WHAT IS BUDGET?

INTRODUCTION
A Budget (from old French bougette, purse) is generally a list of all planned expenses and revenues. It is a plan for saving and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms. In summary, the purpose of budgeting is to: Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out. Enable the actual financial operation of the business to be measured against the forecast. A plan for a person or company's expenditures . Making a budget involves looking at one's revenue or income and matching that to expenses such that the person or company pays for all necessary expenses. A budget is in balance if revenues equal expenditures, in deficit if the person or company must resort to borrowing to meet expenses, and in surplus if money is left over to be used for savings or expansion. In short, budget means it is a short term planning in terns of numerical data for the future course of action for any person or company.

BUDGETING PROCESS

The Planning/ Budgeting process involves four stages. They are: objective determination stage goal determination stages strategy formulation stage budget preparation stage

Objective Determination Stage:

The first stage is setting the Objectives which are defined as the broad and long- range desired state or position in the future. They are motivational or directional in nature and are expressed in Qualitative terms.

Goal Determination Stage:

The second stage is specifying the goals.The term goal represents targets, specific in quantitative terms to be achieved in a specific period of time. The timing of introducing new products, purchase of new plant and machinery and expected rate of return are examples of time and quantity oriented goals.

Strategy Formulation Stage:

The next step involves laying down the strategies. Strategies denote specific methods or courses of action to achieve the goals, for instance, promotion of sales through price reduction or aggressive advertisement and so on.

MERIT

Improved management control of organization. Improved financial control. Allow manager to be aware of their responsibility. Limited resources are used where most effective Budgeting can motivate managers Can improve communication systems organization.

within

DEMERIT
Those excluded from the budgeting process, may not be committed to the budgeted and may feel demotivated. If budgets are inflexible then change in the market or other condition may not be met by appropriate changes in the budget. Also an effective budget can only be based on good quality information.

VARIETY OF BUDGET
The variety of budget as are under. Business start-up budget. Corporate budget. Event management budget. Government budget. Personal or family budget.

Business start-up budget:

The process of calculating the costs of starting a small business begins with a list of all necessary purchases including tangible assets (for example, equipment, inventory) and services (for example, remodeling, insurance), working capital, sources and collateral. The budget should contain a narrative explaining how you decided on the amount of this reserve and a description of the expected financial results of business activities. The assets should be valued with each and every cost. All other expenses are like labour factory overhead all freshmen expenses are also included into business budgeting.

Corporate budget:
The budget of a company is often compiled annually, but may not be. A finished budget, usually requiring considerable effort, is a plan for the short-term future, typically one year. While traditionally the Finance department compiles the company's budget, modern software allows hundreds or even thousands of people in various departments (operations, human resources, IT

etc) to list their expected revenues and expenses in the final budget. If the actual figures delivered through the budget period come close to the budget, this suggests that the managers understand their business and have been successfully driving it in the intended direction. On the other hand, if the figures diverge wildly from the budget, this sends an 'out of control' signal, and the share price could suffer as a result.

Event management budget:

A budget is a fundamental tool for an event director to predict with reasonable accuracy whether the event will result in a profit, a loss or will break-even. A budget can also be used as a pricing tool.

Government budget:
The budget of a government is a summary or plan of the intended revenues and expenditures of that government. A government budget is a legal document that is often passed by the legislature, and approved by the chief executive-or president. The two basic elements of any budget are the revenues and expenses. In the case of the government, revenues are derived primarily from taxes. Government expenses include spending on current goods and services, which economists call government consumption; government investment expenditures such as infrastructure investment or research expenditure; and transfer payments like unemployment or retirement benefits.

Personal or family budget:

In a personal or family budget all sources of income (inflows) are identified and expenses (outflows) are planned with the intent of matching outflows to inflows (making ends meet.) In consumer theory, the equation restricting an individual or household to spend no more than its total resources is often called the budget constraint.

Various modern budget

Zero based budget. Rolling based budget. Performance based budget. Fixed budget. Flexible budget. Activity based budget.

ZERO BASED BUDGETING

Zero-based budgeting is a technique of planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year budget and what has been already spent is automatically sanctioned. No reference is made to the previous level of expenditure. By contrast, in zero-based budgeting, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases. Zero-based budgeting requires the budget request be justified in complete detail by each division manager starting from the zero-base. The zero-

base is indifferent to whether the total increasing or decreasing.

budget is

The term "zero-based budgeting" is sometimes used in personal finance to describe "zero-sum budgeting", the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward. Zero based budgeting also refers to the identification of a task or tasks and then funding resources to complete the task independent of current resourcing. Example Engineering units

ROLLING BUDGET
Rolling budget can be defined as: Budget or plan that is always available for a specified future period by adding a period (month, quarter or year) to the period that just ended also called CONTINUOUS BUDGET Rolling budget is a budget prepared with a fixed planning horizon. To achieve this, the budget is constantly being added to at the same rate as time is passing.it's very useful for companies experiencing rapid change, as they require forecasting for much shorter time periods. Example

PERFORMANCE BASED BUDGET

Performance budgets use statements of missions, goals and objectives to explain why the money is being spent. It is a way to allocate resources to achieve specific objectives based on program goals and measured results. The key to understanding performance-based budgeting lies beneath the word result. In this method, the entire planning and budgeting framework is result oriented. There are objectives and activities to achieve these objectives and these form the foundation of the overall evaluation. According to the more comprehensive definition of Segal and Summery, performance budgeting comprises three elements:

the result (final outcome) the strategy (different ways to achieve the final outcome) activity/outputs (what is actually done to achieve the final outcome) Example

FIXED BUDGET
one based on a single level of activity (e.g., a particular volume of sales or production). It has two characteristics: (1) it is geared toward only one level of activity; (2) actual results are compared against budgeted (standard) costs only at the original budget activity level. A Flexible (Variable) Budget differs from a static budget on both scores. First, it is not geared to only one activity level, but rather, toward a range of activity. Second, actual results are not compared against budgeted costs at the original budget activity level. Managers look at what activity level

was attained during a period and then turn to the flexible budget to determine what costs should have been at that actual level of activity. Example

FLEXIBLE BUDGET
Flexible budgets are one way companies deal with different levels of activity. A flexible budget provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a number of static budgets. For example, a restaurant may serve 100, 150, or 300 customers an evening. If a budget is prepared assuming 100 customers will be served, how will the managers be evaluated if 300 customers are served? Similar scenarios exist with merchandising and manufacturing companies. To effectively evaluate the restaurant's performance in controlling costs, management must use a budget prepared for the actual level of activity. This does not mean management ignores differences in sales level, or customers eating in a restaurant, because those differences and the management actions that caused them need to be evaluated, too. Example

ACTIVITY BASED BUDGET

A method of budgeting in which the activities that incur costs in every functional area of an organization are recorded and their relationships are defined and analyzed. Activities are then tied to strategic goals, after which the costs of the activities needed are used to create the budget. Activity based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period's budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides opportunities to align activities with objectives, streamline costs and improve business practices. Example

TYPES OF BUDGET
Sales budget Production budget Cash budget/cash flow Project budget Marketing budget Revenue budget Expenditure budget Purchase budget Human resource budget Inventory budget

Sales budget:
The sales budget is an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals. A sales budget is a detailed schedule showing the expected sales for the budget period; An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time. The sales budget will help determine how many units will have to be produced. Thus, the production budget is prepared after the sales budget. The production budget in turn is used to determine the budgets for manufacturing costs including the direct materials budget, the direct labor budget, and the manufacturing overhead budget. These budgets are then combined with data from the sales

budget and the selling and administrative expenses budget to determine the cash budget. In essence, the sales budget triggers a chain reaction that leads to the development of the other budgets. The selling and administrative expenses budget is both dependent on and a determinant of the sales budget. This reciprocal relationship arises because sales will in part be determined by the funds committed for advertising and sales promotion

Production budget
Product oriented companies create a production budget which estimates the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material.
Suzlon Energy Ltd - CEC Vadodara Production Plan for FY 2010-11 Sno 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Project No. AE43V3-19 RA40 Vacuum pump-1 No. RA40 vacuum pumps- 4 no. Resin mixing machine RA63 pumps AE43V3-20 AE43V3-21 AE43V3-21 Girder Flipping device Sawing & Drilling m/c 2100 PCD Data loggers Data loggers AE43V3 MSW Mold AE31V1S2-1 AE32V1S2-1 Qty 1 1 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 UOM Each Each Each Each Each Each Each Each Each Each Each Each Each Each Each Each Each Destination Padubidri Udipi Kutch Maharashtra Site NCU Daman Dhule Pondy Padu Padu Padu Padu Padu Bhuj Pondy Bhuj China Pondy Target Date 28-Nov-10 23-Nov-10 10-Dec-10 23-Nov-10 15-Dec-10 24-Dec-10 1/30/2011 2/7/2011 12/31/2010 8/30/2010 9/30/2010 12/30/2010 12/30/2010 1/31/2011 3/31/2011 Responsibility Remarks

Cash Flow/Cash budget:

The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.
SCM Budgeted Cash Flow 2010-11 Vertical: No. Heads Apr10 Cash Outflow Import LC Retirement Domestic LC Retirement DA Cash Advance Custom duty and other delivery cost Outward logistic Domestic Outward logistic Export Overheads Capex Total May10 Jun10 Jul10 Aug10 Monthwise Payment SepOctNov10 10 10

Dec10

Jan11

Feb11

Mar11

Total

A 1 1 2 3 4 5 6 7 8 9

New LC Requriment ImportLC/CAD DomesticLC/CAD Total -

B 1 2

Project budget:
The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.

Marketing budget:
The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

Revenue budget:
The Revenue Budget consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies. A revenue budget identifies each of the individual revenue sources for which the organization is to be responsible; estimates the amount of revenue each is to "earn" in the budget year; documents the basis for the estimate and

other important information about each source; and assigns responsibility for revenue management (including estimate updating) to a specific organization unit/manager. A management responsibility to be associated with revenue budgeting is the development of monthly plans for revenue recognition and collection.

Expenditure budget:
A budget type which include of spending data items.Budget based on the cost of goods and services already received and paid.

SCM Defined Group

Budget 2009-10

Actual 2009-10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10

Budgeted 2010-11 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11

Total

Manufacturing
Power & Fuel Factory Expenses Repairs & Maintenanc Quality Assurance Ex Insurance Crane Hiring Charges -

Selling and Admin

Advertisement and Sa Auditors' Remuneration Charity and Donation Communication Expens Consultancy Charges Conveyance Expenses Exchange Differences -

Maintenance Warranty Other Selling and Admin Expenses R&D, Certification & Rates and Taxes Rent Sales Commission Travelling Expemses Vehicle Expenses

Staff Welfare Expens

Total

FIX / VARIABLE Group

Budget 2009-10

Actual 2009-10

Budgeted 2010-11 J F a e M n b a r 1 1 1 1 1 1 -

Apr 10 FIX VARIABLE -

May 10 -

Jun 10 -

Jul 10 -

Aug 10 -

Sep 10 -

Oct 10 -

Nov 10 -

Dec 10 -

T o t a l -

Total

Standard Group

Budget 2009-10

Actual 2009-10

Budgeted 2010-11 J F a e M n b a r 1 1 1 1 1 1

Apr 10

May 10

Jun 10

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10

T o t a l

Advertisement and Sa Auditors' Remuneration Charity and Donation -

Communication Expens Consultancy Charges Conveyance Expenses Crane Hiring Charges Exchange Differences Factory Expenses Insurance Maintenance Warranty Other Selling and Admin Expenses Power & Fuel Quality Assurance Ex R&D, Certification & Rates and Taxes Rent Repairs & Maintenanc Sales Commission Staff Welfare Expens Travelling Expemses Vehicle Expenses -

Total

Purchase budget:
The purchase budget is another functional budget that estimates the purchase requirement of materials utilized in the production process. The purchase budget is based on

the production budget and the standard material consumption requirement for the production estimates.
Supply Chain Management FY 2010-2011 Purchase Plan

No.

Model

Qty

MW

Total Purchase Amount - Rs. Cr Nacelle Blade Electrical Tower Total Nacelle

Per WTG - Rs. Cr Blade Electrical Tower Total

A 1 2 3 4

India 600KW 1250IW 1500KW 2100KW STV Total Grand Total #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!

B 1 2

Export 2100KW LTV 2100KW STV Total

C 1 2 3

China 1250IW 1500KW 2100KW Total

SCM Total Manp ower Cost A m o u n t R s . L a c s V e rt i c a l

G ra d e

Six monthly -1
Co. Rol l Co ntr act

Six monthly -II

Co. Rol l Co. Rol l

Total
Co ntr act

QUARTER -IV
Co . Ro ll C o H s C t Co Co . ntr Tot Ro act al ll C C C o o o H s H s H s C t C t C t

GRAND TOTAL
Co ntr act C o H s H C t C

Tot al

Cont ract

Tot al

Total

Total

N a c el le V er ti c al

B la d e V er ti c al

El e

S3 & Ab ov e S2 S1 M6 M5 M4 M2 M1 M0 TO TA L S3 & Ab ov e S2 S1 M6 M5 M4 M2 M1 M0 TO TA L S3 & Ab ov e S2 -

C C o o s s H t H t C C

C C o o s s H t H t C C

C C C C o o o o C s H s H s s o t C t C t H t H st C C

Cost

Inventory budget

Variance analysis
Variance analysis is usually associated with explaining the difference (or variance) between actual costs and the standard costs allowed for the good output. For example, the difference in materials costs can be divided into a materials price variance and a materials usage variance. The difference between the actual direct labor costs and

the standard direct labor costs can be divided into a rate variance and an efficiency variance. The difference in manufacturing overhead can be divided into spending, efficiency, and volume variances. Mix and yield variances can also be calculated. Variance analysis helps management to understand the present costs and then to control future costs. Variance analysis is also used to explain the difference between the actual sales dollars and the budgeted sales dollars. Examples include sales price variance, sales quantity (or volume) variance, and sales mix variance. A difference in the relative proportion of sales can account for some of the difference in a companys profits.

Variance analysis, in budgeting (or management accounting in general), is a tool of budgetary control by evaluation of performance by means of variances between budgeted amount, planned amount or standard amount and the actual amount incurred/sold. Variance analysis can be carried out for both costs and revenues. When effect of variance is concerned, there are two types of variances: When actual results are better than expected results given variance is described as favorable variance. In common use favorable variance is denoted by the letter F - usually in parentheses (F). When actual results are worse than expected results given variance is described as adverse variance, or unfavourable variance. In common use adverse variance is denoted by the letter A or the letter U - usually in parentheses (A).

Types of variance

Variances

Material Variance

Labour Variance

Overhead Variance

Material variance