budgeting and budgetary control system
TRANSCRIPT
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Budgeting and Budgetary
Control System
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Prepared by:-
Vaghajiani Chaitali
Poonater Hiral
Pathak Maitri
Thobhani Vidhi Nakum Harish
Guided by:-
Prof. Kaushal Bhatt
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Learning Objectives
Budgeting as a tool of management planning andcontrol.
Application of budget.
Organization for budget development andimplementation.
Budgeting process.
Types of budget.
Budgetary control system as an effective tool.
Contemporary developments in budgeting.
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Definition
Budget is a financial and/or quantitative statement,
prepared and approved prior to a defined period of
time, of the policy to be pursued during that period
for the purpose of attaining a given objective. It may
include income, expenditure and the employment of
capital.
-CIMA
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Features of a budget
One year duration
Estimation of Business Units Profit Potential
Appraisal of Performance
Monetary terms
Alteration of Approved Budget Under Specified Conditions
Review and Approval by a Higher Authority
Managerial Commitment
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Role of a Budget Officer
Functional Budget Preparation
Communication to Responsibility Centres
Co-ordination
Follow-up
Budget Committee Review
Board Review.
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Steps involved in preparation of
Budget
1. Definition of objectives
2. Identification of key(or budget) factor
3. Budget Committee and controller
4.
Budget Manual
5. Budget Period
6. Standard of Activity or output
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Elements of a successfulbudgeting plan
Elements ofa successfulbudgeting
plan
Coordinating businessactivities
Communicating thebudgets
Acceptance&
Cooperation
ReasonableFlexibility
Providing a
frameworkfor
evaluation
Accurateforecastingof business
activities.
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Types of Budget
Budgets
Time period
Long-termBudget
Short-termBudget
Conditions
Basic Budget
CurrentBudget
Capacity
FixedBudget
FlexibleBudget
Coverage
FunctionalBudget
MasterBudget
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Sales Budget
Meaning
The following facts have to be considered for
preparing the sales budget:
(a) Pricing policies.
(b) Quality of sales force.
(c) General economic and political conditions etc.
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Classification of sales budget
The sales budget is prepared on the following bases
to facilitate control:
(a) Products or group of products.
(b) Areas, towns, salesmen, and agents.
(c) Types of customers, e.g. (i) Government, (ii) Export,
(iii) Local sales, (iv) Retail Depots.
(d) Period- months, weeks, etc.
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Production Budget
Meaning
Production budget shows the production for the
budget period based upon:
(a) Sales budget,
(b) Production capacity of the factory,
(c) Planned increase or decrease in finished stocks, and
(d) Policy governing outside purchase.
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Plant utilization budget
Plant utilization budget represents, in terms of
working hours, weight or other convenient units the
plant facilities required to carry out the programme
laid down in the production budget.
Purposes :
(a) To determine the loads on each process, cost or
groups of machines for the budget period.
(b) To take steps to increase sales in order to utilise
available surplus capacity.
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Direct material usage budget
Quality Quantity Prices
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Purchase budget
Purchase budget represents the purchases that must
be made during the budget period to meet the needs
of the business.
Purposes
Components
Considerations
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Direct Labor Budget
This budget shows the number of direct workers
required. The following budgets are prepared in
relation to direct labor costs:
(a) Labor hour requirement budget
(b) Labor cost budget
(c) Manpower recruitment budget
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Selling Costs Budget
The following factors are to be taken into account:
Nature of costs
Relationship between cost and sales volume
Time period of benefit
Trend factors
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Advertising cost budget
The following factors are to be taken into account:
Best method of advertisement
Amount to be spent
Co-ordination between advertising and sales
Effectiveness
The amount of expenditure may be decided based on:
A fixed sum per unit of output can be fixed and added tocost.
An advertisement plan is decided upon and the amount to
be spent on advertising.
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Research and DevelopmentExpense Budget Introduction
The following are some methods of allocation of R&D
expenses:
(a) A percentage on net profit
(b) A sum is fixed on the basis of cash resources
available with the company etc.
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Capital Expenditure Budget
Capital Expenditure Budget represents the planned
outlay on fixed assets, such as land, building, plant
and machinery, etc. during the budget period.
The following factors are to be taken into account:
(a) Sales potential to absorb the increased output;
(b) Possibility of price reductions;
(c) Replacement requests from the concerned
departments.
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Steps involved in preparation ofoperating budgets Sales budget
Production budget
Direct labor budget
Direct materials usage budget
Direct materials purchase budget
Factory overhead budget
Inventory budget
Cost of goods sold budget Administration overhead budget and selling &
distribution overhead budget
Budgeted profit and loss statement
Budgeted balance sheet
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Rolling Budget
A rolling budget is a budget which is continuously
updated by adding a further period, say a month or a
quarter, and deducting the earliest period. It is also
known as continuous budgeting.
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Cash Budget
Cash budgets are a tool for forecasting short-term
cash requirements of a firm. They provide a blueprint
of the cash inflows and outflows that are expected to
occur in the immediate future.
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Advantages of budgeting
Compels and motivates
A valuable means of controlling
Managerial policies and goals
Directing capital
Decentralize responsibility
Cost consciousness
Yardstick for measuring the performance
Systematic and disciplined approach
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Disadvantages of Budgeting
Not an exact science
Success and utility of budgeting
No substitution
Time consuming
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Budgetary Control System
Definition:
Budgetary control is the establishment of budgets
relating the responsibilities of executives to the
requirements of a policy and the continuous
comparision of actual with budgeted results either to
secure by individual action the objective of that
policy, or to provide a basis for its revision.
-CIMA
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Budgetary Control System
The system works as follows:
(a) Establishment of budgets
(b) Comparison on continuous basis of actual results
with budgets,
(c) Ascertainment of variances by responsibility
centres,
(d) Investigation of variances to highlight causes, and
(e) Corrective action to remedy the causes in order to
ensure the defined objectives are attained.
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Prerequisites
Top management support
Proper organizational structure
Realistic nature of goals
Flexibility
Participative process
Conducive environment
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Features
Objectives
Activities
Plans
Performance evaluation
Control action
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Objectives
Definition of goals
Defining responsibilities
Basis for performance evaluation
Optimum use of resources
Co-ordination
Planned action
Basis for policy
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Advantages
Efficiency
Cost control
Performance evaluation
Standard costing and variance analysis
Policy formulation
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Disadvantages
Estimates
Rigidity
False sense of security
Lack of co-ordination
Time and cost
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Zero-base budgeting (ZBB)
The features of ZBB is are as follows:
(a) Holistic
(b) Analytical
(c) Priority based
(d) Review based
(e) Rational
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Modus operandi
ZBB involves the following steps:
Ranking
Decision Areas
Coverage
Objectives
Budgeting
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Advantages of ZBB
Priority allocation
Maximum efficiency
Cost-benefit analysis
Goal congruence
Management by objective
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Disadvantages of ZBB
Lack of co-ordination
Old-is-gold attitude
Time consuming
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Activity-based budgeting
Activity-based budgeting applies activity-based
costing principles to budgeting. It focuses on the
numerous activities necessary to produce and
market goods and services.
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Life-cycle budgeting
Life-cycle budgeting adopts a life-cycle cost
approach. It is intended to account for the costs at all
stages of the value chain (R&D, design, production,
marketing, distribution, and customer service).
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Kaizen budgeting
The Japanese term kaizen means continuous
improvement, and kaizen budgeting assumes the
continuous improvement of products and processes,
usually by way of many small innovations rather than
major changes.
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Planning, Programming andBudgeting system (PPBS) Planning, Programming and Budgeting system is
used in non-profit or non-commercial organizations
to enable them to make more informed decisions
about resource allocation. PPBS differs from
traditional non-profit and non-manufacturing
budgets.
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Steps involved in PPBS
(a) Identify and define the objectives of programme.
(b) Select performance or output measures to asses the
effectiveness of the programme.
(c) Identify and evaluate alternative methods of achieving
the objectives laid down for each specific programme.
(d) Select the appropriate programmes on the basis of cost-
benefit analysis.
(e) Implement the selected alternative and monitor its
performance to ensure that the objectives of the
programmes are achieved.
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Advantages
PPBS has certain advantages as under:
Effective allocation of resources
Identify and evaluate the activities
Asses the effectiveness of plan
Long-term perspective
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Government budgeting
Government budgeting differs from private sector
budgeting. A governmental budget is not only a
financial plan and a basis for evaluating performance
but also an expression of public policy and a form of
control having the force of law.
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Bibliography
Management Accounting by PareshShah
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