Budget
A budget is the monetary or quantitative presentation of business plans and policies to be
pursued in future.
“A Budget is a pre-determined statement of management policy during a given period which
provides a standard for comparison with the result actually achieved.” (Brown & Howard)
Essentials of Budget:
• It is prepared for a definite future period
• It is a special form of statement expressed in quantitative terms which may be in the form
of monetary value or physical units
• It is prepared with a view to attain a definite objective or target
• It expresses the plans and policies of the management to be pursued in future
• It provides a base for measuring the success of actual results
Budgeting
Budgeting is a part of management process which includes preparation of budget, budget
control, budget co-ordination and all those activities that are related with budget.
“Budgeting is a kind of future tense accounting in which the problems of future are met on
paper before the transaction actually occur.” (William J. Batty)
“Budgeting is the preparation of comprehensive operating and financial plans for specific
intervals of time.” (Shilinglaw)
Thus it is clear that budgeting is a wider process which includes all preparations related to
budget, decisions related to various problems arising in budget, implementation of budget and
control on the basis of budget.
Budgetary Control
Budgetary control is an important technique of control on business activities by management in
which business activities are operated on the basis of pre-prepared budget and thereafter actual
results are evaluated in the light of budget estimates.
“The term ‘Budgetary Control’ is applied to a system of management and accounting control by
which all operations and output are forecasted as far as possible and the actual results, when
known , are compared with the budget estimates.” (W. W. Bigg)
In brief, budgetary control is a tool of management control and accounting which directs and
co-ordinates the working operation on the basis of budgets. If there are variances in actual
results, then either they are corrected or budget is modified so that the objective of maximum
efficiency as per the policy of management may be achieved.
Types of Budgets
1) on the basis of Period
• Long-term Budget (Five to Ten years)
• Short-term Budget (One to Five years)
• Current Budget (One month to twelve months)
2) on the basis of Flexibility
• Fixed Budget: is a budget which is designed to remain unchanged irrespective of
the level of activity actually attained.
• Flexible Budget: may be defined as a budget which is designed to change in
accordance with the level of activity attained.
3) on the basis of Functions
• Master Budget: The master budget is a consolidated summary of the various
functional budgets. Budgeted Profit & Loss Account and Budgeted Balance Sheet
may be treated as master budget.
• Functional Budgets: also known as ‘Departmental Budgets’. All those budgets which
are prepared either on the basis of functions or departments in a business concern.
4) Other Budgets
Zero Based Budgeting and Performance Budgeting can be included in this category.
Numerical:
S. K. Ltd. Wishes to arrange overdraft limits with its bankers for the three months period
from July to September 2021. The various forecasts are as follows:
Months Sales Purchases Expenses
May 18,000 12,500 1,200
June 19,000 14,500 1,400
July 11,000 24,000 1,100
August 18,000 25,000 1,000
September 12,000 27,000 1,500
Additional information:
i. Cash balance on 1st July, 2021 was Rs. 2,500
ii. 50% of the sales are realised in the month following the sale and the remaining
50% in the second month following.
iii. Suppliers will be paid in cash in the month of purchases.
iv. All the sales are made on credit basis.
On the basis of the above information, prepare a Cash Budget for the quarter ending September
30, 2021 and indicate the limits of bank overdraft which the company will require at the end of
each month.
Solution:
Calculation of collection from Debtors
Month of Credit Sale Total Sale Collection Months
July August September
May 18,000 9,000 --- ---
June 19,000 9,500 9,500 ---
July 11,000 --- 5,500 5,500
August 18,000 --- --- 9,000
18,500 15,000 14,500
Cash Budget of S.K. Ltd.
Particulars July August September
Opening balances 2,500 -4,100 -15,100
Receipts:
Collection from Debtors 18,500 15,000 14,500
Total 21,000 10,900 -600
Payments:
Cash purchases 24,000 25,000 27,000
Expenses 1,100 1,000 1,500
Total
25,100 26,000 28,500
Closing Balance
Bank Overdraft required -4,100 -15,100 -29,100
4,100 11,000 14,000
Conclusion: The company will require overdraft of Rs. 4,100 in the month of July, Rs. 11,000
in the month of August and Rs. 14,000 in the month of September. Thus the total amount of
overdraft required by the end of September will be Rs. 29,100.
