Meaning of budget


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Meaning of budget

  1. 1. Budget and Budgetary Control Meaning of Budget A budget is a detailed plan of operations of some specific future period. It is an estimate prepared in advance of the period to which it applies. It acts as a business barometer as it is a complete programmer of activities of the business for the period covered. The chartered Institute of management Accountants, London, defines a budget as, “a financial and/or quantitative statement, prepared prior for a defined period of time, of the policy to pursued during that period for the purpose of attaining a given objective.” Budgetary control Every business firms have main objective to maximise the profits and to minimise the cost. No organisation can survive in this competitive market without the minimisation of cost. Budgetary control system is very helpful in bringing economy in the business. Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) 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 basis for its revision". Objectives The objectives of budgetary control are: (1) Compel for planning: As management is forced to look ahead, responsible for setting of targets, anticipating of problems & giving purpose & direction to the organization, this feature is the most important feature of budgetary control . (2) Communication of ideas & plans: Communication of ideas & plans to everyone is effected by budgetary control. In order to make sure that each person is aware of what he is supposed to do, it is necessary that there is a formal system. . (3) Coordinating the activities: The budgetary control coordinates the activities of different departments or sub-units of the organization. The coordination concept implies, for example, on production requirements, the purchasing department should base its budget & similarly, on sales expectations, the production budget should in turn be based. . (4) Establishing a system of control: A system of control can be established by having a plan against which progressive comparison can be made of actual results. . (5) Motivating employees: Employees are motivated for improving their performances by budgetary control. KCCIM | Transforming ordinary aspirants into extraordinary professionals 1
  2. 2. Budget and Budgetary Control Advantages of budgetary control The advantages of budgetary control system are as follows: (1) The objectives of the organization as a whole & the results which should be achieved by each department within this overall framework are defined by the budgetary control. (2) When there is a difference between actual results & budget, then the extent by which actual results have exceeded or fallen short of the budget is revealed by the budgetary control. (3) The variances or other measures of performance along with the reasons of difference between the actual results with those from budgeted is indicated by the budgetary control. Also, the magnitude of differences is established by it. . (4) As the budgetary control reports on actual performance along with variances & other measures of performance; for correcting adverse trends, a basis for guiding executive action is provided by it. (5) A basis by which future budget can be prepared or the current budget can be revised is provided by the budgetary control. . (6) A system whereby in the most efficient way possible the resources of the organization are being used is provided by the budgetary control. . (7) The budgetary control indicates how efficiently the various departments of the organization are being coordinated. . (8) Situations where activities & responsibilities are decentralized, some centralizing control is provided by the budgetary control . (9) The budgetary control provides means by which the activities of the organization can be stabilized, where the organization’s activities are subject to seasonal variations. . (10) By regularly examining the departmental results, a basis for internal audit is established by the budgetary control. . (11) The standard costs which are to be used are provided by it. (12) For the purpose of paying a bonus to employees, a basis by which the productive efficiency can be measured is provided by the budgetary control. KCCIM | Transforming ordinary aspirants into extraordinary professionals 2
  3. 3. Budget and Budgetary Control Limitations of Budgetary Control The main limitations of budgetary control are: (1) It used the estimates as a basis for the budget plan. . (2) In order to fit with the changing circumstances the budgetary programme must be continually adapted. Normally for attaining a reasonably good budgetary programme, it takes several years. . (3) A budget plan cannot be executed automatically. Enthusiastic participation is required by all levels of management in the programme. . (4) The necessity of having a management & administration will not be eliminated by any budgetary control system. The place of the management is not taken by it; rather it is a tool of the management. CLASSIFICATION OF BUDGETS On the basis of TIME Long Term Budget On the basis of FLEXIBILITY On the basis of FUNCTION Fixed Budget Sales Budget Shortterm budgets Flexible Budget Production Budget Cost of Production Purchase Budget Personnel Budget Research Budget Capital Expenditure Cash Budget Master Budget Operating Budget KCCIM | Transforming ordinary aspirants into extraordinary professionals 3
  4. 4. Budget and Budgetary Control CLASSIFICATION ACCORDING TO TIME 1. Long Term Budgets: The Budgets are prepared to depict long term planning of the business. The period of long term budgets various between five to ten years. The long term planning is done by the top'-level management and generally it is not known to lower levels of management. Long-term budgets are prepared for some sectors of the concern such as capital expenditure, research and development, long-term finances etc. These budgets are usefulfor those industries where gestation period is long i.e.,-machinery, electricity, and organization. 2. Short Term Budgets: These budgets are generally for one or two years and are in the form of monetary terms. The consumer's goods industries- like sugar, cotton, textiles, etc., use short-term budget. 3. Current Budget: The period of current budget is generally of months and weeks. The budgets relate to the current activities of the business. According to I.C.W.A. London "Current budget is a budget which is established for use over a short period of time and is related to current conditions". CLASSIFICATION ON THE BASIS OF FUNCTION Budgets can be classified on the basis of functions they are meant to perform. Their number depends upon the size and nature of the business. The following are the usual functional budgets: 1. Sales Budget: The budget forecasts total sales in terms of quantity, value, items, periods, areas etc. 2. Production Budget: The budget is based on sales budget. It forecasts quantity of production in terms of items, periods, areas, etc. 3. Cost of Production Budget: The budget forecasts the cost of production. Separate budgets are prepared for different elements of cost such as direct materials budget, direct labour budget, factory overheads budget, office over heads budgets, selling and distribution overheads budget, etc 4. Purchase Budget:The budget forecasts the quantity and value of purchases required for prod uction. It gives quantity-wise, money-wise and period-wise information about the materials to be purchased. KCCIM | Transforming ordinary aspirants into extraordinary professionals 4
  5. 5. Budget and Budgetary Control 5. Personnel Budget: The budget anticipates the quantity of personnel required during a period for production activity. This may be further split up between direct and indirect personnel budgets. 6. Research Budget: The budget relates to the research work to be done for improvement in quantity of the products or research for new products. 7. Capital Expenditure Budget: The budget provides a' guidance regarding the amount of capital that may be required for procurement of capital assets during the budget period, 8. Cash Budget: The budget is a forecast of cash position by time period for a specific duration of time. It states the estimated amount of cash receipts and cash payments, etc. 9. Master Budget: It is a summary budget incorporating all functional budgets in capsule form. It interprets different functional budgets and covers within its range the preparation of projected income statement and balance sheet. 10. Operating Budget:The budget shows planned operations for the forthcoming period, including revenues, expenses and related changes in inventory. It covers in its ambit Sales Budget, Production Budget, Cost of Production Budget, etc. Thus, it is the principal part of Master Budget of the business. The operating budget usually consists of i) Programmed budget and ii) Responsibility budget. i) Programmed Budget: It consists of expected revenues and costs of various products or projects that are termed as the major programmers of the firm. Such a budget can be prepared for each product time or project showing revenues, Costs and the relative profitability of the various programmers. Programmer budgets*are thus useful in locating areas where efforts may be required to reduce costs and increase revenues. They are also useful in determining imbalances and inadequacies in programmers so that corrective action may be taken in future. ii) Responsibility Budget:It is a budget, which identifies the revenues and costs, with an individ ualresponsible for their incurrence. Such a budget is an excellent control device since it identifies with the individual only such revenues and costs which are controllable by him. The regarding the actual results are collected from different operations and compared with the budgeted figure to find out whether the individual has what he expected. CLASSIFICATION OF THE BASIS OF FLEXIBILITY i) Fixed budget: The fixed budgets are prepared for a given level of activity, the budget is prepared before the beginning of the financial year, if the financial year starts in January then the budget will be prepared a month or two earlier i.e. November or December. The charge in KCCIM | Transforming ordinary aspirants into extraordinary professionals 5
  6. 6. Budget and Budgetary Control expenditure arising out of the anticipated charges will not be adjusted in the budget. There, is a difference of about twelve months in the budgeted and actual figures. According to I.C.W.A. London, "Fixed budget is designed to remain unchanged irrespective of thelevel of activity actually attained". ii) Flexible budget: A flexible budget consists of a series of budgets for different level of activity. It therefore, various with the level of activity attained. A flexible budget is prepared after taking into consideration unforeseen charges in the conditions Business.A flexible budget is defined as a budget, which by recognizing the of the difference between fixed, semi fixed and variable cost is designed to change in relation to the level of activities. KCCIM | Transforming ordinary aspirants into extraordinary professionals 6