Page 113 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes Introduction

Planning and control are the most important functions of business management. For assisting
business management in these two functions, the techniques of budgetary control and standard
costing are applied. Of course, budgeting is not something new to government departments
where every year, there is an attempt to equate revenue with expenditure. In private life also,
there is an attempt to balance expenditure with earnings. In the business world, a budget is the
formal expression of the expected earnings and expenditure for a particular period or future
period. In a word, budget has become an important tool of management in all business activities
today. A budget is a predetermined detailed plan of action developed as a guide for future
operations. Budget also serves as a basis for performance evaluation and control and budgetary
control is a system of controlling costs through budgets. Budgetary control is defined by the
Institute of Cost and Management Accountants as “The establishment of budgets relating the
responsibilities of executives to the requirements of a policy, and the continuous comparison of
actual with budgeted results, either to secure by individual action the objective of that policy, or
to provide a basis for its revision”.

6.1 Concept of Budget

The word ‘Budget’ is derived from a French word ‘Bougette’ representing leather pouch into
which funds are appropriated to meet the anticipated expenses. A budget is a plan and blueprint
for future management action. It is expressed in monetary terms. It is a financial or quantitative
statement, prepared prior to a defined period of time, of the policy to be pursued during that
period for the purpose of attaining a given objective. The following are some of the important
definitions:
According to Brown and Howard, “A budget is a predetermined statement of management
policy during a given period which provides a standard for comparison with the results actually
achieved.”

George R. Terry has defined budget as, “Budget is an estimate of future needs arranged according
to an orderly basis, covering some or all of the activities of an enterprise for definite period of
time.”

According to James, “A budget is a comprehensive and coordinated plan, expressed in financial
terms, for the operations and resources of an enterprise for some specific period in the future.”

6.1.1 Features of a Budget

The following are the main features of a budget:

(i) A budget is prepared for a definite future period of time. Generally, budgets are prepared
for one year. However, in the case of seasonal business like sugar, ice-cream, apparels,
etc., there may be two budgets for each year.
(ii) The figures in the budget are expressed in monetary and quantitative terms.
(iii) Budget is a plan for the operations and resources of the business or firm.
(iv) Budget is a tool for developing the cooperation, coordination and control between the
various departments.
(v) It shows how much profit or loss a business organisation is expected to make and thereby
reveals its profit potential.

(vi) The budget proposal which is prepared by the budgetee is revived and approved by an
authority higher than the budgetee.

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