Budget & Budgetary Control

Definitions

Budget: A financial and/or quantitative statement, prepared and approved prior to a defined period of time, of the policy to be attained during that period for the purpose of attaining a given objective.

Budgeting: The act of preparing budgets.

Budgetary Control: The establishment of budgets relating the responsibilities of executives to the requirements of a policy, the continuous comparison of actual with budgeted results, to secure expenses, etc.

Budget is a PLAN. Budgetary Control is a SYSTEM of controlling costs.

Objectives of Budgetary Control

Planning: Defines goals and strategies.
Coordination: Integrates activities of different departments (Purchase, Sales, Production).
Communication: Communicates goals to all levels of management.
Control: Comparison of Actual vs Budgeted performance (Variance Analysis).
Motivation: Acts as a target for employees.

Classification of Budgets

1. Based on Time

Long-term Budget: 5-10 years (Strategic planning, R&D).
Short-term Budget: 1-2 years (Operational).
Current Budget: Very short period (Weeks/Months).

2. Based on Function

Sales Budget: Estimate of sales (Quantity & Value). *Starting point of budgeting*.
Production Budget: Estimate of production units.
(Sales + Closing Stock - Opening Stock).
Purchase Budget: Material required for production.
Cash Budget: Estimate of cash inflows and outflows. ensures liquidity.
Master Budget: Summary of all functional budgets (Budgeted P&L and Balance Sheet).

3. Based on Flexibility

Fixed Budget	Flexible Budget
Prepared for a single level of activity (e.g., 100% capacity).	Prepared for multiple levels of activity (e.g., 60%, 80%, 100%).
Rigid. Does not change with actual volume.	Dynamic. Adjusted to actual volume for fair comparison.
Not useful for cost control if volume changes.	Essential for cost control.

Modern Budgeting Techniques

1. Zero Based Budgeting (ZBB)

Developed by Peter Pyhrr. Every year is treated as a new year. Justification is required for every penny spent, starting from ZERO, not based on previous year's figures.

2. Performance Budgeting

Focuses on the results/outputs achieved rather than just money spent. Links inputs to outputs.

3. Program Budgeting

Allocates funds to specific programs or projects.

Key Terms

Budget Manual: A document setting out the responsibilities, procedures, and forms for budgetary control.
Budget Key Factor (Limiting Factor): The factor that limits the volume of activity (e.g., Shortage of Raw Material, Limited Sales Demand). Budget preparation starts with this factor.
Variance Analysis: Analyzing the difference between Standard/Budgeted and Actual costs.
- Favorable Variance (F): Actual Cost < Budgeted Cost.
- Adverse Variance (A): Actual Cost > Budgeted Cost.

Numericals & PYQs - Budgeting

Part A: Numericals (10 Questions)

Q1. Sales Forecast: 10,000 units. Opening Stock: 2,000 units. Desired Closing Stock: 3,000 units. Calculate Production Budget.

Production = Sales + Closing Stock - Opening Stock

Production = 10,000 + 3,000 - 2,000 = 11,000 units.

Q2. Material Req per unit: 2 kg. Production: 5,000 units. Op Stock of Mat: 1,000 kg. Cl Stock of Mat: 1,500 kg. Calculate Purchase Budget.

Consumption = 5,000 units x 2 kg = 10,000 kg.

Purchase = Consumption + Cl Stock - Op Stock.

Purchase = 10,000 + 1,500 - 1,000 = 10,500 kg.

Q3. Cash Budget: Sales ₹1,00,000. 50% cash sales. Credit period 1 month. How much cash collection in Jan if Dec Sales were ₹80,000?

Jan Cash Collection comes from:

1. Jan Cash Sales (50% of 1,00,000) = ₹50,000.

2. Dec Credit Sales (50% of 80,000 collected in Jan) = ₹40,000.

Total = 50,000 + 40,000 = ₹90,000.

Q4. Flexible Budget: Variable Cost ₹10/unit. Fixed Cost ₹50,000. Calculate Total Cost for 2,000 units.

Total Cost = (Variable Cost/unit x Units) + Fixed Cost.

Cost = (10 x 2,000) + 50,000 = 20,000 + 50,000 = ₹70,000.

Q5. Current Ratio Budget: Desired Ratio 2:1. Current Liabilities ₹50,000. Required Current Assets?

CA / CL = 2 / 1.

CA = 2 x 50,000 = ₹1,00,000.

Q6. ZBB Question: Dept A spent ₹10k last year. This year they want ₹12k. In Traditional budget they justify ₹2k extra. In ZBB?

In ZBB, they must justify the entire ₹12,000 from scratch, demonstrating the benefit of every rupee.

Q7. Sales Manager is preparing budget. Production capacity is limited to 5,000 units. Market demand 8,000. What is Key Factor?

Production Capacity is the Limiting Factor (Key Factor). Budget will be based on 5,000 units.

Q8. Variance Analysis: Budgeted Cost ₹10,000. Actual Cost ₹12,000. Calculate Variance.

Variance = Standard Cost - Actual Cost.

Variance = 10,000 - 12,000 = -2,000.

₹2,000 Adverse (A) or Unfavorable.

Q9. Fixed Exp ₹10,000. Variable Exp ₹5/unit. Production increases from 1000 to 2000 units. Cost/unit change?

At 1000: (10k + 5k)/1000 = ₹15/unit.

At 2000: (10k + 10k)/2000 = ₹10/unit.

Cost per unit decreases due to fixed cost spreading.

Q10. Calculate Closing Cash Bal. Op Bal ₹5,000. Receipts ₹20,000. Payments ₹18,000.

Cl Bal = Op + Receipts - Payments.

Cl Bal = 5,000 + 20,000 - 18,000 = ₹7,000.

Part B: Previous Year Questions (PYQs) (10 Questions)

Q11. Zero Based Budgeting (ZBB) was introduced by: (JKSSB FAA)

Peter A. Pyhrr (in Texas Instruments, USA).

Q12. The budget which is prepared for a single level of activity is called:

Fixed Budget.

Q13. A budget that gives a summary of all functional budgets is known as:

Master Budget.

Q14. The factor which limits the volume of output or activity is called:

Key Factor or Limiting Factor.

Q15. Budgetary control system acts as a tool for:

Management Control.

Q16. Sales Budget is a:

Functional Budget.

Q17. Which budget is prepared for replacement of assets?

Capital Expenditure Budget.

Q18. "Budgeting is the art of telling your money where to go instead of wondering where it went." This quote emphasizes:

Planning and Control.

Q19. In Flexible Budgeting, variable costs are treated as:

Constant per unit (but variable in total).

Q20. Comparison of actual performance with budgeted performance leads to:

Variance Analysis.

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