Unit 3: Budgets and Budgetary Control

Budgets and Budgetary Control

A budget is a financial plan that estimates income and expenses over a specific period (like a month, quarter, or year). It helps businesses and individuals plan their future activities, manage resources efficiently, and achieve their goals.

🧾 It is a written plan of action expressed in numerical terms for a future period.

Meaning of Budgetary Control: Budgetary Control is the process of comparing actual performance with the budgeted figures to identify any deviations and take corrective actions. It helps management control costs and ensures that the organization stays on track to achieve its objectives.

📚 Objectives of Budget and Budgetary Control

• Proper planning of resources.
• Coordination among departments.
• Cost control and efficiency.
• Performance evaluation.
• Decision-making support.

🧩 Types of Budgets

Budgets can be classified based on time, function, and flexibility:

1. ⏳ Based on Time

2. 🏢 Based on Function (Operational Level)

3. 🌀 Based on Flexibility

Budgets and budgetary control are essential tools for effective planning, coordination, and control in any organization. They help in using resources wisely and guiding the company toward its financial and strategic goals.

Steps in Budgetary Control

Budgetary control involves several important steps that help organizations monitor and manage their budgets effectively. Here's a step-by-step breakdown:

Fixed vs. Flexible Budgeting

Here’s a comparison between Fixed and Flexible Budgeting to understand the difference easily:

Conclusion

• Budgetary Control ensures the company stays on track financially by comparing actual performance with plans.
• Fixed Budget is simple but not adaptable.
• Flexible Budget is more realistic and useful in changing conditions.

Sales Budget

The Sales Budget estimates how much the company expects to sell (in units and value) during a specific period. It is the starting point for all other functional budgets.

Prepared by: Sales Department

Purpose

• Estimate future sales.
• Plan production levels.
• Set targets for the sales team.

Format:

Production Budget

The Production Budget shows how many units need to be produced to meet the sales demand and maintain inventory levels.

Formula:

Production Units = Sales Units + Closing Inventory – Opening Inventory

Purpose:

• To plan production activity.
• To ensure availability of finished goods.

🔹 Format:

Raw Material Consumption Budget

This budget shows how much raw material is required to meet the production needs.

🔹 Formula:

Material Required = Production Units × Material per Unit

Purpose:

• To estimate the total quantity of materials to be consumed.
• Basis for purchasing raw materials.

🔹 Format:

Raw Material Purchase Budget

This budget estimates the quantity and cost of raw materials to be purchased.

🔹 Formula:

Raw Material to be Purchased = Material Required for Production + Closing Stock – Opening Stock

Purpose:

• Plan timely purchase of materials.
• Avoid stockouts or excess inventory.

🔹 Format:

Sales Budget → Production Budget → Raw Material Consumption Budget → Raw Material Purchase Budget

Overhead Budget

The Overhead Budget estimates all indirect costs (costs that are not directly tied to production) such as electricity, rent, maintenance, etc. It is usually divided into three parts: Factory Overhead, Administrative Overhead, and Selling & Distribution Overhead.

🔹 Purpose:

• To forecast all indirect costs.
• Helps in setting accurate product costing and controlling unnecessary expenses.

🔹 Example Format:

Cash Budget

The Cash Budget estimates the cash inflows and outflows for a specific time period. It helps ensure that the business maintains enough cash to operate smoothly.

🔹 Purpose:

• To ensure liquidity.
• To plan short-term investments or loans.
• To avoid cash shortages or surplus.

🔹 Structure:

Master Budget

The Master Budget is the comprehensive summary of all the individual functional budgets (sales, production, cash, overhead, etc.). It shows the complete financial plan of the business for a given period. It combines both operating budgets and financial budgets into one overall plan.

🔹 Components:

• Sales Budget
• Production Budget
• Direct Materials, Labor, Overhead Budgets
• Cash Budget
• Budgeted Income Statement
• Budgeted Balance Sheet

🔹 Purpose:

• Provides an overall view of the financial plan.
• Helps top management in strategic decision-making.

🔹 Structure Example:

Conclusion

Zero-Based Budgeting (ZBB)

Zero-Based Budgeting is a budgeting method where every expense must be justified from scratch ("zero base") for each new period. It means that no expenses are automatically carried forward—each activity or cost must be re-evaluated before approval.

🔍 "Start from zero, justify every rupee."

✅ Key Features:

• Budget starts from zero, not from previous budgets.
• Every department must justify their budget requests.
• Helps in cost reduction and efficient resource allocation.
• Focuses on activities and outcomes, not just numbers.

Steps in Zero-Based Budgeting

Advantages of ZBB:

• 🧮 Cost-effective: Reduces unnecessary expenses.
• 🎯 Efficient: Ensures resource allocation is based on needs.
• 📊 Improves planning & control: Every department is held accountable.
• 🚫 Eliminates outdated practices: Stops funding unproductive activities.

Disadvantages of ZBB:

• 🕐 Time-consuming: Requires detailed analysis every time.
• 💼 Complex: Difficult to implement in large organizations.
• 📉 May overlook long-term goals due to short-term focus.

✅ Example (Simple)

Zero-Based Budgeting is ideal for organizations looking to control costs, improve efficiency, and justify every rupee spent. It promotes a culture of accountability and performance-based budgeting.