Unit 5 (Assign) Budget and Budgetory Control

ASSIGNMENT
Unit 5: Budget and Budgetary Control
1. What is Budget?
Ans : A budget is a financial plan that estimates the revenue and expenses
over a specified future period. It is a detailed projection of financial
performance that businesses, governments, and individuals use to manage
their money. Here are some key components of a budget:
Income: This includes all sources of revenue, such as salaries, sales,
investment returns, and other earnings.
Expenses: These are all costs associated with running a business or
maintaining a household. Expenses can be divided into:
Fixed Expenses: Regular, recurring costs such as rent, salaries, and
insurance.
Variable Expenses: Costs that fluctuate with production or activity level, like
utilities, raw materials, and commissions.
One-Time Expenses: Non-recurring costs, such as equipment purchases or
special projects.
Savings and Investments: The portion of income set aside for future use or
invested to generate returns.
Contingencies: Funds reserved for unexpected expenses or emergencies.
Budgets serve various purposes:
Planning: Helps anticipate and allocate resources effectively.
Control: Provides a benchmark for monitoring and controlling expenditures.
Communication: Clarifies financial goals and expectations for all
stakeholders.
Motivation: Sets financial targets to strive towards.
2. Explain Budgetary control?
Ans : Budgetary control is a management process that involves the use of

budgets to monitor and control costs and operations within an organization.
It ensures that an organization’s actual financial performance aligns with its
planned financial objectives. Here are the main elements and steps involved
in budgetary control:
Elements of Budgetary Control:
Establishing Budgets:
Preparation: Developing detailed budgets for all aspects of the
organization’s operations, including sales, production, marketing, and
overheads.
Approval: Ensuring the budgets are reviewed and approved by relevant
authorities within the organization.
Setting Standards:
Defining performance standards and financial targets based on the budgets.
Recording Actual Performance:
Tracking and recording actual income, expenses, and other financial metrics
regularly.
Comparing Actual with Budgeted Performance:
Analyzing variances between the actual performance and the budgeted
figures.
Analyzing Variances:
Investigating the reasons for significant deviations from the budget.
Variances can be favorable (actual performance better than budgeted) or
unfavorable (actual performance worse than budgeted).
Taking Corrective Actions:
Implementing necessary measures to address unfavorable variances and
bring performance back in line with the budget.
Adjusting budgets and plans if needed to reflect changes in the business
environment or operational conditions.
Reporting and Feedback:
Regularly reporting performance to management and relevant stakeholders.
Providing feedback to improve future budgeting processes and decision-
making.
Objectives of Budgetary Control:
Cost Control: Helps in controlling costs by setting expenditure limits and
monitoring spending.
Resource Allocation: Ensures efficient allocation of resources to various
departments and projects.
Performance Measurement: Provides a basis for evaluating the performance
of different departments and managers.
3. What is Zero Base Budgeting?
Ans : Zero Base Budgeting (ZBB) is a budgeting approach where all expenses must be
justified for each new period, starting from a "zero base." Unlike traditional budgeting,
which typically adjusts previous budgets by a percentage to account for new
expenditures, ZBB requires a complete reevaluation of all expenses, ensuring that each
line item is necessary and justified. Here’s an overview of the key aspects of Zero Base
Budgeting:
Key Aspects of Zero-Base Budgeting:
Starting from Zero:
Every budget cycle begins from a zero base, meaning no assumptions are made based
on past budgets. Each function within the organization is analyzed for its needs and
costs from the ground up.
Justification of Costs:
All expenses must be justified for the new period. Each manager must demonstrate the
need for every item in their budget, explaining the purpose, benefits, and costs.
Decision Packages:
Managers prepare decision packages for their departments or projects, which include a
detailed description of the activity, its objectives, alternatives, and costs. These
packages are ranked by priority.
Priority-Based Allocation:
Resources are allocated based on the ranking of decision packages. Higher-priority items
receive funding, while lower-priority items may be reduced or eliminated.
Focus on Efficiency:
ZBB emphasizes efficient use of resources and cost control. It encourages managers to
find cost-effective ways to achieve their objectives.
Advantages of Zero Base Budgeting:
Cost Efficiency:
Promotes cost-effective allocation of resources by requiring detailed justification of all
expenses.
Elimination of Waste:
Helps identify and eliminate redundant or unnecessary expenditures, leading to more
efficient operations.
Alignment with Goals:
Ensures that spending aligns with organizational goals and priorities, as each expense
must be justified in terms of its contribution to objectives.
Encourages Innovation:
By starting from zero, managers are encouraged to think creatively about how to
achieve their objectives, potentially leading to innovative solutions.
Disadvantages of Zero Base Budgeting:
Time-Consuming:
The process of justifying every expense from scratch can be very time-consuming and
labor-intensive.
Complexity:
Requires detailed analysis and documentation, which can be complex and demanding
for managers.
Resistance to Change:
Employees and managers may resist the changes required by ZBB, particularly if it leads
to cuts in funding for established programs or departments.
Short-Term Focus:
The need to justify all expenses annually can sometimes lead to a focus on short-term
gains at the expense of long-term planning and investments.
Implementation Steps for Zero Base Budgeting:
Define Objectives:
Clearly define the organization’s goals and objectives to ensure that the budgeting
process aligns with strategic priorities.
Identify Decision Units:
Break down the organization into decision units, which are the smallest segments for
which budgets can be prepared (e.g., departments, projects).
Prepare Decision Packages:
Each decision unit prepares detailed decision packages that justify their budget
requests. These packages should include cost-benefit analyses and alternative
approaches.
4. Explain Steps of Budgetary Control?
Ans : Budgetary control is a systematic process that involves the preparation of

budgets, monitoring actual performance, and taking corrective actions to achieve
financial objectives. Here are the detailed steps of budgetary control:
Steps of Budgetary Control:
Establishing Objectives:
Define Goals: Set clear and specific financial and operational goals for the
organization.
Align Objectives: Ensure that these goals align with the overall strategic objectives
of the organization.
Preparation of Budgets:
Identify Budget Period: Determine the time frame for the budget, such as monthly,
quarterly, or annually.
Collect Data: Gather historical data, market trends, and other relevant information
to forecast revenues and expenses.
Draft Budgets: Create detailed budgets for each department, project, or unit,
specifying expected income and expenditures.
Review and Approve: Submit the draft budgets for review and approval by senior
management or the budget committee.
Communication of Budgets:
Distribute Budgets: Communicate the approved budgets to all relevant
departments and individuals within the organization.
Clarify Responsibilities: Ensure that everyone understands their roles and
responsibilities in achieving the budgeted figures.
Monitoring and Recording Actual Performance:
Track Performance: Continuously monitor and record actual financial performance
against the budgeted figures.
Use Accounting Systems: Implement accounting systems and tools to accurately
capture and report financial data in real-time.
Comparing Actual Performance with Budgets:
Analyze Variances: Regularly compare actual results with budgeted figures to
identify variances.
Favorable vs. Unfavorable Variances: Determine whether variances are favorable
(actual performance better than budgeted) or unfavorable (actual performance
worse than budgeted).
Analyzing Variances:
Investigate Causes: Investigate the reasons behind significant variances,
considering both internal and external factors.
Impact Assessment: Assess the impact of variances on overall financial
performance and organizational objectives.

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ASSIGNMENT

Unit 5: Budget and Budgetary Control

Ans : Budgetary control is a management process that involves the use of

Ans : Budgetary control is a systematic process that involves the preparation of

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