GREENLAWNS HIGH SCHOOL

COMMERCIAL STUDIES- CLASS X

Chapter-9: Budgeting
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Please read Chapter-9: Budgeting from the text book and the explanation given below. {9.6, 9.7 and 9.8 is
not in the Syllabus}
After that, answer the following questions in your 200 pages ruled Commercial Studies Journals.
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Budget:
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.

Features of Budget:
• It is a detailed plan of operations for some specific future
period.
• It is prepared in advance.
• It is a statement expressed in monetary and /or physical units.
• It is based on the objectives to be achieved and the policies to
be pursued by the organisation.
• The process of preparing budget is called Budgeting.

Difference between Budget and Forecast:

Basis of Budget Forecast
Distinction
Meaning It is a statement of planned events It is merely a statement of probable
which needs to be followed in future events which is an estimate of what is
under definite conditions. likely to happen
Authority to It is a plan that requires authority of It is a judgement and hence can be made
make management by anybody
Basis Forecast forms the basis of budget It is developed on the basis of forecast
Coordination There requires coordination of various There is not coordination required
functions
Period It is prepared for a year or less It may cover a period of several years
Control It involves control of variations from It represents events over which no
the approved plan control can be exercised
Purpose Budgeting starts after making forecast to They are not only for budgeting but for
achieve the objectives of the other purposes also
organisations
Timeline Budget succeeds forecast Forecast precedes budget
Utility of Budget: PREMACC
P lanning: Budgets make planning purposeful and precise.
It helps to minimise snap judgements and unplanned actions.
R esponsibility: Budgets establishes divisional and
departmental responsibility.
E fficiency: Budget helps management in obtaining the most
profitable combination of different factors of production,
thus bringing efficiency and economy in the working of a
business firm.
M otivation: Budgets become the goal or targets to be
attained which maintain ordered effort in the organisation.
A uthority: Budgets allow delegation of authority without
loss of control. It permits participation of employees at all
levels. It is a democratic way of managing, as the manager
can freely delegate authority to ensure the plan works within
the limits of the budget.
C oordination: The interaction between persons working in
different departments that takes place during the process of
budgeting facilitates uniformity of policies and united
action.
C ontrol: Budgets provide exact standards with which actual
results can be evaluated and variations between actual performance and budgetary targets can be analysed. It
is an important managerial control tool to evaluate and control the performance in the organisation.

Limitation of Budget: {Extra Learning}

• Details given in the budget are cumbersome and rigid, depriving the managers of freedom and
flexibility in managing their departments.
• The estimates given in the budget become irrelevant in crisis affecting the economy like pandemic,
depression, etc
• Budgets may be used to hide wastages and inefficiency, as most of the time the expenditures are always
expressed on inflated amount and revenues maybe underestimated.
• Success of budgeting greatly depends on mutual understanding and cooperation between all the
persons working in the enterprise.
Types of Budgets: {Only sales, production, purchase, cash and master budgets are in
the syllabus}
Sales Budget:
➢ The sales budget generally, forms the fundamental
basis on which all other budgets are built up. It lays down the
revenue goals of the enterprise.
➢ The Sales Manager is directly responsible for the
preparation and execution of this budget.
➢ Factors considered while preparation of sales budget
are: past sales figures and trends, orders in hand, future
product plans, seasonal fluctuations, plant capacity,
government controls, rules and regulations, etc
➢ Sales budget shows the breakup of total sales product
wise, territory wise and month wise.

Production Budget:
➢ Production budget contains an estimate of the total
volume of production product wise and week or
month wise and a forecast of the closing inventory of
finished product.
➢ The Production or Works Manager is responsible
for the preparation and execution of the production
budget.
➢ Production budget is based on sales budget. Other
factors considered are inventory policy, availability of
labour and material, plant capacity, etc.
➢ It ensures sufficient stock for sales, to keep inventory
within reasonable limits and to manufacture goods in
the most economical manner. The production budget
maybe expressed in quantitative or financial units or in both.

Purchase Budget:
➢ The purchase budget contains details about the quantity and
quality of carious things which the firm needs to purchase
during the coming year.
➢ The Purchase or Logistic Manager is in charge of making this
budget based on production and inventory levels.
➢ The budget outlines the cost of inventory in terms of current
and future inventory levels ensuring smooth functioning of the
business.
Cash Budget:
➢ Cash budget is a summary of the firm’s expected inflows and outflows over the future time period.
➢ It involves a projection of future cash requirements
and expected cash receipts over different time intervals.
➢ It is helpful in:
i. Determining the future cash requirements of the
firm.
ii. Planning for financing of those requirements.
iii. Exercising control over cost and liquidity of the
firm.
➢ The objective of cash budget is to meet its
commitments in time while preventing cash
accumulations too.

Master Budget:
➢ Master Budget is a consolidated
summary of the various functional
budgets.
➢ It is prepared by the budget committee
on the basis of coordinated functional
budgets and becomes the target of the
company during the budget period
when it is finally approved.
➢ It segregates income, costs and profits
by areas of responsibility.
➢ This budget acts as the company’s key
to successful financial planning and
control.

❖ Homework:
➢ Short Answers (2 points)
1. Define Budget.
2. Explain any two factors taken into consideration while making Sales Budget.
3. List down any two factors taken into consideration while making Production Budget.
4. How are the Cash budgets helpful?
5. Explain meaning of Master Budget.

➢ Long Answers (5 points)

1. Distinguish between Budget and Forecast.
2. Write short notes: a) Sales Budget; b) Production Budget; c) Purchase Budget and d) Cash
Budget.
3. ‘Budgets are very useful in management.’ Justify.