1. BUDGETING
NEED OF BUDGETING:
A PRIMARY OBJECTIVE OF ANY PROFITABLE ORGANIZATION IS TO MAXIMIZE ITS
INCOME BY ATTAINING THE HIGHEST VOLUME OF SALES AT THE LOWEST POSSIBLE
COST, PLANNING AND CONTROL ARE ESSENTIAL IN ACHIEVING THIS GOAL AND
BUDGETING PRODUCES THE FRAME WORK BY WHICH ORGANIZATION CAN REACH THIS
OBJECTIVE.
 CONCEPT:
“A BUDGET IS A DETAILED PLAN WHICH SHOWS THE CONSEQUENCES OF AN
ORGANIZATION’S OPERATING ACTIVITIES FOR A SPECIFIED PERIOD OF TIME.”
OR
“THE BUDGET IS A FINANCIAL MODEL THAT SUMMARIZES THE FUTURE OPERATIONS OF
THE FIRM AND IS OFTEN VIEWED AS AN IMPORTANT COMPONENT OF AN
ORGANIZATION’S PLANNING SYSTEM.”
OR
“A QUANTITATIVE EXPRESSION OF A PLAN OF ACTION THAT SHOWS HOW A FIRM OR
ORGANIZATION WILL ACQUIRE AND USE RESOURCES OVER SOME SPECIFIED PERIOD OF
TIME.”
 BUDGETING PROCESS:
“THE ACTIVITIES AND PROCEDURES UNDERTAKEN TO DEVELOP BUDGET.”
 PURPOSES OF BUDGETING:
THE BUDGETING PROCESS CAN NORMALLY SERVE FOLLOWING FIVE PURPOSES.
1. PLANNING
2. FACILITATING COMMUNICATION AND COORDINATION
3. ALLOCATING RESOURCES
4. CONTROLLING PROFIT AND OPERATIONS
5. EVALUATING PERFORMANCE AND PROVIDING INCENTIVES

2. TYPES OF BUDGET
THERE ARE BASICALLY TWO TYPES OF BUDGET
1) MASTER BUDGET/ (STATIC BUDGET)/ ANNUAL BUDGET
2) FLEXIBLE BUDGET
1. MASTER BUDGET:
“ IS A COMPREHENSIVE SET OF BUDGET THAT COVERS ALL ASPECTS OF A FIRM’S
ACTIVITIES. THE BUDGET IS PREPARED FOR A SINGLE LEVEL OF VOLUME BASED ON
MANAGEMENT BEST ESTIMATE OF THE LEVEL OF PRODUCTION AND SALES FOR THE
COMING PERIOD.
 COMPONENTS OF MASTER BUDGET
MASTER BUDGET COMPRISES OF TWO COMPONENTS
a. OPERATING BUDGET
b. FINANCIAL BUDGET
a. OPERATING BUDGET:
 A BUDGET THAT RELATES TO THE OPERATING ACTIVITIES (INCOME
STATEMENT) OF THE BUSINESS.
 AN OPERATING BUDGET IS EXPRESSED IN BOTH UNITS AND RUPEES
 WHEN AN OPERATING BUDGET RELATES TO REVENUE (SALES) UNITS ARE
THOSE EXPECTED TO BE SOLD AND RUPEES REFLECT SELLING PRICES, WHEN
AN OPERATING BUDGET RELATES TO COST ITEMS, UNITS ARE THOSE
EXPECTED TO BE PRODUCED OR CONSUMED AND RUPEES REFLECTS COST.
 THE FOLLOWING ARE THE COMPONENTS AND SEQUENCE OF OPERATING
BUDGET
i. SALES BUDGET
ii. PRODUCTION BUDGET
a. DIRECT MATERIAL BUDGET
b. DIRECT LABOR BUDGET
c. FACTORY OVERHEAD BUDGET
( NOTE : IN CASE OF TRADING BUSINESS INSTEAD OF PRODUCTION BUDGET WE USE THE
TERM PURCHASE BUDGET.)
iii. SELLING AND ADMINISTRATIVE BUDGET

3. i. SALES BUDGET:
 THE FIRST STEP IN DEVELOPING A MASTER BUDGET.
 A DETAILED SUMMARY OF THE ESTIMATED SALES UNITS AND REVENUES
FROM THE ORGANIZATION PRODUCT FOR THE BUDGETED YEAR.
 ALL OTHER BUDGETS ARE DEVELOPED FROM THIS BUDGET
 FORECASTING SALES VOLUME BOTH IN TERMS OF UNITS AND RUPEES, FOR
EXAMPLE THE AIRLINES FORECAST THE NUMBER OF PASSENGERS WHO WILL
FLY ON EACH OF THEIR ROUTES AND THE AVERAGE FARES, BANKS FORECAST
THE NUMBER AND RUPEES AMOUNT OF THE PERSONAL AND HOME
MORTGAGE, THAT THEY WILL PROVIDE IN COMING YEAR, HOTEL ESTIMATES
THE NUMBER OF ROOMS THAT WILL BE OCCUPIED DURING VARIOUS SEASON.
MANUFACTURING AND TRADING BUSINESS CAN FORECAST SALE OF THEIR
GOODS
 FORECASTING ALSO INVOLVES WHICH PRODUCT SHOULD BE ADDED IN THE
PRODUCT LINE AND WHICH SHOULD BE DROPPED
 FOLLOWING MAJOR FACTORS ARE CONSIDERED WHILE DEVELOPING SALES
BUDGET
INTERNAL FACTORS
• PAST SALES LEVEL AND TRENDS OF THE COMPANY
• NEW PRODUCTS PLANNED BY THE COMPANY
• THE INTENDED PRICING POLICY OF THE COMPANY
EXTERNAL FACTORS
• GENERAL ECONOMIC GROWTH
• GOVERNMENT POLICIES
• EXPECTED ACTIVITIES OF COMPETITORS
ii. COST BUDGET:
 A SERIES OF BUDGET THAT DETAILS THE COST OF OPERATION NEEDED TO
SUPPORT FORECAST SALES DEMAND.
 IN CASE OF MANUFACTURING AND SERVICE BUSINESS THE BUDGET IS CALLED
PRODUCTION BUDGET AND IN CASE OF TRADING BUSINESS IT IS TERMED AS
PURCHASE BUDGET.
 FACTORS TO BE CONSIDERED WHILE DEVELOPING PRODUCTION BUDGETS
ARE PROJECTED SALES FOR THE PERIOD, THE DESIRED AMOUNT OF ENDING
INVENTORY, AND THE TIME NEEDED TO OBTAIN MATERIAL AND THEN TO
MAKE A UNIT OF PRODUCT. AMONG THE FACTORS ENDING INVENTORY IS AN
IMPORTANT FIGURE BECAUSE MANAGEMENT WANTS ENOUGH UNITS ON
HAND TO MEET CUSTOMER DEMAND AND AT THE SAME TIME NOT SO MANY
UNITS THAT WILL RESULT IN EXCESSIVE INVENTORY HOLDING COST .
 USUALLY THE DESIRED LEVEL OF INVENTORY IS EXPRESSED IN TERMS OF
PERCENTAGE OF THE FOLLOWING PERIOD’S SALES VOLUME, FOR EXAMPLE
THE COMPANY HAS ESTIMATED THAT ITS ENDING INVENTORY SHOULD BE
80% OF THE PROJECTED SALES FOR THE NEXT YEAR.

4.  SELLING AND ADMINISTRATIVE BUDGETS ARE ALSO DEVELOPED ON THE
BASIS OF SALES BU
 COMPONENTS OF PRODUCTION BUDGET:
IN CASE OF MANUFACTURING FIRM PRODUCTION BUDGET COMPRISES OF
FOLLOWING THREE COMPONENTS.
• DIRECT MATERIAL BUDGET
• DIRECT LABOR BUDGET
• FACTORY OVERHEAD BUDGET
 DIRECT MATERIAL BUDGET.
“ON THE BASIS PRODUCTION BUDGET, A SCHEDULE OF DIRECT
MATERIAL TO BE USED AND CONSEQUENTLY TO BE PURCHASED
DURING THAT PERIOD.”
 DIRECT LABOR BUDGET.
“ON THE BASIS OF PRODUCTION BUDGET, A SCHEDULE OF DIRECT
LABOR REQUIREMENTS( IN TERMS OF HOURS AND COST) FOR THE
BUDGETED PERIOD.”
 OVERHEAD BUDGET.
“ON THE BASIS OF PRODUCTION BUDGET, A SCHEDULE OF PRODUCTION
COST OTHER THAN DIRECT MATERIAL AND DIRECT LABOR.” THE
FACTORY OVERHEAD BUDGET CONSISTS OF INDIVIDUAL FACTORY
OVERHEAD ITEMS (WITH THE IDENTITY OF VARIABLE AND FIXED)
NEEDED TO MEET PRODUCTION REQUIREMENTS.
iii. SELLING AND ADMINISTRATIVE EXPENSE BUDGET.
“ ONCE THE SALES FORECAST HAS BEEN MADE , A SELLING AND
ADMINISTRATIVE EXPENSE BUDGET CAN BE PREPARED, ACTUALLY
THIS BUDGET IS A SCHEDULE OF ALL NON PRODUCTION SPENDING
EXPECTED TO OCCUR DURING THE BUDGETED PERIOD.”

5. b. FINANCIAL BUDGET.
 MONETARY DETAILS FROM THE OPERATING BUDGETS ARE AGGREGATED TO
PREPARE FINANCIAL BUDGETS.
 FINANCIAL BUDGET INCLUDES THE ORGANIZATION CASH AND CAPITAL
BUDGETS (INDICATED FUNDS TO BE GENERATED AND CONSUMED)AS WELL AS
PROJECTED OR PRO FORMA FINANCIAL STATEMENTS.
 THESE BUDGETS ARE THE ULTIMATE FOCAL POINT FOR TOP LEVEL
MANAGEMENT.
 THE FOLLOWING ARE THE COMPONENTS OF FINANCIAL BUDGET.
 CASH BUDGET
 CAPITAL EXPENDITURE BUDGET
 INCOME STATEMENT
 BALANCE SHEET
 STATEMENT OF CASH FLOW
 STATEMENT OF RETAINED EARNING.
CASH BUDGET:
 THE CASH BUDGET SHOWS EXPECTED CASH RECEIPTS AND DISBURSEMENTS, BASED
ON PROJECTED REVENUES ,PRODUCTION SCHEDULE AND EXPENSES DURING A
PERIOD.
 USING THIS BUDGET MANAGEMENT CAN PLAN FOR NECESSARY, FINANCING OR
TEMPORARY INVESTMENT OF SURPLUS FUND.
 THE ACCOUNT RECEIVABLE BUDGET, BASED ON ANTICIPATED SALES WILL
INFLUENCE THE CASH BUDGET, BY SHOWING WHEN CASH IS EXPECTED FROM THE
TURNOVER OF INVENTORY AND RECEIVABLES.
 MOST OF THE CASH PAYMENTS ARE BASED ON BUDGETED EXPENSES ,ADJUSTED
FOR ANY AMOUNT OF ACCRUED OR PREPAID
 PREPARING A CASH BUDGET IS AN IMPORTANT COMPONENT OF ANY FORMAL
BUDGETING SYSTEM.
 IT PLAYS AN IMPORTANT ROLE IN HELPING COMPANY TO EVALUATE FINANCIAL
NEEDS, BECAUSE WITHOUT CASH A COMPANY CAN NOT SURVIVE.
 THE CASH BUDGET ALSO FORM THE BASIS FOR DETAILED MONTHLY OR WEEKLY
CASH REQUIREMENTS.

6. CONCEPT OF FLEXIBLE BUDGETING.
BEFORE STUDYING THE CONCEPT OF FLEXIBLE BUDGETING WE SHOULD KNOW WHAT IS
A STATIC BUDGET .
STATIC BUDGET: A QUANTIFIED PLAN THAT PROJECTS REVENUE AND COST FOR ONLY
ONE LEVEL OF ACTIVITY.
WEAKNESS IN STATIC BUDGETING:
“ALTHOUGH STATIC BUDGET HELPS IN PLANNING, BUT THEY ARE NOT USEFUL IN
CONTROLLING COSTS AND MEASURING PERFORMANCE BECAUSE THE ACTUAL LEVEL OF
ACTIVITY MAY HAVE DIFFERED SIGNIFICANTLY FROM THE PLANNED LEVEL.”
EXAMPLE:

7. FLEXIBLE BUDGETING:
“A QUANTIFIED PLAN THAT PROJECTS REVENUE AND COST FOR VARYING LEVELS OF
ACTIVITY.”
STRENGTH IN FLEXIBLE BUDGETING:
 A FLEXIBLE BUDGET IS MUCH MORE USEFUL FOR CONTROL AND PERFORMANCE
EVALUATION, BECAUSE IT IS NOT CONFINED WITH ONE LEVEL OF ACTIVITY, THEY
ARE ACTUALLY DYNAMIC, AND CAN BE TAILORED TO ANY LEVEL OF ACTIVITY
WITHIN THE RELEVANT RANGE.
 THE FLEXIBLE BUDGET IS INFLUENCED BY THE PRESENCE OF FIXED AND VARIABLE
COST.
 FIXED COSTS ARE THOSE COSTS THAT DO NOT CHANGE AS PRODUCTION CHANGES
OVER A GIVEN RANGE OF ACTIVITY; ON THE OTHER HAND VARIABLE COSTS VARY
IN TOTAL TO ANY CHANGE IN PRODUCTION AND SALES VOLUME.
 IT IS BECAUSE OF THESE VARIABLE ITEMS THAT TOTAL COST OR REVENUE WILL
DIFFER FROM AMOUNT IN MASTER BUDGETS LEVEL, HOWEVER FLEXIBLE BUDGET
WILL BE USEFUL, BECAUSE IT WOULD INDICATE THE STANDARD DIRECT
MATERIAL, ALLOWED FOR THE ACTUAL LEVEL OF PRODUCTION ACHIEVED.