Budgeting

Budgeting & Case

Faculty of Management Studies BHU
Submitted To: Submitted by:
Dr. PV Rajeev Prince
Sagar Kanojia
Nirmal Subedi
Abhishek Mishra
GROUP 4
Budgeting
Budget:
A budget is a plan for some specific future period. It is an estimate, expressed
in monetary terms in advance. The terminology of CIMA defines budget as, a plan
quantified in monetary terms prepared and approved prior to a defined period of time
usually showing planned income to be generated or expenditure to be incurred during
that period and the capital to be employed to attain a given objective. The essential
ingredients of a budget are:
1. It is a plan for future action, in monetary terms.
2. It is prepared in advance, for a defined future period.
3. It is approved prior to the commencement of the specified period.
4. It defines the objectives of the firm.
5. It prescribes guidelines to achieve the objectives.
Budgeting
Budgeting & Case
Purpose:
Budget helps to aid the planning of actual operations by forcing managers
to consider how the conditions might change and what steps should be taken now
and by encouraging managers to consider problems before they arise. It also helps
co-ordinate the activities of the organization by compelling managers to examine
relationships between their own operation and those of other departments. Other
essentials of budget include:
1) To control resources.
2) To communicate plans to various responsibility centre managers.
3) To motivate managers to strive to achieve budget goals.
4) To evaluate the performance of managers.
5) To provide visibility into the company's performance & for accountability.
Government budget
Budgeting & Case
The budget of a government is a summary or plan of the intended revenues and
expenditures of that government.
In our country it is prepared by the Budget Division of Department of Economic
Affairs of the Ministry of Finance annually.
The railway budget is presented separately by the Ministry of Railways.
Types of Budget
Budgeting & Case
Long Term
Budget
Short Term
Budget
Basic Budget
Current budget
Fixed Budget
Flexible
Budget
Functional
Budget
Master Budget
Coverage Capacity
Period Condition
Functional Budget
Sales Budget
Budgeting & Case
PastSalesFiguresandTrends.
SalesmansEstimates.
PlantCapacity.
AvailabilityofRawMaterialsandOtherSupplies.
GeneralTradeprospects.
SeasonalFluctuations.
FinancialAspects.
AdequateReturnonCapitalEmployed.
Competition.
Miscellaneous(Advertising,Sales,Promotion,
GovernmentIntervention,ImportPossibility,
ImportPossibility,ProductProfitabilityetc.)
Anestimateoffuture
sales,oftenbroken
downintobothunits
andcurrency.Itisused
tocreatecompany
salesgoals.Sales
Managerisdirectly
responsiblefor
preparationand
executionofsales
budget.Following
factorsshouldbetaken
intoconsideration
whilepreparingsales
budget:
Production Budget
Budgeting & Case
Productionbudget Anestimateofthe
numberofunitsthatmustbemanufactured
tomeetthesalesgoals.Theproduction
budgetalsoestimatesthevariouscosts
involvedwithmanufacturingthoseunits,
includinglabourandmaterial.Itisprepared
byProductionManager
The production budget is typically
presented in either a monthly or quarterly
format. The basic calculation used by the
production budget is:
+Forecasted unit sales
+Planned finished goods ending inventory
balance
=Total production required
- Beginning finished goods inventory
=Products to be manufactured
Production Budget
Quarter1 Quarter2 Quarter3 Quarter4
Forecastedunitsales 5,500 6,000 7,000 8,000
+Plannedendinginv.units 500 500 500 500
=Totalproductionrequired 6,000 6,500 7,500 8,500
BeginningF/Ginventory 1,000 500 500 500
=Unitstobemanufactured 5,000 6,000 7,000 8,000
ABC Company
Production Budget
For the Year Ended December 31, 20XX
Material Budget
Manufacturing Overhead Budget: This Budget gives an estimate of the works
overhead expenses to be incurred in a budget period to achieve the production target.
Budgeting & Case
It deals with the requirement and procurement of direct materials. It is related to
production budget and is of short duration in nature. It Can be classified into Material
requirement Budget and Material procurement budget.
The Preparation of Material Budget includes:
1) The estimate of different types of raw materials needed for various products.
2) Procurement of raw materials in required quantities at the required time.
Plant Utilisation Budget
Cash or Financial Budget: Thisbudget givesanestimateof theanticipatedreceipts
andpaymentsof cashduringthebudget period.
Budgeting & Case
This Budget lays down the requirements of plant capacity to carry out the production as
per the production programme.
Plant Utilisation Budget
Cash or Financial Budget: Thisbudget givesanestimateof theanticipatedreceipts
andpaymentsof cashduringthebudget period.
Budgeting & Case
This Budget lays down the requirements of plant capacity to carry out the production as
per the production programme.
Budgetary Control
Budgetary control is the system of controlling costs which includes the
preparation of budget,co-ordinating the departments and establishing
responsibilities, comparing actual performance with the budgeted and acting
upon the results to achieve maximum profitability.
Budgeting & Case
This Budget lays down the requirements of plant capacity to carry out the production as
per the production programme.
Sales Budget
A manufacturing company submits the following figure of
product x for the first quarter of 2010:
Sales- Unit
J an 50,000
Feb 40,000
March 60,000
Selling price Rs. 100/unit
Target of first Quarter 2011
Sales quantity increase 20%
Sales price increase10%
Prepare Sales Budget for the first quarter of 2011.
Production Budget
A manufacturing company submits the following figures
relating to the product x for the first quarter of 2011:
Sales Target: J anuary 60,000
February 48,000
March 72,000
Stock position
1st J an -50% of J anuary 2011 sale
31st March 2011 40,000 units
End J an&Feb-50%of subsequent Months Sales
You are required to prepare production budget for the first
quarter of 2011.
Material Budget
Prepare Material Budget from the following information :
Estimated sales of the product 40,000 units. Each unit of the
product requires 3 units of material A and 5 units of material B.
Estimated opening balances at the commencement of the next
year : Finished product -5000 units. Material A-12000 units ;
Material B-20,000 units . Material on order- Material A-7000
units and Material B-11000 units .The desirable closing balances
at the end of next year :Finished product-7000 units , Material
A-15,000 units , Material B-25,000 units . Material on the order
Material A-8,000 units and Material B-10,000 units
Manufacturing Overhead Budget
Prepare a manufacturing overhead budget and ascertain thee manufacturing rates at
50% and 70% capacities .The following particulars are given at 60% capacity:
Rs
Variable overhead:
Indirect Material 6,000
Indirect Labour 18,000
Semi-variable O/H :
Electricity(40 fixed) 30,000
Repairs and Maintenance(20% variable) 3,000
Fixed O/Hs:
Depreciation 16,500
Insurance 4,500
Salaries 15,000
Total O/Hs 93,000
Estimated direct labour hrs 1,86,000
Plant Utilization Budget
Three articles X,Y and Z are Produced in a factory . They pass through two cost
centers A and B. From the data furnished compile a statement for the budgeted
machine utilization in both centers.
Product Annual Budgeted O/S of Cl/St
sale (units) finished pro.
X 4,800 600 eq.to 2
mthssale
Y 2,400 300
Z 2,400 800
Plant Utilisation Budget
Machine hrs/unit of Product
Total Number of Machine
Cost Centre
A 284
B 256
Total working hrsduring the year:Estimated2,500hrs/machine
Product Cost centers
A B
X 30 70
y 200 100
Z 30 20
Flexible budget
Definition
A Flexible budget is that which present costs, revenues and profits at various
levels of business activities i.e. various volumes of output and sales.
A Flexible budget may be defined as a budget which is designed to change in
accordance with the level of activity attained.
- I. C. M. A., England
Need Of Flexible Budget
Where the supply of labour and material required for
production is uncertain.
Where the demand goes on changing due to the change
in tastes and fashion of customers.
When either the business unit is new or product is new
and is difficult to forecast the demand.
Need of Flexible Budget
When there are chances of change in level of activity due
to change in government policies.
Where business depends heavily on export markets.
Where business is subject to the vagaries of nature, such
as weather conditions (e.g., soft drinks, raincoats,
woollen goods, etc.).
Need of Flexible Budget
Where production is carried out only after receiving the
customers orders.
Where sales are unpredictable due to typical nature of
business and influence of external factors. It particularly
happens in case of luxury goods
Need of Flexible Budget
Problem
With the help of following data for a 60% activity, prepare
a budget for production at 80% and 100% capacity:
Production at 60% capacity 600 units
Materials Rs. 100 per unit
Labour Rs. 40 per unit
Expenses Rs. 10 per unit
Factory Expenses Rs. 40,000 (40% fixed)
Administration Expenses Rs. 30,000 (30% fixed)
Zero Base Budgeting
It was developed originally by Peter A Pyher at Texas
Instruments in U.S.A.
MEANING : Zero Base budget means new budget is not
linked with the figures of previous budgets but it is
prepared on the basis of new estimates, new analysis and
latest data.
Zero base budgeting can be defined as a method of
budgeting whereby all activities are revalued each time a
budget is set. Discrete levels of each activity are valued
and a combination chosen to match funds available.
CIMA England.
Steps in zero base budgeting..
Determining the objectives of budgeting.
Deciding the scope of applications.
Identification of Decision Units.
Developing decision package.
Ranking of Priority.
Approval and funding.
Advantages of zero base budgeting
Allocation of resources according to priorities.
J ustification of each activity.
No arbitrary cuts or increase in budgets.
Linkage with the Enterprise objectives.
Knowledge of wasteful Expenditure.
Management by Objectives.
Operational Efficiency.
Improvement in co-ordinations.
Motivational impact.
Limitations of zero base budgeting
Expensive Methods.
Conflicts in ranking.
Short-term Benefits.
Problem in Evaluation Of Quantitative Benefits.
Time consuming.
BudgetaryControl
Budgetarycontrolisthesystemofcontrolling
costswhichincludesthepreparationof
budget,coordinatingthedepartmentsand
establishingresponsibilities,comparingactual
performancewiththebudgetedandacting
upontheresultstoachievemaximum
profitability.
ObjectivesofBudgetaryControl
Toassistsinpolicyformulationonthebasis
ofproperandreliabledata.
Toensureplanningforfuturebysettingup
variousbudgets.
Tomakecostaccountingmorereliableand
systematic.
Toeliminatewastesandincreasein
profitability.
Tocorrectthevariationfromtheestablished
standard.
CharacteristicsofBudgetaryControl
Planning
Coordination
ProperRecording
AssignmentofResponsibility
Review
Followup
ImportanceofBudgetaryControl
AtoolforimprovementinPlanning
Asanaidincoordination
AVehicleofComprehensiveControl
AnInstrumentofMotivation
AMediaofCommunication
LimitationofBudgetaryControl
ChangingSituation
EffectofUnclarifiedFacts
DictatorialAttitude
LimitedFreedomforAccountants
FormalArrangement
EffecttoHidevariations