Budgets and Budgetary Controls
BUDGET
Budget is generally defined as a quantitative plan which is chartered for the forthcoming period of time. It generally takes into consideration planned sales volumes, costs to be incurred, expenses to be met out, expected revenue to be generated and flow of cash and cash equivalents during the time period for which the budget is planned.
Budget can be prepared at any level ranging from an individual to national level. It is basically the estimation of revenue and expenses.
Budget is Broadly Categorized into the following 3 categories
- Surplus Budget: It usually means that the expected revenue is more than the estimated expenses. Thus, profits are anticipated.
- Balanced Budget: It means that the expected revenues almost equal the estimated expenses. No profits as well as no losses are anticipated.
- Deficit Budget: It means that the expected revenue is less than the estimated expenses. Hence, losses will be incurred.
PURPOSE OF BUDGET
The purpose of budget includes the following 3 aspects:
- It is a forecast of estimated income and expenditure to be incurred over the time period for which budget is planned.
- It serves as a tool for decision making as it provides clarity with respect to revenues and expenses.
- It is an appropriate mean to measure business performance.
BUDGETARY CONTROLS
Budgetary Control is basically a technique where the actual results i.e. actual revenues and expenses are compared with the budget planned before the start of the financial year. It highlights the need for adjustment of the performance, if required. It also shows how well the managers have controlled costs and operations in an accounting period.
It analyses the budget after its implementation to know major deviations.
TECHNIQUES OF BUDGETARY CONTROL
For the purpose of budgetary control, various techniques are used which are briefly explained as follows
1. Variance Analysis
In the following analysis, Budget is prepared for each and every department. Further, a comparison is made between the actual and estimated accounting figures. With the help of this technique, variances are found. The variances are further divided into Favourable and Unfavourable Variances.
For instance, the difference between actual production cost and estimated production cost will be denoted by production variance.
This technique helps in reducing cost and is commonly used for budgetary control.
2. Responsibility Accounting
It is considered to be a good technique for budgetary control. In this, 3 centres namely Cost Centre, Profit Centre and Investment Centre is created. All these centres are like the department of the organisation and employees are classified on the basis of these centres.
The performance of the employees in manually recorded and their accountability is fixed regarding certain goals that might be quantitative or qualitative. This technique helps to take decision regarding promotion or demotion based on employee’s performance.
3. Adjustment of funds
Under this technique, Top management takes decisions regarding adjustment of funds from one project to another.
For instance, if a new project started by an organisation needs money and there is surplus money allocated to an already existing project, then the surplus funds can be adjusted against new project for its initial setup. This technique facilitates proper allocation and adjustment of funds and prevents misuse.
4. Zero Based Budgeting
Another technique which is immensely popular these days is zero based budgeting. Under this technique, budget of next year is considered as nil which can be only possible if estimated revenue is equal to estimated expenses. At that time, difference between estimated revenue and estimated expenses will be zero. Any excess amount of money will be adjusted. This technique helps in having control over each and every amount of money spent during the year.
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