BUDGETING

SOWMIYA.D
SIVA SANKAR .N. V
SIVA KUMAR
SHALINI
SENTHIL KUMAR
Sathya Narayanan
 BUDGET
 A plan expressed in quantitative and money
terms.
 Income, expenditure, and capital to be
employed.
 Entire organization, department, sales
territory, division, or for a significant activity.
 Can include non monetary as well as
monetary information in it.
 THE CA INSTITUTE OF LONDON

• BUDGET is a financial and / or quantitative

statement , prepared prior to a defined period
of time , of the policy to be pursued during
that period for the purpose of attaining a
given objective .
 PURPOSE OF BUDGET
• Provide a forecast of revenues and
expenditures i.e. construct a model of how
our business might perform financially
speaking if certain strategies, events and plans
are carried out.
• Enable the actual financial operation of the
business to be measured against the forecast.
 ESSENTIALS OF BUDGET
• It is prepared in advance and is based on a
future plan of action.
• It relates to a future period and is based on
objectives to be attained.
• It is a statement expressed in monetary
and/or physical units prepared for the
implementation of policy formulated by the
management.
 PROCEDURE of budgets
• Determination of the key factor .
• Making of forecasts.
• Consideration of alternative combinations of
forecast.
• Preparation of budgets.
 BUDGETARY CONTROL
• Budgetary control is defined as “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
objective of that policy or to provide a basis for its
revision”.
• The difference between budgets, budgeting and
budgetary control has been stated as
“ Budgets are the individual objectives of a
department whereas budgeting may be said to
be the act of building budgets.
• Budgetary control embraces all and in
addition includes the science of planning the
budgets themselves and the utilization of such
budgets to effect an overall management tool
for the business planning and control”.
• It involves the following :
– Establishment of budgets
– Continuous comparison of actuals with budgets for
achievement of targets and placing the responsibility for
failure to achieve the budget figures.
– Revision of budgets in the light of changed
circumstances.
BUdGETING RESPONSIBILITY
• BUDGET CONTROLLER:
CFO Is the responsible for the overall
budgeting to reduce his responsibilities a special
officer called budget controller /budget director
is appointed in a company.
BUDGET COMMITTEE:
It consists of managers of various department
such as sales , finance, production , marketing etc
with budget controller as its chairman.
 ROLE OF BUDGET
COMMITTEE

• The budget controller has the technical

knowledge of the business and he reports the
budget to the president or the CEO.

• It is the duty of the committee to submit ,

discuss, and finally approve the budget
figures.
 CLASSIFICATION

• According to time.
• According to function.
• According to flexibility.
 Classification according to time.
• Long - term budgets:
Budget designed for a long period(5 to 10
years).they are concerned with operations
planning over a long period of time.
• Short - term budgets:
Budget designed for a short period (less than 5
years ). It is prepared in terms of physical as
monetary units.
• Current budgets:
These budget cover a very short period usually
a month or quarter. They are essentially short
term budget adjust to current conditions .

• Rolling budgets:
It is also known as progressive budget there
will always be a budget for a year in advance
 Classification according to function
• Operation budget:
sales budget
Production budget
Cost budget
• Financial budgeting:
Cash budget
Capital expenditure budget
• Sales budget – the budget forecasts total
sales in term of quantity, value, items,
periods, areas ,etc.
• Production budget – the budget is based on
sales budget . It forecast quantity of
production in terms of items, periods, areas
,etc.
• Cost budget – it concerns about all the relevant
cost involved in a firm such as production cost, R
&D cost administration cost , selling and
distribution cost etc.
• Cash budget – the budget is a forecast of the
cash position by time period for a specific
duration of time . It states the estimated
amounts of cash receipts and cash payments and
the likely balance of cash in hand at the end of
different periods.
• Capital expenditure budget – the budget
provides a guideline regarding the amount of
capital that may be required for procurement
of capital assets during the budget period .
 Classification according to flexibility

• Fixed budget
budget prepared in basis of a standard or a
fixed level of activity . It does not change with
the change in the level of activity .
• Flexible budget
a budget designed in a manner so as to give
the budgeted cost of any level of activity is
termed as a flexible budget.
 TRADITIONAL
BUDGETING
• The traditional method to prepare budget is to
take current level of operations as the basis of
estimating the future level of operations.
• This type of budgeting process generally takes
into account that allocations of financial resources
in the past were correct and will continue to hold
good for the future as well.
• In most cases, an addition is made to the current
figures to allow for increase in cost.
• As a result, the business budgets generally take an
upward direction from year to year in spite of
declining efficiency.
• Limitations of Traditional budgeting :

– The inefficiencies of a prior year are carried forward in

determining subsequent years levels of performance.
– Managers tend to inflate their budget requests resulting
in more demand for funds than their availability. This
results in recycling the entire budgeting process.
– Key problems and decision areas are not highlighted.
Thus, no priorities are established throughout the
organization.
– Decision making is irrational in the absence of
rigorous analysis of all proposed costs and benefits.
 Recent trends in budgeting

• Performance budgeting.
• Zero based budgeting.
• Responsibility accounting.
• Control ratio.
 PERFORMANCE BUDGETING
• Performance budgeting is “the process of
analyzing, identifying, simplifying and
crystallizing specific performance objectives of a
job to be achieved over a period in the framework
of the organizational objectives, the purpose and
objectives of the job”.
• It requires preparation of performance reports.
Such reports compare budget and actual data and
show any existing variances.
• The responsibility for preparing the performance
budget of each department lies on the respective
departmental head.
Steps for system of performance budgeting :
Establishment of well defined responsibility centres or
action points where operations are performed and
financial transaction in terms of money take place.
Establishment of each responsibility centre and a
programme of expected performance in physical units of
that centre.
To forecast the amount of expenditure under the various
classification heads to meet the physical plan. Then the
procedure of budgeting could follow the usual routine.
Evaluation performance is done under two stages :
The actual performance is compared with the physical
target in order to determine the extent of deviation and
adjusting the original rupee budget into a budget
allowance for the actual physical work performed.
The actual expenditure is compared with the adjusted
budget to determine the monetary variances.
• Advantages of performance budgeting :
– Performance budgeting presents clearly the
purposes and objectives for which funds are
required.

– It gives better appreciation of budgeting by

legislature.

– It improves budget formulation process.

– It enhances accountability of the executives.

 ZERO BASE BUDGETING
• Zero-base budgeting is “a method of budgeting
whereby all activities are revaluated each time a
budget is set. Discrete levels of each activity are
valued and a combination chosen to match funds
available”.
• It is not based on incremental approach and previous
year's figures are not adopted as a base.
• In ZBB, by delinking the budget from the past, the
past mistakes are not repeated.
• Steps in Zero Base Budgeting :

– Identification of decision units in order to justify

each item of expenditure in their proposed budget.
– Preparation of decision packages.
– Ranking of decision packages based on cost
benefit analysis.
– Allotment of funds based on the above resulting by
following pyramid ranking system to ensure
optimum results.
Advantages of Zero base budgeting :
Efficient allocation of resources, as it is based on needs
and benefits.
Drives managers to find cost effective ways to improve
operations.
Useful for service departments where the output is
difficult to identify.
Increases staff motivation by providing greater
initiative and responsibility in decision-making.
Increases communication and coordination within the
organization.
Identifies and eliminates wasteful and obsolete
operations.
Forces cost centers to identify their mission and their
relationship to overall goals.
• Disadvantages of zero base budgeting :
– Difficult to define decision units and decision
packages, as it is time-consuming and exhaustive.
– Forced to justify every detail related to expenditure.
The R&D department is threatened whereas the
production department benefits.
– Necessary to train managers. Zero-based budgeting
must be clearly understood by managers at various
levels to be successfully implemented.
– Difficult to administer and communicate the budgeting
because more managers are involved in the process.
– Honesty of the managers must be reliable and uniform.
 Control ratio
• The control ratios are used by the
management to find out whether the
deviations of actual from budgeted results are
favourable or otherwise.
• The ratios used are activity ratio , capacity
ratio and efficiency ratio .
• If the ratios are 100% or more the trend is
taken as favourable and if it is less it is taken
as unfavourable.
 Responsibility accounting
• Responsibility accounting is a type if
management accounting that collects and
reports both planned and actual accounting
information in terms of responsibilities.

• It is the system of control by delegating and

locating the responsibility for cost
 conclusion

Budgeting is very essential for the smooth

running of management for controlling cost
and maximizing profit .