Budget, Budgeting & Budgetary

Control
Dr. Rabindra Kumar Swain
P.G. Department of Commerce
Utkal University
 Budget
• According to CIMA (Chartered Institute of
Management Accountants) UK, a budget is
“A plan quantified in monetary terms prepared
and approved prior to a defined period of time,
usually showing planned income to be
generated and, expenditure to be incurred
during the period and the capital to be
employed to attain a given objective”.
 Features of Budget
• It is mainly a forecasting and controlling device.
• It is prepared in advance before the actual
operation of the company or project.
• It is in connection with definite future period.
• Before implementation, it is to be approved by
the management.
• It also shows capital to be employed during the
period.
 Budgetary Control
• Budgetary Control is a method of managing costs
through preparation of budgets. Budgeting is thus
only a part of the budgetary control.
• According to CIMA, “Budgetary control is the
establishment of budgets relating to the
responsibilities of executives of a policy and the
continuous comparison of the actual with the
budgeted results, either to secure by individual
action, the objective of the policy or to provide a
basis for its revision.”
• Estimation of Budget 100 exp
• Measurement of Actual figure 120 exp
• Comparison between budget and actual 100
vs 120
• Deviations identified (20) unfavorable
• Corrective measures taken to ensure that
there is less or no deviation
 Features of Budgetary Control
• 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.
Classification of Budget
 SALES BUDGET
The factor to be consider in forecasting sales are as
follows:
• Study of past sales to determine trends in the market.
• Estimates made by salesman various markets of
company products.
• Changes of business policy and method.
• Government policy, controls, rules and Guidelines etc.
• Potential market and availability of material and
supply.
 Sales budget
• Production = sales(200units) + closing
stock(50 units) – opening stock(20Units)
=250-20=230 units to be produced
• Sales to be made = production + opening
stock – closing stock
= 230 +20-50= 200 units
Sales Budget
 Sales budget
Particulars Det Bright Hans
ails
Dept 1 Dept II Dept III Dept I Dept II Dept III
As per past
performance
Sales 3,00,000 5,62,500 1,80,000 4,00,000 6,00,000 20,000

1,75,000 50,000
Increase of
sales
Rise by 20% 1,12,500 1,20,000
Estimated
sale for the
future 3,00,000 6,75,000 1,80,000 5,75,000 7,20,000 70,000
 Sales Budget for the year 2023-24
• Product A Product B
• Sales (Last year) 10,000 20,000
• Add increase 20% 2,000 decrease 10% 2,000
•
------------------------------------------ estimated
sales A 12,000 B
18,000= 16,000, negative Variance -2,000
• Actual sales product A = 13,500
• Positive variance = 13,500-12,000= 1,500
 PRODUCTION BUDGET
• Usually, the production budget is based on the sales budget.
• At the time of preparing the budget, the production manager
will consider the physical facilities like plant, power, factory
space, materials and labour, available for the period.
• Production budget envisages the production program for
achieving the sales target.
• The budget may be expressed in terms of quantities or
money or both. Production may be computed as follows:
Units to be produced = Desired closing stock of finished goods
+ Budgeted sales – Beginning stock of finished goods
 Production budget
• Units to be produced =
Desired closing stock of finished goods + Budgeted
sales – Beginning stock of finished goods
Example-
Co wants to maintain 10,000 units as closing stock
Estimated sales = 1,24,000 units
Opening stock = 5,000 units
No of units to be produced= 10,000 + 1,24,000-
5,000= 1,29,000 units
 Production Budget
• Closing inventory xxx
• Add estimated sales xxx
• -----------
• xxx
• Less opening stock xxx
• ---------
• Units to be produced xxx
• Closing stock = 10,000 units to maintain
• Sales= 30,000 units
• Opening stock = 5000 units
• Units to be produced= 30,000 + 10,000-
5,000=35,000 units
• Expected slaes = units to be produced +
opening stock – closing stock
• = 35,000 + 5,000 -10,000= 30,000
 RAW‐MATERIAL BUDGET
This budget shows the estimated quantity of all the raw
materials and components needed for production demanded
by the production budget. Raw material serves the following
purposes:
• It supports the purchasing department in scheduling the
purchases.
• Requirement of raw‐materials is decided on the basis of
production budget.
• It provides data for raw material control.
• Helps in deciding terms and conditions of purchase like
credit purchase, cash purchase, payment period etc.
 Raw material Budget
• Sales =100 units
• Closing stock= 30 units
• Opening stock= 20 units
• Raw materials consumed per unit is 5kg @ 2/- per kg
• Prepare Raw materials Budget
Production Budget = estimated sales+ closing Stock – opening
stock
= 100 +30-20= 110 units
Raw materials required to produce 110 units = 110 x 5= 550 kgs
Cost of raw materials = 550 x 2= 1100/-
• Closing finished goods = 1,000 units
• Estimated sale of finished goods=8,000 units
• Opening finished goods = 500 units
• Each unit of finished goods require 3kg of raw
materials
• Rate per kg of raw material = 4/-
• Per unit of finished goods 2hours labour is required
• Rate per hour= 3.50/-
• Prepare raw material budget
 Production budget
Closing finished goods ----------------1,000
Add estimated sales --------------8,000
9,000
Less opening finished goods 500
Units to be produced 8,500units
 Raw material Budget
• One unit of finished goods need 3 kg of raw
material
• For 8,500 units Raw material = 8,500 x 3=
25, 500Kg
Cost of raw material= 25,500 x4= 1,02,000/-
 Labour Budget
• Total hours required = 8,500 x 2= 17,000hrs
• Rate per hr = 3.50/
• Total labour cost= 17,000 x 3.5= 59,500
 PURCHASE BUDGET
• Strategic planning of purchases offers one of
the most important areas of reduction cost in
many concerns.
• This will consist of direct and indirect material
and services.
• The purchasing budget may be expressed in
terms of quantity or money.
• The main purposes of this budget are:
 Contd.
 It designates cash requirement in respect of
purchase to be made during budget period;
and
 It is facilitates the purchasing department to
plan its operations in time in respect of
purchases so that long term forward contract
may be organized
 LABOUR BUDGET
• Human resources are highly expensive item in the
operation of an enterprise. Hence, like other factors of
production, the management should find out in advance
personnel requirements for various jobs in the enterprise.
• This budget may be classified into labour requirement
budget and labour recruitment budget.
• The labour necessities in the various job categories such
as unskilled, semi‐skilled and supervisory are determined
with the help of all the head of the departments.
• The labour employment is made keeping in view the
requirement of the job and its qualifications, the degree of
skill and experience required and the rate of pay.
PRODUCTION OVERHEAD BUDGET
The production overhead budget represents the
estimate of all the production overhead i.e.
fixed, variable, semi‐variable to be incurred
during the budget period.
Production Budget
• Production overhead budget
• Administrative overhead budget
• Selling overhead budget
• Distribution overhead budget
 10,000units 15,000units
Production 60,000/ 80,000/
overhead

Fixed 20,000 20,000

Variable 40,000 60,000
 ADMINISTRATION COST BUDGET
 This budget includes the administrative costs for
non‐manufacturing business activities like
director’s fees, managing directors’ salaries, office
lightings, heating and air condition etc.
 Most of these expenses are fixed so they should not
be too difficult to forecast. There are semi‐variable
expenses which get affected by the expected rise or
fall in cost which should be taken into account.
 Generally, this budget is prepared in the form of
fixed budget.
SELLING AND DISTRIBUTION COST BUDGET

• The Selling and Distribution Cost budget is

estimating of the cost of selling, advertising,
delivery of goods to customers etc.
throughout the budget period.
• This budget is closely associated to sales
budget in the logic that sales forecasts
significantly influence the forecasts of these
expenses
 CAPITAL‐ EXPENDITURE BUDGET
• This budget stands for the expenditure on all
fixed assets for the duration of the budget
period.
• This budget is normally prepared for a longer
period than the other functional budgets.
• It includes such items as new buildings, land,
machinery and intangible items like patents,
etc.
 Contd.
• At the time of preparation of the budget some
important information should be observed:
 Overfilling on the production facilities of
certain departments as revealed by the plant
utilization budget.
 Long‐term business policy with regard to
technical developments.
 Potential demand for certain products.
Overhead Budget
Factory overhead Budget for 1,40,000units
Particulars Details 1,40,000 units
Indirect material 1,40,000 x 2.2 3,08,000
Fixed NIL
Vc per unit 330000-264000/ 150000-
120000= 2.2
120000x 2.2 =264000
Indirect labour 140,000 x 1.25 1,75,000
VC per unit= 1,87, 500-1,50,000/
150,000-120,000=1.25
1,20,000 x 1.25
Fixed cost NIL
Maintenance 12,000
Fixed84000-72000
VC per unit 1,02,000-84,000/ 30,000
=0.60 1,40,000 x0.6 84,000
1,20,000 x 0.6=72,000
Supervision 54,000
Fixed 1,98,000-1,44,000=
vC 36,000/30,000= 1.2
1,20,000 x 1.2=1,44,000 1,40,000 x 1.2 1,68000
• Administrative overhead at 10,000 units= 60,000/-
• Adm Overhead at 15,000 units= 85,000/-
• 15,000 x 5= 75,000/- VC

• Adm overhead st 20,000 units=10,000+ 20,000x

5=1,10,000
VC per unit= 25,000/5,000= 5 /-
10,000 x 5= 50,000
Fixed cost =10,000
 CASH BUDGET
• The cash budget is a sketch of the business
estimated cash inflows and outflows over a
specific period of time.
• Cash budget is one of the most important and
one of the last to be prepared.
• It is a detailed projection of cash receipts
from all sources and cash payments for all
purposes and the resultants cash balance
during the budget.
 Function of Cash Budget
• It makes sure that enough cash is available when it
is required.
• It designates cash excesses and shortages so that
steps may be taken in time to invest any excess
cash or to borrow funds to meet any shortages.
• It shows whether capital expenditure could be
financed internally.
• It provides funds for standard growth.
• It provides a sound basis to manage cash position.
Cash budget
 Cash Budget
May June July
Opening cash 25,000 7,800
Cash from sales 56,800
20% of 60,000+
80% of 56,000
Total 81,800
purchase 30,000
wages 6500
Factory 5500
office 4000
selling 3000
Dividend 10000
bonus 15000
74,000

Closing balance 7,800

 FIXED BUDGET
• A fixed budget is prepared for one level of output
and one set of condition.
• This is a budget in which targets are tightly fixed.
• It is firm and prepared with the assumption that
there will be no change in the budgeted level of
motion.
• Thus, it does not provide room for any modification
in expenditure due to the change in the projected
conditions and activity.
• Fixed budgets are prepared well in advance.
 FLEXIBLE BUDGET
• This is a dynamic budget. In comparison with a
fixed budget, a flexible budget is one “which is
designed to change in relation to the level of
activity attained.”
• It is more sensible and practical, because changes
expected at different levels of activity are given
due consideration.
• Thus a budget might be prepared for various levels
of activity in accordance with capacity utilization.
Fixed Budget
Flexible Budget
 Full capacity= 1,000units
Fixed cost per unit 4/- at 40% capacity
50%(500Units 60%(600Units
DM 5/- 2500 3,000
DL 3/- 1,500 1,800
DE 2/- 1,000 1,200
------ -------
Prime cost 5,000 6,000
Variable ov 2,000 2,400
Marginal c 7,000 8,400
Sales 12,000 15,000
C(S_V) 5,000 6,600
FC 2,400 2,400
 Zero Base Budgeting
• It starts with a presumption that the budget
for the next period is ‘zero’ until the demand
for a function, process, or project is not
justified for single penny.
• The assumption is that without such
justification, no expenditure will be allowed.
In effect, each manager or functional head is
required to carry out cost‐benefit analysis of
each of the activities, etc. under his control
and for which he is responsible.
 Contd.
• ZBB is a planning, resource allocation and control
tool. It, however, presupposes that
(a) There is an efficient budgeting system within the
enterprise.
(b) Managers can develop quantitative measures for
use in performance evaluation.
(c) Among the new suggestions and programs, along
with old ones are put to a strict scrutiny.
(d) Funds are diverted from low‐priority suggestions
to high priority suggestions.
 Contd.
• This method for the first time was used by the
Department of Agriculture, U.S.A. in the 19th
century.
• Other State Governments of the U.S.A. found this
method helpful and so almost all the states took
deep interest in the ZBB method.
• A number of states of America use this technique
even today.
• In India, however, the ZBB approach has not been
fully accepted and actualized.
 Master Budget
• Composition of
 Operating budget (production, sales, purchase
etc. and
 Financial Budget- cash budget, balance sheet
budget, funds flow budget
Master Budget