Budgetary Control.pptx

Budgetary Control

1. What is Budgetary control? Budgetary control  is the process by which budgets are prepared for the future period and are compared with the actual performance for finding out variances, if any. The comparison of budgeted figures with actual figures will help the management to find out variances and take corrective actions without any delay.

2. Meaning Definitions: “According to Brown and Howard, “Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.”

3. Essentials of Effective Budgetary Control

4. Essential elements of effective budgetary control 1. Support of Top Management Generally budgets are prepared for one year . On the basis of the budgets, the employees are changing their working methods, habits and even their inter-relationship also . It leads to the preparation of every budget with  top management  support. 2. Formal Organization An employee can understand his scope of authority and responsibility with regard to budget . In a formal organization, duties of every employee are clearly defined and assigned .

5. 3. Participation by Responsible Executives The involvement of employees in budget preparation helps the management for easy implementation of budgets. 4 . Clear Cut Objectives The success of  budgetary control  programme depends upon the clear-cut objectives of the organization. Hence, the management before framing the objectives should take care.

6. 5. Attainable Objectives If the objectives are not attainable, the budgetary control system cannot succeed. On the other hand, if the objectives are easily attainable, there is no need of special efforts and there is no challenge to anybody. Hence, attainable objectives are framed for effective implementation of budgetary control system. 6. Budget Committee A budget committee is formed to prepare and implements the budgets. The budget committee consists of functional managers of  business organization . The committee should be presided over by one of the top management personnel, to be called the Budget Director.

7. 7. Adequate Accounting System Budgets are prepared on the basis of historical data. Hence, accounting records should be properly maintained. Moreover, actual costs and revenue are periodically compared with those of budgeted figures. The accounts are classified in terms of authority and responsibility that facilitates the introduction of responsibility accounting system. 8. Periodic Reporting There should be a proper communication in an organization for effective budgetary control. Each employee of an organization should know about what is going on and what has been achieved so far with regard to budget. For which, the management can make an arrangement through which information about budget performance can be communicated periodically. The employees can understand the variances through this system. Moreover, it is highly useful to get communication for corrective actions.

8. 9. Budget Education A budget can be implemented very successfully with the active participation of line managers and their sub-ordinates. For which, there is a need of showing interest by the line managers and their subordinates. The budget director should take steps to create interest among the line managers and their sub-ordinates through budget education. 10. Appreciation Uses Every employee of an organization should understand the uses of every budget. No one should have the feeling that the budget is imposed on him. Nobody can participate mechanically in the budget preparation and its administration regardless of whether he likes it or not.

9. 11. Limitations of Budgeting The management should disclose not only the uses of budgets bud also the limitations of every budgets. Everyone should realize that budget is only a managerial tool in capable of managing itself.

10. 5. Flexible Budget

11. 6. Prepare a cash budget for the 3 months ending 30 th June 2018 from the information given below. a ) Month Sales Materials Wages Overheads Feb 14000 9600 3000 1700 march 15000 9000 3000 1900 april 16000 9200 3200 2000 May 17000 10000 3600 2200 june 18000 10400 4000 2300 b) Credit terms are: sales and debtors – 10% sales are on cash, 50% of the credit sales are collected next month and the balance in the following month Creditors- Materials 2 months Wages ¼ month Overheads ½ month c) Cash and bank balance on 1 st April, 2018 is expected to be Rs.6000. d) Other relevant information are: Plant and machinery will be installed in feb 2018 at a cost of Rs.96000. the monthly instalment of Rs.2000 is payable from April onwards. Dividend at 5% on Preference Share Capital of Rs.200000 will be paid on 1 st June. Advance to be received for sale of vehicles Rs.9000 in June Dividends from investments amounting to Rs.1000 are expected to be received in June Income tax (advance) to be paid in June is Rs.2000

12. Month Wages incurred Material purchased Overhead sales Feb 6 20 10 30 March 8 30 12 40 April 10 25 16 60 May 9 35 14 50 June 12 30 18 70 July 10 25 16 60 August 9 25 14 50 September 9 30 14 50

13. It is expected that cash balance on 31 st may will be Rs.22000 The wages maybe assumed to be paid within the month they are incurred It is the company’s policy to pay creditors for materials 3 months after the receipt. Debtors are expected to pay 2 months after delivery Included in the overhead figure is Rs.2000 per month which represents depreciation on 2 cars and one delivery van. There is a one month delay in paying the overhead expenses. 10% of the monthly sales are for cash and 90% are sold in credit. A commission of 5% is paid to agent on all the sales on credit but this is not paid until the month following the sales to which it relates; this expense is not included in the overhead figure shown. It is intended to repay a loan of Rs.25000 on 30 th June. Delivery is expected in July of a new machine costing Rs.45000 of which Rs.15000 will be paid on delivery and Rs.15000 in each of the following months. Assume that overdraft facilities are available, if required You are required to prepare cash budget for the three months of June July and August.

14. 3. A company manufactures two products A and B by making use of two types of materials X and Y. Product A requires 10 units of X and 3 units of Y. Product B requires 5 units of X and 2 units of Y . The price of X is Rs.2 per unit and that of Y is Rs.3 per unit. The sales manager has estimated the sales of product A to be 5,000 units and that of product B 10,000 units. The estimated opening stock of material X for the budgeted period is 2,500 units and that of Y is 3,000 units. The desired closing stock of material X is 5,000 units and that if Y is 4,000 units. Prepare materials purchase budget.