A budget is a financial and quantitative statement of an operational plan related to a specific time period, which is to be followed during the budgeted period in order to achieve specific financial objectives of an organization.
According to I.C.W.A, “A budget is a financial and/or quantitative statement prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective.”
Features of a Budget
It is a financial and quantitative statement of a plan of action
It is always expressed in terms of money and/or quantity
It is prepared prior to the implementation of the operational plan
It is based on pre-determined management policy
It is prepared to achieve specific financial objectives
It indicates the costs and revenues, capital to be employed, incremental effects on former budgets etc.
Budgeting refers to the process of preparation, implementation and operation of budgets. It involves formulation of operational plans for a given future period and expressing it in monetary terms.
Types of Budget
On the Basis of Time
Long Term Budget – Budget prepared for a period of 5 to 10 years.
Short Term Budget – Budget prepared for a period of 1 to 2 years.
Current Budget – Budget prepared for a period of less than 6 months.
On the Basis of Activity
Fixed Budget – Budget that is fixed for a given level of activity or time period and does not change with changing business situations.
Flexible Budget – Budget that is flexible and can be revised from time to time according to the changing business needs and situations.
On the Basis of Nature of transaction
Capital Budget– Budget prepared for the capital expenditures of a business.
Operating Budget – Budget prepared to meet the day to day expenses of a business.
On the Basis of Functions
Master Budget – Various functional budgets are integrated together to form a master budget.
Financial Budgets – Budgets related to various costs and revenues of the organization.
Working Capital Budget
Capital Expenditure Budget
Budgeted Balance Sheet
Operational Budgets – Budgets prepared for different activities or operations of the organization.
Plant Utilization Budget
Administrative & Selling expenses budget
Manufacturing Expenses budget
Budgetary Control is the process of determining various budgeted figures for an organization for the future period and then comparing the budgeted figures with actual figures for calculating deviations and taking remedial measures to minimize deviations. It is a continuous process that helps in planning and controlling costs.
According to Howard and Brown, “Budgetary control is a system of controlling costs which includes preparation of budgets, coordination of departments, comparison of actual performance with budgeted performance and acting upon the results to achieve maximum profitability.”
Requirements of a Good Budgetary System
Budgeting process must be backed by the Chief Executive of an organization
Organizational goals must be clearly stated and quantified and further divided into functional goals
People responsible for execution of budget must be involved in its preparation
Budgets must be realistic, continuous and must cover all relevant aspects
Budgeting system must be based on information, communication and participation
Clear responsibilities for effective budget implementation must be established
Essentials of Budgetary Control
(2) Budget Centers – It may be a department or a group of people in a department, who are responsible for preparation of a budget.
(3) Budget Manual – It is a written document containing rules, regulation, policies and guidelines for preparing budgets.
(4) Budget Officer (Coordinator) – The person responsible for scrutinizing, evaluating and finalizing the budgets prepared by different functional heads.
(5) Budget period – Time period for which budget is prepared.
(6) Budget Committee – Group of people responsible for preparation and execution of budgets
(7) Determining Key Factor – Principle factor that influences all budgets
Steps in Budgetary Control System
Advantages of Budgetary control
Effective budgetary control leads to maximization of profit
It facilitates coordination between different functional departments
It acts as a tool for measuring (financial and operational) performance
It helps in eliminating wastages and taking corrective actions
It helps in reducing costs
It helps to take decisions regarding performance appraisal of employees