Budgets are financial plans prepared in advance to help achieve objectives. There are various types including sales, production, cash budgets. Budgetary control involves establishing budgets, comparing actuals to budgets, analyzing variances, and revising budgets. The key purposes of budgeting and budgetary control are planning, coordination, communication, motivation, control, and performance evaluation. It helps management anticipate the future, coordinate departments, pinpoint inefficiencies, and direct resources for maximum profit.

1. Budget and Budgetary Control

2. Budget
CIMA, London has defined budget as “a financial
and/or quantitative statement, prepared prior
to a defined period of time, of the policy to be
pursued during that period for the purpose of
attaining a given objective.”
It may include income, expenditure and
employment of capital.

3. Budget
According to Gorden Shillinglaw, A budget is ‘ a
predetermined detailed plan of action
developed and distributed as a guide to current
operations and as a partial basis for the
subsequent evaluation of performance’.
Following are the essentials of a budget:
 It is prepared in advance and is based on a
future plan of action.
 It relates to a future period and is based on
objectives to be attained.
 It is a statement expressed in monetary and/or
physical units prepared for the implementation
of policy formulated by the management.

4. Characteristics of budget
• A budget is primarily a planning device but it
also serves as a basis for performance
evaluation and control
• A budget is prepared either in money terms or
in quantitative terms or in both
• A budget is prepared for a definite future
period
• Purpose of budget is to implement the policies
formulated by the management for attaining
the given objectives

5. Budgeting
The entire process of preparing the budget is known
as budgeting. It involves four steps:
(1) Objectives
Objectives are broad and long-range desired state or position in
future.
(2) Goals
Goals are quantitative targets to be achieved in specified period.
(3) Strategies
Strategies represent specific course of action to achieve goals.
(4) Plans
The final step is the preparation of budgets/profit plans. It
converts goals and strategies into annual operating plans..

6. Budget Purpose
The main objectives of budgeting are:
1. Explicit statement of expectations
2. Communication
3. Coordination,
4. Expectations as a framework for judging performance

7. One purpose of budgeting is to state expectations in formal terms so that
most of the underlying assumptions may be identified. A firm has the
basic objective of optimising long-run profit. Its long-range goals
also include survival, consumer satisfaction, employee
welfare, personal power and prestige, and so on.
Another purpose of budgeting is to communicate or inform others of the goals
and methods selected by top management. Since budgeting
deals with fundamental policies and objectives, it is
prepared by top management.
However, a budget does not lay down a statement of expectations in rigid
terms. A budget should be modified when necessary in the light of
the changes in the factors/assumptions on which the
original estimates were based.
1. Explicit Statement of Expectations
2. Communication

8. Yet another purpose of budgeting is coordination. The term ‘coordination’
refers to the operation of all departments of an organisation in
such a way that there is no bottleneck or imbalance.
Finally, a budget establishes expectations as a framework for judging
employee performance.
In view of the above, coordination is a major function of budgeting.
Budgets should be drafted in such a way that the operations
of the various departments are related to each other for
the achievement of the overall goal.
3. Coordination
4. Expectations as a Framework for Judging Performance

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Budgetary Control
It is the system of management control and
accounting in which all operations are
forecasted and so far as possible planned
ahead, and the actual results compared with
the forecasted and planned ones. Thus,
budgetary control involves :
 Establishment of budgets.
 Continuous comparison of actual with
budgets for target achievement and
variance analysis.
 Revision of budgets in the light of changed
circumstances.

10. Characteristics of budgetary control
• Establishment of budgets for each
function/department of the organisation
• Comparison of actual performance with the
budgets on a continuous basis
• Analysis of variations of actual performance
from that the budgeted performance to know
the reasons thereof
• Taking remedial actions, where necessary
• Revision of budgets in view of changes in
conditions

11. • The difference between, budgets, budgeting
and budgetary control has been stated as ,
‘Budgets are the individual objectives of a
department etc., where as budgeting may be
said to be the act of building budgets.
Budgetary control embraces all and in
addition includes the science of planning the
budgets themselves and the utilization of such
budgets to effect an overall management tool
for the business planning and control.’

12. Objectives of budgetary control
• Planning
• Co-ordination
• Communication
• Motivation
• Control
• Performance evaluation

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Budgetary Control As A Management Tool
Advantages of Budgetary Control :
 Budgeting compels managers to think ahead – to
anticipate and preparing for future conditions.
 Budgeting coordinates the coordinates the activities
of various departments and functions of the business
 Increases production efficiency, eliminates waste and
control the cost.
 It pinpoints efficiency or lack of it
 It aims at maximisation of profit through careful
planning and control
 It provides a yardstick against which actual results can
be compared

14. Advantages of Budgetary Control :
• It shows management where action is needed to
remedy a situation
• It directs capital expenditure in most profitable
direction
• It instills into all levels of management a timely,
careful and adequate consideration of all factors
before reaching important decisions
• A budget motivates the executives to attain given
goals
• Budgeting also aids in obtaining bank credit
• A budgetary control system assists in delegation of
authority and assignment of responsibility

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Classification of Budgets
According to time:
 Long term Budget: Designed for a long period, generally 5
to 10 yrs. Concerned with the planning of the operations of
a firm over a considerably long period of time.
 Short term Budget : Designed for a period generally not
exceeding 5 yrs.
 Current budgets: Cover a very short period, say a month or
a quarter. They are essentially short term budgets adjusted
to current conditions.
 Rolling Budgets: A new budget is prepared at the end of
each month or quarter for a full year ahead. The figures for
the month or quarter which has rolled down, are dropped
and the figures for the next month or quarter are added.

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Classification of Budgets ( Contd )
According to function:
 Sales Budget:
It is a forecast of sales to be achieved in a budget period.
The sales budget can be prepared to show sales classified
according to products, salesmen, customers, territories and
periods etc. Factors to be considered while preparation of
sales budget include past sales figures and trends,
Salesmen’s estimates, Plant capacity, Orders in hand,
Seasonal fluctuations, Potential market etc.
 Production Budget:
Provides an estimate of the total volume of production
product-wise, with the scheduling of operations by days,
weeks and months and a forecast of the closing finished
product inventory. The key considerations involved in
budgeting production are:
Sales Budget, Inventory policy which depends upon factors
like storage facility, perishability of the product, risk of
price changes etc., Production capacity, management
policy.

17.  Production cost budget: It shows the estimated
cost of production. The quantities of production
budget are expressed in terms of cost in detail
with respect to elements of cost.
 Purchase Budget:
Forecasts the quantity and value of purchases
required for production. It indicates the quantities
of each type of raw material and other items to be
purchased and the timing of purchases. This
budget also depends upon many factors like
Opening, closing stock, maximum and minimum
stock quantities, EOQs,
 Capital Expenditure Budget :
Forecasts the amount of capital that may be
required for procurement of capital assets like new
building, machinery, land and intangible items like
patents etc. during the budget period.

18. • Labour budget: It represents the forecast of labour
requirements during the budget period. This budget
may be linked with production budget and
production cost budget. Its purpose includes:
a) To estimate the labour cost of production
b)To determine the direct labour required in terms of
labour hours and hence the number and grade of
workers to meet production requirement
c) To provide the personnel department with personnel
requirement
d)To determine cash requirement for payment of
wages and salaries
e) To provide data for managerial control of labour cost

19. Similarly we have,
Production overhead budget
Selling and Distribution cost budget
Administration cost budget

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Classification of Budgets ( Contd )
 Cash Budget:
Forecasts the estimated amount of cash receipts and
payments and the likely cash balance in hand at the end of
different periods. A cash budget helps the management in
i) Determining the future cash needs of the firm.
ii) Planning for financing of those needs
iii) Exercising control over cash and liquidity of the firm.
A Cash budget can be prepared in any of the following
three ways:
i. Receipts and Payments Method : Cash receipts and
payments from various sources are estimated and a budget
is prepared using the estimates.
ii. Adjusted Profit & Loss Account Method: Cash budget is
prepared on the basis of opening cash and bank balances,

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Classification of Budgets ( Contd )
projected profit and loss account and the balance of various
assets and liabilities.
iii. Balance Sheet Method: Under this method, at the end of
each period a projected balance sheet is drawn up listing
various assets and liabilities except cash and bank
balances. The balancing figure is taken as the closing cash/
bank balance.
 Master Budget : It is a summary budget incorporating all
functional budgets in capsule form.
It has two parts i) Operating budget i.e. budgeted profit &
loss account and ii) Financial budget i.e. budgeted balance
sheet.

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Classification of Budgets ( Contd )
According to Flexibility:
Fixed Budget : According to CIMA London, ‘ a fixed budget is a
budget which is designed to remain unchanged irrespective
of the level of activity actually attained’. Hence it is
unrealistic yardstick incase the level of activity actually
attained does not conform to the one assumed for
budgeting purposes.
Flexible Budget : According to CIMA London, a flexible budget is ,
‘ a budget designed to change in accordance to the level of
activity actually attained’. Thus a budget can be prepared
for various level of activities say 70%, 80%, 90%, 100%
capacity utilisation. Then whatever the output is achieved
it can be compared with an appropriate level.
It is used on companies where it is extremely difficult to forecast
output and sales with accuracy like luxury prodcuts, fashion
products, export products etc.