managementaccountingunitiv-230422140105-dd17d80b.ppt

BUDGETARY CONTROL

2. WHATISBUDGET?
Theword‘budget’isderivedfromaFrenchword‘Bougette’
representingleatherpouchintowhichfundsare
appropriatedtomeettheanticipatedexpenses.Theword
‘budget’thereforerefersinthebusinessenterprise,toaplan
intheformofquantitativeandfinancialstatementofthe
firmabouttheworktobedonebytheexecutivesandtheir
officials.
WHATDOYOUMEANBYBUDGETARYCONTROL?
Budgetarycontrolistheprocessofpreparationofbudgetsfor
variousactivitiesandcomparingthebudgetedfiguresfor
arrivingatdeviationsifany,whicharetobeeliminatedin
future.Thusbudgetisameansandbudgetarycontrolisthe
endresult.Budgetarycontrolisacontinuousprocesswhich
helpsinplanningandcoordination.Italsoprovidesa
methodofcontrol.

3. STATETHEOBJECTIVESOFBUDGETARYCONTROL
Toplanandcontroltheincomeandexpenditureof
manufacturingandtradingoperations.
Topredeterminethecapitalexpenditureofabusiness.
Toco-ordinatetheactivitiesofthebusinessinsucha
mannerthateachisapartofthetotal
Toestablishdivisionalandsub-divisionalresponsibility,
thusdecentralizingit.
Topreventwaste,reduceexpensesandoperatemost
efficientlythevariousdepartmentssoastoattainthe
maximumprofitability.
Toplanandcontrolexpenditureonresearchand
development.
Toarrangeforthefinancingoftheoperationssothat
adequateworkingcapitalwillbeavailableasrequired.
Toactasameansofcommunication.

4. TYPESORCLASSIFICATION OFBUDGETARY
CONTROL
I.ClassificationaccordingtoTime
1.LongTermBudget:
Thebudgetsarepreparedtodepictlongtermplanningof
thebusiness.Theperiodoflongtermbudgetsvaries
betweenfiveto10years.Longtermbudgetsareprepared
forsomesectorsoftheconcernsuchascapital
expenditures,researchanddevelopment,longterm
finance,etc,thelongtermbudgetplanningisdonebythe
toplevelmanagement.
2.ShortTermBudget:
Thesebudgetsaregenerallyforoneortwoyearsandarein
formofmonetaryterms.Theconsumergoodsindustries
likesugar,cotton,textiles,etc,useshorttermbudgets.

5. 3.CurrentBudget:
Theperiodofcurrentbudgetsisgenerallyofmonthsand
weeks.Thebudgetsarerelatedtothecurrentactivitiesof
thebusiness.Currentbudgetisabudgetwhichis
establishedforuseoverashortperiodoftimeandisrelated
tocurrentconditions.
II.ClassificationaccordingtoFlexibility
1.FixedBudget:
Afixedbudget,sometimesknownasstaticbudgetisonewhich
remainsunchangedirrespectiveofchangesinvolumeofoutputor
levelofactivity.Thisbudgetisdrawnforonelevelofactivityand
somesetofconditions,ontheassumptionthattheforecastofa
businessactivitywillprovecorrect.Itdoesnottakeintoconsideration
anychangeinexpenditurearisingoutofchangeinthelevelof
activity.
ICMALondondefinesafixedbudgetas,‘Abudgetdesignedto
remainunchangedirrespectiveofthelevelofactivityactually
attained.

6. 2.FlexibleBudget:
Flexiblebudgetisonewhichispreparedinsucha
mannerastheyfacilitatedeterminationofthe
budgetedcostformanylevelofactivity.Itisalso
knownas‘variablebudget’or‘slidingscalebudget’.
ICMALondondefinesaflexiblebudgetas‘abudget
designedtochangeinaccordancewiththelevelof
activityactuallyattained.

7. III.ClassificationaccordingtoFunction
1.SalesBudget:
Generallysalesfactorbecomesakeyfactorinthemajorityofcases,and
thereforeitisthestartingpoint.Thisisthemostimportantbudget,asitis
usuallythemostdifficulttoforecast.Itispreparedbysalesmanagers.
Inthepreparation,thesalesmanagershouldconsiderthefollowingpoints:
Analysisofthesalesofthepreviousyears.
Salesman’sassessment.
Generaltradecondition
Availabilityofrawmaterial
Availabilityoffunds
Plantcapacity
Seasonalfluctuations
Restrictionsimposedbythegovernment

8. 2.ProductionBudget:
Itisabudgetpreparedbytheproductionmanager,
showingtheforecastofoutput.Theobjectiveisto
determinethequantityofproductionfora
budgetedperiod.Itisquantityofunitstobe
producedduringthebudgetperiod.Itisbasedon
thesalesbudget.
3.CostofProductionBudget:
Costofproductionbudgetisdividedintomaterial
costbudget,labourcostbudgetandoverheadcost
budget,becausecostofproductionincludes
material,labourandoverhead.Thereforeseparate
budgetarerequiredforeachitem.

9. 4.PurchaseorRawMaterialBudget:
Tocarryouttheproductionsatisfactorily,regularsupplyof
materialduringthebudgetperiodisensuredbypreparinga
budget.Inthis,thedecisionregardingthequantityof
materialasshownatdifferenttimeduringthatperiodis
followed.Thematerialbudgetshelpproperplanningof
quantitiesaswellasthecostofrawmaterial,requiredfor
productionaspertheproductionbudget.
5.LabourBudget:
Itisapartoftheproductionbudget.Thebudgetis
preparedbythepersonneldepartmentanditshowsan
estimateoftherequirementsoflabourtomeetthe
productiontarget,onthebasisofpreviousrecordsand
budgetedproduction.Thisbudgetgivesdetailed
informationrelatingtothenumberofworkers,salesof
wagesandcostoflabourhourstobeemployed.

10. 6.WorksOverheadBudget:
Itsetsouttheestimatedcostsofindirectmaterial,indirect
labourandindirectfactoryexpenses,duringthebudget
periodinordertoachievethetarget.Thisisclassifiedinto
fixed,variableandsemivariable.
7.AdministrativeOverheadsBudget:
Thisbudgetcoverstheexpenditureofadministrative,office
andmanagementsalaries.Itispreparedwiththehelpofpast
experienceandexpectedchangeinfuture.Theadministrative
costofeachbudgetcentreisdrawnseparatelyand
incorporatedinadministrationcostbudget.
8.Selling&DistributionoverheadBudget:
Thisbudgetrelatestosellinganddistributionofproduction
forthebudgetperiodandbasedonsalesbudget.Itis
generallypreparedterritorywisebythesalesmanagerofeach
territory.Thecostsaredividedintofixed,variableandsemi
variableandestimatedistakenonthebasisofpastrecords.

11. 9.CapitalExpenditureBudget:
Thisbudgetshowstheestimatedexpenditureonfixedassets
land,building,etc.Itisalongtermbudget.Thecapital
expenditurebudgetisnecessitatedonaccountofreplacement
ofoldmachine,increaseddemandofproductsetc.
10.CashBudget:
Thisbudgetrepresentstheamountofcashreceiptsand
paymentsandabalanceduringthebudgetedperiod.Itis
preparedafterallthefunctionalbudgetispreparedbythe
chiefaccountanteithermonthlyorweeklygivingthe
followinghits.
Itensuressufficientcashorbusinessrequirement
Itproposesarrangementtobemade,overdrafttomeetany
shortageofcash.

12. Itrevealsthesurplusamountandtheeffectoftheseasonal
fluctuationoncashposition.
Theobjectiveofcashbudgetistheproperco-ordinationof
totalworkingcapital,sales,investmentandcredit.
11.MasterBudget:
Masterbudgetisthesummarybudgetfortheentire
enterprisesandembodiesthesummarizedfiguresforvarious
activities.Thisisalsoknownassummarybudgetorfinalized
profitplan.Thisbudgetincludesthebudgetedpositionofthe
netprofitandlossaswellasbalancesheet.Masterbudgetis
preparedbythecommitteesandbecomesatargetforthe
company.

13. WHATISZEROBASEBUDGET?
Thepurposeofmanagementcontrolistoensurebetter
performanceandbetterutilizationofscarceresources.
Traditionalbudgetingfailstoachievethisobjectiveof
managementeffectively.Zerobasebudgetingprovidesa
solutiontowardsthisend.