This document provides information about budgets and budgetary control. It defines what a budget is, explains different types of budgets such as sales, production, purchase budgets. It also discusses budgetary control which involves establishing budgets, comparing actual performance to planned budgets, analyzing variances, and taking corrective actions. Finally, it classifies budgets according to time, function, and flexibility. Key types discussed are sales, production, purchase, cash budgets and how they are prepared. Budgets help management plan, control operations, and evaluate performance.

1. Chapter –VII
Budgeting and Budgetary Control

2. 2
The Life of every man is a diary in which he means
to write one story, and writes another; and his
humblest hour is when he compares the volume as it
is with what he vowed to make it.
- J.M. Barrie

3. What is a Budget?
 A planned expression of money”
for a defined activity.
Shows;
• Income & Expenditure
• Total estimated costs
• Defined period of time

4. What is a budget?
A Plan
A Limit
A Schedule
A Reality Check
An Allocation
A budget is an
aid
to management
not a substitute
for management.

5. Budget – Definition
 According to CIMA Official Terminology –
Budget is a financial and/or quantitative
statement, prepared and approved prior to a
defined period of time and the policy to be
pursued during that period for the purpose
of attaining a given objective.
5

6. Cont’d..,
Budget = Quantitative expression of a plan
Budgets involve – Planning
&
Control
Forecasting
&
Planning
Control
&
Evaluation

7. Why set budgets?
 Enables the business to measure success.
 Can be used to keep control of costs.
 May motivate staff by providing them with
targets / direction.
 Enables management to focus on those
areas failing to meet budgets.
 Enables business to empower departments.
 Encourages efficiency = lowers costs long
term.

8. Limitations
of Budgets
May lack flexibility and not
reflect changing conditions.
Managers may take short
term decisions to keep within
budget rather than the ‘right’
long term decision
May be problems agreeing
on the targets.
Budgets may constrain
action; managers may not
take certain steps because
they exceed the budget.
Managers may
resist attempts to
set financial targets
(do not want to be
measured).
The process of
setting and
agreeing budgets
may in itself be
very time
consuming.
Budget may be unrealistic
and demotivate staff
Job insecurity if
they do not meet
targets

9. Effective budgets must be
S.M.A.R.T.
 Specific (inform departments)
 Measurable (A means of tracking progress)
 Achievable (possible to accomplish)
 Realistic (does it fit the business)
 Timed – have a set time scale (1 year)
TASK Write a smart objective for yourself. i.e
I (Mr. ’X’) want to loose 5kg of weight by Christmas

10. What is Budgeting?
Budgeting is the whole process of
designing, implementing and operating
budgets.
The main emphasis in this is short-term
budgeting process involving the prevision
of resources to support plans which are
being implemented.
10

11. Participative Budgeting
Flow of budget data from lower management to top levels.
Invite each level of management to participate.
This “bottom-to-top” approach is called
Participative Budgeting.

12. Budgetary Control
Budgetary control is 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.
 - CMA Official Terminology
12

13. Budgetary Control
 The use of budgets to control operations.
 Compare actual results with planned
objectives.

14. The steps involved in a Budgetary Control system
Establish a plan or target of performance which coordinates
all the activities of the business.
Record the actual performance
Compare the actual performance with that planned.
Calculate the differences, or variances, and analyze
use reasons for them.
Act immediately, if necessary, to remedy the situation.
14

15. Budgetary Control System

16. Advantages of Budgetary Control
Maximization of Profits
Effective coordination
Evaluation of Executive
Performance ( on the basis of
goals set for each
department)
Clear cut goals and
targets
Economy in operations
Correction of Performance
continuously
Introduction of Incentive
schemes of remuneration
Shutting down of
unprofitable products and
activities

17. Limitations of Budgetary Control
Prediction of uncertain future
Changes of conditions
Complacence
Difficulty in coordination
Conflict among different departments

18. Classification of Budgets
ACCORDING TO ACCORDING TO ACCORDING TO
TIME FUNCTION FLEXIBILITY
1. Long term budget 1. Sales budget 1. Fixed budget
2. Short term budget 2. Production budget 2. Flexible budget
3. Current budget 3. Purchase budget
4. Personnel budget
5. R & D budget
6. Capital Expenditure budget
7. Cash budget
8. Master budget

19. I- According to Time
 Long term Budget : They are prepared by top
management to reflect the long-term planning for special
activities like capital expenditure, R&D etc ..,
 Short term Budget : Budgets generally for a duration of
1 yr and expressed in monetary terms.
 Current Budget: Duration – 1 month and are prepared
for current operations of the business
19

20. II- According to Function
 A functional Budget is one, which related to a
function of the business.
 E.g. Sales Budget, Production Budget, Purchase
Budget, Cash Budget etc..,
 There are many types of functional budget, of
which the following are important.
20

21. A. Sales Budget
 A sales budget is a detailed schedule showing the
expected sales for the budget period.
 This budget is a forecast of quantities and values
of sales to be achieved in a budget period.
 It will help to determine that how many units will
have to be produced.
 Thus, the production budget is prepared after the
sales budget.
21

22. Example:
22

23. 23

24. B-Production budget
 Production budget involves planning the level of
production which in turn involves the answer to the
following questions:
a. What is to be produced?
b. When is it to be produced?
c. How is it to be produced?
d. Where is it to be produced?
 The general formula used to determine the required production level is
as follows:
 Required Production = Expected Sales + Expected Ending
Inventory – Beginning Inventory
24

25. Case Study - I
 ABC Company is preparing a quarterly production
budget for 20X3.
 The company estimates to sell 10,000, 12,000,
14,000, and 11,000 of units in each respective
quarter.
 Also, the company wants to maintain the
following ending inventory levels in each
subsequent quarter, respectively: 2,000, 3,000,
4,000, and 2,500 units.
 At the beginning of 20X3, beginning inventory is
8,000 units. 25

26. Solution
ABC Company Production Budget (Units)
For the year ended 12/31/20X3
Quarter
YearI II III IV
Sales 10,000 12,000 14,000 11,000 47,000
Ending Inventory
2,000 3,000 4,000 2,500 2,500
Total Needs 12,000 15,000 18,000 13,500 49,500
Less: Beginning
Inventory -8,000 -2,000 -3,000 -4,000 -8,000
Required
production 4,000 13,000 15,000 9,500 41,500
26
As the budget shows, the company will need to produce 4,000, 13,000, 15,000, and 9,500
units during each of the four quarters to meet the sales and ending inventory demands.

27. –C - Purchase Budget:
– This budget provides information about the materials to be acquired from
the market during the budget period.
 D- Personnel Budget:
 This budget gives an estimate of the requirements of direct labour essential
to meet the production target.
 This budget may be classified into –
 a. Labour requirement budget
 b. Labour recruitment budget
 E- Research and Development Budget:
 This budget provides an estimate of expenditure to be incurred on R & D
during the budget period.
 A R&D budget is prepared taking into consideration the research projects
in hand and new R & D projects to be taken up.
27

28.  F - Capital Expenditure Budget:
 This is an important budget providing for acquisition of assets
necessitated by the following factors:
 a. Replacement of existing assets.
 b. Purchase of additional assets to meet increased production
 c. Installation of improved type of machinery to reduce costs.
 G - Master Budget:
 CIMA defines this budget as “ The summary budget incorporating its
component functional budget and which is finally approved, adopted
and employed”.
 Thus master budget is a summary of all functional budgets in capsule
form available in one report.
28

29. H- Cash budget
Cash budget is a financial budget prepared
to calculate the budgeted cash inflows and
outflows during a period.
It helps the managers to determine any
excessive idle cash or cash shortage that is
expected during the period.
It is also helpful to plan and control our
expenses payment.
29

30. Case Study -II
February
March
April
May
June
Sales Rs. Purchase Rs. Wages Rs. Expenses Rs.
70,000
80,000
92,000
1,00,000
1,20,000
40,000
50,000
52,000
60,000
55,000
8,000
8,000
9,000
10,000
12,000
6,000
7,000
7,000
8,000
9,0000
30
A company is expecting to have Rs. 25,000 cash in hand on 1st April 2003 and it requires
you to prepare cash budget for the three months. April to june 2003. The following
information is supplied to you:
Other Information:
1.Period of credit allowed by suppliers is two months;
2.25% of sale is for cash and the period of credit allowed to customers for credit
sale is one month;
3.Delay in payment of wages and expenses one month:
4.Income tax Rs. 25,000 is to be paid in June 2003.

31. Solution:
Cash Budget for three months ending June 2003
Opening Balance
Receipts:
Cash Sales (25%)
Debtor (75%)
Total
Payments:
Creditors (Purchases)
Wages
Expenses
Income Tax
Total
Closing Balance
April
25,000
23,000
60,000
83,000
40,000
8,000
7,000
-
55,000
53,000
May
53,000
25,000
69,000
94,000
50,000
9,000
7,000
-
66,000
81,000
June
81,000
30,000
75,000
1,05,000
52,000
10,000
8,000
25,000
95,000
91,000
Total
25,000
78,000
2,04,000
2,82,000
1,42,000
27,000
22,000
25,000
2,16,000
91,000
31

32. Working notes
 Cash sales 25%
 (April)= 92000*25/100 = 23000
 May =100000*25/100 = 25000
 June = 120000*25/100 = 30000
 Credit sales 75 (debtors%) for one month:
 April (Consider March month) = 80000*75/100 = 60000
 May = 92000*75/100 = 69000
 June = 100000*75/100 = 75000
32

33. III- According to Flexibility
33
A. Fixed Budget:
This is defined as a budget which is
designed to remain unchanged irrespective
of the volume of output or turnover attained.
This budget will, therefore, be useful only
when the actual level of activity
corresponds to the budgeted level of
activity.

34. B- Flexible Budget
 A flexible Budget is one which is assigned to change in
relation to the level of activity attained.
 It has been developed with the objective of changing the
budget figure to correspond with the actual output
achieved.
 Thus budget might prepared for various level of activity,
says 70%, 80%, 90%and 100% capacity utilization.
 Flexible budgets are prepared in those companies where it
is extremely difficult to forecast output and sales.
34

35. Case Study -III
 Prepare a flexible Budget for production at 80% and 100%
activity on the basis of the following information
 Production at 50% capacity : 5,000units
 Raw Material : Rs. 80 per unit
 Direct Labour : Rs. 50 per unit
 Direct Expenses : Rs. 15 per unit
 Factory Expenses : Rs. 50,000 (50% fixed)
 Administrative Expenses : Rs. 60,000 (60% Fixed)
35

36. Solution:-
Flexible Budget
For the period…………………………….
Cost
80% Capacity 8000units 100% Capacity 10,000unit
Per unit
Rs.
Total
Rs.
Per unit
Rs.
Total
Rs.
Raw material
Direct Labour
Direct Expenses
Prime Cost
Factory expenses:
Fixed
Variable
Works cost
Administrative
Exp.
Fixed
Variable
Total Cost
80.00
50.00
15.00
640,000
400,000
120,000
80.00
50.00
15.00
800,000
500,000
150,000
145.00 1,160,000 145.00 1,450,000
5.00
3.125
40,000
25,000
5.00
2.50
50,000
25,000
153.125 1,225,000 152.50 1,525,000
7.20
3.00
57,600
24,000
7.20
2.40
72,000
24,000
163.325 1,306,600 162.10 1,621,000

37. Working notes
 Factory exp:
 Fixed cost= 50000*50/100 = 25000
 Per unit = 25000/5000 units = 5
 Variable cost for 8000 units = 25000/8000 = 3.125
 Variable for 10,000 units = 25000/10000 = 2.5
 Administrative Exp:
 Fixed = 60000*60/100 = 36000
 Per unit = 36000/5000 = 7.2
 Variable for 8000 units = 60000*40/100=24000
 24000/8000 = 3
 Variable for 10,000 units = 24000/10000 = 2.4
37

38. Zero Base Budgeting
 Zero base budgeting is one of the renowned managerial tool,
developed in the year 1962 in America by the Former President
Jimmy Carter.
 The name suggests, it is commencing from the scratch, which never
incorporates the methodology of the other types of budgeting in
determining the estimates.
 The Zero base budgeting considers the current year as a new year
for the preparation of the budget but the yester period is not
considered for consideration.
 The future activities are forecasted through the zero base budgeting
in accordance with the future activities.

39. Benefits:
 It acts as guide for the management to allocate the resources
more accurately depends upon the priority for an effective
implementation.
 It enhances capability of the managers who prepares the
budget for future action.
 It paves way for optimum utilization of resources available.
 It is dome shaped only towards the achievement of
organizational goals.

40. By,
Dr. Suresh Vadde
M.Com, M.Com (FA), MBA, M.Phil, Ph.D
Dept. of Management, Samara University.