Unit VI: Budgets and

Budgetary Control

Budget

Planning Controlling Versatile tool

MEANING OF BUDGET

BUDGET is the planned future course of action.

According to Brown and Howard of Management Accountant "a

budget is a predetermined statement of managerial policy during

the given period which provides a standard for comparison with the

results actually achieved."

Features:

Quantitative Statement.

Futuristic prepared

Goal Oriented

Components Income, Expenditure and Employment of Capital.

The objectives of Budget

To encourage self-study

To get all members of management to “put their heads”

To promote the planning process and provide a sense of direction

To increase the effectiveness

To direct and coordinate business activities

To facilitate the control process

BUDGETARY CONTROL

BUDGETARY CONTROL is the system of management control and

accounting in which all operations are forecasted as far as possible

and are planned ahead and actual results are compared with

planned & forecasted ones - J.A.SCOTT.

ADVANTAGES OF BUDGETARY CONTROL

Profits are maximized.

It facilitates controlling of activities.

Effective co-ordination is made possible.

Executive performance is evaluated.

Clear-cut goals and targets are set.

Economy in operations is achieved through planned expenses.

It creates cost consciousness.

LIMITATIONS OF BUDGETARY CONTROL

It involves predicting the future which is highly uncertain.

budgets based on past data may not be relevant.

In reality, gaining full co-ordination of all the employees may be difficult.

There may be conflict among different departments.

Preparation of a budget is very difficult.

Resistance in accepting also will not result in achieving the set goals.

Master Budget

The collection of a series of subsidiary or functional budgets into a total

or master budget is the outcome of the budgeting process.

Elements of a Master Budget

Sales BudgetSelling Expenses Budget

Distribution Expenses Budget

Marketing Budget

Research & Development Budget

Production Budget

Raw Materials Budget

Labour Budget

Manufacturing Overheads budget

Purchasing Budget

Administration Expenses Budget

Manpower Budget

Classification of Budgets

Short Term Budget

Long Term Budgets

Fixed budget

Classification of Budgets

Short Term Budget

Long Term Budgets

Fixed budget

Flexible budget

Sales budget

Production budget

Capital Expenditure Budget

Labour budget

Materials budget

Cash budget

Flexible Budget Format Flexible Budget

ParticularLevel of Operation

A.Variable Cost :-

i. Material

ii. Labour

iii. Direct Expenses

iv. Variable Factory overhead

Total of A

B. Semi-Variable Costs:-

Selling Expenses

Distribution Expenses

Total of B

C. Fixed Costs:

Administrative Expenses

Insurance

Maintenance cost

Depriciation

Fixed Factory Overhead

Total of C

Total of A+B+C

Ex.1. the expenses budgeted for production of 10,000 units in a

Pepsi factory are furnished below:

Per Unit

Materials 75

Labour 35

Variable factory overheads 20

Fixed factory overhead (Rs. 1, 00,000) 15

Variable expenses (Direct) 8

Selling expenses (10 % Fixed) 15

Distribution expenses (20 % Fixed) 7

Administrative expenses (Rs. 50,000) 5

Total cost of sale per unit 180

You are required to prepare a budget for the production of 8,000 units.

B) 6000