Budget and budgetary control notes

8.Define Budget and Budgetary control along with its types. (2021)

Meaning of Budget

A financial plan concerned with the future for the welfare of business which estimates expenditure and income for a particular period. It outlines how resources will be allocated to achieve organizational goals and helps in planning, controlling, and monitoring business activities. budget and budgetary control notes

Key Features:

• Prepared in advance
• Based on future expectations
• Can be for individuals, businesses, or governments
• These budgets are a guideline for decision-making and performance evaluation during the business operations.

Example: A company may prepare a monthly sales budget forecasting revenue and expenses to manage cash flow and plan production. budget and budgetary control notes

Meaning of Budgetary Control

Budgetary control is a system of planning and controlling business operations through the preparation of budgets and continuous comparison of actual performance with the budgeted figures. It helps management to monitor financial activities, detect deviations, and take corrective actions to achieve organizational goals efficiently.

Key Aspects:

• Involves setting budgets for different departments
• Compares actual results with budgeted targets
• This method helps in cost control, decision-making, and performance evaluation. budget and budgetary control notes

In short:
Budgetary control is the process of using budgets as a tool to manage and control business activities.

Types of Budgets

1. Based on Flexibility:
   
   • Fixed Budget:
     These budgets can’t be changed regardless of the level of activity or output. It is useful when operations are predictable.
   • Flexible Budget:
     These budgets can be edited and adjusted based on the actual level of activity or output. It helps in dealing with varying levels of production or sales. budget and budgetary control notes
2. Based on Time:
   
   • Short-Term Budget:
     Prepared for a period of less than one year (e.g., monthly, quarterly). It focuses on immediate financial planning.
   • Long-Term Budget:
     Prepared for more than one year (usually 3–5 years). It focuses on long-term goals and investments. types of budget
3. Based on Function:
   
   • Sales Budget:
     Estimates the expected sales in terms of quantity and value for a specific period.
   • Production Budget:
     Plans the quantity of goods that need to be produced to meet the sales forecast.
   • Cash Budget:
     Forecasts cash inflows and outflows to ensure the organization maintains adequate liquidity.
   • Purchase Budget:
     Estimates the materials and goods that need to be purchased to meet production requirements.
   • Labor Budget:
     Projects the labor costs required for production and operations.
   • Capital Budget:
     Plans involving budget for long-term investments in assets such as machinery, buildings, and technology.
4. Based on Activity:
   
   • Master Budget:
     This type of budget has a comprehensive summary that combines all the individual budgets for Example (sales, production, cash, etc.) into one overall financial plan.
   • Operating Budget:
     This type of budget Covers the revenue and expenses related to the day-to-day activities of the organization, such as production and sales.
   • Financial Budget:
     This type of budget create on the financial aspects like cash flow, balance sheet, and capital expenditure.

These budgets are tailored to help organizations plan, control, and evaluate their financial performance. budget and budgetary control notes

Detailed Conclusion of Budget and Budgetary Control with Examples

1. Budget: A budget is essentially a financial yard for an organization. It outlines the expected revenues and expenses over a specific period, typically a year, quarter, or month. It provides a clear direction for resource allocation, helping businesses ensure that their financial resources are being used efficiently.
   
   Example: A manufacturing company prepares a sales budget for the upcoming year, estimating a revenue of ₹50,00,000 from sales of 100,000 units. It also prepares a production budget, forecasting the production of 100,000 units, with a corresponding cost of ₹30,00,000. This allows the company to plan for production and ensure resources are in place to meet sales expectations. budget and budgetary control notes
2. Budgetary Control: Budgetary control is the process of comparing actual performance against the budgeted figures, identifying deviations, and taking corrective actions. This allows managers to identify areas where performance is either exceeding or falling short of expectations and take appropriate actions.
   
   Example: Suppose in the same company, the actual revenue in the month of January was ₹4,50,000 (as opposed to the budgeted ₹5,00,000). The variance analysis will highlight a ₹50,000 shortfall in revenue. The company’s management can investigate the cause of this shortfall (perhaps due to lower-than-expected sales) and take corrective actions, such as increasing marketing efforts or adjusting pricing strategies.

Key Benefits of Budget and Budgetary Control:

• Planning: Budgets help in planning future activities, such as estimating costs, setting targets, and allocating resources effectively.
• Control: Budgetary control ensures that operations stay within the planned limits. It helps in identifying discrepancies early, allowing corrective actions before they affect overall performance.
• Performance Evaluation: By comparing actual results with the budgeted figures, businesses can evaluate departmental performance, assess areas for improvement, and recognize successful strategies.
• Cost Management: Budgetary control helps in keeping track of costs and ensuring that they don’t exceed the planned amounts.

Limitations of Budget and Budgetary Control:

• Rigid Framework: A strict adherence to budgets may reduce flexibility, preventing the organization from responding to unforeseen circumstances. budget and budgetary control notes
• Time-Consuming: Setting up and monitoring budgets can be a time-consuming process, especially for large organizations.
• Overemphasis on Short-Term Targets: Focusing too much on budget adherence may discourage long-term investments or innovation, as departments may prioritize meeting budget targets over exploring new opportunities.

In Summary:

• Budgets serve as a roadmap for financial management and organizational goals.
• Budgetary control helps to keep financial activities in line with planned objectives by identifying and correcting deviations. budget and budgetary control notes
• Both tools, when used effectively, can lead to better resource management, improved decision-making, and greater financial discipline.

You can find the syllabus of cost Accounting on the official website gndu.

Essential questions of Cost Accounting

1. Objectives of budgetary control.
2. Treatment of Normal wastage and Abnormal wastage in cost Accounting.

budget and budgetary control notes