Page 133 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 6.8 Summary

 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 (ICMA)
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”.

 Preparation of budgets involves study of business situations and understanding of
management goals as also the capacity of the organisation.
 Budgets may be classified into a number of categories. Classification of budgets is based
on some features, connected with the operational activities of a business.
 When budgets are prepared for a period of 5 to 10 years these are called long-term budget.
These budgets help in business forecasting and forward planning.
 Short-term Budgets for a short period of a year or two. These are prepared in the form of
production plan in monetary term.

 A current budget can be defined as a budget which is related to the current conditions and
is prepared for use over a short period of time. This budget is more useful than a basis
budget, as a target it lays down will be corrected to current conditions.

 A flexible budget is designed to change in accordance with the level of activity actually
attained.”

 Performance budgeting was first applied in the USA in 1920. It has little difference from
the conventional budgeting technique.
 In conventional budgeting system, the performance of any organisation or company is
considered in terms of financial aspects and generally physical aspects are not much
emphasised to be taken into account. As a consequence, budgetary control in terms of
physical volume and their associated costs cannot be affected. So, the performance
budgeting is a concept evolved for removing this drawback

6.9 Keywords

Budget: It 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.
Budgetary Control: It is the planning in advance of the various function of a business, so that
business as a whole can be controlled.
Budgeting: It is the principal tool of planning and control offered to management by accounting
functions.
Cash Budget: It is the budget of anticipated receipts and payment of cash during the budget
period.

Current Budgets: A current budget can be defined as a budget which is related to the current
conditions and is prepared for use over a short period of time.
Fixed Budget: A fixed budget means a budget which is prepared on the basis of a standard or
fixed level of activity.

128 LOVELY PROFESSIONAL UNIVERSITY