Budgeting &
Budgetary Control
Module 6
Budgets
• Budgets are business plans that are stated in quantitative
terms and are usually based on estimations.
• These plans aid an organization in the successful execution of
strategies.
• Budgeting as a control tool, provides an action plan for the
organization to ensure least deviations
Learning Experience
• Managers should participate in the budgeting process to ensure
consistency in the overall adherence to corporate goals.
• Budgeting helps mangers to enhance their learning experience.
• Learning takes place as they plan and later, compare actuals
with plans.
• Investigating the reasons for deviations, further adds to their
learning experience
Importance of Budgets
• Budgets are used to give an overview of the organization and
its operations.
• They are useful in resource allocation whereby resources are
allocated in such a way that the processes which are
expected to give the highest returns are given priority.
• Budgets are also used as forecast tools and make the
organization better prepared to adapt to changes in the
environment
Importance of Budgets
• Budget preparation requires the participation of managers
from different functions / departments.
• This helps in integrating the tactical and operational strategies
of the departments with the corporate strategy of the
organization.
• Budgets act as a means to verify the progress of the various
activities undertaken to achieve the planned objectives.
• The verification is done by comparing the actuals against
standards
Importance of Budgets
• They help in the delegation of authority and allocation of
responsibility and accountability to more people in an
organization.
• They thus promote division of labor, which , in turn, promotes
the process of specialization.
• Functional specialization leads to the overall efficiency of the
organization
Steps in Budget Formulation
• Creating a budget department or appointing a budget controller
• Developing guidelines for budget preparation
• Determining the budget period and key budgets factors
• Developing budget proposals at department/business unit level
• Developing the budget for the entire organization
• Budget review and approval
• Monitoring progress and revising the budgets
Meaning of Budgetary Control
• The term “budgetary control” is defined as the establishment
of budgets, relating the responsibilities of executives to the
requirements of a policy and the continuous comparison of
actual with budgeted results.
BUDGET TYPES
• Functional
1. Sales or marketing
1. Sales
2. Selling overhead cost budget
3. Advertisement budget
2. Production
1. Costs
2. Purchase
3. Personnel
4. Finance or Cash Budget
• Master Budget
Sales Budget…
• It is a forecast of total sales expressed in
terms of quantity or money.
• Sales quantity may be forecasted after
taking into the following factors.
– Analysis of past trend
– Reports by salesmen
– Market research and market survey
– General economic conditions
Sales Budget
• Selling price at which products of the
company can be sold may depend upon
various factors viz. the following:
– Cost price of the product
– Selling price charged by the competitors
– Expected amount of profits
– Advertisement and other sales promotion
efforts carried out by the company
Production budget
1. Production budget in terms of quantity
2. Production budget in terms of money
3. The production cost budget which is further
classified under:
1. Direct material cost,
2. Direct labor cost and
3. Overheads cost.
Purchases Budget
• It is a forecast of quantity and value of materials, direct or
indirect, which are required to be purchased during the
budget period. It is closely connected with the production
budget.
• Factors considered before setting the purchases budget:
1. Orders already placed for the purchases of materials
2. Material already purchased but reserved for some specific
purposes
3. Opening and closing stocks
4. Storing facilities and economic order quantity
5. Availability of funds
6. Prices of materials
3. Personnel Budget
• This functional budget indicates the requirement of personnel
or labour force, either direct or indirect, to confirm to the sales
forecast and the production budget.
• The labour requirement may be decided in terms of number
and grade of workers, number of labour hours, rupee value
etc.
• Consideration of overtime working or shift working is also
required to be made.
• This budget may also indicate the training plans for new
workers.
4. Finance
• The most important budget prepared under this functional area
is the cash budget.
• Cash budget is an estimate of the expected cash receipts and
cash payments during the budget period.
• It is possible to predict whether at any point of time, there is
likely to be excess or shortage of cash.
• If the shortage of cash is estimated, it may be required to
arrange the cash from some other source.
• If the excess is estimated, it may be possible to explore more
investment opportunities.
5. Miscellaneous Budgets
• Overheads cost budget
– It indicates various types of overheads to be incurred during the
budget period.
• Capital expenditure budget
– It is the plan of proposed investment in the fixed assets. It is
closely related to the sales budget, production budget and cash
budget. As such, capital expenditure budget should be properly
coordinated with other functional budgets.
6. Master Budget
• The master budget is prepared by incorporating all the
functional budgets. The ultimate incorporation of all the
functional budgets takes the form of budgeted profit and loss
account and the budgeted balance sheet.
• It may involve the presentation of current year’s budgeted
figures as well as those of the previous year showing clearly
the reasons for change.
Components of Master Budget
• Usually a master budget of manufacturing companies is made up of
the following components:
1. Sales budget
2. Production budget
3. Purchases budget
4. Wages budget
5. Cost of goods sold budget
6. Administrative expenses budget
7. Selling and distribution expenses budget
8. Cost of sales budget
9. Profit and loss budget
10. Budgeted balance sheet
11. Cash budget
