Page 150 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 7: Budgeting: Tool for Management Control

Figure 7.1 shows the content of a typical operating budget and distinguishes from other planning Notes
documents: the strategic plan, the capital budget, the cash budget and the budgeted balance
sheets. The amounts are the planned rupee amounts for the year together with quantitative
amounts such as: head counts (i.e., no. of employees) and sales in units.
Typical operating budget contains the following:

1. For organization as a whole and for each business unit
2. Classified by responsibility centres
3. Typically includes:
(i) References

(ii) Production cost and cost of sales
(iii) Marketing expenses
(iv) Logistic expenses (it includes order processing, transporting from the factory to the
customer, warehousing and other packing, and construction of accounts receivable)
(v) General and administrative
(vi) Research and development
(vii) Net Income

4. Expenses may be flexible (i.e., to change with changes in either sales revenue or production
volume), discretionary or committed
5. For one year divided into months or quarters

6. Total reconciles to strategic plan (unless revised)

Did u know? Other Budgets
Consist of capital budget, a budgeted balance sheet and a budgeted cash flow statement.
Some companies prepare a statement of non-financial objectives.

Self Assessment

Fill in the blanks:
3. …………………… preparation would give an opportunity to improve the performance
through commitment made by respective managers.

4. The budget is completed just prior to the ……………….. of the budget year.
7.3 Operating Budget Categories

Revenue Budgets

A revenue budget is the starting point for budgeting exercise and consists of unit sales projection
multiplied by expected selling price. The revenue budget is the most critical but also subject to
greatest uncertainty. The degree of uncertainty differs among companies and within the same
company; the degree is different at different times. Companies with large backlogs or companies
whose sales volumes are constrained due to production capacity, the uncertainty element is

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