Budgeting and Budgetary Control System

Prepared by:

Vaghajiani Chaitali Poonater Hiral Pathak Maitri Thobhani Vidhi Nakum Harish

Guided by:Prof. Kaushal Bhatt

Learning Objectives

Budgeting as a tool of management planning and control. Application of budget. Organization for budget development and implementation. Budgeting process.

Types of budget.
Budgetary control system as an effective tool.

Contemporary developments in budgeting.

Definition

Budget is a financial and/or quantitative statement,

prepared and approved prior to a defined period of

time, of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and the employment of capital.

-CIMA

Features of a budget

One year duration Estimation of Business Units Profit Potential Appraisal of Performance Monetary terms Alteration of Approved Budget Under Specified Conditions Review and Approval by a Higher Authority Managerial Commitment

Role of a Budget Officer

Functional Budget Preparation Communication to Responsibility Centres Co-ordination Follow-up

Budget Committee Review

Board Review.

Steps involved in preparation of Budget

1.

Definition of objectives

2.

Identification of key(or budget) factor

Budget Committee and controller Budget Manual Budget Period Standard of Activity or output

3.

4.

5.

6.

Elements of a successful budgeting plan

Coordinatin g business activities Accurate forecasting of business activities. Elements of a successful budgeting plan Providing a framework for evaluation Acceptance & Cooperation Communica ting the budgets

Reasonable Flexibility

Budget centres

An organization is usually broken down into different

budget centres for administrative and control

purposes.

Budget Manual

Introduction

The manual indicates the following:

Budget periods and control periods. Follow-up procedures. Account code and Chart of Accounts used by the company etc.

(a) (b) (c)

Types of Budget
Time period Long-term Budget Short-term Budget Basic Budget

Conditions

Budgets
Capacity

Current Budget Fixed Budget Flexible Budget Functional Budget Coverage Master Budget

Sales Budget

Meaning The following facts have to be considered for preparing the sales budget:

(a) (b) (c)

Pricing policies. Quality of sales force. General economic and political conditions etc.

Classification of sales budget

The sales budget is prepared on the following bases

to facilitate control:
(a) (b) (c)

Products or group of products. Areas, towns, salesmen, and agents. Types of customers, e.g. (i) Government, (ii) Export, (iii) Local sales, (iv) Retail Depots.

(d)

Period- months, weeks, etc.

Production Budget

Meaning

Production budget shows the production for the

budget period based upon:

(a) (b) (c) (d)

Sales budget, Production capacity of the factory, Planned increase or decrease in finished stocks, and Policy governing outside purchase.

Plant utilization budget

Plant utilization budget represents, in terms of

working hours, weight or other convenient units the

plant facilities required to carry out the programme laid down in the production budget.

(a)

Purposes :
To determine the loads on each process, cost or groups of machines for the budget period. To take steps to increase sales in order to utilise available surplus capacity.

(b)

Direct material usage budget

Quality

Quantity

Prices

Purchase budget

Purchase budget represents the purchases that must

be made during the budget period to meet the needs

of the business.

Purposes Components Considerations

Direct Labor Budget

This budget shows the number of direct workers

required. The following budgets are prepared in

relation to direct labor costs:
(a) (b) (c)

Labor hour requirement budget Labor cost budget Manpower recruitment budget

Selling Costs Budget

The following factors are to be taken into account:

Nature of costs
Relationship between cost and sales volume Time period of benefit Trend factors

Advertising cost budget

The following factors are to be taken into account:

Best method of advertisement

Amount to be spent Co-ordination between advertising and sales

Effectiveness
A fixed sum per unit of output can be fixed and added to

The amount of expenditure may be decided based on:

cost.

An advertisement plan is decided upon and the amount to be spent on advertising.

Research and Development Expense Budget

Introduction

The following are some methods of allocation of R&D

expenses:

(a) (b)

A percentage on net profit A sum is fixed on the basis of cash resources available with the company etc.

Capital Expenditure Budget

Capital Expenditure Budget represents the planned

outlay on fixed assets, such as land, building, plant

and machinery, etc. during the budget period. The following factors are to be taken into account:
(a) (b)

Sales potential to absorb the increased output; Possibility of price reductions;

(c)

Replacement
departments.

requests

from

the

concerned

Steps involved in preparation of operating budgets

Sales budget Production budget Direct labor budget Direct materials usage budget Direct materials purchase budget Factory overhead budget Inventory budget Cost of goods sold budget Administration overhead budget and selling & distribution overhead budget Budgeted profit and loss statement Budgeted balance sheet

Rolling Budget

A rolling budget is a budget which is continuously

updated by adding a further period, say a month or a

quarter, and deducting the earliest period. It is also known as continuous budgeting.

Cash Budget

Cash budgets are a tool for forecasting short-term

cash requirements of a firm. They provide a blueprint

of the cash inflows and outflows that are expected to occur in the immediate future.

Advantages of budgeting

Compels and motivates

A valuable means of controlling

Managerial policies and goals Directing capital Decentralize responsibility Cost consciousness Yardstick for measuring the performance Systematic and disciplined approach

Disadvantages of Budgeting

Not an exact science Success and utility of budgeting No substitution Time consuming

Budgetary Control System

Definition:

Budgetary control is the establishment of budgets

relating the responsibilities of executives to the requirements of a policy and the continuous comparision of actual with budgeted results either to secure by individual action the objective of that

policy, or to provide a basis for its revision.

-CIMA

Budgetary Control System

The system works as follows: Establishment of budgets Comparison on continuous basis of actual results with budgets,

(a) (b)

(c)

Ascertainment
centres,

of

variances

by

responsibility

(d) (e)

Investigation of variances to highlight causes, and Corrective action to remedy the causes in order to ensure the defined objectives are attained.

Prerequisites

Top management support

Proper organizational structure

Realistic nature of goals Flexibility Participative process Conducive environment

Features

Objectives

Activities
Plans Performance evaluation Control action

Objectives

Definition of goals

Defining responsibilities
Basis for performance evaluation Optimum use of resources Co-ordination Planned action Basis for policy

Advantages

Efficiency

Cost control
Performance evaluation Standard costing and variance analysis Policy formulation

Disadvantages

Estimates

Rigidity
False sense of security Lack of co-ordination Time and cost

Zero-base budgeting (ZBB)

The features of ZBB is are as follows:
(a) (b) (c) (d) (e)

Holistic Analytical Priority based Review based Rational

Modus operandi

ZBB involves the following steps: Objectives

Coverage
Decision Areas Ranking Budgeting

Advantages of ZBB

Priority allocation

Maximum efficiency
Cost-benefit analysis Goal congruence Management by objective

Disadvantages of ZBB

Lack of co-ordination Old-is-gold attitude Time consuming

Activity-based budgeting

Activity-based

budgeting

applies

activity-based

costing principles to budgeting. It focuses on the

numerous activities necessary to produce and market goods and services.

Life-cycle budgeting

Life-cycle

budgeting

adopts

life-cycle

cost

approach. It is intended to account for the costs at all

stages of the value chain (R&D, design, production, marketing, distribution, and customer service).

Kaizen budgeting

The Japanese term kaizen

means continuous

improvement, and kaizen budgeting assumes the

continuous improvement of products and processes, usually by way of many small innovations rather than major changes.

Planning, Programming and Budgeting system (PPBS)

Planning, Programming and Budgeting system is

used in non-profit or non-commercial organizations

to enable them to make more informed decisions about resource allocation. and PPBS differs from traditional budgets. non-profit non-manufacturing

Steps involved in PPBS

(a)

Identify and define the objectives of programme.

(b)

Select performance or output measures to asses the

effectiveness of the programme. Identify and evaluate alternative methods of achieving

(c)

the objectives laid down for each specific programme.

(d)

Select the appropriate programmes on the basis of costbenefit analysis.

(e)

Implement the selected alternative and monitor its

performance to ensure that the objectives of the programmes are achieved.

Advantages
PPBS has certain advantages as under:

Effective allocation of resources

Identify and evaluate the activities Asses the effectiveness of plan Long-term perspective

Government budgeting

Government budgeting differs from private sector

budgeting. A governmental budget is not only a

financial plan and a basis for evaluating performance but also an expression of public policy and a form of control having the force of law.

Bibliography

Management Accounting by Paresh Shah