 Master Budget: Various functional budgets are integrated into Master Budget.

The
Budget is prepared by the ultimate integration of separate functional Budget. According
to Institute of Cost and Works Accounts, London, “The Master Budget is the summary
Budget incorporating its functional Budget”. The Budget Officer prepares Master Budget
and it remains with the top-level management. This budget is used to co-ordinate the
activities of various functional department and also to help as a control device.

1) CLASSIFICATION ON THE BASIS OF FLEXIBILITY

 Fixed Budget: The fixed budgets are prepared for a given level of activity; the budget is
prepared before beginning of the financial year. If the financial year starts in January then
budget will be prepare a month or two earlier, November or December. The changes in
expenditure arising out of the anticipate changes will not be adjusted in the Budget.
These is a difference of about twelve months in the budgeted an actual figures. According
Institute of Cost and works Accounts, London, “Fixed Budget is a budget which is
designed to remain unchanged irrespective of the level of the level f activity actually
attained”. Fixed budget are suitable under static conditions. If sales expenses and costs
can be forecasted with greater accuracy then this budget can be advantageously used.

 Flexible Budget: A flexible budget consists of series of Budgets for difference level of
activity. It therefore, varies with the level of activity attained. A flexible Budget is
prepared after taking into consideration unforeseen changes in the conditions of the
business.

A flexible Budget is defined as Budget which by recognizing the difference between fixed,
semi-fixed and variable cost is designed to change in relation to the level of activity. The flexible
budgets will be useful where level of activity changes form time to time. When the forecasting of
demand is uncertain and the undertaking operate under shortage of materials, labor etc. this
Budget will be more suited.
OPERATING BUDGETS

1) Sales Budget: A Sales Budget is an estimate of expected sales during a Budget period. A
sales Budget is known as a nerve center or backbone of the enterprise. The degree of accuracy
with which sales are estimated will determine the practicability of operating Budgets. A sales
Budget is the starting points on which other budgets are also bases. A sales Budget lay down
potential sales figures in value as in quantity. It lays down a comprehensive plan and programme
for sales department. The sales manger is made responsible for preparing Sale Budget. He uses
all possible factors to be taken into account while preparing a sales Budget.

2) Production Budget: Production Budget is built up in terms of quantities and money. The
quantities are entered at the beginnings and when the remainder of the Budget has been built up
and the cost of production calculated the costs are entered to compile a production cost Budget.
In preparing the production Budget the following factors should be considered.

 Principal Budget factor, e.g. if the sales be the key factor then sales Budget, otherwise
other Budget.
 Production planning and determination of optimum capacity.
 The opening and closing stocks.
 Management policy regarding make or buy of components.

3) Production Cost Budget: A purchase Budget gives the details of the purchases which must
be made to meet the needs of the business. It includes all items of purchase, such as raw
materials, indirect materials and other equipment. However, purchase Budget for raw materials is
the most important and the following are required to be considering in preparing this Budget.

4) Purchase Budget: A Purchase budget gives the details of the purchases which must be made
to meet the needs of the business. It includes all items of purchase, such as raw materials,
indirect materials and other equipments. However, purchase Budget for raw materials is the most
important and the following factors are required to be considering in preparing this Budget.

 Opening and closing stocks

 Unfulfilled orders at the beginning of the budget period.

 Storage space, economic buying quantity and financial resources.

 The prices to be paid.

2) Material Budget: A Materials Budget shows the estimated quantities as well costs of raw
materials and components required for producing goods as per production Budget. At the
stage of preparation of materials Budget is used to obtain the cost of each material consumed.
It serves the following purposes.

 It assists purchasing department in planning the purchases.

 It helps in the preparation of purchase Budget

 It provides data for raw materials control.

.6) Labour Budget: This Budget gives and estimates the requirements of directs labour essential
to meet the production target. This Budget may be classified into “Labour requirement budget”
and “Labor Requirement Budget”. The purpose of Labour Budget is to assist in the provision of
the correct number and type of

Employee for the projected output. Once the preliminary classification of labour into its principal
grades has been carried out, the labour requirements for each product are then set with the help
of time and motion studies. From the total mean-hour required for production labour
requirements are ascertained and from the estimated rate per hour, labour cost per hour, labour
cost per unit is determined.
7) Plant Utilization Budget: This budget indicates that the plan and machinery requirement to
meet the budgeted production during the period. Such a budget will detail the machine load in
every department and indicate the extent of under or over loading. Thus management may get
useful information regarding the effective utilization of plants and machinery in an organization.

8) Manufacturing Overheads Budget: This Budget gives an estimate of the works overhead
expenses to be incurred in a budget period to achieve the production target. The budget includes
the cost of indirect materials, indirect labour and indirect works expenses. The budget may be
classified into fixed cost, variable cost and semi-variable cost. It can be broken into departmental
overhead can be estimated on the basis of past information after taking into consideration the
expected changes which may occur during the Budget period. Variable expenses are estimated
on the basis of the budgeted output because these expenses are bound to change with the changes
in output.

9) Administration Cost Budget: All the administration costs relating to each Budget center
should be separately and then incorporated in the administration cost Budget. A very important
aspect of predetermining administration costs is to make sure that all administrative functions are
carried out as effectively as possible. Thus, this budget represents forecast of the cost of selling
and Distribution for Budget represents forecast of the cost of selling and distribution of budget
period and is clearly related to the sales Budget. All expenses relating to selling and distribution
of the various products as indicated in the sales budget are included in it. These expenses are
based on the volume of sales distribution overhead. Long-term expenses advertisement are
divided into fixed and variable categories with reference to volume of sale, separate Budgets are
of selling and distribution costs as cost of transport department are

included in the departmental production cost Budget form control point view rather than
including in selling and distribution costs Budget.

FINANCIAL BUDGET
1) Cash Budget: This Budget gives and estimate of the anticipated receipts and payment of each
during the Budget period. So, this Budget is divided into two parts, one showing the estimated
cash receipt on account of cash sales, credit collections and miscellaneous receipt and the other
showing the estimate disbursement on account of cash purchases, amount payable to creditors,
wages payable to workers, indirect expenses payable, Budgeted, wages payable to workers,
indirect expenses payable, budgeted capital expenditure etc. In short, every factor which affects
the receipts and payments of cash are taken into accounts in the preparation of this Budget.

2) Capital Expenditure Budget: The Capital Expenditure Budget gives an estimate of the
amount of capital that may be needed for acquiring the fixed assets required for fulfilling
production requirements as specified in the production budget. The Budget is prepared after
taking into consideration the available productive capacities, probable reallocation of the existing
assets and possible improvement in production techniques. Separates Budget may be prepared
for different items of assets such as plant and equipment Budget, building budget, etc.

The capital expenditure Budget is an important Budget providing for acquisition of assets,
necessitated by the following factors:
 Replacement of existing assets.
 Purchase of additional assets because of starting up of new lines of production.
 Purchase of additional assets to meet a proposed increases in production due to
increase in demand.
 Installation of an improved type of machinery so as to reduce cost of production.

Thus, Capital Expenditure Budget enables one to know what new fixed assets are needed
and what will their costs rate of return.

Purposes: The objectives of Capital Expenditure Budget are stated below:

 To enable the company to establish system of priorities in expenditure

 To correct capacity imbalances.

  To provide a tool for controlling capital expenditure.

 To make proper financial provision to meet planned expenditure.

 To provide Budget of depreciation and maintenance costs for inclusion in the

department expense Budgets.

PERFORMANCE BUDGETING:

“Performance Budgeting” had its origin in the U.S.A after Second

World War. It tries to rectify some of the shortcomings in the traditional Budget. In the
traditional Budgets amounts are earmarked for the objects of expenditures such as salaries,
travel, office expenses, grant-in-aid etc. In such system of Budgeting the money concept was
given more prominence i.e. estimating or projecting rupee value for the various accounting heads
or classification of revenue and cost. Such system of budgeting was more popularly used in
government department and many business enterprises. But such system Budgeting control of
performance in terms of physical units or the related costs cannot be achieved.

These days Budgets are established in such a way so that item of expenditure is related to
specific responsibility center and is closely linked with performance of that standard. Developing
work programs and performance expectations by assigned responsibility is the achievement and
objects of the enterprise. Thus, in performance Budgeting classification of expenditure follows a
three-tier pattern viz. Function-Programme-Activity.

Advantages of Performance Budgeting: The following are the main advantages of

performance Budgeting.

 It presents clearly the purpose and objectives for which funds are required.

 It gives better appreciation of Budgeting by legislature.

 It improves Budget formulation process.

  It enhances accountability of the executives.

ZERO BASE BUDGETING

Under Zero Base Budgeting methods, before preparing a Budget a base determined form
which the Budget process begins. Quite often current year’s Budget is taken as the base or the
starting point for preparing the next year’s Budget. The figures in the base are charged as per the
plan for the next year. This approach of preparing Budget is called “Incremental Budgeting”
since the Budget process is concerned mainly with the increases or changes in operations that are
likely to occur during the Budget period. For example, sales of the current year’s Budget for
sales will be current year’s sales plus and allowance for price increases and expected changes in
sales volumes. The man drawback of this approach is that it perpetuates the past inefficiencies.

Zero Base Budgeting is an alternative to Incremental Budgeting. It was introduced at

Texas Instruments in USA in 1969 by peter phyrr, who is known as the father of Zero Base
Budgeting. It is managerial tool and is steadily gaining acceptance in the business community.
Zero Base Budgeting is not based on Incremental approach and precious figures are not taken as
the base for preparing next year’s budget. Instead, the Budget figures are developed with zero as
the base, which means that a budget will be prepared as if it is being prepare for a new company
for the first time.

In Zero Base budgeting, budget requests for appropriation are accepted on the basis of
cost / benefit approach, which ensures vale for money. If question long-standing assumptions
and systematically examines and perhaps abandons any unproductive projects.

This means that those activities which are of no value find no value in the forthcoming
Budget even though these might have been an integral part of the past budget prepared under the
traditional approach. Zero Base budgeting in way are tries to locate those activities not essential.
The important steps in Zero Base Budgeting are:

 Identification of decision units in order to justify expenditure in their proposed Budget.

 Preparation of Decision Packages. Each package is a separate and identifiable

activity. These packages are linked with corporate objectives.

 Ranking of decision packages based on cost benefit analysis

 Allotment of funds based on the above resulting by following pyramid-ranking system to

ensure optimum results.
ZERO BASED BUDGETING
PRELIMINARIES IN THE INSTALLATION OF BUDGET SYSTEM

Prerequisites for the successful implementation of a budgetary control system are

follows:

1) Establishment of Budget Centers: A Budget center is a section of entity for which control of
exercised and budget prepared. A Budget center may be a department or part there of. Budget
center must be clearly defined because a separate Budget has to be set for each such center with
the help of the department concerned.

2) Linking of Budget requirements with chart of Accounts: Budgets for different budget
centers are prepared on standard forms. If requirements of forms are linked with chart of
accounts information of different Budget centers which is consistently compiled involving
minimum loss of time. Suppose advertisement Budget is being compiled and information for
miscellaneous expenditure is to be collected. It will be an essay exercise together this
information, if code heads to be referred to in this connection are specified in the form on which
information for Budgets is being collected.

3) Preparation of Organizational Chart: An Organization Chart should be prepared which

clearly shows the plan of the organization. Each member of management should know the exact
scope of his authority and responsibility and his relationship to others members. An
organizational chart is statement defining functional responsibilities of executives. Each member
of management should know the exact scope of his authority and responsibility and his
relationship with other members.

The Organization Chart shows:

 Functional responsibility of a particular executive

 Delegation of authority to various levels, and
 Relative position of a functional head with heads of other functions.

4) Establishment of Budget Committee: In small organization and in big organizations having

different units at different places, a Budget committee is formed having representation having
different units at different places., executive, budget officer and heads of all Budgets centers. The
Budget Officer acts as a secretary to chairman. Other members of the Budget committee usually
comprise various heads of functional departments, like sales manager, purchase manager,
production manager, chief accountant etc. as shown in the above Organizational Chart.

5) Preparation of Budget Manual: A Budget manual has been defined by C.I.M.A. London as
“A document which sets out the responsibilities for the persons engaged in the routine of the
forms and records required for budgetary control”. A budget manual is thus a statement of
budget policies. It lay down the details the organizational set up with duties and responsibilities
of executives including the Budget committee and budget Director and the procedures and
programmes to be followed for developing Budgets for various activities. The contents of a
budget manual are summarized as follows:

 Description of the budget system and its objectives.

 Procedure and forms to be used in budget preparation.

 Responsibilities of Operational Executives, Budget Committee and budget Director.

 Budget calendar, specifying definite dates for completion of each part of the Budget and
submission of the report.
 Methods of accounting and account codes in use.

 Procedure to be adopted in operating the system.

 Follow – up procedure.

6) Budget Period: Budget period is the length of time for which a Budget is prepared and
operated. Budget periods vary between short-term and long-term and no specific period can be
laid down for all budgets. It varies among concerns and industries for several factors. Whether a
budget is long-termed or short-termed, it is to decide primary these two factors:

 Type of business.

 Amount of control required.

7) Determination of the key Factor: Also known as limiting factor, governing factor and
principal Budget factor, the key factor means the factor, which limits the size of output. It is
defined as “the factor the extent of whose influence must first be assessed in order to ensure that
functional Budgets are capable of fulfillment”. Such a factor is of vital important and effects all
Budgets to large extent.

8) Budget Officer: The Chief Executive, who is at the top of the organization, appoints some
person as a budget Officer. The Budget Officer is empowered to scrutinize the Budgets prepare
by different functional heads and to make changes in them, if the situation so demands. The
actual performance of different departments is communicated to the budget Officer. He
determines the departments are communicated to the Budget Officer. He determines the
deviations in the Budgets and takes necessary steps to rectify the deficiencies if any. He works as
co-coordinator among different departments and monitors the relevant information. He also
informs the top management about the performance of different departments. The Budget Officer
will be able to carry out his work fully well only if he is conversant with the working of the
department.
9) Patronage from Top Management: For the true success of budgetary activities, impetus and
direction must come from the top management. If involvement of top management is missing, it
will be difficult for Budget Officer to bring round the reluctant line managers to this way of
thinking. Thus, right form the start, activities should be initiated in such a manner that
involvement of top management in budgetary activities becomes apparent.

CONCEPT OF BUDGETARY CONTROL

Budgetary Control and Budgeting are often used inter changeably to refer to a system of
management control. “Budgetary Control” implies the use of a comprehensive system of
budgeting to aid management in carrying out its functions like planning, co-ordination and
control. According to C.I.M.A, London “Budgetary Control is the establishment of budget
relating to the responsibilities of executive of a policy and to continuous comparison of the
actual with the budgeted results, either to secure by individual action the objection of policy or to
provide a basis for its revision”.

According to Brown and Howard “Budgetary Control is a system of controlling costs

which includes the preparation of budgets, co-ordinating the debts and establishing
responsibilities, comparing actual performance with the Budget and acting upon results to
achieve maximum profitability.

Characteristics of Budgetary Control: The main characteristics are as follows:

 Establishment of Budgets for each function or department f the organization.

 Comparison of actual performance with the Budgets on continuous basis.

 Analysis of variations of actual performance form that of the budgeted performance

to know the reasons there of.
Co-Ordinal Features: The three co-ordinal features of a “Budgetary Control” are as follows:
 Planning
 Co-ordination
 Control
Therefore, Budgetary control embraces all and in addition includes sciences of planning
the Budgets to effects an overall management tool for the business planning and control, quotes
Rowland and William.

Objective of Budgeting Control

Budgetary control improves planning and in co-ordination and helps in control. The
reasons for producing budgets are as follows:

1) To aid planning of annual operation.

2) To co-ordinate the activities of various parts and to ensure harmonious conditions
prevails in the organization with each other
3) To communicates plans to the various responsibility center managers.
4) To motivate managers to strive to achieve the organizational goals.
5) To control activities.
6) To evaluate the performance of managers.

Characteristics of a good budgeting

1) Budgeting process should be backed and supported by the chief executive of an

organization.
2) The Organization goal should be qualified and clearly stated. These goals should be
within the frame work of organization in plans.
3) There should be proper fixation and delegation of authority and responsibility.

4) The persons for execution of budget should participate in budget preparation.

 5) The Budget should be realistic. It should present goals that are reasonably attainable.
6) A good system of accounting is also essential to make the budgeting successful.
7) The budget should cover all the phases of the organization and be continuous exercise.

8) Periodic report should be prepared. Comparing budget and actual results i.e.., there
should be effective follow up.
9) Clear-cut organizational lines should be established and the employees should be
impaired budgeting education.
10) The budgeting system should be bases on information, communication and participation.

Requisites for a Successful Budgetary Control System

1) The budgets are used to realize objectives of the business. In the absence of clear goals,
the budgets will also be unrealistic.

2) Budget preparation and control is done at every level of management. Every though
budgets are finalized at top level but the involvement of person form lower levels of
management is essential for their success. This necessitates proper delegations of
authority and responsibility.
3) An effective system of communication is required for a successful budgetary control.
4) Budgetary control may not be taken only as control device by the employees but it should
be used as a tool improves their efficiency.
5) Budgeting is done4 for every segment of the business. It will also require the active
participation and involvement of all employees. The success of budgetary control systems
depends upon the participation of all employees of the organizations.
6) Flexibility in budgets is required to make them suitable under changed circumstances.
Budgets are prepared for the future, which is always uncertain. Flexibility will make the
budgets more appropriate and realistic.

7) All persons should be motivated to improve their working so that budgeting is successful.
A proper system of motivation should be introduced for making this system a success.
Advantages of Budgetary Control
 The Budget programme forces the managers into plan ahead.
 In forces early consideration of basic policies.
 All members of top management participate in budget committee. For this reason even
planning a departmental level gets benefits of experience of seasoned executives.
 Management is forces to put down in cold figures, what is means by satisfactory results.
 It demands the most economical use of labour, materials, facilities and capital.
 In inculcates a habit of timely, careful, adequate considerations of all factors before
reaching important decisions.
 The use of budget promotes understanding of the problems of co-workers.
 It facilitates period self-analysis of the organization.
 The use of budgets removes clouds of uncertainties for lower levels of management
regarding basic policies and objectives.
 Management is forced to give timely and adequate attention to the effect of changing
business conditions.
 Budgeting co-ordinates the activities of various department and functions of the business.
 Budgeting control aims at maximization of profits through careful planning and control.
 It directs capital expenditure in maximization of profits through careful planning and
control
 It directs capital expenditure in the most profitable direction.
 Budgetary control system creates necessary conditions for the introduction of standard
casting techniques.
 A budgetary control system assists in delegation of authority and assignment of
responsibility.

Limitations of Budgeting
  Budgeting cannot take place of management but is only a tool of management the budget
should be regarded not as a master, but as a servant.

 A budget programme must be dynamic and continuously deal with the chaining business
conditions. Budgets will lose much of their usefulness if they acquire rigidity and are not
revised with the changing circumstances

 Budgeting is an expensive technique. The installation and operation of the budgetary

control system is costly affair as it requires the employment of specialized staff and
involves other expenditure which small concern may find difficult to incur.

 Estimates are used as basis for budget plan and estimates are based mostly on available
facts and beset managerial judgments. Since a lot of human element is involved in
exercising managerial judgment. It is but natural to give some allowance interpretation
and utilization of estimated results. Budgeting based on inaccurate forecasts is use less as
a yardstick for the measuring of the actual performance.

 The circumstances are constantly changing and therefore budgets and budgetary
techniques will not be useful, till they are continually adapted.

 Budgetary control cannot reduce the managerial function to a formals. It is only a

managerial tool, which increase effectiveness of managerial control.

 The use of budgets may lead to restricted use of resources. Budgets are often taken as
limits. Efforts may, therefore, not be made to exceed the performance beyond the
budgeted targets, even though it may be physically possible..

THE BUDGETING PROCESS IN NON-PROFIT MAKING ORGANIZATION

 It normally begins with the mangers of the various activities calculating the expected
cost of maintaining current ongoing activities and then adding to those, which are considered
desirable.

Churches, hospitals, charities and other no-profit making organizations produce

estimates for understanding activities and later find the means to finances then, or even adjust the
activities to the available financial resources. Once difficulty in it is that output cannot be
measured in monetary terms i.e., we cannot measure quality amount and services rendered.