Meaning of budget

Budget and Budgetary Control
Meaning of Budget
A budget is a detailed plan of operations of some specific future period. It is an estimate
prepared in advance of the period to which it applies. It acts as a business barometer as it is a
complete programmer of activities of the business for the period covered.
The chartered Institute of management Accountants, London, defines a budget as, “a financial
and/or quantitative statement, prepared prior for a defined period of time, of the policy to
pursued during that period for the purpose of attaining a given objective.”

Budgetary control
Every business firms have main objective to maximise the profits and to minimise the cost. No
organisation can survive in this competitive market without the minimisation of cost. Budgetary
control system is very helpful in bringing economy in the business.
Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as,
"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".

Objectives
The objectives of budgetary control are:
(1) Compel for planning: As management is forced to look ahead, responsible for setting of
targets, anticipating of problems & giving purpose & direction to the organization, this feature is
the most important feature of budgetary control .
(2) Communication of ideas & plans: Communication of ideas & plans to everyone is effected
by budgetary control. In order to make sure that each person is aware of what he is supposed to
do, it is necessary that there is a formal system.

.

(3) Coordinating the activities: The budgetary control coordinates the activities of different
departments or sub-units of the organization. The coordination concept implies, for example, on
production requirements, the purchasing department should base its budget & similarly, on sales
expectations, the production budget should in turn be based.

.

(4) Establishing a system of control: A system of control can be established by having a plan
against which progressive comparison can be made of actual results.

.

(5) Motivating employees: Employees are motivated for improving their performances by
budgetary control.

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Advantages of budgetary control
The advantages of budgetary control system are as follows:
(1) The objectives of the organization as a whole & the results which should be achieved by each
department within this overall framework are defined by the budgetary control.
(2) When there is a difference between actual results & budget, then the extent by which actual
results have exceeded or fallen short of the budget is revealed by the budgetary control.
(3) The variances or other measures of performance along with the reasons of difference
between the actual results with those from budgeted is indicated by the budgetary control. Also,
the magnitude of differences is established by it.

.

(4) As the budgetary control reports on actual performance along with variances & other
measures of performance; for correcting adverse trends, a basis for guiding executive action is
provided by it.
(5) A basis by which future budget can be prepared or the current budget can be revised is
provided by the budgetary control. .
(6) A system whereby in the most efficient way possible the resources of the organization are
being used is provided by the budgetary control. .
(7) The budgetary control indicates how efficiently the various departments of the organization
are being coordinated.

.

(8) Situations where activities & responsibilities are decentralized, some centralizing control is
provided by the budgetary control .
(9) The budgetary control provides means by which the activities of the organization can be
stabilized, where the organization’s activities are subject to seasonal variations.

.

(10) By regularly examining the departmental results, a basis for internal audit is established by
the budgetary control.

.

(11) The standard costs which are to be used are provided by it.
(12) For the purpose of paying a bonus to employees, a basis by which the productive efficiency
can be measured is provided by the budgetary control.


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Limitations of Budgetary Control
The main limitations of budgetary control are:
(1)

It used the estimates as a basis for the budget plan.

.

(2) In order to fit with the changing circumstances the budgetary programme must be
continually adapted. Normally for attaining a reasonably good budgetary programme, it takes
several years.

.

(3) A budget plan cannot be executed automatically. Enthusiastic participation is required by all
levels of management in the programme.

.

(4) The necessity of having a management & administration will not be eliminated by any
budgetary control system. The place of the management is not taken by it; rather it is a tool of
the management.

CLASSIFICATION OF BUDGETS

On the basis of TIME

Long Term Budget

On the basis of
FLEXIBILITY

On the basis of FUNCTION

Fixed Budget

Sales Budget

Shortterm budgets

Flexible Budget

Production Budget

Cost of Production

Purchase Budget

Personnel Budget

Research Budget

Capital Expenditure

Cash Budget

Master Budget

Operating Budget


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CLASSIFICATION ACCORDING TO TIME
1. Long Term Budgets: The Budgets are prepared to depict long term planning of the
business. The period of long term budgets various between five to ten years. The long term
planning is done by the top'-level management and generally it is not known to lower levels of
management. Long-term budgets are prepared for some sectors of the concern such as capital
expenditure, research and development, long-term finances etc. These budgets are
usefulfor those industries where gestation period is long i.e.,-machinery, electricity, and
organization.
2. 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, textiles, etc., use short-term budget.
3. Current Budget: The period of current budget is generally of months and weeks. The
budgets relate to the current activities of the business. According to I.C.W.A. London "Current
budget is a budget which is established for use over a short period of time and is related to
current conditions".
CLASSIFICATION ON THE BASIS OF FUNCTION
Budgets can be classified on the basis of functions they are meant to perform.
Their number depends upon the size and nature of the business. The following are the usual
functional budgets:
1. Sales Budget: The budget forecasts total sales in terms of quantity, value, items, periods,
areas etc.
2. Production Budget: The budget is based on sales budget. It forecasts quantity of production
in terms of items, periods, areas, etc.
3. Cost of Production Budget: The budget forecasts the cost of production. Separate budgets
are prepared for different elements of cost such as direct materials budget, direct labour budget,
factory overheads budget, office over heads budgets, selling and distribution overheads budget,
etc
4. Purchase Budget:The budget forecasts the quantity and value of purchases required for prod
uction. It gives quantity-wise, money-wise and period-wise information about the materials to be
purchased.


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5. Personnel Budget: The budget anticipates the quantity of personnel required during a period
for production

activity. This

may be further

split

up between

direct

and indirect

personnel budgets.
6. Research Budget: The budget relates to the research work to be done for improvement in
quantity of the products or research for new products.
7. Capital Expenditure Budget: The budget provides a' guidance regarding the amount of
capital that may be required for procurement of capital assets during the budget period,
8. Cash Budget: The budget is a forecast of cash position by time period for a specific duration
of time. It states the estimated amount of cash receipts and cash payments, etc.
9. Master Budget: It is a summary budget incorporating all functional budgets in capsule form.
It

interprets different functional budgets and covers within its range the preparation of

projected income statement and balance sheet.
10. Operating Budget:The budget shows planned operations for the forthcoming period,
including revenues, expenses and related changes in inventory. It covers in its ambit Sales
Budget, Production Budget, Cost of Production Budget, etc. Thus, it is the principal part of
Master Budget of the business. The operating budget usually consists of
i) Programmed budget and ii) Responsibility budget.
i) Programmed Budget: It consists of expected revenues and costs of various products or
projects that are termed as the major programmers of the firm. Such a budget can be prepared
for each product time or project showing revenues, Costs and the relative profitability of the
various programmers. Programmer budgets*are thus useful in locating areas where efforts may
be required to reduce costs and increase revenues. They are also useful in determining
imbalances and inadequacies in programmers so that corrective action may be taken in future.
ii) Responsibility Budget:It is a budget, which identifies the revenues and costs, with an individ
ualresponsible for their incurrence. Such a budget is an excellent control device since it
identifies with the individual only such revenues and costs which are controllable by him. The
regarding the actual results are collected from different operations and compared with the
budgeted figure to find out whether the individual has what he expected.
CLASSIFICATION OF THE BASIS OF FLEXIBILITY
i) Fixed budget: The fixed budgets are prepared for a given level of activity, the budget is
prepared before the beginning of the financial year, if the financial year starts in January then
the budget will be prepared a month or two earlier i.e. November or December. The charge in


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expenditure arising out of the anticipated charges will not be adjusted in the budget. There, is a
difference of about twelve months in the budgeted and actual figures. According to I.C.W.A.
London,

"Fixed

budget

is

designed

to

remain

unchanged irrespective

of

thelevel of activity actually attained".
ii) Flexible budget: A flexible budget consists of a series of budgets for different level of activity.
It therefore, various with the level of activity attained. A flexible budget is prepared after taking
into

consideration

unforeseen

charges

in

the

conditions

Business.A flexible budget is defined as a budget, which by recognizing the

of

the

difference between

fixed, semi fixed and variable cost is designed to change in relation to the level of activities.


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Meaning of budget

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