CHAPTER 3

BUDGETARY CONTROL

BY
PROF. SUKU THOMAS SAMUEL
DEPARTMENT OF MANAGEMENT
 BUDGET
An estimate of costs, revenues, and resources over a specified period,
reflecting a reading of future financial conditions and goals.
“A budget is a pre-determined statement of management policy during
a given period which provides a standard for comparison with the
results actually achieved”
- Brown and Howard
“A quantitative expression of a plan for a defined period of time. It may
include planned sales volumes and revenues, resource quantities, costs
and expenses, assets, liabilities and cash flows”.
- CIMA
 BUDGETING
Act of preparing budgets is called budgeting.
• Systematic and formalized approach.
• States and communicates the firm's expectations.
• Road map to maximize the use of give resources.
• Covers the verticals of planning, coordination and control
responsibilities of management.

“ The entire process of preparing the budgets is known as budgeting ”

- Batty
 BUDGETARY CONTROL
Budgetary control is a system of controlling costs through
preparation of budgets.
Budgeting is a part of the budgetary control.
Definition
“ Budgetary control is the establishment of budgets relating to the
responsibilities of executives of a policy and the continuous
comparison of the actual with the budgeted results, either to secure
by individual action the objective of the policy or to provide a basis
for its revision”
- CIMA
 BUDGETARY CONTROL – ADVANTAGES
1. Compels managers to think ahead.
2. Co-ordinates the activities of various departments and functions of
the business.
3. Increases production efficiency, eliminates waste and controls the
costs.
4. Aims at maximization of profits through careful planning and control.
5. Must be dynamic and continuously deals with the changing business
conditions.
6. Participation of management for the realization of the budgetary
goals.
 BUDGETARY CONTROL – LIMITATIONS
1. Based on future forecasts, forecasting cannot be an exact science.
2. Must be dynamic and continuously deal with the changing business
conditions.
3. Participation of the entire organisation.
4. Installation and operation of a budgetary control system is costly.
 BUDGETARY CONTROL – PROCESS

Determining Recording the Comparison of

Calculate the Take Remedial
Targets and Actual Actual with
variance Actions
preparing plan performance Plan
 BUDGETARY CONTROL – PROCESS
Determining Targets and preparing • Setting targets according to business goals
plan • Budget prepared to match the goal.

Recording the Actual performance • Measuring the performance of the company.

Comparison of Actual with Plan • Review of performance.

Calculate the variance • Deviation from actuals,

• Take corrective measures.

Take Remedial Actions
 Preparation Of Flexible Budget
Changes with the changes occurring in the volume or activity held in
production.
Multiple budget will be prepared.
One budget to be selected based on the activity.
Costs in a company can be classified into three:
1. Fixed Cost – Cost does not change with the level of output.
2. Variable Cost – Cost varies with the level of output.
3. Semi variable cost – Certain portion is fixed, and certain portion is
variable.
 PREPARATION OF FLEXIBLE BUDGET

100 Units 1,000 Units

Particulars
Cost/ Unit Total Cost/Unit Total
 FLEXIBLE BUDGET PREPARATION – QUESTION 1
The expenses budgeted for production of 1,000 units in a factory are
furnished below. Prepare a budget for production of 600 units and 800 units
assuming administrative expenses are rigid for all level of production.
Particulars Per Unit Rs.
Material Cost 700
Labour Cost 250
Variable overheads 200
Administrative expenses (Rs. 2,00,000) 200
Total Cost 1,480
 FLEXIBLE BUDGET PREPARATION – QUESTION
The details are when the production was 60% capacity of 600 units. Prepare
a flexible budget showing marginal cost and total cost for 60%, 80% and 100%
activity

Particulars Amount
Materials Rs 120 per unit
Labour Rs 50 per unit
Expenses Rs 15 per unit
Factory expenses Rs 50,000
Administrative expense Rs 35,000
 PREPARATION OF CASH BUDGET
Also known as finance budget.
• Most important of all the functional budgets.
• Prepared after the preparation of all other functional budgets.
• Summarizes the anticipated cash receipts and payments for a specific
period.
• Arrange of cash if enough cash is not available.

• There are three methods of preparing a cash budget

1. Receipts and Payments Method
2. Adjusted Profit and Loss Method
3. Balance Sheet Method
 PREPARATION OF CASH BUDGET
MONTH Jan Feb March April
Opening cash balance (A)
CASH RECEIPTS
Cash Receipt 1
Cash Receipt 2
TOTAL CASH RECEIPTS (B)
TOTAL CASH AVAILABLE (A+B)

CASH PAYMENTS
Cash payments 1
Cash payments 2
TOTAL CASH PAYMENTS (C)
Closing cash balance (A+B-C)
 PREPARATION OF CASH BUDGET – QUESTION 1
A company is expected to have Rs. 32,000 cash in hand on 01/04/2020 and it
request you to prepare cash budget for the three months: April to June 2020.
The following information is supplied to you
Month Sales (Rs) Purchase (Rs) Wages (Rs) Expenses (Rs) Other Information
• Period of credit allowed by
February 70,000 44,000 6,000 5,000
suppliers is two months.
March 80,000 56,000 9,000 6,000
• Credit allowed to customers
April 96,000 60,000 9.000 7,000 for credit sales is one month.
May 1,00,000 68,000 11,000 9,000 • Delay in payment of wages and
June 1,20,000 62,000 14,000 9,000 expenses one month.
• Income Tax Rs. 28,000 is to be
paid in June 2020.
 PREPARATION OF CASH BUDGET – QUESTION 2
From the following forecast of Income and expenditure, prepare a cash
budget for the month January to April 2014
Manufacturing Administrative Selling
Month Sales (Rs) Purchase Wages
Expenses Expenses Expenses
Nov 2013 30,000 15,000 3,000 1,150 1,060 500
Dec 2013 35,000 20,000 3,200 1,225 1,040 550
Jan 2014 25,000 15,000 2,500 990 1,100 600
Feb 2014 30,000 20,000 3,000 1,050 1,050 620
Mar 2014 35,000 22,500 2,400 1,100 1,220 570
April 2014 40,000 23,000 2,600 1,200 1,180 710
 PREPARATION OF CASH BUDGET – QUESTION 2
Additional Information:
• The customers are allowed a credit period of 2 months.
• A dividend of Rs. 10,000 is payable in April.
• Capital Expenditure to be incurred: Plant purchased on 15th of January
for Rs. 5,000, a Building has been purchased on 1st March and the
payments are to be made in monthly instalments of Rs. 2,000 each.
• The creditors are allowing a credit of 2 months.
• Wages are paid on the 1st of next month.
• Lag in Payment of other expenses is one month.
• Balance of Cash in Hand on 1st January 2016 is Rs. 15,000.