Business Budgeting

Budget is a financial statement which contains a comprehensive plan of

all businesses activities of a firm for a definite period to achieve pre-
determined objectives.

It refers the plan in action for the achievement of goals.

When a budget is prepared for business firm then t is termed as

business budget.

 Comprehensive/ Integrated plan (sales, purchases, finance etc.)

 Monetary units/ financial terms.
 Plan of firm’s activities and resources (income and expenditure
available with firm) (assets and resources of firm)
 Revaluate on a periodic basis.
 Written document
 Definite period of time
 Budget as a standard (Target accomplished for compare with
actual results)

# Objectives

 To maximise the business profit.

 Planning for future.
 Optimum utilization of resources.
 Physical and financial resources.
 To fix the duties and responsibilities of department.
 To increase business efficiency.
 To protect the business from future risk of uncertainties.
 To use as a source of business communication.
  To use as a standard for measuring performance.
 To establish coordination among various departments.
 To reduce the production cost.

# Types of Budget:-

1. On the basis of Time

 Long term
 Short term
 Current budget

Long term budget – Future sales, future production, long term

capital expenditure, research and development programmes,
financial requirements, forecast etc.

Short term budget – Enough time to cover production cycle.

Current budget – This differs on current situations.

2. On the basis of Flexibility:-

 Fixed budget
 Flexible budget

Fixed budget – Remain unchanged, irrespective of the level of

activity attain.

Flexible budget – Sorting out of the cost and determining their

variability for different levels of activity is the crux of the flexible
budget.

Fixed, Variable, Semi-Variable

# Difference between Fixed budget and Flexible budget:

 Basis Fixed Budget Flexible Budget
Nature Remain unchanged Can be changed
Assumptions It assumes that level It assumes that level
of activity will remain of activity can be
unchanged. changed.
Cost classification Not classified Fixed, variable, Semi-
according to their variable
nature.
Comparison No comparison Comparison can be
done
Forecast Results can’t be Results can be
forecast or difficult. forecast.
Determination of cost To determine the Can be determined.
cost when actual
level of performance
differs from budgeted
level is difficult.

3. On the basis of Activity:-

 Functional budget
 Master budget

Functional Budget:

Sales budget – It is the forecast of the total sales expressed in quantity

or money during the budget period.

BASIS – Analysis of past sales, market analysis, reports of salesmen,

business condition, plant capacity, financial aspects etc.

Production budget – Forecast of anticipated production of each

product to be produced by the firm.
BASIS – Sales budget, production capacity of the firm, stock position,
inherent loss in production, policy regarding manufacturing etc.

Cost budget – It summarizes material budget, labour budget and

factory overheads budget which may be expressed and analyzed by
departments.

MATERIAL BUDGET – It is forecast of the total quantity and cost of each

item of material required.

Material Requisition Budget, Material Purchase Budget (Type, time,

cost)

LABOUR BUDGET – Forecast of the requirements of direct and indirect

labour for various production and service departments.

 To estimate number of employees.

 To estimate labour cost.
 To measure labour performance.

OVERHEAD BUDGET – It forecast of all manufacturing overheads to be

incurred during the budget period to achieve the targeted production.

Master Budget: It is a budget which is prepared incorporating the

functional budgets already formulated by all the function departments
of the business.

# Other Budgets:-

 Surplus budget – Income greater than expenditure

 Deficit budget – Expenditure greater than income
 Balance budget – Income = Expenditure
 Human resource budget
  Progressive budget
 Supplementary budget

# Essentials of effective budget:-

 Fixed period of time

 Sound forecast
 Proper accounting system
 Planned cost accounting system
 Efficient organisation
 Authority and responsibility
 Well defined business policy
 Budget organisation
 Flexible
 Economical
 Reasonable attainable targets
 Formulation of master budget

Important for Exam:

“Budget is an essential tool for managers.” Explain this statement and

discuss the qualities of an essential budget.

# Budgeting Process / Technique:-

1. Establishment of operational goals and objectives.

2. Formulation of business policies (Sales policy, purchase policy,
production policy, production policy, finance and inventory policy)
is a task of top management.
3. Preparation of budget forecast-
 Sales forecast – Cash or credit sales, terms of credit
  Purchase forecast – Cash or credit purchase, terms of purchase,
stock position
 Production forecast- Direct and indirect expenses
 Research and development forecast
 Capital expenditure forecast
4. Comparison of alternatives, coordination and review
5. Formulation of master budget, financial approval and budget
execution.

# Advantages of Budget:-

 Helpful in managerial functions

 Profitability analysis
 Cost analysis
 Helpful in comparison
 Participation
 Determination of functions and responsibilities
 Regular accounting
 Optimum use of business resources
 Motivation
 Development of cooperation spirit

# Disadvantages of Budget:-

 Budgets are only estimates

 Lack of full knowledge
 Personal biasness
 Ineffective
 Extra burden

# Difference between Budget and Budgeting:

Budget
It is a plan
It shows business objectives and
means to achieve terms.
It is estimate of revenue and
expenditure.
It is a kind of standard.
Concern of business activities.
It is related to definite future
period.
Budgeting
It is a managerial process
It is a process of budget
preparation and decides the
objective of a budget.
It is implementation and
revaluation.
It prepares budget for standards.
Concern with budget activities.
It does not work for fixed period.