1

INTRODUCTION:
For effective running of a business, management must know: where it intends to go i.e. organizational objectives how it intends to accomplish its objective i.e. plans overall

whether individual plans fit in the organizational objective. i.e. coordination

whether operations conform to the plan of operations relating to that period i.e. control
Budgetary control is the device that a company uses for all these purposes.
2

WHAT IS A BUDGET? A plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure and the capital to be employed.

WHAT IS BUDGETARY CONTROL?

Budgetary control is the use of the comprehensive system of budgeting to aid management in carrying out its functions like planning, coordination and control. This system involves: Division of organization on functional basis into different sections known as a budget centre. Preparation of separate budgets for each budget centre. Consolidation of all functional budgets to present overall organizational objectives during the forthcoming budget period. Comparison of actual level of performance against budgets. Reporting the variances with proper analysis to provide basis for future course of action.
4

CLASSIFICATION OF BUDGETS

ACCORDING TO TIME

ACCORDING TO FUNCTION

ACCORDING TO FLEXIBILITY

1. 2. 3. 4.

Long term budget Short term budget Current budget Rolling budget

1. Sales budget 2. Production budget 3. Cost of Production budget 4. Purchase budget 5. Personnel budget 6. R & D budget 7. Capital Expenditure budget 8. Cash budget 9. Master budget

1. Fixed budget 2. Flexible budget

1. SALES BUDGET:
Sales budget is the most important budget based on which all the other budgets are built up. This budget is a forecast of quantities and values of sales to be achieved in a budget period.

2. PRODUCTION BUDGET:
Production budget involves planning the level of production which in turn involves the answer to the following questions: a. What is to be produced? b. When is it to be produced? c. How is it to be produced?

d. Where is it to be produced?

3. COST OF PRODUCTION BUDGET: This budget is an estimate of cost of output planned for a budget period and may be classified into Material Cost Budget Labour Cost Budget

Overhead Cost Budget

4. PURCHASE BUDGET: This budget provides information about the materials to be acquired from the market during the budget period.

5. PERSONNEL BUDGET: This budget gives an estimate of the requirements of direct labour essential to meet the production target. This budget may be classified into a. Labour requirement budget

b. Labour recruitment budget

6. RESEARCH AND DEVELOPMENT BUDGET: This budget provides an estimate of expenditure to be incurred on R & D during the budget period. A R&D budget is prepared taking into consideration the research projects in hand and new R & D projects to be taken up.
8

7. CAPITAL EXPENDITURE BUDGET: This is an important budget providing for acquisition of assets necessitated by the following factors: a. Replacement of existing assets. b. Purchase of additional assets to meet increased production

c. Installation of improved type of machinery to reduce costs.

8. CASH BUDGET:

This budget gives an estimate of the anticipated receipts and payments of cash during the budget period.
Cash budget makes the provision for minimum cash balance to be maintained at all times.
9

9. MASTER BUDGET: CIMA defines this budget as The summary budget incorporating its component functional budget and which is finally approved, adopted and employed. Thus master budget is a summary of all functional budgets in capsule form available in one report. 10. FIXED BUDGET: This is defined as a budget which is designed to remain unchanged irrespective of the volume of output or turnover attained. This budget will, therefore, be useful only when the actual level of activity corresponds to the budgeted level of activity.
10

11. FLEXIBLE BUDGET: CIMA defines this budget as one which, by recognising the difference in behaviour between fixed and variable costs in relation to fluctuations in output, turnover or other variable factors such as number of employees, is designed to change appropriately with such fluctuations.

12. PERFORMANCE BUDGETING: These days budgets are established in such a way so that each item of expenditure is related to specific responsibility centre and is closely linked with the performance of that standard.

11

13. ZERO BASE BUDGETING: The zero base budgeting is not based on the incremental approach and previous figures are not adopted as the base. Zero is taken as the base and a budget is developed on the basis of likely activities for the future period. A unique feature of ZBB is that it tries to help management answer the question, Suppose we are to start our business from scratch, on what activities would we spent out money and to what activities would we give the highest priority?

12

Question on Flexible Budget

Cost of an article at a capacity level of 5,000 units is given. Calculate the cost budget at 4,000 & 6,000 units
Particulars Material cost Labour cost Power Repairs & maintenance Stores Inspection Administrative overheads Selling overheads Depreciation A 25,000 15,000 1,250 2,000 1,000 500 5,000 3000 10,000 Percentage 100 (Variable) 100 (Variable) 80(semivariable) 75(semivariable) 100 (variable) 20 (semivariable) 25 (semivariable) 50 (semivariable) 100 (fixed)

Total Cost per unit

62,750 13.37

Q.2 on Flexible Budget

Capacity worked 50% Fixed costs: 2,90,000 Variable costs:
Materials 2,40,000 Labour 2,56,000 Other expenses 38,000 Total 5,34,000 Possible sales at various capacities: 60% 9,50,000 75% 11,50,000 90% 13,75,000 100% 15,25,000

Prepare a Cash budget

october, november, december
MONTH SEPTEMBER OCTOBER (Budgeted) NOVEMBER (Budgeted) CREDIT SALES 15,000 18,000 20,000 CASH SALES 14,000 5,000 6,000

for
CREDIT PURCAHSES 40,000 23,000 27,000

DECEMBER (Budgeted)

25,000

8,000

26,000

Debtors are allowed one month's credit & creditors are to be paid in the month following delivery.

Other information

Wages Rs. 3,000 p.m. Administration Rs. 1,500 p.m Rent Rs. 3,600 for the next 12 months to be paid in october. Equipment Rs. 16,000 to be purchased in october. Short term loans Rs. 15,000 to be paid in December. Bank balance in October is 35,000.