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Budgeting
* INTRODUCTION
* TYPES
* METHODS

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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
• whether individual plans fit in the overall
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.”
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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. May be drawn up showing
incremental effects on former
budgeted or actual figures, or be
compiled by Zero-based budgeting.”
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 Organisation chart

CEO

Budget officer
(committee)

Production Sales Finance personnel R&D

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.
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Budget VS Forecast
 Forecast is an estimate where Budget relates
to planned events
 Forecast provides basis for budgeting
 Budget provides standards for comparison

with result actually achieved.

 CLASSIFICATION OF BUDGETS

ACCORDING TO ACCORDING TO ACCORDING TO

TIME FUNCTION FLEXIBILITY

1. Long term budget 1. Sales budget 1. Fixed budget

2. Short term budget 2. Production budget 2. Flexible
budget
3. Current budget 3. Cost of Production budget
4. Rolling budget 4. Purchase budget
5. Personnel budget
6. R & D budget
7. Capital Expenditure budget
8. Cash budget
9. Master budget

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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?

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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.

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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.
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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.
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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.

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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”.

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Fixed expenses Expenses at capacity
50%
Salaries 50000
Rent and taxes 40000
Depreciation 60000
Admin expenses 70000
Variable expenses
material 200000
Labour 250000
Others 40000
Semi variables
repairs 100000
Indirect labour 150000
others 90000
Contd
It is estimated that fixed capacity Sales
expenses will remain
constant at all
capacities ,semivariable
expenses will not change 60% 1100000
between 45% and 60%
capacity,will rise by 10%
between 60 and 75 %
capacity,further increase 70% 1300000
of 5% when capacity
crosses 75%.Estimated
sales at various levels of 90% 1500000
capacity are:
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?”

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