A budget is a detailed plan of operation for same specific

future period. It is an estimate made in advance of the period

to which it applies. It acts as a business barometer.

The CIMA, London, defines management as,

“ a financial and/or quantitative statement, prepared prior to
a defined period of time, of the policy to be pursued during
that period for the purpose of attaining a given objective.”

A budget is a statement of planned events, generally

expressed in financial and/or quantitative terms. It is
generally evolve from the forecast.
 As a tool, budget serves as a guide to the conduct of
operations and a basis for evaluating actual results.

The main purpose of budget are:

1) Explicit Statement of Expectations

2) Communication
3) Co-ordination
4) Expectations as a framework for judging performance
 Cash budget is concerned with expected cash receipts and
disbursements, of the firm for certain period of time in
future.

Two element of cash budget:

1) Time horizon
2) Cash Flows (inflows & outflows)
a) Operating Cash Flows
b) Financial Cash Flows
Cash inflows/Receipts Cash outflows/Disbursements

1) Cash sales 1) Accounts payable

2) Collection of accounts 2) Purchase of raw-material
receivables 3) Wages and salary
3) Disposal of fixed assets 4) Factory expenses
5) Administrative and selling
expenses
6) Maintenance expenses
7) Purchase of fixed assets
Cash inflows/Receipts Cash outflows/Payments

1) Loans/borrowings 1) Income tax/tax payment

2) Sales of securities 2) Redemption of loan
3) Interest received 3) Re-purchase of shares
4) Dividend received 4) Interest paid
5) Rent received 5) Dividend paid
6) Refund of tax
7) Issues of new shares and
securities
A budget prepared on the basis of a standard or a
fixed level of activity is called a fixed budget. It
does not change with the change in level of activity.

According to CIMA, London,

” a fixed budget is design to remain
unchanged irrespective of the level of activity
actually attained.”
A budget designed in a manner so as to give the
budgeted cost of any level of activity is termed as a
Flexible budget.

According to CIMA, London,

“ a flexible budget is a budget designed to
change in accordance with the level of activity
actually attained.”
 A company produces 1000 units at 100% capacity and the costs at this
level are as follows:
Fixed: Rs. 5000
Variable – Rs. 3 per unit
Semi-variable – Rs. 4 per unit (40% variable)
In case the budgeted level of activity are 80%, 90% and 100%, the flexible
budget figure for the different level of activity will be as follows

Level of activity
Perticulars
80% 90% 100%
(800 units) (900 units) (1000 units)

Fixed cost 5000 5000 5000

Variable cost ( Rs. 3 per unit) 2400 2700 3000
Semi-variable cost
Fixed 2400 2400 2400
Variable 1280 1440 1600
Total Cost 11080 11540 12000
Performance budgeting involves evaluation of performance of
organisation in the context of both specific as well as overall
objective of the organisation. It presupposes the crystal
clarity of organizational objective in general short-term
business objectives as stipulated in budget, in particular by
each employee of organisation, irrespective of his level. It
provides definite direction to each employee and also a
control mechanism to higher management.

According to NIBM, Mumbai,

“performance budgeting technique is the process
of analyzing, identifying, simplifying and crystallizing specific
performance objective of a job to be achieved over a period.”
“ZBB is management tool which provides a
systematic method for evaluating all operations
and programs, current or new, allows for budget
reduction and expansions in a rational manner
and allows re-allocation of source from low to high
priority programmes.”