Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions

Budgetary Control and Budget Types for CMA Foundation

Updated 10 October 2026 · Fact-checked

A budget is a plan of income and expenditure in numbers for a future period. Budgetary control compares actual results with the budget, finds variances and takes corrective action. To solve questions, identify the budget type, fix the key (limiting) factor, then build figures step by step: sales, production, costs, cash.

Understand Budgetary Control and Budget Types

A budget is a financial or quantity plan prepared in advance for a defined period. It tells each department what to sell, make, spend or collect. Think of a household budget: you plan income and spending, then check at month end.

Budgetary control is the process of preparing budgets, comparing actual results with them, finding the differences (variances) and acting on them. Its main objectives are planning, coordination between departments, control of spending, motivation of managers and fixing responsibility.

Budgets are prepared for a budget period under a budget committee, with a budget manual giving the rules. Before starting, find the key factor (also called limiting or principal budget factor). This is the factor that limits activity, such as sales demand, raw material supply or machine hours. You build the other budgets around it. In most firms it is sales.

Main types:
- Functional budgets cover one function: sales, production, purchase, direct material, direct labour, overhead, and so on.
- Cash budget forecasts cash receipts and payments to show cash surplus or shortage month by month.
- Fixed budget is prepared for one level of activity and is not changed. It is of little use if actual activity differs.
- Flexible budget is prepared for several activity levels. It separates fixed and variable costs, so you can restate costs for the actual level.
- Master budget is the summary budget that combines all functional budgets. It usually contains the budgeted profit and loss account and balance sheet, and is approved by top management.

Key formulas to remember

Production budget (units): Production = Budgeted sales + Closing stock − Opening stock; Use finished goods units. Closing stock is the target at period end.
Purchase budget (units of material): Purchases = Material consumed + Closing stock of material − Opening stock of material; Material consumed = Production units × material per unit.
Flexible budget cost: Total cost at new level = Fixed cost + (Variable cost per unit × Units at new level); Fixed cost stays the same in total within the relevant range. Variable cost per unit stays the same.
Variable cost per unit from a budget: Variable cost per unit = Total variable cost ÷ Units of budgeted activity; Semi-variable costs must first be split into fixed and variable parts.
Closing cash balance: Closing cash = Opening cash + Receipts − Payments; Leave out non-cash items such as depreciation. Include only actual cash timing.
Key factor rule: Start the budgets from the limiting factor; If sales is the key factor, the sales budget is prepared first.

How to solve Budgetary Control and Budget Types questions

Use this method for any budget question, whether it asks for a flexible budget, a cash budget or a functional budget.

1Read the question and identify the budget asked for and the period (month, quarter, year).
2Note the key factor if given. It decides which budget you prepare first.
3List all data in a small table: units, prices, costs, opening and closing stocks, credit terms.
4Separate fixed, variable and semi-variable costs. Split semi-variable costs into two parts.
5Build the budget in order: sales, then production, then material, labour and overheads, then cash.
6For a cash budget, put each item in the month of actual receipt or payment. Exclude depreciation and other non-cash items.
7Compute totals and check them: closing cash equals opening plus receipts less payments.
8Match your final figure to the options. Recheck units against rupees if nothing matches.

Quickest way: Per-unit method for flexible budgets and MCQs

When to use it: Use when an MCQ gives costs at one activity level and asks for cost or profit at another level.

Mark each cost as fixed or variable. Semi-variable: use the high-low split if two levels are given.
Compute variable cost per unit once.
New total = fixed cost + variable per unit × new units.
For cash budgets, write only the month asked for and one lag (for example, credit sales of last month).
Eliminate options that include depreciation or mix up fixed and variable costs.

Common mistakes in Budgetary Control and Budget Types

Scaling all costs in proportion to activity in a flexible budget.
Students forget that fixed costs do not change in total.
Fix: Scale only variable costs. Keep fixed costs as they are.
Including depreciation in the cash budget.
Depreciation appears in the expense list, so it looks like a payment.
Fix: Depreciation is a non-cash item. Leave it out of cash payments.
Recording credit sales as cash receipts in the month of sale.
Students overlook the credit period.
Fix: Shift the receipt to the month when the customer pays, as per the credit terms.
Using sales units as production units.
Stock changes are ignored.
Fix: Production = sales + closing stock − opening stock.
Confusing a fixed budget with a flexible budget.
Both show budgeted costs, so the labels blur.
Fix: A fixed budget is for one level of activity only. A flexible budget gives costs at different levels.
Treating the master budget as just another functional budget.
The word budget hides its summary role.
Fix: The master budget combines all functional budgets and shows the overall budgeted profit and financial position.

Worked examples

Example 1

A firm budgets 10,000 units at a variable cost of ₹40 per unit and fixed cost of ₹2,00,000. What is the total budgeted cost at 12,000 units?

Show the solution

Variable cost per unit = ₹40.
Variable cost at 12,000 units = 12,000 × ₹40 = ₹4,80,000.
Fixed cost stays ₹2,00,000.
Total cost = ₹4,80,000 + ₹2,00,000 = ₹6,80,000.

Answer: ₹6,80,000

Example 2

A company expects credit sales of ₹1,00,000 in March, all collected in the following month. Opening cash on 1 April is ₹20,000. April cash purchases and expenses will be ₹60,000. April credit sales are ₹1,20,000. Find the closing cash balance on 30 April.

Show the solution

April receipts come from March credit sales = ₹1,00,000.
April credit sales are collected in May, so they are not included.
Opening cash = ₹20,000.
Closing cash = ₹20,000 + ₹1,00,000 − ₹60,000 = ₹60,000.

Answer: ₹60,000

Exam tips

Check whether the question gives a key factor. It tells you the starting budget.
In flexible budget MCQs, look at which costs are fixed before calculating anything.
Cross out depreciation, provisions and other non-cash items in cash budget questions.
Know definitions well: key factor, master budget, fixed versus flexible budget. Many MCQs test these directly.
With no negative marking, always attempt every question and use elimination to narrow options.

Practice questions from Application of Cost Accounting for Business Decisions

Budgetary Control and Budget Types in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Budgetary Control and Budget Types: frequently asked questions

What is budgetary control?

It is the process of setting budgets, comparing actual results with them, finding variances and taking corrective action. Its objectives include planning, coordination, control and fixing responsibility.

What is the difference between a fixed budget and a flexible budget?

A fixed budget is prepared for one level of activity and does not change. A flexible budget shows costs at different activity levels by treating fixed and variable costs separately, so it can be adjusted to actual activity.

What is a master budget?

It is the summary budget that combines all functional budgets. It usually includes the budgeted profit and loss account and balance sheet, and is approved by top management.

What is a key factor in budgeting?

It is the factor that limits the firm's activity, such as sales demand or material supply. You prepare the budgets starting from it.