Meaning of budget:

It is predetermined statement of management policy during a given period which provides a

standard for comparison with the results actually achieved.
According to CIMA “a plan quantified in monetary terms prepared and approved prior to a
defined period of time, usually showing planned income to be generated and expenditure to be
incurred during the period and the capital to be employed to attain a given objective”
 A budget is primarily a planning and control device.
 A budget is prepared in monetary terms/ quantitative terms
 A budget is prepared for a definite future period.
 It shows planned income and expenditure and also the capital to be employed.
 Purpose of a budget is to implement the policies formulated by the management for
attaining the given objectives.

Budgeting: The act of preparing budget is called budgeting.

According to batty, the entire process of preparing the budgets is known as budgeting.

Budgetary control: It is a system of controlling costs through preparation of budgets.

Budgeting is thus only a part of the budgetary control. According to CIMA, “Budgetary control
is the establishment of budgets relating to the responsibilities of executives of a policy and the
continuous comparison of the actual with the budgeted results, either to secure by individual
action the objective of the policy or to provide a basis for its revision”
 Establishment of budgets for function/dept of the organization.
 Comparison of actual performance with the budget on a continuous basis.
 Analysis of variations of actual performance from that of the budgeted performance to
know the reasons thereof.
 Taking suitable remedial action, where necessary.
 Revision of budgets in view of changes in conditions.

Objectives of Budgetary control:

 Planning: By planning many problems are anticipated long before they arise and
solutions can be sought through careful study, thus most emergencies can be avoided
by planning.
 Co-ordination: Budgeting aids managers in coordinating their efforts so that objectives
of the organization as a whole harmonise with the objectives of its divisions Effective
planning and organization contributes a lot in achieving coordination. There should be
coordination in the budgets of various dept.
 Communication: A budget is communication device. The approved budget copies are
distributed to all management personnel who provide not only adequate understanding
and knowledge of the programmes and police to be followed but also given knowledge
about the restrictions to be adhered to.
 Motivation: A budget is a useful device for motivating managers to perform in line with
the company objectives. If individuals have actively participated in the preparation of
budgets, it acts as a strong motivating force to achieve the targets.
 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 b/w plans and actual performance. The difference b/w the two is
reported to the management for taking corrective action.
 Performance evaluation: A budget provides a useful means of informing managers how
well they are performing in meeting targets. In many companies there is a practice of
rewarding employees on the basis of their achieving the budget targets or promotion of
a manager may be linked to his budget achievement record.
Advantages of Budgetary control:
 Budgeting compels managers to think ahead i.e, to anticipate and prepare for changing
conditions.
 It coordinates the activities of various departments and functions of the business.
 It increases production efficiency, eliminates waste and controls the costs.
 Budgetary control aims at maximization of profits through careful planning and control.
 It provides a yardstick against which actual results can be compared.
 It shows management where action is needed to remedy a situation.
 A budget motivates executives to attain the given goals.
 A budgetary control system assists in delegation of authority and assignment of
responsibility.
 It creates necessary conditions for the introduction of the standard costing technique.

Limitations of Budgetary control:

 Budgets are based on forecasts and forecasting cannot be an exact science. The strength
or weakness of the budgetary control system depends to a large extent, on the accuracy
with which estimates are made.
 Budgets will lose much of their usefulness if they acquire rigidity and are not revised
with the changing circumstances.
 Budgeting cannot take the place of management but is only a tool of management.
 The installation and operation of a budgetary control system is a costly affair as it it
requires the employment of specialized staff and involves other expenditure which
small concerns may find difficult to incur.
Types of budget:
Time basis:
1. Long term budget
2. Short term budget
Flexibility basis:
1. Fixed budget
2. Flexible budget
Functional basis:
1. Master budget
2. Functional budget
a) Sales budget
b) Production budget
c) Finance budget
 Cash budget
 Capital expenditure budget
d) Cost budget
 Production cost budget (Material budget, labour budget, Overheads budget,
Plant budget)
 Admin cost budget
 Selling & distribution budget
 Research & development budget

Cash budget: It is a detailed estimate of cash receipts from all sources and cash payments for
all purposes and resultant cash balances during the budget period. It makes certain that the
business has sufficient cash available to meet its needs as and when these arise. It is a device
coordinating and controlling the financial side of the business to ensure solvency and provide a
basis for planning and financing required to cover up any deficiency in cash.
Cash Budget for the period………………….
Particulars Jan Feb March
Opening Balance of cash
Add: Cash Receipts:
Cash Sales
Collection from debtors/B/R
Interest, Dividend rd
Sale of Fixed assets
Issue of share and debenture
Loan from bank/others
Total Receipts(A)

Less: Cash Payments:

Cash purchase
Payment to creditors/B/P
Wages and salaries paid
Redemption of share and debentures
Purchase of Fixed assets
Repayment of loans
Other payments
Total Payments(B)
Closing balance of cash (A-B)

Purpose:
 It ensures that sufficient cash is available when required.
 It indicates cash excesses and shortages so that action may be taken in time to invest
any excess cash or to borrow funds to meet any shortages.
 It establishes a sound basis for credit.
 It shows whether capital expenditure may be financed internally.
 It establishes a sound basis for control of cash position.

Methods:
 Receipts and payments method
 Adjusted profit and loss method
 Balance sheet method

Flexible budget: FB is one which is designed to change in relation to the level of activity
attained. It has been developed with the objective of changing the budget figures to correspond
with the actual output achieved. Thus a budget might be prepared for various levels of activity,
say 60%, 70%, 100%.
Flexible budget are more useful and beneficial in modern times. Due to the present instable
political situation, there is no stability in the govt policy. In effect, no concern is in a position
to estimate its production and sale correctly.
 It helps the concern in estimating its production, sale and profit at different level. of
activities.
 Actual figures can easily be compared.
 It is the only suitable budget, under the present scenario
 Flexible Budget for the period…………………..
Particulars Level of activity
60% 80% 100%
Production & Sales Units/Rs Units/Rs Units/Rs
A: Fixed Expense
Administration exp
Depreciation
Total (A)
B: Variable Expense
Material
Labour
Direct exp
Total (B)
C: Semi Variable Expense
Repair & Maintenance
Power
Selling & distribution
Total(C)
Total Cost (A+B+C)
Profit ( Sale- Total cost)

Sales budget:
Sales budget is an estimated sale during a budget period. It lays down a comprehensive plan
and program for sales department. Sales manager is responsible for preparing sales budget. It
expresses the figure in qty, in value according to area/territory. The degree of accuracy with
which sales are estimated determines the success of budgeting exercises.
Factors to be considered in forecasting sale:
1. Past sales

2. Reports by salesmen

3. Company condition/business condition

4. Market analysis

5. Seasonal fluctuations/competition

Problem: A company has four sales territories 1,2,3 and 4 each salesman is expected to sell
the following number of units during the first quarter. Assume the average selling price to be
Rs 30.
Territory 1 2 3 4
Jan 1,000 1,500 2,500 3,500
Feb 2,000 1,800 2,800 4,000
March 2,500 2,000 3,000 4,500
Prepare the sales budget for the first quarter of the year.
Sales budget (first quarter)
Territory Jan Feb March Total

Unit Value Unit Value Unit Value Unit Value

1 1,000 30,000 2,000 60,000 2,500 75,000 5,500 1,65,000
2 1,500 45,000 1,800 54,000 2,000 60,000 5,300 1,59,000
3 2,500 75,000 2,800 84,000 3,000 90,000 8,300 2,49,000
4 3,500 1,05,000 4,000 1,20,000 4,500 1,35,000 12,000 3,60,000
8,500 2,55,000 10,600 3,18000 12,000 3,60,000 31,100 9,33,000

Production budget:
It is a forecast of a number of units to be produced during the budget period. It is prepared in
relation to the sale budget. The number of units to be produced is arrived after taking into
account opening and closing stock. This prepared by factory in charge or production manager.
The factors to be considered are:
 Sales budget
 Plant capacity
 Lag time
 Stock Qty to be held
 Availability of key factor
 Production planning

Production budget is prepared in two parts:

1. Production volume budget
2. Cost of production/ manufacturing cost budget(direct material, direct labour
and overheads)

Raw material budget:

This budget shows the estimated quantities of all the raw materials and components needed for
production demanded by the production budget
 It assists purchasing department in planning the purchases.
 It helps in the preparation of purchase budget.
 It provides data for raw material control.

Purchase budget:
The purchase budget provides details of the purchases which are planned to be made during the
period to meet the needs of the business. It indicates the qty of each type of raw material,
timing and estimated cost of material.
 O/S and C/S, will affect material requirements.
 Maximum and minimum stock qty
 EOQ
 Financial resources available.
 Purchase orders placed before the budget period.
 Policy of the management.

Labour budget:
The labout budget represents the forecast of labour requirements to meet the demands of the
company during the budget period. This budget must be linked with production budget and
production cost budget. The standard direct labour hours of each grade of labour required for
each unit and standard wage rate are ascertained.
Purposes:
 To estimate the labour cost of production
  To determine the direct labour required in terms of labour hours
 To provide data to personnel dept, so that it may plan recruitment activities.
 To provide data for determination of cash requirements for payment of wages.
 To provide data for managerial control of labour cost.
Production overhead budget:
Production overhead budget represents the forecast of all the production overhead to be
incurred during the budget period.
 Allocation of production overheads to product manufactured
 Control of production overheads.
Factors to be considered:
 Classification of all overhead costs into fixed and variable elements.
 Level of activity likely to be achieved during the budget period.
 Policy of management regarding overtime work etc.
 Individual items of cost incurred in the past.

Problem: The following information has been made available from the records for last 6
month.
1. The units to be sold in different months are:
July-1100 Aug- 1100 Sep- 1700 Oct-1900 Nov-2500 Dec- 2300 Jan-
2000
2. There will be no WIP at the end of any month.
3. Finished units equal to half of sales for the next month will be in stock at the end of
every month.
4. Budgeted production (units)-22,000, direct materials per unit-10, direct wages per unit-
4.
Factory overheads-88,000
Prepare production budget and production cost budget.

Sol:
Production budget for 6 months

Particulars July Aug Sep Oct Nov Dec

Sales(in units) 1100 1100 1700 1900 2500 2300

(+)C/S 550 850 950 1250 1150 1000

½ of sales for next
month
1650 1950 2650 3150 3650 3300

(-) O/S 550 550 850 950 1250 1150

Production in units 1100 1400 1800 2200 2400 2150

Production cost budget for 6 months (July to Dec)

(1100+1400+ 1800+ 2200+ 2400+2150)= 11050 units

Direct material 10 per unit (11050x10)= 110500

 Direct wages 4 per unit (11050x4)=44200
Factory overheads (88000/2)=44000
Total - 198700

Problem: A company manufactures product A and B. during the year ending, it is expected to
sell 15000 kg of product A and 75000 kg of product B at 30 and 16 per kg respectively. The
direct material P,Q and R are mixed in the proportion of [Link] in the manufacture of product A
and Q R are mixed in the proportion of 1:2 of manufacture B.

Sol: Production budget for the year ending

Particulars Product A (kg) Product B (kg)

Sales 15000 75000
+ C/S 1500 4500
16500 79500
-O/S 3000 4000
Production 13500 75500

Material budget: This budget shows the estimated Qty of all the raw materials and
components needed for production demanded by production budget.

Particulars P(Kg) Q(Kg) R(Kg)

A(13500kg in [Link]) 4050 6750 2700
B(75500kg in 1:2 QR) - 25167 50333
Material consumption 4050 31917 53033
(+)C/S 3000 6000 9000
(-)O/S 4500 3000 30000
Material purchase budget 2550 34917 32033

Cost per Kg 12 10 8

Expenditure on purchase 30600 349170 256264

Capital expenditure budget:

It is prepared to estimate the capital expenditure required to purchase or to acquire fixed assets
for fulfilling the production targets as fixed by the production budget. Therefore it represents the
expenditure on all fixed assets during the budget period. It is a long term budget, prepared for
five to ten years, includes new building, machinery, land and intangible items.
 It deals with items not directly related to profit and loss a/c
 It is frequently planned a number of year in advance, five to ten years.
 This budget involves large amount of expenditure which needs top management
approval.
 Thus capital budget reveals about the need of capital assets and also the time when they
are needed and the purpose for which needed.

Master budget:
Master budget is a consolidated summary of all the functional budgets. It has two parts
(1) Operating budget i.e., budgeted profit and loss a/c
(2) Financial budget i.e., budgeted balance sheet
Thus a projected profit and loss a/c and a balance sheet together constitute a master
budget. It is prepared by the budget director (budget officer) and is presented to the budget
committee for approval. If approved, it is submitted to the board of director for final approval.
The board may make certain amendments/alternations before it is finally approved.

Problem: Manufacturing co requires you to present the master budget for next year.

Sales –A- 600000 B- 200000 Stores and spares- 2.5% on sales

Direct material -60% of sales Dep on machinery-12600
Direct wages- 20 workers@ 150 p.m Light and power-3000
Indirect labour-work manager-500 p.m Repair- 8000
Foreman-400 p.m Other exp10% on direct wages
Administration exp-36000 per year.

Sol: Master budget

For the year………………

Sales
A 600000
B 200000
Total sales 800000
Less: Direct material (60% of 800000) 480000
Direct wages(20x150x12) 36000
Prime cost 516000
Fixed factory overheads:
Works manager salary(500x12) 6000
Foreman salary(400x12) 4800
Depreciation 12600
Light power 3000 26400
Variable factory overheads:
Stores and spares 20000
Repair 8000
[Link] 3600 31600 574000
Works cost

Gross profit 226000

Less: Admin ,selling and distribution exp 36000
Net profit
190000

Research and development budget:

R & D work is given due importance a R& D dept is established which controls and operates all
works. Budget estimates are made on the basis of last year’s expenditures and future prospects

Zero base budgeting (ZBB):

ZBB was introduced at Taxas in USA in 1969 by Peter Phyrr, “a planning and budgeting process
which requires each manager to justify his entire budget in detail from scratch. Each manager
states why he should spend any money at all. This approach requires that all activities be
identified as decision packages which will be evaluated by systematic analysis ranked in order of
impotence”. It is a budgeting method where each budget item needs to be justified whenever a
new budget is prepared.
 All budget items, both old and newly proposed are considered totally afresh.
 Amount to be spent on each budget item is to be totally justified.
 It results in efficient allocation of resources.
 Departmental objectives are linked to corporate goals.
 The main stress is not on how much department will spend but on why it needs to spend.

Performance budgeting:
Performance budgeting is a relatively new concept which focuses on functions, programs and
activities In other words, traditional budgeting, both input and output are mostly measured in
monetary unit while PB lays emphasis on achievement of physical targets.
Performance budget are established in such a manner that each item of expenditure related to a
specific responsibility centre is closely linked with the performance of that centre.