Budgetary Control

What is a Budget?
A financial and / or quantitative
statement prepared and approved prior
to a defined period of time, or the policy
to be pursued during the period for the
purpose of attaining a given objective.

What is Budgetary Control?
Establishment of budgets relating to
responsibilities of executives to the
requirements of policy and the continuous
comparison of actual with budgeted results
to provide a basis for its revision.
Objectives of Budgetary Control

Planning
Communication
Coordination
Motivation
Control
Approved Plan
Objectives & advantage of
Budgetary Control
Establishment of budgets on the basis of
responsibility accounting.
Recording of actual performance, preferably
every month / week.
Continuous comparison of actual with budgeted
results.
Recording of the variances.
Ascertainment of reasons for such variances.
Taking corrective and remedial measures.
If required, revise the budgets.
Difference between Forecast & Budget
Forecasts are mere
estimates based on the
probable events.
Forecast is not used to
evaluate the
performance.
Forecasts are events
over which no control can
be exercised.
The function of
forecasting ends with the
assessment of the
probable event.
Budgets are estimates
based on planned events.
A budget is always used
for evaluating the
performance by
comparison with actual.
Budgeting connotes a
sense of control. Control
function starts with the
setting of approved
budgets.
Forecasts are converted
into budgets.
Types of Budgets
Functional Budgets
Nature of Transactions
Activity Levels
Miscellaneous Budgets
Cash Budget
Functional Budgets
Sales Budget
Production Budget
Purchase Budget
Direct Materials Budget
Direct Labour Budget
Overheads Budget
Capital Expenditure Budget
Nature of Transactions
Operating Budget
Capital Budget
Activity Levels
Fixed Budget
Flexible Budget
Flexible Vs Fixed Budget
A budget changes in
accordance with the
level of activity.

This budget has
different budgeted
costs for different
levels of activity.

It is most suited for
variable costs
A budget that remains
unchanged whatever
the level of activity.

This budget does not
provide for any
change in expenses
arising due to change
in the level of activity.

It is most suited for
fixed costs.
Flexible Vs Fixed Budget
This budget provides
a meaningful basis for
comparison and
control.

Variance Analysis will
enable mgmt. to take
appropriate actions.

Helps in fixation of
price.
This budget is simple
to prepare but
reporting to mgmt. is
less meaningful.

This budget does not
consider the variance
due to changes in the
volume.

Fixation of prices
becomes difficult if
budgeted & actual
activity varies.
Performance Budgeting
Performance budgeting involves evaluation of the performance of the
organization.In the context of both specific as well as overall objectives of
the organisation.

performance budgeting requires preparation of performance
reports.Such reports compare budget and actual data and show any
existing variances.The responsibility of preparing the performance budget
lies on the respective Department Head.

Responsibility Accounting

Responsibility Accounting is a system of control by delegating and locating
the responsibility for costs. Responsibility accounting emphasises division
of an organization among different sub units in such a way that sub unit is
the responsibility of an individual manager.
Types of Responsibility Centre:

1. Expense Centre 2. Profit Centre 3. Investment Centre


Master Budget


The Master budget is a summary of the budget schedules in capsule form made
for the Purpose of presenting in one report the highlights of the budget forecast.

According to CIMA,London The summary budget incorporating its
components functional Budgets,which is finally approved,adopted employed
















Master Budget
For the period ending..


Sales
Less: Cost of goods sold
Direct Material
Direct Labour
Variable factory Overheads
Fixed Factory Overheads

Add: Opening Stock
Less: Closing Stock

Gross Profit

Less: Administrative Overheads
Less: Selling and Distribution Overheads

Net Profit
Zero Base Budgeting
Process-
1.Development of Decision Units
2.Development of Decision Packages
3.Review and Ranking of Decision
Packages

Control Ratios
These ratios are commonly used by the management to find out wheather the
deviations of actuals from budgeted are favourale or not.If the ratio is more than
100% or more ,the trend is taken as favourable .

Activity Ratio :

Activity Ratio = Standard hours for actual Production x100
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Budgeted Hours

Capacity Ratio = Actual Hours Workedx100
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Budgeted Hours

Efficiency Ratio = Standard Hours for actual production x100
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Actual Hours Worked