BUDGETARY

CONTROL
as a Control Tool

Presented by
Tonmoy Haldar
MBA-2nd year
MAGNETS
Topics to be covered
Revision of Budgets

ZBB
Budgetary control approach

Committed costs
INTRODUCTION:
For effective running of a business,
management must know:
● where it intends to go i.e. organizational

objectives
● how it intends to accomplish its objective i.e.

plans
● whether individual plans fit in the overall
organizational objective. i.e. coordination
● whether operations conform to the plan of
operations relating to that period i.e. control
●
“Budgetary control is the device
that a company uses for all these
purposes.” 33
WHAT IS A BUDGET?
“ A plan expressed in money. It
is prepared and approved prior to
the budget period and may show
income, expenditure and the
capital to be employed. May be
drawn up showing incremental
effects on former budgeted or
actual figures, or be compiled by
Zero-based budgeting.”
44
WHAT IS BUDGETARY CONTROL?
Budgetary control is the use of the comprehensive
system of budgeting to aid management in carrying out
its functions like planning, coordination and control.

55
Classification of Budgets
TIME
TIME FUNCTION
FUNCTION FLEXIBILITY
FLEXIBILITY
● Long ● Long ● Long
term term term
● Short ● Short ● Short
term term term
● Cu ● Cu ● Cu
rre rre rre
● Ro ● Ro ● Ro
nt nt nt
lli lli lli
● S
ng
● S
ng
● S
ng
● a
Prod ● a
Prod ● a
Prod
● lCost
uctio of ● lCost
uctio of ● lCost
uctio of
● e
n
production
Pur ● e
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production
Pur ● e
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production
Pur
● s
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Pers ● s
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Pers ● s
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Pers
● as
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R ● as
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R ● as
onn
R
● e
el
&
Capital ● e
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Capital ● e
el
&
Capital
● D
Expenditure
M ● D
Expenditure
M ● D
Expenditure
M
●
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F ●
a
F ●
a
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i i i
●
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Flex
x
●
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Flex
x 66
1. SALES BUDGET:
Sales budget is the most important budget based
on which all the other budgets are built up. This
budget is a forecast of quantities and values of sales
to be achieved in a budget period.

2. PRODUCTION BUDGET:
Production budget involves planning the level of
production which in turn involves the answer to the
following questions:
a. What is to be produced?
b. When is it to be produced?
c. How is it to be produced?
d. Where is it to be produced?

77
 3. COST OF PRODUCTION BUDGET:
This budget is an estimate of cost of output
planned for a budget period and may be
classified into –
● Material Cost Budget
● Labour Cost Budget
● Overhead Cost Budget

● 4. PURCHASE BUDGET:
● This budget provides information about
the materials to be acquired from the
market during the budget period.

88
5. PERSONNEL BUDGET:
This budget gives an estimate of the
requirements of direct labour essential to meet
the production target.
This budget may be classified into –
a. Labour requirement budget
b. Labour recruitment budget
6. RESEARCH AND DEVELOPMENT BUDGET:
This budget provides an estimate of
expenditure to be incurred on R & D during the
budget period.
A R&D budget is prepared taking into
consideration the research projects in hand and
new R & D projects to be taken up.
99
7. CAPITAL EXPENDITURE BUDGET:
This is an important budget providing for
acquisition of assets necessitated by the following
factors:
a. Replacement of existing assets.
b. Purchase of additional assets to meet increased
production
c. Installation of improved type of machinery to
reduce costs.
8. CASH BUDGET:
This budget gives an estimate of the anticipated
receipts and payments of cash during the budget
period.
Cash budget makes the provision for minimum
cash balance to be maintained at all times.
10
9. MASTER BUDGET:
CIMA defines this budget as “ The summary budget
incorporating its component functional budget and
which is finally approved, adopted and employed”.
Thus master budget is a summary of all functional
budgets in capsule form available in one report.
10. FIXED BUDGET:
This is defined as a budget which is designed to
remain unchanged irrespective of the volume of
output or turnover attained.
This budget will, therefore, be useful only when the
actual level of activity corresponds to the budgeted
level of activity.

11
11. FLEXIBLE BUDGET:
CIMA defines this budget as one “ which, by
recognising the difference in behaviour between
fixed and variable costs in relation to fluctuations
in output, turnover or other variable factors such
as number of employees, is designed to change
appropriately with such fluctuations”.

12. PERFORMANCE BUDGETING:

These days budgets are established in such a way
so that each item of expenditure is related to
specific responsibility centre and is closely linked
with the performance of that standard.

12
13. ZERO BASE BUDGETING:
qThe zero base budgeting is not based on the
incremental approach and previous figures are
not adopted as the base.

qZero is taken as the base and a budget is

developed on the basis of likely activities for the
future period.

A unique feature of ZBB is that it tries to help

q

management answer the question, “Suppose we

are to start our business from scratch, on what
activities would we spent out money and to
what activities would we give the highest
priority?” 13
F● DE
C
io
n Costs involved in a business
x g
ee ic
m
s
m
A classification
dd nri
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The cost which varies directly in
proportion with every increase or
decrease in the volume of output
or production is known as
variable cost. Some of its
examples are as follows:
Wages of labourers
Cost of direct material
Power
The cost which does not vary but
remains constant within a given
Fixed Costs::Committed Costs

Committed fixed costs consist largely

of those fixed costs that arise from the
possession of plant, equipment and a
basic organization structure.
For e.g
once a building is erected and a plant
is installed, nothing much can be done
to reduce the costs such as
depreciation, property taxes, insurance
and salaries of the key personnel etc.
Fixed Costs::Discretionary
Costs
Discretionary fixed costs are those
which are set at fixed amount for
specific time periods by the
management in budgeting process.
These costs directly reflect the top
management policies and have no
particular relationship with volume of
output. These costs can, therefore, be
reduced or entirely eliminated as
demanded by the circumstances
For e.g.
R&D costs, Mgmt Costs, ADV & promo
Variable Costs::Engineered
Costs
Engineered variable costs are those variable
costs which are directly related to the
production or sales level. These costs exist in
those circumstances where specific
relationship exists between input and output.
For e.g.
in an automobile industry
Relation between parts & final car
Variable Costs::Discretionary
costs
Discretionary costs is generally linked
with the class of fixed cost. However, in
the circumstances where management
has predetermined that the organization
would spend a certain percentage of its
sales for the items like research,
donations, sales promotion etc.,
discretionary costs will be of a variable
character.
Thus, an increase in discretionary
variable costs is due to the
authorization of management whereas
an increase in engineered variable
costs is due to the volume of output or
sales.
QUESTIONS

???
Thank

You!!!!