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. Budgets In businesses management plans In governments management plans AND laws Control the activities authorized to carry out plans Prepare statement that permit comparison of actual results with budget and evaluation of variances 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 Purpose of Budgetary Control : 1.Planning 2.Co-ordination 3.Communication 4.Motivation 5.Control 6.Performance evaluation Advantages of Budgetary Control : 1.Maximisation of Profit 2.Co-ordination 3.Specific Aims 4.Tool for Measuring Performance 5.Economy 6.Determining Weaknesses 7.Corrective Action 8.Consciousness 9.Reduces Costs 10.Introduction of Incentive Schemes Budget Manual 1.It clearly defines the objectives of budgetary control system. 2.The duties and responsibilities of various persons dealing with preparation and execution of budgets are also given in a budget manual. 3.It gives information about the sanctioning authorities of various budgets. 4.A proper table for budgets including the sending of performance reports is drawn. 5.Budget centres involved should be clearly stated. 6.The length of various budget periods and control points be clearly given.

7.The procedure to be followed in the entire system should be clearly stated. 8.A method of accounting to be used for various expenditures. Requisites for a successful budgetary control system : 1.Clarifying objectives 2.Proper Delegation of Authority and Responsibility. 3.Proper Communication System 4.Budget Education 5.Participation of All Employees 6.Flexibility 7.Motivation Classification of budgets according to time function flexibility Long term budget 1. Sales budget 2. Fixed budget Short term budget 1. Production budget 2. Flexible budget 1. Current budget 2. Rolling budget 3. Cost of Production budget 4. Purchase budget 5. Personnel budget 6. R & D budget 7. Capital Expenditure budget 8. Cash budget 9. Master budget 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. PRODUCTION BUDGET: Production budget involves planning the level of production which in turn involves the answer to the following questions: What is to be produced? When is it to be produced? How is it to be produced? Where is it to be produced? 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 PURCHASE BUDGET:This budget provides information about the materials to be acquired from the market during the budget period

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 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. CAPITAL EXPENDITURE BUDGET: T his 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 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. 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. 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. 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. Comparison of Different Budget Types Fixed Appropriations are for specific dollar amounts of expenditures / expenses Appropriated amount may not be exceeded Limit flexibility of Chief Executive Flexible Typically fixed per unit of goods or services but vary in total based on demand for goods or services More appropriate for Proprietary Funds but rarely used PERFORMANCE BUDGETING: These days budgets are established in such a way so that each item of expenditure is related to specific responsibility centre and is closely linked with the performance of that standard 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?

Important features of Zero-base budgeting 1.Concentration of efforts is not simply of how much a unit will spend but why it needs to spend 2.Choices are made on the basis of what each unit can offer for a specific cost. 3.Individual unit objects are linked to corporate targets. 4.Quick budget adjustments can be made if, during the operating year costs are required to maintain expenditure level. 5.Alternative ways are considered. 6.Participation off all levels in decision making. Advantages All programs face annual review Concentrate attention on costs & benefits of services Improves decision-making Limitations Much paperwork and lengthy process Can be difficult to get data Annual review of programs costly and time-consuming Limitations : 1.Uncertain Future 2.Budgetary Revisions Required 3.Discourages Efficient Persons 4.Problem of Co-ordination 5.Conflict among Different Departments 6.Depends upon Support of Top Management.