Unit IV - Budget

Meaning and Need for Budget:

A budget is a blueprint of the plan of action to be followed during a specified period of time for the purpose of attaining a given objective.

According to CIMA Terminology, budget is “a plan quantified in monetary terms prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective”.

Features:

An analysis of the above definition reveals the following essential features of a budget:

(i) It is prepared beforehand based on a future plan of actions;

(ii) It is related to a definite future period and is based on the objectives to be attained;

(iii) It is expressed in financial terms;

(iv) It shows planned income to be generated;

(v) It shows probable expenditure to be incurred;

(vi) It indicates the capital to be employed during the period;

Thus, a budget sets the firm’s goals in clear formal terms to avoid confusion and provides a detailed plan of action for achieving the goals. It is a means of communication by which the top management uses the budget as a vehicle to communicate their ideas to the subordinates who are to give them the practical shape.

It coordinates the various activities (such as sales, production, purchases etc.) of the organization in such a way that the use of resources is maximized. It also provides a means of measuring and controlling the performance of the organization, and supplies information to the management, on the basis of which necessary corrective actions may be taken.

Types of budget:-

1. Sales Statement:

It includes a forecast of total sales during a period expressed in money and/or quantities in the organization. The forecast relates to the total volume of sales and also its break-up product-wise and area-wise in the organization. The responsibilities for making the sales budget lies with the sales manager in the organization.

2. Cash Budget 2:

In the organization, the cash budget usually gives detailed estimates of (a) cash receipts and (b) cash disbursements for the budget period. In the organization, it is prepared (i) to ensure that cash is available in time for meeting the financial commitments and (ii) to use cash available in the best possible manner.

3. Production Budget:

It includes a forecast of the output during a particular period analyzed according to (a) products, (b) manufacturing departments, to schedule its production according to sales forecast in the organization.

4. Flexible budget:

A flexible budget is a budget that adjusts or flexes with changes in volume or activity. The flexible budget is more sophisticated and useful than a static budget. (The static budget amounts do not change. They remain unchanged from the amounts established at the time that the the static budget was prepared and approved.

Video Lecture Links:

https://youtu.be/2LKHzjgncNk

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