Budgeting and Budgetary Control

Arun Kumar D C

Budgeting

According to CIMA– A Financial or Quantitative statement prepared

prior to a defined period of time, of the policy to be pursued during the period for the purpose of achieving the given objective.

– It is forward looking– Prepared in quantitative or units or both– For a particular time frame

Budgetary control

Control in which actual results are compared with the budgeted results

Steps in Budgetary control– Developing Budgets– Recording the actual– Comparison between budgeted and actual– Corrective action

Objectives of Budgetary Control

To operate the business efficientlyElimination of waste and increase in

profitabilityAnticipate the capital expenditure for

futureCentralize the control systemCorrection of Deviations from the

standardsFixation of Responsibility

Advantages of Budgetary Control

Maximization of ProfitsCo-ordinationMeasuring the performanceCorrective Action Reward SystemGoal Congruence

Limitations of the Budgetary Control

Uncertain FutureNeed to be revised every timePeople try to perform only up-to budgetConflict among different departmentsDepends on the support of top

management

Types of Budget

Classification according to Time– Long Term Budget

• Budget for long term planning of business. Usually for more than 5 years.

• It is done by the top level management.

– Short Term Budget• For a shorter duration. Mostly on the operation fronts and

achievement of long term objectives

– Current Budget• Generally for a month or a week. Done at lower level,

mainly on operations

Classification Based on Functions– Operating Budget

• Budget of different activities or operations. E.g. Sales Budget, Material Budget, Purchase Budget, Labor budget etc.

• Operating Budget Consists of – Programme Budget

• Shows revenues and costs of each line of product or project

– Responsibility Budget• Displays the persons responsible for achieving the targets.

Usually prepared for responsibility centres.

Financial Budget– Concerned with cash inflows and

disbursements.– E.g. Cash Budget, Working Capital Budget,

Capital Expenditure budget etc.Master Budget

– It is the summary of the budget incorporating functional areas.

Based on Flexibility– Flexible Budget

• Budget which is prepared for different levels of capacity utilization

• It is a series of fixed budgets

– Fixed Budget• Budget prepared assuming a fixed capacity

utilization.• Irrespective of the level of activity same budget

will be used

Sales Budget

A sales budgetis a detailed schedule showing the expected sales for the budget period. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time.

Thank You