Definition and Concept of Budget:

A budget is an instrument of management used as an aid in the planning, programming and

control of business activity. A budget may be defined as a financial and/or quantitative
statement, prepared and approved prior to a defined period of time, of the policy to be
pursued during that period for the purpose of attaining a given objective. It may include
income, expenditure and employment of capital.
According to Brown and Howard of Management Accountant a budget is a predetermined
statement of managerial policy during the given period which provides a standard for
comparison with the results actually achieved.

Based upon this definition, a recreation budget of a person for one fine evening may
look as:

The budget is a statement showing the way the person plans to spend Rs. 121.50.Thus budget
is a written plan of action.

Objectives of Budget:

A budget is used for cost control purposes and it is one of the most important overall control
devices employed by management. A budget represents the financial requirements of
different sections of the business during a given period to achieve an estimated profit based
upon a given volume of sales.

A budget is based upon past statistical data and it predicts the estimated labour, sales,
production and other management requirements for future, i.e., for a definite budgetary
period (of time). A budget can be thought of as an overall plan for the operation of the
business in terms of sales, production and expenditures. Thus budget acts as a coordinating
device among the various functions of the business.

Different Types of Budget:

• Sales budget – an estimate of future sales, often broken down into both units. It is
used to create company and sales goals.
• 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 labour and material. Created by product
oriented companies.
• Capital budget - used to determine whether an organization's long-term investments
such as new machinery, replacement machinery, new plants, new products, and
research development projects are worth pursuing.
• 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 to determine when income will be sufficient to cover
expenses and when the company will need to seek outside financing.
• Conditional budgeting is a budgeting approach designed for companies with
fluctuating income, high fixed costs, or income depending on sunk costs, as well as
NPOs and NGOs.
• 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 labour, materials, and other related expenses. The project
budget is often broken down into specific tasks, with task budgets assigned to each. A
cost estimate is used to establish a project budget.
• 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..
• Flexibility budget - it is established for fixed cost and variable rate is determined per
activity measure for variable cost.
• Appropriation budget - a maximum amount is established for certain expenditure
based on management judgment.
• Performance budget - it is mostly used by organization and ministries involved in
the development activities. This process of budget takes into account the end results.
• Zero based budget - A budget type where every item added to the budget needs
approval and no items are carried forward from the prior years budget. This type of
budget has a clear advantage when the limited resources are to be allocated carefully
and objectively. Zero based budgeting takes more time to create as all pieces of the
budget need to be reviewed by management.
• Personal budget - A budget type focusing on expenses for self or for home, usually
involves an income to budget.

Definition and Concept of Budgetary Control:

Budgetary control makes use of budgets for planning and controlling all aspects of producing
and/ or selling products or services. Budgetary control attempts to show the plans in financial
terms. Budgetary control is the planning in advance of the various functions of a business so
that the business can be controlled. Budgetary control relates expenditure to a section or
department who incurs the expenditure, so that the actual expenses can be compared with the
budgeted ones, thus providing a convenient method of control.

Budgetary control is the process of determining various actual results with budgeted figures
for the enterprise for the future period and standards set then comparing the budgeted figures
with the actual performance for calculating variances, if any. First of all, budgets are prepared
and then actual results are recorded.

The comparison of budgeted and actual figures will enable the management to find out
discrepancies and take remedial measures at a proper time. The budgetary control is a
continuous process which helps in planning and co-ordination. It provides a method of
control too. A budget is a means and budgetary control is the end-result.

According to Brown and Howard, “Budgetary control is a system of controlling costs which
includes the preparation of budgets, coordinating the departments and establishing
responsibilities, comparing actual performance with the budgeted and acting upon results to
achieve maximum profitability.” Weldon characterizes budgetary control as planning in
advance of the various functions of a business so that the business as a whole is controlled.

Advantages of budgetary control

There are a number of advantages to budgeting and budgetary control:

· Compels management to think about the future, which is probably the most important
feature of a budgetary planning and control system. Forces management to look ahead, to set
out detailed plans for achieving the targets for each department, operation and (ideally) each
manager, to anticipate and give the organisation purpose and direction.

· Promotes coordination and communication.

· Clearly defines areas of responsibility. Requires managers of budget centres to be made

responsible for the achievement of budget targets for the operations under their personal
control.

· Provides a basis for performance appraisal (variance analysis). A budget is basically a

yardstick against which actual performance is measured and assessed. Control is provided by
comparisons of actual results against budget plan. Departures from budget can then be
investigated and the reasons for the differences can be divided into controllable and non-
controllable factors.

· Enables remedial action to be taken as variances emerge.

· Motivates employees by participating in the setting of budgets.

· Improves the allocation of scarce resources.

· Economises management time by using the management by exception principle.