Budgeting: budgeting is the process of preparing these estimates . It is a technique for formulating Budgets.
Budgetary Control: Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures with the actual results for arriving at deviations if any, which are to be eliminated in future.
Characteristics of a Successful Budget:
1. Must be realistic.
2. Should be flexible.
3. Should be evaluated regularly.
4. Must be well planned and clearly communicated.
5. Should have a financial format.
6. There should be proper fixation of authority and responsibility.
7. It should have a whole hearted support of the top management
8. Good accounting System
9. Participation- All the key employees should be made involved in the preparation of the budget.
Steps for Budgetary Control:
1. Establishment of Budgets: Budgetary control primarily aims at preparation of various budgets such as sales Budget, production budget, overhead expenses budget, cash budget etc.,
2. Responsibilities of executives:The budgetary control system is designed to fix responsibilities on executives through preparation of budgets.
3. Policy making:The established policies of the organisation are designed as budgets so as to fix responsibility on executives.
4. Comparison of actuals with budgets:After establishing the budgets, the actuals are compared with them and any deviations, if any are called variances.
5. Achieving the desired result:The desired result of the budgetary control system is comparison of actuals with the budgeted results and the causes of variances, if any, are analysed.
6. Reporting to Top Management: After the causes of Variances are analysed, the variances and their causes are reported to top management so that the remedial action can be taken.
Classification of Budget :
Budgets are broadly classified based on:
1. Time
2. Nature of expenditure and receipts
3. Functions
4. Master Budget
5. Capacity
1. ON THE BASIS OF TIME
a) Long term budget: Budget prepared covering a period of more than a year.
b) Short term budget: These budgets are generally for one or two years and are in the form of monetary term.
c) Current budget: The period of current budget is generally of months and weeks. These budgets relate to the current activities of the business.
2. ON THE BASIS OF NATURE OF EXPENDITURE AND RECEIPTS
a) Capital Budget: It is a budget prepared for capital receipts and expenditure such as obtaining loans, issue of shares, purchase of assets, etc.
b) Revenue Budget: A Budget covering revenue receipts and expenses for a certain period is called Revenue Budget. Examples: Sales, other incomes, purchases, administrative expenses etc.
3. ON THE BASIS OF FUNCTIONS
Functional Budget: If budgets are prepared of a business concern for a certain period taking each and every function separately such budgets are called functional budgets.
Example: Production, Sales, purchases, cost of production, cash, materials etc.
Types of Functional Budgets
1. Sales Budget: The sales budget is a forecast of total sales, expressed in terms of money or quantity or both.
2. Production Budget: The production budget is a forecast of the production for the budget period.
3. Materials Budget: The material budget includes quantities of direct materials; the quantities of each raw material needed for each finished product in the budget period is specified. The input data for this budget is obtained by applying standard material usage rates by each type of material to the volume of output budgeted.
4. Purchase Budget: The purchase budget establishes the quantity and value of the various items of materials to be purchased for delivery at specified points of time during the budget period taking into account the production schedule of the concern and the inventory requirements.
5. Cash Budget: Cash Budget is estimated receipts and expenses for a definite period, which usually are cash sales, collection from debtors and other receipts and expenses and payment to suppliers, payment of wages, payment of other expenses etc.
6. Direct Labour Budget or Personnel Budget: This budget is based on:
(a) Production Budget,
(b) Sales Budget,
(c) Capital expenses Budget,
(d) Research and Development cost Budget,
(e)Possibility of new wage agreements. The main purposes of this budget are to:
(1) help in the efficient labour management,
(2) show the planned outlay on direct and indirect wages.
7. Selling and Distribution Cost Budget: This budget is based on:
(a) Sales budget,
(b) Selling and Distribution cost budget for the current period,
(c) Actual selling and distribution costs for the current period,
(d) Expected changes in the rate of commission on sales, method of distribution, advertisement policy, etc.
8. Administration Cost Budget: This budget shows the total estimated cost of administration.
9. Research and Development Budget : It is a planned outlay on R & D activities of a company. The budget covers materials, equipments and supplies, salaries, expenses, and other costs relating to design, development, and technical research projects.
4. MASTER BUDGET:Once all the functional budgets are created, then the master budget is prepared. It is an integrated budget that reflects the estimated profit and loss and financial position using Budgeted Profit & Loss Account and Budgeted Balance Sheet of the concern. Master budget, also known as summary budget or finalized profit plan, combines all the budgets for a period into one harmonious unit and thus, it shows the overall budget plan. Before the budget plan is put into operation, the master budget is considered by the top management and revised if the position of profit disclosed therein is not found to be satisfactory. After suitable revision is made, the master budget is finally approved and put into action.
5. ON THE BASIS OF CAPACITY
1. Fixed or Rigid budget: A fixed budget is a budget designed to remain unchanged irrespective of the level of activity actually attained.
2. Flexible Budget: A flexible budget is defined as a budget which, by recognising the difference between fixed, semi-variable and variable costs is designed to change in relation to the level of activity attained.
6. ZERO-BASED BUDGETING (ZBB)
As the name says “Zero-based budgeting” is an approach to plan and prepare the budget from the scratch. Zero-based budgeting starts from zero, rather than a traditional budget that is based on previous budgets.With this budgeting approach, you need to justify each and every expense before adding it to the actual budget. The primary objective of zero-based budgeting is the reduction of unnecessary cost by looking at where costs can be cut.To create a zero base budget involvement of the employees is required. You can ask your employees what kind of expenses the business will have to bear and figure out where you can control such expenses. If a particular expense fails to benefit the business, the same should be axed from the budget. This method for the first time was used by the Department of Agriculture, U.S.A. in the 19th century.
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