BUDGETING AND BUDGETARY CONTROL NOTES

Present  business world is full of competition, uncertainty and exposed to different types of risks. The complexity of managerial problems has led to the development of various management control techniques and procedures useful for the management in managing the business successfully. One of the essential features of modern business management is planning and control. There are a number of tools and devices which assist management in planning and controlling business operations. Budgetary control  is the most common, useful and widely used standard device of planning and control. Before defining the  budgetary control let us first understand the meaning of a ‘budget’ and ‘control’.

Meaning of Budget



A budget is a detailed plan of operations for some specific future period. It is an estimate prepared in advance of the period to which it applies. It acts as a business barometer as it is complete programme of activities of the business for the period covered. According to Gordon and Shillinglaw budget may be defined as “a predetermined detailed plan of action developed and distributed as a guide to current operations and as a partial basis for the subsequent evaluation of performance”. The Chartered Institute of Management Accountants, London defines a budget as “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. Thus, the following are the essentials of a budget :

• It is prepared in advance and is based on a future plan of actions.
• It relates to a future period and is based on objectives to be attained.
• It is a statement expressed in monetary and/or physical units prepared for the implementation of policy formulated by the management.

Meaning of Control

Control means, “some sort of systematic effort to compare current performance to a predetermined plan or objective, presumably in order to take only remedial action required”. This is a very general definition of the term. However, as a management function, it has been defined as “the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organisation’s goals”.

Management control process involves two separate but closely related activities : planning and control. Planing means deciding what is to be done and how it is to be done. Control is assuring that desired results are attained. Budget is imply a plan of action hence the technique of Budgetary Control is an important tool of management control.

15.2   MEANING OF BUDGETARY CONTROL

According to W.W. Bigg, “The term ‘budgetary control’ applies to a system of management and accounting control by which all operations and output are forecast as far as ahead as possible and the actual results, when known, are compared with the budget estimates.” Thus, the term ‘budgetary control’ is designed to evaluate the performance in terms of goals budgeted through budget reports.

According to J. Batty, “Budgetary control is a system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities or services.” Budgetary control consists of the following :

• Determination of the objective to be achieved. The objective may be higher profits, better financial position, better position in the market etc.
• Knowing the steps necessary to achieve the objective, that is to say laying down an exact and detailed course of action, month by month and over the whole period.
• Translation of the course of action into quantitative and monetary terms. This means drawing up budgets.
• Constant comparison of the actual with the budget (again both physical achievement and money values involved), noting discrepancies and their reasons and taking steps to remove causes of shortcoming, wastages, losses etc., and to consolidate reasons leading to good results.

15.3 ADVANTAGES OF BUDGETARY CONTROL



Budgetary control has become an essential tool of management for controlling costs and maximising profits. It acts as a friend, philosopher and guide to the management. Its advantages to management can be summarised as follows :

1. Economy in working : It brings efficiency and economy in the working of the business enterprise. Even though a monetary reward is not offered, the budget becomes a game – a goal to achieve or a target to shoot at – and hence it is more likely to be achieved or hit than if there was no predetermined goals or target. “The budget is an impersonal policeman that maintains ordered effort and brings about efficiency in results”.
2. Buck-passing avoided : It establishes divisional and departmental responsibility. It thus prevents alibis and “buck-passing” when the budget figures are not met.
3. Establishes coordination : It coordinates the various divisions of a business, namely, the production, marketing, financial and administrative divisions.

It “forces executives to think, and think as a group”. This results in smoother operation of the entire plant.

4. Acts as a safety signal : It acts as a safety signal for the management. It shows when to proceed cautiously and when manufacturing or merchandising expansion can be safety undertaken. It serves as an automatic check on the judgement of the executives as losses are revealed in time which is a caution to the management to stop wastage.
5. Adoption of uniform policy : Uniform policy without the disadvantage of military type of business organisation can be pursued by all divisions of the business by means of centralisation of budgetary control.
6. Decrease in production costs : Seasonal variations in production can be reduced by developing new “fill in” products. This results in decreasing the cost of production by increasing volume of output.
7. Adoption of standard costing principles : The use of budget figures as measures of operating performance and financial position makes possible the adoption of the standard costing principles in divisions other than the production division.
8. Optimum mix : It helps management in obtaining the most profitable combination of different factors of production. This results in a more economical use of capital.
9. Favour with credit agencies : Managements who have developed a well ordered budget plan and who operate accordingly, receive greater favour from credit agencies.

15.4  LIMITATIONS OF BUDGETARY CONTROL

1. Based on estimates : The strength or weakness of the budgetary programme depends to a large degree on the accuracy with which the basic estimates are made. The estimates must be based on all available facts and good judgement. The forecasting of sales and expenses cannot be an exact science. However, there are numerous statistical and Other techniques that may be efficiently applied to the problem. These tempered with sound reasoning and judgement produce satisfactory results in most cases.
2. Need for continuous adaptation : A budgetary programme cannot be installed and perfected in a short time. Budget techniques must be continuously adapted not only for each particular concern but for changing conditions within the concern.
3. No automatic execution of the budget : Once the budget is complete, it will be effective only if all responsible executives get behind it and exert continuous and aggressive efforts towards its achievement. Departmental heads must feel the responsibility for achieving and bettering department goals laid down in the budget.
4. Only a tool of the management : The budget should be regarded not as a master but as a servant. It is one of the best tools yet devised for advancing the affairs of a company and the individuals in their various areas of managerial activity.

15.5  REQUIREMENTS OF A SOUND BUDGETARY SYSTEM

An evaluation of successful budgetary programmes indicates that there are some common practices to be observed. Failure to appreciate and observe these essentials will negate to a large extent the value of a budgetary program. These essentials or pre-requisites for successful budgeting are listed below :

1. Support of top management : The budget should be sponsored by management and it should have the active and whole-hearted support of top management.
2. Built-up by responsibility centres : For sound budgetary system, it is also necessary that it should be built-up by responsibility centres and should show the controllable costs in each responsibility centre.
3. Participation by responsible supervisors : The responsible supervisors should participate in the process of setting the budget figures and should agree that the budget goals are reasonable. If they are not consulted, their attitude towards the budget is likely to be one of indifference and resentment. In other words, budget targets should not be imposed by the management rather they should emanate from the organization itself.
4. Clear-cut organizational structure : A successful budgetary program presupposes a clear allocation of authority, duties and responsibilities in the organisation. Everybody in the organization should know who is responsible to whom.
5. Continuous budget education : If the budget is to be effective, all responsible supervisors must be actively interested in it. This requires that the responsible supervisors are aware of the entire budgeting process. The best way to assure this is a program of continuous budget education through manuals, meetings, etc. to discuss the preparation of budget and actual results achieved.
6. Reasonably attainable targets : The targets laid down in the budget should be reasonably attainable. Too high a target will be frustrating and too low a target will encourage complacency.
7. Thorough review of budget estimates : The review of budget estimates by higher levels of management should be thorough. Casual review is a signal that management is really not much interested in the budget process.
8. Proper communication : Final approval of the budget should be specific and this approval should be communicated to the organisation. An attempt to operate on the doctrine “silence gives consent” inevitably leads to misunderstanding.
9. Flexible : It is important that budgeting is flexible rather than static. Instead of basing budgets on a single fixed level of activity, they should be prepared for several levels of activity. Again, budget should be revised if market conditions change.

15.6  BUDGETARY CONTROL ORGANISATION



The shape and design of budgetary control system is largely determined by the size and nature of the business organisation. In a large sized organization, an effective budgetary control system can be organised on the following lines :

1. Creation of Budget Centres : The first step in the budget preparation is the creation of budget centres. A budget centre is a section of the organisation of an undertaking defined for the purposes of budgetary control. Generally different departments organised on the basis of functions form budget centres and department heads work as responsibility centre. For example, production manager has to be consulted for the preparation of production budget.
2. Provision of Adequate Accounting Record : An efficient budgetary system requires the provision of appropriate and adequate accounting records also. A chart of accounts corresponding with the budget centres should be maintained in order to help in preparation and analyzing information.
3. Setting the Guidelines : The next step in the preparation of budget is setting the  It is mainly concerned with determining management policy with regard to range of products, stock levels, channels of distribution, investment policies etc.
4. Establishment of a Budget Committee : In small organisations budget may be prepared by one executive and he is made incharge of all budgetary arrangements. But in large organisations, a budget committee may be created under the charge of a budget officer or the Director of Finance. Though individual circumstances affect the actual composition of the committee, it has often been found advisable to include various departmental heads as members of this committee. This budget committee will prepare, review, discuss and co-ordinate budget activities in the organization. The various departmental heads will be members of this committee and they will prepare initial estimates for the budgets of their respective departments. Then these budgets will be reviewed and coordinated by the budget committee. A good budget is the result of the combined skill of the executives responsible for their own particular phase of the activities of the organisation.
5. Budget Officer : A major step in introducing the budgetary control programme is the appointment of an expert in budgeting, known as budget officer, budget accountant, budget controller, or budget director (in some organisations budgeting is taken care of by Finance Director also). He is responsible for designing the entire budgetary programme and furnishing the estimates of financial data to help in the compilation of budget. He provides necessary technical assistance and advice to the executives in utilizing the budget. The supervisory responsibility concerning budget operations is delegated to him and through variance analysis he prepares budget report. These reports are submitted to the line executives. He is also responsible for bringing the technical analysis of the data when called for by the various departments.
6. Preparation of a Budget Manual : To systematize the budget procedure and provide the necessary guidelines for the preparation of various budgets a Budget Manual can be prepared. This manual would include such matters as the following – the functions and responsibilities of various members of the budget committee, the objects and description of the budgetary control system, statement of the steps in the preparation of a budget, the procedure of preparation and modification of various accounting records for the budget period etc.
7. Determination of the ‘Key Factor’ : Key-factor is also known as a ‘Limiting Factor’, Governing Factor’ or ‘Principal Budget Factor’. For the successful implementation of a budgetary system, the individual budgets for each item should be co-ordinated and inter-related. Because of this interlink, the limitation or constraint affecting a particular budget has its influence on the rest of the budgets. A factor which is of such importance that it affects almost all the other functional budgets to a large extent is known as the Principal Budget Factor.
8. Laying Down the Levels of Activity : It is also essential to establish the normal level of activity; i.e., the level of output/sales company can reasonably expect to achieve during the year.
9. Budget Reports : Installation of budgets is in itself of no use unless a comparison is made regularly between the actual expenditure and the budgeted allowances. The results of this comparison should be reported to the management promptly. For this purpose, budget reports showing the comparison between the actual and budgeted expenditure should be presented periodically.
10. Revision of Budgets : To be of maximum use to the management for planning and operation, it is essential to revise budgets, as and when necessary, in order to fit them with the changing business conditions.

15.7   TYPES OF FUNCTIONAL BUDGETS



In the case of a manufacturing business accounting information should be supplied to management in the form of a series of budgets. The main functional budgets and the methods of arranging for the compilation of these budgets are as set out hereunder :

15.7.1 Sales Budget :  These should be analysed as between products, periods and areas. By reference to the trends disclosed by the past figures and with the aid of information supplied by the sales department, a forecast of anticipated sales for the forthcoming period can be made. In making such forecast regard must be had to general trading conditions, any special conditions affecting the particular business, elasticity of demand, pricing policy, future advertising policy and the relevant factors. The sales forecast or sales budget is the basic core budget on which other budgets depend. As such rational efforts should be made to develop a proper sales budget which can be reasonably accomplished.

Preparation of Sales Budget :

It has already been stated that the Sales Budget is prepared by the sales manager. He is, therefore, to consider the following matters at the time of its preparation :

• Analysis of Historical Sales : Analysis of past sales, with the help of statistical measurements, cyclical trends, seasonal fluctuations etc., provides valuable information which ultimately helps to predict future sales.
• Reports by Salesmen : Salesmen also can submit a report to the sales manager which is highly significant since they are in frequent contact with customers having an internal knowledge about the habits, tastes, and demand of the customers.
• Business Conditions : The general business conditions can also be studied from the national as well as international economic statistics, political influences etc.
• Market Analysis : Market analysis may be employed by the large firms whereas specialists are employed by the small firms for collecting necessary information about the market demands, product-designs, fashion trends, degrees of competition etc.
• Special condition : There are certain events which may influence sales outside the firm e.g., introduction of electricity to a village will increase the demand for electrical appliances.

• Purchase Budget : The purchase budget indicates, either in terms of money or of quantity, the expected purchases of raw materials to be made during the budget period. After ascertaining the proper requirement of different types of raw materials, it needs adjustment between the contract already made for the purchase of raw materials and the existing level of stock (in order to maintain a balanced level of stock of raw materials). In this respect, it may also be mentioned that internal sources of raw materials, if any, are also to be considered. However, this budget is based on Sales Budget, Production Cost Budget, Maximum and Minimum Stock, Stock Level, Economic Order Quantity (EOQ) etc.

• Production Budget : Production budget is prepared after the preparation of Sales Budget, to determine the quantity of goods which  should be produced to meet the budgeted sales. It is expressed in physical terms, such as : (a) Units of output; (b) Labour hours and (c) Material requirement.

The Production Budget is prepared by the production management and is submitted to the budget committee for its approval. The following points are to be carefully noted at the time of its preparation.

• To determine the quantity of each product which will be produced during the budget period.
• To prepare the production plan on the basis of the Sales Budget.
• To consider the key factor or limiting factor, if any.
• To consider the production plant capacity and production planning. (v) To consider the volume of production.

Raw Material Budget : This budget reveals the quantities of materials which are needed to make the budgeted production. It also shows the anticipated cost of materials to be purchased, terms of credit from suppliers, the time taken to procure raw materials etc.

Direct Labour Budget

The direct labour budget tells about the estimates of direct labour requirements essential for carrying out the budgeted output. The direct labour cost is estimated as a result of the evaluation of standard hours worked or the quantity of work done by the individual worker in terms of certain average wage rate. This average wage rate may be different for each department. For estimating the average wage rates the following different approaches can be used :

• The rates for the last budget period may be taken. Historical ratio may be calculated. This is arrived at by taking the ratio of wages paid to the direct labour hours worked. This ratio can be adjusted in the light of fresh changes, if any.
• Wage rates may be fixed by the agreement with the trade union.
• The current wage rate of the industry, trade or the national wage rate may be taken as average wage rate.

 

The Direct Labour Budget serves many purposes. The personnel manager can plan its requirements as per the budget requirements. The management can also control the direct labour cost by viewing per unit cost of production. It helps in estimating cash requirements for direct labour in preparing cash budget.

Following is the example of a Direct Labour budget.

6Manufacturing Overhead Budget :  Manufacturing or Factory overhead include the cost of indirect labour, indirect materials and indirect expenses. The manufacturing overhead can be classified into three categories, (i) Fixed, i.e. which tend to remain constant irrespective of any change in the volume of output, (ii) Variable, i.e. which tend to vary with the output and (iii) Semi-variable, i.e., which are partly variable and partly fixed. The Manufacturing Overhead Budget will provide an estimate of all these overheads to be incurred in the budget period.

Selling and distribution overheads budget : The selling expenses include all items of expenditure on the promotion, maintenance and distribution of finished products. Sales office rent, salaries, depreciation and other miscellaneous expenses are provided for as a fixed amount per month. Advertising, selling commission, bad debts, travelling and delivery expenses are provided for as a percentage of budgeted sales. Although selling expenses are not included as a part of product cost, these are frequently analysed by lines of product, sales territories, customers, salesmen or some such unit basis. Such an analysis of selling expenses can be applied in planning sales activity. Besides, if selling costs are budgeted and computed on a unit responsibility basis (products, territories, type of salesmen, customers etc.), it may be possible to identify differences by sales territories, salesmen, customer group etc. Thus, selling costs, like manufacturing costs, can be identified by area of responsibility and can be used as a means for control. The selling and distribution overheads budget is closely linked with the sales budget and should be prepared simultaneously with the sales budget. The sales manager, advertising manager and sales office manager will cooperate with the budget officer in the preparation of this budget.

15.7.8 Cash Budget : The cash budget is a summary of the firm’s expected cash inflows and outflows over a particular period of time. In other words, cash budget involves a projection of future cash receipts and cash disbursements over various time intervals. There must be a balance between cash and the cash demanding activities/operations, capital expenditure and so on. Very often, the need for additional cash is not realised until the situation becomes critical. The cash budget consists of two parts :

1. The projected cash receipts (inflows) and; 2. The planned cash disbursements (outflows).

Cash receipts include collection from debtors, cash sales, dividends received, sale of assets, loans received and issues of shares and debentures. Payments include wages and salaries, payment to creditors and suppliers, rent and rates, taxes, capital expenditure, dividend payable, commission payable and repayment of loans and debentures. The main purposes of the cash budget may be outlined as follows : 1. To indicate the probable cash position as a result of planned operations.

2. To indicate cash excess or shortages.
3. To indicate the need for borrowing or the availability of idle cash for investment.
4. To make provision for the coordination of cash in relation to (a) total working capital; (b) sales; (c) investment; and (d) debt.
5. To establish a sound basis for credit.
6. To establish a sound basis for exercising control over cash and liquidity of the firm.

The Master Budget : The Institute of Cost and Management Accountings, England, defines it as ‘the Summary Budget; incorporating its component functional budgets, which is finally approved, adopted and employed’. In other words, it is a summary budget which is prepared from and summarises all the functional budgets. This summarising is done in the form of :

• Budgeted Profit and Loss Account/Budgeted Profit and Loss Appropriation Account,
• Budgeted Balance Sheet.

Budgeted Profit and Loss/Profit and Loss appropriation Account shows the principal items of revenue, expenses, loss as well as profit whereas the Budgeted Balance Sheet reveals the principal items of Balance Sheet.

This budget is prepared by the budget officer. After its preparation, it is submitted to the budget committee for its approval. If the budget committee does not find it satisfactory, it makes suitable changes in this budget and puts it into action when the final approval is given, However, once it is approved, the company seeks to a achieve the targets during the budget period.

• FIXED BUDGETS

It is a budget in which targets are rigidly fixed. According to I.C.M.A. London, “Fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained”. Such budgets are usually prepared from one to three months in advance of the fiscal year to which they are applicable. Thus, twelve months or more may elapse before figures forecast for the December budget are used to measure actual performance. Many things may happen during the period of twelve months and they may make the figures go widely out of line with the actual figures. This defect may be removed by the revision of budgeted targets, even then, the basic nature of such budget is of rigidly and it brings artificiality in the control over costs and expenses. Such budgets are preferred only where sales can be forecast with the greatest of accuracy, otherwise, it becomes an unrealistic measuring yard in case the level of activity (volume of production or sales) actually attained does not conform to the one assumed for budgeting purpose. The management will not be in a position to assess the performance of different departments on its basis. On account of these defects of fixed budgeting, it has become a common practice in case of concerns where sales and production can not be estimated accurately to give up the concept of fixed budgeting as it does not provide for automatic adjustments with volume changes.

• FLEXIBLE BUDGET

Fixed or static Budget is generally rigid as it is based on one level of activity and one set of conditions and hence not  quite helpful for control purpose. A flexible budget is therefore, designed to provide information as to sales, expenses and profits for different levels of activity which may be obtained. Such budgets are prepared in businesses where it is impossible to make a firm forecast of the future, not because of the absence of a clear management policy but because circumstances being entirely beyond the control of management, cannot be predicted.

It would be desirable to have a flexible budget for the following circumstances :

1. where sales cannot be predicted because of the nature of the business;
2. where the business is subject to variance of weather;
3. where progress depends upon an adequate supply of labour; and
4. in the case of a new business, where it is difficult to forecast the demand accurately.

In these similar circumstances, a budget should be prepared for a series of possible levels of activity.

In a flexible budgeting system, it is necessary to have the budgets quickly recast and changed to suit the actual conditions. Analysis of the behaviour of costs and expenses forms the bed rock of flexible budgeting system. With moderate changes in output or sales, fixed expenses do not change. Variable expenses per unit also remain the same. But there are a number of expenses, which are semi variable. Such expenses will vary when output and sales change but their change will not be in the same proportion as the change in output or sales nor will the proportion of change be uniform for variable expenses. Every item of expense should be studied to find out how it will behave if output or sales will change by say steps of 5%. Only when all expenses have been studied in this manner, can a system of flexible budgets be used. In short, flexible budgets mean new budgets to suit actual conditions.

PERFORMANCE BUDGETING



Among the methods which relate costs to outputs or results, performance budgeting stands out the most prominent. It has emerged as a whole new way of  considering fiscal responsibility. Also sometimes called as performance, or programme budgeting and planning, programming and budgeting system (PPBS), it focuses attention on the physical aspects of achievement. It is a refined approach to budgeting with an emphasis on work done or services rendered rather than being based simply on spending limits. It establishes cost/output relationship. It is a process of integrating inputs with outputs of a development programme. Performance budgeting involves three levels of management.

1. Policy management – identification of needs, analysis of options, selection of programmes and allocation of resources.
2. Resource management – establishment of basic support systems consisting of budgeting structures and financial management practices.
3. Programme budgeting – implementation of policies and related operations, accounting, reporting and evaluation.

Thus, a performance budget is one that presents the purposes and objectives of which funds are required, the cost of achieving them, and the quantitative data measuring the accomplishment and work performed under each programme. Performance budgeting involves the following steps :

1. Activity classification in terms of functions, programmes and activities.
2. Financial and physical measurement of the activities.
3. Progress reporting of performance at periodic intervals.
4. Needed restructuring of the accounting system.

The main objectives of performance budgeting are : (a) to coordinate the physical and financial aspects; (b) to improve the budget formulation, review and decisionmaking at all levels of management; (c) to facilitate better appreciation and review by controlling authorities (legislatures, Board of Trustees or Governors, etc.); (d) to make more effective performance audit possible; and (e) to measure progress towards long-term objectives which are envisaged in a development plan.

Since the financial and physical results are interwoven, it facilitates management control. It is of particular importance to government and non-profit oganisations. With them, budgets have been essentially appropriation budgets with the focus largely on spending resources rather than on obtaining results. At the year-end, managers in these establishments are tempted to spend the appropriated amounts even if they are not needed. Performance budgeting changes the emphasis as budgets get related to outputs since it integrates financial outlays with physical content of programmes.

15.11 ZERO-BASE BUDGETING (ZBB)

The ZBB takes into account consequences that may flow if the project or responsibility centre is scratched. In other words, the objects of the ZBB is to formulate the budget so as to estimate the amount of expenditure likely to be incurred if the existing project resumes operation after being scratched. This method is called Zero-Base Budgeting since the existing system is discontinued and a fresh is made or the existing system is reviewed on the assumption of ‘Zero-Base’.

Generally, the following points are to be considered before introducing ZBB :

• Is it absolutely necessary ?
• What should be the qualitative features of current activities?
• Will production be continued according to the existing system ?
• What is the cost of production under current conditions ?

In this way, cost reduction is possible in the enterprises after careful analysis. However it takes a long time to implement this method although, through a minute review of the present system, overheads can be controlled.

15.11.1 Application of ZBB : It is very useful where ‘cost analysis’ is taken into consideration. Normally, the ZBB is applicable to those budgets which are not involved with direct costs only, because, direct costs (e.g. Direct Material and Direct Labour) may be controlled by the normal prediction operation since it assumes that each component of direct cost has been monitored and adjusted with production. That is why, ZBB is applicable to those budgets which involve overheads (e.g. Administration, Selling and Distribution Overhead) i.e., it is more applicable to discretionary cost areas. It is implied that ZBB is relevant where a budgeting system which has already been introduced, requires managers at the same time to develop qualitative measures.

The significant advantages of ZBB are :

• It supplies the firm a systematic way in order to evaluate different programmes which are undertaken by the management allocating resources according to priority of the programmes and operations of the undertaking.
• It helps the management to know different departmental budgets on the basis of cost-benefit analysis, as such, no arbitrary increase or cuts in budget estimates are done.
• It is most appropriate both for the staff and supported areas of an organisation since the output are not related directly to the finished products of the unit.
• It also helps to locate the areas of wasteful expenditure, if any, and as such, it can also suggest alternative courses of action, if so desired by the management. 11.2 Limitations of ZBB : ZBB suffers from the following :
• Introduction of ZBB system is no doubt expensive and time consuming process.
• ZBB also invites ranking process problems. It includes (a) Who will do the ranking? (b) What method should be adopted for this purpose? and (c) To what extent it will be ranked and how?

(iv) Since ZBB requires significant support from the top management level which is practically not possible from different sources, its successful implementation practically is very difficult.

• ZBB involves a lot of training for managers, i.e., if the managers do not understand properly the idea of ZBB, it cannot be successfully implemented.
• Moreover, the determination of performance measures is difficult.

15.11.3 Features of ZBB :

• Before its implementation justify ‘why’ is it so needed and not ‘how’ much.
• All levels of management should participate in the discussion making process.
• Corporate objectives and individual unit objectives should be linked.
  • SUMMARY

Budgeting is an all-important exercise. It pervades all organisations-public and private, government and non-government. A budget is a blueprint for action. It is a quantified plan of action in financial terms. Budgeting is a versatile tool, but is has two main purposes: budgetary planning  and budgetary control. In manufacturing organisation is the process of budget setting starts with the sales budget. Production budget follows which, in turn, necessitates budget for materials, direct labour, and overheads. These and some other budgets are assembled into a master budget. It becomes a governing document, and virtually a forecasted profit and loss account. Best budgets are the ones which are prepared on standard costs. To be meaningful, budgets have to be flexible rather than static. A flexible budget is prepared for several levels of activity but, at minimum, it is for at least three levels. These are most optimistic, the most pessimistic, and the most likely levels. The two approaches followed in the preparation of flexible budgets are: formula method, and the multiple-activity method. A few noteworthy recent trends in budgeting are towards zero-base budgeting and performance budgeting. The former denotes an operating, planning and budgeting process which requires each manager to justify his entire budget in detail from scratch. The latter refers to a budget which specifies outputs or results to be achieved along with the inputs or expenditures to be incurred during the budget period.

• KEYWORDS

Budget: A budget is a quantitative expression of a plan of action prepared in advance for the period to which it relates.

Budgetary control: Budgetary control is a tool of management used to plan, carryout and control the operations of the business.

Budget centre: It is a section of an organisation defined for the sake of budgetary control.

Cash budget: Cash budget is a summary of the firm’s expected cash inflows and outflows over a particular period of time.

Performance budgeting: Performance budgeting is a process of integrating inputs with outputs of a development programme.

Zero-base budgeting: In zero-base budgeting, the budget is prepared by considering the base for the current year as zero and this eliminates the accrual of inefficiency for preparing future years budget.

15.14 SELF ASSESSMENT QUESTIONS

1. What is budgetary control ? State the main objectives of budgetary control.
2. Explain the term ‘Budget’ as used in the business. What are the essentials of an effective budget system ?
3. “For planning, the manager wants information about the future, for control about the past”. Comment upon this statement and show how can budgeting helps in this respect.
4. “Budgetary control means worrying before work rather than after. Its keynotes are planning, co-ordination and control”. Explain this statement.
5. What are functional budgets? Which functional budgets are most commonly used by management.
6. Discuss briefly the procedure for the preparation of a sales budget.
7. Differentiate between Fixed Budgeting and Flexible Budgeting
8. Define Zero-Base Budgeting and distinguish it from traditional budgeting. Enumerate the benefits to be achieved by a business organisation in introducing Zero-Base Budgeting.
9. What do you understand by “Performance Budgeting”? What steps are required to be taken for preparing performance budget?
10. Write short notes on :
    • Budget Committee
    • Zero Base Budgeting
    • Limitations of budgets
    • Master Budget
    • Budget Review
    •  Budget Manual
    • Budget Officer