Budgets and Budgetary Control | PAPER III – ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | MODULE D: TAXATION AND FUNDAMENTALS OF COSTING

Budgets and Budgetary Control

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1. Budget Concept

A budget is a formal quantitative expression of management’s plans. It serves as a financial roadmap for an organization, showing income and expenditure plans over a future period. Budgets are used for planning, coordinating, and controlling business operations.

2. Budget Manual

A budget manual is a detailed document explaining the responsibilities, procedures, and timelines related to the budgeting process. It facilitates uniformity in the budget preparation and implementation process.

3. Fixed and Flexible Budgets

• Fixed Budget: Prepared for a single level of activity; does not change with actual levels of output.
• Flexible Budget: Adjusts costs according to varying levels of activity. Useful in performance evaluation.

4. Preparation and Monitoring of Budgets

Budgets are typically prepared using historical data, future forecasts, and departmental input. Monitoring involves variance analysis – comparing actual performance with budgeted figures and investigating deviations.

5. Budgetary Control System

It is a systematic approach to comparing budgeted and actual results to ensure objectives are met.

Advantages:

• Improves resource allocation
• Enhances cost control
• Facilitates accountability

Limitations:

• May lead to rigidity
• Time-consuming to prepare
• Relies heavily on assumptions

6. Zero-Based Budgeting (ZBB)

ZBB requires all expenses to be justified for each new period, starting from a "zero base." It enhances efficiency but is time-intensive.

7. Programme and Performance Budgeting

• Programme Budgeting: Focuses on allocating funds based on specific projects or programs.
• Performance Budgeting: Links funding to measurable results and outcomes.

8. Mathematical Examples

1. Fixed Budget Example:
   Budgeted Sales = ₹500,000
   Budgeted Expenses = ₹300,000
   Budgeted Profit = ₹200,000
2. Flexible Budget Example (at 80% capacity):
   Variable Costs = ₹20/unit
   Fixed Costs = ₹100,000
   Output = 10,000 units
   Total Cost = ₹100,000 + (₹20 × 10,000) = ₹300,000
3. Flexible Budget Example (at 60% capacity):
   Output = 7,500 units
   Total Cost = ₹100,000 + (₹20 × 7,500) = ₹250,000
4. Variance Analysis:
   Budgeted Expense = ₹100,000, Actual = ₹110,000
   Variance = ₹10,000 (Adverse)
5. Sales Volume Variance:
   Budgeted = ₹600,000, Actual = ₹500,000
   Variance = ₹100,000 (Adverse)
6. Zero-Based Budgeting Evaluation:
   Project A = ₹150,000 (priority 1)
   Project B = ₹100,000 (priority 3)
   Project C = ₹120,000 (priority 2)
   Select A and C under ₹300,000 limit
7. Cost per Unit (Flexible Budget):
   Total Cost = ₹350,000; Units = 14,000
   Cost/Unit = ₹350,000 ÷ 14,000 = ₹25
8. Profit Planning (Fixed Budget):
   Sales = ₹1,000,000, Variable Cost = ₹600,000, Fixed Cost = ₹200,000
   Profit = ₹1,000,000 - ₹800,000 = ₹200,000
9. Break-Even Sales (Flexible Budget):
   Fixed Cost = ₹120,000, Contribution/Unit = ₹10
   BEP = ₹120,000 ÷ ₹10 = 12,000 units
10. Efficiency Ratio (Performance Budgeting):
    Expected Output = 100 units/hr, Actual = 90 units/hr
    Efficiency = 90/100 × 100 = 90%

9. MCQs (Medium Difficulty)

1. Which type of budget adjusts with varying levels of activity?
   a) Fixed Budget
   b) Flexible Budget
   c) Zero-Based Budget
   d) Performance Budget
   Answer: b) Flexible Budget
2. Which budgeting method starts from scratch every cycle?
   a) Performance Budgeting
   b) Zero-Based Budgeting
   c) Fixed Budgeting
   d) Incremental Budgeting
   Answer: b) Zero-Based Budgeting
3. What is the main disadvantage of a fixed budget?
   a) Too flexible
   b) Time-consuming
   c) Cannot adjust to actual activity
   d) Expensive
   Answer: c) Cannot adjust to actual activity
4. Which document outlines procedures for budgeting?
   a) Budget Manual
   b) Annual Report
   c) Performance Sheet
   d) Trial Balance
   Answer: a) Budget Manual
5. What is the key focus of performance budgeting?
   a) Cost cutting
   b) Outcome measurement
   c) Increasing expenses
   d) Recording profits
   Answer: b) Outcome measurement
6. What does budget variance indicate?
   a) New expenses
   b) Past errors
   c) Difference between budget and actuals
   d) Depreciation
   Answer: c) Difference between budget and actuals
7. Which of the following is NOT a benefit of budgetary control?
   a) Coordination
   b) Improved planning
   c) Reduced control
   d) Accountability
   Answer: c) Reduced control
8. What does ZBB require?
   a) Historic expense trend
   b) Previous year budget
   c) Justification for all expenses
   d) Forecasted revenue
   Answer: c) Justification for all expenses
9. Which budgeting approach is most suitable for non-routine projects?
   a) Fixed Budget
   b) Zero-Based Budget
   c) Incremental Budget
   d) Performance Budget
   Answer: b) Zero-Based Budget
10. Flexible budgeting is best suited when:
    a) Activity levels remain constant
    b) Output is unknown
    c) Fixed cost is variable
    d) Costs are always the same
    Answer: b) Output is unknown