Budgetry control

Management accounting

1. Budgetary control

2. What is Budget? The word budget can say- ‘ a small leather bag’. The “bag” contains is an economic bill which is presented by the Finance Minister in the parliament every year. Definition- “A budget is a written plan covering projected activities of a firm for a defined time period”. It can also say that it is a fiscal plan by which expenditure may be balanced against income.

3. Features of Budget: Budgets are the blueprint of the desired plan of action. They are means of communications. They indicate the business policies. They provide services as declaration of policies. They set goals. They are the instruments of managerial control. They are controlling tools.

4. Budgeting: Budgeting refers to the management action of formulating budgets. Preparation of Budgeting is a planning function and their application or implementation is a control function. “The entire process of preparing the budgets is known as budgeting”

5. Objectives of Budgeting: To obtain more economical use of capital. To obtain waste & reduce expenses. To plan and control the income & expenditure of the firm . To co-ordinates the activities of various departments. To create a good business practice by planning for future. To fix responsibilities on different departments or heads.

6. Budgetary control To control over budget is know as budgetary control. It is a process to supervise the actual budget and the outcome from that budget, so that corrective measure can be taken on time if any variances is there so.

7. First of all budgets are prepared and then actual results are recorded. So that comparison of budgeted and actual figures will enable the management to find out discrepancies and remedial measure can be taken at proper time. The budgetary control is a continuous process which help in planning and co-ordination. It provides a method of control too.

8. “A system which uses budgets as a means of planning & controlling all aspects of producing or selling commodities & services”. fig: Budgetary Control Plan Budgets/Targets Compare Actual with Budgets Variance Action

9. Features of Budgetary Control Budget are prepared for each department & the plans & objectives are prepared before the management. The Budgetary control co-ordinates the plans of various departments and master budget is prepared. The essential features of budgetary control is to conduct continuous comparison of actual performance with budgeted figures, revealing the variations. Budgets are revised, if necessary, according to changed conditions. It help us to maintain the our budget.

10. Objectives of Budgetary Control To ensure planning for future by setting up various budget. To co-ordinate the activities of different departments. Elimination of wastes & increase in profitability. To anticipate Capital expenditure for future. To centralize the control system.

11. Requisites for successful Budgetary control system Clarifying objectives. Proper delegation of Authority and responspility . Proper communication system Flexibility Participation of all employees.

12. Budgetary Control Advantages Disadvantages Maximisation of profit Proper co-ordination Provides specific Aims Tools for measuring performance Economy Corrective action Reduces cost Determines Weakness 1. Uncertain Future. 2.Revision required 3. Discourage efficient persons 4. Depends upon support of Top Management 5. Conflict among different departments.

13. Classification of Budgets:

14. Classification a ccording to Time Long term Budget : The period of long term budgets various between five to ten years. The long term planning is done by the top level management; it is not generally known to lower level of management. Sort term Budgets : These budgets are generally for one or two years and are in the form of monetary terms. The consumer’s goods industries like sugar, cotton textile etc. use short-term budgets.

15. Classification on the basis of Functions Sales Budget Sales Budget : is an estimate of expected sales during a budget period. A sales budget is known as a nerve centre or backbone of the enterprise. A sales budget is the starting point on which other budgets are also based. Sales budget lays down a comprehensive plan & programme for preparing sales department.

16. Factors to be taken while preparing sales budget: Past sales Figures Availability of Raw Materials Seasonal Fluctuations Assessment &report by salesman Availability of finances

17. Production Budget The production budget is prepared in relation to the sales budget. Whatever is to be sold should be produced in time so that it is delivered to the customer. Two Important considerations are involved in the preparation of production of budget: a) What is to be produced? b) When is to be produced? The preparation of production budget involves the following stages : 1. Production Planning 2. Consideration of plant capacity 3. Stock quantity to be held 4. Considering sales budget.

18. Cost of production budget The production budget calculates the number of units of products that must be manufactured, and is derived from a combination of the  sales forecast  and the planned amount of  finished good inventory  to have on hand  The production budget is typically prepared for a "push" manufacturing system, as is used in a  material requirements planning environment. The production budget is typically presented in either a monthly or quarterly format. The basic calculation used by the production budget is: + Forecasted unit sales + Planned finished goods ending inventory balance = Total production required

19. Research and Development budget I t is a series of investigative activities to improve existing products and procedures or to lead to the development of new products and procedures . In addition, this report brings together the expenditure and personnel figures for the R&D performers in the economy, i.e. for the Business, Higher Education and Government sectors . The main aim is to prepare this is to know which sector need special importance for budgeting process. e.g. Agriculture, textile, Mining, IT sector , Infrastructure, Health etc.

20. Cash budget Cash budget is based on cash forecast. Cash forecast is an estimate showing the amount of cash which would be available in a future period. Importance: It is prepared in advance. It is an estimated of cash receipt and payment. It is expressed in terms of money values. Uses: Helps in determining future cash requirement. Help in making plan Help in cash control and liquidity of the enterprises.

21. Master Budget The master budget is the summary of various functional budgets. It can also say that it is a backup plan representing in one sheet for the detail analysis. It is prepared by integrating various budgets into one consolidated budget . Steps involved in Preparation of Master budget . 1. Sales budget, as the starting point 2. Production budget 3. Cost of production budget 4. Cash budget 5. Project income statement and the balance sheet

22. Classification on the basis of Flexibility Fixed Budget: “Fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained”. Flexible Budget: A flexible budget is defined as a budget which by recognizing the differences fixed, semi-fixed and variable cost is designed to change in relation to the level of activity.

23. Installation of the system(B.C) There are certain steps necessary to install a good budgetary control system in an organization. They are as follows- 1. Determination of the objectives- (Objectives need to clear for what to do) 2. Organization for budgeting-( Responsibility allocated to executive) 3. Budget centre- (space for appraisal) 4. Budget officer -( Convener play the role to describe the budget) 5. Budget Manual ( duties allocated to different officer) 6. Budget committee (for preparation and execution of budgets) 7. Budget Period- (financial year, or Quarter , month to prepare) 8. Determination of Key factors( A factor which influences all other budgets known as Key factor)

24. Zero Base Budgeting(ZBB) Zero-based budgeting (ZBB) is a method of budgeting in which all  expenses  must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analysed for its needs and costs . Budgets  are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

25. It Implies that- Every budget starts with a zero base. No previous figure is to be taken as a base for adjustments. Every activity is to be carefully examined a fresh Each budget allocation is to be justified on the basis of anticipated circumstances Advantages: 1. Management by objectives becomes a reality. 2. Effective cost control can be achieved. 3. Controls wasteful expenditure Disadvantages: 1. The possibility  of  being manipulated by senior managers and a bias towards short-term planning . 2. Zero-based budgeting is also quite resource-intensive . 3. It takes a lot more time and effort to draw up a budget from scratch rather than modify an existing budget