Budget
A quantitative or financial plan relating to the future. It can be for the company as a whole or for
departments or functions or products or for resources such as cash, materials, labour, etc. It is usually
for one year or less.
Framework for budgeting includes:
(i) Master budgets
(ii) Functional budgets
(iii) Incremental budgeting
(iv) Zero-based budgeting
(v) Activity-based budgeting
Incremental budgeting
The traditional approach to budgeting is to take the previous year's budget and to add on a percentage
to allow for inflation and other cost increases. In addition there may be other adjustments for specific
items such as an extra worker or extra machine.
A master budget for the entire organisation brings together the departmental or activity budgets for all
the departments or responsibility centres within the organization
The structure of a budget depends on the nature of the organisation and its operations. In a
manufacturing organisation, the budgeting process will probably consist of preparing several functional
budgets, beginning with a sales budget.
Budgets have several different purposes:
1. Planning
Budgets compel planning. The budgeting process forces management to look ahead, set targets,
anticipate problems and give the organisation purpose and direction. Without the annual
budgeting process the pressures of day-to-day operational problems may tempt managers not
to plan for future operations.
2. Control
3. Co-ordination
4. Communication
5. Motivation
6. Evaluation
7. Authorisation
