FM

1. BUDGETARY CONTROL
Financial Management
MBA(MMS)
Semester II

2. Budget: Budget is a financial and or quantitative
statement prepared and approved prior to a defined
period of time, of the policy to be pursued during that
period for the purpose of attaining a given objective.
It is a plan quantified in monetary terms, prepared
and approved prior to a defined period of time -
showing planned income to be generated and or
expenditure to be incurred during that period and
capital to be employed to attain a given objective. It is
a plan of future activities for an organisation. It is
expressed mainly in financial terms, but also usually
incorporates many non- financial measures as well.

3. Budgeting:
Budgeting is the whole process of designing,
implementing and operating the budgets. The
main emphasis in this short term budgeting
process involving the provision of resources to
support plans which are being implemented.
Budgetary Control:
Budgetary control is the establishment of
budgets relating the responsibilities and the
continuous comparison of actual with budgeted
results for the purpose.

4. OBJECTIVES
•Define Targets.
• Define Responsibilities.
•Investigate and Correct Deviation from Targets.
• Optimise Resources and Maximise Profits.
• Create Dynamic Team-Spirit.

5. Advantages of Budgeting :
•Budgetary control establishes a basis of internal for
internal audit by regularly evaluating departmental
results.
•Only reporting information which has not gone
according to plan, it economises on managerial time
and maximizes efficiency. This is called “Management
by exception by reporting “.
•Scares resources should be allocated in an optimal way,
thus controlling expenditure.
•It forces management to plan ahead so that long term
goals are achieved.

6. •An effective budgetary control system will allow
the people to participate in setting budgets and
thereby have motivational impact on work force.
Individual and corporate goals are aligned.
•Areas of efficiency and inefficiency are identified.
Variance analysis will prompt remedial action
where necessary.
•People are made responsible for items of cost and
revenue i.e. areas responsibility are clearly
delineated.

7. Limitations of Budget:
Budgets are Estimate: Budgets are based on
estimates of quantities and values. It is not possible to
be 100% accurate while making estimates. The
estimates in respect of cost are subject to many
external factors beyond the control of management
e.g. change in prices, market conditions, inflation. If
the budgeted period is long the estimates are bound
to be widely different from actual,
Unrealistic Target: If the targets set by the Budget are
too high, employees will be discouraged and
demoralized. If the targets are low, management will
be at a disadvantage due to lower level of performance

8. Budgets Should not become Mere Forecasts:
Budget is an exercise in planning and not a
forecast or guesswork. Budget should not make
passive estimates but must actively lay down
policies to guide future action.
Fixed Budget Ignores Variable Costs: Fixed
Budget is made for a specific level of activity.
Elaborate and Costly System and
Administration: The Budgetary Control system is
costly to establish and organise. A small
organization cannot afford the cost of having an
elaborate budgeted department.

9. Functional Budget: A budget of income and expenditure
appropriate to, or the responsibilities of a particular function.
Thus functional budgets pertain to different functions or
department in an organization such as sales, purchase,
production etc. Examples of functional budgets are sales
budget, purchase budget, cash budget and etc.
Types of functional Budgets:
•Sales Budget.
•Production Budget.
•Purchase Budget
•Research and development Budget.
•Cash Budget
•Personnel Budget.
•Expenses Budget: Such as Direct material Budget, Direct
Labour Budget, Administrative Budget, Selling and Distribution
Budget.

10. FIXED BUDGET
A Budget which is designed to remain unchanged
irrespective of the level of capacity or volume. All
the calculations of sales, production, expenses are
related to this specific level or volume. Fixed
Budget is used as an effective tool of cost control.
Such a budget is quite suitable for fixed expenses.
But, in case the level of activity usually attained is
different from the level of activity budgeted, the
fixed budget becomes ineffective. It ignores the
effect of change in volume on sales, production,
expenses etc. It does not take into account the
classification of cost into fixed and variable costs.

11. Flexible Budget as - "A budget which, by
recognizing the difference between fixed, semi-
fixed and variable costs, is designed to change in
relation to the level of activity attained. Flexible
Budget does not assume a fixed level of capacity or
volume. It is prepared for the level of activity
usually attained. It is more elastic, useful and
practical as compared to a fixed budget it takes into
account effect of change in volume on sales,
production expenses etc. It may be adjusted for
current conditions arising out of seasonal changes
or change in the length of working period etc. It is
thus an effective tool for control. It is based on the
classification of costs into fixed costs and variable
costs.

12. Flexible budgets are necessary and useful in the
following circumstances –
•Seasonal fluctuations in sales or production .i.e.
cold drink industry.
•A company which keeps introducing a new
product or changing product design frequently.
•Job-order industries e.g. Ship- building
•Fashion industry.
•General changes in sales.
•

13. Flexible budgets are necessary and useful in the
following circumstances –
•Seasonal fluctuations in sales or production .i.e. cold
drink industry.
•A company which keeps introducing a new product or
changing product design frequently.
•Job-order industries e.g. Ship- building
•Fashion industry.
•General changes in sales.

14. Zero Based Budgeting: It is a method of
Budeting where by all the activities are
revaluated each time a budget is formulated and
it requires each manager to justify his entire
budget request in detail from starch and shifts
the burden of proof to each manager to justify
why he should spend any money at all. ZBB is a
planning tool for management which helps in
identification of wasteful and obsolescent items
of expenditure.