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QUICK REVIEW
1.Budgetary Control: It is the system of management control and accounting in which all the operations are forecasted and planned in advance to the extent possible and the actual results compared with the forecasted and planned results.
2.Types of Budget:
Capacity wise – Fixed Budget, Flexible Budget, Functions wise – Sales Budget, Production Budget, Plant Utilisation Budget, Direct Material Usage Budget, Direct Material Purchase Budget, etc.,
Master Budget, Period wise – Long Term Budgets, Short Term Budgets, Current Budgets.
3.Budget Ratios: It provide information about the performance level, i.e., the extent of deviation of actual performance from budgeted performance and whether the actual performance is favourable or unfavourable.
Ratio is 100% or more - Favourable performance
Ratio is less than 100% - Unfavourable performance
Efficiency Ratio = Standard Hours Actual Hours × 100
Activity Ratio = Standard Hours Budgeted Hours × 100
Calendar Ratio = Available Working Hours Budgeted Working Hours × 100
Standard Capacity Usage Ratio = Budgeted Hours Maximum possible hours in the Budgeted period × 100
Actual Capacity Usage Ratio = Actual Hours worked
Maximum possible working hours in a period × 100
Actual Usage of Budgeted Capacity = Actual Hours worked Budgeted Hours × 100
THEORY QUESTIONS
Q1. What are the essential characteristics of budget. [Nov. 2011, 2 Marks]
Ans.: Essential characteristics of budget:
It is concerned for a definite future period.
It is a detailed plan of all economic activities of a business.
It is a mean to achieve business objectives and it is not an end in itself.
It helps in planning, co-ordination and control.
It acts as a business barometer.
It is usually prepared in the light of past experiences.
Q2. What are the objectives of Budgetary Control System?
[ICAI Module]
Ans.:
Portraying with precision the overall aims of the business and determining targets of performance for each section or department of the business.
Providing a basis for the comparison of actual performance with the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures.
Ensuring optimum use of available resources to maximise profit or production, subject to the limiting factors.
Co-ordinating various activities of the business, and centralising control and yet enabling management to decentralise responsibility and delegate authority in the overall interest of the business.
Providing a basis for revision of current and future policies.
Drawing up long range plans with a fair measure of accuracy.
Q3. Describe the steps involved in establishing good budgeting control system [Nov. 2013, 4 Marks]
Ans.: The following steps are necessary for establishing a good budgetary control system:
1. Determining the objectives to be achieved, over the budget period, and the policy or policies that might be adopted for the achievement of these objectives.
2. Determining the activities that should be undertaken for the achievement of objectives.
3. Drawing up a plan or a scheme of operation in respect of each class of activity, in quantitative as well as monetary terms for the budget period.
4. Laying out a system of comparison of actual performance by each person, or department with the relevant budget and determination of causes for the variation, if any.
5. Ensuring that corrective action will be taken where the plan has not been achieved and, if that is not possible, for the revision of the plan.
Q4. What are the advantages of Budgetary Control System?
Points
1. Efficiency
2. Control on expenditure
3. Finding deviations
4. Effective utilisation of resources
5. Revision of plans
6. Cost Consciousness
Description
The use of budgetary control system enables the management to conduct its business activities in an efficient manner.
It is a powerful instrument used by business entity for the control of their expenditure. It provides a yardstick for measuring and evaluating the performance of individuals and their departments.
Budget reveals the deviations of the actual from the budgeted figures after making a comparison and communicating the deviation to management.
Effective utilisation of various resources like men, material, machinery and money, is made possible, as the production is planned after taking these into account.
Budget helps in the review of current trends and framing of future policies.
Budgetary control system encourages cost consciousness and maximum utilisation of available resources.
Q5. What is ‘Budgetary Control System’ and discuss the components of the same. [Dec. 2021, May 2009, 5 Marks] OR
Discuss the four components of Budgetry Control System. [Jan. 2026, 4 Marks]
Ans.: It is the system of management control and accounting in which all the operations are forecasted and planned in advance to the extent possible and the actual results compared with the forecasted and planned results.
Components of Budgetary Control System: The policy of a business for a defined period is represented by the master budget, the detailed components of which are given in a number of individual budgets called functional budgets. These functional budgets are broadly grouped under the following heads:
1. Physical budgets: Those budgets which contain information in quantitative terms such as the physical units of sales, production etc. This may include quantity of sales, quantity of production, inventories, and manpower budgets are physical budgets.
2. Cost budgets: Budgets which provides cost information in respect of manufacturing, administration, selling and distribution, etc. for example, manufacturing costs, selling costs, administration cost and research and development cost budgets are cost budgets.
3. Profit budgets: A budget which enables the ascertainment of profit. For example, sales budget, profit and loss budget, etc.
4. Financial budgets: A budget which facilitates in ascertaining the financial position of a concern, for example, cash budgets, capital expenditure budget, budgeted balance sheet etc.
Q6. State the limitations of Budgetary Control System. [Jan. 2021, 5 Marks] Ans.:
Limitations of Budgetary Control System
Points
1. Based on Estimates
2. Time factor
3. Co-operation Required
4. Expensive
Description
Budgets are based on a series of estimates, which are based on the conditions prevalent or expected at the time budget is established. It requires revision in plan if conditions change.
Budgets cannot be executed automatically. Some preliminary steps are required to be accomplished before budgets are implemented. It requires proper attention and time of management. Management must not expect too much during the initial development period.
Staff co-operation is usually not available during the initial budgetary control exercise. In a decentralized organisation, each unit has its own objective and these units enjoy some degree of discretion. In this type of organisation structure, coordination among different units is required. The success of the budgetary control depends upon willing co-operation and teamwork.
The implementation of budget is somewhat expensive. For successful implementation of the budgetary control, proper organisation structure with responsibility is prerequisite. Budgeting process start from the collection of information to for preparing the budget and performance analysis. It consumes valuable resources
Points Description
(in terms of qualified manpower, equipment, etc.) for this purpose; hence, it is an expensive process.
5. Not a substitute for management Budget is only a managerial tool and must be intelligently applied for management to get benefited. Budgets are not a substitute for good management.
6. Rigid document
Budgets are sometime considered as rigid documents. But in reality, an organisation is exposed to various uncertain internal and external factors. Budget should be flexible enough to incorporate ongoing developments in the internal and external factors affecting the very purpose of the budget.
Q7. Describe the salient features of budget manual. [RTP May 2021]
Ans.: Following are the salient features of Budget Manual:
It contains much information which is required for effective budgetary planning.
It is a collection of documents that contains key information for those involved in the planning process.
It includes introductory explanation of the budgetary planning and control process, statement of the budgetary objective and desired results.
It contains a form of organisation chart to show who is responsible for the preparation of each functional budget and the way in which the budgets are interrelated.
In contains a timetable for the preparation of each budget.
Copies of all forms to be completed by those responsible for preparing budgets, with explanations concerning their completion is included in Budget Manual.
Q8. Explain briefly the concept of ‘flexible budget’. [Nov. 2019, Nov. 2017, Nov. 2008, 2 Marks]
Ans.: Flexible Budget: A flexible budget is defined as “a budget which, by recognizing the difference between fixed, semi-variable and variable cost is designed to change in relation to the level of activity attained”. A fixed budget, on the other hand is a budget which is designed to remain unchanged irrespective of the level of activity actually attained. In a fixed budgetary control, budgets are prepared for one level of activity whereas in a flexibility budgetary control system, a series of budgets are prepared one for the each of a number of alternative production levels or volumes. Flexible budgets represent the amount of expense that is reasonably necessary to achieve each level of output specified. In other words, the allowances given under flexibility budgetary control system serve as standards of what costs should be at each level of output.
Q9. What are the cases when a flexible budget is found suitable? [May 2019, 5 Marks]
Ans.: Flexible budgeting may be resorted to under following situations:
(i) In the case of new business venture due to its typical nature it may be difficult to forecast the demand of a product accurately.
(ii) Where the business is dependent upon the mercy of nature e.g., a person dealing in wool trade may have enough market if temperature goes below the freezing point.
(iii) In the case of labour-intensive industry where the production of the concern is dependent upon the availability of labour.
Suitability for flexible budget:
1. Seasonal fluctuations in sales and/or production, for example in soft drinks industry.
2. A company which keeps on introducing new products or makes changes in the design of its products frequently.
3. Industries engaged in make-to-order business like ship building.
4. An industry which is influenced by changes in fashion; and
5. General changes in sales.
Q10. Distinguish between ‘Fixed and flexible budget’. [Nov. 2011, May 2016, 4 Marks]
Ans.:
1. It does not change with actual volume of activity achieved. Thus it is rigid. It can be recasted on the basis of activity level to be achieved. Thus it is not rigid.
2. It operates on one level of activity and under one set of conditions. It consists of various budgets for different level of activity.
3. If the budgeted and actual activity levels differ significantly, then cost ascertainment and price fixation do not give a correct picture.
4. Comparisons of actual and budgeted targets are meaningless particularly when there is difference between two levels.
It facilitates the cost ascertainment and price fixation at different levels of activity.
It provided meaningful basis of comparison of actual and budgeted targets.
Q11. List the eight functional budgets prepared by a business. [Nov. 2009, 3 Marks]
Ans.: The various commonly used Functional budgets are:
1. Sales Budget
2. Production Budget
3. Plant Utilisation Budget
4. Direct Material Usage Budget
5. Direct Material Purchase Budget
6. Direct Labour (Personnel) Budget
7. Factory Overhead Budget
8. Production Cost Budget.
Q12. State the considerations on which capital expenditure budget is prepared. [Nov. 2012, 4 Marks]
Ans.: The preparation of Capital Expenditure Budget is based on the following considerations:
1. Overhead on production facilities of certain departments as indicated by the plant utilisation budget.
2. Future development plans to increase output by expansion of plant facilities.
3. Replacement requests from the concerned departments.
4. Factors like sales potential to absorb the increased output, possibility of price reductions, increased costs of advertising and sales promotion to absorb increased output, etc.
Q13. Write a short note on ‘Zero Base Budgeting as an approach towards Productive improvement.’ [Nov. 2005, 4 Marks]
Ans.: Zero Base Budgeting approach plays key role in productivity improvement. It is beneficial in this regard in the following manner:
1. ZBB ensures that the various functions adopted by the organisation are important and critical for the achievement of its objectives and are being performed in the best possible way.
2. ZBB gives an opportunity to the management to allocate resources for different activities only after proper cost benefit analysis.
3. In this approach, ‘chances of arbitrary cuts and enhancement are thus avoided.
4. Department budgets are closely linked with corporate objectives.
5. It provides a systematic approach for the evaluation of different activities and rank them in order of preference for the allocation of scarce resources.
6. Wasteful expenditures can be easily identified and eliminated.
Q14. Why is ‘Zero Base Budgeting’ (ZBB) considered superior to ‘Traditional Budgeting’? Explain. [May 2018, 5 Marks]
Ans.: Zero based budgeting is superior to traditional budgeting: Zero based budgeting is superior to traditional budgeting in the following manner: It provides a systematic approach for evaluation of different activities. It ensures that the function undertaken is critical for the achievement of the objectives.
It provides an opportunity for management to allocate resources to various activities after a thorough – cost benefit analysis.
It helps in the identification of wasteful expenditure and then their elimination. It facilitates the close linkage of departmental budgets with corporate objectives.
It helps in the introduction of a system of Management by Objectives.
Q15. What are the advantages and limitations of zero base budgeting? [Nov. 2004, 4 Marks]
Ans.: Advantages of ZBB:
It provides a systematic approach for the evaluation of different activities and rank them in order of preference for the allocation of scarce resources. It ensures that the various functions undertaken by the organization are critical for the achievement of its objectives and are being performed in the best possible way.
It provides an opportunity to the management to allocate resources for various activities only after having a thorough cost-benefit-analysis. The chances of arbitrary cuts and enhancement are thus avoided.
The areas of wasteful expenditure can be easily identified and eliminated. Departmental budgets are closely linked with corporation objectives. The technique can also be used for the introduction and implementation of the system of ‘management by objective.’ Thus, it cannot only be used for fulfilment of the objectives of traditional budgeting but it can also be used for a variety of other purposes.
Limitations of ZBB:
The work involves in the creation of decision-making and their subsequent ranking has to be made on the basis of new data. This process is very tedious to management.
The activities selected for the purpose of ZBB are on the basis of the traditional functional departments. So the consideration scheme may not be implemented properly.
Q16. Define Zero Base Budgeting and mention its various stages. [Nov. 2019, 5 Marks]
Ans.: Zero-based Budgeting: (ZBB) is an emergent form of budgeting which arises to overcome the limitations of incremental (traditional) budgeting system. Zero- based Budgeting (ZBB) is defined as ‘a method of budgeting which requires each cost element to be specifically justified, although the activities to which the budget relates are being undertaken for the first time, without approval, the budget allowance is zero’.
ZBB is an activity based budgeting system where budgets are prepared for each activities rather than functional department. Justification in the form of cost benefits for the activity is required to be given. The activities are then evaluated and prioritized by the management on the basis of factors like synchronisation with organisational objectives, availability of funds, regulatory requirement etc.
ZBB is suitable for both corporate and non-corporate entities. In case of non-corporate entities like Government department, local bodies, not for profit organisations, where these entities need to justify the benefits of expenditures on social programmes like mid-day meal, installation of street lights, provision of drinking water etc.
ZBB involves the following stages:
(i) Identification and description of Decision packages
(ii) Evaluation of Decision packages
(iii) Ranking (Prioritisation) of the Decision packages
(iv) Allocation of resources
Q17. What are the important points an organization should consider if it wants to adopt Performance Budgeting? [Nov. 2020, 5 Marks]
Ans.: For an enterprise that wants to adopt Performance Budgeting, it is thus imperative that:
The objectives of the enterprise are spelt out in concrete terms. The objectives are then translated into specific functions, programmes, activities and tasks for different levels of management within the realities of fiscal constraints.
Realistic and acceptable norms, yardsticks or standards and performance indicators should be evolved and expressed in quantifiable physical units. A style of management based upon decentralised responsibility structure should be adopted, and
An accounting and reporting system should be developed to facilities monitoring, analysis and review of actual performance in relation to budgets.
