Understand budgets, flexible budgeting, budgetary control, objectives, types, advantages & limitations in an easy, exam-ready format.
📘 Budgets and Budgetary Control
“A budget is a plan quantified in monetary terms for a specific future period.” – CIMA UK
🧾 Meaning of Budget
🔹 Derived from French word ‘baguette’ → little bag or document container
🔹 A formal action plan in money terms
🔹 Shows expected income & expenses under assumed conditions
🔹 A blueprint for future activities
➡ In Simple Words: A budget is a future financial plan used for decision-making and control.
🧠 Definitions
📌 CIMA: Plan in monetary terms, showing income, expenditure, and capital use.
📌 Keller & Ferrara: Action plan based on assumptions to meet goals.
📌 G.A. Welsh: Written plan for future activities over a defined time.
🧮 What is Budgetary Control?
🔹 A method of managing costs by comparing budgeted vs actual results.
🔹 Helps take corrective action or revise plans.
📌 CIMA: “Establishment of budgets with continuous comparison and revision.”
🎯 Objectives of Budgeting
-
Planning
➤ Think ahead → Predict problems → Plan solutions -
Coordination
➤ Align different departments → Avoid conflict -
Measurement of Success
➤ Compare performance vs targets -
Motivation
➤ Employees feel responsible if involved in budget creation -
Communication
➤ Share goals, restrictions, and expectations -
Control
➤ Monitor if things are going as planned
✅ Advantages of Budgetary Control
✔ Sets clear policies & direction
✔ Encourages teamwork
✔ Ensures efficient use of resources
✔ Reduces waste & controls costs
✔ Helps in performance tracking
✔ Useful for getting bank credit
✔ Supports planning & coordination
✔ Seen as a sign of good management
⚠️ Limitations of Budgeting
❌ Can cause rigidity in operations
❌ Expensive & complex for small businesses
❌ Not a substitute for good management
❌ Can cause managerial conflicts
❌ If poorly implemented → morale drops
❌ Requires skilled staff & setup → high cost
🧩 Types of Budgets (Functional Classification)
| Type | Description |
|---|---|
| 📊 Sales Budget | Estimate of future sales → Forms base for other budgets |
| 🏭 Production Budget | Based on sales → Shows production targets |
| 💰 Production Cost Budget | Breaks down cost into materials, labor, overheads |
| 🧱 Raw Material Budget | Estimates raw materials needed → Helps in purchase planning |
| 🛒 Purchase Budget | Plans buying schedule of materials → Helps cash flow & contract planning |
| 👷 Labour Budget | Estimates labor needs (skilled, unskilled, supervisors) |
| 🏗️ Production Overhead Budget | Forecasts all factory-related overhead costs |
| 📦 Selling & Distribution Budget | Covers marketing, delivery, and ad expenses |
| 🏢 Administration Cost Budget | Includes non-manufacturing costs like salaries, office maintenance |
| 🏗️ Capital Expenditure Budget | Long-term fixed assets: land, machinery, patents etc. |
| 💵 Cash Budget | Forecast of all cash inflows and outflows → Ensures solvency |
🛠️ Flexible Budget
🔄 A budget designed to change with different levels of activity
🔹 Used when output levels are uncertain
🔹 Adjusts for actual activity level → more accurate control
🔁 Summary Flow → Easy Revision
Budget (💰)↓ Planned Income + Expenditure = Goal Achievement 📈 ↓ Budgetary Control 🔍 ↓ Compare Actual vs Budgeted → Take Corrective Actions ✅
📚 Quick Recap
| Topic | Key Points |
|---|---|
| Budget | Future financial plan |
| Budgetary Control | Comparison of planned vs actual results |
| Objectives | Planning, Coordination, Measurement, Motivation, Communication, Control |
| Advantages | Professionalism, Efficiency, Creditworthiness |
| Limitations | Costly, Rigid, Conflict-prone |
| Types | Sales, Production, Cost, Raw Material, Purchase, Labour, Admin, Capital, Cash |
| Flexible Budget | Adjusts with level of activity |