Index

1.Introduction
2.Importance
3. Budget
a. Definition
b. Features , Essentials
c. Forecast vs Budget
4. Budgeting
a. Features
b. Objectives
c. Fundamentals
5.Budgetary Control
a. Objectives
b. Advantages & Disadvantages
c. Essentials & Steps
d. Requisites
e.Types & Sums
f. Conculsion

Introduction :

Budget is essential in every walk of our life national, domestic

and Business. A
budget is prepared to have effective utilization of funds and for
the realization of objective as
efficiently as possible. Budgeting is a powerful tool to the
management for performing its
functions i.e., formulation plans, coordination activities and
controlling operations etc.,
efficiently. For efficient and effective management planning and
control are tow highly
essential functions. Budget and budgetary control provide a set of
basic techniques for
planning and control.
A budget fixes a target in terms of rupees or quantities against
which the actual
performance is measured. A budget is closely related to both the
management function as well
as the accounting function of an organization. As the size of the
organization increases, the
need for budgeting is correspondingly more because a budget is
an effective tool of planning

and control. Budget is helpful in coordinating the various activities

(such as production, sales,
purchase etc) of the organization with result that all the activities
precede according to the
objective.
Budgets are means of communication. Ideas of the top
management are given the
practical shape. As the activities of various department heads are
coordinated at the much
needed for the very success of an organization. Budget is
necessary to future to motivate the
staff associated, to coordinate the activities of different
departments and to control the
performance of various persons operating at different levels.
Budgets may be divided into two basic classes. Capital and
operating budgets. Capital
budget are directed towards proposed expenditure for new
projects and often require special
financing. The operating budgets are directed towards achieving
short-term operational goals
of the organization for instance, production or profit goals in a
business firm. Operating

budgets may be sub-divided into various departmental of

functional budgets.
This system helps in fixing the goals for the organization as a
whole and concentrated efforts
are made for its achievements. No system of planning can be
successful without having an
effective and efficient system of control. Budgeting is closely
connected with control. The
exercise of control in the organization with the help of budgets is
known as budgetary control.
The process of budgetary control includes:
1. Preparation of various budgets.
2. Continuous comparison of actual performance with budgetary
performance.
3. Revision of budgets in the light of changed circumstances.

NEEDANDIMPORTANCEOFBUDGETA
ND
BUDGETARYCONTROL

Budgetary control is a strong tool of business is to maximize

profits. The management
Is therefore always trying to focus on the proper planning,
effective coordination
and control in order to maximize profits. There are various
managerial tools and
techniques useful for the management to plan a nd control
business
operations. Budget is also used for the management to plan and
control business
operations and it is widely used as a standard device of planning
and control.
Budget provides as a valuable aid to management through
planning, coordination
and control. It is a tool which measures the managerial
performance of an organization. It
promotes good morale and generates harmony in the
organization. Also it promotes efficiency

and facilities management by exceptions. It helps in promoting a

feeling of cost consciousness
among the employees in the organization.
On the other side, as a budget is based on estimates, it may or
may not be true. It is
not substitute of management because, the efficiency and utility
of the budgetary system
depends on the skill and experience of the management. It
cannot be executed automatically
because continuous efforts are necessary for the execution of the
budget. In case of the
manufacturing organizations, the estimation about the future is
very important for the
production activities as huge amount of costs are invested in the
same activity. Especially the
medium scale manufacturing organizations have their key
customers & these customers are the
large scale manufacturing organizations. The medium scale
engineering industries are
numerous. These types of industries manufacture their products
as per the demands &

requirements of the large scale industries (key customers). The

large scale & continuous
demand (& supply) is throughout the year. For this purpose, the
production budget &
budgetary control on the same function becomes very essential.

What do u mean by budget?

A budget is an itemized summary of likely income and expenses

for a given period. It helps you determine whether you can grab
that bite to eat or should head home for a bowl of soup. It is
typically created using a spreadsheet, and it provides a concrete,
organized, and easily understood breakdown of how much money
you have coming in and how much you are letting go. Its an
invaluable tool to help you prioritize your spending and manage
your moneyno matter how much or how little you have.

Definition:

The word budget is derived from Bougettee a French word

meaning a leather pouch in which funds are appropriated for
meeting anticipated expenses. In fact, this is the basic idea
behind budgeting. A budget is a statement of expected results

stated in numerical terms. It is formed in advance of the period to

which it applies. It is an instrument of planning as well as control.
An estimate of costs, revenues, and resources over a specified
period, reflecting a reading of future financial conditions and
goals.
One of the most important administrative tools, a budget serves
also as a (1) plan of action for achieving quantified objectives, (2)
standard for measuring performance, and (3) device for coping
with foreseeable adverse situations.
In the words of G.R. Terry, A budget is an estimate of future
needs arranged according to an orderly basis, covering some or
all of the activities of an enterprise for a definite period of time.

Characteristics:

It is expressed in quantitative or monetary terms.

- It is prepared for a fixed period of time It is prepared before the

period in which it commences.

- Practical to implement.

- It spells out the objects and the policies to be pursued in order

to achieve the objective of the organisation.

- Many people are involved in drawing up a budget.

- Flexible enough to allow changes in the changing environment.

- Prepared on the basis of established standards of performance.

- Analysis of cost and revenues.

- On the basis of budget report performance of the organisation is

constantly monitored.

Essentials of a Budget
An analysis of the above said definitions reveal the following
essentials of a budget:
(1) It is prepared for a definite future period.
(2) It is a statement prepared prior to a defined period of time.
(3) The Budget is monetary and I or quantitative statement of
policy.
(4) The Budget is a predetermined statement and its purpose is to
attain a given objective.
A budget, therefore, be taken as a document which is closely
related to both the managerial as well as
accounting functions of an organization

Forecast Vs Budget
Forecast is mainly concerned with an assessment of probable
future events. Budget is a planned
result that an enterprise aims to attain. Forecasting precedes
preparation of a budget as it is an important
part of the budgeting process. It is said that the budgetary
process is more a test of forecasting skill than
anything else. A budget is both a mechanism for profit planning
and technique of operating cost control.
In order to establish a budget it is essential to forecast various
important variables like sales, selling prices,
availability of materials, prices of materials, wage rates etc.

Difference between Forecast and Budget

Both budgets and forecasts refer to the anticipated actions and
events. But still there are wide
Differences between budgets and forecasts as given
below:
Forecasts
(1) Forecasts is mainly concerned with anticipated or
probable events
(2) Forecasts may cover for longer period or years
(3) Forecast is only a tentative estimate
(4) Forecast results in planning
(5) The function of forecast ends with the forecast of
likely events

(6) Forecast usually covers a specific business function

(7) Forecasting does not act as a tool of controlling
measurement.

Budgets
(1) Budget is related to planned events
(2) Budget is planned or prepared for a shorter period
(3) Budget is a target fixed for a periOd.
(4) Result of planning is budgeting
(5) The process of budget starts where forecast ends
and converts it into a budget
(6) Budget is prepared for the business as a whole
(7) Purpose of budget is not merely a planning device
but also a controlling tool.

What is budgeting?
Budgeting is a process. This means budgeting is a number of
activities performed in order to prepare a budget. A budget is a
quantitative plan used as a tool for deciding which activities will
be chosen for a future time period.
Budgeting is essentially a managerial process concerned with
planning, co-ordination and control. A business budget is a plan

which covers all the phases of operation of an enterprise for a

definite period of time.
It is prepared for a specific future period and it expresses
everything in precise numerical terms. In a sense, a budget may
be considered as a statement specifying policies and plans to be
pursued during a certain period, to achieve specified goals and
objectives.
In a business, the budgeting for operations will include the
following:
preparing estimates of future sales
preparing estimates of future cash collections and disbursements
preparing estimates of the future day-to-day activities of the
organization
summarizing these estimates into an income statement and
balance sheet
The budgeted income statement and balance sheet are also
known as pro-forma financial statements. Once prepared and
approved, the budgeted income statement and balance sheet are
used to control the future activities of the busines

Characteristics
(a) It is framed in advance keeping an eye on a future plan of
action.

(b) It is for a future period and is based on objectives to be

achieved.
(c) It is a financial and/or quantitative statement prepared for the
execution of policy formulated by the top management.
Budget is used as a technique both for planning as well as for
control. As a tool of planning, a budget expresses plan to
numerical figures and informs people what is expected of them.
Budgets explain programmes and determine the steps to be taken
to attain the estimated results.
As a device of controlling, a budget serves as a standard for the
measurement and evaluation of actual performance. It assists in
the delegation of authority and fixation of responsibility.
Budgeting also encourages co-ordination enabling all the subdivisions to work towards the common objectives.

OBJECTIVES OF BUDGETING
1. STATE OF EXPECTATION:
Budgeting states the firms expectation (gods) in clear
and formal terms to avoid confusion and to facilitate attain ability.
The targets of expiated performance are laid down to a budget.
The

target are directional and motivational. It direct individual and

group efforts and operations towards a common goals. It
establishes a harmony between short-run and long run goals of
the firms.
2. COMMUNICATION OF EXPECTATION
A mere statement of goals and means of attaining them does not
mean that the goals will be achieved. The manager should know
that the gods are, they should understand and support them. Top
management should communicate expectations to all concerned
will management if the firm so that they are understood
supported and implemented.
3. PLANNING
Planning reduced uncertainty and provides direction to the
employees by determining the course of action in advance. It
compels management to plan comprehensively and coherently. It
provides an orderly way to proceed to attain goals and also
provides a time seduce for future actions and provides
measurable results
4. COORDINATING
Coordinating implies striking balance labour materials and other
resources so that goals of the firm are attend at a minimum lost.
The activities of the various departments must remain in harmony
with one another. Each department manager should establish
proper report between the activities of his department and that of

other departments. Where there exists any disharmony in the

relationship between the activities of department it should be
properly identified and corrected
5. MEANS OF CONTROL
A budget indicates the performance expected of employees. A
budget may therefore serves as an index for measuring
employees performance. The actual performance of the employee
is compared with the budgeted performance provided feedback.
The actual performance is adjudged favorable or unfavourable in
the right of budgeted and change

FUNDAMENTALS OF BUDGETING
To ensure effective and efficient administration of budget on
organizational structure may be in the form of line and staff,
admitted, line or function type of organizational structures. An
organizational structures is a process of dividing work into the
convenient task or duties of grumping such duties in from of posts
of delegating authority to each post, and of appointing qualified
staff to responsibility, that the work is calmed out as planned.
Most organization narrates the line and staff function. Budget
preparation is said to be a line function while organization and
administration of budgeting is a staff function. The primary
responsibility of the staff organization is to assist line executive in
preparing budget by providing data and technical advice and co-

coordinating the budget of various department to form a master

budget.

Meaning of budgetary control?

According to terry, budgetary control is a process of comparing
actual results with the corresponding budget data in order to
approve accomplishments or to remedy differences by either
adjusting the budget estimates or correcting the causes of the
differences. A budget is a means and budgetary control is the end
result.
From the above definitions , it becomes clear that the process of
budgetary control involves the following stages:
1.Fixing the responsibility on executives / managers
2.Establishment or setting up of various budgtes
3.Recording of actual performance
4.Comparison of actual results with the budgets
5.Calcuations of budget deviations
6.Investigation into the causes of deviations
Thus, budgeting is an art of planning ; budgetary control is the act
of adhering to the plan.

Objectives of budgetary control:

The general objectives of budgetary control , are summarized
under the following heads:
1.Planning :
A budget is a plan of action.A business concerns cannot attain its
objectives unless effective planning is done.Budgeting helps
management in preparing the detailed plans pertaining to
production , sales, advertising, raw materials, inventory, labour
requirements, capital expenditure, etc. While planning many
problems are anticipated .budgetary control helps management
at all levels,in planning properly.
2. Co-ordination:
In an organization , there are various departments and sections
carrying out various functions / activities. Unless there is a
coordination among the various activities of these departments, it
is not possibles to achieve the objectives. A department , while
planning cannot work in isolation. Proper co-ordination requires
joint thinking and effort. There has to be effective communication
among the dpartments. A budgetary control system helps to have
effective communication and co-ordination.
3. Control :
Control is necessary to see that performance take places
according to plan. The function of controlling cannot be performed

unless standards are set i.e., predetermined. Budgetary control

system consist of establishment of standards and finding out the
deviations. The management can take corrective actions on the
deviations reported , and bring actual performance , close to
desired performance / plans.
4. Communication:
A budget is a communication device. It communicates information
about the plans and policies of organization.

Advantages of budgetary control :

1.Budgetary control aims at maximization of profits through
effective utilization of resourcs
2.It provides information about the objectives and policies of the
organization
3.IT results into co-ordination and co-operation between the
various members of the organization in their activities.
4.It reveals the weak points and deficiencies and helps
management in taking corrective action.
5.It provides an incentives to executives when the standards are
set at reasonable level.
6.I ensures availability of working capital whenever it is required.
7.It develops the habit of thinking & analysis among the
executives.

8.It acts as an powerful tool of accounting responsibility.

9.It provides basis for internal check.
10.It facilitates bank credit.
11.IT facilitates effective delegation of authority.
12.IT creates cost consciousness among the executives.

Limitations of Budgetary Control

Budgetary Control is an effective tool for management control.
However, it has certain important
limitations which are identified below:
(1) The budget plan is based on estimates and forecasting.
Forecasting cannot be considered to be
an exact science. If the budget plans are made on the basis of
inaccurate forecasts then the
budget progamme may not be accurate and ineffective.
(2) For reasons of uncertainty about future, and changing
circumstances which may develop later
on, budget may prove short or excess of actual requirements.
(3) Effective implementation of budgetary control depends upon
willingness, co-operation and

understanding among people reasonable for execution. Lack of

co-operation leads to inefficient
performance.
(4) The system does not substitute for management. It is mere
like a management tool.
(5) Budgeting may be cumbersome and time consuming process.

Essential conditions for budgetary control.

For an effective and successful implementation of budgetary
control , the following are the essential requirements:
1.Organisational Structure:
To get the maximum benefits from budgetary control the
company must have a proper organizational structure. The
organisation chart should clearly define the responsibility of each
executive
2.Well defined objectives:
The objectives/ policies of the business should be clearly defined.
3.System of Accounting :
There should be an effective system of accounting. It should
provide relevant data quickly whenever required.
4.Budget manual:

Effective implementation of budgetary control system depends

upon the budget manual.Budget manual gives detailed
information about the plans , policies, procedures and operations
of the organization.

5.System of communication:
The organization should have proper system of communication.
The top management should be able to communicate to lower
levels the plans as quickly as possible. At the same time, it should
be possible to get the feedback immediately from lower levels.
Based on feedback , the top management should issue
instructions for correcting the situations.
6.Preparation of budget:
While preparing budgets , the top management & other
responsible executives / officers of the organization should be
consulted. It should allow the people even at the lower cadre to
participate in the budget preparation process. A separate budget
committee should be formed to look after the establishment of
budget and its implementation.
7.Acceptance of the systems:
There should be an assurance from top management , of cooperation and acceptance of the system. Without co-operation
and acceptance of the system, budgetary control will not succeed.

8.cost.
The cost of the system should not exceed the gain/ benefits.
9. The budget should be complete, continuous and realistic.

Steps in budgetary control system:

The process of budgeting normally followed by the organisations
is as follows:
1.Organisational Objectives:
Budget is a source of information about organizational objectives
and policies.
Budgeting is a technique of achievement of organizational
objectives. Before starting with the process of budgeting , it is
essential for the mangers to communicate the objectives ,
document the objectives and make people understand the
objectives.
2. Determination of key factors:
Performance of any organization is subject to certain critical
success factors. Such factors limit the volume of output . it has a
direct impact on profitablility of the organization. Key factors may
include raw materials , tools, labour skills, service facility , floor

space, cash resources etc. unless these critical factors are

decided , budgets cannot be prepared.
3. Determination of organizational chart:
An organizational chart showing the lines of authority and
responsibility of managers should be decided
4. Establisments of budget centers:
The entire organization is divided into different segments which
are called as budget centers. budget centers should be decided
for the purpose of budgetary control.
5. Determiniation of budget period :
Budget period is a period for which budgets are prepared. It may
be decided as per the policies of the organization. A budget may
be short termor long term. A short term budget is for short period
i.e for one year. Mostly operating budgets are of one year. Long
term budgets is prepared for a long period which may extend to
five or even more years. Capital expenditure budget is for a long
term period.
6. Establishment of budget committee:
A budget committee consisting of functional heads is formed for
the purpose of preparation of budgets. A budget committee is
necessary for effective coordination and review of budget
programme .
The committee performs th following functions:

1.Recommendation of functional budgets.

2.review of general policies
3. Review and approval of budgets
4. Analysis of periodic performance reports from budgets centres
5. Examination of budget reports
6.Analysis of the causes of deviation
7. Recommendation of corrective action.

7. Appointment of budget controller:

A budget controller is appointment for the purpose of
administration and co-ordination of different departmental
budgets. His functions include the following
1.Generation of information and passing it to those who are
decision makers .
2. Establishment and maintenance of planning system
3.Construction and use of models of the organization to verify the
effect of external and internal variables on achievement of
organizational objectives.
4.Analysis of deviations in performance and taking remedial
action.
5.Perparation, presentation and interpretation of financial plan.

6.Development of budget procedures.

7. Co-ordination of budgetary functions.

8. Preparation of budget manual:- A budget manual contains

information as given below:
1.Responsibility of different levels of management.
2.Authority of different levels of management.
3.Establishment of organizational structure
4. Clarification of various terms in budgeting.
5.Defining organizational and functional objectives
6.Fixation of responsibility of individuals.
7.Deciding the system of reporting
8.Deciding the procedure in management information system
9.Deciding the procedure of feedback
10. Perparation of exhaustive programme of budgeting.

Requisites for Effective Budgetary Control:

The following are the requisites for effective budgetary control :
(1) Clear cut objectives and goals should be well defined.

(2) The ultimate objective of realising maximum benefits should

always be kept uppermost.
(3) There should be a budget manual which contains all details
regarding plan and procedures for
its execution. It should also specify the time table for budget
preparation for approval, details
about responsibility, cost centers etc.
(4) Budget committee should be set up for budget preparation
and efficient execution of the plan.
(5) A budget should always be related to a specified time period.
(6) Support of top management is necessary in order to get the
full support and co-operation of the
system of budgetary control.
(7) To make budgetary control successful, there should be a
proper delegation of authority and
responsibility.
(8) Adequate accounting system is essential to make the
budgeting successful.
(9) The employees should be properly educated about the
benefits of budgeting system.

(10) The budgeting system should not cost more to operate than
it is worth.
(11) Key factor or limiting factor, if any, should consider before
preparation of budget.
(12) For budgetary control to be effective, proper periodic
reporting system should be introduced.

Types of Budgets
As budgets serve different purposes, different types of budgets
have been developed. The following
are the different classification of budgets developed on the basis
of time, functions, and flexibility or
capacity.
(A) Classification on the basis of Time:
1. Long-Term Budgets
2. Short-Term Budgets
3. Current Budgets
(B) Classification according to Functions:
1. Functional or Subsidiary Budgets
2. Master Budgets
(C) Classification on the basis of Capacity :

1. Fixed Budgets
2. Flexible Budgets
(A) Classification on the Basis of Time
Functional
Budget
Master
Budget Fixed
Budget
Flexible
Budget
1. Long-Term Budgets: Long-term budgets are prepared for a
longer period varies between five to
ten years. It is usually developed by the top level management.
These budgets summarise the general plan
of operations and its expected consequences. Long-Term Budgets
are prepared for important activities like
composition of its capital expenditure, new product development
and research, long-term finance etc.
2. Short-Term Budgets: These budgets are usually prepared for a
period of one year. Sometimes

they may be prepared for shorter period as for quarterly or half

yearly. The scope of budgeting activity may
vary considerably among different organization.
3. Current Budgets: Current budgets are prepared for the current
operations of the business. The
planning period of a budget generally in months or weeks. As per
ICMA London, "Current budget is a
budget which is established for use over a short period of time
and related to current conditions."
(B) Classification on the Basis of Function
1. Functional Budget: The functional budget is one which relates
to any of the functions of an
organization. The number of functional budgets depend upon the
size and nature of business. The
following are the commonly used:
(1) Sales Budget
(2) Purchase Budget
(3) Production Budget
(4) Selling and Distribution Cost Budget
(5) Labour Cost Budget
(6) Cash Budget

(7) Capital Expenditure Budget

2. Master Budget: The Master Budget is a summary budget. This
budget encompasses all the
functional activities into one harmonious unit. The ICMA England
defines a Master Budget as the
summary budget incorporating its functional budgets, which is
finally approved, adopted and employed.
(C) Classification on the Basis of Capacity
1. Fixed Budget: A fixed budget is designed to remain unchanged
irrespective of the level of activity
actually attained.
2. Flexible Budget: A flexible budget is a budget which is designed
to change in accordance with the
various level of activity actually attained. The flexible budget also
called as Variable Budget or Sliding
Scale Budget, takes both fixed, variable and semi fixed
manufacturing costs into account.
Illustration 1.
The bright ltd. Manufactures two brands of pen-one sold under
the name of bright and another under the name of Hans. The
sales department of the company has three departments in
different areas of county.

The sales budgets for the year ending 31st December 2010 were:
Bright

: Department 1

Hans

3,00,000

: Department 2

5,62,500

: Department 3

1,80,000

: Department 1

4,00,000

: Department 2

6,00,000

: Department 3

20,000

Sales price are Rs 3 and Rs 1.20 in all departments.

It is estimated that by forced sales promotion the sale of hans in
department 1 will increase by 1,75,000. It also expected that by
increasing production and arranging extensive advertisement
department 3 will be enabled to increase the sale of hans to
50,000.
It is recognized that the estimated sales by department 2
represent an unsatisfactory target . it is agreed to increase both
estimates by 20%.
Prepare a Sales budget for the year ended 31st dec 2010.
Solution:

Selling
price

Bright

Hans

Rs 3
Quantity

Rs1.20
Quantity

Rs

Total
Rs

Departme
nt1
Departme
nt2
Departme

3,00,000

9,00,000

5,75,000
7,20,000

6,90,000

15,90,00

8,64,000

0
28,89,00

6,75,000

20,25,00

1,80,000

0
5,40,000

70,000

84,000

0
6,24,000

11,55,00

34,65,00

13,65,00

16,38,00

51,03,00

nt3

Lllustration 2:
The Golden Company plans to sell 1,08,000 units of a certain
product line in the first fiscal quarter, 1,20,000units in the second
quarter, 1,32,000units in the third quarter and 1,56,000units in
the fourth quarter and 1,38,000units in the first quarter of the
following year. At the beginning of the first quarter of the current
year, there are 18,000units of product in the stock. At the end of
each quarter,the plans to have an inventory equal to one-sixth of
the sales for the next fiscal quarter
How many units must be manufactured in each quarter of the
current year?
Solution

Sales

First

Second

Third

Fourth

quarter

quarter

quarter

quarter

units
1,08,000

units
1,20,000

units
1,32,000

units
1,65,000

Budget
Add:Stock

20,000

22,000

26,000

23,000

required at
the end
Total
Less:

1,28,000
18,000

1,42,000
20,000

1,58,000
22,000

1,79,000
26,000

1,10,000

1,22,000

1,36,000

1,53,000

Opening
stock
Estimated
Production

Conculsion:
Every organization has pre-determined set of objectives and
goals, but reaching those objectives and goals only by proper
planning and executing of the plans economically The
organization needs the capable personalities as management to
lead the organization successfully, the management makes the
plans and implement of these plan are expressed in terms of

budget and budgetary control One is the capital expenditure

budget and another is operating maintenance budget, the capital
expenditure budget shows the list of capital projects selected for
investment along with their estimated cost, operating &
maintenance budget refers to the repairs & maintenance budgets,
the special budgets are rarely used in the organization like longterm budgets, research & development budget and budget for
consultancy.

Biblography:
www.google.com
www.wikipedia.com
www.slideshare.com

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