Budgeting and Budgetary Control
Definitions and objectives
A budget is a quantitative expression of a plan for a defined future period. Budgetary control is the establishment of budgets, continuous comparison of actual with budgeted results, and corrective action. Objectives: planning, coordination, control, performance evaluation, communication and motivation.
Types to know
Functional budgets (sales, production, purchase, direct labour, cash); master budget (budgeted profit and loss, balance sheet, cash budget); fixed versus flexible budgets; zero-based budgeting; capital budget; rolling budget.
Mechanics
Identify the key factor (limiting factor) first - usually sales demand or a scarce resource; prepare the sales budget; derive production, then material, labour and overhead budgets; consolidate into the master budget. Budget centres, a budget committee and a budget manual support the process.
Worked example
Sales budget 10,000 units; opening finished goods 800; closing finished goods 1,200. Production = 10,000 + 1,200 − 800 = 10,400 units. Each unit needs 2 kg of material: usage 20,800 kg. Closing raw material 1,800 kg, opening 1,300 kg, so purchases = 20,800 + 1,800 − 1,300 = 21,300 kg. Reasoning: closing stock must be produced or bought but not sold, so it is added; opening stock is already available, so it is subtracted.
Traps that cost marks
Reversing the opening and closing stock adjustment; ignoring the key factor and preparing an unattainable production budget; using a fixed budget to judge performance at a different activity level instead of flexing it; including non-cash items such as depreciation in a cash budget; describing zero-based budgeting as "last year plus a percentage" - it starts from zero and justifies every rupee.