BUDGET Definition An itemized forecast of an individual's or company's income and expenses expected for some period in the future.

With a budget, an individual is able to carefully look at how much money they are taking in during a given period, and figure out the best way to divide it among a variety of categories. When making apersonal budget, an individual will typically designate the appropriate amount of money to fixed expenses such as rent, car payments, or utility bills, and then make an educated estimation for how much money they will spend in other categories, such as groceries, clothing, or entertainment. By keeping track of where one's money goes, one may be less likely to overspend, and more likely to meet their financial goals. Definition An estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals. One of the most important administrative tools, a budget serves also as a (1) plan of action for achieving quantified objectives, (2) standard for measuring performance, and (3) device for coping with foreseeable adverse situations. Differences Between Forecasting & Budgeting Budgeting and forecasting are two very different--but necessary--aspects of money management. To understand the differences between the two, you must understand the purpose of money management and how each component works What Is Budgeting?

Budgeting is the process of organizing your existing income and expenses for the purpose of projecting your [financial-based] values out into the future. The process of budgeting itself, though, is primarily an organizational process. What is Forecasting? Forecasting is the actual projection of your values out into the future with an expected (but not guaranteed) result. Budgeting Specifics

Budgeting organizes cash flow, develops a payment process for your regular bills, and allows you to track savings and investments. It tells you things like what your mortgage payment is, and how much income you make(Note the present tense). Forecasting Specifics Forecasting projects your budget into the future and sets an expected result within a specific time frame. For example, budgeting will tell you how much your mortgage payment is. Forecasting will tell you how soon the mortgage should be paid off or whether you could accelerate payments based on your projected future income, and so on. Forecasting allows you to set goals.

Why Both Forecasting & Budgeting Are Inseperable

You must have both forecasting and budgeting for successful money management ; you cannot separate one from the other. Difference between Budget and Forecast Once the financial objectives have been set, it is possible to prepare and agree a budget. A budget should relate the overall plan in figures. It is different from a forecast in the sense that the plan, and therefore the budget, sets minimum requirements, whereas a forecast is usually an expectation of what is likely to happen. Example You might choose to budget for sales of Rs.180,000 and use this figure in calculating your likely expenditure, profit and so on. Based on your market research, however, you predict sales of Rs.200,000, and set a target of Rs.220,000, in order to stretch your sales force. If all your costs are covered by the budgeted figure, then you will make a greater profit if you achieve the forecast and a still greater one if you achieve the target. (Whilst this is an important distinction, in practice for most businesses the forecast and budget will be the same.)

Budgeting and Forecasting are two important constituents of managerial decision making process. Even though both of these functions are distinct and are not same but their use and their dependency on each other make them inseparable and thus many confuse the two as same and use them interchangeably. Lets understand the technical difference between these two. Budgeting is a process of monetizing the plan and giving the plan an understandable structure. Budgeting provides us an outlook about the expected end results based on what has been planned or established. Most of the time budgets are based on standard costs and revenues which management establish before the task is executed. So, we can say that budgeting is a process of monetizing standard plan. Forecast on the other hand is the expected end results based on the latest experience and circumstances at hand. Forecast enables management to predict the results by adjusting their existing plans according to the latest information. As circumstances are seldom static and thus can change over time and things might be different from what they were initially planned. Therefore, forecast helps management to adjust its plan accordingly and it is forecasting that pushes management to adjust the standards for a relevant range of time based on latest information.

Types of costing system 6 types of costing used for ascertaining cost For ascertaining cost, following types of costing are usually used. 1. Uniform Costing When a number of firms in an industry agree among themselves to follow the same system of costing in detail, adopting common terminology for various items and processes they are said to follow a system of uniform costing. In such a case, a comparison of the performance of each of the firms can be made with that of another, or with the average performance in the industry. Under such a system it is also possible to determine the cost of production of goods which is true for the industry as a whole. It is found useful when tax-relief or protection is sought from the Government.

2. Marginal Costing: It is defined as the ascertainment of marginal cost by differentiating between fixed and variable costs. It is used to ascertain effect of changes in volume or type of output on profit. 3. Standard Costing and variance analysis It is the name given to the technique whereby standard costs are pre-determined and subsequently compared with the recorded actual costs. It is thus a technique of cost ascertainment and cost control. This technique may be used in conjunction with any method of costing. However, it is especially suitable where the manufacturing method involves production of standardized goods of repetitive nature. 4. Historical Costing It is the ascertainment of costs after they have been incurred. This type of costing has limited utility. 5. Direct Costing It is the practice of charging all direct costs to operations, processes or products leaving all indirect costs to be written off against profits in which they arise. 6. Absorption Costing It is the practice of charging all costs, both variable and fixed to operations, processes or products. This differs from marginal costing where fixed costs are excluded.

Business start-up budget The process of calculating the costs of starting a small business begins with a list of all necessary purchases including tangible assets (for example, equipment, inventory) and services (for example, remodeling, insurance), working capital, sources and collateral. The budget should contain a narrative explaining how you decided on the amount of this reserve and a description of the expected financial results of business activities. The assets should be valued with each and every cost. All other expenses are like labour factory overhead all freshmen expenses are also included into business budgeting. Corporate budget The budget of a company is often compiled annually, but may not be. A finished budget, usually requiring considerable effort, is a plan for the short-term future, typically one year (see budget year). While traditionally the Finance department compiles the company's budget, modern software allows hundreds or even thousands of people in various departments (operations, human resources, IT, etc.) to list their expected revenues and expenses in the final budget. If the actual figures delivered through the budget period come close to the budget, this suggests that the managers understand their business and have been successfully driving it in the intended direction. On the other hand, if the figures diverge wildly from the budget, this sends an 'out of control' signal, and the share price could suffer as a result. Event management budget A budget is a fundamental tool for an event director to predict with reasonable accuracy whether the event will result in a profit, a loss or will break-even. A budget can also be used as a pricing tool. There are two basic approaches or philosophies when it comes to budgeting. One approach focuses on mathematical models, and the other on people. The first school of thought believes that financial models, if properly constructed, can be used to predict the future. The focus is on variables, inputs and outputs, drivers and the like. Investments of time and money are devoted to perfecting these models, which are typically held in some type of financial Government budget The budget of a government is a summary or plan of the intended revenues and expenditures of that government. Personal or family budget In a personal or family budget all sources of income (inflows) are identified and expenses (outflows) are planned with the intent of matching outflows to inflows (making ends meet). In

consumer theory, the equation restricting an individual or household to spend no more than its total resources is often called the budget constraint.

Production budget an estimate of the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material. Created by product oriented companies. Cash flow/cash budget a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing. Marketing budget an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service. Project budget a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each. Revenue budget consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies. Expenditure budget includes spending data items.

Sales budget :Sales budget is a functional budget. The product wise as well as regional breakup of sales estimates are incorporated in the sales budget. The sales budgetbegins with the previous year actual and incorporates the likely changes Production Budget The production budget is prepared based on the sales estimate incorporated inthe sales budget. The adjustments with respect to the opening and closing stock positions that are policy decisions of the business are then made to prepare the production budget. Purchase Budget The purchase budget is another functional budget that estimates thepurchase requirement of materials utilized in the production process. The purchase budget is based on the production budget and the standard material consumption requirement for the production estimates. Expenditure Budgets Expenditure budgets may be drafted as fixed / flexible budgets. A fixed budget isone which is prepared keeping in mind one level of activity. It is defined as one which is designed to remain unchanged irrespective of the level of activity attained. In contrast, flexible budget is one which is designed to change in relation to the level

of activity attained. Flexible budgets are prepared where the nature of business is such that it is difficult to predict the demand/sale of goods.

Cash Budget A cash budget consolidates all the cash inflows and outflows for the business.The cash budget is also a functional budget. The cash budget helps the business to plan the project purchases as well as to provide for the loan requirements. The cash budgets also help in defining the repayment plans for short and long term loans of the business. Management Science-II Institute of Technology Madras The cash budget is based upon the business policy of holding a certain amount as cash. This is the desired opening cash balance for the business. Accordingly , cash budget forecasts the loan requirements or short term investments thatare to be made with excess cash at any specific time. Master Budget The overall or master budget summarizes the other functional budgets. Consolidating the functional budgets, an income and expenditure budget and budgeted balance sheet are prepared. The master budget is usually a one-year budget expressing the expected asset position and capital and liability positions for the projected year. Indian Institute of Technology Madras Zero Base Budget An illustration of a long term budget is the Zero base budget. Zero Base Budgeting process looks at requirements/ plans anew each year irrespective of project continuity. These are necessarily long term project budgets. Definition of 'Zero-Based Budgeting - ZBB' A method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations. Investopedia explains 'Zero-Based Budgeting - ZBB' Because of its detail-oriented nature, zero-based budgeting may be a rolling process done over several years, with only a few functional areas reviewed at a time by managers or group leadership.

Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period's budget. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting. The practice also favors areas that achieve direct revenues or

production; their contributions are more easily justified than in departments such as client service and research and development.