BUDGET & BUDGETING
INTRODUCTION
• Profit-planning or budgeting is a
systematic approach for attaining
effective management
performance.
• A budget is a comprehensive and
coordinated plan expressed in
financial terms, for the operations
and resources of an enterprise, for
some specific period in future
PURPOSE OF BUDGETING
• To attain the management’s
objectives.
• To communicate expectations to
all concerned.
• To help in making detailed plans.
• To provide a basis for measuring
and controlling activities.
STEPS IN PREPARING A BUDGET
• Establish budget centres and form a committee.
• Prepare budget manual (budget manual is procedures to be followed and
forms to be used).
• Form budget committee.
• Determine the limiting or the key factor.
• Select the budget period.
• Select the objectives to be achieved at the end of the budget period.
• Prepare forecasts.
• From forecast prepare provisional budget
• Review and prepare final budget.
ADVANTAGES OF BUDGETING
• Compels management to plan for
future.
• Coordinates integrates and
balances the effort of various
department.
• Forms a basis of evaluation and
control.
• Forms a basis of communication.
• Helps in optimum utilization of
resources.
LIMITATIONS
• Restricts creativity
• Must be continuously adapted.
• Everybody must be involved as
otherwise execution is difficult.
• Estimates are basis for budgets
which might not match results
BUDGETARY CONTROL
• Budgetary control involves the use
of budgets and budgetary reports
though out the period of budget to
co-ordinate evaluate and control
day to day operations in
accordance with the goals
specified by the budget
OBJECTIVES OF BUDGETARY
CONTROL
• The objectives of budgetary control are:
• To compel planning. This is the most important feature of budgetary control, because
management is forced to look ahead, set targets, anticipate problems and give the
organization purpose and direction,
• To communicate Ideas and Plans. To everyone affected by them. It is necessary to
have a formal system to make sure that each person is aware of what he is supposed to
be doing.
• To co-ordinate the activities. Of different department or sub-units of the
organization, this concept of co-ordination implies, for example, that the purchasing
department should base its budget on production requirements, and that the production
budget should in turn be based on sales expectations.
• To establish a system of control by having a plan against which actual results can
be progressively compared.
• To motivate Employees to improve their performance.
KEY FACTOR
• In each organization there is always some factor which governs the scale
of its activity. Such a factor is known as the ‘limiting factor,’ ‘principal
budget factor’ or ‘key factor’. Some examples of limiting factor are:
• Production capacity:
• Shortage of space :
• Shortage of skilled labour:
• Shortage of material:
• Low market demand:
• Lack of capital:
DIFFERENT TYPES OF BUDGET
• Budgets may be classified into number of categories. This classification is
based on some features, connected with the operational activities of a
business. The classification along with the features that have led to the
said classifications, are discussed hereunder:
• Budget Based on Coverage
• Budget Based on Capacity
• Budget Based on the length of the period
• Budget Based on Conditions
BUDGET BASED ON COVERAGE
• Budgets are often drawn encompassing the different areas of activities of a
business undertaking. That is to say, a budget is often drawn covering
different functions of business unit. On the basis of the coverage, the budget
is classified into two
• A. Functional budget: is that budget which is associated with the functions
of an organization. For examples: Sales budget, Production budget, Labour
budget, Cost budget, Overhead budget, Capital expenditure budget and Cash
budget etc.
• B. Master budget: This budgeting contains the details of sales budget,
production budget, cash budget etc. When it is complete, the budget
committee will review all the details and if approved, it will be submitted to
the board of directors. Once it is accepted and approved it becomes the
target for the company during a specific period to achieve the desired target.
BUDGET BASED ON CAPACITY
• The operation of a business unit is characterized by level of activity. This
level of activity is known as the capacity at which the business functions.
This capacity depends on the extent of the demand of the product of the
business entity. The budgets which are drawn considering the operational
capacity of a business concern may be classified into two:
• A
. Fixed budget: A fixed budget is a budget that does not change or flex
for increases or decreases in volume. ("Volume" could be sales, units
produced, or some other activity.)
• B. Flexible budget: This type of budget is most often based on changes in
a company's actual revenue and uses percentages of revenue rather than
static numbers. For example, a flexible budget may allot 25% of a
company's revenue to salary as opposed to allotting Rs100,000 to salary in
a given year
BUDGET BASED ON THE LENGTH
OF THE PERIOD
• Some budgets are drawn for a long period of time.
• This period may cover 5 years or so.
• Some budgets are to run for a short period of time, say for a day, a weal
or a month as the case may be.
• The budget that covers a long period of time is known as a Long range
budget or long term budget.
• When the budgets are drawn covering a short period of time, as stated
above, are called short term budget or short range budget.
BUDGET BASED ON CONDITIONS
• It is sometimes found that budgets are based on some conditions
required to be taken into account for efficient management. The budgets
bases on conditions may be classified in to the following:
• A. Basic budget: It is a simple monthly budget that calculates income
vs. expenses and allows you to allocate and track your spending
• B. Current budget: means the sum of approved estimates of
the current expenditure for a financial year in the
Annual Budget Statement
WHAT IS AN INCOME
EXPENDITURE ACCOUNT
• An income and expenditure account record every income and expenditure
of a non trading organisation in a specific financial year.
• Vitally it restricts to operational revenues and does not take into account
capital base income and expenses.
• Furthermost these are nominal accounts maintained on an accrual basis
thereby considering every income and expenditure irrespective of
whether they receive clearance or not
DIFFERENCE BETWEEN INCOME
AND EXPENDITURE
• Income is the revenue generated by a non trading institution in a financial
year, while expenditure denotes outgoing expenses incurred.
• These are the basis of an income and expenditure account, and their net
balance calculated after a financial year ends indicates if there is a
surplus or deficit.
FORMAT OF AN INCOME
EXPENDITURE ACCOUNT
• Like any accounting method an income and expenditure account has its specific
format accompanied by its formula. This format has the following features:
• Name of the institution is mentioned on the top, followed by its heading of income
and expenditure account.
• Financial year for which this account has been created must be mentioned too.
• Typically these have 4 columns with 2 on the left for expenditure while those on its
right for income.
• First column indicates expenditure details while the following column notes these
expense amount
• Third column lists every income along with its following column mentioning income
accounts.
• These second and fourth columns mentions total expenditure and income in a
financial year.
FORMAT
• Income expenditure account for the year ended -------
Expenditure (Dr.) INR Income (Cr.) INR
To Consumable Materials xxx By Subscriptions xxx
To Honorarium xxx By Grants Received xxx
To Salary & Wages xxx By Entrance Fees xxx
To Repairs xxx By Entrance on Deposits xxx
To Entertainment Expenses xxx By Dividends xxx
To Printing and Stationary xxx By Profit on sales xxx
To Housing Rent xxx By Rent received xxx
To Municipal Taxes xxx By Receipt on Sales xxx
To Surplus (Excess of income to exp) xxx By Deficit(Excess of exp to income xxx
