JAIIB AFM Module-D Unit 7 : Budgets And Budgetary Control

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Sep 22

JAIIB Paper 3 AFM Module D Unit 7 : Budgets And Budgetary Control (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 3 (Accounting and Financial Management for Bankers) includes an important topic called "Budgets And Budgetary Control". Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 3 (AFM) Module D (TAXATION AND FUNDAMENTALS OF COSTING ) Unit 7 : Budgets And Budgetary Control Aspirants must go through this article to better understand the topic, Budgets And Budgetary Control, and practice using our Online Mock Test Series to strengthen their knowledge of Budgets And Budgetary Control. Unit 7 : Budgets And Budgetary Control

Concept Of Budget and Budgeting

A number of definitions are available to describe a budget. From these various definitions, the following prominent points, about budgets, are highlighted:

It is a financial plan serving as an estimate of and a control over future operations
It contains estimate of future costs
It is a systematic plan for the utilisation of manpower, material or other resources
It is a plan expressed in money terms/physical units
It is prepared and approved prior to the budget period (usually a year). and may show income, expenditure and the capital to be employed

The complete process of designing, implementing and operating budgets is called Budgeting.

Types Of Budgets

Budgets may be classified into various categories depending upon the base adopted to prepare it. Budgets may be classified on the basis of:

The scope of their coverage or the functions covered by them. Examples: Sales budget, Production budget, Overheads budget, cash budget, Production Cost budget, Capital expenditure budget, etc. These are called Functional Budgets.
the capacity or efficiency to which they are related. Based on this, a budget may be Fixed or Flexible budget.
The conditions on which they are based. Based on this, a budget may be Basic or Current budget.
The periods which they cover. Based on this, a budget may be a Long period or a Short period budget.

Preparation and Monitoring Of Budgets

The highlights about the characteristics and preparation and monitoring of various types of budgets are given below:

Functional budgets

Budgets are prepared for each of the various interrelated activities in the organisation. These budgets are then consolidated to show the combined budget for all the activities. This consolidated budget is called the "Master Budget". Approved budgets for individual functions are called "functional budgets". The main functional budgets are:

Sales Budget:

Forms the basis for preparing other functional budgets.
estimate of total sales, expressed in money terms as also in terms of
The sales during the budget period (normally one year), are estimated taking into account various internal and external factors.
Internal Factors: Present production capacity of the company, expansion plans, development of new products, pricing policy etc.
The external Factors: Competition in the market, growth of economy, Consumer preference, Government policies, etc.

Production Budget:

It contains the estimated production quantities of various products during the budget period.
This is an offshoot of the sales budget and depends on the decision taken by the management regarding the sales estimates of various products.

Production Cost Budget:

As per the components of cost of products, this budget may be a combination of three budgets, viz., Materials, Labour and Overhead costs budgets.

Cash Budget:

This budget contains the detailed estimates of cash inflows (receipts) and cash outflows (payments) periodically.
For this, the budget period is further sub-divided on quarterly, monthly or even weekly basis.

Capital Expenditure Budget:

The Capital expenditure budget details the plan of the proposed expenditure on fixed assets to enhance the capacity and efficiency of production process of the organisation.
Capital expenditure is a continuous process in any organisation and is planned through a long-term budget.
- Capital forecasts should be made for a number of years. As the capital budget affects the cash budget also, normally, a short-term forecast to cover the general budget period is also prepared along with the long term capital expenditure plan.

Master budget:

The Master budget is prepared by consolidating various functional budgets like the sales budget, production budget, production cost budget, purchase budget etc.
It is not a simple consolidation but a coordinated consolidation of various functional budgets.
This is the budget which is finally approved, adopted and employed by the organisation.
The Master budget is very important for successful financial planning and control in the organisation.

Fixed and Flexible Budgets

The characteristics of a fixed budget are;

It does not change with the level of activity actually attained. In practice, however, a fixed budget is revised if the business conditions undergo a basic change or if, due to any reasons, actual operations are widely different from the planned ones.
It is designed for a specific planned output level.
It is not adjusted to the actual level of activity at periodic reviews which compare the budgeted and actual costs.
Normally, fixed budgets are established for a shorter period of time during which the actual output and the budgeted output are not anticipated to differ much from each other

The characteristics of a flexible budget are;

It recognises different cost behaviour patterns.
It is designed to change as volume of output changes.
It is prepared in such a manner that it gives the budgeted cost for any level of activity.
It recognises the difference between fixed, semi-fixed and variable costs and changes with the actual activity level attained.

Basic and Current budgets

Basic budgets:

Basic budget is prepared for use over a long period of time without any change.
This is attainable only under standard conditions as current conditions are not take into consideration for preparing this budget.

Current budgets:

Current budget is prepared for use over a relatively shorter period of time and takes into account the current conditions. without any change.
As the target laid down in the current budget take into account the current conditions, it is considered to be more useful than the basic budget.

Long-term or Short-term budget

Long-term budget:

A budget which is prepared for a period longer than a year is, normally considered to be a long-term budget.
As the period is long, the precise details of various items are not included in this budget. It is more helpful in business forecasting and forward planning.
For example, a Capital expenditure budget contains planning for a period beyond one year. Similarly, a research and developments budget involve strategic planning over a longer period.

Short-term Budget:

A budget which is prepared for a period of up to one year is, normally considered to be a short-term budget. It emphasises on the micro aspects of the business rather than the long term strategic planning of the organisation.
A short-term budget is not in contradiction to the long-term budget but is fits into it.

Budgetary Control System

The CIMA, London, defines Budgetary control as "the establishment of budgets, relating the responsibilities of executive to the requirements of a policy and the continuous comparison of actual with budgeted results either to secure by individual action the objectives of that policy or to provide a firm basis for its revision".

This definition implies that a budgetary control system involves:

Preparing and approval of budgets
Comparing actual attainments with the budgeted figures
Secure control over performance and costs in different parts of a business by taking corrective action and remedial measures or revision of the budgets, if considered appropriate.

While budgeting involves planning for a future period, budgetary control involves continuous comparison of actual results with the budgets and taking appropriate remedial action promptly.

Budgetary control is a logical extension of the budgets. The budget involves fixing of targets, in the form of specific tasks, and the budgetary control involves collection of information regarding actual performance, its comparison with the targets and reporting these comparisons to the management for their action.

In short, budgetary control means laying down in monetary and quantitative terms, what exactly is expected to be done over the budget period and then to monitor the actual results so that they do not diverge from the planned ones.

The main advantages of a budgetary control system are as under:

It enhances the probability of achieving the planned objectives of the organisation expressed through the budget.
It leads to optimum utilisation of limited resourced available to the organisation.
It leads to better coordination amongst various functionaries of the organisation.
It encourages the culture of proactive thinking and actions as the targets are known to the functionaries.
It leads to delegation of authority while inculcating the culture of accountability.
It makes performance evaluation of various functionaries more transparent.

The main shortcomings/limitations of a budgetary control system are as under:

The comparison of actual achievement with the budgeted figure may, sometimes, lead to conflicts specially when the budgeted figure is estimated on unrealistic presumptions and is far from reality.
The budgeted figures are for a future period (normally one year). The business conditions may change too fast to keep these figures relevant. For example, the Covid pandemic has caused an unprecedented business turmoil over a short period of time and this has upset the budget estimates of many organisations.
The personal/human aspect is often neglected in formation of budgets and their monitoring. The monitory and quantitative aspects of the business often prevail at the cost of personal/human considerations.
Like any other control, the budgetary controls are also not liked by many persons. They consider these as blocks in the way of their creativity and innovative skills.

Implementation Of Budgetary Control System

The Budgetary Control System of a business organisation depends on its size, nature of business, objectives and its peculiar control needs.
No two organisations can be expected to have the same structure of their Budgetary Control Systems. Still, there are a few common things amongst the Budgetary Control Systems of various organisations.

The following are the usual components of a Budgetary Control System.

Organisation Chart:

This chart shows the functional responsibilities of each functional executive, the delegation of authority to him and his relative position with other functional heads.

Budget Centre

A budget centre means a section of the organisation with clearly defined functions.
The functions are as per the budget.
This centre is monitored for the purpose of budgetary control.
The actual performance of a budget centre is recorded under the budgetary control and the variance from the budgeted figure is reported to the management.

Budget Manual:

Setting out instructions and guidelines relating to the preparation and use of budgets, is known as the budget manual.
Pertain to forms and records, responsibilities of persons, the procedures to be followed and the time schedules to be followed etc.
The intention behind the budget manual is to lay down in unambiguous terms the procedures to be followed by the executive so that, there is no confusion or resentment regarding these, in future.

Budget Committee:

These budget centres or functionaries are inter-related and budget for each cannot be set in isolation. They have to consult each other before finalising the budget.
For example; The sales promotion department may plan a budget for promoting new products but it may turn out that the production department will not be ready to produce these in near future.
Unless there is co-ordination between the two departments, a realistic budget for the organisation will not be finalised.
The budget committee consists of the representatives of various departments of the organisation. This committee co-ordinates in preparing and finalising the budget.

Budget Controller:

The function of the budget controller is to bring together and co-ordinate the various functions involve in preparation of the budget.
He mainly carries out the function of compiling various types of information for the purposes of preparation of realistic budgets and proper reporting.

Budget Reports:

The budget reports contain the comparison of actual performance with the budgeted one.
These reports are submitted periodically and regularly to the management.
The budget reports are submitted irrespective of whether the variance is positive or negative.

Zero Base Budgeting

Zero base budgeting is budgeting from the beginning without any reference to any base.
For example: A company, which has achieved a sales level of ₹ 50 Crore, may budget for a 10% increase in sales for the next year. In this process a base of ₹ 50 Crore has been used to form the budget.
In Zero base budgeting, the process starts from the scratch and the potential of the company is judged without any constraint of the past data.
It is based on the premise that every rupee of expenditure requires justification.
This is a deviation from the traditional budgeting approach where an expenditure of previous year is automatically incorporated in new budget proposals and only the quantum of increment is subjected to discussion.

Programme Budgeting

A budget prepared for a specific activity or program is called a Programme Budget.
Includes the estimates/targets related to the functions pertaining only to that specific activity or programme.
For example: a management institute, conducting a special programme for middle-level executives of large companies, prepares a budget of revenue and expenditure of conducting only that programme, rather than having a budget covering all the programme of the Institute.
Another example of programme budgeting are specific programmes like safety drive, conducted by a Government body. By looking at a Programme Budget, it can be easily found out, in considerable detail, what precisely will be carried out, at what cost and with what expected results.

Performance Budgeting

According to National Institute of Bank Management, Mumbai, performance budgeting technique is the process of analysing, identifying, simplifying and crystallising specific performance objectives of a job, to be achieved over a period, in the frame work of the organisational objectives, and the objectives of the job.
The performance budgeting is characterised by its specific stress on the performance of every unit of the organisation. direction towards the business objectives of the organisation.
It reflects both the input of resources and the output of services for each unit of an organization.
It is widely used in Government agencies to show the link between allocation of funds and the outcome of services provided by the government agency.
The performance budgeting lays stress on the achievement of specific goals, by a unit of the organisation, over a specific period of time.
Preparation of periodic performance reports is an essential part of this.
These performance reports compare budget and actual performance and the corrective steps are taken if so needed
The performance budgeting has certain limitations. These include difficulty in correctly segregating programmes and activities, lack of standard methods of evaluation of different schemes, the results being unmeasurable etc.

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JAIIB Paper 3 (AFM) Module D Unit 7- Budgets And Budgetary Control ( Ambitious_Baba )