1.

Introduction:
Budgeting has come to be accepted as an efficient method of short-term planning and
control. It is employed, no doubt, in large business houses, but even the small businesses
are using it at least in some informal manner. Through the budgets, a business wants to
know clearly as to what it proposes to do during an accounting period or a part thereof.
The technique of budgeting is an important application of Management Accounting.
Probably, the greatest aid to good management that has ever been devised is the use of
budgets and budgetary control. It is a versatile tool and has helped managers cope with
many problems including inflation.
2.DEFINITION OF BUDGET:
The Chartered Institute of Management Accountants, England, defines a 'budget' as
under:
" A financial and/or quantitative statement, prepared and approved prior to define period
of time, of the policy to be persued during that period for the purpose of attaining a given
objective."
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."








3.Study objective:
1. Indicate the benefits of budgeting.
2. State the essentials of effective budgeting.
3. Identify the budgets that comprise the master budget.
4. Describe the sources for preparing the budgeted income statement.
5. Explain the principal sections of a cash budget.
6. Indicate the applicability of budgeting in non-manufacturing companies.
4. Rationale for preparing a cash budget

There are numerous reasons for preferring to prepare a cash flow budget. It allows a
business to make management decisions concerned with their cash reserves or cash
position. In the absence of monitoring imposed by the cash budgeting process, a manager
or owner may be unaware of the actual cash flow through the business. At the end of the
financial year or a business cycle, a string of monthly cash flows demonstrates just how
much cash has come into the business and the pattern in which it is being used. Seasonal
variations will be made clear. Besides, cash budgeting also allows a firm to evaluate and
plan its capital requirements. It will help one evaluate whether the firm may need any
short-term borrowing at any given point of time during the operations cycle. Long term
borrowing assessment can also be made. Basically, it offers good management decision
making.
There are three major elements needed for the creation of a cash budget:
Time Period: Ideally, the first decision one should make while preparing a cash budget is
deciding the period of time for while the budget is applicable. This means, is the firm
preparing the budget for the following three month, three months, six months or twelve
months or some other span?
Cash Position: The amount of cash in hand at any point of time is depended on the nature
of ones business, the estimated level of accounts receivable and the probabilities of
major opportunities or catastrophes that may require the firm to have ample reserves of
cash. As such, the firm may even consider its cash reserves on the basis of sales in a
certain number of days. The budgeting process helps them determine if they have enough
cash reserves at the end of a certain period.
Estimated sales and expenditures: One fundamental purpose of cash budget is the
estimation of all future cash receipts and cash expenses that may occur during the
stipulated time period. However, the most important estimation is that of sales. Once sales
levels are estimated, everything else can gradually fall into place.
5.Essentials of a Budget:
An analysis of the above said definitions reveal the following essentials of a budget:
(1) It is prepared for a definite future period.
(2) It is a statement prepared prior to a defined period of time.
(3) The Budget is monetary and I or quantitative statement of policy.
(4) The Budget is a predetermined statement and its purpose is to attain a given objective.
A budget, therefore, be taken as a document which is closely related to both the
managerial as well as accounting functions of an organization.
Budget:
Formal written statement of managements plans for a specified future time period,
expressed in financial terms.
Primary way to communicate agreed-upon objectives to all parts of the company.
Promotes efficiency.
Control device - important basis for performance evaluation once adopted.
5. Budgeting and Accounting
Historical accounting data on revenues, costs, and expenses help in formulating future
budgets.
Accountants normally responsible for presenting managements budgeting goals in
financial terms.
The budget and its administration are, however, entirely managements responsibility.

6. The Benefits of Budgeting
Requires all levels of management to plan ahead.
Provides definite objectives for evaluating performance.
Creates an early warning system for potential problems.
Facilitates coordination of activities within the business.

7.The Benefits of Budgeting
Results in greater management awareness of the entitys overall operations.
Motivates personnel throughout organization to meet planned objectives.
A budget is an aid to management; not a substitute for management

8.Purpose
Budget helps to aid the planning of actual operations by forcing managers to consider
how the conditions might change and what steps should be taken now and by encouraging
managers to consider problems before they arise. It also helps co-ordinate the activities of
the organization by compelling managers to examine relationships between their own
operation and those of other departments. Other essentials of budget include:
To control resources
To communicate plans to various responsibility center managers.
To motivate managers to strive to achieve budget goals.
To evaluate the performance of managers
To provide visibility into the company's performance
For accountability

9.Essentials of Effective Budgeting
Depends on a sound organizational structure with authority and responsibility for
all phases of operations clearly defined.
Based on research and analysis with realistic goals.
Accepted by all levels of management.
10. Length of the Budget Period
May be prepared for any period of time.
Most common - one year.
Supplement with monthly and quarterly budgets.
Different budgets may cover different time periods.
Long enough to provide an attainable goal and minimize seasonal or cyclical
fluctuations.
Short enough for reliable estimates.
Continuous twelve-month budget.
11. BUDGETARY CONTROL
Budgetary Control is the process of establishment of budgets relating to various activities
and comparing the budgeted figures with the actual performance for arriving at
deviations, if any. Accordingly, there cannot be budgetary control without budgets.
Budgetary Control is a system which uses budgets as a means of planning and
controlling.
According to I.C.M.A. England Budgetary control is defined by Terminology as
the establishment of budgets relating to the responsibilities of executives to the
requirements of a policy and the continuous comparison of actual with the budgeted
results, either to secure by individual actions the objectives of that policy or to provide a
basis for its revision.
Brown and Howard defines budgetary control is "a system of controlling
costs which includes the preparation of budgets, co-ordinating the department and
establishing responsibilities, comparing actual performance with the budgeted and acting
upon results to achieve maximum profitability."
The above definitions reveal the following essentials of budgetary control:
(1) Establishment of objectives for each function and section of the organization.
(2) Comparison of actual performance with budget.
(3) Ascertainment of the causes for such deviations of actual from the budgeted
performance.
(4) Taking suitable corrective action from different available alternatives to achieve the
desired
12.Objectives of Budgetary Control:
Budgetary Control is planned to assist the management for policy formulation, planning,
controlling and co-ordinating the general objectives of budgetary control and can be
stated in the following ways:
(1) Planning: A budget is a plan of action. Budgeting ensures a detailed plan of action
for a business over a period of time.
(2) Co-ordination: Budgetary control co-ordinates the various activities of the entity or
organization and secure co-operation of all concerned towards the common goal.
(3) Control: Control is necessary to ensure that plans and objectives are being achieved.
Control follows planning and co-ordination. No control performance is possible without
predetermined standards. Thus, budgetary control makes control possible by continuous
measures against predetermined targets. If there is any variation between the budgeted
performance and the actual performance, the same is subject to analysis and corrective
action.

13.Advantages of Budgetary Control:
The advantages of budgetary control may be summarized as follows :
(1) It facilitates reduction of cost.
(2) Budgetary control guides the management in planning and formulation of policies.
(3) Budgetary control facilitates effective co-ordination of activities of the various
departments and functions by setting their limits and goals.
(4) It ensures maximization of profits through cost control and optimum utilization of
resources.
(5) It evaluates for the continuous review of performance of different budget centers.
(6) It helps to the management efficient and economic production control.
(7) It facilitates corrective actions, whenever there is inefficiencies and weaknesses
comparing actual performance with budget.
(8) It guides management in research and development.
(9) It ensures economy in working.
(10) It helps to adopt the principles of standard costing.
14.Limitations of Budgetary Control:
Budgetary Control is an effective tool for management control. However, it has certain
important limitations which are identified below:
(1) The budget plan is based on estimates and forecasting. Forecasting cannot be
considered to be an exact science. If the budget plans are made on the basis of inaccurate
forecasts then the budget progamme may not be accurate and ineffective.
(2) For reasons of uncertainty about future, and changing circumstances which may
develop later on, budget may prove short or excess of actual requirements.
(3) Effective implementation of budgetary control depends upon willingness, co-
operation and understanding among people reasonable for execution. Lack of co-
operation leads to inefficient performance.
(4) The system does not substitute for management. It is more like a management tool.
(5) Budgeting may be cumbersome and time consuming process.
15.Types Of Budget
Sales Budget
Production Budget
Purchase Budget
Expenditure Budgets
Cash Budget
Master Budget
Zero Base Budget
Flexible Budget
As budgets serve different purposes, different types of budgets have been developed. The
following are the different classification of budgets developed on the basis of time,
functions, and flexibility or capacity.
(A) Classification on the basis of Time:
1. Long-Term Budgets
2. Short-Term Budgets
3. Current Budgets
(B) Classification according to Functions:
1. Functional or Subsidiary Budgets
2. Master Budgets
(C) Classification on the basis of Capacity :
1. Fixed Budgets
2. Flexible Budgets
Functional budget
A budget of income and/or expenditure applicable to a specific function. A function may
refer to a process or a department. Functional budgets frequently include the following:
production cost budget (based on a forecast of production and plant utilization);
marketing cost budget; sales budget; personnel budget; purchasing budget; and research
and development budget.
A functional budget is one which is related to function of the business as for
example, production budget relating to the manufacturing function. Functional budgets
are
prepared for each function and they are subsidiary to the master budget of the business.
The various types of functional budgets to be prepared will vary according to the size and
nature of the business. The various commonly used functional budgets are:
1. Sales budget
2. Production budget
3. Plant utilization budget
4. Direct material usage budget
5. Direct material purchase budget
6. Direct labour (personnel) budget
7. Factory overhead budget
8. Production cost budget
Master Budget:
When the functional budgets have been completed, the budget committee will prepare a
Master Budget for the target of the concern. Accordingly a budget which is prepared
incorporating the summaries of all functional budgets. It comprises of budgeted profit and
loss account, budgeted balance sheet, budgeted production, sales and costs. The ICMA
England defines a Master Budget as "the summary budget incorporating its functional
budgets, which is finally approved, adopted and employed." The Master Budget
represents the activities of a business during a profit plan. This budget is also helpful in
coordinating activities of various functional departments.
fixed budget:
A budget which is normally set prior to the start of an accounting period, and which is not
changed in response to subsequent changes in activity or costs/revenues. Fixed budgets
are generally used for planning purposes.
flexible budget
A budget is drawn for a particular level of activity is called fixed budget. According to
ICWA London "Fixed budget is a budget which is designed to remain unchanged
irrespective of the level of activity actually attained." Fixed budget is usually prepared
before the beginning of the financial year. This type of budget is not going to highlight
the cost variances due to the difference in the levels of activity. Fixed Budgets are
suitable under static conditions.
Flexible Budget is also called Variable or Sliding Scale budget, "takes both the fixed and
manufacturing costs into account. Flexible budget is the opposite of static budget showing
the expected cost at a single level of activity. According to lCMA, England defined
Flexible Budget is a budget which is designed to change in accordance with the level of
activity actually attained." According to the principles that guide the preparation of the
flexible budget a series of fixed budgets are drawn for different levels of activity. A
flexible budget often shows the budgeted expenses against each item of cost
corresponding to the different levels of activity. This budget has come into use for solving
the problems caused by the application of the fixed budget.
Advantages of Flexible Budget
(1) In flexible budget, all possible volume of output or level of activity can be covered.
(2) Overhead costs are analysed into fixed variable and semi-variable costs.
(3) Expenditure can be forecasted at different levels of activity.
(4) It facilitates at all times related factor can be compared. which are essential for
intelligent decision making.
(5) A flexible budget can be prepared with standard costing or without standard costing
depending upon What the Company opts for.
(6) Flexible budget facilitates ascertainment of costs at different levels of activity, price
fixation, placing tenders and Quotations.
(7) It helps in assessing the performance of all departmental heads as the same can be
judged by terms of the level of activity attained by the business.

Conditions for Successful Budgeting:
1. The involvement and support of top management.
2. A clear definition of long term objectives and their communication. Short term
plans must be linked to long term objectives.
3. A realistic organisation structure with clearly defined responsibilities.
4. Genuine involvement of managers in all aspects of the budgeting process.
5. An appropriate accounting information system. This requires:
i. The recording of performances in relation to responsibilities.
ii. Prompt and accurate reporting of results.
iii. The ability to provide more detailed information and advice on request.
6. Budgets should be administered in a flexible manner. Significant changes in
circumstances should lead to changes in plan. Rigid adherence to budgets which are
inappropriate for current conditions leads to loss of credibility and effectiveness.

Budgetary control must be flexible:
This is the essential point of budgetary control. In budgetary control, we should make
budget flexible. According to changes, we change our budget.
Budgetary control must be through top management:
For successful budgetary control, it is necessary that budget must be made by top
management not middle management level.
Main type of budget:
A ) On the basis area coverage
i) Sale budget:
Sale budget is made by sale manager. This is sale departments budget. It is just
estimation of value of sale. But before making sale budget, sale manager must be kept
following point in the mind a) Business cycle b) changes seasons c) development of
market.
ii) Production budget:
Production budget is made by production manager. This is production department budget.
This is just estimation of the value of production in form of quantity and amount. Before
making production budget, production manager must be kept following point in his mind
a) demand of product b) supply of raw material, labour c) closing stocks quantity.
iii) Personnel budget:
Personnel budget is made by personnel manager. This is personnels department budget.
This is just estimation of following.
I) No. of workers
II) No. of working hours
III) Rate per hour
iv) Cash budget /Financial budget
This is made by finance accountant. This is finances department budget. This is just
estimation of reception and payment of cash and bank.
The importance of cash budget may be summarised as follow:-
1) Helpful in Planning. Cash budget helps planning for the most efficient use of cash. It
points out cash surplus, or deficiency at selected point of time and enables the
management to arrange for the deficiency before time or to plan for investing the surplus
money as profitable as possible without any threat to the liquidity.
(2) Forecasting the Future needs. Cash budget forecasts the future needs of funds, its
time and the amount well in advance. It, thus, helps planning for raising the funds through
the most profitable sources at reasonable terms and costs.
(3) Maintenance of Ample cash Balance. Cash is the basis of liquidity of the enterprise.
Cash budget helps in maintaining the liquidity. It suggests adequate cash balance for
expected requirements and a fair margin for the contingencies.
(4) Controlling Cash Expenditure. Cash budget acts as a controlling device. The
expenses of various departments in the firm can best be controlled so as not to exceed the
budgeted limit.
(5) Evaluation of Performance. Cash budget acts as a standard for evaluating the
financial performance.
(6) Testing the Influence of proposed Expansion Programme. Cash budget forecasts
the inflows from a proposed expansion or investment programme and testify its impact on
cash position.
(7) Sound Dividend Policy. Cash budget plans for cash dividend to shareholders,
consistent with the liquid position of the firm. It helps in following a sound consistent
dividend policy.
(8) Basis of Long-term Planning and Co-ordination. Cash budget helps in co-
ordinating the various finance functions, such as sales, credit, investment, working capital
etc. it is an important basis of long term financial planning and helpful in the study of
long term financing with respect to probable amount, timing, forms of security and
methods of repayment.
Scope and Techniques of Standard Costing and Budgetary Control
Scope:
(1) Budgets are prepared for different functions of business such as production, sales etc.
Actual results are compared with the budgets and control is exercised.
Standards on the other hand are complied by classifying, recording and allocation of the
expenses to cost units. Actual costs are compared with standard costs.
(2) Budgets have a wide range of coverage of the entire organization. Each operation or
process is divided into number of elements and standards are set for each such element.
(3) Budgetary control is concerned with origin of expenditure at functional levels.
Standard costing is concerned with the requirements of each element of cost.
(4) Budget is a projection of financial accounts whereas standard costing projects the cost
accounts.
Technique:
(1) Budgetary control is exercised by putting budgets and actuals side by side.
Variances are not normally revealed in the accounts. Standard costing variances are
revealed through accounts.
(2) Budgetary control system can be operated in parts. For example, Advertisement
Budgets, Research and Development Budgets, etc. Standard costing is not put into
operation in parts.
(3) Budgetary control of expenses is broad in nature whereas standard costing system is a
far more technically improved system by means of which the variances are analysed in
detail. Requisites for Effective Budgetary Control
The following are the requisites for effective budgetary control :
(1) Clear cut objectives and goals should be well defined.
(2) The ultimate objective of realising maximum benefits should always be kept
uppermost.
(3) There should be a budget manual which contains all details regarding plan and
procedures for its execution. It should also specify the time table for budget preparation
for approval, details about responsibility, cost centers etc.
(4) Budget committee should be set up for budget preparation and efficient execution of
the plan.
(5) A budget should always be related to a specified time period.
(6) Support of top management is necessary in order to get the full support and co-
operation of the system of budgetary control.
(7) To make budgetary control successful, there should be a proper delegation of
authority and responsibility.
(8) Adequate accounting system is essential to make the budgeting successful.
(9) The employees should be properly educated about the benefits of budgeting system.
(10) The budgeting system should not cost more to operate than it is worth.
(11) Key factor or limiting factor, if any, should consider before preparation of budget.
(12) For budgetary control to be effective, proper periodic reporting system should be
introduced. Organization for Budgetary Control In order to introduce budgetary control
system, the following are essential to be considered for a sound and efficient
organization. The important aspects to be considered are :
1. Organisation Chart
2. Budget Center
3. Budget Officer
4. Budget Committee
5. Budget Manual
6. Budget Period
7. Key Factor
(1) Organisation Chart: For the purpose of effective budgetary control, it is imperative
on the part of each entity to have definite "plan of organization." This plan of
organization is embodied in the organization chart. The organization chart explaining
clearly the position of each executive's authority and responsibility of the firm. All the
functional heads are entrusted with the responsibility of ensuring proper implementation
of their respective departmental budgets. An organization chart for budgetary control is
given showing clearly the type of budgets to be prepared by the functional heads. From
the above chart we can observe that the chairman of the company is the overall in charge
of the functions of the Budgeted Committee. A Budget Officer is the convener of the
budget committee, who helps in co-ordination. The Purchase Manager, Production
Manager, Sales Manager, Personnel Manager, Finance Manager and Account Manager
are made responsible to prepare their budgets.
(2) Budget Center: A Budget Center is defined by the terminology as "a section of the
organization of an undertaking defined for the purpose of budgetary control." For
effective budgetary control budget centre or departments should be established for each
of which budget will be set with the help of the head of the department concerned.
(3) Budget Officer: Budget Officer is usually some senior member of the accounting staff
who controls the budgetary process. He does not prepare the budget himself, but
facilitates and co-ordinates the budgeting activity. He assists the individual departmental
heads and the budget committee, and ensures that their decisions are communicated to
the appropriate people.
(4) Budget Committee: Budget Committee comprising of the Managing Director, the
Production Manager, Sales Manager and Accountant. The main objectives of this
committee is to agree on all departmental budgets, normal standard hours and
allocations. In small concerns, the Budget Officer may co-ordinate the work for
preparation and implementation of budgets. In large-scale concern a budget committee is
setup for preparation of budgets and execution of budgetary control.
(5) Budget Manual: A Budget Manual has been defined as "a document which set out the
responsibilities of persons engaged in the routine of and the forms and records required
for budgetary control." It contains all details regarding the plan and procedures for its
execution. It also specifies the time
table for budget preparation to approval, details about responsibility, cost centers,
constitution and organization of budget committee, duties and responsibilities of budget
officer.
(6) Budget Period: A budget is always related to specified time period. The budget period
is the length of time for which a budget is prepared and employed. The period may
depend upon the type of budget. There is no specific period as such. However, for the
sake of convenience, the budget period may be fixed depending upon the following
factors:
(a) Types of Business
(b) Types of Budget
(c) Nature of the demand of the product
(d) Length of trade cycle
(e) Economic factors
(f) Availability of accounting period
(g) Availability of finance
(h) Control operation
Key Factor
Key Factor is also called as "Limiting Factor" or Governing Factor. While preparing the
budget, it is necessary to consider key factor for successful budgetary control. The
influence of the Key Factor which dominates the business operations in order to ensure
that the functional budgets are reasonably capable of fulfillment. The Key Factors
include.
(1) Raw materials may be in. short supply.
(2) Non-availability of skilled labours.
(3) Government restrictions.
(4) Limited sales due to insufficient sales promotion.
(5) Shortage of power.
(6) Underutilization of plant capacity.
(7) Shortage of efficient executives.
(8) Management policies regarding lack of capital.
(9) Insufficient research into new product development.
(10) Insufficiency due to shortage of space.








Difference between Forecast and Budget:
budgets and forecasts refer to the anticipated actions and events. But still there are wide
differences between budgets and forecasts as given below:

Forecasts

Budgets

(1) Forecasts is mainly concerned with
anticipated or probable events

(1) Budget is related to planned events

(2) Forecasts may cover for longer period
or years

(2) Budget is planned or prepared for a
shorter period

(3) Forecast is only a tentative estimate

(3) Budget is a target fixed for a periOd
(4) Forecast results in planning

(4) Result of planning is budgeting

Difference between basis and current budget
Basis budget Current budget
A Budget, which remains unaltered over a
long period of time, is called as basis
budget.
A Budget, which is established for use over
a short period of time and is related to the
current condition, is called current budget.

Difference between fixed and flexible budget.

Particular Fixed budget Flexible budget
a. Definition
It is a Budget designed to remain
unchanged irrespective of the level
of activity actually attained.
It is a Budget, which by
recognizing the difference
between fixed, semi variable
and variable costs is designed
to change in relation to level
of activity attained.
b. Level of
Activity
It operates on one level of activity
and under one set of conditions. It
assumes that there will be no
change in the prevailing
conditions, which is unrealistic.
It consists of various budgets
for different levels of activity
c. Effect of
variance
analysis
Variance Analysis does not give
useful information as all Costs
(fixed, variable and semi variable)
are related to only one level of
Activity.
Variance Analysis provides
Useful information as each
cost is analyzed according to
its behavior.
d. Use for If the budgeted and actual activity
If facilitates the ascertainment
of cost, fixation of selling



Zero Base Budgeting (ZBB)
Zero Base Budgeting is a new technique of budgeting. It is designed to meet the needs of
the
management in order to ensure the operational efficiency and effective utilization of the
allocated resources of a concern. This technique was originally developed by Peter A.
Phyhrr, Manager of Taxas Instrument during 1969. This concept is widely used in USA
for controlling their state expenditure when Mr. Jimmy Carter was the president of the
USA. At present the technique has for its global recognition for many countries have
implemented in real terms. According to Peter A. Phyhrr ZBB is defined as an "Operative
Decision
making
levels differ significantly, then
aspects like cost ascertainment
and price fixation do not give a
correct picture.
price and submission of
quotations.
e.
Performance
Evaluation
Comparison of actual performance
with budgeted targets will be
meaningless, especially when
there is a difference between two
activity levels.
It provides a meaningful basis
of comparison of the actual
performance with the
budgeted targets.
f. Rigidity
It does not change with actual
volume of activity achieved. Thus it is
known as a Rigid or Inflexible budget.
It can be re casted
the basis activity level to be
achieved. Thus it is not rigid.
Planning and Budgeting Process" which requires each Manager to justify his entire
budget in detail from Scratch (hence zero base) and shifts the burden of proof to each
Manager to justify why we should spend any money at all." In zero-base budgeting, a
manager at all levels have to justify the importance of activity and to allocate the
resources on priority basis.
Zero-Base Budgeting
Traditionally, on the basis of the targets which have been set in the last year,
budgeting is done. In the last years budget, certain additions & deductions are done for
arriving at the figures for the current budget. Thus, in making traditional budget, we have
to depend on the last years targets as well as on the principles of incrementalism or
decrementalism, for the purpose of deciding upon the additions or deletions which are
required to be incorporated in the budget figures of the previous year so that the figures of
the current budget can be arrived.

In case of Zero-base budgeting (ZBB), the assumption is made that there was no
budget for the previous year & in the light of expected benefits & costs which are
involved; independent evaluation are made of the proposals of the current budget. Thus,
ZBB refers to the formulation of a budget without any reference made to the previous
plans & achievement but particular reference is made to the justification of the proposed
resources allocation. This is not done only once. Whenever a budget needs to be
prepared, every time, the process of budgeting should start from zero & in terms of cost-
benefit analysis, the proposed allocation of resources should be justified.
In the cases of planning & decision making, ZBB becomes ideal. Undertaking of
previous type of work of which there is no previous experience is included in
development planning. In these cases, on the basis of past targets which have been
modified by certain additions & deletions, budgets can be prepared. On the basis of cost-
benefit analysis, evaluation of every budget proposal is to be done. Identification of all
proposed activities is to be done, as evaluation of decision packages is made by
systematic analysis & ranking is done in order of priority. Upon the priority list, depends
the decision making.
Main Features of ZBB:
The main features of ZBB are the following:
a. As the basis of budgeting, Zero (or scratch) is taken & not the previous budgets
targets.
b. The fund demanded has to be justified by the management of each decision unit.
c. Grouping of all proposed activities has to be done into various decision packages.
d. According to priority, the adequate evaluation & arrangement of all decision
packages are done.
e. After proper evaluation, consideration has to be given to the alternative decision
packages.
f.On the merits of evaluation of all decision packages including the alternative decision
packages, resources are finally allocated.
Difference between ZBB & Traditional Budgeting:
The distinction between the traditional budgeting & zero-base budgeting are the
following:
a. In traditional budgeting, emphasis is given on previous level of expenditure,
whereas, in ZBB, every time a budget is prepared, new economic appraisal is made.
b. Traditional budgeting is a function which is accounting oriented, whereas, ZBB is
a function which is project or decision oriented.
For the preparation of a traditional project, rejustification of the existing programme is
not needed, whereas, for the preparation of a zero-base budgeting, the justification of
existing & new projects is needed to be done in the light of benefits & costs.
c. In the case of traditional budget, the justification regarding why, for a particular
decision unit, a particular amount of expenditure is decided upon, is justified by the top
management, whereas, in case of ZBB, the amount of expenditure is justified by the
manager of the decision unit & not the top management.
d. In the case of traditional budgeting, the amount to added with or deleted from the
figures of the previous budget figures is only taken into account, whereas, in case of ZBB,
existing level of expenditure is appraised & the justification of future proposal for
expenditure is done from different angles.
e. Preparation of a traditional budget is a simple job which is done year after year
monotonously, whereas, preparation of a zero-base budgeting requires logical approach &
many complex steps are involved for the establishment of logic behind a proposal.
Applicability of ZBB:
In planning & development areas particularly of the government & local bodies, ZBB is
very suitably applicable. With reference to costs & benefits, thorough examination of the
projects of every ministry is done. In respect of allocation of resources, upon the report of
cost-benefit examination which is prepared by persons competent to do so, depends,
which project of which ministry shall enjoy priority. ZBB becomes ideal in cases where
the resources are limited but there are many development works which is needed to be
done as in case of educational institutions, local bodies etc., because there is almost
guarantee of the efficient use of limited resource.
In manufacturing concerns, for the purpose of controlling cost there are many devices like
standard cost technique, work & motion study etc. The prime costs & production
overhead gets controlled by these techniques because in these cases direct relationship
between cost & output is there. But in manufacturing concerns production function gets
supported by various other expenditures, but in these cases, relationship cannot be
established between cost & output. For the application of ZBB, this area of expenditure is
a suitable field. Expenditure like accounting, maintenance, electricity, rent of
administrative office, postage, advertisement, research, development & many others
covers this area.
Merits of ZBB:
The following are the merits of ZBB:
a. Careful examination of all projects-whether current or future is done with
reference to cost & benefits & the project which is most efficient is accepted. Thus, ZBB
is always a technique which is based on logic. The current projects, only if they are
logically sound & efficient, are continued.
b. For rational planning, on the cost-benefit acceptability, the most efficient ones
amongst the available alternatives are chosen. The managers of decision units are
required by ZBB to find out cost effective ways for the implementation of the plans.
Thus, with the help of ZBB, best planning is made & cost can also be controlled with the
help of ZBB.
c. In respect of both existing & future projects, cost-benefit analysis is done.
Ranking of the projects is done on the basis of the result of the analysis & allocation of
funds is done in order of priority. Thus, ZBB helps in getting labour efficiently allocated.
d. In ZBB, for the purpose of using the available resources of the organization, the
most useful alternatives are found out. Alternative ways are taken into consideration in
performing an activity also. Similarly, consideration is also given to the alternative
quantum of efforts which are to be put in. These help promoting new ideas so that an
activity can be performed in the best possible way.
e. With regard to justifiability of continuing new undertaking on the basis of cost-
benefit analysis, existing activities & new projects are appraised with equal importance.
f. In ZBB, reports are to be submitted by managers of all decision units on their
claims of funds & justification of the claims. Thus, in the making of zero-base budget, it
becomes compulsory for all managers of decision units to participate. Thus in allocation
& utilization of funds, forthcoming of new ideas gets promoted by this.
g. Since in ZBB, existing activities gets appraised carefully, activities which fails to
give desired results may be discontinued & thus by this way unproductive expenditure
may be saved.
h. Since all managers adopt ZBB technique, they are obliged for making self
evaluation of projects under their command. If there are any loopholes in the working
progress, those are automatically detected & remedial measures are adopted. Efficiency in
performance can be achieved by awareness of managers in respect of detection of errors
& their rectification.
i. Automatic motivation is created by ZBB which helps forming a management team
of individuals having skills & talents.
j. Top management gets linked with medium & lower level management with the
help of ZBB. Thus, speedy communication helping expediting appropriate decision-
making is ensured.
k. ZBB helps in introducing & implementing Management by objective (or MOB).
The objectives of the traditional budgeting can be fulfilled using ZBB; as other objectives
can as well be fulfilled with its help.
Demerits of ZBB:
The following are the demerits of ZBB:
a. Time, energy & money is required in collecting & analyzing data of alternative
future projects as well as existing activities.
b. If full co-operation amongst management staff is not forthcoming, then ZBB
technique implementation becomes difficult.
c. As ideal standard of evaluation is not available, evaluation often becomes very
difficult. Technical knowledge may be required in a desired managers evaluation which
may not be available.
d. Managers are required to undergo continuous training. Implementation of ZBB
cannot be expected in a right way if basis idea & objective of ZBB are not crystal clear to
managers.
e. In case of ZBB, according to priority, ranking of projects need to be done.
Irrational ranking of project may arise due to ego of top management (i.e. Irrespective of
its merits, a project favored by the top management may be ranked high). Moreover,
regarding the method of ranking which needs to be adopted, confusion may arise among
the management staff.
f. Involvement of good number of individuals may be required by ZBB. Thus,
complications may be created in communication system which results in difficulty in
managing of the huge volume of data & voluminous paper work may be involved etc

Important Aspects of ZBB
Zero Base Budgeting involves the following important aspects:
(1) It emphasises on all requisites of budgets.
(2) Evaluation on the basis of decision packages and systematic analysis, i.e., in view of
cost benefit analysis.
(3) Planning the activities, promotes operationai efficiency and monitors the performance
to achieve the objectives.
Steps Involved in ZBB
The following are the steps involved in Zero Base Budgeting:
(1) No Previous year performance of inefficiencies are to be taken as adjustments in
subsequent year.
(2) Identification of activities in decision packages.
(3) Determination of budgeting objectives to be attained.
(4) Extent to which Zero Base Budgeting is to be applied.
(5) Evaluation of current and proposed expenditure and placing them in order of priority.
(6) Assignment of task and allotment of sources on the basis of cost benefit comparison.
(7) Review process of each activity examined afresh.
(8) Weightage should be given for alternative course of actions.
Advantages of ZBB
(1) Utilization of resources at a maximum level.
(2) It serves as a tool of management in formulating production planning.
(3) It facilitates effective cost control.
(4) It helps to identify the uneconomical activities.
(5) It ensures the proper allocation of scarce resources on priority basis.
(6) It helps to measure the operational inefficiencies and to take the corrective actions.
(7) It ensures the principles of Management by Objectives.
(8) It facilitates Co-operation and Co-ordination among all levels of management.
(9) It ensures each activity is thoroughly examined on the basis of cost benefit


Flexible budget problem

Illustration1: For the production of 10000 units of a product, the following are the
budgeted expenses:
rs (per unit)
Direct material 30
Direct Labour 15
Variable overhead 12.50
Fixed overhead (rs 75000) 7.50
Variable expenses (direct) 2.50
Selling expenses (10% fixed) 7.50
Administration expenses ($ 25000 rigid for all production levels) 2.50
Distribution expenses (20% fixed) 2.50
Total cost of sale per unit 80.00
Prepare a budget for production of 12000, 14000 & 16000 units

Solution: Flexible Budget
Per unit 12000 units 14000 units 16000 units
rs rs rs rs
Direct Material 30 360000 420000 48000
Direct Labour 15 180000 210000 240000
Direct Variable expenses 2.50 30000 35000 40000

Variable Overhead:

Production 12.50 150000 175000 200000
Selling (Workings 1) 6.75 81000 94500 108000
Distribution (Workings 2) 2.00 24000 28000 32000
Marginal Cost 137.50 825000 962500 1100000
Fixed Production Overhead 75000 75000 75000
Administration Overhead 25000 25000 25000
Selling Overhead (Workings 1) 7500 7500 7500
Distribution Overhead (Workings 2) 5000 5000 5000
Fixed Cost 112500 112500 112500
Total Cost 937500 1075000 1212500
Cost per unit 78.125 76.78 75.78
Workings:

(1) Selling Expenses:
Total for 10000 units is rs 75000. 10% of this i.e. rs 7500 is fixed & the balance of rs
67500 is variable. Hence, variable cost per unit is rs 6.75.
(2) Distribution expenses:
Total for 10000 units is rs 25000. 20% of this i.e. rs 5000 is fixed & the balance of rs
20000 is variable. Hence, variable cost per unit is rs 2.
Illustration(flexible budget):
Q.A factory is currently working at 50% capacity and produce 10,000 units.prepare a
flexible budget and estimate the profits of the company when it worked @60% and 80%
capacity and advise to the company.at 605 working raw material cost increases by 2%.at
80% raw material cost increases by 5% and selling price fall by 5%.at 50% capacity
working the product cost of rs.180 per unit and is sold at rs.200 per unit.
The unit cost of rs.180 is made up as follows:
Material rs.100
Labour rs.30
Factory oh rs.30(40% fixed)
Administration oh rs.20(50% fixed)
SOLUTION:
Capacity(%) 50 60 80
units 10,000 12,000 16,000
Per unit Rs Per unit Rs Per unit rs
A.sales 200.00 20,00,000 196.00 23,52,000 190.00 30,40,000
B.variable cost
Direct materials
direct labour
variable overheads
-factory overheads
-administrations
overheads

100
30

18
10

10,00,000
3,00,000

1,80,000
1,00,000

102
30

18
10

12,24,000
3,60,000

2,16,000
1,20,000

105
30

18
10

16,80,000
4,80,000

2,88,000
1,60,000

Total variable costs 158 15,80,000 160 19,20,000 163 26,08,000
c.contribution(A-B) 42 4,20,000 36 4,32,000 27 4,32,000
D.fixed costs
-factory
-administration
TOTAL FIXED
COSTS
E.TOTAL
COST(B+D)
F.PROFIT(A-E)

12.00
10.00
22.00

180.00

20.00

1,20,000
1,00,000
2,20,000

18,00,000

2,00,000

10.00
8.33
18.33

178.33

17.67

1,20,000
1,00,000
2,20,000

21,40,000

2,12,000

7.50
6.25
13.75

176.75

13.25

1,20,000
1,00,000
2,20,000

28,28,000

1,12,000






CASH BUDGET:
cash budget sets out the expected cash/bank receipts and payments, usually on a month
by- month basis, for the next three, six or twelve months, in order to show the estimated
bank balance at the end of each month throughout the period.
From the cash budget, the managers of a business can decide what action to take when a
surplus of cash is shown to be available or, as is more likely, when a bank overdraft needs
to be arranged.
Definition: A cash budget is an estimation of a person's or a company's cash inputs and
outputs over a specific period of time.
Cash budget are mostly used to estimate whether or not a company has a sufficient
amount of cash to fulfill regular operations. You can also use it to determine whether too
much of a companys cash is being spent in unproductive ways.
By creating a cash budget - wherein a company develops a summary of the anticipated
revenues, operating expenditures, sale and purchase of assets, and admission or settlement
of debt one can determine when more cash resources are needed, and when there will be
an excess of cash.
A cash budget helps
determine whether or not a company has enough cash to operate
What is considered to be cash?
Cash is the amount of assets that a company has available to spend immediately. These
include bank balances, bank account deposits, and more. Liquidity is another word for
cash.
Why should have a cash budget?
A cash budget is very important, especially for smaller companies. It allows a company to
establish the amount of credit that it can extend to customers without having problems
with liquidity.
A cash budget helps you avoid having a shortage of cash during periods of numerous
expenses. If you cannot pay your expenses because you have a cash shortage, you must
resolve this problem right away by bringing in more revenue, deferring or eliminating
some of your costs or being approved for a larger loan from your bank.
These solutions are costly, time-consuming, and not guaranteed, so it's therefore best to
plan for higher expenses ahead of time, if possible.
A cash budget should be distinguished from a cash forecast, although the two are
closely connected.A forecast is A prediction of future events and their quantification
for planning purposes (CIMA Official Terminology). In other words, a forecast is used
for planning future action; it is not the plan.A cash budget is a plan and may also be used
for control purposes. Consequently, the cash budget may remain unchanged throughout
the budget period, whereas a cash forecast is updated regularly. A cash forecast is
intended to alert management to future problems due to cash shortages or to the
opportunities provided by cash surpluses.
Principles of cash budgeting:
CIMA Official Terminology describes a cash budget as A detailed budget of estimated
inflows and outflows incorporating both revenue and capital items. Cash budgeting, like
operational budgeting, requires you to follow instructions carefully. The following points
are important:
1 It is necessary to take into account the leads and lags between activities generating
revenues or incurring costs and the resulting cash inflows and outflows. For example,
materials are bought in advance of production, but, because they are purchased on credit,
they may not be paid for until after the product has been manufactured and sold.
Similarly, not all credit customers will pay at the end of the month, some will be allowed
(or take) a longer period of credit than others.
2 It will be necessary to take account of non-trading transactions such as capital
expenditure, corporation tax and value added tax.
3 Provisions for depreciation and any notional or opportunity costs must be subtracted
from total costs when calculating cash payments. The reason that these costs should be
ignored is that they are imaginary, therefore, they do not cause any cash expenditure.
4 It may be necessary to take overdraft limits into account as they can constrain the
period of credit allowed or taken, the levels of stock carried and the growth in sales.
However, in the ICSA Management Accounting examination you only need to be aware
of these problems insofar as they affect your solutions.The details of working capital
management are examined in the ICSAs Corporate Financial Management paper.
5 In cash budgeting problems it is usually necessary to have figures for opening balances
for debtors, creditors and cash. These balances can be taken from the working capital
section of the preceding periods balance sheet.
2 The mechanics of cash budgeting
The cash budget should fit into the working capital budget. The working capital budget is
linked to operational budgets via inventory, debtors and creditors. Connections between
the operating budgets, the working capital budget and the cash budget include:
_ the receipts section of the cash budget is linked to the budgets for sales and debtors;
_ payments for materials in the cash budget are linked to the budgets for materials
purchases and creditors;
_ payments for wages in the cash budget are directly linked to the wages budget; _
payments for overheads in the cash budget are linked to the budgets for overheads and to
the creditors budget.
sections of a cash budget
A cash budget consists of three main sections:
receipts for the month
payments for the month
summary of bank account
Receipts are analysed to show the amount of money that is expected to be received from
cash sales, trade receivables, sale of non-current assets, capital introduced/issue of shares,
loans received etc.
Payments show how much money is expected to be paid in respect of cash purchases,
trade payables, expenses (often described in cash budgets as operating expenses),
purchases of noncurrent assets, repayment of capital/shares and loans. Note that non-cash
expenses (such as depreciation and doubtful debts) are not shown in the cash budget.
The summary of the bank account at the bottom of the cash budget shows net cash
flow (total receipts less total payments) added to the bank balance at the beginning of the
month, and resulting in the estimated closing bank balance at the end of the month. An
overdrawn bank balance is shown in brackets.
The main difficulty in the preparation of cash budgets lies in the timing of receipts and
payments for example, trade receivables may pay two months after date of sale, or trade
payables may be paid by the business one month after date of purchase: it is important to
ensure that such receipts and payments are recorded in the correct month column.
Remember that the cash budget, as its name suggests, deals only in cash/bank
transactions; thus non-cash items, such as depreciation, are never shown. Where cash
discounts are allowed or received, only the actual amount of money expected to be
received or paid is recorded. Similarly, where a business incurs bad debts, only the
amount of money expected to be received from good trade receivables is recorded in the
cash budget.
CASH BUDGET :

ILLUSTRATION:
JAB company making for a stock in the first quarter of the yesr is assisted by its bankers
with overdraft accommodation.the following are the relevant budget figures:
months Sales(Rs) Purchases (rs) Wages(rs)
Nov. 1,20,000 83,000 9,800
Dec. 1,28,000 96,000 10,000
Jan 72,000 1,62,000 8000
Feb. 1,16,000 1,64,000 4,000
Mar. 84,000 1,79,000 10,400

BUDGETED CASH AT BANK, 1 JAN 2004=RS 17,200.Credit terms of sales on payment by the
end of the month of supply. On an average, one-half of sales are paid on the due date while the
other half are paid during next month. Creditors are paid during the month following the month of
supply. You are required to prepare a cash budget for quarter, 1
st
January-31
st
March 2004
showing the budgeted amount of bank facilities required at each month. (M.com.,
oct.99, adapted)

Solution:
Cash budget for the quarter ending 31-3-2004
PARTICULARS Jan Feb. Mar.
A. opening
B .receipts
Received from
debtors
17,200

1,24,000
37,200

1,00,000
(28,800)

94,000
C.TOTAL(A+B) 1,41,200 1,37,200 65,200
PAYMENTS
Paid to creditors
Expenses-wages

96,000
8,000

1,62,000
4,000

1,64,000
10,400
E.TOTAL 1,04,000 1,66,000 1,74,400
F.CLOSING(C-
E)
37,200 (28,800) (1,09,200)

Q.From the following information and the assumption that the balance in hand on 1
st
jan
is rs.72,500,prepare cash budget.
Month Sales
Rs
Materials
Rs
Wages
Rs
Selling,
Distribution
Cost . Rs
Production
Cost
Rs
Administration
Cost
Rs
JAN 72,000 25,000 10,000 4,000 6,000 1,500
FEB 97,000 31,000 12,100 5,000 6,300 1,700
MAR 86,000 25,500 10,600 5,500 6,000 2,000
APR 88,600 30,600 25,000 6,700 6,500 2,200
MAY 1,02,500 37,000 22,000 8,500 8,000 2,500
JUN 1,08,700 38,800 23,000 9,000 8,200 2,500
Assume that 50% are cash sale.assests are to be acquired in the month of feb and
april.therefore provision should be made for the payment of rs.40,000 and rs.25,000 for
the same.an application has been made to the bank for the grant of loan of rs.30,000 and it
is hoped that it will be received in the month of may.
It is anticipated that dividend of rs.35,000 will be paid in june.debters are allowed 1
months credit.sales commission @2% on cash sale and 5% on cash collection from
debtors is to be paid.creditors(for goods or overheads)grant one month credit.
SOLUTION:
Cash budget from January to june
particulars Jan. Feb. Mar. April May june
A. opening
B. receipts
Sales(cash)
Received from debtors
Bank loan
72,500

36,000
-
-
97,780

48,500
36,000
90,910

43,000
48,500
1,24,525

43,300
43,000
1,19,789

51,250
44,300
30,000
1,74,099

54,350
51,250
C .total 1,08,500 1,82,280 1,82,410 2,11,825 2,45,339 2,79,699
D. payments
Paid to creditors exp.
-wages
-Commissinn
-production oh
-s & d oh
-administration OH
-cash discount

-
10,000
720
-
-
-
-

25,000
12,100
970
6,000
4,000
1,500
1,800

31,000
10,600
860
6,300
5,000
1,700
2,425

25,500
25,000
886
6,000
5,500
2,000
2,150

30,600
22,000
1,025
6,500
6,700
2,200
2,215

37,000
23,000
1,087
8000
8,500
2,500
2,563
Machine
Dividend
40,000 25,000


35,000
E. TOTAL 10,720 91,370 57,885 92,036 71,240 1,17,650
F.CLOSING 97,780 90,910 1,24,525 1,19,789 1,74,099 1,62,049























SUMMARY
A budget is a financial plan for a business, prepared in advance.
Budgets are used to plan and control the business.
Budgets for income or expenditure are prepared for each section of the business
purchases, sales (revenues), production, labour, trade receivables, trade payables, cash
Budgetary planning is the process of setting the budget for the next period.
Budgetary control uses the budgets to monitor actual results with budgeted figures.
Responsibility for budgets is given to managers and supervisors the budget holders.
A cash budget sets out the expected cash/bank receipts and payments expected to pass
through the bank account, usually on a month-by-month basis.
A cash budget enables the managers of a business to take action when a surplus of
money is shown to be available or when a bank overdraft needs to be arranged.
http://accountingexplained.com/managerial/master-budget/cash-budget.. Written by
Irfanullah Jan
2. http://www.unf.edu/~dtanner/dtch/dt_ch40.htm
3. Magazines
Journal of Accountancy
The Practical Accountant
http://www.bankingawareness.com
4. www.gntmasterminds.com/BUDGETARY.pdf
http://ebooks.narotama.ac.
5. http://www.tutorsonnet.com
http://accountingexplained.com