MANAGEMENT CONTROL SYSTEMS PROJECT REPORT

BUDGET PREPARATION PROCESS AT VIZAG STEEL PLANT

& HPCL

SUBMITTED

By

ID NAME
1226115109 G.Prasad Rao IB
1226115122 K.Venu IB
12265134 Sagun Sakshi IB
122625102 Sri Ramya IBF
122635105 Sumanth Varma GLSCM
 INTRODUCTION

Many organizations prepare budgets that they use as a method of comparison when evaluating
their actual results over the next year. The process of preparing a budget should be highly
regimented and follow a set schedule, so that the completed budget is ready for use by the
beginning of the next fiscal year. Here are the basic steps to follow when preparing a budget.

Update budget assumptions: Review the assumptions about the company's business
environment that were used as the basis for the last budget, and update as necessary.

Review bottlenecks: Determine the capacity level of the primary bottleneck that is
constraining the company from generating further sales, and define how this will impact any
additional company revenue growth.

Available funding: Determine the most likely amount of funding that will be available during
the budget period, which may limit growth plans.

Step costing points: Determine whether any step costs will be incurred during the likely range
of business activity in the upcoming budget period, and define the amount of these costs and at
what activity levels they will be incurred.

Create budget package: Copy forward the basic budgeting instructions from the instruction
packet used in the preceding year. Update it by including the year-to-date actual expenses
incurred in the current year, and also annualize this information for the full current year. Add a
commentary to the packet, stating step costing information, bottlenecks, and expected funding
limitations for the upcoming budget year.

Issue budget package: Issue the budget package personally, where possible, and answer any
questions from recipients. Also state the due date for the first draft of the budget package.

Obtain revenue forecast: Obtain the revenue forecast from the sales manager, validate it with
the CEO, and then distribute it to the other department managers. They use the revenue
information as the basis for developing their own budgets.

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Obtain department budgets: Obtain the budgets from all departments, check for errors, and
compare to the bottleneck, funding, and step costing constraints. Adjust the budgets as necessary.

Obtain capital budget requests: Validate all capital budget requests and forward them to the
senior management team with comments and recommendations.

Update the budget model: Input all budget information into the master budget model.

Review the budget: Meet with the senior management team to review the budget. Highlight
possible constraint issues, and any limitations caused by funding limitations. Note all comments
made by the management team, and forward this information back to the budget originators, with
requests to modify their budgets.

Process Budget Iterations: Track outstanding budget change requests, and update the budget
model with new iterations as they arrive.

Issue the budget: Create a bound version of the budget and distribute it to all authorized
recipients.

Load the budget: Load the budget information into the financial software, so that you can
generate budget versus actual reports.

BUDGETARY CONTROL METHODS

Budget: A formal statement of the financial resources set aside for carrying out specific
activities in a given period of time. It helps to co-ordinate the activities of the organization. An
example would be an advertising budget or sales force budget.

Budgetary control: A control technique whereby actual results are compared with budgets.
Any differences (variances) are made the responsibility of key individuals who can either
exercise control action or revise the original budgets.

Budgetary Control And Responsibility Centers: These enable managers to monitor

organizational functions. A responsibility centre can be defined as any functional unit headed by

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a manager who is responsible for the activities of that unit. There are four types of responsibility
centers.

Revenue centers :

Organizational units in which outputs are measured in monetary terms but are not directly
compared to input costs.

Expense centers: Units where inputs are measured in monetary terms but outputs are not.

Profit Centers : Where performance is measured by the difference between revenues (outputs)
and expenditure (inputs). Inter-departmental sales are often made using "transfer prices".

Investment centers : Where outputs are compared with the assets employed in producing
them, i.e. ROI.

Advantages of budgeting and budgetary control: There are a number of advantages to

budgeting and budgetary control: It Compels management to think about the future, which is
probably the most important feature of a budgetary planning and control system. Forces
management to look ahead, to set out detailed plans for achieving the targets for each
department, operation and (ideally) each manager, to anticipate and give the organization
purpose and direction.

 Promotes coordination and communication.

 Clearly defines areas of responsibility.
 Requires managers of budget centers to be made responsible for the achievement of budget
targets for the operations under their personal control.
 Provides a basis for performance appraisal (variance analysis). A budget is basically a
yardstick against which actual performance is measured and assessed.
 Control is provided by comparisons of actual results against budget plan.

Departures from budget can then be investigated and the reasons for the differences can be
divided into controllable and non-controllable factors. Enables remedial action to be taken
variances emerge. Motivates employees by participating in the setting of budgets. Improves the

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allocation of scarce resources. Economizes management time by using the management by
exception principle.

Problems In Budgeting: Whilst budgets may be an essential part of any marketing activity
they do have a number of disadvantages, particularly in perception terms. Budgets can be seen
as pressure devices imposed by management, thus resulting in:

 Bad labor relations

 Inaccurate record-keeping.
 Departmental conflict arises due to:
 Disputes over resource allocation
 Departments blaming each other if targets are not attained.
 It is difficult to reconcile personal/individual and corporate goals.

Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is
often coupled with "empire building" in order to enhance the prestige of a department.
Responsibility versus controlling, i.e. some costs are under the influence of more than one
person, e.g. power costs. Managers may overestimate costs so that they will not be blamed in the
future should they overspend.

Budget Preparation: Firstly, determine the principal budget factor. This is also known as the
key budget factor or limiting budget factor and is the factor which will limit the activities of an
undertaking. This limits output, e.g. sales, material or labor.

1.) Sales budget: This involves a realistic sales forecast. This is prepared in units of each
product and also in sales value. Methods of sales forecasting include:

 sales force opinions

 market research
 statistical methods (correlation analysis and examination of trends)
 mathematical models.

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In using these techniques consider:

 company's pricing policy

 general economic and political conditions
 changes in the population
 competition
 consumers' income and tastes
 advertising and other sales promotion techniques
 after sales service
 credit terms offered.
2) Production budget: Expressed in quantitative terms only and is geared to the sales budget.
The production manager's duties include:
 Analysis of plant utilization
 work-in-progress budgets.

3) Raw Materials And Purchasing Budget: The materials usage budget is in quantities.
The materials purchases budget is both quantitative and financial.

 Production requirements
 Planning stock levels
 Storage space
 Trends of material prices.

4) Labor budget: It is both quantitative and financial. This is influenced by:

 Production requirements
 Man-hours available
 Grades of labor required
 Wage rates (union agreements)
 The need for incentives.

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4) Cash budget: A cash plan for a defined period of time. It summarizes monthly receipts and
payments. Hence, it highlights monthly surpluses and deficits of actual cash. Its main uses are:

 To maintain control over a firm's cash requirements, e.g. stock and debtors
 To enable a firm to take precautionary measures and arrange in advance for investment and
loan facilities whenever cash surpluses or deficits arises
 To show the feasibility of management's plans in cash terms
 ·To illustrate the financial impact of changes in management policy, e.g. change of credit
terms offered to customers.

Zero base budgeting (ZBB): After a budgeting system has been in operation for some time,
there is a tendency for next year's budget to be justified by reference to the actual levels being
achieved at present. In fact this is part of the financial analysis discussed so far, but the proper
analysis process takes into account all the changes which should affect the future activities of the
company. Even using such an analytical base, some businesses find that historical comparisons,
and particularly the current level of constraints on resources, can inhibit really innovative
changes in budgets. This can cause a severe handicap for the business because the budget should
be the first year of the long range plan. Thus, if changes are not started in the budget period, it
will be difficult for the business to make the progress necessary to achieve longer term
objectives.

One way of breaking out of this cyclical budgeting problem is to go back to basics and develop
the budget from an assumption of no existing resources (that is, a zero base). This means all
resources will have to be justified and the chosen way of achieving any specified objectives will
have to be compared with the alternatives. For example, in the sales area, the current existing
field sales force will be ignored, and the optimum way of achieving the sales objectives in that
particular market for the particular goods or services should be developed. This might not
include any field sales force, or a different-sized team, and the company then has to plan how to
implement this new strategy. The obvious problem of this zero-base budgeting process is the
massive amount of managerial time needed to carry out the exercise. Hence, some companies
carry out the full process every five years, but in that year the business can almost grind to a halt.

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Thus, an alternative way is to look in depth at one area of the business each year on a rolling
basis, so that each sector does a zero base budget every five years or so.

OBJECTIVES

 To study the Budgeting process in Steel Plant, HPCL Vizag.

BRIEF COMPANY PROFILES OF VIZAG STEEL PLANT AND HPCL

1. STEEL PLANT :

With a view to give impetus to Industrial growth and to meet the inspirations of the
people from South India, Government of India decided to establish integrated steel plant in
Public Sector Undertaking at Visakhapatnam (Andhra Pradesh).

Modern Technology:

In Visakhapatnam steel plant modern technology has been adopted in many areas of
production, some of them for the first time in the country.

 selective crushing of coal

 7 meter tall coke ovens
 dry quenching of coke
 on ground blending of sinter base mix
 conveyor charging and bell less top for blast furnace
 cast house slag granulation for blast furnace
 100% continuous casting of liquid steel
 Gas expansion turbine for power generation, utilizing blast furnace top gas pressure.
 Hot metal desulphurization
 Extensive treatment facilities of effluents for ensuring proper environmental protection

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Major Plant Facilities:

The production facilities in the Visakhapatnam steel plant are most modern amongst the
steel industry in the country. The know-how and the technology have been acquired from
different parts of the world from the reputed and established source.

Business Scenario of Visakhapatnam Steel Plant:

VSP is the second largest government owned steel company in India with original liquid steel
production capacity of 3.0 MTPA and expanded liquid steel production capacity of 6.3 MTPA,
which is in the advanced stages of completion by the Financial Year 2013. The plant at
Visakhapatnam, VSP, was originally established in 1971 as part of SAIL, a PSU producing iron
and steel products. In 1982, the Company was incorporated and the assets and liabilities of VSP
were transferred from SAIL to VSP.

2.HPCL :

Hindustan Petroleum has meant different things to different people. For some it
represents an abundant supply of Petrol and Diesel. For others it stands for the easy availability
of LPG and lubricants. Thousands of others see in it an inexhaustible reservoir of Kerosene and
other petroleum products for meeting their energy needs. For all of them HP signifies an ever-
radiant source of energy. Energy that is making a big difference to millions of lives. HP is all set
to unveil an exciting new phase in its growth. Diversifying into oil Exploration and Production,
Power Generation, Renewable Energy ventures and much more. Confident of creating a Future
full of Energy. HPCL has the second largest share of product pipelines in India with a pipeline
network of more than 2,500 kms for transportation of petroleum products and a vast marketing
network consisting of 13 Zonal offices in major cities and 101 Regional Offices facilitated by a
Supply & Distribution infrastructure comprising Terminals, Pipeline networks, Aviation Service
Stations, LPG Bottling Plants, Inland Relay Depots & Retail Outlets, Lube and LPG
Distributorships. HPCL's infrastructure is at par with that of the best global corporations in the
hydrocarbons sector. For over a quarter century now, HPCL has been consistently breaking new
grounds in production and marketing

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 BUDGET PREPARATION PROCESS AT HPCL

Nishi Vasudeva revolutionized the process of capital budgeting, making life easier for
employees and other stakeholders. She developed a Lotus Notes workflow tool and deployed it
across the organization. Today, the system provides the means to justify the investment, mention
the estimated timelines for completion and the estimated ROI. The implementation of the new
online system entailed a paradigm shift from the way the entire capital budgeting process was
being carried out. Any capital investment proposal from any operating location in the country
can be routed to relevant reviewers and approving authorities. Each year, over 2,000 budget
proposals originate from these locations requesting for capital budgets for various purposes like
expanding operations, replacement of assets, etcetera,". These proposals, along with supporting
documents were being couriered to regional, zonal or head offices for review and approval.
During reviews, clarifications are often sought and the paper flows back to the originator, and a
new loop is formed.

This manual process not only involved huge amounts of paper flow, but had other
inherent issues. There was a complete lack of discipline in meeting timelines to complete the
budgeting process and activities subsequent to it. Monitoring the budgeting process was
hampered because there was no ready access to facts and figures by various monitoring agencies
at different levels within the organization. "The need, clearly, was to eliminate paper flows and
ensure that the information was readily available for review and decision-making. The company
developed a Lotus Notes workflow tool and deployed it across the organization. "Now, any
capital investment proposal from any operating location in the country can be routed to relevant
reviewers and approving authorities. The implementation of the new online system entailed a
paradigm shift from the way the entire capital budgeting process was being carried out. So,
change management was an issue. But extensive end-user training and feedback mechanisms
helped Vasudeva fix these problems. Today, the system provides the means to justify the
investment, mention the estimated timelines for completion and the estimated ROI. Proposals
can be enabled online and even be converted into capital budgets with necessary controls and
validations built into the system. This system has also brought in high level of discipline and
adherence to the timelines. "The total cost savings as a result of reduced man-hours amounts to
about Rs 25 lakh per annum.
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 BUDGET PREPARATION PROCESS AT STEEL PLANT

Identification of budget requirement under various heads is the main aspect of budget
preparation process at Steel plant. Control of the budget and spares, consumables & Raw
materials inventory.

Systems and Procedures: Streamlining the contract management system to ensure

consistency of approach and adoption of sound principles of contract management. Ensuring the
implementation and maintenance of quality management system requirements for ISO 9001:
2000 Certificate. Monitoring pollution control activities of the plant and interaction with the state
and central pollution control board.

Directorate of Finance & Accounts : It means making arrangement for long term fund
requirements. Accounting of all minority transactions and preparation of financial statement of
the company and getting the same audited as required under law. Maintaining records with
regard to the cost of products produced by the company.

 Release of payments to suppliers/ providers of goods and services.

 Release of Salaries to the employees.
 According concurrence to proposals for investments & Expenditure as per the policies,
procedures and the delegation of powers.
 Conduct Internal Audits, stock verification and statutory compliance.
 Making working capital arrangements.
 Submission of periodical reports to banks as per their sanctioned terms.
 Organizing for payment of central excise, sales tax, Income tax, and other statutory
payments.

Nature Of Investment Decisions :

The investment decisions of a firm are generally known as the capital budgeting, or capital
expenditure decisions. A capital budgeting decision may be defined as the firm’s decision to
invest its current funds most effectively in the long- term assets in anticipation of an expended
flow of benefits over a series of years. The long-term assets are those that affect the firm’s
operational beyond the one year period. Investment decisions generally include expansion,
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acquisition modernization and replacement of the long-term assets. Sale of a division or business
(Divestment) is also an investment decision. Decision like the change in the methods of sales
distribution, or an advertisement campaign or are search and development program have long-
term implications for the firm’s expenditures and benefit, and therefore, they should also be
evaluated as investment decisions. The following are the features of investment decisions.

 The exchange of current funds for future benefits.

 The funds are invested in long-term assets.
 The feature benefits will occur to the firm over a series of years

Process Of Investment Decisions : Capital Budgeting is a complex process which may be

divided into the following phases.

Capital Budgeting Process :

Identification of Investment Proposal

Screening the proposal

Evalution of Various Proposals

Fixing priorities

Final Approval & Preparation of capital Expenditure budget

Implementing proposal

Performance Review

Identification of Investment Proposal : The capital budgeting process begins with the
identification of investment proposal. The proposal or idea about potential investment
opportunities may originate from the top management or may come from the rank and file
workers of any department or from any officers of the organization. The departmental head
analyses the various proposals in the light of the corporate strategies and submits the suitable
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proposals to the capital expenditures planning committee in ease of large organization or to the
officers a concerned with the corporate strategies and submits the suitable proposals to the
capital expenditures. Capital expenditures planning committee in the case of large organizations
or the officers concerned with the process of long term investment decisions.

Screening the Proposal : The expenditures planning committee screens the various proposals
received from different departments. The committee view these proposals from various angles to
ensure that these are in accordance with the corporate strategies or selection criterion of the firm
and also do not lead to the department imbalances.

Evaluation of various proposals: The next step in the capital budgeting process is to
evaluate the profitability of various proposals. There are many method which may be used for
this purpose such as payback period method, rate of return method, net present value method,
internal rate of return. It should be classified as below:

 Independent proposals
 Contingent or dependent proposals
 Mutually exclusive proposals.

The Role Of Budgeting In Management Planning And Control

Effective budgeting systems can help managers perform their major management functions.
Budgeting, when done properly, can serve as a planning and controlling system. The company's
goals and performance objectives are documented in financial terms. Once formulated, these
plans are used throughout the year. Monthly performance reports compare budgeted results with
actual results. To control operations, management can examine the performance reports and take
necessary corrective actions. The role that effective budgeting plays in the management of a
business is best understood when it is related to the fundamentals of management. The many
existing definitions of business management can be expressed in terms of five major functions:
planning, organizing, staffing, directing, and controlling. Management must first plan. The plan
is executed by organizing, staffing, and directing operations. To control operations, management
must institute appropriate techniques of observation and reporting to determine how actual

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results compare to plans. Budgeting is concerned primarily with the planning and controlling
functions of management.

Strategic &
Long Range
plan
Long Range
Sales Forecast

Sales Budget Marketing

Expense
Budget
Production
Budget

Inventory
Manufacturing Administrative
Budget
Cost center Budget
Budgets
Profit Plan

Cash Budget Capital Expenditure

Budget

Balance Sheet
Budget

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Flexible Budgeting :

Flexibility is an essential component of an effective budget program. A flexible budget is defined

as a budget whose amount depends on the, actual activity level achieved. In months with high
planned activity, the master budget amount is higher than in months with low activity. Flexible
budgets make sense because most companies have costs that fluctuate with activity. Some costs,
such as advertising expense costs, are budgeted as a fixed amount based on management's
decisions. These are discretionary fixed expenses, and the flexible budget amount is a fixed
amount. To gain a clearer understanding of the flexible budget concept, consider a distribution
warehouse that fills and ships sales orders. The master budget for January shows the following
selected amount.

EFFECTIVE BUDGETING :

Growing complexity of business and business problems and because of the movement toward
decentralization in large enterprises, increased attention is being given to better planning and
control techniques. Consequently, the use of sound budgeting techniques is becoming more
prevalent. In addition, corporate restructuring has resulted in a trend toward placing the
responsibility for budgeting at higher levels in the organization. In earlier days it was customary
to find the budget function buried deeply in the accounting operation; today it is not uncommon
to have the budget function report to levels of management above the controller. Although it is
still useful for the budget director to report to the corporate controller, the trend toward reporting
to a higher level is a recognition of the need to have the budget function broadly based in all
operating areas of the business. Many companies use budget committees. The budget committee
typically is composed of representatives from most operating areas. This composition promotes
coordination. If properly administered, the budget committee can perform the very useful role of
encompassing and reconciling the many diverse interests that make up a modern business. An
effective budgeting system facilitates control. The budgeting system must fit the company's
operational control needs.

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 CONCLUSION

Effective budgeting systems facilitate the value creation process. They are an invaluable
component of a company's planning and control efforts. The system forces managers to plan and
promotes coordination. The system supports responsibility accounting and reporting. The master
budget, accompanied by detailed plans, documents the company's goals and objectives. Linking
the master budget to the company's long-range and strategic planning enhances the overall
planning effort.

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 REFERNCES

 Profile Of The Visakhapatnam Steel Plant

URL:http://shodhganga.inflibnet.ac.in/bitstream/10603/8661/11/11_chapter%203.df

 Hindustan petroleum corporation limited

URL: http://www.hindustanpetroleum.com/aboutus.

 HPCL Revamps Ways of Capital Budgeting -January 15, 2009

URL: http://www.cio.in/case-study/hpcl-revamps-ways-capital-budgeting

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