Budget and Budgeting

• Budget: It is a financial and / or quantitative statement, prepared and approved prior to defined period of time, of the policy to be pursued during the period for the purpose of attaining a given objective

• Budgeting: it is a whole process of designing, implementing and operating budget

• Budgetary control: it is establishment of budget relating the responsibilities of executives to the requirements of a policy and the continuous comparison of the actual with budgeted result either to secure by individual action the objective of that policy or to provide a basis for its revision

Advantages of Budgeting

1. A basis for internal audit for regularly evaluating departmental result
2. Scarce resources can be allocated in an optimal way
3. It forces management to plan ahead so that long term goals are achieved
4. Communication and coordination throughout the firm improves
5. Participation in budget has a motivational impact on the work force
6. Areas of efficiency and inefficiency are identified
7. People are made responsible for items of cost and revenue

Problem in Budgeting

1. They are perceived by work force as pressure device imposed by top management
2. Departmental conflict arises because of competition for resources allocation.
3. They make allowance for task to be performed only in relation to volume rather than time

Budgeting Process

1. Specification and communication of organizational objective
2. Determination of key success factor
3. Establishment of clear lines of authority and responsibility
4. Establishment of budget centers
5. Determination of budget period
6. Establishment of budget committee
7. Appointment of budget controller
8. Preparation of budget manual

Flexible Budget

Flexible budget is a budget which by recognizes the difference in behavior between fixed and variable cost in relation to fluctuation in output, turnover or other variable factor etc. it is designed to change in relation to the level of activity actually attained.

Steps in Preparation

1. Specify the time period that is used
2. Classify all the cost into fixed, variable and semi-variable categories.
3. Determine the types of standards that are to be used.
4. Analyze the cost behavior pattern in response past levels of activity
5. Build up appropriate flexible budget for specific level of activity.

Importance of Flexible Budget

1. Flexible budget enable an organization to predict its performance and income level at a given level of sales level and activity levels.
2. Impact of changes in sales and production levels on revenue, expenses and ultimately income
3. Flexible budget enables more accurate assessment of managerial and organisational performance.

Fixed Budget and Flexible Budget

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Tags: Advantages, Audit, Budget, Budgetary Control, Budgeting, Budgeting Process, Communication, Cost, Designing, Financial, Flexible Budget, Importance, Income Level, Objective, Problem in Budgeting, Revenue, Sales, Static, Steps, Top Management, Variable, Work Force