Budgeting, budgetary control and zero-base budgeting
A budget is a quantitative plan for a future period; budgetary control compares actuals with it and corrects gaps. Zero-base budgeting justifies every activity afresh.
The budgetary control cycle
- back to Set objectives
Organising for budgeting
- Budget committee: senior managers who coordinate and approve budgets, helped by a budget officer.
- Budget manual: written rules, responsibilities, timetable and forms.
- Budget period: the time a budget covers, often a year split into months or quarters.
- Principal (key or limiting) budget factor: whatever limits activity, usually sales; that budget is prepared first.
- Budget centre: a unit of the organisation for which a budget is set.
Types of budget
| Basis | Types |
|---|---|
| Function | Sales, production, materials, labour, overheads, cash, capital expenditure; the master budget sums them up |
| Flexibility | Fixed (static: one activity level) and flexible (several activity levels) |
| Time | Long-term, short-term, current (very short), rolling or continuous |
| Approach | Incremental (last year plus a change), zero-base, performance, programme (PPBS), activity-based |
Incremental versus zero-base budgeting
ZBB steps: identify decision units → prepare decision packages → evaluate and rank packages → allocate funds by rank.
Production and purchase budgets
Budgeted sales 10,000 units; opening finished stock 1,500 units; desired closing stock 2,000 units. Each unit needs 2 kg of material at ₹15 per kg; opening material stock 4,000 kg; desired closing material stock 3,000 kg.
- Production = sales + closing stock − opening stock = 10,000 + 2,000 − 1,500 = 10,500 units
- Material needed for production = 10,500 × 2 = 21,000 kg
- Purchases = 21,000 + 3,000 − 4,000 = 20,000 kg
- Purchase cost = 20,000 × 15 = ₹3,00,000
Produce 10,500 units; buy 20,000 kg costing ₹3,00,000.
Flexible budget
At 10,000 units: variable costs ₹80,000 (₹8 per unit), fixed costs ₹60,000, semi-variable costs ₹30,000 of which 40% is fixed. Find the budgeted cost at 12,000 units.
- Variable: 12,000 × 8 = ₹96,000
- Fixed: unchanged at ₹60,000
- Semi-variable: fixed part 40% × 30,000 = ₹12,000; variable part 18,000 ÷ 10,000 = ₹1.80 per unit, so 12,000 × 1.80 = ₹21,600
- Total at 12,000 units = 96,000 + 60,000 + 12,000 + 21,600 = ₹1,89,600 (against ₹1,70,000 at 10,000 units)
Flexible budget cost at 12,000 units = ₹1,89,600.
Cash collections
Sales: January ₹1,00,000; February ₹1,20,000. 40% is collected in the month of sale and 60% in the next month. Opening cash on 1 February ₹20,000; February payments ₹1,10,000.
- February collections = 40% × 1,20,000 + 60% × 1,00,000 = 48,000 + 60,000 = ₹1,08,000
- Closing cash = 20,000 + 1,08,000 − 1,10,000 = ₹18,000
Collections ₹1,08,000; closing cash balance ₹18,000.
NET asks who developed ZBB, the difference between fixed and flexible budgets, the principal budget factor, and quick sums on production, flexible or cash budgets.
Typical MCQ: “Which budget is prepared first in most firms?” The sales budget, because sales demand is usually the principal budget factor.
Typical MCQ: “Sales 8,000 units; opening stock 1,000; closing stock 1,500. How many units to produce?” 8,000 + 1,500 − 1,000 = 8,500 units. Trap: reversing the stock adjustment gives 7,500.
Production = Sales + Closing − Opening. ZBB asks 'why spend at all?'; incremental asks 'how much more?'.