BUDGET & BUDGETARY CONTROL

INTRODUCTION:-
A budget is a written plan covering projected activities of a firm for a definite period of time. It is a
monetary & quantitative expression of business plans & policies to be pursued in the future period of time. A
budget is prepared to have effective utilization of funds & for the realization of objective as efficiently as
possible.

Q. GIVE THE MEANING AND DEFINITION OF THE TERM BUDGET. ( 2 Marks)

A Budget is a numerical statement expressing the plans, policies & goals for a definite future period. A
budget is a blue print of a plan expressed in quantitative terms. It forms the basis for the budgetary control.
Definition
I.C.M.A. defines a budget is “A financial and / or quantitative statement, prepared prior to a defined period of
time, of the policy to be pursued during that period for the purpose of attaining a given objective”.

Q.WHAT ARE THE ESSENTIAL FEATURES OF A BUDGET.

 A budget is a financial statement but it can be a statement of quantities also with or without monetary
data.
 Budget is prepared for a particular period & it is prepared in advance.
 Budget is a detailed plan of the policy to be pursued during the period for which the budget is prepared.
 The function of the budget is to attain a specific objective.

Q. GIVE THE MEANING AND DEFINITION OF THE TERM BUDGETING. ( 2 Marks)

Budgeting means the process of preparing budgets. In other words, it is the technique of formulating budgets or
it is an art of planning.
Definition- “The entire process of preparing the budget is known as budgeting”.

Q. EXPLAIN THE CHARACTERISTICS OF GOOD BUDGETING. ( 4 Marks)

 A good budgeting system should involve persons at different levels while preparing the budget.
 Authority and responsibility should be properly fixed.
 The target of the budgets should be realistic.
 The system should get the whole-hearted cooperation of the top management.
 Employees should be imparted budget education.
 A proper reporting system should be introduced and the actual results should be promptly reported, so
that performance appraisal is undertaken.
 A good system of accounting is essential to make the budgeting successful.

Q. WHAT IS MEANT BY CONTROL? ( 2 Marks)

Control may be defined as “Company operating results with the plans, and taking corrective action
when results deviate from the plans”. Control is a mechanism according to which something or some one is
guided to follow the predetermined course.

Q. GIVE THE MEANING AND DEFINITION OF THE TERM BUDGETARY CONTROL. ( 2 Marks)
Budgetary control is the process of preparation of budgets for various activities & comparing the budgets
figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means &
budgetary control is the end result. Budgetary control is a continuous process which helps in planning &
coordination. It also provides a method of control.
Definition
I.C.M.A. defines budgetary control as “the establishment of budgets, relating the responsibilities of
executives to the requirements of a policy, & the continuous comparison of actual with budgets results either to
secure by individual action the objectives of that policy or to provide a basis for its revision”.
Q. EXPLAIN THE OBJECTIVE OF BUDGETARY CONTROL.

1
 a) To define the goal of the enterprise.
b) To provide long & short period plan for attaining these goals.
c) To co-ordinate the activities of different departments.
d) To operate various cost centres & department with efficiency & economy.
e) To eliminate waste & increase the profitability.
f) To estimate capital expenditure requirements of the future.
g) To centralize the control system.
h) To correct deviations from established standards.
i) To fix the responsibility of various individuals in the organization.
j) To ensure that adequate working capital is available for the efficient operation of the business.
k) To indicate to the management as to where action is needed to solve problems without delay.

Q. DISTINGUISH BETWEEN ESTIMATES, FORECASTS & BUDGETS.

An ‘estimate’ is predetermination of future events either on the basis of guess work or following
scientific procedure.
‘Forecast’ is an assessment of possible future events.
‘Budget’ is planning of future events. Forecasting precedes budgeting. Effective budgeting is based on
efficient forecasting. In order to prepare a budget it is essential to forecast various important variables like
Sales, Selling prices, availability of materials, prices of materials, wage rates etc.

Q. WHAT ARE THE ADVANTAGES & LIMITATIONS OF BUDGETARY CONTROL?

Advantages or Importance of budgetary control
1. Budget fixes the goals & target, without which operation lack direction.
2. Reduction in cost & elimination of inefficiency is achieved automatically.
3. The budget facilitates to maintain ordered effort & brings about efficiency in results.
4. An effective system of budgetary control results in co-coordinated effort of all persons involved.
5. Budgetary control enables the management, to decentralize responsibility without losing control of the
business since it pin-points in efficiency.
6. The Budgetary control & standard costing go hand in hand & the combination of the two gives the most
effective results. It promotes mutual co-operation & team spirits among the persons included.
7. Budgetary control ensures that the capital employed at a particular level is kept as a minimum level.
8. It facilitates an intelligent & planned forecast for future.
9. It is on the basic of budgetary control realistic budgets can be drawn.
10. It aims at maximization of profit through cost control & proper utilization of resources.
11. It brings to light the inefficiencies & weakness on comparing actual performance with budget. Thus
management can take remedial measures.
12. It is a guide to the management in the field of research & development in future.
13. It evaluates the performance.
14. Since budget provides advance information, financial crisis can be avoided.
15. It acts as a safety signal for the management. It prevents wastages of all types.