October 10, 2022 · Gangadharan V

A business concern has to utilize its resources effectively, in order to achieve its main objective of maximizing profit. Profit maximization depends on planning and controlling of its activities. Budgets and budgetary controls are the tool in the hand of the management for effective utilization of resources.



A budget is a written plan covering projected activities of a business for a definite future period of time. It is a financial and /or quantitative expression of business plans and policies to be pursued in the future period of time. A Budget is prepared to have effective utilization of funds and for the realization of objectives as effectively as possible.
CIMA defines a budget as, “A budget is a financial and /or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective.”


Budgetary control is the process of determining various budgeted figures and comparing them with the actual performance for calculating variances, if any. Comparison of budgeted and actual figures will enable the management to find out discrepancies and take remedial measures at proper time.


  • Budget helps to formulate a plan of action.
  • All the activities of the business are to be coordinated to achieve the objectives. Although different budgets are prepared for different activities, coordination between them can be made possible by preparing a summary budget called Master Budget.
  • Budget is a means for the top management to control the business operation centrally. For the proper implementation of the policy and achieving targets, there should be central control and delegation of authority and responsibility to the executives.
  • The main objective of the budget is cost control. Cost control is the process of controlling the cost by eliminating wastage. Preparation of budgets helps in the control of cost through comparison.
  • Budgeting helps for the fixation of responsibility of executives.
  • Budgeting system provides adequate and satisfactory norms of performance over the various activities of the enterprises.
  • Budgeting and budgetary control helps to use the assets  and resources of the enterprise most efficiently and effectively .


(A)    On the basis of time
          (i)    Long term budget: A budget prepared covering a period of more than a year can be taken as long term budget.
          (ii)   Short term Budget: It is a budget prepared for a period covering a year or less than a year.
(B)     On the basis of nature of  expenditure and receipts
           (i)    Capital Budget: It is a budget prepared for capital receipt and expenditures such as obtaining loans, issue of shares, purchase of asset etc.
           (ii)    Revenue Budget: A budget covering revenue receipt and expenses for a certain period is called revenue budget. Examples – Sales, Other Incomes, Purchases, Administrative expenses etc.
(C)     On the basis of functions
           (i)    Functional Budget: If budgets are prepared of a business concern for a certain period taking each and every function separately such budgets are called functional budgets. The number of these budgets depends on the size and nature of business. The commonly used functional budgets are sales budgets, Productions budgets, Materials budget, purchase budgets, cash budgets, Direct Labor budgets, Human resources budgets, selling and distribution cost budgets, administration cost budgets, Research and Development cost budgets etc.
           (ii)    Master Budgets: Master budget is the budget prepared to cover all the functions of the business organization. It can be taken as the integrated budget of business concern. It shows the profit or Loss and financial possession of the business concern such as budgeted profit and loss account, budgeted balance sheet etc. Master Budget combines all the budgets for a period into one harmonious unit and thus, it shows the overall budget plan.
(D)    On the basis of capacity
          (i)    Fixed or Rigid Budget: When budgets are prepared for a fixed and standard volume of activity, they are called static or rigid or fixed budget. They don’t change with changes in the volume of the output. Fixed budget are most suited for fixed expenses.
          (ii)    Flexible Budget: A flexible budget is a budget that is prepared for different levels activity or capacity utilization or volume of output.  If the budget prepared in such a way so as to change in accordance with the volume of output, they are called flexible budgets.


  • A budget provides a structured plan leading to better decision making and goal achievements.
  • A good budget plan can help in the more judicious use of resources as well as control over financial expenses.
  • It improves communication and coordination.
  • It provides a standard for performance evaluation.
  • Fixes accountability, assignment of responsibility and authority.
  • It forces managers to plan.
  • Weaknesses are revealed and corrective measures can be taken.


One of the most effective instruments for managing your company’s resources is your budget. Tracking your company’s performance versus its budget can provide you with valuable information that you can use to solve problems or capture new possibilities.  

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