For effective running of a business, management must
where it intends to go i.e. organizational objectives
how it intends to accomplish its objective i.e. plans
• whether individual plans fit in the
organizational objective. i.e. coordination
whether operations conform to the plan of
operations relating to that period i.e. control
“Budgetary control is the device that a company
uses for all these purposes.”
Budget is a detailed plan of operations
for some specific future period.
According to Gordon budget may be
defined as “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
WHAT IS A BUDGET?
“ A plan expressed in money. It is
prepared and approved prior to the
budget period and may show income,
expenditure and the capital to be
employed. May be drawn up showing
incremental effects on former
budgeted or actual figures, or be
compiled by Zero-based budgeting.”
CLASSIFICATION OF BUDGETS
Long term budget
Short term budget
1. Sales budget
2. Production budget
1. Fixed budget
3. Cost of Production budget
4. Purchase budget
5. Personnel budget
6. R & D budget
7. Capital Expenditure budget
8. Cash budget
9. Master budget
1. SALES BUDGET:
Sales budget is the most important budget based on which all the
other budgets are built up. This budget is a forecast of quantities
and values of sales to be achieved in a budget period.
2. 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?
When is it to be produced?
How is it to be produced?
Where is it to be produced?
3. COST OF PRODUCTION BUDGET:
This budget is an estimate of cost of output planned for a
budget period and may be classified into –
• Material Cost Budget
• Labour Cost Budget
• Overhead Cost Budget
4. PURCHASE BUDGET:
This budget provides information about the materials to be
acquired from the market during the budget period.
5. 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
6. 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
7. 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
8. CASH BUDGET:
This budget gives an estimate of the anticipated receipts and
payments of cash during the budget period.
Cash budget makes the provision for minimum cash
balance to be maintained at all times.
9. 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.
10. FIXED BUDGET:
This is defined as a budget which is designed to remain
unchanged irrespective of the volume of output or turnover
This budget will, therefore, be useful only when the actual level of
activity corresponds to the budgeted level of activity.
11. FLEXIBLE BUDGET:
CIMA defines this budget as one “ which, by recognising the
difference in behaviour between fixed and variable costs in
relation to fluctuations in output, turnover or other variable
factors such as number of employees, is designed to change
appropriately with such fluctuations”.
12. PERFORMANCE BUDGETING:
These days budgets are established in such a way so that each
item of expenditure is related to specific responsibility centre
and is closely linked with the performance of that standard.
13. ZERO BASE BUDGETING:
The zero base budgeting is not based on the incremental
approach and previous figures are not adopted as the base.
Zero is taken as the base and a budget is developed on the
basis of likely activities for the future period.
A unique feature of ZBB is that it tries to help
management answer the question, “Suppose we are to start
our business from scratch, on what activities would we spent
out money and to what activities would we give the highest
Assumes static business
Based on the assumption of
Prepared only for one level of
Prepared for different capacity
levels or for any level of
The values( figures) will not
change when actual level of
The figures are adjusted
according to the actual level of
When actual level of activity
differs from budgeted level of
activity, then fixed budgets
between actual and budgeted
figures is not possible.
Such comparison are quite
Budgetary control as ‘the
establishment of budgets relating to
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
WHAT IS BUDGETARY CONTROL?
Budgetary control is the use of the comprehensive system of budgeting
to aid management in carrying out its functions like planning,
coordination and control.
This system involves:
Division of organization on functional basis into different sections
known as a budget centre.
Preparation of separate budgets for each “budget centre”.
Consolidation of all functional budgets to present overall
organizational objectives during the forthcoming budget period.
Comparison of actual level of performance against budgets.
Reporting the variances with proper analysis to provide basis for
future course of action.