2. What is Budget
A Budget is a detail plan of operations for a specific
period of time. In the present era every one is with the
term budget because it is essential in life. A budget is
prepared for the effective utilization of resources,
which will help in achieving the set objectives. Budget
are also very important in individual life as it important
in business firms.
3. Budgetary Control
Every business firms have main objective to maximize
the profits and to minimize the cost. An organization
cannot run properly without a good budgetary system.
Budgetary Control system is very helpful in bringing
economy in business. It is applied to a system of
management and accounting control by which all the
operations and output are forecasted in a proper
manner to achieve the best possible profit.
4. Budgetary is Define
“Budgetary control is a system of controlling
costs which includes the preparation of
budgets, coordinating the department and
establishing responsibilities, comparing actual
performance with the budgeted and acting
upon to achieve maximum profitability.”
By Brown and Howard
5. Features of Budgetary Control
• One Year Duration
• Estimation of Business Units Profit Potential
• Appraisal of Performance
• Monetary Terms
• Alteration of Approved Budget under
Specified Conditions
• Review and Approval by a Higher Authority
• Managerial Commitment
6. Objectives of Budgetary Control
• Basic Purpose
• Cooperative Spirit
• Maximum Profitability
• Centralized Control
• Optimum Use of Resources
• Coordination
• Execution
• Remedial Measures
• Revision.
7. Advantages of Budgetary Control
• Maximization of Profit
• Co-ordination
• Specific Aims
• Tool for Measuring Performance
• Economy
• Determining Weaknesses
• Corrective Action
• Consciousness
• Reduces Costs
• Introduction of Incentive Schemes
8. Disadvantages of Budgetary Control
• Uncertain Future
• Budgetary Revisions Required
• Discourage Efficient Persons
• Problem of Co-ordination
• Conflict among Different Departments
• Depends upon Support of Top Management
9. Classification of Budget
• Classification According to Time
• Classification on the Basis of Function
• Classification to Flexibility
11. Classification on the Basis of Function
1.) Operating Budgets
Production Budget
Material Budget
Labour Budget
Overhead Budget
2.) Financial Budgets
Cash Budget
Capital Expenditure Budget
Income Statement of Retained Earnings Budget
Budgeted Balance Sheet or Position Statement Budget
3.) Master Budget
14. Sales Budget
Sales Budget is an estimate of expected sales
during a budget period. It is the starting point
on which other budgets are also based.
15. Factors considered in Preparing a Sales
Budget
• Past Sales figures and Trend
• Salesmen's Estimates
• Plant Capacity
• General Trade Prospects
• Orders in Hand
• Seasonal Fluctuations
• Potential Market
• Availability of Material and Supply
• Financial Aspect
16. Format of Sales Budget
Format of Sales Budget
Period/
Area
Budgeted in the current
Period
Actual Sales Budgeted for the future
Period
Units Rate
(Rs.)
Amt
(Rs.)
Units Rate
(Rs.)
Amt
(Rs.)
Units Rate
(Rs.)
Amt
(Rs.)
Northe
rn Area
Produc
t – X
Produc
t – Y
Southe
rn Area
Produc
t – X
Produc
t – Y
Grand
Total
17. Production Budget
• It is a component of the master budget that
establishes the level of production planned for
the budget period. It fixes the target for the
future output.
• Production budget attempts to estimate the
number of units of each product that the
company is planning to produce during the
budget period.
18. Factors while preparing a Production
Budget
• Sales
• Inventory Policies
• Availability of Production Resources
• Key Factor
• Plant Factor
• Plant Maintenance
• Technological Obsolescence
• Production Control
• Time Lag
• Time Involved
• Change Over
• Economic Batch Qauntity
19. Format of Production Budget
Particulars January February March
Sales in quantity
(as per sales
budget)
XXX XXX XXX
Add: Desired
inventory at the
end
XXX XXX XXX
Total quantity
required
XXX XXX XXX
Less: Stock at
beginning
XXX XXX XXX
Quantity to be
produced
XXX XXX XXX
20. Material Budget
The process of preparing material budget or
purchase budget in terms of quantity and
money value of materials to be procured in
given period of time.
21. Benefits of Material Budget
• Help to estimate material prices during a
year
• Help to analysis material requirement
• Reduced risk of inventory planning
• Maximum purchase lead time
• Reduces transportation cost
• Better supplier relations.
22. Factors Considered in Preparing a
Material Budget
• Raw material required for the budget output.
• The Percentage of raw material to total cost of products should be
calculated on the basis of previous records. On the basis of this
percentage a rough total value of raw materials for the budgeted
output will be ascertained.
• Consideration must be given to the companys stocking policy.
Figures related to anticipated raw material stock to be held at
different time should be known.
• Consideration must be given to the lag between the placing of the
order of the purchase of materials and the receipt of materials.
• The seasonal nature in the availability of raw material should be
considered.
• The price trend in the market.
23. Direct Labour Budget
The direct labour budget is developed from the
production budget. Direct labour requirements must
be computed so that the company will know whether
sufficient labour time is available to meet the
budgeted production needs. By knowing in advance
how much labour will be needed throughout the
budget year, the company can develop plans to adjust
the labour force as situation requires. Companies that
neglect to budget run the risk of facing labour
shortages or having to hire and lay off workers at
awkward times
24. Department Labour Budget
Cost Center: Product Output Quantity Month: Standard Hours
A
B
C
Workers Number Hours Rate of Wages Direct Labour Cost Total
Male:
Skilled
Semi-skilled
Unskilled
Female:
Skilled
Semi-skilled
Unskilled
Total
25. Availability of Workers in Each Grade
• Overtime working.
• Second shift working – full or partly
• Transfer from one department to another
department
• Recruitment.
• Sub – contracting
• Reduce idle time.
• To investigate possible increased sales.
• Retrenchment in case of excess on the long –
term basis.
26. Overhead Budget
OVERHEAD BUDGET shows the expected cost of all
production costs other than direct materials and direct
labour. Budgeted variable overhead costs are based on a
budgeted variable overhead rate multiplied by budgeted
activity. Budgeted fixed overhead costs remain unchanged as
the activity level changes within the relevant range.
27. Format of Overhead Budget
Production Budget
Particulars Original Budget (Rs.) Budget for Next Year
(Rs.)
Direct Labour XXX XXX
Direct Material XXX XXX
Prime Cost XXX XXX
Factory Overhead: XXX XXX
Fixed XXX XXX
Variable XXX XXX
Total Cost XXX XXX
28. Cash Budget
A cash budget is extremely important, especially for small
businesses, because it allows a company to determine how
much credit it can extend to customers before it begins to
have liquidity problems.
For example, without setting a cash budget, spending a dollar
a day on a cup of coffee seems fairly unimpressive. However,
upon setting a cash budget to account for regular annual cash
expenditures, this seemingly small daily expenditure comes
out to an annual total of $365, which may be better spent on
other things. If you frequently visit specialty coffee shops,
your annual expenditure will be substantially more.
29. Characteristics of Cash Budget
• Is a statement of anticipated cash receipts and
payments.
• Is related to predetermine future period.
• Is expressed in terms of monetary values.
• Is forecast of financial aspirations of the
enterprise.
• Is an outline of future plans, policies and
actions of the management.
30. Items in Cash Budget
Cash Receipts Cash Payments
Cash sales Cash Purchase
Collection from Debtors Payment to creditors
Sales of fixed assets Labour cost
Issue of share and debenture Factory overhead
Loans and Borrowings Loan repayment
Interest and dividend Purchase of market securities
Miscellaneous receipts Interest and dividend
Tax payment
Payment for wages and salaries, rent
and other expenses.
Miscellaneous expenses
31. Format of Cash Budget
Particulars Jan Feb March
1.) Opening Cash Balance
2.) Estimates Cash Receipts
3.) Total Receipts available
during the month (1+2)
4.) Estimated Cash Payments
5.) Total Cash Payments
6.) Closing Cash Budget
(3-4)
32. Master Budget
• It is summary of various functional budgets. It
is prepared by integrating various budget into
one consolidated budget so as to represent
the budgeted profit and loss account and the
budgeted balance sheet as at the end of the
budget period.
33. Steps Involved in Preparation of
Master Budget
• Sales budget, as the starting point,
• Production budget,
• Cost of production budget,
• Cash budget
• Projected income statement and the balance
sheet.
34. Advantages of Master Budget
• All summary report is prepare in one report.
• The accuracy of al.
• l the functional budgets is checked because the
summarized information of all functional budgets
should agree with the information given in the master
budgets.
• Estimated profit of the organization.
• Information relating to forecast balance sheet is
available in the master budget.
• It reveals the managerial goals regarding revenues,
expenses, profits and cash flows etc.
35. Format of Master Budget
Particulars January February For the Period
Budget Previous
Period
Budget Previous Period Budget Previous
Period
Previous period
Less: Purchase as per
material budget.
Direct labour as per direct
labour budget.
Gross Profit
Less: Factory overhead-
variable
Repairs and maintenance
Factory overhead- fixed
Research and
development expenses
Administrative overheads
Selling and distribution
overheads
Operating Profit
36. Flexible Budget
Is based upon different levels of activity. It is a very
useful tool for comparing actual costs experienced to
the cost allowable for the activity level achieved, i.e. it
is dynamic in nature as compared to static. A series of
budgets can be readily developed to fit any activity
level. Flexible budgeting distinguishes between fixed
and variable cost, thereby allowing for a budget that
can be automatically adjusted to the level of activity
actually attained.
37. Features of Flexible Budget
• Cover a Range of Activity
• Dynamic in nature
• Facilitate Performance Measurement
38. Advantages of Flexible Budget
• A flexible budget makes it possible to establish budget
cost for any level of activity within the relevant range
even after the periods activity is over.
• Helpful in assessing the performance of the
department heads,
• Ascertain the cost
• Evaluating the effects of varying volumes of activities
on profits and cash position. It helps in production
planning as well as profit planning.
• It control overheads.
39. Disadvantages of Flexible Budget
• Linearity of cost and not maintain record of
e.g. discounts of bulk purchase of goods or
material.
• It make on assumption of continuity, but in
future it may be stop.
• Determining the fixed and variable elements
• It tend to maintain fixed cost at the same
level of output or sales.
40. Format of Flexible Budget
Particulars Capacity 60% Capacity 80% Capacity 100%
Prime cost
Variable Overheads
Marginal Cost (A)
Sales (B)
Contribution
C= (B-A)
Fixed Cost (D )
Profit (C-D)
41. Zero Based Budgeting (ZBB)
A method of budgeting in which all expenses must be justified
for each new period. Zero-based budgeting starts from a
"zero base" and every function within an organization is
analyzed for its needs and costs. Budgets are then built
around what is needed for the upcoming period, regardless of
whether the budget is higher or lower than the previous one.
ZBB allows top-level strategic goals to be implemented into
the budgeting process by tying them to specific functional
areas of the organization, where costs can be first grouped,
then measured against previous results and current
expectations.
42. Definition: Zero Based Budgeting (ZBB)
ZBB is a method of budgeting whereby all
activities are re-evaluated each time a budget
is set. Discrete levels of each activity are
valued and combination chosen to match
funds available.
By CIMA
43. Features of ZBB
• Decision completely justify by manager.
• Activities are identified in decision packages.
• Decision packages are ranked in order of priority,
• Packages are evaluated by systematic analysis.
• There should be good relation between superior
and subordinates. So that they can discuss and
plan for future step they are going to take.
• Corporate objective should be clear.
• Arrange the order on priority basis for good
results or output.
44. Important Aspects of ZBB
• It emphasises on all requisites of budgets.
• Evaluation on the basis of decision packages and
systematic analysis, i.e., in view of cost
benefit analysis.
• Planning the activities, promotes operationai efficiency
and monitors the performance to
achieve the objectives.
45. Steps Involved in ZBB
• No Previous year performance of inefficiencies are to be
taken as adjustments in subsequent year.
• Identification of activities in decision packages.
• Determination of budgeting objectives to be attained.
• Extent to which Zero Base Budgeting is to be applied.
• Evaluation of current and proposed expenditure and
placing them in order of priority.
• Assignment of task and allotment of sources on the basis of
cost benefit comparison.
• Review process of each activity examined afresh.
• Weightage should be given for alternative course of
actions.
46. Advantages of ZBB
• Utilization of resources at a maximum level.
• It serves as a tool of management in formulating production
planning.
• It facilitates effective cost control.
• It helps to identify the uneconomical activities.
• It ensures the proper allocation of scarce resources on priority
basis.
• It helps to measure the operational inefficiencies and to take the
corrective actions.
• It ensures the principles of Management by Objectives.
• It facilitates Co-operation and Co-ordination among all levels of
management.
• It ensures each activity is thoroughly examined on the basis of cost
benefit analysis.
47. Disadvantages of ZBB
• It is not suitable for all the activities in an
organization.
• It has limited application in a profit making
organization. It applied in case of workers
welfare measures.
• It is not apply in R&D activities .
• ZBB is indifferent as to whether total budget is
increasing or decreasing.
• More paper work
• It takes more time and efforts.
48. Performance Budgeting
“The Process of analyzing, identifying,
simplifying and crystallizing specific
performance objectives of a job to be
achieved over a period, in the framework of
the organizational objectives, the purpose
and objectives of the job.“
BY National Institute of Bank Management
49. Features of Performance
Budgeting
• Classification into functions, activities or
programme.
• Specifying objectives of each programme.
• Establishing appropriate methods for
measurement of work.
• Setting work target for each programme.
50. Importance of Performance Budgeting
• It correlates the financial and physical aspects
of every programme or activity
• It improves budget formulation.
• It facilitates better appreciation and review of
the organization activities by the top
management.
• It measures progress towards long term goals.
• It helps in making effective performance
audit.
51. Steps of Performance Budgeting
• Classification of Activities
• Specification of Objectives.
• Analysis of Activities.
• Establishing Control Norms.
• Clears Lines of Authority and Responsibility.
• Evaluation.
53. Disadvantages of Performance Budget
• Rapid Organizational Activities not Considered
• Difficulties in Comparison.
• Quality is Ignored.
• External Factors not Considered.
