BUDGETING

Topics to be covered
 Budgeting
 Budgeting as a tool of Management Control
 Steps in Budget Preparation
 Functional Budgets
 Concept of Zero Based Budgeting
 Application of ZBB
 Advantages of ZBB
 Disadvantages of ZBB
Budgeting
 Budgeting is a formal process of financial planning
using estimated financial planning using estimated
financial and accounting data.
 The institute of Cost and Management Accountants
(UK) defines the budget as “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.”
Budgeting as a tool of management
control
 An effective budgeting system is vital to the success
of a business firm. Budgeting is needed in
organizations to perform the following functions:
 Planning
 Coordination
 Communication
 Control and Performance evaluation
Steps in budget preparation
 The common steps in budget preparation can be listed
as follows:
 Obtaining estimates of sales, production levels,
expected costs, and availability of resources from each
sub-unit/division/department.
 Coordinating estimates
 Communicating the budget to responsible manager and
the concerned departments
 Implementing the budget plan
 Reporting interim progress towards budgeted objectives
Functional budgets
 A functional budget is a budget which relates to
any of the functions of an undertaking, e.g., sales,
production, research and development, cash etc.
 Following Functional budgets are generally
prepared:
 Sales Budget
 Cash Budget
 Flexible Budget
Sales Budget
 The sales budget is usually the keystone in planning and
control of operation of a business. The sales budget is
prepared in quantitative terms of units expected to be
sold and the value expected to be realized.
 The Sales Manager should be made directly
responsible for the preparation and execution of sales
budget. This is prepared according to the requirements
of the business while preparing sales budget. The useful
classification may be-products, territories, customers,
salesmen, etc.
Cash Budget
 A Cash Budget is a summary statement of the firms‘
expected cash inflows and outflows over a projected
time period. In other words, cash budget involves a
projection of future cash receipts and cash
disbursements over various time intervals. While
preparing cash budget seasonal factors must be taken
into account and in practice cash budget is prepared on
a monthly basis.
 Cash budget is also called as cash flow statement which
indicates cash inflow and cash outflows. It is generally
prepared for a maximum period of one year.
Flexible Budget
 Flexible budget, also known as variable or sliding sale
budget, is a budget which is designed to furnish
budgeted costs for any level of activity actually
attained.
 Flexible budgeting technique may be employed to
adjust other budgets according to current conditions
arising out of seasonal variations or changes in the
length of the working period etc.
 A flexible budget is more realistic, useful and practical.
The likely changes in the actual circumstances are taken
into account while preparing a flexible budget. The
technique is highly useful for control purposes.
Zero Based Budgeting (ZBB)
 The technique of zero based budgeting suggests that
an organization should not only make decisions about
the proposed new programmes but it should also, from
time to time, review the appropriateness of the existing
programmes. Such review should particularly done of
such responsibility centres where there is relatively high
proportion of discretionary costs.
 ZBB is a method of budgeting whereby all activities are
revaluated each time budget is formulated and every
item of expenditure in the budget is fully justified. That
is ZBB involves starting from scratch or zero.
Applications of ZBB
 The application of ZBB involves the use of the
“Decision package”. All budgetary procedures
involve an identification of organizational
objectives.
 In this context of these objectives, ZBB involves 3
stages:
 Identification of decision units.
 Development of decision package.
 Review and ranking of decision packages.
Advantages of ZBB
 This system is decision oriented.
 The technique is relatively elastic, because budgets are
prepared every year as zero base.
 It reduces wastage, eliminates inefficiency and reduces the
overall cost of production because every budget proposal is on
the basis of cost-benefit ratio after careful evaluation of
different alternatives and the one which is ‘best’ is approved.
 It provides for a greater possibility of goal congruence.
 It takes into consideration inflationary trends, competitor games
and consumer behavior.
 It vastly improves financial planning and management
information system in view of its revolutionary approach.
Disadvantages of ZBB
 It is possible to quantify and evaluate budget proposals
involving financial matters but computation of cost-benefit
analysis is not possible in respect of non-financial matters
 The cost of administration of zero based budgeting is high.
 It may be difficult to search out various alternatives for the
same activity.
 Some decision packages are inter-related which may be
difficult to rank.
 Ranking the decision is a scientific technique. Every manager
cannot be expected to have the necessary technical expertise
in this matter.
 Zero based budgeting dismisses that the past is irrelevant and
thereby challenges the fundamental theory of continuity.