ICAI Notes: Budget and Budgetary Control | Cost and Management Accounting for CA Intermediate PDF Download

 Page 1


LEARNING OUTCOMES 
CHAPTER 
15 
 
 BUDGETS & BUDGETARY 
CONTROL 
? State the meaning of budget and budgetary control 
? Essentials of budget. 
? Discuss the objectives and importance of budget and 
budgetary control. 
? Describe the process of preparing budgets. 
? State the motivation in budget process. 
? List the different types of budgets. 
? Differentiate between fixed and flexible budget. 
? Prepare fixed and flexible budget. 
 
© The Institute of Chartered Accountants of India
Page 2


LEARNING OUTCOMES 
CHAPTER 
15 
 
 BUDGETS & BUDGETARY 
CONTROL 
? State the meaning of budget and budgetary control 
? Essentials of budget. 
? Discuss the objectives and importance of budget and 
budgetary control. 
? Describe the process of preparing budgets. 
? State the motivation in budget process. 
? List the different types of budgets. 
? Differentiate between fixed and flexible budget. 
? Prepare fixed and flexible budget. 
 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
15.2 
 1. INTRODUCTION 
An organization has its long-term objectives to achieve. The objectives are broken 
down into achievable goals and targets. When these goals and targets are 
translated into business plans, it is necessary to express the plans into quantifiable 
terms to make it achievable. Budget is a commonly used business language that 
expresses the business plans in quantifiable terms.  When the targets are monitored 
and compared with the actual results with the objective to narrow down the 
deviations, make participants responsible and implement the preventive and 
corrective actions, is known as budgetary control.  
Meaning of Budget and Budgeting  
Budget: A budget is an instrument of management used as an aid in the planning, 
programming and control of business activity. The Chartered Institute of 
Management Accountants (CIMA), UK defines budget as “A financial and/or 
quantitative statement, prepared and approved prior to a defined period of time 
of the policy to be pursued during that period for the purpose of attaining a given 
objective.  It may include income, expenditure and employment of capital” The 
budget is a blue-print of the projected plan of action expressed in quantitative 
terms for a specified period of time. 
Budgets & Budgetary Control
Essentials of Budget
Objectives of 
Budgeting
Types of Budgets
Capacity-wise
Functions-wise
Period-wise
Master Budget
Zero-based 
Budgeting (ZBB)
Performance 
Budgeting
Budget Ratio
 1. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


LEARNING OUTCOMES 
CHAPTER 
15 
 
 BUDGETS & BUDGETARY 
CONTROL 
? State the meaning of budget and budgetary control 
? Essentials of budget. 
? Discuss the objectives and importance of budget and 
budgetary control. 
? Describe the process of preparing budgets. 
? State the motivation in budget process. 
? List the different types of budgets. 
? Differentiate between fixed and flexible budget. 
? Prepare fixed and flexible budget. 
 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
15.2 
 1. INTRODUCTION 
An organization has its long-term objectives to achieve. The objectives are broken 
down into achievable goals and targets. When these goals and targets are 
translated into business plans, it is necessary to express the plans into quantifiable 
terms to make it achievable. Budget is a commonly used business language that 
expresses the business plans in quantifiable terms.  When the targets are monitored 
and compared with the actual results with the objective to narrow down the 
deviations, make participants responsible and implement the preventive and 
corrective actions, is known as budgetary control.  
Meaning of Budget and Budgeting  
Budget: A budget is an instrument of management used as an aid in the planning, 
programming and control of business activity. The Chartered Institute of 
Management Accountants (CIMA), UK defines budget as “A financial and/or 
quantitative statement, prepared and approved prior to a defined period of time 
of the policy to be pursued during that period for the purpose of attaining a given 
objective.  It may include income, expenditure and employment of capital” The 
budget is a blue-print of the projected plan of action expressed in quantitative 
terms for a specified period of time. 
Budgets & Budgetary Control
Essentials of Budget
Objectives of 
Budgeting
Types of Budgets
Capacity-wise
Functions-wise
Period-wise
Master Budget
Zero-based 
Budgeting (ZBB)
Performance 
Budgeting
Budget Ratio
 1. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
BUDGETS AND BUDGETARY CONTROL
15.3 
Budget and Forecast 
There is some similarity between the budget and forecast as both relate to a 
defined period of time. A forecast is an assessment of probable future events. 
Budget a financial/quantitative plan of a business enterprise to be pursued over a 
period of time.  Therefore, at the planning stage it is necessary to forecast a 
probable course of action for the business. Budget is a commitment or a target 
which the management seeks to attain on the basis of the forecasts made. Forecasts 
are made regarding sales, production cost and financial requirements of the 
business. A forecast denotes some degree of flexibility while a budget denotes a 
definite target. 
Budgeting: Budgeting is the process of designing, implementing and operating of 
budget. The main emphasis in budgeting process is the provision of resources to 
support plans which are being implemented. It is a means of coordinating the 
combined intelligence of an entire organisation into a plan of action based on past 
performance and governed by rational judgment of factors that will influence the 
course of business in the future. 
 2. ESSENTIAL CHARACTERISTICS OF BUDGET 
The main characteristics of budget are as follows: 
1. A budget is concerned for a definite future period. 
2. A budget is a written document. 
3. A budget is a detailed plan of all the economic activities of a business. 
4. All the departments of a business unit should co-operate for the preparation 
of a business budget. 
5. Budget is a means to achieve business objectives and it is not an end in itself. 
6. Budget needs to be updated, corrected and controlled every time 
circumstances change. Therefore, it is a continuous process. 
7. Budget helps in planning, coordination and control. 
8. Different types of budgets are prepared by industries according to business 
requirements. 
 2. 
© The Institute of Chartered Accountants of India
Page 4


LEARNING OUTCOMES 
CHAPTER 
15 
 
 BUDGETS & BUDGETARY 
CONTROL 
? State the meaning of budget and budgetary control 
? Essentials of budget. 
? Discuss the objectives and importance of budget and 
budgetary control. 
? Describe the process of preparing budgets. 
? State the motivation in budget process. 
? List the different types of budgets. 
? Differentiate between fixed and flexible budget. 
? Prepare fixed and flexible budget. 
 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
15.2 
 1. INTRODUCTION 
An organization has its long-term objectives to achieve. The objectives are broken 
down into achievable goals and targets. When these goals and targets are 
translated into business plans, it is necessary to express the plans into quantifiable 
terms to make it achievable. Budget is a commonly used business language that 
expresses the business plans in quantifiable terms.  When the targets are monitored 
and compared with the actual results with the objective to narrow down the 
deviations, make participants responsible and implement the preventive and 
corrective actions, is known as budgetary control.  
Meaning of Budget and Budgeting  
Budget: A budget is an instrument of management used as an aid in the planning, 
programming and control of business activity. The Chartered Institute of 
Management Accountants (CIMA), UK defines budget as “A financial and/or 
quantitative statement, prepared and approved prior to a defined period of time 
of the policy to be pursued during that period for the purpose of attaining a given 
objective.  It may include income, expenditure and employment of capital” The 
budget is a blue-print of the projected plan of action expressed in quantitative 
terms for a specified period of time. 
Budgets & Budgetary Control
Essentials of Budget
Objectives of 
Budgeting
Types of Budgets
Capacity-wise
Functions-wise
Period-wise
Master Budget
Zero-based 
Budgeting (ZBB)
Performance 
Budgeting
Budget Ratio
 1. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
BUDGETS AND BUDGETARY CONTROL
15.3 
Budget and Forecast 
There is some similarity between the budget and forecast as both relate to a 
defined period of time. A forecast is an assessment of probable future events. 
Budget a financial/quantitative plan of a business enterprise to be pursued over a 
period of time.  Therefore, at the planning stage it is necessary to forecast a 
probable course of action for the business. Budget is a commitment or a target 
which the management seeks to attain on the basis of the forecasts made. Forecasts 
are made regarding sales, production cost and financial requirements of the 
business. A forecast denotes some degree of flexibility while a budget denotes a 
definite target. 
Budgeting: Budgeting is the process of designing, implementing and operating of 
budget. The main emphasis in budgeting process is the provision of resources to 
support plans which are being implemented. It is a means of coordinating the 
combined intelligence of an entire organisation into a plan of action based on past 
performance and governed by rational judgment of factors that will influence the 
course of business in the future. 
 2. ESSENTIAL CHARACTERISTICS OF BUDGET 
The main characteristics of budget are as follows: 
1. A budget is concerned for a definite future period. 
2. A budget is a written document. 
3. A budget is a detailed plan of all the economic activities of a business. 
4. All the departments of a business unit should co-operate for the preparation 
of a business budget. 
5. Budget is a means to achieve business objectives and it is not an end in itself. 
6. Budget needs to be updated, corrected and controlled every time 
circumstances change. Therefore, it is a continuous process. 
7. Budget helps in planning, coordination and control. 
8. Different types of budgets are prepared by industries according to business 
requirements. 
 2. 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
15.4 
9. A budget acts as a business barometer. 
10. Budget is usually prepared in the light of past experiences. 
11. Budget is a constant endeavour of the Management. 
 3. ESSENTIAL STEPS FOR PREPARING BUDGET 
Essential steps for preparing a budget are as follows: 
1. Organisational structure must be clearly defined and responsibility should be 
assigned to identifiable units within the organisation.  
2. Setting of clear objectives and reasonable targets. Objectives should be in 
consonance with the long-term plan of the organisation. 
3. Objectives and responsibility should be clearly stated and communicated to 
the management or person responsible. 
4.   Budgets are prepared for the future periods based on expected course of 
actions. 
5. Budgets are updated for the events that were not kept into the mind while 
establishing budgets. Hence, budgets should flexible enough for mid- term 
revision. 
6. The entire organisation must be committed to the preparation and 
implementing budgeting. 
7.  Budgets should be quantifiable and master budget should be broken down 
into various functional budgets. 
8. Budgets should be monitored periodically. Variances of the actual outcomes 
should be compared with the actuals and variances analysed and 
responsibility should be fixed. 
9. Budgetary performance needs to be linked effectively to the reward system.  
 3. 
© The Institute of Chartered Accountants of India
Page 5


LEARNING OUTCOMES 
CHAPTER 
15 
 
 BUDGETS & BUDGETARY 
CONTROL 
? State the meaning of budget and budgetary control 
? Essentials of budget. 
? Discuss the objectives and importance of budget and 
budgetary control. 
? Describe the process of preparing budgets. 
? State the motivation in budget process. 
? List the different types of budgets. 
? Differentiate between fixed and flexible budget. 
? Prepare fixed and flexible budget. 
 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
15.2 
 1. INTRODUCTION 
An organization has its long-term objectives to achieve. The objectives are broken 
down into achievable goals and targets. When these goals and targets are 
translated into business plans, it is necessary to express the plans into quantifiable 
terms to make it achievable. Budget is a commonly used business language that 
expresses the business plans in quantifiable terms.  When the targets are monitored 
and compared with the actual results with the objective to narrow down the 
deviations, make participants responsible and implement the preventive and 
corrective actions, is known as budgetary control.  
Meaning of Budget and Budgeting  
Budget: A budget is an instrument of management used as an aid in the planning, 
programming and control of business activity. The Chartered Institute of 
Management Accountants (CIMA), UK defines budget as “A financial and/or 
quantitative statement, prepared and approved prior to a defined period of time 
of the policy to be pursued during that period for the purpose of attaining a given 
objective.  It may include income, expenditure and employment of capital” The 
budget is a blue-print of the projected plan of action expressed in quantitative 
terms for a specified period of time. 
Budgets & Budgetary Control
Essentials of Budget
Objectives of 
Budgeting
Types of Budgets
Capacity-wise
Functions-wise
Period-wise
Master Budget
Zero-based 
Budgeting (ZBB)
Performance 
Budgeting
Budget Ratio
 1. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
BUDGETS AND BUDGETARY CONTROL
15.3 
Budget and Forecast 
There is some similarity between the budget and forecast as both relate to a 
defined period of time. A forecast is an assessment of probable future events. 
Budget a financial/quantitative plan of a business enterprise to be pursued over a 
period of time.  Therefore, at the planning stage it is necessary to forecast a 
probable course of action for the business. Budget is a commitment or a target 
which the management seeks to attain on the basis of the forecasts made. Forecasts 
are made regarding sales, production cost and financial requirements of the 
business. A forecast denotes some degree of flexibility while a budget denotes a 
definite target. 
Budgeting: Budgeting is the process of designing, implementing and operating of 
budget. The main emphasis in budgeting process is the provision of resources to 
support plans which are being implemented. It is a means of coordinating the 
combined intelligence of an entire organisation into a plan of action based on past 
performance and governed by rational judgment of factors that will influence the 
course of business in the future. 
 2. ESSENTIAL CHARACTERISTICS OF BUDGET 
The main characteristics of budget are as follows: 
1. A budget is concerned for a definite future period. 
2. A budget is a written document. 
3. A budget is a detailed plan of all the economic activities of a business. 
4. All the departments of a business unit should co-operate for the preparation 
of a business budget. 
5. Budget is a means to achieve business objectives and it is not an end in itself. 
6. Budget needs to be updated, corrected and controlled every time 
circumstances change. Therefore, it is a continuous process. 
7. Budget helps in planning, coordination and control. 
8. Different types of budgets are prepared by industries according to business 
requirements. 
 2. 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
15.4 
9. A budget acts as a business barometer. 
10. Budget is usually prepared in the light of past experiences. 
11. Budget is a constant endeavour of the Management. 
 3. ESSENTIAL STEPS FOR PREPARING BUDGET 
Essential steps for preparing a budget are as follows: 
1. Organisational structure must be clearly defined and responsibility should be 
assigned to identifiable units within the organisation.  
2. Setting of clear objectives and reasonable targets. Objectives should be in 
consonance with the long-term plan of the organisation. 
3. Objectives and responsibility should be clearly stated and communicated to 
the management or person responsible. 
4.   Budgets are prepared for the future periods based on expected course of 
actions. 
5. Budgets are updated for the events that were not kept into the mind while 
establishing budgets. Hence, budgets should flexible enough for mid- term 
revision. 
6. The entire organisation must be committed to the preparation and 
implementing budgeting. 
7.  Budgets should be quantifiable and master budget should be broken down 
into various functional budgets. 
8. Budgets should be monitored periodically. Variances of the actual outcomes 
should be compared with the actuals and variances analysed and 
responsibility should be fixed. 
9. Budgetary performance needs to be linked effectively to the reward system.  
 3. 
© The Institute of Chartered Accountants of India
BUDGETS AND BUDGETARY CONTROL
15.5 
 
 4. OBJECTIVES OF BUDGETING 
Planning 
Planning is the beginning of any activity.  Planning establishes the objectives of the 
firm and decides the course of action to achieve it. It is concerned with formulating 
short-term and long-term plans to achieve a particular end. Planning is a statement 
of what should be done, how it should be done and when it should be done. The 
process of preparing budget begins with the establishment of specific targets of 
performance and is followed by devising plans to achieve such desired goals.  These 
targets include both the overall business targets as well as the specific targets for 
the individual units within the business.  Establishing specific targets for future 
operations is part of the planning function of management, while executing actions 
to meet the goals is the directing function of management. It may be explained as 
• Budget is prepared in synchronisation with the overall objectives of the 
organisation, keeping mission and corporate strategy into account. Individual 
plans at unit level should be in consonance with organisational plan. 
• Budget reflects plans. Therefore, planning should precede the preparation of 
budget. 
• Budgeted plans are quantified and responsibility is assigned to the persons 
who are responsible for execution of plan. 
Specification of 
Objectives
Setting goals 
and targets
Preparation of 
Budgets
Monitoring the 
actual results
Identifying the 
deviations
Taking 
preventive and 
corrective 
actions
 4. 
Planning
Direction and Co-
ordination
Controlling
© The Institute of Chartered Accountants of India