Management Accounting: Budgeting Topics

1. Budget and Budgetary
Control
“Managing Finances Effectively”

2. Definition of Budget
• A budget is a comprehensive financial plan that outlines an organization's
expected revenues and expenditures over a specific period.
• It serves as a roadmap for managing financial resources, setting financial goals,
and guiding decision-making processes.
• Budgets typically include income, expenses, and allocation of resources across
various departments or projects.
• There are different types of budgets, such as operating budgets for day-to-day
expenses, capital budgets for long-term investments, and master budgets for a
holistic financial overview.

3. Budgeting
 Budgeting refers to the management action of formulating budgets.
 Preparation of Budgeting is a planning function and their application or
implementation is a control function.
 “The entire process of preparing the budgets is known as budgeting”

4. Budgetary control
• Definition: Budgetary control is a systematic process that involves the
establishment of budgets and the continuous comparison of actual results
against these budgets to ensure financial goals are met.
• Objective: The primary goal of budgetary control is to provide a mechanism for
planning, coordination, and control of an organization's financial activities.
• Continuous Monitoring: It involves continuous monitoring and adjustment of
financial performance based on the comparison of actual results with budgeted
figures.
• Variance Analysis: Budgetary control includes a thorough analysis of
variances, understanding the differences between planned and actual
outcomes, and taking corrective actions as necessary.

5. Importance of Budgetary Control
• Financial Discipline: Budgetary control helps maintain financial discipline by
setting spending limits and ensuring resources are used efficiently.
• Performance Evaluation: It provides a basis for evaluating the performance of
different departments or projects by comparing actual results against budgeted
figures.
• Strategic Planning: Budgets align with strategic goals, helping organizations
allocate resources strategically to achieve long-term objectives.
• Resource Allocation: Efficient allocation of resources is facilitated through
budgetary control, ensuring that each department receives the necessary
funding.

6. Budgetary Control Process
• Setting Budgets: Establishing realistic and achievable budgets for various
organizational functions, such as sales, production, and expenses.
• Comparing Actual Performance: Regularly comparing actual financial results
with the budgeted figures to identify any deviations.
• Variance Analysis: Analysing the variances to understand the reasons behind
deviations from the budget.
• Taking Corrective Actions: Implementing corrective actions based on the
variance analysis to ensure alignment with organizational goals.
• Feedback Loop: Highlighting the cyclical nature of budgetary control as a
continuous improvement process.

7. Budgeting Process

8. Types of Budgets

9. Classification According to Time
 Long term Budget: The period of long term budgets various between five to ten
years.
The long term planning is done by the top level management; it is not generally
known to lower level of management.
 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 textile etc. use short-term
budgets.

10. Functional Budgets

11. Classification on the basis of Functions
 Sales Budget: is an estimate of expected sales during a budget period.
 A sales budget is known as a nerve centre or backbone of the
enterprise.
 A sales budget is the starting point on which other budgets are also
based.
 Sales budget lays down a comprehensive plan & programme for
preparing sales department.

12. Factors to be taken while preparing sales
budget:
 Past sales Figures
 Availability of Raw Materials
 Seasonal Fluctuations
 Assessment &report by salesman
 Availability of finances

13. Inter connection of Budgets

14. Production Budget
The production budget is prepared in relation to the sales budget.
Whatever is to be sold should be produced in time so that it is delivered to the
customer.
Two Important considerations are involved in the preparation of production of
budget:
a) What is to be produced?
b) When is to be produced?
The preparation of production budget involves the following stages:
1. Production Planning
2. Consideration of plant capacity
3. Stock quantity to be held
4. Considering sales budget.

15. Cash budget
Cash budget is based on cash forecast.
Cash forecast is an estimate showing the amount of cash which would be
available in a future period.
Importance:
 It is prepared in advance.
 It is an estimation of cash receipt and payment.
 It is expressed in terms of money values.
Uses:
 1. Helps in determining future cash requirement.
 2. Help in making plan
 3. Help in cash control and liquidity of the enterprises.

16. Master Budget
The master budget is the summary of various functional budgets.
 it is a plan representing all aspects in one sheet for the detail analysis.
 It is prepared by integrating various budgets into one consolidated budget .
Steps involved in Preparation of Master budget.
1. Sales budget, as the starting point
2. Production budget
3. Cost of production budget
4. Cash budget
5. Project income statement and the balance sheet

17. Fixed and Flexible Budgets
Managers use budgets to control operations and see that
planned objectives are met.
 A master budget based on a predicted level of activity
for the budget period.
 Two alternative approaches: fixed or flexible budgeting.
 A fixed budget, or static budget, based on a single
predicted amount of sales or other activity measure.
 A flexible budget, or variable budget, based on several
different amounts of sales.

18. Classification on the basis of Flexibility
 Fixed Budget: “Fixed budget is a budget which is designed to remain
unchanged irrespective of the level of activity actually attained”.
 Flexible Budget: A flexible budget is defined as a budget which by
recognizing the differences fixed, semi-fixed and variable cost is designed to
change in relation to the level of activity.

19. Purpose of Flexible Budgets
 Flexible Budgets
 Show revenues and expenses that should have
occurred at the actual level of activity.
 May be prepared for several activity levels in the
relevant range.
 Reveal variances due to good cost control or lack of
cost control.
 Improve performance evaluation and helps
managers focus on problem areas.