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BUDGETING AND

BUDGETARY
CONTROL
DR. SHUBHRA
CONCEPT OF BUDGET
The Chartered Institute of Management Accountants (CIMA) London, has defined a budget as a financial and/or
quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the
purpose of attaining a given objective. It may include income, expenditure and employment of capital.

Characteristics

A budget is primarily a planning device but it also serves as a basis for performance evaluation and control.
(a)

A budget is prepared either in money terms or in quantitative terms or in both.


(b)

A budget is prepared for a definite future period.


(c)

Purpose of a budget is to implement the policies formulated by management for attaining the given objectives.
(d)
CONCEPT OF BUDGETARY CONTROL
Budgeting: The act of preparing budgets is called budgeting. In the words of J Batty, the entire process of preparing the
budgets is known as budgeting.
Concept of Budgetary Control: According to CIMA, London, Budgetary control is the establishment of budgets relating to
the responsibilities of executives of a policy and the continuous comparison of the actual with the budgeted results, either
to secure by individual action the objective of the policy or to provide a basis for its revision.
Characteristics
Establishment of budgets for each function/department of the organization.
(a)

Comparison of actual performance with the budgets on a continuous basis.


(b)

Analysis of variations of actual performance from that the budgeted performance to know the reasons thereof.
(c)

Taking suitable remedial action, where necessary.


(d)

Revision of budgets in view of changes in conditions.


(e)
OBJECTIVES OF BUDGETARY
CONTROL

A budget provides a Budgeting aids A budget is a communication A budget is a useful


detailed plan of managers in co- device. It provides not only device for
action for a business ordinating their adequate under- standing and motivating managers
over a definite efforts so that knowledge of the programmes to perform in line
period of time. objectives of the and policies to be followed but with the company
organization. also alerts about the restrictions objectives.
to be adhered to .
Planning Co-ordination Communication Motivation

Control is necessary A budget provides a useful


to ensure that plans means of informing
and objectives as managers how well they
laid down in the are performing in meeting
budgets are being targets they have
achieved. previously helped to set.
Performance
Control
evaluation
ESSENTIALS OF EFFECTIVE
BUDGETING
Participation
Support of top Reasonable Clearly defined
by responsible
management goals organization
executives

Continuous Adequate
Constant Maximum
budget accounting
vigilance profits
education system

Integration
Cost of the
with standard
system
costs
PRELIMINARIES IN THE INSTALLATION
OF BUDGET SYSTEM
Creation of budget centres
Budget centre is section of organization for which a budget is prepared.
Introduction of adequate accounting records
System is designed to be able to record and analyse information required.
Preparation of an organization chart
Organization chart should be prepared which shows the plan of organization.
Establishment of budget committee
In large concerns, the direction and execution of the budget is delegated to a budget committee which reports
directly to the top management.
Preparation of budget manual
A budget manual has been defined by CIMA, London as a document which sets out the responsibilities for the
persons engaged in the routine of and the forms and records required for budgetary control.
Budget period
Budget period is a length of time for which a budget is prepared and operated.
Determination of the key factor
The key factor means the factor which limits the size of output.
CLASSIFICATION OF BUDGETS
On the basis of
On the basis of
function and
flexibility:
scope:

Functional Fixed
budgets budget

Master Flexible
budget budget
FUNCTIONAL BUDGETS
A functional budget is one which relates to a particular function of the business.
FUNCTIONAL
BUDGETS(Contd.)
CASH BUDGET
It is a detailed estimate of cash receipts from all sources and cash payments for all purposes and the resultant cash
balances during the budget period.

Preparation of Cash Budget


MASTER BUDGET
According to CIMA, London, master budget is a summary budget incorporating its component functional
budgets and which is finally approved, adopted and employed.

The master budget is prepared by the budget director (or budget officer) and is presented to the budget
committee for approval. If approved, it is submitted to the Board of Directors for final approval. The Board may
make certain amendments/alterations before it is finally approved.
FIXED AND FLEXIBLE BUDGETS
Fixed Budget: A fixed budget is one which is prepared keeping in mind one level of output. It is defined as a budget which
is designed to remain unchanged irrespective of the level of activity attained.
Flexible Budget: In contrast to a fixed budget, a flexible budget is one which is designed to change in relation to the level
of activity attained. The underlying principle of flexible budget is that a budget is of little use unless cost and revenue
are related to the actual volume of production.

Distinction between Fixed and Flexible Budgets


BUDGET REPORTS
Establishing budgets in itself is of no use unless there is a continuous flow of budget reports showing comparison of
actual and budget figures. Budget reports should be prepared at regular intervals (say, every month) showing the
reasons for the differences between actual and budget figures.

Essentials of a Budget Report


ZERO BASE BUDGETING (ZBB)
According to CIMA, London, ZBB is defined as a method of budgeting whereby all
activities are revaluated each time a budget is set. Discrete levels of each activity are valued and a combination chosen
to match funds available.
Main Features of Zero Base Budgeting (ZBB)
PERFORMANCE
BUDGETING
Performance budgeting is a relatively new concept which focuses on functions, programmes and activities. Performance
budgets are established in such a manner that each item of expenditure related to a specific responsibility centre is
closely linked with the performance of that centre.

Steps in Performance Budgeting


A budget is a predetermined detailed plan of action
developed and distributed as a guide to current
operations and as a partial basis for the subsequent
evaluation of performance.