Budget & Budgetary Control

 A budget is a detailed plan for some specific future period. It is an estimate prepared in advance for some specific period to which it is applicable  So more precisely we can say “ a budget is a comprehensive and coordinated plan expressed in financial terms for the operation and resources of an enterprise for some specific period in future.”

 On the basis of the following definition we can say the basic elements of budget are  1. It is comprehensive and coordinated plan  2. It is expressed in financial terms  3. It is a plan for firm’s operations and resources  4. It is a future plan for specific period.

A budget can be classified into three categories 1. According to time 2. According to function 3. According to flexibility According to time – it consists of four categories : a. Long term budget – budget prepared for long period of time generally for five to ten years. b. Short term budget – it is prepared for less than five years.

c. Current budget – it is prepared for very short period say for a month,for a quarter and maximum for a year. d. Rolling budget – in this the budget is prepared in advance for the remaining 10 year. A new budget is prepared after the end of each month / quarter / year. For the next term ahead the figures for the month which have rolled down are dropped the figures for next month are called and on the basis of those figures the next term will be prepared.

1. Sales budget – the budget forecasts total sales in terms of quantity,value,items,periods and areas,etc. 2. Production budget – this budget forecasts quantity of product in terms of items,periods and areas. 3. Cost of production budget – in this separate budgets are prepared for different elements of costs such as direct labor, direct material, office overheads, etc.

4. Purchase budget – the budget forecasts the quantity and value of purchase required for production. 5. Personnel budget – the budget anticipates the quantity and quality of personnel required during a period for production activity. 6. Research budget – for research and development of new products R&D department exists in most of the companies. 7. Capital Expenditure – the budget provides guidelines regarding the amount of capital that may be required for the procurement of capital assets during the budgeting period.

this budget is a forecast of cash position by the time period for a specific duration of time. It estimates amount of cash receipt, estimation of cash payments and likely balance of cash in hand at the end of different periods.

 it is a summary budget which incorporates all functional budgets and cover within its range the preparation of projected incomes statement and balance sheets.

A budget described in a manner so as to give the budgeted cost of any level of activity is termed as flexible budget.

 This is a new technique of budgeting. It is a technique whereby each program whether new or existing must be justified in its entirely a new budget is formulated. It involves : 1. Dealing with practically all elements managers budget request. 2. Critically examination of ongoing activities as closely as proposed activities. 3. Provide each manager a range of choice in setting priorities in respect of different activities and allocating resources.

 The major strength of budgeting is that it coordinates activities across departments.  Budgets translate strategic plans into action. They specify theresources, revenues, and activities required to carry out the strategic plan for the coming year.  Budgets provide an excellent record of organizational activities.  Budgets improve communication with employees.  Budgets improve resources allocation, because all requests are clarified and justified.  Budgets provide a tool for corrective action throughreallocations.

 The major problem occurs when budgets are applied mechanically and rigidly.  Budgets can demotivate employees because of lack of participation. If the budgets are arbitrarily imposed top down, employees will not understand the reason for budgeted expenditures, and will not be committed to them.  Budgets can cause perceptions of unfairness.  Budgets can create competition for resources and politics.  A rigid budget structure reduces initiative and innovation at lower levels, making it impossible to obtain money for new ideas.