Budgeting and Budgetary Control
Domain focus
Budgeting and budgetary control covers preparation, coordination, authorization, monitoring and revision of budgets. The exam tests functional and master budgets, cash budgets, flexible budgets, zero-based budgeting and behavioural issues.
Core rules
- A budget is a quantified plan; budgetary control compares actual with budget and acts on variances.
- The sales budget usually drives production, material, labour and overhead budgets; a cash budget tracks timing, not profit.
- A flexible budget recognizes cost behaviour: variable costs flex with activity, fixed costs remain within the relevant range.
- ZBB starts from zero and justifies each activity and decision package; incremental budgeting starts from last year.
- Rolling budgets are continuously updated and are useful in uncertain conditions.
Worked example
Budget at 10,000 units: variable cost ₹6 per unit, fixed ₹50,000. Actual output is 12,000 units: variable ₹78,000, fixed ₹52,000. Flexible budget at 12,000 units: variable ₹72,000, fixed ₹50,000, total ₹122,000. Actual total ₹130,000, so total variance is ₹8,000 A. Split: variable overspend ₹6,000 A (78,000 - 72,000) and fixed overspend ₹2,000 A. Comparing actual with the original static budget would wrongly mix volume and spending effects.
Traps
Flexing fixed costs; comparing actual with a static budget for variable costs; treating a cash budget as a profit forecast; confusing ZBB with zero balances; ignoring the timing of receipts and payments.