Budgeting and Budgetary Control & It's Functions


Shyodayal Choudhary
Managemant Students
NIILM School of Business


Present business world is full of competition, uncertainty and exposed to different types of risks. The complexity of managerial problems has led to the development of various  management control techniques and procedures useful for the management in managing the business successfully. One of the essential features of modern business  management  is planning and control.

Budgetary control is the most common, useful and widely used  standard device of planning and control. It is very helpful for the business organization to conduct a business in the competitive market.


A budget is a detailed plain of operations for some specific future period. It is an estimate prepared in advance of the period to which it applies. It acts as a business barometer as it is complete programmed of activities of the business for the period covered

Besides' budgetary control' refers to a system of management and accounting control by which all operations and output are forecast as far as ahead  as possible and the actual results, when known are compared with the budget estimates. Thus the term budgetary control  is designed to evaluate the performance in terms of goals budgeted.


(1) Sales Budget: These should be analyzed as between products, periods and areas. By reference to the trends disclosed by the past figures and with the aid of information supplied by the sales department forecast of anticipated sales for the forthcoming period can be made. The sales forecast or sales budget is the basic core budget on which other budget depend. As such rational efforts should be made to develop a proper sales budget which can be reasonably accomplished.

Preparation Of Sales Budget: It has already been started that sales budget is prepared by the sales manager. He is therefore, to consider the following  matters at the time of its preparation:

(i) Analysis of Historical Sales:Analysis of past sales, with the help of statistical measurements, cyclical trends seasonal fluctuations etc

(ii) Reports By Salesman: Salesmen also can submit a report to the sales manager which is highly significant since thery are in frequent contact with customer  having an internal knowledge about the habits tastes and demand of customers.

(iii) Business Conditions:  The general business condition can be also studied from the national as well as international economic statistics, political influences etc

(iv) Market Analysis: .Market analysis may be employed by the large firms where's specialists are employed by the small firms for collecting necessary information about the   market demand products-design fashion trends, degree of competition etc.

(v) Special Condition:  There are certain events which may influence sales outside the firm e.g. introduction of electricity to a village will increase the demand for electrical appliance.

(2) Production Budget:   Production budget is prepared after the preparation of sales budget, to the determine quality of goods which should be produced to meet the budget sales .It is expressed in physical terms, such as (a)Union of output,(b)Labor of house and (c) Material requirement.

(3) Raw Material Budget:  This  budget reveals the quantities of materials which are needed to make the budget production. It also shows the anticipated cost of materials to be purchased, terms of credit from suppliers ,the time taken to procure raw materials etc.

(4) Direct Labor Budget: The direct labor budget tells about the estimates of direct labor requirements essential for carrying out the budgeted output. The direct labor cost is estimated as a results of the evaluation of standard hours worked or the quantity of work done by the individual worker in terms of certain average wage rate. This   wage rate  may be different for each department.

(5) Manufacturing Overhead Budget: Manufacturing overhead include the cost of indirect labor indirect expenses. The manufacturing overhead can be  classified into three categories,(1)Fixed i.e. which tend to remain constant irrespective of any change in the volume of output.(2)Variable i.e. which tend to vary with the output  and(3)Semi-variable i.e. which are party variable and party fixed.

(6) Selling And Distribution Overhead Budget: The selling expenses include all items of expenditure on the promotion, maintenance and distribution of finished goods Sales off cent rent ,salaries. depreciation and miscellaneous expenses are provided for as a fixed amount per month.

(7) Cash Budget: The cash budget is a summary of the firms expected cash inflows and outflows over a particular period of time .In other word, cash budget involves of a projection of future cash receipts and cash disbursements over various time intervals. There must be a balance between cash and the cash demanding activities.

(8) The Master budget: The institute of cost and management accountings England, defines it as the Summery Budget ,incorporating its component functional  budgets, which is finally approved, adopted and employed. In other words, it is a summery budget which is prepared from and summarizes all the functional  budget.

(9) Fixed Budgets: It is a budget in which targets are rigidly fixed. Accord ting to I.C.M.A.  London. Fixed budget is a budget which to remain in changed irrespective of  the level of activity actually attained. Such budgets are usually prepared from one to three months in advance of the fiscal year to which they  are applicable.

(10) Flexible Budget: Fixed budget is generally rigid as it is based on one level of activity and one set of condition and hence not quite helpful for control purpose. A  flexible budget is therefore, designed to provide information as to sales, expenses and profits for different levels of activity which may be obtained.

(11) Performance Budget: Among the methods which relate costs  to outputs, performance budgeting stands out the most prominent. It has emerged as a whole  new way of considering fiscal responsibility.

(12) Zero-Base Budgeting(ZBB): The ZBB take account consequences that may flow if the project or responsibility centre is scratched. In other words, the objective of ZBB is to formulate the budget so as to estimate the amount of expenditure likely to be incurred if the existing project resumes operation after being  scratched. This method is called Zero Base budgeting since the existing system is discontinued and a fresh is made or the existing system is reviewed on the assumption of Zero-Base.


Budgetary control has become an essential tool of management for controlling costs and maximizing profits. It acts as a friend, philosopher and guide to the management. It advantages to management can be summarized as follows:

(1) Economy in working: It  brings efficiency and economy in the working of the business       enterprises .Even though a monetary reward is not offered, the budget become a game

(2) Buck- passing avoided: It establishes divisional and departmental responsibility. It thus prevents alibis and buck-passing when the budget figures are not met.

(3) Establishes coordination: It coordinates the various divisions of a business, the production ,marketing, financial and administration divisions.

(4) Acts as a safety signal: It acts as a safety signal for the   management. It show when to proceed cautiously and when manufacturing expansion can be safety undertaken

(5) Adoption of uniform policy: Uniform policy without the disadvantages of military type pf business  organization can be pursued by all division of business.

(6) Decrease in production costs : Seasonal variation in production can be reduced by developing new fill in products.

(7) Adoption of standard costing principles: The use of budget  figures  as measures of operating performance and financial position makes possible the adoption of   the standard costing principle  in divisions other than the production division.

(8) Optimum mix: It helps management in obtaining the most profitable combination of different factors of production.

(9) Favor with credit agencies: management who have developed a well ordered budget plan and who operate  accordingly, receive greater favor from credit  agencies


Based on estimates: The strength or weakness of  the   budgetary programmer depends to a degree on the accuracy with which the basic estimate are made. The estimate must be based on all available facts and good judgments.

Need for continuous adaptation:  A budgetary programmed can not be installed and perfected in a short time. Budget techniques must be continuously adapted not only for each particular concern but for changing conditions within the concern.

No automatic execution of the budget: Once the budget is complete, it will be effective only if all responsible executive get behind it and exert continuous and aggressive efforts towards its achievement.

Only a tool of the management: The budget should be regarded not as a master but as a servant .It is one of the best tools yet devised for advancing the affairs of accompany and the individual in their various areas of management activity


The shape and design of budgetary control system is largely determined by the size and nature of the business organization. In a large sized organization, an effective budgetary control system can be organized on the following lines:

Creation of budget centers: The first step in the budget preparation is the creation of budget  centers budget is a section of the organization of an undertaken defined for the purpose of budgetary.

Provision of adequate accounting record: An efficient budgetary system requires the provision of appropriate and adequate accounting records also.

Setting the guidelines: The next step in the preparation of budget is setting the guidelines. It is mainly concerned with determining management policy with regard to range of products, stock level, investment polices etc.

Establishment of a budget committee: In small organization budget may be prepared by one executive and he is made in charge of all budgetary arrangements.

Budget officer: A major step in introducing the budgetary control programmer is the appointment of an expert in budgeting, known as budget officer, budget accountant, budget controller, or budget director.

Preparation of a budget manual: To systemize the budget procedure and provide the necessary guidelines for the preparation of various budgets a budget  manual can be prepared. This manual would include such matters as the following functions and responsibility of various members of the budget committee.

Determination of the key factor: Key factor is also known as a limiting factor, or principle factor .For the successful implementation of a budgetary system, the individual budgets for each item for should be co-coordinated and inter-related.

8. Laying down the levels of a activity: It is also essential to the normal level of activity, i.e., the level of output/sales company can reasonably expect to achieve during the year.

9. Budget reports: Installation of a budgets is in itself of no use unless a comparison is made regularly between the actual expenditure and the budgeted allowances.

10. Revision of budgets: To be of maximum use to the management, it is essential to revise budgets, as and when necessary. in order to fit them with the changing business conditions.

References By Dr. M.C.  Garg

Shyodayal Choudhary
Managemant Students
NIILM School of Business

Source: E-mail September 3, 2010




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