Budgeting and Budgetary Control

Semester II

Concept of Budgeting
Budgeting is a whole process of planning, designing, implementing and operating budget Budget is a financial and / or quantitative statement, prepared and approved prior to defined period of time, of the policy to be pursued during the period for the purpose of attaining a given objective Budgeting acts as a tool for both planning and control

Budgetary Control
The use of a budget to control a firms activities is known as budgetary control Budgetary control is: establishment of budget relating the responsibilities of executives to the requirements of a policy the continuous comparison of the actual with budgeted result either to secure by individual action the objective of that policy or to provide a basis for its revision

Budgeting and Forecasting

Both relate to future events and involve prediction of something Basic difference lies in degree of sophistication involved in the predictions used by them Forecasting is an essential part of the budgeting process relying mainly on data from the past and present and analysis of trends Budgeting is not merely forecasting, it is a plan that shows the policy to be followed

1. Planning- A budget incorporates expected performance and present managerial targets 2. Coordination- Budgeting provides the basis for individuals in all parts of the firm to exchange ideas on how best to achieve the objectives 3. CommunicationBudgeting involves participation, exchange of information and awareness about availability of resources 4. Control and Performance Evaluation- Actual performance is compared with budget as a means of controlling and judging performance

Objectives and Functions of Budgeting

Budgeting Process (Steps)

1. Obtaining estimates of sales, production levels, expected costs and availability of resources from each sub-unit 2. Coordinating estimates 3. Communicating budget to responsible managers and the concerned departments 4. Implementing budget plan 5. Reporting interim progress towards budgeted objectives

Important Terms
Budget manual- It is a document that specifies the procedures to be followed in developing the budget and the responsibilities of persons engaged Budget Centre- It is the lowest level in an organization for which detailed costs are budgeted, separately from those of other budget centers

 Budget factor/key factor/limiting factor- It is a factor which will limit the activities of an undertaking and which is taken into account in preparing budgets. Some examples of principal budget factors are as follows: i. Raw materials ii. Labor iii. Plant capacity iv. Sales activity v. Management vi. Capital/resources Incase a limiting factor cannot be overcome, then the entire budget involving all functions will have to be built around the factor

Zero-based Budgeting
ZBB is an analytical approach to budgeting All activities are re-evaluated each time a budget is formulated Each functional budget starts with the assumption that the function does not exist and is at zero cost Previous years actual results are not given any due consideration