Budget and Budgetary Control

Dr. Rupali Gupta

 Budget
CIMA : “ Quantitative expression of a plan for a defined period of
time”.

Budget is a plan quantified in monetary terms, prepared and approved prior to a

definite period of time, usually showing planned income to be generated and/or
expenditure to be incurred during that period and the capital to be employed to
attain a given objective.

It’s a plan of future activities for an organisation.

Expressed mainly in financial terms, but also usually incorporates many non-financial
quantitative measures as well.
 Characteristics

1. Concerned with a definite future period

2. Written document
3. Detailed plan of all economic activities of a business
4. All the departments of business units cooperate for the performance of a
business budget.
5. Means to achieve business and not an end in itself
6. Needs to be updated, corrected and controlled every time
7. Helps in planning, coordinating and controlling
8. Different budgets for different requirements
9. Usually prepared in the light of past experiences
10. Continuous process
 Budgeting
Budgeting is the process of designing, implementing and operating

budgets.

Budgeting is the highest level of accounting in terms of future which

indicates a definite course of action and not merely reporting.

 Budgetary Control
Budgetary control is the continuous establishment of budgets relating to the
responsibilities of executives to the requirements of a policy.

It requires 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.
 Sound Budgeting System

The authority and responsibility of different levels of management and departmental

executives are clearly defined.

The organizational goals should be quantified and clearly stated.

The goals should be within the framework of the organization’s strategic and long
range plans.

All levels of management should participate in setting budget.

The budget control system should provide for a degree of flexibility designed in
relation to level of activity attained.

The impact of changes in sales and production levels on revenue are known, expenses
are known.
Proper communication systems should be established for management reporting
and information service.

The top management’s involvement in budget process is essential for successful

implementation of the budgets.

A sound system for generating accurate and reliable and prompt accounting
information is basic for successful implementation of budget system in an
organization.
 Budgeting process

Step 1: specification and communication of organizational objectives (following form

statement of objectives, a corporate long range or strategic plan can be built)

Step 2: Determination of principal budget factors (when a factor is of so much

importance that influences all other budgets, it is called ‘principal budget factor’

e.g.:
Sales activity : low demand, shortage of skilled personnel, inadequate warehouse,
insufficient advertising, etc.
Plant capacity: shortage of capital, import restriction, lack of space, etc

Raw material: non-availability, restrictions imposed by government, licenses, quotas,

etc.

Labour: general shortage of skilled workers, etc.

Step 3: establishment of clear lines of authority and responsibility

Step 4: establishment of budget centres ( these segments of an organisation defined for

the purpose of budgetary control are technically referred to as “budget centres”)

Step 5: Determination of Budget Period

Step 6: Establishment of budget committee

Step 7: Appointment of budget Controller (for administration of budget)

Step 8: Preparation of Budget Manual ( documentation of policies and procedures

involved in implementation of budgetary control system
 Budget

Functions-
Capacity-Wise Master Budget Period Wise
wise

Sales Budget
Production budget
Short
Plant utilization budget Long
Fixed Flexible Mediu term
Direct material usage budget term
Budgets Budgets Direct labor usage budget m term
budget
Factory overhead budget
Production cost budget
Selling and distribution budget
Administration expenses
budget
Research & Development
budget
Capital expenditure budget
Cash budget
 Flexible Budget
A budget, which by recognizing the difference between fixed, semi-variable and
variable costs is designed to change in relation to the level of activity
ascertained.

A flexible budget is a budget that adjusts to the activity or volume levels of a

company.

It can be assumed to be a series of static(fixed) budget for different levels of

activity.

The variable expense will be proportionate, the fixed expenses are within a
reasonable limit, a function of time and semi-variable expenses will move in
sympathy with production but in less than proportionately.
 Cash Budget
Detailed budget of cash income and cash expenditure incorporating both revenue
(recurring nature related or not related to the operations of the business) and capital
items (non-recurring nature related/not related to the operations of the business)

The cash flow budget is to be prepared in the same format in which actual position is
to be presented.

The cash budget shows the cash flows arising from the operational budgets and the
profit and asset structure.

The working capital is effectively managed through preparation of cash budget

wherein the estimated receipts and disbursements for a period into the future are
drawn.
Points to be considered in the preparation of Cash budget

Credit periods allowed to customers

Credit periods allowed by the suppliers

Payment of dividend, taxation and capital expenditure, etc. and the months when cash
expenditures are expected to be made.

Non-consideration of transactions which have no impact on cash flow e.g. depreciation

Minimum cash balance required

The bank overdrafts limit allowed

Dealing with surplus cash e.g. by putting in marketable securities

Dealing with the cash deficit e.g. arrangements to borrow funds from outside or sale of
marketable securities
Trend of sales

Period of debt payments

Raising of long term funds during the course of cash budget, etc.
Methods of Cash Budgeting

1. Adjusted Income Method

The annual cash flows are calculated by adjusting the sales revenue and cost figures
for delays in receipts and payments (change in debtors and creditors) and
eliminating non-cash items such as depreciation.

2. Adjusted Balance Sheet

The budgeted balance sheet is predicted by expressing each type of asset and short-
term liabilities as percentage of the expected sales. The profit is also calculated as a
percentage of sales, so that the increase in owner’s equity can be forecast. Known
adjustments, may be made to long term liabilities and the balance sheet will then show
if additional finance is needed.
Receipts and Payments

In this method, all the expected receipts and payments for budget period are
considered. All the cash inflow and outflow of all functional budgets including
capital expenditure budgets are considered. Accruals and adjustments in
accounts will not affect the cash flow budget.

Anticipated cash inflow is added to the opening balance of cash and cash
payments are deducted from this to arrive at the closing balance of cash.