BUDGETS AND By Dr.

Aleem Ansari
BUDGETARY CONTROL
MEANING: BUDGET
- Budget refers to a plan relating to a definite future period of time expressed in monetary and
quantitative terms.
- In relation to business, a budget is a formal expression of the expected incomes and expenditure
for a definite future period.
- Characteristics-
1. A budget is primarily a planning device but it also serves as a basis for performance evaluation
and control.
2. A budget is prepared either in money terms or in quantitative terms or in both.
3. A budget is prepared for a definite future period.
4. Purpose of a budget is to implement the policies formulated by management for attaining the
given objectives.
 MEANING: BUDGETARY
CONTROL
• The act of preparing budgets is called budgeting. Basically, the entire process of preparing the budgets
is known as budgeting.
•Budgetary control is a system of controlling costs through preparation of budgets.
•Budgeting is thus only a part of budgetary control.
•A process of control requires the following steps:
1. Establishment of standards/targets/budgets for a future period.
2. Measurement of actuals for the period.
3. Comparison of standard or budgetary figures with the actual figures and finding out the deviations.
4. Analyzing the reasons for such deviations.
5. Fixation of responsibility and taking corrective action for adverse performance.
6. The corrective action may involve the revisions of standards or budgets.
OBJECTIVES OF BUDGETARY
CONTROL
1. To plan future activities.

2. To help in coordination of various activities.

3. To act as communication device.

4. To act as a tool of control.

5. To help in fixation of responsibility and prompt corrective action.

6. A basis for performance evaluation.

ADVANTAGES OF BUDGETARY
CONTROL
Evaluation of
Maximisatio Effective
Executive
n of Profits Coordination
Performance

Clear-Cut Correction of
Goals and Performance
Targets Continuously
LIMITATIONS OF BUDGETARY
CONTROL
Conflict among Different
Departments

Prediction of Uncertain Future

Changes of Conditions
CLASSIFICATIONS OF BUDGETS
AND THEIR PREPARATION
CASH BUDGET
•A cash budget is a budget or plan of expected cash receipts and payments during the period.
•These cash inflows and outflows include revenues collected, expenses paid, and loans receipts
and payments.
• In other words, a cash budget is an estimated projection of the company’s cash position in the
future.
•Management usually develops the cash budget after the sales, purchases, and capital
expenditures budgets are already made.
•These budgets need to be made before the cash budget in order to accurately estimate how cash
will be affected during the period.
•For example, management needs to know a sales estimate before it can predict how much cash
will be collected during the period.
FIXED BUDGET
•A fixed budget is one which is prepared keeping in mind one level of output.
•It is defined as a budget “which is designed to remain unchanged irrespective of the level of
activity attained.”
•Fixed budget is prepared on the assumption that output and sales can be estimated with a fair
degree of accuracy.
•This means that in those situation where sales and output cannot be accurately estimated,
fixed budget does not suit.
 FLEXIBLE BUDGET
•Flexible budget is one “which is designed to change in relation to the level of activity
attained”.
•Flexible budget is of little use unless cost and revenues are related to the actual volume of
production.
•Flexible budgeting has been developed with the objective of changing the budget figures
to correspond with the actual output achieved.
•Thus a budge might be prepared for various level of activity say, 70%, 80%, 90% and
100% capacity utilization.
WHY USE FLEXIBLE BUDGET?

Good for an Irregular Income

Adapts to Current Needs

Creates Spending Awareness

DISTINCTION BETWEEN FIXED
AND FLEXIBLE BUDGET
Basis Fixed Budget Flexible Budget
Meaning The budget designed to remain constant, The budget designed to change
regardless of the activity level reached is with the change in the activity
Fixed Budget. levels is Flexible Budget.
Nature Static Dynamic
Activity Level Only one Multiple
Performance Comparison between actual and budgeted It provides a good base for
Evaluation levels cannot be done accurately, if there making a comparison between
is a distinction in their activity levels. the actual and budgeted levels
Rigidity Fixed Budget cannot be modified as per Flexible budget can be easily
the actual volume. modified in accordance with
the activity level attained.
Estimates Based on assumption. Realistic and Practical
QUESTION 1
SOLUTION 1
QUESTION 2
S O L U T I O N 2
QUESTION 3
SOLUTION 3
QUESTION 1
SOLUTION
QUESTION 2
SOLUTION 2
QUESTION 3
SOLUTION 3
 QUESTION 4
Question 5:

Chandu Ltd. is currently working at its 60% capacity and produces 24,000 units. The unit cost and selling price for the
same level are as follows:
Particulars Per Unit (Rs.) 60%
Material 120
Labour 90

Factory Overhead (80% variable) 60

Administrative overhead (75% fixed) 40
Selling and distribution overhead (50% variable) 30
Total cost per unit 340
Selling price per unit 500

You are required to prepare a flexible budget and estimate the profit of the company when it works at 80% and 100%
capacities. It is believed that at 80% capacity raw material cost increases by 3% and selling price falls by 3% whereas at
100% capacity raw material cost increases by 5% and selling price falls by 10%.
 SOLUTION 4
SP 500 485 450
Particulars 60% (24,000 units) 80% (32,000 units) 100% (40,000 units)
Total Revenue 1,20,00,000 1,55,20,000 1,80,00,000
Total Cost:
Variable Costs:
Material per unit 120 123.6 126
Material 28,80,000 39,55,000 50,40,000
Labor 21,60,000 28,80,000 36,00,000
Semi- Variable Costs:
Factory Overhead
Fixed (20%) 2,88,000 2,88,000 2,88,000

Variable (80%) 11,52,000 15,36,000 19,20,000

Adminstrative Overheads
Fixed (75%) 7,20,000 7,20,000 7,20,000
Variable (25%) 2,40,000 3,20,000 4,00,000
Selling and Distribution overhead
Fixed (50%) 3,60,000 3,60,000 3,60,000
Variable (50%) 3,60,000 4,80,000 6,00,000
Total Cost 81,60,000 1,05,39,000 1,29,28,000
Profit 38,40,000 49,81,000 50,72,000