Unit – IV

Budgetary Control

Syllabus : Budget, Budgetary Control, Steps in Budgetary Control, Flexible Budget,

Different Types of Budgets: Sales Budget, Cash Budget, Production Budget, Performance
Budgets and Computerized Budgeting. Activity Based Budgeting. Budgeting Process in
Non-Profit Organizations. Zero Based Budgeting. Criticisms of Budgeting. An
Introduction to Cost Audit and Managerial Audit

Budget, Budgetary Control, Steps in Budgetary Control :

Budget:
A budget is a financial plan that outlines the expected revenues and expenses over a
specific period, usually a fiscal year. It serves as a roadmap for managing financial
resources and achieving organizational goals. Budgets can be comprehensive, covering all
aspects of an organization's operations, or specific, focusing on particular areas like sales,
production, or capital expenditures.
Key components of a budget include:
1. Revenue Budget:
 Estimates the expected income from various sources, such as sales, services,
investments, and grants.
2. Expense Budget:
 Details the projected costs associated with operations, including salaries,
utilities, materials, and other expenditures.
3. Operating Budget:
 Combines revenue and expense budgets to provide a comprehensive view of
the organization's financial activities.
4. Capital Budget:
 Focuses on major investments in assets, such as equipment, facilities, or
technology, and their financing.
Budgetary Control:
Budgetary control is a process that involves setting budgets, comparing actual
performance against the budgets, and taking corrective actions to ensure that
organizational objectives are met. It provides a systematic approach to managing financial
resources and maintaining financial discipline within an organization.
Steps in Budgetary Control:
1. Establishing Objectives:
 Clearly define organizational objectives and set specific, measurable targets
in the budget.
2. Budget Formulation:
 Develop detailed budgets for various functions and departments based on
the organizational objectives. This involves collaboration between
management and relevant departments.
3. Communication and Approval:
 Communicate the budgetary goals to all relevant stakeholders, and obtain
approval from top management. Ensure that everyone understands their
roles and responsibilities in achieving the budget targets.
4. Implementation:

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  Put the budget into action by allocating resources, authorizing expenditures,
and initiating planned activities.
5. Monitoring and Measurement:
 Regularly monitor actual performance against budgeted targets. This
involves comparing actual revenues, expenses, and other financial metrics
with the budgeted figures.
6. Variance Analysis:
 Identify and analyze any variances (differences) between actual
performance and the budget. Variances can be favorable (actual
performance is better than budgeted) or unfavorable (actual performance is
worse than budgeted).
7. Reporting:
 Prepare and distribute budget performance reports to management and
relevant departments. Highlight key variances, their causes, and potential
corrective actions.
8. Corrective Action:
 Take corrective actions to address significant variances. This may involve
adjusting activities, reallocating resources, or revising the budget if
necessary.
9. Feedback and Learning:
 Use the insights gained from the budgetary control process to improve
future budgeting processes. Learning from variances helps refine future
budgets for increased accuracy.
10. Continuous Improvement:
 Continuously refine and improve the budgeting and budgetary control
processes based on feedback and changing organizational circumstances.
Budgetary control is an essential tool for effective financial management. It helps
organizations stay on track, align resources with strategic objectives, and respond
promptly to changes in the business environment.
Flexible Budget:
A flexible budget is a budget that adjusts for changes in activity levels. Unlike a static
budget, which remains fixed regardless of actual activity, a flexible budget is designed to
adapt to variations in production or sales volumes. This flexibility allows for more
accurate performance evaluation and better decision-making, especially in dynamic
business environments. Here are the key features and benefits of a flexible budget:
Key Features of a Flexible Budget:
1. Variable Components:
 A flexible budget includes variable components that change with the level
of activity. Variable costs and revenues are adjusted based on actual
production or sales levels.
2. Multiple Activity Levels:
 The budget is prepared for various levels of activity, allowing for
comparisons with actual performance at different production or sales
volumes.
3. Adaptability:
 It can be easily adjusted or revised as circumstances change. This
adaptability is particularly useful in industries with fluctuating demand or
variable production levels.
4. Detailed Breakdown:

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  Provides a detailed breakdown of costs and revenues, allowing for a more
granular analysis of performance at different activity levels.
Benefits of a Flexible Budget:
1. Accurate Performance Evaluation:
 Allows for a more accurate evaluation of performance by comparing actual
results with budgeted figures that are adjusted for the actual level of
activity.
2. Variance Analysis:
 Facilitates variance analysis, helping management identify the causes of
differences between actual results and the budget at different activity levels.
3. Better Decision-Making:
 Provides managers with insights into how changes in activity levels impact
financial performance, enabling better decision-making regarding resource
allocation and operational adjustments.
4. Scenario Planning:
 Supports scenario planning by allowing managers to assess the financial
implications of different levels of production or sales. This helps in
developing contingency plans.
5. Performance Measurement:
 Enables performance measurement at various levels of activity, which is
particularly important for businesses with seasonality or variable demand
patterns.
6. Cost Control:
 Facilitates better control over costs as managers can see how cost behavior
varies with changes in activity levels. This is essential for maintaining cost
efficiency.
Different Types of Budgets: Sales Budget, Cash Budget, Production Budget,
Performance Budgets and Computerized Budgeting:
Budgets play a crucial role in planning, controlling, and evaluating the financial
performance of an organization. Different types of budgets serve various purposes,
addressing specific aspects of financial management. Here are explanations of some
common types of budgets:
1. Sales Budget:
 A sales budget is a forecast of the expected sales for a specific period. It serves as
the starting point for the entire budgeting process, influencing other budgets like
production, cash, and operating budgets. The sales budget considers factors such as
market demand, pricing strategies, and sales targets.
2. Cash Budget:
 A cash budget focuses on the organization's cash inflows and outflows over a
specific period. It helps manage cash flow by predicting when cash will be received
and when payments need to be made. This budget is crucial for avoiding liquidity
issues and ensuring the availability of funds for operational needs.
3. Production Budget:
 The production budget outlines the quantity of units that a company plans to
produce during a specific period. It is derived from the sales budget, taking into
account factors like desired ending inventory levels and beginning inventory levels.
The production budget guides the manufacturing process and resource allocation.
4. Performance Budgets:
 Performance budgets focus on the outputs or results of various departments or units
within an organization. These budgets link financial and non-financial performance

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 metrics to assess efficiency and effectiveness. Examples include cost center
budgets, profit center budgets, and capital expenditure budgets.
5. Operating Budget:
 An operating budget integrates various sub-budgets (sales, production, and expense
budgets) to provide an overview of an organization's expected financial
performance for a specific period. It includes both revenue and expense budgets,
helping in the planning and control of day-to-day operations.
6. Master Budget:
 The master budget is a comprehensive budget that incorporates all the individual
budgets (sales, production, cash, etc.) into a single, integrated financial plan. It
provides a holistic view of the organization's financial position and performance.
7. Capital Budget:
 A capital budget focuses on the organization's long-term investments in capital
assets, such as machinery, buildings, and technology. It helps in decision-making
regarding major capital expenditures and their financing.
8. Flexible Budget:
 A flexible budget adjusts for changes in activity levels, allowing for more accurate
performance evaluation in dynamic business environments. It provides a range of
budgeted figures based on different levels of activity.
9. Computerized Budgeting:
 Computerized budgeting involves using software and advanced technologies to
create, manage, and analyze budgets. It streamlines the budgeting process,
facilitates collaboration, and allows for real-time updates and adjustments.
Each type of budget serves a specific purpose in the overall financial management of an
organization. The choice of budget types depends on the nature of the business, its goals,
and the information needed for effective decision-making.
Activity Based Budgeting:
Activity-Based Budgeting (ABB) is an extension of Activity-Based Costing (ABC)
principles into the budgeting process. ABB aligns the budget with the activities that drive
costs, providing a more accurate representation of resource needs and promoting better
decision-making. Here are key features and steps involved in Activity-Based Budgeting:
Key Features of Activity-Based Budgeting:
1. Focus on Activities:
 ABB emphasizes activities rather than traditional cost centers. It identifies
and analyzes the activities that consume resources and contribute to costs.
2. Resource Drivers:
 ABB identifies resource drivers—factors that influence the consumption of
resources in performing various activities. These drivers are used to allocate
resources more accurately.
3. Detailed Cost Analysis:
 ABB involves a detailed analysis of costs associated with specific activities.
It breaks down costs into fixed and variable components related to each
activity.
4. Linkage to Strategic Objectives:
 ABB aligns budgeting with the organization's strategic objectives. It ensures
that resources are allocated to activities that directly contribute to achieving
those objectives.
5. Flexible Budgeting:
 ABB incorporates flexibility to adapt to changes in the business
environment or shifts in activity levels. It allows for adjustments in response

Strategic Cost and Management Accounting MBA I Year IISem (R22)

 to variations in demand or other factors.
6. Performance Measurement:
 ABB facilitates performance measurement by evaluating how well activities
are aligned with strategic goals and how efficiently resources are utilized.
Steps in Activity-Based Budgeting:
1. Identify Activities:
 Identify and define the activities that contribute to the organization's overall
goals. These could include manufacturing processes, service delivery,
customer support, etc.
2. Determine Resource Drivers:
 Identify the factors that drive the consumption of resources for each
activity. These resource drivers could be the number of units produced, the
number of customers served, machine hours, etc.
3. Estimate Costs for Each Activity:
 Estimate the costs associated with each activity, breaking them down into
fixed and variable components. Understand how changes in activity levels
impact costs.
4. Budgeting for Activities:
 Develop budgets for each activity based on the estimated costs and expected
levels of activity. Allocate resources in accordance with the strategic
importance of each activity.
5. Monitoring and Feedback:
 Regularly monitor actual performance against the activity-based budget.
Analyze any variances and provide feedback to management. This step is
crucial for continuous improvement.
6. Adjustments and Revisions:
 Based on performance feedback and changes in the business environment,
make adjustments and revisions to the activity-based budget. This flexibility
allows for better responsiveness to market dynamics.
7. Strategic Alignment:
 Ensure that the budget is aligned with the organization's strategic objectives.
Resources should be directed towards activities that contribute most
significantly to achieving these goals.
Activity-Based Budgeting is particularly beneficial for organizations with diverse
products or services, complex operations, or changing business environments. It provides
a more accurate and strategic approach to budgeting by directly linking resource
allocation to the activities that create value and drive costs.
Budgeting Process in Non-Profit Organizations:
Budgeting is a critical process in non-profit organizations, just as it is in for-profit
entities. Non-profit organizations use budgets to plan and control their financial activities,
allocate resources effectively, and ensure that they can fulfill their mission and objectives.
The budgeting process in non-profit organizations typically involves several steps:
1. Mission and Strategic Planning:
 Begin with a clear understanding of the organization's mission and strategic goals.
The budget should align with and support the mission, ensuring that financial
resources are directed toward fulfilling the organization's purpose.
2. Involvement of Stakeholders:
 Engage key stakeholders, including board members, staff, and possibly donors or
beneficiaries, in the budgeting process. Their input is valuable in understanding
priorities, setting goals, and ensuring that the budget reflects the organization's

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 values.
3. Program Budgeting:
 Non-profits often use program budgeting, where budgets are aligned with specific
programs or projects rather than just administrative or functional categories. This
allows for a more detailed understanding of how resources contribute to the
organization's mission.
4. Revenue Projection:
 Estimate and project the sources of revenue for the upcoming fiscal period. This
includes grants, donations, membership fees, fundraising events, and any other
sources of income. Realistic revenue projections are crucial for planning activities.
5. Expense Planning:
 Identify and allocate resources to various expense categories, including program
costs, administrative costs, fundraising expenses, and other operational costs.
Ensure that the budget reflects the organization's priorities and strategic initiatives.
6. Grant Budgets:
 If the organization relies on grants, develop separate budgets for each grant. These
budgets should outline how the funds will be used to achieve the grant's specific
objectives.
7. Cash Flow Projection:
 Consider the organization's cash flow needs. Non-profits often have irregular cash
flows due to grant cycles and donation patterns. A cash flow projection helps
ensure that there are sufficient funds to cover expenses during periods of lower
income.
8. Budget Approval:
 Once the budget is prepared, present it to the board of directors for approval. Board
members play a crucial role in overseeing the financial health of the organization,
and their approval is typically required before the budget is finalized.
9. Monitoring and Reporting:
 Regularly monitor actual financial performance against the budget throughout the
fiscal year. Provide regular financial reports to the board and other stakeholders. If
there are significant variances, take corrective action as needed.
10. Adaptability and Flexibility:
 Non-profit organizations often operate in dynamic environments. The budget
should be adaptable and flexible to accommodate changes in funding, unexpected
expenses, or shifts in priorities.
11. Grant Compliance:
 Ensure that the budget complies with any specific requirements outlined in grant
agreements. Some grants may have restrictions on how funds can be used.
12. Year-End Review and Audit:
 At the end of the fiscal year, conduct a thorough review of the budget's
performance. Non-profits may also undergo an independent audit to ensure
financial transparency and accountability.
13. Feedback and Learning:
 Collect feedback from staff and stakeholders about the budgeting process. Use this
input to learn from the past and improve future budgeting processes.
In summary, the budgeting process in non-profit organizations involves careful planning,
stakeholder engagement, and alignment with the organization's mission. It is a tool for
financial management that helps ensure responsible stewardship of resources and the
effective pursuit of the organization's goals.

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 Zero-Based Budgeting (ZBB):
Zero-Based Budgeting (ZBB) is a budgeting approach where each expense item must be
justified from scratch, starting from a "zero base," rather than basing the budget on the
previous year's expenditures. This method requires departments and programs to justify
all expenses, providing a comprehensive view of the organization's needs and priorities.
Steps in Zero-Based Budgeting:
1. Identify and Evaluate Activities:
 Identify and evaluate all activities and functions that need funding.
2. Rank Activities by Priority:
 Prioritize activities based on their importance to the organization's goals.
3. Allocate Resources:
 Allocate resources based on the priority of activities, starting from a zero
base.
4. Justify Every Expense:
 Every expense must be justified, and decision-makers must evaluate the
necessity of each item.
5. Build Budgets from Scratch:
 Departments and programs build their budgets from scratch, rather than
using the previous year's budget as a baseline.
Criticisms of Budgeting:
While budgeting is a widely used tool in financial management, it has faced criticisms
over the years. Some common criticisms include:
1. Incrementalism:
 Traditional budgeting methods often follow an incremental approach, where
the new budget is based on the previous year's budget with adjustments.
Critics argue that this approach may lead to inertia and the perpetuation of
inefficient spending patterns.
2. Time-Consuming:
 The budgeting process can be time-consuming, requiring significant effort
from various departments. This can divert attention from strategic planning
and day-to-day operations.
3. Rigidity:
 Fixed budgets may lack flexibility, making it challenging to adapt to
changes in the business environment. This is especially problematic in
dynamic industries or uncertain economic conditions.
4. Focus on Short-Term Results:
 Some budgeting systems may encourage a short-term focus, as managers
prioritize meeting annual targets rather than making decisions for the long-
term health of the organization.
5. Lack of Alignment with Strategy:
 In some cases, budgets may not align well with the organization's strategic
goals. This misalignment can result in resources being allocated to activities
that do not contribute significantly to the organization's mission.
6. Top-Down Approach:
 In a traditional budgeting process, senior management often sets targets and
allocates resources without sufficient input from lower-level managers. This

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 top-down approach can lead to a lack of ownership and commitment among
those responsible for implementation.
7. Focus on Cost Cutting:
 In times of financial constraint, the emphasis on cost-cutting in traditional
budgeting may lead to reductions in essential areas, such as employee
training and development or research and development.
8. Difficulty in Measurement:
 Some aspects of organizational performance, particularly in non-profit or
public sectors, are challenging to measure accurately. This can make it
difficult to allocate resources effectively.
9. Fixed Performance Targets:
 Fixed performance targets set in budgets may not always reflect the
dynamic nature of markets and can create pressure to achieve unrealistic
goals.
It's important to note that these criticisms apply more to traditional budgeting methods.
The criticisms have prompted organizations to explore alternative budgeting approaches,
such as Zero-Based Budgeting and rolling budgets, to address some of the limitations
associated with traditional methods. Each organization must carefully consider its unique
circumstances and goals when selecting a budgeting approach.
Cost Audit:
Definition: Cost audit is an examination of cost accounting records and verification of
facts to ensure that the cost accounting principles have been correctly applied and to
ensure the cost statements are accurate.
Objectives:
 Verification of Cost Records: Ensuring that the cost records are accurately
maintained.
 Compliance with Cost Accounting Standards: Ensuring compliance with
applicable cost accounting standards.
 Cost Control and Efficiency: Identifying areas for cost control and operational
efficiency.
 Statutory Compliance: Meeting legal requirements related to cost audit as
mandated by regulatory authorities.
Process:
 The cost audit process involves the examination of cost records, books, and
accounts.
 Verification of cost accounting principles and compliance with cost accounting
standards.
 Examination of the cost statements and financial statements.
 Reporting findings and suggestions for improvement.
Applicability:
 Cost audit is typically applicable to companies engaged in manufacturing,
processing, mining, or activities specified by regulatory authorities.
 Applicability thresholds and criteria vary by jurisdiction.
Managerial Audit:
Definition: Managerial audit is an examination and assessment of managerial policies,
processes, and performance to ensure efficient and effective management practices within
an organization.
Objectives:
 Evaluate Managerial Effectiveness: Assessing the effectiveness of managerial
decisions and actions.

Strategic Cost and Management Accounting MBA I Year IISem (R22)

  Efficiency Analysis: Analyzing the efficiency of resource utilization and
allocation.
 Goal Alignment: Ensuring that organizational goals are aligned with managerial
decisions and strategies.
 Risk Management: Identifying and managing risks associated with managerial
decisions.
 Compliance with Policies: Verifying compliance with organizational policies and
procedures.
Process:
 Managerial audit involves the examination of managerial decisions, processes, and
outcomes.
 Evaluating the effectiveness of planning, organizing, directing, and controlling
functions.
 Assessing risk management practices and compliance with organizational policies.
 Providing recommendations for improvement in managerial practices.
Applicability:
 Managerial audit is applicable to all types of organizations, including both profit
and non-profit entities.
 It is relevant to assess and improve managerial effectiveness and organizational
performance.
Key Differences:
1. Focus:
 Cost Audit: Primarily focuses on verifying cost accounting records and
ensuring compliance with cost accounting standards.
 Managerial Audit: Focuses on evaluating managerial decisions, processes,
and overall organizational performance.
2. Scope:
 Cost Audit: Concentrates on cost-related aspects, including cost records,
cost statements, and adherence to cost accounting principles.
 Managerial Audit: Has a broader scope, encompassing managerial
effectiveness, efficiency, risk management, and goal alignment.
3. Applicability:
 Cost Audit: Typically applies to companies involved in manufacturing,
processing, mining, etc., based on regulatory requirements.
 Managerial Audit: Applicable to organizations of various types, focusing
on improving overall managerial practices and organizational performance.
Both cost audit and managerial audit play crucial roles in organizational governance and
performance improvement. While cost audit focuses on the financial and cost-related
aspects, managerial audit provides a broader assessment of managerial effectiveness and
organizational efficiency.

Strategic Cost and Management Accounting MBA I Year IISem (R22)