University of Gondar

College of Business and Economics

Department of Management
MBA Program

Financial and Managerial Accounting

Budget and Budgetary Control

Submitted by : Binyam Abebaw

Section 2

Submitted to: Eneye Guade (Phd)

Date: 19/06/15
Budget and Budgetary Control
• Budgets are financial plans for the future and are a key component of planning. They
identify objectives and the actions needed to achieve them. The process or art of
preparing a budget is called budgeting.

Essentials of a budget are as follows:

 Organizational structure must be clearly defined and responsibility should be assigned

to identifiable units within the organization.
 Setting of clear objectives and reasonable targets.
 Objectives and degree of responsibility should be clearly stated and communicated to
the management or person responsible for.
 Budgets are prepared for the future periods based on expected course of action
 Budgets are updated for the events that were not kept into the mind while establishing
budgets. Hence, budgets should flexible enough for midterm revisions.
 Budgets should be quantifiable and master budget should be broken down into various
functional budgets.
 Budgets should be monitored periodically. Variances from the set yardsticks (standards)
should be analyzed and responsibility should be fixed.
 Budgetary performance needs to be linked effectively to the reward system.

Characteristics of budget:

 A budget is concerned for a definite future period.

 A budget is a written document.
 A budget is a detailed plan of all the economic activities of a business.
 Budget is a means to achieve a business and it is not an end in itself.
 Budget needs to be updated, corrected and controlled every time when circumstances
changes. Therefore, it is a continuous process.
 Budget helps in planning, coordination and control.
 A budget acts a business barometer.
 Budget is usually prepared in the light of past experience.
 Budget is a constant Endeavour of the management.
 Budgeting is closely connected with control. Therefore, budgetary control is the use of
budgets to control an organization's activity.

The main features of budgetary control are:

 Establishment of budgets for each purpose of the business.

 Revision of budget in view of changes in conditions.
 Comparison of actual performances with the budget on a continuous basis.
 Taking suitable remedial action, wherever necessary.
 Analysis of variations of actual performance from that of the budgeted performance to
know the reasons thereof.

Benefits Derived from Budgeting

 Enhanced managerial responsibility
 Coordination of activities
 Assignment of decision making responsibilities
 Performance evaluation

Flow of budget data

Top Management

Middle Middle
Management Management

Supervisor Supervisor Supervisor Supervisor

The Master Budget

The master budget is the comprehensive financial plan for the organization as a
whole. Typically, the master budget is for a one-year period, corresponding to the fiscal year
of the company. Yearly budgets are broken down into quarterly and monthly budgets.
Most organizations prepare the master budget for the coming year during the last four or
five months of the current year.

Preparing the Master Budget:

The Production Budget

Budgeted product sales in units + Desired product units in ending inventory = Total
product units needed – Product units in beginning inventory = Product units to produce
Some other types of budget

Zero base budgeting (ZBB) is a method of budget preparation which begins each period with
a clean slate. It requires that all budget amounts be currently justified even if they were supported in
prior budgets. Managers must start from zero and justify budgets every period.

 Used in government budgeting.

 Due to the cost of the process, this zero base budgeting is often not used in business (Not commonly
used in business).

Incremental budgeting

A budgeting approach that assumes the starting point for each budget item is the amount spent
on it in the previous budget. The new budget is seen as last year’s +/- a specified increment. Its
less costly but may not be strategically sound.

Static budget v. Flexible Budget

Static budget:

A budget designed for only one level of activity. Differences from the budget can be misleading
when an organization actually operates at a different level of activity.
 It is not adjusted for the actual level of production and is not suited for performance
measurement.
Flexible Budget

A budget designed to cover a range of activity. It can be used to compare actual costs incurred
to budgeted costs around that level of activity.

 It is a set of budget relationships that can be adjusted to various activity levels. It is suited
for performance measurement.
 Show expenses that should have occurred at the actual level of activity.
 May be prepared for any activity level in the relevant range.
 Reveal variances due to good cost control or lack of cost control.
 Improve performance evaluation.
 Total variable costs change in direct proportion to changes in activity.
 Total fixed costs remain unchanged within the relevant range.

Total Cost Variable cost

Fixed Cost