Types of Budgetary Control: UGC NET Commerce Notes & Study Material

Budgetary control is a vital financial management tool. It helps organizations plan, coordinate, and track their financial resources. It enables businesses to achieve their goals and objectives. By managing their finances. There are different types of budgetary control methods. Such as incremental, activity-based, value proposition, and zero-based budgets. Each method has its benefits and drawbacks. Organizations should select the one that suits their needs. The use of diverse classification of budgetary control procedures helps regulate finances efficiently.

The UGC-NET Commerce Examination includes questions about budgetary control. Therefore, aspirants must have thorough knowledge. Different types of budgetary control and their practical applications in the business world.

In this article, the readers will be able to know about the following:

• What is Budgetary Control?
• Types of Budgetary Control Systems
• Types of Budgetary Control in Management Accounting
• Types of Budgetary Control in Cost Accounting

What is Budgetary Control?

Budgetary control is a way for organizations to manage their money. It helps them compare what they planned to spend with what they actually spend. This is done by creating a financial plan called a budget. Which includes how much money the organization thinks it will make and spend. A budget is important because it helps the organization prepare for the future.

Budgetary control also involves ensuring people are doing what they are supposed to. This means that the organization needs to check the budget regularly. And make sure that everything is going according to plan. If there are any differences between what was planned and what is happening. The organization needs to figure out why and make any necessary changes.

Types of Budgetary Control Systems

Budgetary control is an important part of managing finances in a business. It involves making plans, controlling expenses, and keeping track of money. This helps the business achieve its financial goals by using money in the best way possible. There are different classification of budgetary control. Including incremental, activity-based, value proposition, and zero-based budgeting. The various types of budgetary control techniques have been stated below.

Expenditure or Expense Budget

Its sole concentration is on keeping expenditures and expenses under control inside the company. By preventing spending from going over budget, it contributes to the preservation of financial stability and profitability. It supports departmental, administrative, and operational budgets.

Revenue Budget

It projects the income or revenue expected from various sources over a specified period. It helps in setting sales targets, pricing strategies, and marketing efforts to achieve revenue goals. It helps in sales budgets, income projections, and fundraising budgets for non-profits.

Profit Budget

It combines both revenue and expense budgets to forecast net profit. It is focused on profitability, it helps management make decisions to optimize financial performance by balancing revenues and expenses. It is used in overall corporate budget, business unit budgets.

Cash Flow Budget

It tracks the expected inflows and outflows of cash over a particular period. It ensures that the organization maintains sufficient liquidity to meet its obligations and avoid cash shortfalls. It is used in short-term financial planning, managing working capital.

Capital Budget

It plans for investments in long-term assets and capital projects. It facilitates decisions on capital expenditures such as purchasing equipment, expanding facilities, or other significant investments. It is used in capital expenditure projects, strategic investments.

Master Budget

A comprehensive budget that consolidates all individual budgets related to sales, production, finance, and other departments. Provides an overall financial plan and ensures all departmental budgets are aligned with the organizational goals. Overall organizational budgeting, top-level management reporting.

Operating Budget

It is an itemized forecast of revenues, expenses, and profit for a specific period, usually the fiscal year. It serves as a detailed plan for daily operations, guiding both the revenues to be generated and the costs to be incurred. The annual business plans, quarterly reviews.

Production Budget

It focuses on the quantity of products to be produced to meet expected sales and inventory requirements. It ensures that production levels are aligned with sales forecasts and inventory policies. The manufacturing sector, inventory control.

Sales Budget

It estimates the expected sales volume and revenue for a future period. It helps in setting sales targets and evaluating the effectiveness of sales strategies and marketing campaigns. It is used in marketing planning, sales forecasting.

Flexible Budget

It adjusts or flexes with changes in volume or activity levels. It provides a more accurate comparison of budgeted and actual costs, allowing for better performance analysis. It is used in variable cost and management, scenario analysis.

Fixed Budget

It remains unchanged regardless of variations in business activity levels. It is suitable for organizations with stable environments where activities don't fluctuate significantly. It is used in organizations with predictable operating conditions.

Zero-Based Budget

It requires each department to justify all expenses from scratch for each new period, rather than just adjusting prior period budgets. It promotes cost-efficiency by ensuring all expenses are necessary and justified. It is used in cost-cutting measures, financial restructuring.

Types of Budgetary Control in Management Accounting

Various types of budgetary control are used in management accounting to ensure that an organization has a clear, in-depth view of its finances and is able to effectively limit, guide and oversee its operations. These types exposes one to both finance and operations with the help of which a manager can takes the right decisions. Here are the primary types of budgetary control in management accounting:

Operating Budget

It provides information on the anticipated income and costs associated with daily business operations over a given time frame, usually a fiscal year. Budgets for sales, production, and administration are all included. It directs operational activities and makes sure that standard tasks are completed within budgetary restrictions.

Capital Budget

It plans for long-term investments in fixed assets such as machinery, equipment, and real estate. The components are project investment budgets, capital expenditure approvals. It facilitates strategic planning for growth and improvement of the organization’s physical and intangible assets.

Cash Flow Budget

It projects the inflows and outflows of cash over a particular period to ensure liquidity and solvency. The components are cash receipts, payments, and net cash flow analysis. It ensures that the organization can meet its short-term financial obligations and manage cash inflow and cash outflow surpluses and shortfalls effectively.

Sales Budget

It estimates future sales revenues, based on projected sales volumes and selling prices. Components are sales forecasts by product line, territory, or customer segment. The purpose of it is sets sales targets and forms the basis for other budgets such as production and marketing budgets.

Production Budget

The details the quantity of products that must be produced to meet the sales budget and inventory requirements. The components are production schedules, raw material requirements, and labor needs. The purpose is to ensure that production meets sales demand without overproducing or under producing.

Flexible Budget

It offers a dynamic tool for performance evaluation by modifying budgeted amounts in accordance with actual activity levels or output. Variable costs, fixed costs, and mixed costs are the constituents.

Fixed Budget

It remains unchanged regardless of changes in activity levels or business conditions. The components are fixed revenue and expense estimates. It is suitable for stable environments with predictable activity levels, though less adaptable to changes.

Zero-Based Budgeting (ZBB)

It requires all expenses to be justified for each new period, starting from a "zero base." Each unit or function must justify its entire budget request. It encourages cost-efficiency and allocation of resources based on current needs and priorities rather than historical spending patterns.

Activity-Based Budgeting (ABB)

The emphasis is on managing budgets according to the activities that incur costs and how they are related to the consumption of resources in the organisation. It helps to allocate costs according to real activities and use of resources, instead of rough averages. These should include the identification of cost drivers, activity levels and resource consumption.

Types of Budgetary Control in Cost Accounting

In cost accounting, budgetary control focuses on planning, monitoring, and controlling costs to enhance the efficiency and profitability of an organization. Here are the primary types of budgetary control used specifically in cost accounting:

Standard Costing

It uses predetermined standards for costs of materials, labor, and overheads. It serves as a benchmark against which actual costs are compared, allowing for variance analysis to identify inefficiencies. The components are standard material costs, standard labor rates, standard overheads.

Flexible Budget

It adjusts budgeted figures based on the actual levels of activity or volume of output. It provides a more accurate cost comparison by adapting to changes in production levels or business activities. The components are variable costs (which change with activity levels), fixed costs (which remain constant).

Variable Budget

Similar to a flexible budget, it emphasizes variable costs which fluctuate with changes in the level of activity. It helps in managing and controlling costs that are directly tied to production volumes. The components are direct materials, direct labor, variable manufacturing overheads.

Fixed Budget

It remains unchanged regardless of increases or decreases in activity levels. It provides a static plan, often used in stable environments where costs and activities are predictable. The components are costs outlined for a constant level of activity.

Zero-Based Budgeting (ZBB)

It requires every department to justify all its expenses, starting from zero, for each budget period. It ensures that all expenditures are necessary and justified; drives cost efficiency. The components are budget prepared by evaluating and justifying all operations and associated costs from scratch.

Activity-Based Budgeting (ABB)

It focuses on budgeting based on activities that incur costs, linking them to the consumption of the organization's resources. It ensures that costs are allocated based on actual activities and resource usage rather than broad averages. The components are identification of cost drivers, activity levels, and resource consumption.

Incremental Budgeting

It uses the previous period’s budget as a base, with incremental adjustments for the new budget period. It simplifies the budgeting process, which can be less detailed but potentially overlooks significant cost drivers or opportunities for savings. The components are case year budget plus/minus incremental changes.

Program Budgeting

It allocates costs to specific programs or projects rather than departments or functions. It facilitates cost control and resource allocation for specific organizational initiatives. The components are costs associated with individual programs or projects.

Responsibility Budgeting

It assigns budgetary responsibility to specific managers or departments, holding them accountable for cost control within their areas. It improves managerial accountability and cost control as managers are directly responsible for the costs under their purview. The components are budgets tailored to departments or individual managers’ responsibilities.

Rolling Budget (Continuous Budget)

It continuously updates the budget by adding a new period (such as a month or a quarter) as the current period ends. It provides a constantly updated financial plan that reflects recent performance and current cost conditions. The components are regularly updated costs forecasts, maintaining a rolling view.

Product Cost Budget

It focuses on the estimated costs required to manufacture specific products. It ensures that product costs are managed and controlled to maintain profitability. The components are direct materials, direct labor, manufacturing overheads.

Functional Budget

Functional Budget, it divides the budget into functional classification like production, sales, administration etc. It improves control by concentrating on costs in each functional area. The components are costs for each functional department, or area.

Project Budget

It focuses on project cost estimation and is frequently applied to short-term or long-term projects. It makes it easier to keep track of and manage project-related expenses in detail. 

Conclusion

To manage finances and oversee operations in organizations, a variety of budgetary control techniques are necessary. When combined, these techniques offer a strong framework for budgetary control that improves an organization's capacity to plan, monitor, and modify its financial operations. Each technique has distinct benefits that address various facets of budgetary control, from strategic resource allocation to accurate variance tracking. 

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Major Takeaways for UGC NET Aspirants What is Budgetary Control: Budgetary control is a way for organizations to manage their money. It helps them compare what they planned to spend with what they actually spend.  Types of Budgetary Control Systems: Systems for budgetary control assist companies in tracking and planning their expenditures. Fixed budgets, flexible budgets, zero-base budgets, and incremental budgets are the four primary categories. Depending on their requirements, each kind aids companies in cost reduction in a different way. Types of Budgetary Control in Management Accounting: A variety of budgetary management solutions are available to assist firms in managing their finances. The four primary categories are incremental, zero-base, flexible, and fixed budgeting. Types of Budgetary Control in Cost Accounting: Various budgetary control techniques are available in cost accounting to aid in cost management. These include flexible budgets that adapt as circumstances change and fixed budgets, where spending is specified in advance. Other forms include incremental budgeting, which builds on the budget from the prior year, and zero-base budgeting, in which every expense is examined.

Types of Budgetary Control Previous Year Questions

1. A budget is a plan of action expressed in…

1. Financial terms
2. Non‐financial terms
3. Both
4. Subjective matter

Ans. c. both