Budgeting is an important tool of management control, it is a form of managerial planning in order to control the future operations of business. A budget is merely a plan expressed in quantitative terms. But in addition to its use in planning, the budget is also used for control and for co-ordination. Though the use of budgeting system is very common, there is a considerable diversity of practice in budgeting.
However, a comprehensive budgeting system must include the three types of budgets: an operating budget, a cash budget and a capital budget.
An operating budget shows the planned operations for the forthcoming period. It consists of two parts – programme budget and responsibility budget. These both parts represent two ways of depicting the overall operating plan for the business.
The programme budget describe the major programmes, the company plans to undertake. Such a budget can be arranged by products or product lines showing the anticipated revenue and costs associated with each product.
On the another hand, a responsibility budget sets forth plans in terms of the persons responsible for carrying them out. It is, therefore, primarily a control device, since it is a statement of expected performance (i.e., standard performance) against which actual performance can later be compared.
The main components of the operating budget are-sales budget, production budget and cost budgets. The production budget is a quantity budget while others are value budgets.
The financial budget represents a summation of anticipated receipts and disbursements for the budget period. Its purpose is to plan for the allocation of working capital as represented by the current assets of the enterprise. It indicates the need of capital at various times and helps the management in planning and providing the proper quantity of cash to meet the needs of the business.
It provides information of the probable profits to be realized during the budget period and helps the management in making the long-term plans.