Basics of different types of Budgeting, Budgetary control

<–2/”>a >Basics of different types of BUDGETING, Budgetary control

Table of Content:-

Budgeting-

1. Different types of Budgeting
2. Budgetary Control
3. Responsibility Accounting
4. Social Accounting

Different types of Deficits-

1. Budgetary
2. Fiscal
3. Revenue Deficit

 

Budgeting

Budgeting is the process of estimating the availability of Resources and then allocating them to various activities of an organization according to a pre-determined priority. In most cases, approval of a budget also means the approval to various spending units to utilize the allocated resources. Budgeting plays a criucial role in the socio-Economic Development of the nation.

Budget is the annual statement of the outlays and tax revenues of the government of India together with the laws and regulations that approve and support those outlays and tax revenues . The budget has two purposes in general : 1. To finance the activities of the Union Government 2. To achieve macroeconomic objectives.

The Budget contains the financial statements of the government embodying the estimated receipts and expenditure for one financial year, ie. it is a proposal of how much Money is to be spent on what and how much of it will be contributed by whom or raised from where during the coming year.

Different types of Budgeting

Economists throughout the globe have classified the budgets into different types based on the process and purpose of the budgets, which are as follows:-

1- The Line Item Budget

line-item budgeting was introduced in some countries in the late 19th centuary. Indeed line item budgeting which is the most common form of budgeting in a large number of countries and suffers from several drawbacks was a major reform initiative then. The line item budget is defined as “the budget in which the individual financial statement items are grouped by cost centers or departments .It shows the comparison between the financial data for the past accounting or budgeting periods and estimated figures for the current or a future period”In a line-item system, expenditures for the budgeted period are listed according to objects of expenditure, or “line-items.” These line items include detailed ceilings on the amount a unit would spend on salaries, travelling allowances, office expenses, etc. The focus is on ensuring that the agencies or units do not exceed the ceilings prescribed. A central authority or the Ministry of Finance keeps a watch on the spending of various units to ensure that the ceilings are not violated. The line item budget approach is easy to understand and implement. It also facilitates centralized control and fixing of authority and responsibility of the spending units. Its major disadvantage is that it does not provide enough information to the top levels about the activities and achievements of individual units.

2 – Performance Budgeting

a performance budget reflects the goal/objectives of the organization and spells out performance targets. These targets are sought to be achieved through a strategy. Unit costs are associated with the strategy and allocations are accordingly made for achievement of the objectives. A Performance Budget gives an indication of how the funds spent are expected to give outputs and ultimately the outcomes. However, performance budgeting has a limitation – it is not easy to arrive at standard unit costs especially in social programmes which require a multi-pronged approach.

3- Zero-based budgeting

The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, every budgeting cycle starts from scratch. Unlike the earlier systems where only incremental changes were made in the allocation, under zero-based budgeting every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, are funds allocated to it. The basic purpose of Zero-based Budgeting is phasing out of programmes/ activities which do not have relevance anymore. However, because of the efforts involved in preparing a zero-based budget and institutional resistance related to personnel issues, no government ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB are often used.

4- Programme Budgeting and Performance Budgeting

Programme budgeting in the shape of planning, programming and budgeting system (PPBS) was introduced in the US Federal Government in the mid-1960s. Its core themes had much in common with earlier strands of performance budgeting. Programme budgeting aimed at a system in which expenditure would be planned and controlled by the objective. The basic building block of the system was Classification of expenditure into programmes, which meant objective-oriented classification so that programmes with common objectives are considered together. It aimed at an integrated expenditure management system, in which systematic policy and expenditure planning would be developed and closely integrated with the budget. Thus, it was too ambitious in scope. Neither was adequate preparation time given nor was a stage-by-stage approach adopted. Therefore, this attempt to introduce PPBS in the federal government in USA did not succeed, although the concept of performance budgeting and programme budgeting endured.

Budgetary Control

Budgetary control refers to how well managers utilize budgets to monitor and control costs and operations in a given accounting period. In other words, budgetary control is a process for managers to set financial and performance goals with budgets, compare the actual results, and adjust performance, as it is needed.

Budgetary control involves the following steps :

(a) The objects are set by preparing budgets.

(b) The business is divided into various responsibility centres for preparing various budgets.

(c) The actual figures are recorded.

(d) The budgeted and actual figures are compared for studying the performance of different cost centres.

(e) If actual performance is less than the budgeted norms, a remedial action is taken immediately.

The main objectives of budgetary control are the follows:

1. To ensure planning for future by setting up various budgets, the requirements and expected performance of the enterprise are anticipated.
2. To operate various cost centres and departments with efficiency and economy.
3. Elimination of wastes and increase in profitability.
4. To anticipate Capital Expenditure for future.
5. To centralise the control system.
6. Correction of deviations from the established standards.
7. Fixation of responsibility of various individuals in the organization.

Responsibility Accounting

Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts.

These decentralized parts are divided as : 1) revenue centers, 2) cost centers, 3) profit centers and 4) Investment centers.

1. revenue center (a segment that mainly generates revenue with relatively little costs),
2. costs for a cost center (a segment that generates costs, but no revenue),
3. a measure of profitability for a profit center (a segment that generates both revenue and costs) and
4. return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs).

Advantages:-

1. It provides a way to manage an organization that would otherwise be unmanageable.
2. Assigning responsibility to lower level managers allows higher level managers to pursue other activities such as long term planning and policy making.
3. It also provides a way to motivate lower level managers and workers.
4. Managers and workers in an individualistic system tend to be motivated by measurements that emphasize their individual performances.

In India the budget is prepared from top to bottom approach and responsible accounting would not only improve the efficiency of Indian budgetary system but also will help in performance analysis.

 

Social Accounting

Social accounting is concerned with the statistical classification of the activities of human beings and human institutions in ways which help us to understand the operation of the economy as a whole.

Social accounting is the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within Society and to society at large

The components of social accounting are production, consumption, capital accumulation, government transactions and transactions with the rest of the world.

The uses of social accounting are as follows:

(1) In Classifying Transactions

(2) In Understanding Economic Structure

(3) In Understanding Different Sectors and Flows

(4) In Clarifying Relations between Concepts

(7) In Explaining Movements in GNP

(8) Provide a Picture of the Working of Economy

(9) In Explaining Interdependence of Different Sectors of the Economy

(10) In Estimating Effects of Government Policies

(11) Helpful in Big Business Organisations

(12) Useful for International Purposes

(13) Basis of Economic Models

 

Budgetary Deficit

Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the Treasury Bills issued by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was called Deficit Financing by the government of India. This deficit adds to Money Supply in the economy and, therefore, it can be a major cause of inflationary rise in prices.

Budgetary Deficit of central government of India was Rs. 2,576 crores in 1980-81, it went up to Rs. 11,347 crores in 1990-91 to Rs. 13,184 crores in 1996-97.

The concept of budgetary deficit has lost its significance after the presentation of the 1997-98 Budget. In this budget, the practice of ad hoc treasury bills as SOURCE OF FINANCE for government was discontinued. Ad hoc treasury bills are issued by the government and held only by the RBI. They carry a low rate of interest and fund monetized deficit. These bills were replaced by ways and means advance. Budgetary deficit has not figured in union budgets since 1997-98. Since 1997-98, instead of budgetary deficit, Gross Fiscal Deficit (GFD) became the key indicator.

Fiscal Deficit

 The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government and thus amounts to all the borrowings of the government . While calculating the total revenue, borrowings are not included.

 The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over Revenue Receipts (including external grants) and non-debt capital receipts. The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.

 Generally fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.

 A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and Bonds.

Revenue Deficit

 Revenue deficit is concerned with the revenue expenditures and revenue receipts of the government. It refers to excess of Revenue Expenditure over revenue receipts during the given fiscal year.

 Revenue Deficit = Revenue Expenditure – Revenue Receipts

 Revenue deficit signifies that government’s own revenue is insufficient to meet the expenditures on normal functioning of government departments and provisions for various Services.

 In India social expenditure like MNREGA is a revenue expenditure though a part of Plan expenditure.

 Its targeted to be 2.9% of GPD in the year 2014-15, though the fiscal revenue and budget management act specifies it to be zero by 2008-09,

Budgeting is the process of planning and controlling financial resources. It involves setting financial goals, developing plans to achieve those goals, and monitoring progress to ensure that goals are met.

A master budget is a comprehensive financial plan for an organization. It includes budgets for all aspects of the organization’s operations, such as sales, production, and expenses.

An operating budget is a budget that covers the day-to-day operations of an organization. It includes budgets for things like payroll, materials, and utilities.

A financial budget is a budget that covers the long-term financial goals of an organization. It includes budgets for things like capital expenditures and debt repayment.

A Capital Budget is a budget that covers the acquisition of long-term assets, such as property, plant, and equipment.

Zero-based budgeting is a budgeting method in which each budget is prepared from scratch, as if no previous budget had been created. This requires managers to justify all expenses, regardless of whether they were included in the previous budget.

A rolling budget is a budget that is updated on a regular basis, typically monthly or quarterly. This allows managers to track progress and make adjustments as needed.

Participative budgeting is a budgeting method in which employees at all levels of an organization are involved in the budgeting process. This can help to improve employee morale and commitment to the budget.

A discretionary budget is a budget that is not subject to strict financial controls. This type of budget is often used for research and development or other projects that are considered to be high risk.

A fixed budget is a budget that is based on the assumption that certain factors, such as sales volume or production levels, will remain constant. This type of budget can be difficult to use in a dynamic Environment, where factors are constantly changing.

A flexible budget is a budget that is adjusted to reflect changes in actual sales volume or production levels. This type of budget is more realistic than a fixed budget and can help to improve financial performance.

Budgetary control is the process of monitoring and adjusting budgets to ensure that financial goals are met. It involves comparing actual results to budgeted results and taking corrective action when necessary.

A budget Variance is the difference between actual results and budgeted results. Budget variances can be favorable or unfavorable. Favorable variances indicate that actual results are better than budgeted results, while unfavorable variances indicate that actual results are worse than budgeted results.

Budget variance analysis is the process of identifying the causes of budget variances and taking corrective action to prevent them from happening in the future.

Budget revision is the process of updating a budget to reflect changes in actual results or in the organization’s plans.

Budget reports are reports that summarize budget information. They are used to communicate budget results to managers and other stakeholders.

Budgetary slack is the amount of money that is built into a budget to allow for unexpected expenses.

Budgetary gaming is the process of manipulating budget numbers to achieve desired results.

Budgeting is an essential part of financial management. It helps organizations to plan for the future, track progress, and make adjustments as needed. Budgeting can also help to improve Communication and coordination within an organization.

Budgeting

• What is budgeting?
  Budgeting is the process of planning and controlling financial resources. It involves setting financial goals, developing strategies to achieve those goals, and tracking progress to ensure that goals are met.

• What are the different types of budgeting?
  There are many different types of budgeting, but the most common are:

  • Zero-based budgeting: This type of budgeting requires each department or division to start from scratch each year and justify all of its expenses.
  • Incremental budgeting: This type of budgeting simply adds a Percentage to the previous year’s budget to account for Inflation and other factors.
  • Activity-based budgeting: This type of budgeting focuses on the activities that drive costs, rather than on departments or divisions.

• What are the benefits of budgeting?
  Budgeting can help you:

  • Achieve your financial goals: By setting financial goals and developing strategies to achieve them, budgeting can help you stay on track and reach your financial targets.
  • Reduce Stress: When you have a budget, you know where your money is going and you can make informed decisions about your spending. This can help reduce financial stress.
  • Improve your financial Health: Budgeting can help you get out of debt, save for the future, and reach your financial goals.

• What are the challenges of budgeting?
  The biggest challenge of budgeting is sticking to it. It can be difficult to resist temptation and overspend, especially when you’re faced with unexpected expenses. However, there are a few things you can do to make budgeting easier:

  • Set realistic goals: Don’t try to do too much too soon. Start with small goals and gradually increase them over time.
  • Track your spending: This will help you see where your money is going and identify areas where you can cut back.
  • Make a budget that works for you: There is no one-size-fits-all budget. Find a budgeting method that works for you and stick with it.

Budgetary control

• What is budgetary control?
  Budgetary control is the process of using budgets to monitor and control financial performance. It involves setting financial targets, comparing actual results to those targets, and taking corrective action when necessary.

• What are the benefits of budgetary control?
  Budgetary control can help you:

  • Improve your financial performance: By setting financial targets and tracking your progress, you can identify areas where you need to improve.
  • Reduce costs: Budgetary control can help you identify unnecessary expenses and eliminate them.
  • Increase efficiency: By planning and controlling your spending, you can make more efficient use of your resources.
  • Make better decisions: By having a clear understanding of your financial situation, you can make better decisions about your business.

• What are the challenges of budgetary control?
  The biggest challenge of budgetary control is getting everyone on board. It’s important to get buy-in from all levels of your organization, from top management to front-line employees.

Another challenge is that budgets can be inflexible. If your business is constantly changing, your budget may not be able to keep up. It’s important to be prepared to adjust your budget as needed.

Despite the challenges, budgetary control can be a valuable tool for improving your financial performance. If you’re willing to put in the effort, it can pay off handsomely.

1. Which of the following is not a type of budgeting?
   (A) Zero-based budgeting
   (B) Capital budgeting
   (C) Operational budgeting
   (D) Profit budgeting

2. Which of the following is the most common type of budgeting?
   (A) Zero-based budgeting
   (B) Capital budgeting
   (C) Operational budgeting
   (D) Profit budgeting

3. Zero-based budgeting is a type of budgeting in which:
   (A) All expenses are justified each year, even if they were approved in previous years.
   (B) Only new expenses are justified each year.
   (C) All expenses are based on the previous year’s budget.
   (D) All expenses are based on the current year’s budget.

4. Capital budgeting is a type of budgeting in which:
   (A) Funds are allocated for long-term projects.
   (B) Funds are allocated for short-term projects.
   (C) Funds are allocated for operating expenses.
   (D) Funds are allocated for capital expenditures.

5. Operational budgeting is a type of budgeting in which:
   (A) Funds are allocated for long-term projects.
   (B) Funds are allocated for short-term projects.
   (C) Funds are allocated for operating expenses.
   (D) Funds are allocated for capital expenditures.

6. Budgetary control is a process that:
   (A) Ensures that budgets are met.
   (B) Identifies variances from budgets.
   (C) Takes corrective action to address variances.
   (D) All of the above.

7. Which of the following is not a benefit of budgeting?
   (A) It helps to improve communication and coordination within an organization.
   (B) It helps to ensure that resources are used efficiently.
   (C) It helps to control costs.
   (D) It helps to improve decision-making.

8. Which of the following is not a limitation of budgeting?
   (A) Budgets can be inflexible and difficult to change.
   (B) Budgets can be based on inaccurate information.
   (C) Budgets can lead to gaming and manipulation.
   (D) Budgets can be used to control employees.

9. Which of the following is the most important step in the budgeting process?
   (A) Setting goals.
   (B) Developing a budget.
   (C) Implementing the budget.
   (D) Evaluating the budget.

10. Which of the following is not a common mistake made in budgeting?
    (A) Not setting realistic goals.
    (B) Not developing a detailed budget.
    (C) Not implementing the budget effectively.
    (D) Not evaluating the budget regularly.