Meaning of budget


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Meaning of budget

  1. 1. Meaning of Budget: A budget is the monetary or/and quantitative expression of business plans and policies to bepursued in the future period of time. According to CIMA, “A budget is a financial and/or quantitative statement prepared prior toa defined period of time, of the policy to be pursued during that period for the purpose of attaininga given objective”.Meaning of Budgetary Control: It is the process of determining various budgeted figures for the enterprises for the futureperiod and then comparing the budgeted figures with the actual performance for calculatingvariances, if any. Budgetary control is a system of controlling costs which includes preparation of budgets, co-coordinating and department and establishing responsibilities, comparing actual performance withthe budgeted and acting upon results to achieve maximum profitability.Objective of Budgetary Control: 1. To ensure planning for future by setting up various budgets. The requirements and expected performance of the enterprise are anticipated. 2. To coordinate the activities of different department. 3. To operate various cost centers and departments with efficiency and economy 4. Elimination of wastes and increase in profitability 5. To anticipate capital expenditure for future 6. To centralize the control system 7. Correction of deviation form the established standards 8. Fixation of responsibility of various individuals in the organization. Advantages of Budgetary Control: 1. Maximization of profit 2. Coordination 3. Tools for measuring performance 4. Determining weakness 5. Corrective action 6. Reduces cost Limitation of Budgetary Control: 1. Uncertain future
  2. 2. 2. Discourages Efficient persons 3. Problem of coordinating 4. Conflict among different department 5. Depends upon support of top management Types of Budget: The budget may be classified into A) Classification according to Time a. Long term budgets b. Short term budgets c. Current budgets B) Classification on the basis of Function a. Operating budgets b. Financial budget c. Master budget C) Classification on the basis of Flexibility a. Fixed budget b. Flexible budgetFlexible Budget: A Flexible budget consists of a series of budgets for different level of activity. Itvaries with the level of activity attained. A flexible budget is prepared after taking into considerationunforeseen changes in the condition of the business. A flexible budget is defined as a budget whichby recognizing the difference between fixed, semi –variable, and variable cost is designed to changein relation to the level of activity. The flexible budget will be useful where level of activity changes from time to time. Whenthe forecasting of demand is uncertain and the undertaking operates under the conditions ofshortage of materials, labour etc, then this budget will be more suitable.Format of Flexible Budget
  3. 3. Particulars Capacities 50% 60% 100%Fixed Expenses -- -- --Variable Expenses -- -- --Semi Variable Expenses -- -- --Add : profit / Less : Loss -- -- --Estimated Sales *** *** ***Cash Budget : A cash budget is an analysis of flow of cash in a business over a short or long period of time.It is a forecast of cash intake and outlay.Format of Cash BudgetCash budget for the months from Jan to April (4 month ending)Details Jan Feb Mar AprReceipts:Opening balance (cash in hand)Cash SalesCredit SalesOther ReceiptsTotal ……………………………….(A)Payments:PurchasesWagesExpensesIncome TaxTotal ……………………………..(B)Closing Bal (A - B)