Budgeting

Budgeting is a tool of planning. Planning involves specification of the basic objectives that the organisation will pursue and the fundamental policies that will guide it.

A budget is defined as a comprehensive and coordinated plan, expressed in financial terms, for the operations and resources of an enterprise for some specified period in the future. The essential elements of a budget are: plan, financial terms, operations and resources, specific future period, comprehensive coverage and coordination. As a tool, a budget serves as a guide to conduct operations and a basis for evaluating actual results. The main objectives of budgeting are: explicit statement of expectations, communication, coordination and expectations as a framework for judging performance.

The overall budget is known as the master budget. It has the following components: sales budget, production budget, purchase budget, direct labour budget, manufacturing expenses budget, administrative and selling expenses budget, budgeted income statement, cash budget and budgeted balance sheet.

Budgets prepared at a single level of activity, with no prospect of modification in the light of changed circumstances, are referred to as fixed budgets. The alternative to fixed budgets is flexible or variable budgets. A flexible budget estimates costs at several levels of activity. Its merit is that instead of one estimate, it contains several estimates in different assumed circumstances.