CHAPTER – II
THEORETICAL
CONCEPTS RELATED
TO BUDGETING
Theoretical concept of
Budgeting
Budget is a tool of management for planning its
future
activities
including
estimates
of
sales,
expenditure, production, etc,. It is done for indicating
the expected results of the business and the possible
future line of action to be followed for the attainment of
such results. Budget may be defined as “ a forecast of
programme of operations based on expected operating
efficiency.”
Budget should be based on estimated future
requirement for a definite period of time. It should be
prepared by taking into consideration of previous year
statistical data. Thus, Budgeting can be defined as “
forecasting and preplanning for the next period using
past experience, market trends and present position.
Budget
provides
predetermined
standard
of
performance for the guidance of the efforts and activities
in the business. As budgets provides standard of
performance, they usually become basic control. Control
used for the execution of the budgets is what is called”
Budgetary control”. Thus budgeting is concerned with
the planning function of management, while “budgetary
control “ involves the function of controlling in the
organization.
Budgeting : Budget is an art of budget making. This
implies forecasting and preplanning for the budget
period on the basis of statistical data, present trends and
other related known present facts.
Budget as means for Planning, Coordination and
Control : Since, planning is looking ahead and anticipate
difficulties expected and their soluction. Budget palns
and forecast the expenditure and performance as
regards production, sales, purchase, plant utilisation.
As coordination means weaving tighter the
segments of the organization so as to operate at the
most efficient level and produce maximum profit. This is
achieved as all the sections like sales, purchase,
production, finance, personnel etc., work together to
achieve common goals as defined in the budget.
Controlling means by systematic appraisal of results
to ensure that actual and operations coincide, and
remedial actions are taken if there is any deviation. The
budget means , by which plans are regularly compared
with actual results regarding expenses and performance.
Objective of Budgeting : It has the following main
objectives.
 To make periodical evaluation of management
policies.
 To
provide
basis
for
examining
the
achievement of the industry.
 To provide check over expenditure in various
departments.
 To make a programme for systematic
development.
 To decide basis for the expenditure of funds.
 To provide basis for checking of working of the
concern by seeing their efficiency and
economy.
Advantages of Budgeting : Budgeting is essential for
every concern. The main advantages is as follows :
 Responsibilities for the performance may be
fixed. Therefore, it provides check over
shifting of responsibility.
 By budgeting, financial position of the concern
is made clear.
 A check on the performance and efficiency of
the industry is provided.
 It improves management by providing check
at all levels. Thus, it helps in improving
efficiency.
 It is essential to show budget while taking loan
from banks so that they may know about the
financial position of the concern.
 It helps in making the policies for the coming
period.
 It helpful to predetermine the price of the
product.
Budge Requisites :
The followings are essential for preparation of Budget

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Clearly defined Business polices.
Allotting authority and responsibly.
Information about forecast
Cost information
Previous years statistical data
Budgeting principles :
The following principles should be adopted while budgeting
for any kind of organization, and for budgets any kind:
 Budget should be related to the organizational
objectives,
and
should
be
linked
with
the
Organisational structure.
 Budget should be flexible.
 Budget should contain realistic estimates.
 There should be norms, standards and productivity
indices for inputs and outputs for the activity.
 There should be a system of periodical review and
follow-up.
 For effective budgeting, management compliments and
involvement of all concerned executives necessary.
Budget classification :
 On the basis of flexibility
1. Fixed Budget
2. Variable budget
 On the basis of mechanism
1. Appropriation budgeting
2. Performance budgeting
3. Zero based budgeting
 On the basis of functions
1. Master budget
2. Sales budget
3. Production budget
4. Labour budget
5. Financial budget
6. Cash budget
7. Purchase budget
8. Capital expenditure budget
Budgetary control :
Budgetary control is defined as “ process of comparing
the actual result with the corresponding budget data to
know the actual cause of difference”
Advantages :
 It clearly defines the goals of the organization
 It helps in making plans to attain these goals
 It helps in determining the polices of the concern
 It controls expenditure
 It gives advance information regarding amount of
capital needed for the budget period
 It also helps to control the financial position of the
undertaking
 It helps management in controlling the causes of
inefficiency
 It acts as tool for administration
 It helps to know that where executive action is
required to obtain desired results
 It helps measuring the performance of each
department of the concern
 It centralizes management control
Essential conditions for applying budgetary control :
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Focus on objective
Consistent delegation
Proper targets
Appropriate period
Communication of planning promises
Provision for flexibility