Budgeting and Budgeting Control PDF

Budget By Debayan Ray  What is budget? It’s a plan covering all phases of operations for definite periods in the future. It is a formal expression of plan, policies, objective and goals laid down in advance by the top management for the concern as a whole. FORECAST AND BUD...

Budget By Debayan Ray  What is budget? It’s a plan covering all phases of operations for definite periods in the future. It is a formal expression of plan, policies, objective and goals laid down in advance by the top management for the concern as a whole. FORECAST AND BUDGET  Budgetary control This process involve use of budgets and budgetary reports throughout the periods of budgets to co-ordinate evaluate and control day to day operation in accordance with the goals specified by the budgets. It involves constant checking and evaluation of actual results compared with the budgetary goals. Definition of budget and budgeting  Difference between budget and budgeting and budgetary control Budgets are individual objectives of a departments. Budgeting may be defined as a act of setting budgets Budgetary control include all and include the science of planning the budgets themselves and utilization of such budgets as a overall and wider management tool for the business planning and control.  Objective of budgetary control To compare with planning To communicate idea and planning To co-ordinate the activities To establish a system of control To motivate employee To communicate with all To control whole activity  Advantage of budgetary control It defines the objective of a organization as a whole and within this overall framework it defines the results which each departments should achieve. It reveals that the extent by which actual result have exceed or fallen short of the budgets. It provide some centralized control in an organization It indicate the efficiency with which the various activities of a org have been co-ordinate. As a result of reporting on actual performance along with variances and other performances, it provide basis of guidelines for execution actions to correct adverse trends. Advantage of budgetary control  Limitation of budgetary control Danger of inaccurate estimates Expensive Human factor Time consuming No substitute for efficient management Danger of over budgeting Hide Inefficiencies  Essentials of effective budget 1) Support of top management: 2) Team Work: 3) Realistic Objectives: 5) Structure of Budget team: 6) Well defined Business Policies: 7) Integration with Standard Costing System: 8) Inspirational Approach: An organizational chart is a statement defining functional representatives of executives responsible for accomplishment of organizational objectives. Classification of Budget Classification of Budget  Rolling budgets A rolling budget is a twelve month budget which is prepared several times each year (say once each quarter). The purpose of a rolling budget is to give management the chance to revise its plans, but more importantly, to make more accurate forecasts and plans for the next few months. When rolling budgets are used, the extra administration costs and effort of producing several budgets instead of just one, should be balanced with more accurate forecasting and planning.  The advantages associated with the use of rolling budgets are Budgets are reassessed regularly and thus should be more realistic and accurate. Because rolling budgets are revised regularly, uncertainty is reduced Planning and control is based on a recent updated plan. The budget is continuous and will always extend a number of months ahead.  The disadvantages are Rolling budgets are time consuming and expensive as a number of budgets must be produced during the year. The volume of work required with each reassessment of the budget can be off putting for managers. Each revised budget may require revision of standards or stock valuations which is time consuming. Classification of Budget on the basis of function Cash Budget  Different terms in budget Budget Center – It’s a department in a organization identified and separated from rest of the organization for budgetary control and it have responsibility to prepare budgets for coming years. Budget Manual – It’s a document which assists everyone engaged in budgeting and budgetary control.  Different terms in budgets Budget Committee – It’s a committee which frequently established for coordinating and reviewing budgets program me. Budget Period: “the period for which a budget is prepared and used, which may then be sub-divided into control periods”. Budget Key Factor- a factor which will limit the activities of an undertaking and which is taken into account in preparing budgets” Budget Reports: - In brief, a budget report is a comparison of the actual with the budgets both for the month and cumulative up to the current month. Format of budget report  Zero Base Budgeting: The ‘Zero-Base’ refers to a ‘nil-budget’ as the starting point. It starts with a presumption that the budget for the next period is ‘zero’ until the demand for a function, process, or project is not justified for single penny. The assumption is that without such justification, no expenditure will be allowed. In effect, each manager or functional head is required to carry out cost-benefit analysis of each of the activities, etc. under his control and for which he is responsible.  The method of ZBB suggests that the business should not only make decision about the proposed new programmed but it should also, regularly, review the suitability of the existing programmed. This approach of preparing a budget is called incremental budgeting since the budget process is concerned mainly with the increases or changes in operations that are likely to occur during the budget period. This method for the first time was used by the Department of Agriculture, U.S.A. in the 19th century.  Definition of ZBB "ZBB is a management tool, which provides a systematic method for evaluating all operations and programmes, current or new, allows for budget reductions and expansions in a rational manner and allows re-allocation of sources from low to high priority program- mes."  ZBB is a planning, resource allocation and control tool. It, however, presupposes that (a) There is an efficient budgeting system within the enterprise (b) Managers can develop quantitative measures for use in performance evaluation. (c) Among the new suggestions and programmes, along with old ones are put to a strict scrutiny. (d) Funds are diverted from low-priority suggestions to high priority suggestions. Procedure of Zero-base Budgeting: Determination of the objective: Degree at the ZBB is to be introduced: Growth of Decision units: Growth of Decision packages: Assessment and Grading of decision packages: Allotment of money through Budgets:  Advantages: ZBB rejects the attitude of accepting the current position in support of an attitude of inquiring and testing each item of budget. It helps improve financial planning and management information system through various techniques. It is an educational process and can promote a management team of talented and skillful people who tend to promptly respond to changes in the business environment. It facilities recognition of inefficient and unnecessary activities and avoid wasteful expenditure. Cost behavior patterns are more closely examined. Management has better elasticity in reallocating funds for optimum utilization of the funds.  Disadvantages: 9 It is an expensive method as ZBB incurs a huge cost every in its preparation.. It also requires high volume of paper work, hence sometimes it becomes a tedious job. In ZBB there is a danger of emphasizing short-term benefits at the expenses of long term ones. This is not a new method for evaluating various alternatives, and cost-benefit analysis. The psychological effects can also not be ignored. It holds out high hopes as a modern technique, claiming to raise the profitability and efficiency of the business.  Type of budgets Master budgets – The master budgets is summary budgets incorporating its components functional budgets. Functional budgets – it’s a budgets which relates to specific function of the business. Financial Budgets – It’s a budgets which summaries the total package of a begets in terms of money.  Type of functional budgets Sales budgets Selling expenses budgets Distribution expenses budgets Purchase budgets Marketing budgets R and D budgets Production budgets  Type of financial budgets Cash Budgets Budgets profit and loss Budgeted balance sheet Budgeted fund flow and cash flow statement Capital Budgets Example of production Budget Illustration – 1 - From the following particulars prepare a purchase budget for the year 2001 when the estimated price per kg of material is : A – Rs. 1, B – Rs 2, and C – Rs. 3 Materials Estimated consumption of material (in Kg) A 2,00,000 B 3,00,000 C 4,00,000 Estimated stock (in Kg) On 1.1.2001 On 31.12.2001 A 20,000 25,000 B 40,000 30,000 C 50,000 40,000 Solution – Production Budget for material for the year ending on 31.12.2001 Materials Particulars A KG B KG C KG Estimated consumption 2,00,000 3,00,000 4,00,000 Add: Closing stock of materials 25,000 30,000 40,000 2,25,000 3,30,000 4,40,000 Less Opening stock of material 20,000 40,000 50,000 Purchase of raw material 205,000 2,90,000 3,90,000 Estimated price per KG 1 2 3 Budgeted purchase ( quantity X Price 2,05,000 5,80,000 11,70,000 per KG)  Practical Problems in budgets 2. Sales director of a manufacturing company reports that next year he expect to sale 58000 unit of a certain product. The production manager consult the store keeper and cast its figure as follows: Two kind of raw material A and B required for manufacturing the product. Each unit of unit of the product required 2 units of A and 3 units of B. The estimated opening balance in the commencement of the year Finished product 10,000 Units. A 12,000 Units. B 15,000 Units. The desirable closing balance at the end of the next year are : Finished product 10,000 Units A 13,000 Units B 16,000 Units Draw a quantitative chart showing the material purchased budget for the next year.  Material Purchase budget for the year Solution - Material A Material B (Units) (Units) Material Required : A (58,000x2) 1,16,000 B (58,000x3) 1,74,000 Closing balance 13,000 16,000 1,29,000 1,90,000 Opening Stock (12,000) (15,000) Budgeted Purchase (In Units) 1,17,000 1,75,000 P – 3 Prepare a production budget for each month and a summaries production cost budgets for the six months ending 31 st December 2016 From the following data of product “X” The units to be sold for different months are as follows: Months Units July 2017 1,100 October 2017 1,900 August 2017 1,100 November 2017 2,500 September 2017 1,700 December 2017 2,300 January 2018 2,000 There will be no work in progress at the end of the month Finished unit equal to half of sales for the next month will be in stock at the end of the each month (including, 2016) Budgeted production and production cost for the year ending 2016 are as follows Production (Units) - 22,000 Direct Material Per Units 10/ unit Direct Wages Per Units – 4 / unit Total Factory overhead Apportioned to product - 88,000 Illustration - 4 Illustration - 5 Thank You