which actual performance is measured
and assessed. Control is provided by comparisons of actual results
against budget plan. Departures from budget can then be investigated
and the reasons for the differences can be divided into controllable and
non-controllable factors.
• Enables remedial action to be taken as variances emerge.
• Motivates employees by participating in the setting of budgets.
• Improves the allocation of scarce resources.
• Economises management time by using the management by exception principle.
Problems in budgeting
• Whilst budgets may be an essential part of any marketing activity they
do have a number of disadvantages, particularly in perception terms.
• Budgets can be seen as pressure devices imposed by management, thus resulting

in:
a) bad labour relations
b) inaccurate record-keeping.
• Departmental conflict arises due to:
a) disputes over resource allocation
b) departments blaming each other if targets are not attained.
• It is difficult to reconcile personal/individual and corporate goals.
• Waste may arise as managers adopt the view, "we had better spend it or
we will lose it". This is often coupled with "empire building" in order to
enhance the prestige of a department.
• Responsibility versus controlling, i.e. some costs are under the influence
of more than one person, e.g. power costs.
• Managers may overestimate costs so that they will not be blamed in the
future should they overspend.

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BUDGETARY CONTROL

Definition: Budgetary Control is defined as "the establishment of budgets, relating the

policy(ies) that might be adopted for the achievement of these ends.

a) BASED ON TIME PERIOD:

(ii) Current Budget

• Budgets can be seen as pressure devices imposed by management, thus resulting

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