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Unit 7: Budgeting: Tool for Management Control

may be a larger amount, in the belief that more can be spent in good times, if the company Notes
expects an increase in sales revenue or if there is a good chance of developing a significantly new
product or process. The second approach is to aggregate the planned spending on each approved
project plus an allowance for work that is likely to be undertaken, even though it is not currently
identified.
Self Assessment

Fill in the blanks:
5. A ……………….. is the starting point for budgeting exercise and consists of unit sales
projection multiplied by expected selling price.
6. ………………….. expenses are expenses incurred to obtain sales.

7.4 Other Budgets

Capital Budget

The capital budget states the approved capital projects plus a lump-sum amount for small
projects that do not require high level approval. At the budget time, the approved budgets are
aggregated to an overall package and examined in total. It may turn out that the total exceeds the
amount that the company is willing to spend on capital projects, if so, some projects are deleted,
some are reduced in size and others are deferred. For the remaining projects, an estimate of cash
spending is made for each quarter. This is necessary to prepare the cash flow statement.

Budgeted Balance Sheet

The budgeted balance shows the balance sheet implications of decisions taken in the operating
budget and capital budget. Overall, it is not used for management control but some parts are
used for control purposes such as level of inventories, accounts receivable or accounts payable,
and the operating managers are held responsible for the level of these items.

Budgeted Cash Flow Statement

The budgeted cash flow statement shows how much of the cash needs can be met by retained
earnings and how much must be obtained by borrowing it from other outside sources. This is
necessary for financial planning. The cash inflows and outflows of cash are further divided by
quarters. In addition, the treasurer needs an estimate of cash requirements for monthly (or even
shorter) intervals as a basis for planning lines of credit and short-term borrowing.

Management by Objectives

The financial objectives that managers are responsible for attaining during the budget year are
set forth in the budgets described earlier. There are some other specific objectives - opening of
new sales office, introduction of a new product line, retrain employees, install a new computer
system and so on.

Some companies make these objectives explicit. The process of doing so is called management
by objectives. The objectives of each responsibility centre are set a forth in quantitative term
wherever possible along with the budget amounts and accepted by the respective manager
becomes a motivating tool for implementation.

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