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10
BUDGETARY CONTROL
CONTENTS
10.0 Aims and Objectives
10.1 Introduction
10.2 Types of Budget
10.3 Cash Budget
10.4 Fixed & Flexible Budget
10.4.1 Fixed Budget
10.4.2 Flexible Budget
10.5 Master Budget
10.6 Zero Base Budgeting (ZBB)
10.6.1 Traditional Budgeting vs Zero Base Budgeting
10.6.2 Steps involved Zero Base Budgeting
10.6.3 Benefits of Zero Base Budgeting
10.6.4 Criticism
10.7 Let us Sum up
10.8 Lesson-end Activity
10.9 Keywords
10.10 Questions for Discussion
10.11 Suggested Readings
10.1 INTRODUCTION
Budget is an estimate prepared for definite future period either in terms of financial or
non financial terms. Budget is prepared for any course of action or business or state or
Nation, as a whole. The budget is usually expressed in terms of total volume.
According to ICMA, England, a budget is as follows "a financial and or quantitative
statements prepared and approved prior to a defined period of time, of the policy to be
pursed during the period for the purpose of attaining a given objective".
It is in other words as " detailed plan of action of the business for a definite period of time".
What is meant by Budget?
It is a statement of financial affairs/quantitative terms of an activity for a defined period,
to achieve the enlisted objectives.
Accounting and Finance for What is budgeting?
Managers
Budgeting is the course involved in the preparation of budget of an activity.
What is Budgetary Control?
Budgetary control contains two different processes one is the preparation of the budget
and another one is the control of the prepared budget.
According to ICMA, England, a budgetary control is " the establishment of budgets
relating to the responsibilities of executives to the requirements of a policy and the
continuous comparison of actual with budgeted results, either to secure by individual
action the objectives of that policy or to provide a basis for its revision".
According to J.Batty "Budgetary control is a system which uses budgets as a mans of
planning and controlling all aspects of producing and/or selling commodities and services".
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Budgetary Control
10.2 TYPES OF BUDGET
The budgets can be classified into three categories:
Budgets
Material Budget
Short Term
Labour Budget
Cash budget
Other Incomes
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Accounting and Finance for Cash payments are as follows:
Managers
Cash payments
Illustration 1
From the following information prepare a cash budget for the months of June and July
Month Credit sales Credit purchase Manufacturing Selling
Rs Rs Overheads Rs overheads Rs
April 80,000 60,000 2,000 3,000
May 84,000 64,000 2,400 2,800
June 90,000 66,000 2,600 2,800
July 84,000 64,000 2,000 2,600
Additional Information:
1. Advance tax of Rs 4,000 payable in June and in December 1994
2. Credit period allowed to debtors is two months
3. Credit period allowed by the vendors or suppliers
4. Delay in the payment of other expenses one month
5. Opening balance of cash on 1st June is estimated as Rs. 20,000/-
Solution:
First step is in the preparation of a cash budget is to open the statement with the opening
cash balance available.
Secondly, if any cash receipts are available that should be added one after another. In
this problem, Sales can be bifurcated into two classifications, the first one is cash sales.
If the cash sales is given, the amount of cash receipt due to cash sales should have to be
immediately brought under the respective period i-e during the same month or week.
The next is the credit sales of the firm, the volume of sales should only be effected only
at the amount of realization of sales or collection of credit sales from the consumers and
customers. If cash sales is not given instead credit sales only the component given, that
should be added in the list of cash receipts ; by registering the credit period involved for
the customers and consumers. Being as credit sales, the amount of sales realization
should only relevantly be considered during the specified period.
Third step is to list out the various items of cash expenses expected to incur during the
specified period. The text of the problem deals with the delay of making the payment of
expenses is one month in all cases; It means the expenses like Manufacturing overheads,
selling overheads are expected to pay one month later i-e these expenses will be paid
one month after. It means that the May month of other expenses are paid only in the
month of June and during the month of June month expenses are met out.
The purchases requires same kind of treatment in the case of sales. Normally, the
purchases are classified into two divisions viz cash purchases and credit purchases.
The cash purchases should be given effect only at the moment of cash payment is paid
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on the volume of purchase, but, if the credit purchases are made by the firm, the credit
allowed by the vendor/supplier to make the payments should be relatively considered for Budgetary Control
the expected outflow of cash i-e payment of purchase one month later or two months
later.
The expected time period occurrence of a either cash receipt or cash payment should be
considered for the preparation of the cash budget.
The cash budget should be prepared separately in the statement to derive the closing
balance of the specified year/month. The closing balance of the yester period or previous
period has to be carried forward to the next period as opening balance of the preparation
of a budget. The closing balance of the month June will be the opening balance of the
month July. Once the statement has been completed in the preparation of budget of
respective periods should be consolidated for the specified periods.
Cash Budget for the Months of June and July 1998
Particulars June Rs July Rs
Opening balance 20,000 26,800
Receipts: 80,000 84,000
Sales
Total Cash Receipts I 1,00,000 1,10,800
Payments: 64,000 66,000
Purchases
Manufacturing Overheads 2,400 2,600
Selling Overheads 2,800 2,800
Tax payable 4,000 -------------
Total Payments II 73,200 71,400
Balance I-II 26,800 39,400
Illustration 2
From the estimates of income and expenditure, prepare cash budget for the months from
April to June.
Month Sales Rs Purchases Rs Wages Rs Office Exp. Selling Exp. Rs
Rs
Feb 1,20,000 80,000 8,000 5,000 3,600
Mar 1,24,000 76,000 8,400 5,600 4,000
Apr 1,30,000 78,000 8,800 5,400 4,400
May 1,22,000 72,000 9,000 5,600 4,200
June 1,20,000 76,000 9,000 5,200 3,800
i. Plant worth Rs. 20,000 purchase in June 25% payable immediately and the remaining
in two equal installments in the subsequent months
ii. Advance payment of tax payable in Jan and April Rs 6,000
iii. Period of credit allowed
a. By suppliers 2 months
b. To customers 1 month
iv. Dividend payable Rs.10,000 in the month of June
v. Delay in payment of wages and office expenses 1 month and selling expenses
½ month. Expected cash balance on 1st April is Rs. 40,000.
Solution:
a. Plant worth Rs 20,000/ purchased, payable immediately is 25% i-e Rs.5,000 should
be paid in the month of June. The remaining cost of the machine has to be paid in
the subsequent months, after June. The payments whatever are expected to make
after June is not relevant as far as the budget preparation concerned.
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Accounting and Finance for b. Delay in the payment of wages and office expenses is only one month. It means
Managers
wages and office expenses of Feb month are paid in the next month, March.
Selling expense From the above coloured boxes, it is obviously understood that
during the months of April, May and June ; the following will be stream of payment
of selling expenses.
April= Rs. 2,000 of Mar (Previous Month) and Rs. 2,200 of April (Current month)=
Rs.4,200/
May= Rs. 2,200 of April (Previous Month) and Rs.2,100 of May (Current month)=Rs.
4,300/
June= Rs. 2,100 of May (Previous Month) and Rs.1,900 of June (Current
month)=Rs. 4,000/
c. Selling expenses is having the delay of ½ month, which means 50% of the selling
expenses is paid only in the current month and the remaining 50% is paid in the next
Particulars Feb Mar April May June
Selling 3,600 4,000 4,400 4,200 3,800
Expenses
Payment 50% 1,800 2,000 2,200 2,100 1,900
in the current
month
Delay 50%- 1,800 2,000 2,200 2,100 1,900
will be paid in
the subsequent
month
Every month 50% of the selling expenses of the current month and 50% of the previous
month selling expenses are paid together ; the above coloured boxes depict the payment
of 50% of the current selling expenses along with 50% expenses of previous month.
Cash Budget for the Periods ( April and June)
Flexible budget is prepared for any level of production as an estimate of statement of all
expenses i-e the expenses are classified into three categories viz variable, semi-variable
and fixed expenses. The structure of the budget for any output is only to the tune of the
actual performance achieved. This is the budget facilitates not only to have comparison in
between various levels of production but also to identify the level of lowest production cost.
Utilities of the flexible budget:
l This budget is most useful tool of analysis in studying the sales at when the
circumstances are not warranting to predict
l It is mostly suited to the seasonal business, where the sales volume is getting differed
from one period to another due to changes taken place in the taste and preferences
of the buyers
l The production is being done on the basis of demand of the products in the market.
The demand of the products is studied only through demand forecasting. The flexible
budget is more applicable in the case of products, which are greatly finding difficult
to forecast the demand
l The budget is prepared only during the time of acute shortage of resources of
production viz Men, Material and so on
Illustration 3
Draft a flexible budget for overhead expenses on the basis of following information and
determine the overhead rates at 70% 80% and 90% plant capacity.
Particulars 70% capacity 80% capacity Rs 90% capacity
Variable Overheads
Indirect Labour ----------------- 24,000 ----------------
Stores including spares ----------------- 8,000 ----------------
Semi-variable overheads ----------------- 40,000 ----------------
Power( 30% fixed ,70%)
Repairs and maintenance ----------------- 4,000 ----------------
80% fixed and 20% variable
Fixed Overheads ----------------- 22,000 -----------------
Depreciation
Insurance ----------------- 6,000 -----------------
Salaries ----------------- 20,000 -----------------
Total overheads ----------------- 1,24,000 -----------------
Solution:
Flexible Budget for the various capacities
Illustration 5
From the following information relating to 1963 and conditions expected to prevail in
1964, prepare a budget for 1964:
State the assumption you have made, 1963 actuals
Sales 1,00,000 (40,000 units)
Raw materials 53,000
Wages 11,000
Variable overheads 16,000
Fixed overheads 10,000
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1964 prospects Budgetary Control
10.6.4 Criticism
1. Non financial matters cannot be considered for the cost & benefit analysis
2. Difficulties involved in the process of ranking of the decision packages
3. It needs more time span for preparation and cost of operations is more and more
10.9 KEYWORDS
Budget: A financial statement prepared for specified activity for future periods
Budgeting: Activity of preparing the budget is known as budgeting
Budget control: Quantitative controlling technique to assess the performance of the
organization
Cash Budget: It is a statement prepared by the organization to identify the future needs
and receipts of cash from the yester activities
Flexible Budget: It is a financial statement prepared on the basis of principle of flexibility
to identify the cost of the unknown level of production from the existing level of operational
176 capacity.
Budgetary Control
10.10 QUESTIONS FOR DISCUSSION
1. Define budget.
2. Define budgetary control.
3. Highlight the various types of budget.
4. Elucidate the process of production budget.
5. Illustrate the methodology of purchase budget.
6. Draw the process of preparing the cash budget.
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