Beruflich Dokumente
Kultur Dokumente
1-2
Introduction
For effective running of a business, management must know:
i.e.
whether individual plans fit in the overall organizational objective. i.e. coordination whether operations conform to the plan of operations relating to that period i.e. control
Budgetary control is the device that a company uses for all these purposes.
1-3
Definition of Budget
Budget has been defined by CIMA U.K. as, A financial and/or quantitative statement prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of achieving a given objective. According to Bartizal: A budget is a forecast, a detail, of the results of an officially recognized programme of operations based on the highest reasonable expectations operating efficiency
1-4
Characteristics of Budget
Budget is prepare prior to a defined period of time. Budget is prepared either in quantitative details or monetary details or both. Budget is prepared for the purpose of attaining a given objective. Budget is prepared on a certain operating efficiency. It elucidates the policies to be pursued during a definite period for attaining a given objective.
1-5
This system involves: Division of organization on functional basis into different sections known as a budget centre. Preparation of separate budgets for each budget centre. Consolidation of all functional budgets to present overall organizational objectives during the forthcoming budget period. Comparison of actual level of performance against budgets. Reporting the variances with proper analysis to provide basis for future course of action.
1-6
(2)
(3)
(4)
Planning:- A budget is plan of action. Budgeting ensures a detailed plan of action for a business over a period of time. Co-ordination:- Budgetary control co-ordinates the various activities of the entity or organization and secure cooperation of all concerned towards the common goal. Control:- Control is necessary to ensure that plans and objectives are being achieved. No control performance is possible without predetermined standards. Thus, budgetary control makes control possible by continuous measures against predetermined targets. Fixing Administrative Responsibility:- Fix authority and responsibility of administration so that for every failure and success responsible person may be punished or rewarded.
1-7
2.
3.
4.
Budgeting facilitates planning of various activities and ensures that the working of the organization is systematic and smooth. Budgeting is a coordinated exercise and hence combines the ideas of different levels of management in preparation of the same. Any budget cannot be prepared in isolation and therefore coordination among various departments is facilitated automatically. Budgeting is an effective means for planning and thus ensures sufficient availability of working capital and other resources.
1-8
6.
7.
8. 9.
It is extremely necessary to evaluate the actual performance with predetermined parameters. Budgeting ensures that there are well-defined parameters and thus the performance is evaluated against these parameters. It guides the management in taking decision regarding the operations which needs control and not to be controlled. As the resources are directed to the most productive use, budgeting helps in reducing the wastages and losses. It guides management in research and development. It helps in the review of current trends and framing of future policies.
1-9
Estimates: Budgets may or may not be true, as they are based on estimates. The assumptions about future events may or may not actually happen. Rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may affect day-to-day operations and ignores the dynamic state of organizational functioning. False Sense of Security: Mere budgeting cannot lead to profitability. Budgets cannot be executed automatically. It may create a false sense of security that everything has been taken care of in the budgets. Lack of coordination: Staff cooperation is usually not available during Budgetary Control exercise. Time and Cost: The introduction and implementation of the system may be time consuming and expensive.
1-10
The following are the requisites for effective budgetary control : 1. Clear cut objectives and goals should be well defined. 2. The ultimate objective of realizing maximum benefits should always be kept uppermost. 3. There should be a budget manual which contains all details regarding plan and procedures for its execution. It should also specify the time table for budget preparation for approval, details about responsibility, cost centers etc. 4. Budget committee should be set up for budget preparation and efficient execution of the plan. 5. A budget should always be related to a specified time period. 6. The budgeting system should not cost more to operate than it is worth.
1-11
Contd..
7.
8.
9.
10.
11.
12.
Support of top management is necessary in order to get the full support and co-operation of the system of budgetary control. To make budgetary control successful, there should be a proper delegation of authority and responsibility. Adequate accounting system is essential to make the budgeting successful. The employees should be properly educated about the benefits of budgeting system. Key factor or limiting factor, if any, should consider before preparation of budget. For budgetary control to be effective, proper periodic reporting system should be introduced.
1-13
In order to introduce budgetary control system, the following are essential to be considered for a sound and efficient organization. The important aspects to be considered are : 1) Organization Chart 2) Budget Center 3) Budget Committee 4) Budget Manual 5) Budget Period 6) Key Factor
1-14
1. Organization Chart
There should be an organization chart that shows clearly defined authorities and responsibilities of various executives. The organization chart will define clearly the functions to be performed by each executive relating to the budget preparation and his relationship with other executives. The organization chart may have to be adjusted to ensure that each budget center is controlled by an appropriate member of the staff.
1-15
1-16
2. Budget Center
A Budget Center is defined by the terminology as "a section of the organization of an undertaking defined for the purpose of budgetary control." For effective budgetary control budget centre or departments should be established for each of which budget will be set with the help of the head of the department concerned. For example, manpower planning budget, research and development cost budget, production and production cost budget, labor hour budget and so on.
1-17
3. Budget Committee
Budget Committee comprising of the Managing Director, the Production Manager, Sales Manager and Accountant. The main objectives of this committee is to agree on all departmental budgets, normal standard hours and allocations. The main functions of the budget committee are to get the budgets prepared and then scrutinize the same, to lay down broad policies regarding the preparation of budgets, to approve the budgets, to suggest for revision, to monitor the implementation and to recommend the action to be taken in a given situation.
1-18
4. Budget Manual
A budget manual is defined by ICMA as a document which sets out the responsibilities of the person engaged in, the routine of and the forms and records required for budgetary control. The budget manual thus is a schedule, document or booklet, which contains different forms to be used, procedures to be followed, budgeting organization details, and set of instructions to be followed in the budgeting system. It also lists out details of the responsibilities of different persons and the managers involved in the process.
1-19
Contd..
Objectives and managerial policies of the business concern. Internal lines of authorities and responsibilities. Functions of the budget committee including the role of budget officer. Budget period Principal budget factor Detailed program of budget preparation Accounting codes and numbering Follow up procedures.
1-20
5. Budget Period
A budget is always related to specified time period. The budget period is the length of time for which a budget is prepared and employed. The period may depend upon the type of budget. There is no specific period as such. However, for the sake of convenience, the budget period may be fixed depending upon the following factors:
Types of Business Types of Budget Nature of the demand of the product Length of trade cycle Economic factors Availability of accounting period Availability of finance Control operation
1-21
A key factor or a principal budget factor [also called as constraint] is that factor the extent of whose influence must first be assessed in order to prepare the functional budgets. Normally sales is the key factor or principal budget factor but other factors like production, purchase, skilled labor may also be the key factors. For example, a company has production capacity to produce 30,000 tones per annum but if the sales forecast tells that the market can absorb only 20,000 units, there is no point in producing 30,000 units.
1-22
Contd..
In all conditions the key factor is the starting point in the process of preparation of budgets. A typical list of some of the key factors is given below:
Sales: Consumer demand, shortage of sales staff, inadequate advertising Material: Availability of supply, restrictions on import Labor: Shortage of labor Plant: Availability of capacity, bottlenecks in key processes Management: Lack of capital, pricing policy, shortage of efficient executives, lack of know- how, faulty design of the product etc.
CLASSIFICATION OF BUDGET
1-24
Classification of Budget
As budgets serve different purposes, different types of budgets have been developed. The following are the different classification of budgets developed on the basis of time, functions, and flexibility.
Long-Term Budgets Short-Term Budgets Current Budgets Functional or Subsidiary Budgets Master Budgets Fixed Budgets Flexible Budgets
1-25
Longterm Budget
Shortterm Budget
Current Budget
Fixed Budget
Flexible Budget
Functional Budget
Master Budget
1-26
Long-term Budget
Short-term Budget
Current Budget
1.
Long-Term Budgets:
Long-term budgets are prepared for a longer period varies between five to ten years. It is usually developed by the top level management. These budgets summarize the general plan of operations and its expected consequences. Long-Term Budgets are prepared for important activities like composition of its capital expenditure, new product development and research, long-term finance etc.
1-27
Contd.
2.
Short-Term Budgets:
These budgets are usually prepared for a period of one year. Sometimes they may be prepared for shorter period as for quarterly or half yearly. The scope of budgeting activity may vary considerably among different organization.
3.
Current Budgets:
Current budgets are prepared for the current operations of the business. The planning period of a budget generally in months or weeks. As per ICMA London, "Current budget is a budget which is established for use over a short period of time and related to current conditions."
1-28
Fixed Budget
Flexible Budget
1.
Fixed Budgets:
When a budget is prepared by assuming a fixed percentage of capacity utilization, it is called as a fixed budget. As per ICMA, London, the budget which is designed to remain unchanged irrespective of the level of activity actually attained.
1-29
Contd.
2.
Flexible Budgets:
A flexible budget is a budget which is designed to change in accordance with the various level of activity actually attained. The flexible budget also called as Variable Budget or Sliding Scale Budget, takes both fixed, variable and semi fixed manufacturing costs into account. The basic principle of flexible budget is that if a budget is prepared for showing the results at say, 15,000 units and the actual production is only 12,000 units, the comparison between the expenditures, budgeted and actual will not be fair as the budget was prepared for 15,000 units. Therefore a flexible budget is developed for a relevant range of production from 12,000 units to 15,000 units.
1-30
While preparing flexible budget, it is necessary to study the behavior of costs and divide them in fixed, variable and semi variable. After doing this, the costs can be estimated for a given level of activity. It is also necessary to plan the range of activity. A firm may decide to develop flexible budget for activity level starting from 50% to 100% with an interval of 10% in between. It is necessary to estimate the costs and associate them with the chosen level of activity. Finally the profit or loss at different levels of activity will be computed by comparing the costs with the revenues.
1-31
Flexible Budget
recognizing the difference between fixed, semivariable and variable costs is designed to change in relation to level of activity attained.
Rigidity
It does not change with It can be re-casted on the actual volume of activity basis of activity level to be achieved. Thus it is achieved. Thus it is not rigid. known as a Rigid or Inflexible budget.
1-32
Fixed Budget
Flexible Budget
Level of Activity
It operates on one level of It consists of various activity and under one set of budgets for different levels conditions. It assumes that of activity there will be no change in the prevailing conditions, which is unrealistic.
Effect of Variance Analysis does not Variance Analysis provides Variance give useful information as all useful information as each Costs (fixed, variable and cost is analysed according Analysis
semivariable) re related to to its behaviour. only one level of activity.
1-33
Fixed Budget
Flexible Budget
If facilitates the ascertainment of cost, fixation of selling price and submission of quotations.
If the budgeted and actual activity levels differ significantly, then aspects like cost ascertainment and price fixation do not give a correct picture.
Performance Comparison of actual It provides a meaningful Evaluation performance with budgeted basis of comparison of
targets will be meaningless, the actual performance especially when there is a with the budgeted difference between two targets. activity levels.
1-34
1-35
* 12, 500 units X Rs.9.70 per unit = Rs.1, 21, 500 ** 22, 500 units X Rs.9.50 per unit = Rs.2, 13, 750
1-36
Master Budget
1.
Master Budget:
The Master Budget is a summary budget. This budget encompasses all the functional activities into one harmonious unit. The ICMA England defines a Master Budget as the summary budget incorporating its functional budgets, which is finally approved, adopted and employed.
1-37
Contd.
2.
Sales Budget for sales related activity Production Budget for production related activity Production Cost Budget for production cost related activity Administrative Cost Budget for administrative expenses related activity Selling & Distributive Cost Budget for selling & distributive expenses related activity Research & Development Cost Budget for new product development related activity Cash Budget for cash related activity Capital Expenditure Budget for capital expenditure related activity
1-38
Production Budget
Administrative Cost Budget
Cost Budget
Selling & Distribution Cost Budget Research & Development Cost Budget
Finance Budget
Cash Budget Material Budget Labour Budget Overhead Budget Capital Expenditure Budget
1-39
1. Sales Budget
Sales budget is the most important budget based on which all the other budgets are built up.
Sales budget is primarily concerned with forecasting of what products will be sold in what quantities and at what prices during the budget period.
A Sales Budget may be prepared product wise, territories/area/country wise, customer group wise, salesmen wise as well as time wise like quarter wise, month wise, weekly etc.
1-40
The following factors are taken into consideration while preparing a sales budget: Analysis of past sales Estimates given by the sales staff Market Potential Analysis Plant Capacity Seasonal Fluctuations Availability of raw materials Future Competition Financial conditions Prospective Economic, Social &Political situations
1-41
1-42
Solution
Sales Budget for the year 2011
Total Divisions Amount (Rs.) Quantity Price (Rs.) Value (Rs.) Quantity Price (Rs.) Value (Rs.) West 60,000 2 1,20,000 80,000 3 2,40,000 3,60,000 Product X Product Y
South
East Total
1,10,000
20,000 1,90,000
2
2
2,20,000
40,000 3,80,000
88,000
1,00,000 2,68,000
3
3
2,64,000
3,00,000 8,04,000
4,84,000
3,40,000 11,84,000
1-43
2. Production Budget
Production budget is a pre-estimation of the total production of the concern. This budget is prepared by the production manager. It contains the following information:
Estimation of the total production: Production of the concern is estimated for each product separately. Time-wise estimation: Production of the concern is estimated time-wise i.e. weekly, fortnightly or monthly etc. Estimation of closing stock: Expected closing stock of the product goods is also estimated in the budget.
1-44
The following factors are taken into consideration while preparing a production budget:
Plant Capacity
Time consumes in production process Availability of raw materials and labour Determination of stock limits Separate information for each production
1-45
Production cost budget is a pre-estimation of the factory cost or cost of production of the budget production. Production targets are fixed by the sales budget and the production budget. It is the combination of following three budgets: Material Budget Labour Budget Overhead Budget
1-46
Material Purchase Budget is concerned with purchase and requirement of direct materials to be made during the budget period. Following pre-estimations are made in this budget:
Estimation of the requirement of different direct materials for production of different products. Estimation of the quantity of opening and closing stock of each of the direct materials. Time period for the purchase and receipt of direct material. Financial requirements for purchase of required quantity of direct materials.
Material Budget may be divided in two parts: Material Quantity Budget (showing the estimated quantity of material during the budgeted period) Material Purchase Budget (showing the estimated amount required for the purchase of direct materials)
1-47
The following factors are taken into consideration while preparing a production budget: Estimated sales and production. Requirement of materials during budget period. Expected changes in the prices of raw materials. Different stock levels, EOQ etc. Availability of raw materials, i.e., seasonal or otherwise. Availability of financial resources. Price trend in the market. Company's stock policy etc.
1-48
The labor budget estimates the labor required for smooth and uninterrupted production. The labor budget shows the number of each type or grade of workers required in each period to achieve the budgeted output, budgeted cost of such labor, period wise and period of training necessary for different types of labour. This budget must contains the following informations: Total number of labourers required during production process producing the budget number of units. Number of skilled and unskilled labourers. Rate of wages which will be payable to skilled and unskilled workers. Estimated working labour-hours. Overtime labour hours.
1-49
This budget is prepared for planning of the factory overheads to be incurred during the budget period.
In this budget the overheads should be shown department wise, so that responsibility can be fixed on proper persons. Classification of factory overheads into fixed and variable components should also be shown in this budget.
This budget deals with the following costs: Estimated cost of indirect materials. Estimated amount of indirect labour. Estimated amount of factory overheads.
1-50
Estimated administration costs of the current year are given in this budget. Fixed and variable administration costs are shown separately in the budget. The budget covers the expenses incurred in framing policies, directing the organization and controlling the business operations. In budget an estimate of expenses is prepared regarding central office and of management salaries. The budget can be prepared with the past experience and anticipated changes.
1-51
In this budget experts have to plan for the expected selling and distribution expenses of the firm. This budget is prepared by sales manager, advertisement manager and distribution manager combinedly. Generally, following expenses are shown in this budget:
Direct selling expenses (e.g. Salesmans Commission, travelling allowances etc.) Sales office expenses (e.g. rent of sales office, tax and maintenance , salaries of employees working in office etc.) Advertisement expenses (e.g. advertisement incurred for sales promotion, in newspapers, TV, hoardings etc., poster exhibition etc.) Distribution expenses (e.g. distribution related to goods, rent of godown, its tax and insurance, salaries of drivers and salaries of workers in godowns, in packaging work etc.)
1-52
This budget is one of the important tools for planning and controlling research and development costs. It helps management in planning the research and development activities well in advance and also about the fairness of the expenditure. Research and development is one of the important activities of any firm and hence proper planning and coordination is required for effectiveness of the same. This budget also helps to plan the requirement of necessary staff for carrying out research and development.
1-53
The cash budget is a summary of the firm's expected cash inflows and outflows over a particular period of time. In other words, cash budget involves a projection of future cash receipts and cash disbursements over various time intervals. A cash budget helps the management in:
Determining the future cash needs of the firm Planning for financing of those needs Exercising control over cash and liquidity of the firm
1-54
Contd.
The main purpose of cash budget is to predict the receipts and payments in cash so that the firm will be able to find out the cash balance at the end of the budget period. Cash Budget is prepared in various ways, but the most popular form of the same is by the method of Receipt and Payment method. Remember that the cash budget, as its name suggests, deals only in cash/bank transactions; thus non-cash items, such as depreciation, are never shown.
1-55
Cash Sales Credit Sales Collection from Sundry Debtors Bills Receivable Interest Received Income from Sale of Investment Commission Received Dividend Received Income from Non-Trading Operations etc.
1-56
Cash Purchase Payment to Creditors Payment of Wages Payments relate to Production Expenses Payments relate to Office and Administrative Expenses Payments relate to Selling and Distribution Expenses Any other payments relate to Revenue and Capital Expenditure Income Tax Payable, Dividend Payable etc.
1-57
Identify any possible bank overdraft in advance and take steps to minimize the borrowing (so saving interest payable) Consider rescheduling payments to avoid bank borrowing, e.g. delay purchase of fixed assets, agreement to pay rises, payment of drawings/dividends Arrange any possible bank finance well in advance Identify any possible cash surpluses in advance and take steps to invest the surplus on a short-term basis (so earning interest)
1-58
1-59
Opening Balance
RECEIPTS: Cash Sales(20% of Sales) Cash from Debtors(80% of previous month sales) Total Cash Receipts(=A) PAYMENTS: Material (Previous months purchase) Direct Labour (Current month) Factory and Administrative Expenses (Current months) Advertisement on cost Selling & Distribution on cost Cash Payment(=B)
3,000
1,800 -----
-1,500
2,700 7,200
-9,450
3,600 10,800
-13,200
3,600 14,400
4,800
8,400
4,950
4,800
Closing Balance(=A-B)
-1,500
-9,450
-13,200
-14,700
1-60
Capital budget is prepared to estimate the capital expenditure required to purchase or to acquired fixed assets for fulfilling the production targets as fixed by the production budget. Capital budget shows estimated costs required for acquisition of capital assets. Following points should be specially cared for while preparing this budget: Replacement of present assets; Existing production capacity and impact of the probable improvements on the production capacity; Purchase of additional asset to fulfill the production targets; Purchase of additional assets for starting a new production; Purchase of high efficiency machine to lower down the cost of production.
1-61
Zero Base Budgeting is method of budgeting whereby all activities are revaluated each time budget is formulated and every item of expenditure in the budget is fully justified. This technique was originally developed by Peter A. Phyhrr, Manager of Taxas Instrument during 1969.
According to Peter A. Phyhrr ZBB is defined as an "Operative Planning and Budgeting Process which requires each Manager to justify his entire budget in detail from Scratch (hence zero base) and shifts the burden of proof to each Manager to justify why we should spend any money at all."
1-62
In zero-base budgeting, a manager at all levels have to justify the importance of activity and to allocate the resources on priority basis. Hence in Zero Based Budgeting, the beginning is made from scratch and each activity and function is reviewed thoroughly before sanctioning the same and all expenditures are analyzed and sanctioned only if they are justified.
1-63
1-64
1-65
Utilization of resources at a maximum level. It serves as a tool of management in formulating production planning. It facilitates effective cost control.
3. 4.
5.
1-66
Advantages contd.
6.
7.
8.
9.
It helps to measure the operational inefficiencies and to take the corrective actions. It ensures the principles of Management by Objectives. It facilitates Co-operation and Coordination among all levels of management. It ensures each activity is thoroughly examined on the basis of cost benefit analysis.
1-67
It is a very detailed procedure and naturally if time consuming and lot of paper work is involved in the same. Cost involved in preparation and implementation of this system is very high. Morale of staff may be very low as they might feel threatened if a particular activity is discontinued. Ranking of activities and decision-making may become subjective at times. It may not advisable to apply this method when there are non financial considerations, such as ethical and social responsibility because this will dictate rejecting a budget claim on low ranking projects.
1-68
THANK YOU