1.

Concept of Budget, Budgeting & Budgetary Control

📌 What is a Budget?
 A budget is a financial plan prepared for a specific period.
 It includes expected incomes, expenses, assets, liabilities, cash flows, sales, costs, etc.
 Example: Government budget, family monthly expense plan.

🧠 "A plan expressed in monetary terms for a defined time to achieve certain goals."

🎯 2. Objectives of Budgeting
1. Planning – What to do?
2. Coordination – Who will do what?
3. Direction – What is the desired result?
4. Control – Are we on track?

📘 3. What is Budgetary Control?

Definition: It’s a system of managing costs by comparing actual results with the budget and taking
corrective actions.

Involves:

 Creating budgets
 Assigning responsibilities
 Comparing performance
 Taking corrective steps
 Revising budgets when needed

Types of Budgets
📆 A. Based on Time

Type Duration Used in...

Long-term Budget 5–10 years Machinery, engineering firms
Short-term 1–2 years Consumer goods, textiles
Current Budget Months/weeks Day-to-day operations

B. Based on Functions
Functional Budget Description
Sales Budget Forecast of future sales
Production Budget Needed output and related costs
Material Budget Required raw materials
Labour Budget Direct labour hours and cost
Overhead Budget Other production-related expenses
R&D Budget Innovation and improvement activities
Capital Expenditure Long-term assets like machines
Cash Budget Expected inflows and outflows of cash

C. Based on Flexibility

1. Fixed Budget (Static Budget)

 Doesn’t change with output level.

 Useful when output is predictable.
 Example: Salaries or rent (not affected by production level).

2. Flexible Budget (Sliding Scale Budget)

 Adjusts according to level of activity/output.

 Separates fixed, variable, and semi-variable costs.
 Used when production varies.

🧮 Flexible Budget Example (Car Factory):

 50,000 cars at 100% capacity.

 Budget can be adjusted for 25,000 (50%), 35,000 (70%), etc.

5. Cost Types in Flexible Budgeting

Type Description
Fixed Cost Doesn’t change with output (e.g., Rent)
Variable Cost Changes with output (e.g., Raw materials)
Semi-variable Partly fixed, partly variable (e.g., Electricity)

6. Zero-Based Budgeting (ZBB)

“Start from zero and justify every expense.”

 Every cost is reviewed from scratch.

 No assumptions based on last year’s budget.
 Promotes efficiency and cost control.
✅ 7. Merits of Budgeting
 Helps in planning and resource allocation
 Better funding decisions
 Performance evaluation
 Encourages profitability focus

⚠️8. Limitations of Budgeting

 Time-consuming
 Rigid once set
 Based on estimates
 Can increase admin costs
 Doesn’t always account for uncertainties

Budget and Budgetary Control – Summary

1. Meaning
 Budget: A quantitative expression of a plan for a defined period (CIMA definition), covering
sales, revenues, expenses, cash flows, etc.
 Budgeting: The process of converting organisational plans into actionable, numerical plans.

2. Essentials of a Good Budget

 Clear organisational structure and assigned responsibilities
 Realistic and consistent objectives
 Periodic review and flexibility
 Quantification and departmental breakdown
 Commitment from the entire organisation
 Monitoring, variance analysis, and linkage to rewards

3. Objectives of Budgeting
 Planning: Setting performance targets aligned with the organisation’s goals
 Directing & Coordinating: Guiding units and departments toward common goals
 Controlling: Comparing actual results with budgets, identifying deviations, and correcting them

4. Budgetary Control
  Defined as establishing budgets and comparing them with actual results to take corrective action
or revise plans
 Involves: setting objectives, comparing actuals with budgets, and fixing responsibility

5. Objectives of Budgetary Control

 Target setting for departments
 Assigning responsibility and accountability
 Performance comparison and corrective actions
 Optimal use of resources
 Coordination and decentralisation of authority
 Policy revision and long-range planning

6. Advantages
 Improves efficiency and resource use
 Controls expenditures
 Helps in performance evaluation and planning
 Supports creditworthiness
 Encourages cost consciousness

7. Limitations
 Based on estimates, hence needs revisions
 Time-consuming and expensive
 Requires cooperation and proper organisational structure
 Not a substitute for good management
 Perceived rigidity

8. Components of Budgetary Control System

 Physical Budgets (quantities)
 Cost Budgets (expenses)
 Profit Budgets
 Financial Budgets (cash flow, balance sheet, etc.)

9. Budget Preparation Process

1. Define objectives
2. Identify the key factor (limiting factor)
 3. Appoint budget controller and form a committee
4. Develop a budget manual
5. Set budget period
6. Determine activity standards
7. Forecast sales and plan production accordingly

10. Types of Budgets

a) Capacity-based

 Fixed Budget: For a single level of activity

 Flexible Budget: Adjusts to different activity levels

b) Function-based (Functional Budgets)

 Sales, Production, Purchase, Labour, Cash, Administration, R&D, Capital Expenditure, etc.

c) Time-based

 Short-term, Long-term, Monthly, Quarterly, Annual

d) Special Budgets

 Master Budget: Consolidated summary of all functional budgets

 Zero-Based Budgeting: Starts from zero every period
 Performance Budgeting: Focuses on outcomes and results
 Budget Ratios: Analytical tools for budgetary comparisons

11. Fixed vs. Flexible Budget (Key Differences)

Feature Fixed Budget Flexible Budget

Activity Level Single Multiple
Rigidity Rigid Adaptable
Variance Analysis Less useful More meaningful
Accuracy May mislead More realistic

What is a Budget?
A budget is a detailed plan, expressed in quantitative terms, that outlines expected operations and financial
results over a specific period.

CIMA Definition: “A financial and/or quantitative statement prepared and approved prior to a defined
period...to attain a given objective.”
📌 What is Budgetary Control?
A system of controlling costs and operations by:

 Preparing budgets
 Comparing actual performance with budgeted performance
 Taking corrective actions

Objective: Ensure goals are achieved efficiently and economically.

🔹 Objectives of Budgeting and Budgetary Control

1. Planning future activities
2. Coordination among departments
3. Control through variance analysis
4. Resource optimization
5. Responsibility fixation
6. Performance evaluation
7. Basis for decision-making

🔹 Features of a Good Budgetary Control System

 Defined organizational structure
 Budget centers and cost centers
 Budget officer and committee
 Budget manual (procedures and rules)
 Key factor identification (limiting factor like sales, machine capacity, etc.)

🔹 Types of Budgets
🔸 On the Basis of Flexibility

Fixed Budget Flexible Budget

Prepared for one level of activity Can be adjusted for various levels
Rigid Dynamic
Not suitable for cost control More accurate and practical

Slide Highlights
 1. Introduction
o Analogy: Household budget to introduce concept
o Mention of Government Budget for real-world connection
2. Definition of Budget
o Formal statement of expected income and expenditure
o Covers sales, costs, cash flow, assets, liabilities
3. Budget Classification
o Functional, Time-based, Flexibility-based
4. Budget Committee
o Role in preparation and coordination
5. Preliminaries in Budget System
o Budget Centres, Organisation Chart, Budget Manual, Key Factor
6. Definition of Budgeting
o The process of preparing budgets
7. Objectives of Budgeting
o Economy, waste prevention, coordination, control, responsibility fixing
8. Essentials of Effective Budgeting
o Management support, executive participation, realistic goals, education
9. Budgetary Control
o Comparing actual results with budgeted data
o Steps: Establish → Compare → Revise → Assign Responsibility
10. Objectives of Budgetary Control
o Planning, coordination, communication, control, motivation
11. Advantages
o Efficiency, cost control, resource use, plan revisions
12. Limitations
o Estimates-based, rigidity, resistance from staff, expensive
13. Budget vs Budgetary Control
o Likely discussed in tabular or comparative format (though no table visible in the preview)

🔷 Functional Budgets Covered

 Sales Budget
o Illustrated with example from JK Ltd
 Production Budget
 Production Cost Budget
 Cash Budget
 Master Budget
 Raw Material, Purchase, Labour, Overheads, Admin, Capital Budgets

🔷 Types of Budgets
 Fixed Budget
o Static, unresponsive to volume changes
 Flexible Budget
o Adjusts based on activity level
 Zero-Based Budget (ZBB)
o Justify all expenses from scratch
  Difference between Traditional and ZBB
o Also includes steps in ZBB: Scratch → Objectives → CBA → Approve

🔷 Cost Classification
 Fixed, Variable, Semi-variable
 Used in building flexible budgets

1. Introduction
 Starts with analogy to house budget and government budget—great for relatability.

🔷 2. Key Concepts

📌 Budget

 Formal statement of estimated income & expenses

 Includes sales, costs, cash flows, assets, liabilities

📌 Budgeting

 Process of planning income and expenditure

 Concerned with expected revenues and planned expenses

📌 Objectives of Budgeting

 Economic use of capital

 Prevent waste
 Departmental coordination
 Income & expense control
 Responsibility fixation

📌 Budgetary Control

 Compares actual results with budgets

 Involves: Establishing → Monitoring → Revising → Fixing responsibility

🔷 3. Types of Budgets

Basis Type
Function-wise Sales, Production, Admin
Period-wise Long-term, Short-term, Current
 Basis Type
Capacity-wise Fixed & Flexible Budgets

Fixed Budget

 Unchanged with activity level

 Example: Commission remains ₹200 regardless of sales

📌 Flexible Budget

 Varies with volume or output

 Example: Commission @ 10% of sales

📌 Types of Costs

 Fixed, Variable, Semi-variable

📌 Functional Budgets

 Production Budget: Based on sales forecast

 Purchase Budget: For raw material planning
 Sales Budget: Based on demand trends and availability
 Cash Budget: Classified cash inflows & outflows
 Sales Overheads Budget: Fixed (salaries) vs. Variable (commissions)
 Advertising, R&D, Capital Expenditure Budgets

🔷 4. Zero-Based Budgeting (ZBB)

 Starts from scratch each period
 Justify all expenses
 Includes an example (Zen Corp)

📌 ZBB Steps

1. Start from scratch

2. Enlist objectives
3. Cost-benefit analysis
4. Approve and finalize

📌 ZBB vs. Traditional Budget

 Traditional builds on past figures

 ZBB analyzes all costs anew
🔷 5. Limitations of Budgeting
 Based on future assumptions
 Time-consuming, costly
 Requires cross-departmental coordination
 Policy unpredictability

Unit 8 Summary: Budgetary Control

1. Meaning
 Budget: An estimate prepared for a definite period, in financial or quantitative terms, representing
a plan of action.
 Budgetary Control: A system using budgets to plan and control all aspects of business by
continuously comparing actual with budgeted results.

2. Objectives of Budgetary Control

 Coordinates activities across different levels of management.
 Facilitates centralized control with delegated authority.
 Aims for maximum profitability through optimal resource planning.
 Ensures sufficient working capital and minimizes losses.
 Identifies areas needing corrective action and keeps the firm on track toward long-term objectives.

3. Types of Budgets
(a) On Functional Basis:

 Production Budget: Based on sales estimates, determines how much to produce.

 Materials/Purchase Budget: Calculates raw materials needed for production.
 Sales Budget: Estimates future sales volume and value.
 Sales Overhead Budget: Plans sales promotion and sales-related expenses (fixed and variable).
 Cash Budget: Projects cash inflows and outflows for a period.

(b) Based on Flexibility:

 Fixed Budget: Prepared for a single level of activity, mainly for fixed overheads, not useful when
actual output differs from budgeted.
 Flexible Budget: Prepared for various levels of activity, useful for cost control when production
levels vary.

4. Zero-base Budgeting (ZBB)

 Definition: A budgeting method where each budget cycle starts from zero, ignoring past budgets.
 Process: Identify objectives, decide scope, prioritize activities, do cost-benefit analysis, select and
approve "decision packages."
 Benefits: Accurate resource allocation, better management focus, emphasizes achievement of
objectives.
 Limitations: Time-consuming, difficult to rank activities, non-financial factors hard to quantify.
5. Master Budget
 Combines all functional budgets into one comprehensive plan for the business.

6. Key Points
 Budgeting aids in planning and controlling resources.
 Different budgets serve different managerial purposes.
 Comparison of fixed vs. flexible budgeting depends on business needs and stability.
 ZBB is more focused on critical evaluation of activities and their necessity.

Keywords:
Budget, Budgetary Control, Sales Budget, Production Budget, Materials Budget, Cash Budget, Fixed
Budget, Flexible Budget, Zero-base Budgeting.

Main Takeaway:
Budgetary control uses various types of budgets for planning and control, aiding in resource optimization,
cost control, and achievement of organizational objectives. Flexible approaches like ZBB ensure ongoing
relevance and cost-effectiveness.

Budgetary Control
1. Concepts & Definitions
 Budget: A financial plan for a defined period, typically a year.
 Budgeting: The process of creating budgets, which may include projected income, expenditure,
resources, assets, liabilities, and cash flows.
 Budgetary Control: The continuous process of preparing budgets, comparing actual performance
to set budgets, analyzing variances, and taking corrective actions.

2. Objectives and Features

 Planning: Guides activities and defines financial direction.
 Coordination & Direction: Aligns different departments towards organizational goals.
 Controlling: Monitors performance through budget comparisons, identifies issues, and ensures
corrective steps.

3. Types of Budgets
a) According to Time

 Long-term Budgets: 5–10 year horizon, for long-range planning.

 Short-term Budgets: 1–2 years, used for more immediate planning.
 Current Budgets: Typically for weeks or months, focused on current activities.

b) According to Function (Functional Budgets)

 Sales Budget: Estimates future sales.

  Production Budget: Outlines production needs based on sales.
 Materials/Purchase Budget: Schedules raw material requirements.
 Labour Budget: Details direct labor needs and costs.
 Overhead Budget: Covers all indirect production costs.
 R&D Budget: For innovation and product/process improvement.
 Capital Expenditure Budget: For investments in long-term assets.
 Cash Budget: Projects cash inflows and outflows.

c) According to Flexibility

 Fixed Budget: Prepared for a single level of activity, does not change with actual output.
 Flexible Budget: Adapts to various output levels; distinguishes between fixed, variable, and semi-
variable costs.

4. Zero-Based Budgeting (ZBB)

 Approach: Starts from zero, requiring all expenses to be justified for each new period.
 Purpose: Ensures necessity and effectiveness of every activity.
 Merits: Resource optimization, cost control, managerial focus.
 Demerits: Time-consuming, sometimes hard to quantify non-financial benefits.

5. Budget Administration
 Establish Budgets: Set for each area of operation.
 Continuous Monitoring: Compare actual results to budget, analyze variances.
 Responsibility Assignment: Allocate responsibility for performance.

6. Master Budget
 Consolidates all functional budgets into a single comprehensive plan, including financial
statements and cash forecasts.

7. Merits & Demerits of Budgeting

 Merits: Better planning and coordination, performance evaluation, profitability, funding and cash
management.
 Demerits: Can be rigid, time-intensive, administratively costly, based on estimates and forecasts
(future uncertainty).

Main Takeaway:
Budgeting and budgetary control are essential for financial planning, coordination,
control, and performance evaluation within an organization. Using various types of
budgets—including flexible and zero-based approaches—helps businesses adapt,
optimize resources, and achieve their goals while being aware of the limitations and
challenges of the process.

Zero-Based Budgeting (ZBB) — Summary

1. Concept & Definition
 Zero-Based Budgeting (ZBB) is a budgeting method where every expense must be justified for
each new period, starting from a “zero base.” No expenditures are automatically carried over; each
function/activity is re-evaluated every cycle.
 Developed in 1962 (notably advanced by US President Jimmy Carter).

2. ZBB vs. Traditional Budgeting

Attribute Traditional Budgeting Zero-Based Budgeting
“How much” (accounting
Emphasis “Why” (decision oriented)
oriented)
Focuses on objective
Approach Monitors expenditures
achievement
Focus Spending changes Cost-benefit analysis
Communication Vertical Vertical & horizontal
Method Projects from past figures Based on cost-benefit analysis

3. Steps in ZBB Formulation

1. Identify Decision Units: Discrete activities or cost centers (non-overlapping, manageable).
2. Prepare Decision Packages: Document each activity for comparison and evaluation.
3. Prioritize Packages Within Units: Rank decision packages inside each unit.
4. Prioritize Across Units: Rank decision packages organization-wide.
5. Allocate Resources: Assign budgets to selected packages.
6. Monitor and Evaluate: Track and assess performance based on package outputs and assigned
accountability.

4. Key ZBB Elements

 Decision Unit: An identifiable cost center or activity.
 Decision Package: A document specifying an activity’s objectives, costs, alternatives, impact if
unfunded, and benefit-cost analysis.
 Ranking Criteria: Legal status, urgency, technological advancement, welfare, policy facilitation,
etc.

5. Benefits
 More accurate and priority-based resource allocation.
 Enhances managerial capability and accountability.
 Promotes optimum use of resources and achievement of organizational goals.

6. Criticisms
 Hard to assess non-financial factors in cost-benefit analysis.
 Ranking decision packages can be complex.
  Preparation is time-consuming and potentially costly.

Main Takeaway:
Zero-Based Budgeting is a systematic, objective-driven approach that ensures each activity is essential and
cost-effective but can be time-intensive and complex to implement fully.