This document is a project report submitted by a student named Ojas Nitin Narsale to the University of Mumbai for an Advanced Cost Accounting and Budgetary Control course. The report discusses various types of budgets including zero-base budgeting, performance-based budgeting, and flexible budgets. It provides definitions and comparisons of different budgeting models and their advantages and disadvantages. The report also discusses key aspects of zero-base budgeting and its use in both the public and private sectors.

1. UNIVERSITY OF MUMBAI
PROJECT REPORT ON
ADVANCED COST ACCOUNTING
BUDGETARY CONTROL
BY
Mr. OJAS NITIN NARSALE
M.COM (Part-I) (SEM-I) (Roll No.40)
ACADEMIC YEAR 2015-2016
PROJECT GUIDE
PROF. SUNITA MADHAV
PARLE TILAK VIDYALAYA ASSOCIATION’S
M.L. DAHANUKAR COLLEGE OF COMMERCE
DIXIT ROAD, VILE PARLE ( E)
MUMBAI- 400057

2. DECLERATION
I, Mr. OJAS NITIN NARSALE of PARLE TILAK VIDYALAYA
ASSOCIATION’S M.L. DAHANUKAR COLLEGE OF COMMERCE
of M.COM(Part-I) (SEM-I) (Roll No.40) hereby declare that I have
completed this project on Budgetary Control in the ACADEMIC YEAR
2015-2016. This information submitted is true and original to the best of
my knowledge.
(Signature of Student)

3. ACKNOWLEDGEMENT
To list who all helped me is difficult because they are so numerous and
the depth is so enormous.
I would like to acknowledge the following as being idealistic channels
and fresh dimensions in the completion of this project.
I would firstly thank the University of Mumbai for giving me chance to
do this project.
I would like to thank my Principal, Dr. Madhavi Pethe for providing
the necessary facilities required for completion of this project.
I even will like to thank our co-ordinator, for the moral support that I
received.
I would like to thank our College Library, for providing various books
and magazines related to my project.
Finally I proudly thank my Parents and Friends for their support
throughout the Project.

4. INDEX
No Topic Pages
1 Definition 1
2 Purpose 1
3 Types of Budget 2
4 Zero Base Budgeting 6
5 Performance-based budgeting 13
6 Fixed Budget 19
7 Flexible Budget 20
8 Benefits Of Budgeting 22
9 Essentials of a budgetary control 23
10 Budgetary Control 24
11 Budgeted Balancesheet 27
11 Limitation and Conclusion 30
12 Illustration 33
13 References 35

5. Definition:-
A budget (derived from old French word bougette, purse) is a quantified financial plan for a
forthcoming accounting period
A budget is an important concept in microeconomics, which uses a budget line to illustrate the
trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in
monetary terms.
The Chartered Institute of Management Accountants, England, defines a budget as:
“A plan quantified in monetary terms prepared and approved prior to a defined period of time
usually showing planned income to be generated and/or expenditure to be incurred during that
period and the capital to be employed to attain a give objective.”
Simply put, a budget is an itemized summary of likely income and expenses for a given
period. It’s an invaluable tool to help you prioritize your spending and manage your money—no
matter how much or how little you have.
Planning and monitoring your budget will help you identify wasteful expenditures, adapt quickly
as your financial situation changes, and achieve your financial goals.
Purpose
Budget helps to aid the planning of actual operations by forcing managers to consider how the
conditions might change and what steps should be taken now and by encouraging managers to
consider problems before they arise. It also helps co-ordinate the activities of the organization by
compelling managers to examine relationships between their own operation and those of other
departments. Other essentials of budget include:
 To control resources
 To communicate plans to various responsibility center managers.

6.  To motivate managers to strive to achieve budget goals.
 To evaluate the performance of managers
 To provide visibility into the company's performance
 For accountability
In summary, the purpose of budgeting tools:
1. Tools provide a forecast of revenues and expenditures, that is, construct a model of how a
business might perform financially if certain strategies, events and plans are carried out.
2. Tools enable the actual financial operation of the business to be measured against the
forecast.
3. Lastly, tools establish the cost constraint for a project, program, or operation.
Budgets help businesses track and manage their resources. Businesses use a variety of budgets to
measure their spending and develop effective strategies for maximizing their assets and
revenues. The following types of budgets are commonly used by businesses:
MasterBudget
A master budget is an aggregate of a company's individual budgets designed to present a
complete picture of its financial activity and health. The master budget combines factors like
sales, operating expenses, assets, and income streams to allow companies to establish goals and
evaluate their overall performance, as well as that of individual cost centers within the
organization. Master budgets are often used in larger companies to keep all individual managers
aligned.
Operating Budget
An operating budget is a forecast and analysis of projected income and expenses over the course
of a specified time period. To create an accurate picture, operating budgets must account for
factors such as sales, production, labor costs, materials costs, overhead, manufacturing costs, and

7. administrative expenses. Operating budgets are generally created on a weekly, monthly, or
yearly basis. A manager might compare these reports month after month to see if a company is
overspending on supplies.
Cash Flow Budget
A cash flow budget is a means of projecting how and when cash comes in and flows out of a
business within a specified time period. It can be useful in helping a company determine whether
it's managing its cash wisely. Cash flow budgets consider factors such as accounts payable and
accounts receivable to assess whether a company has ample cash on hand to continue operating,
the extent to which it is using its cash productively, and its likelihood of generating cash in the
near future. A construction company, for example, might use its cash flow budget to determine
whether it can start a new building project before getting paid for the work it has in progress.
Financial Budget
A financial budget presents a company's strategy for managing its assets, cash flow, income, and
expenses. A financial budget is used to establish a picture of a company's financial health and
present a comprehensive overview of its spending relative to revenues from core operations. A
software company, for instance, might use its financial budget to determine its value in the
context of a public stock offering or merger.
Static Budget
A static budget is a fixed budget that remains unaltered regardless of changes in factors such as
sales volume or revenue. A plumbing supply company, for example, might have a static budget
in place each year for warehousing and storage, regardless of how much inventory it moves in
and out due to increased or decreased sales.

8. The following list summarizes the key aspects and disadvantages of each type of budgeting
model:
 Static budgeting. This is the classic form of budgeting, where a business creates a model
of its expected results and financial position for the next year, and then attempts to force
actual results during that period to align with the budget model as closely as possible.
This budget format is typically based on a single expected outcome, which can be
extremely difficult to achieve. It also tends to introduce a great deal of rigidity into an
organization, rather than allowing it to react quickly to ongoing changes in its
environment.
 Zero-base budgeting. A zero-base budget involves determining what outcomes
management wants, and developing a package of expenditures that will support each
outcome. By combining the various outcome-expenditure packages, a budget is derived
that should result in a specific set of outcomes for the entire business. This approach is
most useful in service-level entities, such as governments, where the provision of services
is paramount. However, it also takes a considerable amount of time to develop, in
comparison to the static budget.
 Flexible budgeting. A flexible budget model allows you to enter different sales levels in
the model, whch will then adjust planned expense levels to match the sales levels that
have been entered. This approach is useful when sales levels are difficult to estimate, and
a significant proportion of expenses vary with sales. This type of model is more difficult
to prepare than a static budget model, but tends to yield a budget that is reasonably
comparable to actual results.
 Incremental budgeting. Incremental budgeting is an easy way to update a budget model,
since it assumes that what has happened in the past can be rolled forward into the future.
Though this approach results in simplified budget updates, it does not provoke a detailed
examination of company efficiencies and expenditures, and so does not assist in the
creation of a lean and efficient enterprise.
 The rolling budget. A rolling budget requires that a new budget period be added as soon
as the most recent period has been completed. By doing so, the budget always extends a
uniform distance into the future. However, it also requires a considerable amount of

9. budgeting work in every accounting period to formulate the next incremental update.
Thus, it is the least efficient budgeting alternative, though it does focus ongoing attention
on the budget.
 The rolling forecast. A rolling forecast is not really a budget, but rather a regular update
to the sales forecast, frequently on a monthly basis. The organization then models its
short-term spending on the expected revenue level. This approach has the advantages of
being very easy to update, and requiring no budgeting infrastructure.
Of the budgeting models shown here, the static model is by far the most common, despite being
unwieldy and rarely attained. A considerably different alternative is to use a rolling forecast, and
allow managers to adjust their expenditures "on the fly" to match short-term revenue
expectations. Organizations may find that the rolling forecast is a more productive form of
budget model, given its high degree of flexibility.

10. Zero-based budgeting
is an approach to planning and decision-making that reverses the working process of traditional
budgeting. In traditional incremental budgeting departmental managers justify only variances
versus past years based on the assumption that the "baseline" is automatically approved. By
contrast, in zero-based budgeting, every line item of the budget must be approved, rather than
only changes. Zero-based budgeting requires that the budget request be re-evaluated thoroughly,
starting from the zero-base; this involves preparation of a fresh budget every year without
reference to the past. This process is independent of whether the total budget or specific line
items are increasing or decreasing.
The term is sometimes confused with "zero-sum budgeting", a personal finance technique of
budgeting every unit of income received, and then adjusting some part of that budget downward
for every other part that needs to be adjusted upward.
Zero based budgeting also refers to the identification of a task or tasks and then funding
resources to complete the task independent of current resourcing.
Advantages
1. Efficient allocation of resources, as it is based on needs and benefits rather than history.
2. Drives managers to find cost effective ways to improve operations.
3. Detects inflated budgets.
4. Increases staff motivation by providing greater initiative and responsibility in decision-
making.
5. Increases communication and coordination within the organization.
6. Identifies and eliminates wasteful and obsolete operations.
7. Identifies opportunities for outsourcing.
8. Forces cost centers to identify their mission and their relationship to overall goals.
9. Facilitates more effective delegation of authority
Zero-based budgeting helps in identifying areas of wasteful expenditure, and if desired, can also
be used for suggesting alternative courses of action.

11. Disadvantages
1. More time-consuming than incremental budgeting.
2. Justifying every line item can be problematic for departments with intangible outputs.
3. Requires specific training, due to increased complexity vs. incremental budgeting.
4. In a large organization, the amount of information backing up the budgeting process may
be overwhelming.
Background
Zero Base Budgeting (ZBB) in the public sector and the private sector are very different
processes, and this must be understood when implementing a ZBB process in the public sector.
“The use of ZBB in the private sector has been limited primarily to administrative overhead
activities (i.e. administrative expenses needed to maintain the organization…)”.For example,
Peter Pyhrr used ZBB successfully at Texas Instruments in the 1960s and authored an influential
1970 article in Harvard Business Review. In 1973, President Jimmy Carter, while governor of
Georgia, contracted with Pyhrr to implement a ZBB system for the State of Georgia executive
budget process.
President Carter later required the adoption of ZBB by the federal government during the late
1970s. “Zero-Base Budgeting (ZBB) was an executive branch budget formulation process
introduced into the federal government in 1977. Its main focus was on optimizing
accomplishments available at alternative budgetary levels. Under ZBB agencies were expected to
set priorities based on the program results that could be achieved at alternative spending levels,
one of which was to be below current funding.”
According to Peter Sarant, the former director of management analysis training for the US Civil
Service Commission during the Carter ZBB implementation effort, “ZBB means “different
things to different people.” Some definitions are implying that zero-base budgeting is the act of
starting budgets from scratch or requiring each program or activity to be justified from the
ground up. This is not true; the acronym ZBB, is a misnomer. ZBB is a misnomer because in
many large agencies a complete zero-base review of all program elements during one budget
period is not feasible; it would result in excessive paperwork and be an almost impossible task if

12. implemented.” In many respects the “common misunderstanding” of ZBB noted above resemble
a “sunset review” process more than a traditional public sector ZBB process.
Definition
According to Sarant, ZBB is a technique which complements and links to existing planning,
budgeting and review processes. It identifies alternative and efficient methods of utilizing limited
resources . It is a flexible management approach which provides a credible rationale for
reallocating resources by focusing on a systematic review and justification of the funding and
performance levels of current programs.”
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.
Components of a public sector ZBB analysis
In general there are three components that make up public sector ZBB:
1. Identify three alternate funding levels for each decision unit (Traditionally, this has been
a zero-base level, a current funding level and an enhanced service level.);
2. Determine the impact of these funding levels on program (decision unit) operations using
program performance metrics; and
3. Rank the program “decision packages” for the three funding levels.
The process was also specifically intended to involve both program staff and budget staff in the
process. In many cases, program staffers were asked to look for alternative service delivery
models that could deliver services more efficiently at lower funding level.

13. The US General Accounting Office (GAO) reviewed past performance budgeting initiatives in
1997 and found that ZBBs “main focus was on optimizing accomplishments available at
alternative budgetary levels. Under ZBB agencies were expected to:
Set priorities based on the program results that could be achieved at alternative spending levels,
one of which was to be below current funding.
1. In developing budget proposals, these alternatives were to be ranked against each other
sequentially from the lowest level organizations up through the department and without
reference to a past budgetary base.
2. In concept, ZBB sought a clear and precise link between budgetary resources and
program results.”
Further, “ZBB illustrated the usefulness of:
1. Defining and presenting alternative funding levels; and
2. Expanded participation of program managers in the budget process.”
The federal ZBB budgeting system had the following components: “Budget requests for each
decision unit were to be prepared by their managers, who would (1) identify alternative
approaches to achieving the unit’s objectives, (2) identify several alternative funding levels,
including a “minimum” level normally below current funding, (3) prepare “decision packages”
according to a prescribed format for each unit, including budget and performance information,
and (4) rank the decision packages against each other.”
ZBB was officially eliminated in federal budgeting on August 7, 1981. “Some participants in the
budget process as well as other observers attributed certain program efficiencies, arising from the
consideration of alternatives, to ZBB. Interestingly, ZBB established within federal budgeting a
requirement to:
1. Present alternative levels of funding; and
2. Link (them) to alternative results.”

14. This element of the ZBB budgeting process remained in effect through the Reagan, Bush and
early Clinton administrations before being eliminated in 1994.
Defining the government program zero-base
As noted earlier, there is often considerable confusion over the meaning of zero-base budgeting.
There is no evidence that public sector ZBB has ever included “building budgets from the
bottom up” and “reviewing every invoice” as part of the analysis. In discussions of ZBB, there is
often confusion between a ZBB process and a sunset review process. In a sunset review the
entire function is eliminated unless evidence is provided of program effectiveness. This
confusion ultimately leads to the question: what is a zero-base?
Sarant’s definition of the zero-base based on the federal training experience is: “A minimum
level is actually the grass roots funding level necessary to keep a program alive. Therefore, the
minimal level is the “program or funding level below which it is not feasible to continue a
program… because no constructive contribution can be made toward fulfilling its objective.”
dentifying this level of program funding has been subjective and problematic.
Consequently, “some states have selected arbitrary percentages to insure that an amount smaller
than last year’s request in considered. They do this by stipulating that one alternative must be 50
or 80 or 90 percent of last year’s request.” This equates to analyzing the impact on program
operations of a 10, 20 or 50 percent reduction in funding as the “zero base” funding level.

15. Importance of performance measures
Performance measures are a key component of the ZBB process. At the core, ZBB requires
quality measures that can be used to analyze the impact of alternative funding scenarios on
program operations and outcomes. Without quality measures ZBB simply will not work because
decision packages cannot be ranked. To perform a ZBB analysis “alternative decision packages
are prepared and ranked, thus allowing marginal utility and comparative analysis.”
Traditionally, a ZBB analysis focused on three types of measures. “They (federal agency
program staff) were to identify the key indicators to be used in measuring performance and
results. These should be “measures of:
1. effectiveness,
2. efficiency, and
3. workload for each decision unit.
Indirect or proxy indicators could be used if these systems did not exist or were under
development.”
Impact of ZBB on Government Operations
According to the GAO:
“Agencies believed that inadequate time had been allowed to implement the new initiative. The
requirement to compress planning and budgeting functions within the timeframes of the budget
cycle had proven especially difficult, affecting program managers’ ability to identify alternative
approaches to accomplishing agency objectives. Some agency officials also believed that the
performance information needed for ZBB analysis was lacking.”
According to the National Conference of State Legislatures:
“In its original sense, ZBB meant that no past decisions are taken for granted. Every previous
budget decision is up for review. Existing and proposed programs are on an equal footing, and
the traditional state practice of altering almost all existing budget lines by small amounts every

16. year or two would be swept away. No state government has ever found this feasible. Even
Georgia, where Governor Jimmy Carter introduced ZBB to state budgeting in 1971, employed a
much modified form.
State programs are not, in practice, amenable to such a radical annual re-examination. Statutes,
obligations to local governments, requirements of the federal government, and other past
decisions have many times created state funding commitments that are almost impossible to
change very much in the short run. Education funding levels are determined in many states partly
by state and federal judicial decisions and state constitutional provisions, as well as by statutes.
Federal mandates require that state Medicaid funding meet a specific minimum level if Medicaid
is to exist at all in a state. Federal law affects environmental program spending, and both state
and federal courts help determine state spending on prisons. Much state spending, therefore,
cannot usefully be subjected to the kind of fundamental re-examination that ZBB in its original
form envisions.
To the extent that ZBB has encouraged governors and legislators to take a hard look at the
impact of incremental changes in state spending, it produced a significant improvement in state
budgeting. But in its classic form--begin all budget evaluations from zero--ZBB is as unworkable
as it ever was.”

17. Performance-based budgeting
Performance-based budgeting is the practice of developing budgets based on the relationship
between program funding levels and expected results from that program. The performance-based
budgeting process is a tool that program administrators can use to manage more cost-efficient
and effective budge
Introduction
Today, when the management of money is more important than ever for public and private
entities, budgeting plays an enormous role in controlling operations efficiently and effectively.
Budgeting in itself is a familiar process to even the smallest economic unit – the household - but
it needs to be divided into two different classes: budgeting for public entities and private entities.
This differentiation is important because public bodies need to go through many processes before
moving into the budget execution phase and post-execution analyses; furthermore, the entire
process involves the collaboration of different bodies throughout the government. This
collaboration is not only for budget preparation, negotiation and approval processes, but also for
the spending approval after the whole budget allocation is finalized. Compared to private sector,
it is cumbersome.
Another factor is the increasing awareness of the policies of the World Bank in pursuit of
restructuring the budgeting and spending processes of developing nations via the World Bank
Treasury Reference Model. This new model has led the public sector to understand, digest and
adopt a new style.
According to this new budgeting methodology, traditional methods of analyzing and utilizing
budget figures are insufficient. In traditional terms, organizations start building up their long-
term plans and break those plans into annual budgets that are formed as forecasts. At the end of
the year, budget figures are compared with actual results and a simple actual-budget variance
comparison is calculated. Since the analysis is simple, this analysis lacks any sophistication in
terms of adjusting similar budget items for forthcoming periods by increasing or decreasing the
expenditure estimates. Basically, variance results are generally used for revising monetary

18. amounts for the next planning and budgeting cycle, and also for very simple departmental
performance tracking.
This new approach to budget analysis and utilization is many steps ahead of traditional methods.
As an example, a governmental project to enhance the social welfare of children in a remote area
can help explain the performance-oriented approach. For such projects, which are generally
composed of long-term plans, governments decide on objectives and the activities that are
required to be accomplished to achieve them. Practical ways of enhancing social welfare of
children in a rural area might include increasing the job skills of parents in the area.
In order to achieve such an objective, the government may plan to establish schooling
infrastructures in various locations, complete with the necessary equipment, and further plan to
assign trainers to those schools for implementing the educational programs. All these activities
have a cost aspect and, at this point, long-term plans are broken down into annual budgets that
incorporate the monetary figures. Once the long-term plans are accomplished, the traditional way
to gauge the effectiveness of this whole project would be to assess the gap between the budget
and the actual money spent. However, with the new budgeting approach, the questions to answer
are tougher:
 Did we really succeed in enhancing the social welfare of children?
 Did this project cost what we expected?
 Have we done what we should have done in enhancing the social welfare of
children?
Peter van der Knaap from the Ministry of Finance in the Netherlands suggests: “The general
purpose of the proposals is to make budget documents and, hence, the budgetary process more
policy-oriented by presenting information on (intended and achieved) policy objectives, policy
measures or instruments, and their costs.” Furthermore, van der Knaap explains that this type of
budgeting has the following major performance indicators:
 (the quantity, quality, and costs of) products and services (output) produced by
government or government services in order to achieve certain effects, and;
 the intended effects of those measures (outcome).

19. Within this kind of a planning and budgeting setup, the lack of reliable information on the effects
of policies emerges as a serious issue. Therefore, it is important to approach the planning and
budgeting cycle in a holistic and integrated way, with collaboration across the areas of policy
design, performance measures definition and policy evaluation.
From a conceptual point of view, performance-based budgeting systems are a sub-set of what are
known as 'outcomes systems'. Outcomes systems are any systems designed to identify, prioritize,
measure, attribute and/or hold parties to account for outcomes. The technical principles for
developing and implementing sound performance-based budgeting systems as a type of
outcomes system are described in outcomes theory.
Performance-based budgeting (PBB)
This whole framework points us to a newer way of budgeting, the performance-based budgeting.
As explained by Carter (as quoted in ) “Performance budgets use statements of missions, goals
and objectives to explain why the money is being spent. It is a way to allocate resources to
achieve specific objectives based on program goals and measured results.” The key to
understanding performance-based budgeting lies beneath the word “result”. In this method, the
entire planning and budgeting framework is result oriented. There are objectives and activities to
achieve these objectives and these form the foundation of the overall evaluation.
According to the more comprehensive definition of Segal and Summers, performance budgeting
comprises three elements:
 the result (final income)
 the strategy (different ways to achieve the final outcome)
 activity/outputs (what is actually done to achieve the final outcome)
Segal and Summers point out that within this framework, a connection exists between the
rationales for specific activities and the end results and the result is not excluded, while
individual activities or outputs are. With this information, it is possible to understand which
activities are cost-effective in terms of achieving the desired result.

20. As can be seen from some of the definitions used here, Performance-Based Budgeting is a way
to allocate resources for achieving certain objectives,
Harrison elaborates: “PBB sets a goal, or a set of goals, to which monies are “connected” (i.e.
allocated). From these goals, specific objectives are delineated and funds are then subdivided
among them.”
Achieving PBB
Adopting public sector’s performance-based budgeting to the private sector using the
Corporate Performance Management (CPM) framework. In performance-based budgeting first
the goals and objectives of organization or department are identified, then measurement tools are
developed and the last step is reporting.
For this type of advanced budgeting, which requires the definition of Key Performance
Indicators (KPIs) at the outset, linking these performance indicators to resources becomes the
vital part of the entire setup. This is similar to the CPM framework, which is “where strategy and
planning meet execution and measurement”, according to John Hagerty from AMR Research.
This is a sort of a Balanced Scorecard approach in which KPIs are defined and linkages are built
between causes and effects in a tree-model on top of a budgeting system which should be
integrated with the transactional system, in which financial, procurement, sales and similar types
of transactions are tracked. Moreover, linking resources with results provides information on
how much it costs to provide a given level of outcome. Many public bodies fail to figure out how
much it costs to deliver an output, primarily due to problems with indirect cost allocation. This
puts the Activity-Based Costing framework into the picture.
Both the concepts of scorecards, as first introduced by Kaplan and Norton, and activity-based
costing are today well-known concepts in the private sector, but much less so for the public-
sector bodies…until the advent of Performance-Based Budgeting! Another conceptual
framework that has gained ground is the relatively recently introduced CPM, again more popular
in the private sector. The point is that the CPM framework has not much touched on the topic of
Performance-Based Budgeting, although the similarities in policies offered by these frameworks

21. are worth a deeper look. The technical foundation that the CPM framework puts on the table may
well be a perfect means to rationalize the somewhat tougher budgeting approach, not only for the
public sector but also for commercial companies.
The way to CPM and PBB
Leading companies are integrating various business intelligence applications and processes in
order to achieve corporate performance management. The first step is for senior management to
formulate the organization’s strategy and to articulate specific strategic objectives supported by
key financial and non-financial metrics.
These metrics and targets feed the next step in the process, Planning and Budgeting, and are
eventually communicated to the front-line employees that will carry out the day-to-day activities.
Targets and thresholds are loaded from the planning systems into a Business Activity Monitoring
engine that will automatically notify responsible persons of potential problems in real time. The
status of the business is reviewed regularly and re-forecast and, if necessary, budget changes are
made. If the business performance is significantly off plan, executives may need to re-evaluate
the strategy as some of the original assumptions may have changed. Optionally, activity-based
costing efforts can enhance the strategic planning process – deciding to outsource key activities,
for example. ABC can also facilitate improved budgeting and controls through Activity-Based
Budgeting which helps coordinate operational and financial planning.
The ability to establish CPM to enhance control on budget depends first upon achieving a better
understanding of the business through unified, consistent data to provide the basis for a 360-
degree view of the organization. The unified data model allows you to establish a single
repository of information where users can quickly access consistent information related to both
financial and management reporting, easily move between reporting the past and projecting the
future, and drill to detailed information.
By then, you are ready to plug in - on the unified data - the applications that support
consolidations, reporting, analysis, budgeting, planning, forecasting, activity-based costing, and
profitability measurement. The applications are then integrated with the single repository of

22. information and are delivered with a set of tools that allow users to follow the assessment path
from strategy, to plans and budgets and to the supporting transactional data.
CPM and the adoption of more public-sector oriented PBB are not easy to tackle, but in the ever-
changing business and political climate they are definitely worth a closer look.
PBB in Higher Education
The application of Performance Based Budgeting in U.S. Institutions of Higher Education
provides incentives for colleges to enroll students and thus provide access to postsecondary
education. Performance-based budgeting is an approach in which funding for an institution
“depends on performing in certain ways and meeting certain expectations”. “Historically, many
colleges have received state funding based on how many full-time equivalent students are
enrolled at the beginning of the semester”. Thirty states have a funding formula in place that
allocates some amount of funding based on performance indicators such as course completion,
time to degree, transfer rates, the number of degrees awarded, or the number of low-income and
minority graduates”.
The strengths of PBB for Higher Education
 Provides incentives for enrolling students and opening access to higher education
 Focuses on results and accomplishments
 A simple approach once expectations and measurements are defined
 “Promotes equitable allocation of resources to those institutions that meet performance
criteria"
 The weaknesses of PBB for Higher Education
"Does not necessarily provide incentives for institutions to help students successfully complete
degree programs”
 Performance criteria and measures can be difficult to define
 The time between and accomplishment and its measurement and the allocation of funds
might be great and Measuring long-term outcomes is difficult

23. Fixed Budget:
A fixed budget is a budget that does not change or flex when sales or some other activity
increases or decreases. A fixed budget is also referred to as a static budget.
1. It is inflexible and does not change with the actual volume of output achieved.
2. It assumes that conditions would remain static.
3. Costs are not classified according to their variability i.e. fixed, variable and semi-variable.
4. Comparison of actual and budgeted performance cannot be done correctly if the volume of
output differs.
5. It is difficult to forecast accurately the results in it.
6. Only one budget at a fixed level of activity is prepared due to an unrealistic expectation on the
part of the management i.e., all conditions will remain unaltered.
7. Its is not possible to ascertain costs correctly if there is a change in circumstances
8. It has a limited application and is ineffective as a tool for cost control.
9. If the budgeted and actual activity levels vary, the correct ascertainment of costs and fixation
of prices becomes difficult.

24. Flexible Budget:
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The
flexible budget is more sophisticated and useful than a static budget, which remains at one
amount regardless of the volume of activity.
1. It is flexible and can be suitably recasted quickly according to the level of activity attained.
2. It is designed to change according to changed conditions.
3. Costs are classified according to the nature of their variability.
4. Comparisons are realistic as the changed plan figures are placed against actual ones.
5. It clearly shows the impact of various expenses on the operational aspect of the business.
6. Under it, series of budgets are prepared at different levels of activity.
7. Costs can be easily ascertained at different levels of activity under this type of budget.
8. It has more applications and can be used as a tool for effective cost control.
9. It helps in fixation of price and submission of tenders due to correct ascertainment of costs.
For example, a budget can be prepared for capacity utilization levels of 50%, 60%, 70%, 80%,
90% and 100%. The basic principle of flexible budget is that if budget is prepared for showing
the results at say, 15, 000 units and actual production is only 12, 000 units, the comparison
between the expenditures, budgeted and actual will not be fair as the budget was prepared for 15,
000 units.
Therefore it is developed for a relevant range of production from 12, 000 units to 15, 000 units.
Thus even if the actual production is 12, 000 units, the results will be comparable with the
budgeted performance of 12, 000 units.

25. Even if the production slips to 8,000 units, the manager has a tool that can be used to determine
budgeted cost at 8,000 units of output. The flexible budget thus, provides a reliable basis for
comparison because it is automatically geared to change in production activity. Thus a flexible
budget covers a range of activity, it is flexible i.e. easy with variation in production levels and it
facilitates performance measurement and evaluation.
iii. While preparing flexible budget, it is necessary to study the behavior of cost and divide them
in fixed, variable and semi variable. After doing this, the costs can be estimated for a given level
of activity. iv. It is also necessary to plan the range of activity. A firm may decide to develop
flexible budget for activity level starting to plan the range of activity level from 50% to 100%
with an interval of 10% in between.

26. BENEFITS OF BUDGETING
 Gives you control over your money – A budget is a way of being intentional about the
way you spend and save your money. It is said that with budgeting, you control your
money and not your money controls you. Budgeting saves you the stress of suddenly
having to adjust to lack of funds because you did not initially plan how to spend them. It
also helps you decide if you want to sacrifice short term spending like buying coffee
everyday in exchange for a long term benefit like a cruise vacation or a new HDTV.
 Keeps you focused on your money goals – You avoid spending unnecessarily on items
and services that do not contribute to attaining your financial goals. If you are working
with limited resources, budgeting makes it easier to make ends meet.
 Makes you aware what is going on with your money – With budgeting, you are clear
on what money is coming in, how fast it goes out, and where it is going to. Budgeting
saves you from wondering every end of the month where your money went. A budget
enables you to know what you can afford, take advantage of buying and investing
opportunities, and plan how to lower your debt. It also tells you what is important to you
based on how you allocate your funds, how your money is working for you, and how far
you are towards reaching your financial goals.
 Helps you organize your spending and savings – By dividing your money into
categories of expenditures and savings, a budget makes you aware which category of
expenditure takes which portion of your money. That way, it is easy for you to make
adjustments. Budget also serves as a reference for organizing your bills, receipts, and
financial statements. When all of your financial transactions are organized for tax time or
creditor questions, you save time and effort.
 Enables you to communicate with your significant others about money – If you share
your money with your spouse, family, or anyone, a budget can communicate how you use
money as a group. This promotes teamwork on working for common financial goals and
prevents conflict on how money is used. Creating a budget in tandem with your spouse
will avoid conflicts and resolve personal differences on how your money is
spent. Budgeting teaches family members spending responsibility and accountability

27. Budgetary Control
Budgetary control is actually a means of control in which the actual results are compared with
the budgeted results so that appropriate action may be taken with regard to any deviations
between the two. Budgetary control has the following stages.
A. Developing Budgets: The first stage in budgetary control is developing various budgets. It
will be necessary to identify the budget centers in the organization and budgets will have to
develop for each one of them. Thus budgets are developed for functions like purchase, sale,
production, manpower planning as well as for cash, capital expenditure, machine hours, labor
hours and so on. Utmost care should be taken while developing the budgets. The factors
affecting the planning should be studied carefully and budgets should be developed after a
thorough study of the same.
B. Recording Actual Performance: There should be a proper system of recording the actual
performance achieved. This will facilitate the comparison between the budget and the actual. An
efficient accounting and cost accounting system will help to record the actual performance
effectively
C. Comparison of Budgeted and Actual Performance: One of the most important aspects of
budgetary control is the comparison between the budgeted and the actual performance. The
objective of such comparison is to find out the deviation between the two and provide the base
for taking corrective action.
D. Corrective Action: Taking appropriate corrective action on the basis of the comparison
between the budgeted and actual results is the essence of budgeting. A budget is always prepared

28. for future and hence there may be a variation between the budgeted results and actual results.
There is a need for investigation of the same and take appropriate action so that the deviations
will not repeat in the future.
Responsibilities can be fixed on proper persons so that they can be held responsible for any such
deviations.
Essentials of a budgetary control
 Establishment of budgets for each function and section of the organization.
 Continuous comparison of the actual performance with that of the budget so as to know
the variations from budget and placing the responsibility of executives for failure to
achieve the desires results as given in the budget.
 Taking suitable remedial action to achieve the desires objective if there is a variation of
the actual of the actual performance from the budgeted performance.
 Revision of budgets in the light of changed circumstances.
Objectives of Budgetary Control
• Planning: A budget provides a detailed plan of action for a business over a definite
period of time. Detailed plans relating to production, sales, raw material requirements,
labor needs, advertising and sales promotion performance, research and development
activities, capital additions etc. are drawn up. By planning many problems are anticipated
long before they arise and solutions can be sought through careful study. Thus most
business emergencies can be avoided by planning. In brief, budgeting forces the
management to think ahead, to anticipate and prepare for the anticipated conditions.

29. • Coordination: Budgeting aids managers in co-coordinating their efforts so that
objectives of the organization as a whole harmonize with the objectives of its divisions.
Effective planning and organization contributes a lot in achieving coordination. There
should be co-ordination in the budgets of various departments. For example, the budget
of sales should be in coordination with the budget of production. Similarly, production
budget should be prepared in co-ordination with the purchase budget, and so on.
• Communication: A budget is actually a communication device. The accepted budget
copies are distributed to every management personnel which gives not only adequate
understanding and knowledge of the policies and programmes to be followed however
also gives understanding about the restrictions to be followed to. It is not the budget by
itself that facilitates communication; however the vital information will be communicated
in the work of preparing budgets and participation of most responsible men and women
in this act.
• Motivation: A budget is a helpful device for encouraging managers to carry out in line
with the organization objectives. If men and women have actively participated in the
planning of budgets, it acts like a strong motivating force in order to achieve the targets.
• Control: Control is necessary to ensure that plans and objectives as laid down in the
budgets are being achieved. Control, as applied to budgeting, is a, systematized effort to
keep the management informed of whether planned performance is being achieved or not.
For this purpose, a comparison is made between plans and actual performance. The
difference between the two is reported to the rr1anagement for taking corrective action.

30. • Performance evaluation: A budget offers a useful means of telling managers how nicely
they are performing in conference targets they have formerly helped to set. In numerous
companies there is an exercise of rewarding workers on the basis of their reaching the
budget targets or promotion of a manager might be linked to his budget accomplishment
record.
Advantages Of Budgetary Control
• The major problem occurs when budgets are applied mechanically and rigidly.
• Budgets can demotivate employees because of lack of participation. If the budgets are
arbitrarily imposed top down, employees will not understand the reason for budgeted
expenditures, and will not be committed to them.
• Budgets can cause perceptions of unfairness.
• Budgets can create competition for resources and politics.
• A rigid budget structure reduces initiative and innovation at lower levels, making it
impossible to obtain money for new ideas.

31. Budgeted Balance Sheet
Definition
A budgeted balance sheet shows estimated financial position of a company.
By seeing budgeted balance sheet, we can expect same at the end of the financial year.
But this is not real balance sheet. When it is not real, then what is the need of preparing it
and why I am here to explain it? Reason behind this is very clear. It is useful tool for
management for decision making. We know management makes almost all type of
budget. We should see all these budget's effect on our future financial position. Future is
in our hand. We have made cash budget, material budget, production budget, sales
budget, purchase budget and master budget and other departments' budgets. After this, we
should make budgeted balance sheet to check whether all budget's effect is positive on on
our estimated financial position or not. Now, I am explaining the steps to make it.
1. Take the Beginning Real Balance Sheet
For making budgeted balance sheet, we take all the data of real balance sheet of
beginning of financial year.
2. Collect the Data of All Budget
For making budgeted balance sheet, you need to collect the data of various budget like
cash budget, purchase budget, finished goods budget, raw material budges, projected
sales or purchase deal of fixed assets on credit.
3. Adjustment of Beginning Real Balance Sheet with Data of Different Budgets
If your hand is good on ms excel, within just few minutes, you can make budgeted
balance sheet.

32. Following are the main adjustments which you should do.
Balance Sheet Items Adjustment Basis of Budget
a)
Cash in Hand and at
bank
Take the figure of closing
cash in hand balance from
cash budget
Cash Budget
b) Sundry Debtors
Opening Debtors + New
Credit Sale -
Cash Received
Sales Budget and
Cash Budget
c) Sundry Creditors
Opening Creditors+ New
Credit Purchase - New
Payment
Purchase budget and
Cash Budget
d) Finished Stock
Opening Finished Stock +
New Production - New
total Sales (Cash+ Credit)
Production, Sales and
Cash Budgets
e) Raw Material Stock
Opening Raw
Material Stock + New
Purchase ( Cash+Credit) -
New Consumption
Material, production
and Cash Budget
f) Fixed Assets
Opening Balance+ New
Purchase - New Sale (
Cost Value)
Cash Budget and
Projected Plan Report
andPlant Utilization
budget
g) Loan Liabilities
Opening Balance of Loan
Liabilities + New Loan
Taken - Repayments
Cash Budget
h)
Accumulated
Depreciation
Opening Balance
Accumulated
Depreciation + New
Depreciation
Overhead Budget
i) Paid in Capital
Opening Balance of Paid in
Capital + Additional Paid
in Capital
Cash Budget
j) Retained Earning
Opening Retained
Earning + Estimated Net
Profit - (Estimated
Dividend declared +
Estimated Dividend Paid
)
Cash Budget and
Budgeted Income
Statement
k) General Reserve
Opening Balance of
General Reserve + New
General Reserve on
Specific Rate as per law
l) Taxation
Opening Payable Tax +
New Payable Tax -
(Advance+ TDS)
Tax Returns, New
Income Tax Law
reports, finance
budget of Govt. of
India and Cash
Budget

34. Limitations And Problems
There are several limitations and problems associated with the master budget that need to
be considered by management. These problems involve uncertainty, behavioral bias and
costs.
 Uncertainty:
Budgeting includes a considerable amount of forecasting and this activity involves a
considerable amount of uncertainty. Uncertainty affects both sides of the financial
performance dichotomy,but uncertainty on the revenue side presents a more serious
limitation for planning. The sales budget is frequently based on a forecast supported by a
variety of assumptions about the economy, the actions of the federal reserve board and
congress in implementing monetary and fiscal policy, and the actions of competitors,
suppliers, and customers. The uncertainty associated with sales forecasting creates a
greater problem than uncertainty on the cost side because the other parts of the budget are
derived from the sales forecast. This forces management to constantly monitor and
analyze changes in the economic environment. From the planning perspective, the
inability to accurately forecast the future reduces the usefulness of the original budget
estimates for materials requirements planning (MRP) and planning for other resource
needs. Uncertainty on the cost side tends to be less of a problem because management has
more influence over the quantities of resources consumed than over the quantities of their
own products purchased by customers. From a performance evaluation and control
perspective, uncertainty on both sides of the financial performance dichotomy is not as
much of a problem because flexible budgets are used to fine tune the original budget to
reflect expectations at the current level of activity.
 Behavioral Bias
A second problem involves a variety of behavioral conflicts that are created when the
budget is used as a control device. To be effective, the budget must be used by the
managers it is designed to help. Thus, it must be acceptable to all levels of management.
The behavioral literature on budgeting supports the view that the budget should reflect
what is most likely to occur under efficient operating conditions. If a budget is to be used
as an effective planning and monitoring device, it should encourage a high level of
performance and efficiency, but at the same time, it should be fair and obtainable. If the

35. budget is viewed by managers as unfair, (too optimistic) it may intimidate rather than
motivate. One way to gain acceptance is referred to as participative (rather than imposed)
budgeting. The idea is to include all levels of management in the budget preparation
process. Of course this process must be coordinated by a budget director to ensure that a
fair budget is obtained that will help achieve the goals of the total organization.
Another way to reduce the behavioral bias against budgeting is to recognize the concepts
of variation and interdependence when using the budget to evaluate performance. Recall
from our discussion of the statistical control concept in Chapter 3 that there is variation in
all performance and most of this variation is caused by the system , (i.e., common causes)
not the people working in the system. The concept of interdependence refers to the fact
that the various segments of a company are part of a system. Inevitably, these segments,
or subsystems influence each other. Failure to adequately recognize the
interdependencies within an organization tends to cause behavioral conflicts and motivate
participants to optimize the performance of the various segments (subsystems) rather than
to optimize the performance of the overall system.
Finally, the behavioral conflicts associated with budgeting are reduced by using flexible
budgets when evaluating performance.
 Costs
A third problem or limitation is that budgeting requires a considerable amount of time
and effort. Many companies maintain a twelve month budget on a continuous basis by
adding a future month as the current month expires.4 While this does not create a major
expenditure for large or medium sized organizations, smaller companies may find it
difficult to justify the costs involved. Many small, potentially profitable firms, do not
plan effectively and eventually fail as a result. Cash flow problems are common, e.g., not
having enough cash available (or accessible through a line of credit with a bank) to pay
for merchandise or raw materials or to meet the payroll. Many of these problems can be
avoided by preparing a cash budget on a regular basis.
 The Assumptions Of The MasterBudget
Typically, the following simplifying assumptions are made when preparing a master
budget:

36. 1.) sales prices are constant during the budget period
2.) variable costs per unit of output are constant during the budget period
3.) fixed costs are constant in total
4.) sales mix is constant when the company sells more than one product.
These assumptions facilitate the planning process by removing many of the economic
complexities. Instead of planning on the basis of the more complicated non-linear model
on the left, the master budget is very similar to the more easily understood linear model
on the right. In addition, a practical approach for analyzing the differences between
budgeted and actual sales prices, unit cost, sales mix and sales volume.
 Conclusion:
A budget is a detailed quantitative plan for acquiring and using financial and other
resources over a specified forthcoming time period.
1. The act of preparing a budget is called The act of preparing a budget is called
budgeting.
2. The use of budgets to control an organization’s activity is known as
budgetary control.

37. Navratri Event Budget
Provided below is an in list of items that could potentially cause expenses in Navratri Event
Budget.
Murti Cost: Rs. 6,501
Pundit Dakshina: Rs. 5,001
Murti Decoration Cost: Rs. 2,000
Daily Prasad Cost : Rs. 1000
Location Costs:
Site rental fee Rs.50,000
Additional labor Rs.15,000
Subtotal Rs.65,000
Rental Needs:
Electricity Rs.25,000
Furniture Rs.4,000
Carpeting Rs. 5,000
Labor Rs. 4,000
Subtotal Rs. 38,000
Food and Beverage Costs:
Food/catering Rs.65,000
Labor/staff Rs.7,000
Misc. charges Rs.10,000
Subtotal Rs.82,000
Audio-Visual/Entertainment Costs:
Recorders Rs.12,000
Sound system Rs.26,000
Technical staff Rs.15,000
Other Rs.20,000
Subtotal Rs.73,000
Lighting Costs:
Special lighting (pictures/videos) Rs.12,500
Generator/extension cords Rs.7,000
Labor Rs.3,000
Subtotal Rs.22,500

38. Decorations and Supplies
Stage decor Rs.2,000
Stage backdrop Rs.5,00
Flowers/plants Rs.1,000
Specialty linens Rs.3,000
Misc. charges Rs.1,000
Subtotal Rs.7,500
Other Event and Incidental Expense : Rs. 30,000
Income:-
Donation from the People:- Rs. 2,50,000
Danpeti Receipt:- Rs. 50,000

39. References:
 http://www.myaccountingcourse.com/accounting-dictionary/master-budget
 http://www.accountingtools.com/master-budget
 http://www.businessdictionary.com/definition/master-budget.html
 http://accountingexplained.com/managerial/master-budget/
 http://www.ehow.com/info_7806988_master-budget.html
 http://docs.oracle.com/cd/A60725_05/html/comnls/us/gl/budmet06.htm
 http://maaw.info/Chapter9.htm