MANAGERAL ACCOUNTING AND FINANCE

Unit 6 : Budgeting and Budgeting Control

Meaning of a Budget

A Budget is the monetary or quantitative expression of business plans and policies to be pursued in the future period of time. A budget is the pre-determined statement of management policy during a given period which provides a standard for comparison with the result actually achieved.

Meaning of Budgetary Control

Its the process of determining various budgeted figures for the enterprise and then comparing it with the actual performance.

Objective of Budgetary control

To ensure planning for the future by setting up various budget. To coordinate the activities of different departments. To operate various cost centers and departments with efficiency and economy. Elimination of waste and increase in profitability. To anticipate capital expenditure for future To centralize the control system Correction of deviation from the established standards Fixation of responsibility of various individuals in the organization.

Characteristics of good budgeting

It should involve persons at different levels

Proper fixation of authority and responsibility It should be realistic Good system of accounting is essential Budgeting should have support from the top management

Types of budget

Classification according to Time

1. 2. 3. Long term budgets Short term budgets Current budgets

Classification on the basis of functions 1. Operating budgets 2. Financial budgets 3. Master budgets Classification on the basis of flexibility 1. Fixed budget 2. Flexible budget

Operating budget

Types
1. 2. 3. 4. Sales budget Production budget Labour budget Purchase budget

Financial budget

Types
1. 2. 3. 4. 5. 6. Cash budget Working capital budget Capital expenditure budget Income statement budget Statement of retained earnings budget Budgeted balance sheet

Sales Budget
It is an estimate of sales during the budget period It is the nerve center or back bone of the enterprise A sales budget is the starting point on which other budgets are also based Sales budget lays down potential sales figures in value as well as in quantity Sales manager is made responsible for sales budget.

Factors of sales budget

Past sales figures Assessment and reports by salesmen Availability of raw materials Seasonal fluctuations Availability of finances Plant capacity

Production budget
It is prepared in relation to the sales budget. It is a forecast of the production for the budget period. It is prepared for the number of units to be produced and also for the cost to be incurred on materials, labour and factory overheads. Two important considerations involved in the preparation of production budget what is to be produced? When is to be produced?

Stages of production budget

The preparation of production budget involves the following stages

PRODUCTION PLANNING: A proper planning is required for the preparation of production budget. The utilization of optimum plant capacity and avoidance of bottlenecks due to shortage of materials and labour is considered while preparing a production plan. CONSIDERATION OF PLANT CAPACITY: The number of units of different products to be produced should be determined and the capacity which the plant will be able to work throughout the budgeted period should be decided. One should not fix the capacity too high or too low.

Purchase budget
It is concerned with determining the quantity of raw materials required for production. Materials are purchased as per the requirements of production department. The number of units to be produced to be multiplied by the rate of consumption will give the figure of materials required. Purchase budget is also called as

The purchase budget will serve the following purposes: The purchase department will be able to plan the purchase of raw materials at different times. It will enable the fixation of minimum stock level, maximum stock level and reordering level. The raw materials purchase budget will be determined. The budgeted cost of raw materials will be determined.

Labour budget
The labour required for production may be classified in to direct and indirect labour. The labour required for manufacturing the product is known as direct labour. The labour which cannot be specified with production is called indirect labour. The labour time needed for each job, process and operation is determined with the help of time and motion study. The rates of pay including all allowances are multiplied by labour time for calculating labour cost. Labour budget is useful for anticipating labour time required for production. The personnel department is also able to make

Cash budget

The cash budget is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlay This is a sum total of the requirements of cash in respect of various functional budgets as well as anticipated cash receipts. The amount to be spent on purchase of materials, payment to creditors and meeting various other revenue and capital expenditure needs should be considered. Cash forecast will include all possible sources from which cash will be received and the channels in which payments are to be made so that consolidated cash position is determined.

Flexible budget

A flexible budget is defined as a budget which by recognizing the difference between fixed, semi-fixed and variable cost is designed to change in relation to the level of activity. The cost can be easily ascertained under different levels of activity. This helps in fixing prices. Flexible budget is changed if the level of activity varies.