Budgeting Concepts

Profit Plan ( Budget)

Realistic plan for future/
in Quantitative terms.
Planning Tool
Written Plan
Anticipate problems in advance. Eg without knowing
budgeted sales and demand units are produced
which can cause severely overproduction.
Targeted Goals.

Budgeting Concepts
Control Tool:
Controls cost through cost guidelines and in turn
shows usage efficiently or inefficiently.
Variances are verified if controllable cost are over
budget.
Reveals Progress of effective Managers who uses
budget as self evaluation tool.
Overestimations are avoided.
Integration with Accounting system segment wise.
Motivational tool. Manager must be positive always.
Flexibility must be depending on circumstances.



Budgeting Concepts
Means of Communication.
Updates the goals to be accomplished.
No Budget would be taken as Different Goals
Eg without purchase budget procurement will
purchase on their own and without limit to get
maximum discounts.
Corporation and non profit organizations too
have their own goals which cannot be achieved
without planning for Allocation of Resources and
Expected Results.
For corporations budgets are usage v/s
outcomes.

Budgeting Concepts
Role in Planning /Evaluating
Planning is setting objectives , goals and approach to achieve
them ethically.
Formulation of mission Statement. Eg Shareholders wealth
maximization.
Strategic plans are made (long term objectives) .eg Double the
production and profit.
Setting up clear priorities i.e. allocation of limited resources eg
how to make double production with same quality.
Short Term Objectives follows then eg how many new machines
and man power would be required to do above.
Quantification is necessary while evaluating progress.
Variance analysis after comparison A v/s B
Budgeting Concepts
External Factors effects on budget process
Economic conditions eg inflation effect on costs.
Industry situation eg due to increase costs the effect
on profits will be shown by budgets with compared to
industry average.
Does Budget could be in Loss ?
Specific Revenue achievement and Limiting
Expenses for strategic business units monthwise.
Budgeting Concepts
Successful Process.
Sufficient Lead time
for preparation
Budget Planning
Calendar.
Budget Manual.
Interdependencies and
instructions.
Employee subordinate
participation.

12 week cashflow reporting
requirement
Starting bank
balance
First week
endin
g
Last week
endin
g Due Date
1
04 January
2010
10 January
2010
28 March
2010
06 January
2010
2
18 January
2010
24 January
2010
11 April
2010
20 January
2010
3
4
Budgeting Concepts
Performance measurement while
comparison and base is variance analysis.
Goal Congruence segment wise /
subunit wise budget.
Coordination of various activities.
Budgeting Concepts
Controllability depends upon efficiencies of
Managers can influence.
Controllable cost
Non Controllable cost.
Efficient allocation of resources is must.
Budgeting Concepts

Time Frame
Strategic Senior managers 10 years or
more.
Intermediate Middle managers- 2 years
Operational Lower level 1year or less.


Budgeting Concepts
Participation
Board of directors formulate mission
statement
Senior Management converts into stratgic
plans.
Budget committee forms Budget calendar n
Budget Manual
Middle and Lower level draw their own
Budgets on basis of above.


Budgeting Concepts
Cost Standards : cost of an activity or unit
input cost or unit output costs.
It is guideline for non deviation from
standard.
Basis is detailed studies of
accounting/engineering/statistics quality
control
Flexible budgeting is must to implement
standard costing due to fixed costs impact.
Budgeting Concepts
Theoretical or ideal standards : Maximum
efficiency or perfection standards for production
under optimal conditions.
Based on most skilled labor who work on no
waste or machine breakdown basis.
Tight standards , positive when taken to attain
excellence but taken negative if goals are
unachievable.
Ideal standards are replaced by perfect current
attainable standards or financial planning will be
impossible.


Budgeting Concepts
Practical or currently attainable standards :
Performance achievable by skilled employee
with reasonable allowance for wastage
and downtime .
Other way round possible but difficult to
attain result.
Budgeting Concepts
Grass roots or participative
standards prepared at middle n
lower level
Acceptance n more
commitment to goals in budget
Broader information base
about operational realities.
Performance rewards and
penalties
Can be drafted on achievable
basis.
Top down or authoritative
approach :prepared at top
level.
consistent across all functional
areas.
Less informed about
operational areas.
Budgeting Concepts
Steps of preparation of budget standards:
Direct material depends upon input cost n
quality n wastage
Direct labor : complexity of production
process n restriction on pay scale also
affect the cost standards.

Budgeting Concepts
Activity analysis determining resources n
activities used for given output n process
aids in development of standard cost.
Historical data is used where company
lacks the resources.
Budgeting Concepts
Revisions in Budget : If any changes are seen in
the assumptions on which basis budgets were
sketched ,then policy for revision has to be
made as budgets must be flexible.
A v/s B = V = efficient or inefficient of companies
resources.
Steps :
Establish standards of performance
Measure actual performance
Compare the actual with standards
Implement corrective actions
Review n revise the budget.



Budgeting Concepts
Budgetary Slack participation in preparation of
budget sometimes results in padding.
Excess of budgeted resource over required
resource to achieve the target goal. It is done
due to overestimation and for safety of
managers himself from variances.
Eg : estimation of tax payment is over due to
which provision for cash is kept in excess where
tax is calculated quite less. Where as under
where provision was short and tax is more.
Learning Curve
Due to experience rate at which people
perform their tasks.
Time taken to perform a task shortens in
early stage of production.
Curve is expressed as % of reduced time
to complete a task for each doubling of
cumulative production i.e. generally 80 %