Budget & Budgetary Control

Budget is an estimate prepared for definite future period either in terms of financial or non financial terms.

1. BUDGET  Budget is an estimate prepared for definite future period either in terms of financial or non financial terms. Budget is prepared for any course of action or business or state or Nation, as a whole. The budget is usually expressed in terms of total volume . According to ICMA, England, a budget is as follows "a financial and or quantitative statements prepared and approved prior to a defined period of time, of the policy to be pursed during the period for the purpose of attaining a given objective

2. FORECAST VS BUDGETS Forecasts are concerned with expected events Forecasting is done for a long duration Results of forecasting is plaing Forecasting does not act as a tool of measurement Budgets are concerned with planed events Budgets are for a shorter or specific duration Result of planning is budgeting Budgets are the targets against which actual are compared.

3. TYPES OF BUDGET

4. CLASSIFICATION ACCORDING TO TIME 1. Long-Term Budget: Long-term budgets are prepared for a period exceeding one year. They are only forward looking plans. They act as a guidelines for preparing short term budgets. 2. Short-Term Budget: A budget prepared for a period less than a year is called short-term budget. Short term budgets are prepared for actual implementation and it has a practical value. 3.Current Budget: A budget prepared for a short time is called a current budget. It is meant for actual implementation. Conditions prevailing at the present are the basis for preparing these budgets.

5. CLASSIFICATION BASED ON FLEXIBILITY 1. Fixed Budget - According to CIMA, London – “A fixed budget is a budget designed to remain unchanged irrespective of the level of activity actually attained.” Thus, a budget which is prepared on the basis of standard or fixed level of activity is known as fixed budget. 2. Flexible Budget  - According to CIMA, London- “A flexible budget is a budget designed to change with the level of activity actually attained.” E.g. – Budget was prepared for 60% production capacity but in actual 50% or 70% production capacity was used.

6. ON THE BASIS OF FUNCTIONS Functional Budgets: Functional budgets are the budgets prepared for various activities of a firm. Sales Budget: The sales budget is a statement of planned sales in quantity and value both. In sales budget, sale is forecasted during the budget period. The sales manager is responsible for preparation of this budget. Purchase Budget: This budget is prepared for every purchase item to be purchased in each department. The purchase manager is entrusted with the responsibility of making this budget. This budget enables the purchase department to make bulk purchases.

7. Production Budget: The production budget is prepared for making a plan of production e.g., quantity of production, cost of production, type of products, plant capacity, operating cycle, availability of inputs, make or buy policy etc., during the budgeted period. Cash Budget: Cash Budget forecasts both the inflow and outflow of cash during the Budget Period  Three important methods are available for preparing the Cash Budgets. They are: i . Receipts and Payments Method - ii. Adjusted Profit and Loss Account Method, and iii. Balance Sheet Method.

8. OVERHEAD BUDGET i . Production Overhead Expenses Budget – It shows the amount of production overhead expenses expected to be incurred to produce the budget output. ii. Administrative Overhead Expenses Budget – It shows the probable expenses pertaining to top managerial and supervisory functions. iii. Selling and Distribution Overhead Expenses Budget – It presents the information in detail about the probable expenditure to be incurred to promote the sale of goods and services, and for distribution.

9. iv. Research and Development Cost Budget – This Budget presents the details about the limits within which the research and development activities are to be carried out during the Budget Period. v. Capital Expenditure Budget – It shows the details about the future capital expenditure programme which the company intends to undertake in future. Further, it presents information about the probable capital to be employed on the projects during the Budget Period. This Budget is normally prepared for a long period

10. Budgetary Control Budgetary control contains two different processes one is the preparation of the budget and another one is the control of the prepared budget . According to ICMA, England, a budgetary control is " the establishment of budgets relating to the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a basis for its revision".

11. OBJECTIVES OF BUDGETARY CONTROL Planning – ensures effective planning by setting up of budgets Coordination- helpful in coordination of business activities Efficiency and Economy- effective budgetary control results in cost control & cost reduction Increase in profitability – budgets helps to control cost in turn profit increases Anticipation of future capital expenditure

12. ADVANTAGES OF BUDGETARY CONTROL Maximization of profits – achieved through planning, coordination ad control of various activities Evaluation of Executive performance – through actual performance is compared with standards and deviation are reported Economy in operations – expenses are properly planned & utilized Shutting down of unprofitable products ad activities

13. LIMITATIONS OF BUDGETARY CONTROL Prediction of uncertain future Difficulty in coordination among various departments Changes of conditions frequently may frustrate the employees.

14. BUDGETARY CONTROL VS STANDARD COSTING Time frame Standards have no time frame . They caused over a long period budgets are for specific time periods beyond which they have no relevance. New budgets may be prepared thereafter Interdependence Standard costing is based on budgets during any specified period. production, sales etc are take from budgeted figures to implement standards Budgetary control can be carried on without standards . It is not dependent on standard costing

15. Basis for preparation Standards are based on technical assessments . Budgets are usually the past actual figures adjusted for future changes Approach Standards are more intensive and concentrate on each element of cost, operation, etc Budgets are extensive and are set for departments, functions, etc. Scope Standards are mainly for costs . Revenue is not the focus of standard costing Both income and expenditure form part of budgetary control.

16. Criterion Standards are the goals or targets to be attained . Actual costs are expected to conform to the standards. They must be aimed at and attained. Budgets set the maximum limits for expenses which are not expected to be exceeded . Origin Standard are purely ‘ cost oriented ’. Standard costing is a projection of cost accounts expenditure. Budgets are projections of financial accounts. Overall business efficiency both in the areas of income and is the goal of budgetary control.

17. Nature of costs used Standard costs are the norms or what cost should be under specified circumstances. Budgets are estimated costs. They are what the costs will be . Uses for forecasting Forecasting standard costs cannot be used for forecasting material required etc..because they are like goals and or what the costs will be. Budgeted figures can be used for because they are the expected costs and revenues.