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Unit 6: Budgetary Control

output or turnover attained.” In other words, “fixed budget is prepared for one level Notes
of activity for a definite time period. It is also known as a static budget.”
The main feature of a fixed budget is that it is not adjusted to actual levels of activity,
when comparisons are made with actual results of operations. A fixed budget may
be satisfactory when the company’s or firm’s activities can be estimated reasonable
accurately. But at best it has limited usefulness as a control tool.

Did u know? Fixed budget is not going to highlight the cost variances due to the difference
in the levels of activity. This type of budget is not of much use to the management as no
adjustment is made to the costs for the difference in the activity level.
(b) Flexible Budget: A flexible budget is also known as dynamic budget, sliding budget,
variable budget, step or expenses control budget. A flexible budget means a budget
which is prepared to give the budgeted cost for any level of activity.

6.5 Preparation of Cash Budgets

According to CIMA, London, “A detailed budget of cash inflows and outflows incorporating
both revenue and capital items.” In other words, cash budget is the budget of anticipated receipts
and payment of cash during the budget period. This budget is considered as a nerve centre of the
entire budgetary control system.

Note The most of the necessary details of this budget are available from sales budget,
production budget, capital expenditure budget, and overhead budget.

Cash budgets can be prepared by using any one of the three methods:
(a) Receipts and Payments Method,
(b) Adjusted Profit and Loss Method, and

(c) Balance-Sheet Method.
The receipts and payments method is usually used. While preparing the cash budget, the
following factors are considered:

(i) Estimated opening balance,
(ii) Monthly sales value in the sales budget,
(iii) Sales policy and credit policy,
(iv) Monthly purchases, closing stock in the materials purchase budget and inventory budget,
(v) Miscellaneous sales,

(vi) Suppliers payment policy, credit terms and agreement,
(vii) Dividend policy,
(viii) Capital budget,

(ix) Amount of salaries, wages and similar payments for the month,

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