BUDGET
COSTING
GROUP: 07
CONCEPT OF
BUDGET:
• A BUDGET IS A FINANCIAL PLAN FOR A DEFINED PERIOD OF TIME,
USUALLY A YEAR.
• IT MAY ALSO INCLUDE PLANNED SALES VOLUMES AND REVENUES,
RESOURCES QUANTITIES, COST AND EXPENSES, ASSETS, LIABILITIES AND
CASH FLOWS.
ADVANTAGES OF BUDGETARY CONTROL
SYSTEM:
1. Effective Resource Allocation
•Proper allocation of resources to various departments/projects.
•Ensures efficiency and minimizes wastage of resources.
2. Performance Monitoring
•Compares actual performance with budgeted figures.
•Identifies variances and enables corrective actions.
3. Improved Decision Making
•Informed decisions based on clear financial data.
•Helps prioritize expenditures and allocate funds accordingly.
4. Financial Discipline
•Enforces discipline in financial planning and spending.
•Promotes cost-conscious behavior across departments.
5. Cost Control
•Tracks expenses to identify areas of cost reduction.
•Helps in managing inefficiencies and controlling costs.
LIMITATIONS OF BUDGETARY CONTROL SYSTEM:
1. INACCURACY: BASED ON ASSUMPTIONS, TRENDS, MARKET SCENARIOS,
PREDICTION.
2. COSTLY: EXTRA MANPOWER REQUIRED AND SEPARATE DEPARTMENT TO CARRY
OUT BUDGETING.
3. RIGIDITY: ANY CHANGE IN MARKET SITUATION DOES NOT GENERALLY EVOKE THE
ATTENTION OF THE MANAGEMENT TO MAKE ANY DRASTIC CHANGE IN THE
STRATEGY DUE TO BUDGET CONSTRAINT.
4. ALLOCATION OF RESOURCES: IT IS NOT POSSIBLE TO TAKE INTO CONSIDERING
SUGGESTIONS FROM ALL DEPARTMENTS REGARDING BUDGETING METHODS
AND ALLOCATION OF EXPENSES.
5. FINANCIAL OUTCOME: IT FOCUSES ON THE QUANTITATIVE ASPECT OF THE
BUSINESS OR IMPROVING THE PROFITABILITY OF THE COMPANY AND DOES NOT
CONSIDER THE SUBJECTIVE OR QUALITATIVE ASPECT.
TYPES OF
BUDGETS:
1. Master Budget:
• A master budget is an aggregate of a company's individual budgets.
• It is designed to present a complete picture of its financial activity and health.
• The master budget combines factors like sales, operating expenses, assets, and income streams to allow companies
to establish goals and evaluate their overall performance, as well as that of individual cost centers within the
organization.
• Master budgets are often used in larger companies to keep all individual managers aligned.
2. Operating Budget:
• An operating budget is a forecast and analysis of projected income and expenses over the course of a specified time
period.
• To create an accurate picture, operating budgets must account for factors such as sales, production, labor costs,
materials costs, overhead, manufacturing costs, and administrative expenses.
• Operating budgets are generally created on a weekly, monthly, or yearly basis. A manager might compare these
reports month after month to see if a company is overspending on supplies.
3. Cash Flow Budget:
• A cash flow budget is a means of projecting how and when cash comes in and flows out of a business within a
specified time period.
• It can be useful in helping a company determine whether it's managing its cash wisely.
• Cash flow budgets consider factors such as accounts payable and accounts receivable to assess whether a company
has ample cash on hand to continue operating, the extent to which it is using its cash productively, and its likelihood
of generating cash in the near future.
• A construction company, for example, might use its cash flow budget to determine whether it can start a new
building project before getting paid for the work it has in progress.
TYPES OF
BUDGETS:
4. Financial Budget:
• A financial budget presents a company's strategy for managing its assets, cash flow, income, and expenses.
• A financial budget is used to establish a picture of a company's financial health and present a comprehensive overview of its
spending relative to revenues from core operations.
• A software company, for instance, might use its financial budget to determine its value in the context of a public stock
offering or merger.
5. Static Budget:
• A static budget is a fixed budget that remains unaltered regardless of changes in factors such as sales volume or revenue.
• A plumbing supply company, for example, might have a static budget in place each year for warehousing and storage,
regardless of how much inventory it moves in and out due to increased or decreased sales.
6. Flexible Budget:
• Flexible budget shows how cost vary with different rate of output or sales volume and sales revenue based on these different
outputs levels.
• Easy to change according to variation of production and sale volumes.
• It helps in controlling cost.
• Flexible budget helps in measure the performance and evolution.
7. Flexible Budget:
• A fixed budget is a budget that remains static irrespective of the activity level.
• The fixed budget doesn't change as per the fluctuations of business.
• A fixed budget is always static.
• A fixed budget is mostly estimated on assumptions and anticipations.
TYPES OF
BUDGETS:
8. Zero Based Budget:
THANK
YOU
CREATED BY ANSARI MUBASSHIR IMTIYAZ AHMED (24068)
