ACCOUNTINGFOR MANAGERS

ASSIGNMENT 2
PART-I
WHAT IS A BUDGET?

“ A plan expressed in money. It is prepared and approved prior to the budget period and may show
income, expenditure and the capital to be employed. May be drawn up showing incremental effects on
former budgeted or actual figures, or be compiled by Zero-based budgeting.”

A budget is a plan expressed in quantitative, usually monetary term, covering a specific period
of time, usually one year. In other words a budget is a systematic plan for the utilization of
manpower and material resources.

In a business organization, a budget represents an estimate of future costs and revenues.

Budgets may be divided into two basic classes: Capital Budgets and Operating Budgets.

Capital budgets are directed towards proposed expenditures for new projects and often require
special financing. The operating budgets are directed towards achieving short-term operational
goals of the organization, for instance, production or profit goals in a business firm. Operating
budgets may be sub-divided into various departmental of functional budgets.

The main characteristics of a budget are:

1. It is prepared in advance and is derived from the long-term strategy of the organization.
2. It relates to future period for which objectives or goals have already been laid down.

It is expressed in quantitative form, physical or monetary units, or both.

Different types of budgets are prepared for different purposed e.g. Sales Budget, Production
Budget, Administrative Expense Budget, Raw-material Budget etc. All these sectional budgets
are afterwards integrated into a master budget, which represents an overall plan of the
organization.

ADVANTAGES OF BUDGETS

A budget helps us in the following ways:

1. It brings about efficiency and improvement in the working of the organization.

2. It is a way of communicating the plans to various units of the organization. By
establishing the divisional, departmental, sectional budgets, exact responsibilities are
 assigned. It thus minimizes the possibilities of buck passing if the budget figures are not
met.
3. It is a way or motivating managers to achieve the goals set for the units.
4. It serves as a benchmark for controlling on-going operations.
5. It helps in developing a team spirit where participation in budgeting is encouraged.
6. It helps in reducing wastage and losses by revealing them in time for corrective action.
7. It serves as a basis for evaluating the performance of managers.
8. It serves as a means of educating the managers.

BUDGETORY VARIANCE?

A budget, defined basically, is a strategic financial plan. It usually considers income and
expenditures. In doing so, a number of other factors, such as labor and raw material availability,
may need to be considered. A budget variance arises when there is a difference between the
plan and the outcome.

When considering budget variance, it can be very important to differentiate between the things
that affect the budget that can be controlled and those that cannot. There are a number of
reasons why a budget variance can occur. One reason is that the budget was poorly planned.
This is an example of a controllable factor.

Some causes of budget variance can be controlled. Labor costs are another example. A
company can control its spending in this area by making decisions such as prohibiting overtime
and outsourcing projects that would otherwise require high salaried staff members.

Some causes of budget variance are uncontrollable. Factors in this category are commonly
external. This means that these factors are determined by entities outside of the company that
has made the budget. A rise in utility prices can be an example of an uncontrollable factor. If a
natural disaster causes a shortage of some raw materials, this is also an uncontrollable factor.

When one considers a budget variance, she should not automatically assume that it refers to
losses. A budget variance can be either positive or negative. When it is positive, it is commonly
referred to as a favorable variance. When it is negative, it is considered an unfavorable
variance.

There are several categories of budget variances. Profit variance is one of the most common.
This refers to the gap between the profits that were expected and the profits that were actually
earned, whether they are higher or lower than predicted.

It is common for large organizations to have numerous budgets. These may, for example, be
divided by sector, branch, or department. When this is the case, there is a possibility that there
can be numerous budget variances. There are numerous ways this can be handled.
 PERFORMANCE REPORT:

Hind Liver Sons (Rs. Crore) BUDGETED DEC'09 ACTUALS DEC'09 Variance ABS Percentage
Gross fixed assets 1047.9 1122.8 74.9 74.9 7.147629
Land & building 223.7 278.3 54.6 54.6 24.40769
Plant & machinery 628 636.5 8.5 8.5 1.353503
Other fixed assets 102.4 120.9 18.5 18.5 18.06641
Capital WIP 93.8 87.1 -6.7 6.7 -7.14286
Less: cumulative depreciation 326.4 328.8 2.4 2.4 0.735294
Net fixed assets 721.5 794 72.5 72.5 10.04851
Revalued assets 0.6 0.6 0 0 0
Investments 328.6 544.5 215.9 215.9 65.70298
In group/associate cos. 191.8 253.6 61.8 61.8 32.22106
In mutual funds 2.7 77.7 75 75 2777.778
Other investments 134.1 213.2 79.1 79.1 58.98583
Marketable investment 76.3 183.5 107.2 107.2 140.498
Market value of quoted investment 215.3 573.7 358.4 358.4 166.4654
Deferred tax assets 0 0 0 0 0
Inventories 903.4 1044.6 141.2 141.2 15.62984
Raw materials and stores 389.8 484.2 94.4 94.4 24.21755
Raw materials 366.3 455.6 89.3 89.3 24.37892
Stores and spares 23.5 28.6 5.1 5.1 21.70213
Finished and semi-finished goods 514.1 560.4 46.3 46.3 9.00603
Finished goods 470 521.2 51.2 51.2 10.89362
Semi-finished goods 44.1 39.2 -4.9 4.9 -11.1111
Other stock 0 0 0 0 0
Receivables 720.8 582.11 -138.69 138.69 -19.2411
Sundry debtors 143.5 145.4 1.9 1.9 1.324042
Debtors exceeding six months 30.3 22.8 -7.5 7.5 -24.7525
Accrued income 9.3 8.3 -1 1 -10.7527
Advances/loans to corporate 30.6 56.1 25.5 25.5 83.33333
bodies
Group/associate cos. 30.6 56.1 25.5 25.5 83.33333
Other cos. 0 0 0 0 0
Deposits with govt./agencies 16.8 33.5 16.7 16.7 99.40476
Advance payment of tax 0 0.01 0.01 0.01 0
Other receivables 520.6 338.8 -181.8 181.8 -34.9212
Cash & bank balance 203.3 574.5 371.2 371.2 182.5873
Cash in hand 1.3 2.5 1.2 1.2 92.30769
Bank balance 202.8 572 369.2 369.2 182.0513
Intangible assets (not written off) 0 0 0 0 0
Intangible assets (goodwill, etc.) 0 0 0 0 0
Total Assets 2878.1 3539.71 661.61 661.61 22.98773
Hind Liver Sons (Rs. Crore) BUDGETED DEC'09 ACTUALS DEC'09 Varianc ABS Percentage
e
Networth 938.1 1261.2 323.1 323.1 34.44196
Authorized capital 225 225 0 0 0
Issued capital 145.8 199.1 53.3 53.3 36.55693
Paid-up equity capital[1] 145.8 199.1 53.3 53.3 36.55693
Preference capital 0 0 0 0 0
Reserves & surplus 792.37 1062.1 269.73 269.73 34.04092
Free Reserves 761.8 1030.5 268.7 268.7 35.27172
Share premium reserves 46 121.2 75.2 75.2 163.4783
Other free reserves 715.8 909.3 193.5 193.5 27.03269
Specific reserves 29.9 31 1.1 1.1 3.67893
Revaluation reserves 0.6 0.6 0 0 0
Accumulated losses 0 0 0 0 0
Borrowings 260 186.4 -73.6 73.6 -28.3077
Bank borrowing 35.1 3.2 -31.9 31.9 -90.8832
Short-term bank borrowings 31.2 3.2 -28 28 -89.7436
Long-term bank borrowings 3.9 0 -3.9 3.9 -100
Financial institutional 12.2 8 -4.2 4.2 -34.4262
borrowings
Govt./sales tax deferral 0 0 0 0
borrowings
Debentures/bonds 18.6 18.5 -0.1 0.1 -0.53763
Fixed deposits 91.3 87.3 -4 4 -4.38116
Borrowings from corporate 1.5 0 -1.5 1.5 -100
bodies
Commercial paper 15 0 -15 15 -100
Other borrowings 86.3 69.4 -16.9 16.9 -19.5829
Secured borrowings 96.4 65.7 -30.7 30.7 -31.8465
Unsecured borrowings 163.6 120.7 -42.9 42.9 -26.2225
Current portion of long term 22.6 4.1 -18.5 18.5 -81.8584
debt
Total foreign currency 0 0 0 0 0
borrowings
Deferred tax liabilities 0 0 0 0 0
Current liabilities & provisions 1680 2092.11 412.11 412.11 24.53036
Current liabilities 1438 1673.61 235.61 235.61 16.38456
Sundry creditors 1142.3 1596.01 453.71 453.71 39.71899
Interest accrued/due 15.4 17.8 2.4 2.4 15.58442
Creditors for capital goods 0 0 0 0 0
Other current liabilities 280.3 59.8 -220.5 220.5 -78.6657
Share application money 230.9 0 -230.9 230.9 -100
Advance against WIP 0 0 0 0 0
Provisions 242 418.5 176.5 176.5 72.93388
Tax provision 26.4 71.8 45.4 45.4 171.9697
Dividend provision 129.4 189.2 59.8 59.8 46.21329
Dividend tax provision 0 0 0 0 0
Other provisions 86.2 157.5 71.3 71.3 82.71462
Total liabilities 2878.1 3539.71 661.61 661.61 22.98773
Contingent liabilities
Bills discounted 30.4 41.4 11 11 36.18421
Disputed taxes 0 0 0 0 0
Letters of credit 0 0 0 0 0
Total guarantees 59.3 55.3 -4 4 -6.74536
Future lease rent payable 0 0 0 0 0
Liabilities on capital account 39.2 49 9.8 9.8 25
INCOME STATEMENT:

Hindustan Lever Ltd. (Rs. Crore) BUDGETED Dec-09 ACTUAL DEC'09 Varianc ABS
e
Income 7137.8 8363.3 1225.5 1225.5
Other income 106.7 165.2 58.5 58.5
Change in stocks 15.2 46.4 31.2 31.2
Non-recurring income 137.8 50.4 -87.4 87.4
7397.5 8625.3 1227.8 1402.6
Expenditure
Raw materials, stores, etc. 4533.4 5201.9 668.5 668.5
Wages & salaries 385 448.7 63.7 63.7
Energy (power & fuel) 105.8 110.8 5 5
Indirect taxes (excise, etc.) 577.1 626.5 49.4 49.4
Advertising & marketing expenses 283 490.6 207.6 207.6
Distribution expenses 279.2 289.1 9.9 9.9
Others 386.6 474.9 88.3 88.3
Non-recurring expenses 139.9 54 -85.9 85.9
6690 7696.5 1006.5 1178.3
Profits/losses
PBDIT 707.5 928.8 221.3 221.3
Financial charges (incl. Lease rent) 57 33.8 -23.2 23.2
PBDT 650.5 895 244.5 244.5
Depreciation 55.2 57.9 2.7 2.7
PBT 595.3 837.1 241.8 241.8
Tax provision 192.55 270 77.45 77.45
PAT 402.8 567.1 164.3 164.3
Appropriation of profits
Dividends 261.9 372.44 110.54 110.54
Equity dividend 249 338.5 89.5 89.5
Dividend tax 12.9 33.9 21 21
Retained earnings 140.9 194.7 53.8 53.8
 ANALYSIS
PART II

1. PAT(Profit after tax)

Budget Actual Difference % Change

402.8 567.1 164.3 40.78

The difference in PAT between budget and actual is 164.3 i.e. 40.78%.

2. Current Liabilities

Budget Actual Difference % Change

1438 1673.6 235.61 16.38

The difference in Current liabilities between budget and actual is 235.6 i.e. 16.38%. Factors such
as creditors, bank overdraft, bills payable and other short term liabilities were the reasons for
increase in current liabilities.

3. Sundry Debtors

Budget Actual Difference %Change

143.5 145.4 1.9 1.32

The difference in Sundry debtors between budget and actual is 1.9 i.e. 1.32%. There is a minute
difference and therefore will not affect the balance sheet too much.

4. Cash and Bank Balance

Budget Actual Difference %Change

203.3 574.5 371.2 182.58

The difference in Cash and Bank balance is 371.2 i.e. 182.58%. As the company gains profit there
could have been sale in assets or could have incurred income from other parties.
5. Total Asset

Budget Actual Difference %Change

2878.1 3539.71 661.61 22.98

The difference in total assets is 661.61 i.e. 22.98%. the company has purchased inventories,
fixed assets, cash and bank balance, debtors, bills receivable, investments and other assets.

6. Bills Receivable

Budget Actual Difference %Change

720.8 582.11 -138.69 -19.24

The difference in bill receivable is -138.69 i.e. -19.24%. The issued bills are unpaid promissory
notes. It is noticed that not too many notes are being issued and are generally being held by the
firm.

7. Net Fixed Assets

Budget Actual Difference %Change

721.5 794 72.5 10.04

The difference in net fixed assets is 72.5 i.e. 10.04%. The increase is due to increase in land and
building, Capital WIP, plant and machinery and other fixed assets.

8. Net Worth

Budget Actual Difference %Change

938.1 1261.2 323.1 34.44

The difference in net worth is 323.1 i.e. 34.44%. This increase is due to oversubscription of
shares for all type of capital. These funds can be utilized for the expansion on the firms.

9. Inventories

Budget Actual Difference %Change

903.4 1044.6 141.2 15.62

The difference in inventories is 141.2 i.e. 15.62%. As there is idle stock in the warehouse there
might be defective products which are sent back or expired.
10. Sundry Creditors

Budget Actual Difference %Change

1142.3 1596.01 453.71 39.71

There difference in sundry creditors is 453.71 i.e. 39.71%. As we have purchased excess supply
from supplier, being the main reason for increase in sundry creditors.