A budget is a quantitative statement that plans revenues, expenses, assets, liabilities and cash flows for a defined period. Budgets can be classified according to time (short-term and long-term), function (sales, production, research & development, cash), or flexibility (fixed and flexible). Short-term budgets cover 1-12 months while long-term budgets extend beyond one year. Functional budgets include sales, production, cost of production, research & development, and cash budgets. Fixed budgets remain unchanged while flexible budgets cover a range of activity levels. Zero-base budgeting re-evaluates all activities and expenditures each budget cycle, starting from a base of zero.

1. •
What is a Budget?
ICMA defines budget as:
''A budget is a quantitative statemen t, for a defined period of
time, wh ich may include planned revenues, expenses, assets,
liabilit ies and cash flows.A budget provides a focus for the
organizations, aids in the co-ordina tion of activities and
facilitates control."

2. Classification of Budgets
According to time
IP" L ong te.n n 1
budget
Aecording to function Aa :onling to flexibility
IFixed Budget '
•
[ Sales Budget
1
F&exib&e Budget
Production
Budget
Cost of Production
Budget
[ R&O Budget
[ Cash Budget ,
'

3. Classification of Budget according to Time
ShQrt Term Budget
Ma)' corer periods of three to
tlelve months depending upon
nature of bu siness
Should be long enough to a llow
completion of a sea son or all aspects
ofa blLo;iness
The period should coincide with
fina ncial accounting period to
facilita re evalua tion of perforn1a nee
e.g. A budget allocated to
n1anu facturing of lots for spring
su n1n1er season, Fa shion Retailing,etc.
LQng Term Bydg,et
A systematic and formalized
process for directing & controlling
operations for period extending
be}'Ond one ye<:ir
I t evaluates future in1plica
tions
associJted Vith presen t decisions
r..itarket trends, change
in den1ographics. nationa l incon1e,
etc. play important role in preparing
long tern1 budget
J t proves useful in forecasting
and
evaluation of a n organiza tion
over
period of tin1e
e.g. A father planning -
requirement for his h<
U
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4. budget
Short Term budget:
A student allocating his/her pocket money to his monthly expenses like
food, clothing, rent, l eisure activities, stationaries, etc.
Long Term budget:
A father pl anning future of his children: College expen ses -
Child 1(current age 8); $20,ooo/year begin ning in 10 years Child 2
(current age 3); $24,000/year begi nning in 15 years
E.
xamples on short term and long term
New car purchase - $30,000 in two years ($4,000 upfront + _
. _-
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$400/ month for seven years)
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5. E.
g.
(_Jttdl ( f'l' I
Classification of Budget according to Function
Sales Bud t
•The most important budget, all other budgets are contingent upon
•Production budget, selling and distribution, etc. are affected b)' sales
budget
10
2400
1
30
12
l86o
Salesu11its
Price per uoit
Tot.>I Sales
11-0
Sales forecasting:
Dereloping a sales budget requires forecasting future sales, Vhlch depends upon three
n1ain factors:
1.lnforn1ation concerning past perforn1ance
2. lnforn1ation about present conditions'vithin industryand sales territoryand
3. Data concerning the industry and general business conditions -- - _
-- - ::::.--:::::::
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6. Classification of Budget according to Function
Production Budaet
•It is stated inph)'Sical units
•It specifies the number of un its
of each product that produced to
satisfy the sales forecast
must be
• The number of units to be produced can be formul ated using:
Units to Produ ce = Budgeted sales + Desired closing inventory of f
inished goods - Beginning inventory offinished goods
E.
g.
Budgeted sales = 70 , 0 0 0 ,
Desired closing finished goods inventory = 2 0 , 0 0 0
Beginning finished goods inventory = 4 0 , 0 0 0
Units to be produced = (7 0, 0 0 0 + 2 0, 0 00 - 4 0 , 0 0 0 ) = 5 0,0 0 0 -- -::::
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7. Classification of Budget according to Function
Production Cost Budget
•It sun1n1arizes the n1ateri als budget, labor budget and
the fucto1y overhead budget
•It is n1ade up of tlu·ee budgets:
• Materials
• Labor
• Factmy overhead
Direct Materials budget:
•I t speciftes the cost of direct n1<:1terials used and cost of the
direct n1aterials
purchased .
•I t helps in developing purcha sing a nd delivery schedule
•H elps to n1eet production targets
Direct Labor Budget:
• J t estin1Jtes the labor,in nun1berand grades, to ena ble production budget to be
achie,,ed
• I t m ust disclose:grade of labor along with cost (wages) and period of training
Factory Overhead Budget: _--
-
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• Prepared on basis of chart of accounts Vhich reflec!!.£li-
ffe
"1!_
l n.d
- a ils of cost centet .ru:.
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8. Product A
Example on Production Cost budget
l1aterial lJsage
budget
Bu dgeted
production
Dire ct materials
requirements
Product A Product
B
Di rect materials
u sage (kg)
Cost per kg Cost of
Direct
material s used
--..=..=rz -=-
Product B Total
5 0 , 0 0 0 8o,ooo
Rs. I
Rs. 2 ,5 0 ,0 0 0
-- -- =
=
=
:
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1 = sai 4 -
x 8
4,So,000
Rs. 1.50
Rs.7,20,000
Rs. 9,70,000 ;:.;::-::-:-C--
----

9. Classification of Budget according to Function
Research and Develo.pment Budget
•A tool for planni ng and controll ing research and developmen t costs
•Helps in coordination with company's other plans and projects
•Helps allocation of funds fur R& D by coordi nating company's
immediate and long-term plans
•Helps i n plannin g staff and equipmen t requirements for R&D
-
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10. Classification of Budget according to Function
Cash Bud get
It contains details of cash inflows and cash outflows for the budget period of
son1e other specific period.
It indicates effect on cash positions of seasonal requirements, unusual receipts
and slowness in collecting receivables
Indicatesavai !ability of cash
Shows availability of excess funds for short tem1investments
Helpsin planning bond reden1ptions, incon1e tax installments and payn1ents
toen1ployees
Peri od of Cash budget
1. Operational:May be prepared n1onthly,Veek ty eren da ily to n1eet requiren1ents
2. Short range:Prepared annu.a Uyand is in correspondence'vith <innual profit plan. Indica
tescash inflovs and outfloVS asgenera ted byannual profit plan
3. Long range:Does not disclose detil iled estin1ates of revenue and expenses.
I t is prepared according to: _:::;-_;::;
• The tin1ing of the capital expenditure projects _
• The tin1ing of long range profit plan - - :.:
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11. Classification of Budget according to Function
Ma ster Budt
•It is summary or total budget package for a business fi rm
•It can be called end product of budget making process
•IT reveals the top management's goals of revenues, expenses, net
income, cash inflows and financial positions
•Takes the macro view of business and coordinates with
producti on, raw materials, manpower and other resources with
producti on targets
•It cuts across divisional boundari es to coordi nate firms' diverse
activities
•The operating budgets constitute the buildi ng block used to complete
the master budget

12. Classification of Budget according to Function
Fixed Budg.et
•Fixed budget isdesigned to remai n unch anged irrespective of the level
of the activity actu ally attained
•It is based on single level of activity
•It compares data from actual operations with single level of activi ty
reflected in budget
•Fixed budget isgood for performance measurement, if output can
be estimated with in d ose limits

13. Classification of Budget according to Function
Flexible Bud get
•It is prepared for a ra nge, for more than one level of activity
•It is a set of alternative budgets to different levels of activity
•Flexibl e budget is prepared considering that a business is dynamic, ever
changin g and never static
•Important features of flexible budget:
• It covers a range of activity
• It is easy to change with variation in production levels
• It facilitates performance measurement and evaluation
Advantages of Flexible budgeting:
1.Accurate budge.ting :Output factor is considered vhile preparation ,slnce cos t of goods n1ay
fluctuate time to time
2. Coordination: Production is planned in relation to e.
xpected sales, n1aterialsand labor are
acquired to n1eet e.
xpected production requiren1ents
3. Control tool:Con1parison betveen the budgeted costs and actua l costs forn1 basis for
analyzing cos t variances and fixing responsibility for san1e. Thls motivates n1anagers to feel
themselves motivated in rontrolling costs for whic th= e-= =
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14. Zero Base Budgeting (ZBB)
• Zero base budgeting is method of budgeting where by all the activities are re-
val uated each time budget is formulated .
• It involves starting from zero
• In ZBB, each department's functions are reviewed completely
• ZBB rejects incremental nature of traditiona l budgeting, instead states that
expenditure of each program must start from base zero with each new budget
bei ng compiled as if the programs were being launched fur first time
Advantages of ZBB:
• It id entifiesand eliminates V.1.Stage <i nd obsolete operations
• Oerelops q uestioning attitud e
• Leads tostaff invol,rem ent'vhtch nl<l}' le<id to improved n1otivation
• Increases con1n1unica tion and coordination vithin organii..a tion
Disadv,antagesof ZBB:
• Cost invol,red in prepa ring J 'ast num ber of declsion packages in large firm are''er)' high
•
•
Tin1e consun1ing and large an1ount of paper,.,.ork is involved - -- ---:--
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Managers may oppose neV ideas and chan
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15. Steps followed in application of ZBB:
1.Decision pac kages are prepared so that management can:
• Evaluate and rank it against other activities and
• Decide to approve of disapprove it
2. Each decision package is justi fied th at it promotes the goals of
enterprise
If justifies, then the cost of minimum efforts n eeded to sustain is
determined
4. Altern atives for each package are considered
Incremental decision package are also justifi ed and costed to
describe benefits of additional work th at would be done
6. Managers rank their decision packages in order of priority for
resource allocation
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Zero Base Budgeting (ZBB)

16. Thank Y
ou