BUDGETARY CONSDASDASDASDASDASDASDTROL PPT.ppt

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1. Budget and Budgetary Control
A budget is an accounting plan.
It is a formal plan of action
expressed in monetary terms.
It could be seen as a statement
of expected income and
expected expenses under certain
anticipated operating conditions.
It is a quantified plan for future activities – quantitative blue print for action.
About Budget

2. About Budget (Continue…)

3. Meaning and Definition
According to CIMA (Chartered Institute of Management Accountants) UK, a budget is
“A plan quantified in monetary terms prepared and approved prior to a defined period of
time, usually showing planned income to be generated and, expenditure to be incurred
during the period and the capital to be employed to attain a given objective.”
In a view of Keller & Ferrara, “a budget is a plan of action to achieve
stated objectives based on predetermined series of related assumptions.”

4. Basic Characteristics of a Budget
It is mainly a forecasting and controlling device.
It is prepared in advance before the actual operation of the company
or project.
It is in connection with definite future period.
Before implementation, it is to be approved by the management.
It also shows capital to be employed during the period.

5. Budgetary Control is a method of
managing costs through preparation
of budgets.
Budgeting is thus only a part of the
budgetary control.

6. Definition of Budgetary Control
According to CIMA, “Budgetary control is
the establishment of budgets relating to the
responsibilities of executives of a policy and
the continuous comparison of the actual with
the budgeted results, either to secure by
individual action, the objective of the policy
or to provide a basis for its revision.”
Features of Budgetary Control
1. Establishment of budgets for each purpose of the
business.
2. Revision of budget in view of changes in
conditions.
3. Comparison of actual performances with the
budget on a continuous basis.
4. Taking suitable remedial action, wherever
necessary.
5. Analysis of variations of actual performance from
that of the budgeted performance to know the
reasons thereof.

7. Budgetary Control Process
The budgetary control process can be broadly broken down into 3 steps, as shown below:
1.Preparation of budget:
 
The preparation of
the budget is the very first step in the process
wherein the management decides on a set of
financial targets based on the goals set forth by
the organization.

8. Budgetary Control Process (Continue…)
2. Comparison of budgeted performance
with actual performance:
 
This step starts
once the company records the actual
performance. The management compares
the actual performance with the budgeted
performance to determine how well the
company’s performance aligns with the
expected performance.

9. Budgetary Control Process (Continue…)
3. Performance of corrective measures:
 
This
step comes into play only when there is a variance
between actual and budgeted performance.
The management then initiates root cause analysis
for the deviation, and once it is unearthed, it takes
corrective measures.
In this way, the corrective actions may improve
the underperforming operations’ performance.

10. Let us assume that ABC Ltd. had decided on the budget for January 2024 at the
start of the month.
Now the management is reviewing the actual performance vis-à-vis the budgeted
performance the following month.
The comparison of the actual figures with the budgeted figures is shown in the
table below.
Example #1 (How Budgetary Control Works)

11. Particulars Budget Actual Variance
Sales
₹
2,50,00,000
₹
2,45,00,000-2.00%
Cost of goods sold
(COGS)

₹
1,20,00,000
₹
1,25,00,000-4.20%
Gross profit
₹
1,30,00,000
₹
1,20,00,000-7.70%
Gross margin 52.00% 49.00% -3.00%
Selling, General &
administration (SG&A)

₹
1,00,00,000
₹
90,00,000 10.00%
EBITDA
₹
30,00,000
₹
30,00,000 0.00%
EBITDA margin 12.00% 12.20% 0.20%

12. Interpretation
The table shows that the sales have remained 2.0% below the
expected performance while the COGS was 4.2% higher than
budget, resulting in a lower than expected gross margin.
However, SG&A has been 10.0% better than budget,
offsetting the impact of higher COGS on the EBITDA margin.
In this case, the company would like to investigate the reason
for lower sales and higher COGS to take corrective actions in
the following months.
This is how budgetary control works.

13. Objectives of Budgetary Control
Budgeting is about planning for the future. It's a key tool for managing and
controlling a business.
Main objectives of budgeting are,
1.Planning: Planning means designing a desired future for a
business, based on the belief that this future can be achieved
through continuous management efforts.
Detailed plans are created for production, sales, raw materials,
labor needs, capital additions, and more.
By planning, many potential problems are identified and solutions
are developed before the problems even arise.

14. For Example,
Through budgeting, the management team plans
the production schedule for the next year.
They estimate the amount of raw materials
needed, the labor required, and the expected
sales.
By doing this, they can foresee potential
shortages or surpluses and make adjustments to
avoid disruptions, ensuring smooth operations
throughout the year.
Imagine a company that manufactures
electronics.

15. It makes sure that everyone is working towards
the same goals.
Good planning and budgeting help the business
meet its targets.
Problems can happen when one department
grows without thinking about how it affects
others. So, coordination is needed at all levels.
Objectives of Budgetary Control (Continue…)
2. Coordination: Budgeting helps different
parts of a business work together.

16. With budgeting, both
teams can plan together
to make sure there are
enough products for
the advertising
campaign.
For Example
Imagine the marketing team wants to spend a lot on advertising a
new product.
If they don’t talk to the production team, there might not be
enough products made to meet the demand from the ads.

17. Objectives of Budgetary Control (Continue…)
3. Measurement of Success
Budgets help managers see how well they
are doing in reaching their goals.
 In many companies, employees get rewards
if they meet or beat their budget targets.
Managers can also get promoted based on how well
they stick to their budgets.
Success is measured by comparing current performance
with past performance.

18. For Example
Imagine a Sales Manager sets a goal to
sell 1,000 products in a month.
The company looks at their sales numbers from each
month to see if they are improving.
If they meet or exceed this goal,
they might get a
If they keep doing well over several months, they
might get a promotion.