Budget & Budgeting

Budget-
• Plan expressed in Quantitative Terms.
• Usually prepared for one year, hence called
short term plan.
• Usually structured around a product or an
activity
“Budgeting is a technique for formulating budgets.”

Budgetary Control-
In addition to above it encompasses its use as
management tool for the business planning and
control.
10/17/08 hmahesh45@yahoo.com; VIM Pune 1
 Why Budgeting?

•It helps in fine tuning of strategic plan.

•It estimates profit potential of BU in quantitative
terms.
•It ensures management’s commitment.
•It is useful tool for performance appraisal.
•It helps co-ordination of efforts of all functional
units.
•It helps in assigning responsibility.
•It gives basis for performance evaluation.

10/17/08 hmahesh45@yahoo.com; VIM Pune 2

 Limitations of Budgeting

• It deals with uncertain future.

• Budgetary revisions are usually unavoidable.
• Discourages efficient person.
• Problems of coordination.
• Conflict among different departments.
• Lot depends on top managements support.

10/17/08 hmahesh45@yahoo.com; VIM Pune 3

 Budget – Classification

• Operating Budgets and Financial Budgets

• Fixed Budget and Flexible Budget
• Zero Base Budget
• Program Budget and Responsibility Budget

10/17/08 hmahesh45@yahoo.com; VIM Pune 4

 Operating Budgets – Classification
• Production Budget – How much to produce?
• Purchase Budget – What & How much to
procure? (Value in Quantity &
Rs)
• Labor Budget –Requirement of labor force?
(Value in Hours & Rs. )
• Manufacturing Expenses Budget – What
would be the cost of production ?
• Administrative and Selling Expenses Budget
– What would be the admn. and
slg. Expenses?
• Sales Budget – How much to sell?
10/17/08 hmahesh45@yahoo.com; VIM Pune 5
 Financial Budget – Classification

• Cash Budget – What would be cash inflow &

outflow?
• Working Capital Budget –
• Capital Expenditure Budget –
• Income Statement Budget – Projected P&L
• Budgeted Balance Sheet – Projected B/S

10/17/08 hmahesh45@yahoo.com; VIM Pune 6

 Fixed and Flexible Budget – Classification

• Fixed Budget – Budget prepared for given level

of activity, which will not be
changed for period under
consideration.

• Flexible Budget – Budget prepared for varying

activity levels.

10/17/08 hmahesh45@yahoo.com; VIM Pune 7

 Zero Base Budget – Classification

• Starting from scratch.

• Activity has no memory.
• Budget for current year need to be justified on
current situation.
• No inefficiency of past will be carried to future
• Justification and priority plays vital role in ZBB

10/17/08 hmahesh45@yahoo.com; VIM Pune 8

 Zero Base Budget – Advantages

• Priority of the program is taken care of.

• Improves the efficiency of the management.
• Identifies economical and wasteful areas.
• Ensures optimum use of resources.
(cost benefit analysis)
• Best suited for activities whose output is not
related with production.
(since performance
evaluation is difficult)
• Helps in achieving organizational goal.
10/17/08 hmahesh45@yahoo.com; VIM Pune 9
 Zero Base Budget – Limitations

• Cost benefit analysis is a difficult task in case of

non financial matters.
• Analyzing and ranking the activities may need
special expertise.
• No scope to adjust for changes, Flexible
budgeting is not possible.
• Involves high cost in terms of time and efforts.

10/17/08 hmahesh45@yahoo.com; VIM Pune 10

 Thanks…

10/17/08 hmahesh45@yahoo.com; VIM Pune 11