Cost and Management accounting concept Budgetary Control

The chartered institute of management accounting (CIMA) UK as defined a budget as “A plan quantified in monitory terms prepared and approved prior to a defined period of time usually showing planned income to be generated showing planned income to be generated and or expenditure to be incurred during the period and the capital to be employed to attain a given objective.
      A budget is primarily a planning and control device
      A budget is prepared in monitory terms.
      A budget is prepared for a definite future period.
      It shows planned income and expenditure and also the capital to be employed
      Purpose of a budget is to implement the policies formulated by the management for attaining the given objective.
            The act of preparing budget is called budgeting. In other words batty “The entire process preparing the budget is known as budgeting
Meaning of budgetary control:
            It is a system of controlling cost s through preparation of budgets. Budgeting is the only a part of the budgetary control is the establishment of budgets relating to the responsibilities of executives of a policy and the continuous companies on of the actual with the budgeted results either to secure quite individual action the objective of the policy are to provide a basis for its revision.
Characteristics of budgetary control:
      Establishment of budgets for each function dept of the org.
      Comparison of actual performance with the budgets on a continuous places.
      Analysis of variations of actual performance from that of the budgeted performance to know the reasons these off.
      Taking suitable re medial action where necessary
      Revision of budgets in the view of changes in conditions.

Difference between budget and forecasting:
Basis of distinction





It relates to planned events i,e the policy and program to be followed in a future period under planned conditions.

It is usually planned for separately for each accounting period

It comprises the whole business unit sectional budgets are co-ordinates into a logical whole.

Budget is a tool of control as it represent actions which can be shaped according to which may or may not be happened
The process of budget starts where forecast ends and converts it not a budget
This concerned with probable events likely to happen, anticipated conditions during a specified period of time.

It may cover a long period of year

It may cover a limited function or activity of business forecast.

It doesn’t note any sections of control as forecast is necessarily a statement of future events

The function of forecast ends with the forecast of likely events
Objectives of budgetary control:
            A budget provides detail plan of action for a business over a definite period of a business over a definite period of time plans relating to production, sales, raw material requirements, labor, needs, advertising promotion, performance, R&D activities etc..
            These should be in co-ordination with the budgets of various depts. For example the budget of sales should be in co-ordination with the budget of production similarly production budget.
            It is not budget itself that facilities communication but the vital information is communicated in the act of preparing budget and participation of all responsible individuals in this act.
It is a useful device for motivating managers to perform in line with the company objectives.
            It is necessary to ensure the plans and objectives as laid down in the budgets or being achieved. Control acts applied to budgeting is a systematized effort to keep the management informed of whether planned performance is being achieved or not.
Performance evaluation:
            A budget provides a useful means of informing managers how will they performing in meeting targets they have previously helped to set. In many companies there is a practice of rewarding employees on the basis of their achieving the budget targets or promotion of a manager must be linked to its budget achieve record.
Advantages of budgetary control:
      Maximization of control
      Specific aims
      Tools for measuring performance
      Determining weakness
      Corrective action
      Reduces costs
      Introduction of incentives skills
Limitations of budgetary control:
      Uncertain future
      Describes efficient persons
      Problem of co-ordination
      Conflict among different departments.
      Dependence upon support of top management
Steps involved in budgetary control:
organisation charts
a concern must have an org charts this is necessary in order to have clear idea of authority and responsibility of each executive. So that their may be low conflict among functional executives for shifting responsibilities and planning others for poor performance
the business objectives plans and policies should be the scope of budgetary and stated in an ambitious term and scope of budgetary  control should be clearly laid down.
            Their must be efficient system of accounting in order to record & provide necessary accounting information to the mgt for successful system of budgetary control
             The budget or key factor if any must be indicated before starting the preparation of budgets.
            To make a budgetary control successful their should be a proper system of communication & reporting between the various level of mgt. A top mgt should be able to communicate budgeted plans to be lower levels in clear terms. Who in terms should feedback b reporting deviations from the targets to the higher levels.
            Budget centers should be established for cost control & all budgets should be related to cost control.
            Their should be budget manual to indicates characters of program it contains all details regarding the plan & process for its execution. It should also specify the length of the budget period.
            To motivate the workers the budget must be prepared by those who responsible for its performance.
            The budget should covers all phases to top management approval is necessary in order to get full co-operation & acceptance of the system of budgetary control.
Difference between fired & flexible budget:
Point of distinction
Fixed budget
Flexible budget

Classification of cost




Ascertainment of costs

Tools for cost

Fixation of prices & submission of tends
It is flexible doesn’t change with the actual volume of output achieve.

Costs are not classified according to their variability i.e, fixed variability

Comparison of actual & budgetary performance can’t be done currently if the volume of output differs.
It is difficult to forecast accurate the results in it.

Only one budget to fired level of activity is prepare due to an unreleased expectation on the part of the management. That is all conditions will remained.

It is not possible to ascertain cost currently if there is a change in circumstances.

It is limited applications & is in effective as a tool forecast control.

If the budget & actual activity levels varieing.

The current ascertainment of cost.
It is flexible can be suitable re-costed quickly according.

Costs are classified according to nature of variability.

Comparison of realistic the changed plan figures are place against actual one.

It is clearly should the impact of various expenses on the organisational aspects of the business.

Under it series of budgets are prepared at different levels of activity.

Cost can be easily ascertain at differently under this type of budget.

It has more applications scan be used as it tool for effective cost control.

It helps in fixation of prices & submissions of tenders due to correct ascertain cost.
Classification & types of budget:
Classification according to time:
      Long term budget
      Short term budget
      Current budget
Classification on the basis of functions:
a.       Operating budget
b.       Finance budget
c.        Master budgets
Classification on the basis of flexibility:
      Fixed budget
      Flexible budget
Classification on according to time:
Long-term budget:
            The budget are prepaid by long-term planning of the business. The period of long-term planning is done by the top level mgt.
Short- term budget:
            The budget are generally for 1 or 2 years in the form of monitory term. The consumer goods industries like sugar, cotton, textiles etc..
Current budgets:
            The period of current budget is generally months & weeks.

Classification on the basis of functions:
Operating budgets:
            This budget to the different activities or operations of a firm the number of such budgets depends upon the size & nature of business.
Sales budgets:
            The sales budget is a statement of planned sales in the terms of quantity & value. It forecast what the company responsible expect to sell its customer can be paid prepaid to show sales classified according to products, sales mans customers.
Sales budget factors:
      Analysis of cost to determined trends in market.
      Reports by salesman various markets of company product.
      Any changes in company policies & methods & they effect on sales.
      Any changes in economic conditions and is business related to conditions & policies.
      Market research to measure potential demand for company product.
Production budget:
            The production budget is an estimate of production for the budget period. It is firs drawn is activities of each product and when the remaining budget have been prepared & cost of production calculated. Then the quantities of production costs are translated into many teems. What in effect becomes a production cost budgets.
Raw – material budgets:
            This budget shows to estimated quantities of all the raw-materials and components needed for production demand by the production budget.
      It assists purchasing departments. In planning the purchases.
      It helps in the preparation of purchase budget.
      It provides data for raw-material control.
Purchase budget:
            The purchase budget provides details of the purchases which are plan to made during the period of meets the need of the business.
      The timing of re-purchase.
      The quantities of each type of raw-material & other items to be purchased. The estimated cost of material purchases.

Financial budget:
Cash budget:
              The cash budget is one of the most important and one of the cost to be prepared. It is a detail estimate of cash receipts from all sources & cash payment for all purpose and the resultant cash balance during the budget period. It makes certain that the business sub-efficient cash available to its need as when the raised.
            It is a device for planning & financial required to cover up many deficiency in cash.
The main purpose of cash budget or out line below:
      It ensure that sufficient cash is available when required.
      It indicates cash excess & shortages show that action may be taken in time to invest any excess cash or to borrow funds to meet any shortage.
      It establishes a sound basis for credit.
      It shows whether capital expenditure may be finance internally.
      It establishes a sound basis for control of cash position.
Preparation of cash budget:
      Receipts & payment method.
      Adjusted profit & loss method.
      Balance sheet method.
Master budget:
            According to CIMA master budget is summary budget in cooperating it’s components in financial budgets and which is finally approved adopted & employed.
            A master budget has 2 parts.
Operating budget:
            This is budgeted profit & loss a/c.
Financial budget:
            That is budgeted balance sheet. Thus a projected profit & loss a/c & balance sheet together constitute a master budget.
            A master budge is prepared by a budget director & is presented to it budget committee for approval.