cost & management accounts iii

8/7/2019 Cost & Management Accounts III

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Budgeting

� Definition:-

A financial and/or quantitative statement,

prepared and approved prior to a definiteperiod of time, policy to be pursued during

that period for the purpose of attaining a

given objective.



Characteristics of Budget

� It is a quantitative statement expressed in

terms of money.

�

It is prepared in advance approved prior to adefinite period.

� It relates to a future time i.e for future

implementation.

� A budget is prepared for the implementation

of policy formulated by the management.



Budgetary Control

� Definition:-

The establishment of budget relating to the

responsibility of executives to therequirements of a policy and the continuous

comparison of actual with budgeted results,

either to secure by individual action, the

objectives of that policy or to provide a firm

basis for its revision.



Characteristics of Budgetary Control

� Establishment of budgets for eachfunction/deptt. of the organization.

� Comparison of actual performance with thebudgets on a continuous basis.

� Analysis of variation of actual performance.

� Taking suitable remedial action where

necessary.� Revision of budget in view of changes in

condition.



Objective of Budgetary Control

� Control Planning:- A budget is a plan of action

which provides a detailed plan over a definite

period of time.

� Co-ordination:- Co-ordination is the process

where by different division of a concern work in

harmony to achieve the objective of a business.

� Control:- Control is the action necessary toensure that the plans and objectives being

achieved in a systematic order or manner.



Advantages of budgetary control

� It provides planned approach.

� It directs capital expenditure in most profitable channel.

� It co-ordinates activities of various departments.

� It increases efficiency, eliminates waste and controls cost.

� Fixes responsibilities of each individual,� Motivates employee to achieve goal.

� Provides incentives when set results are achieved.

� Compels mgmt. to plan economically and careful.

� Creates necessary condition for introduction of standard costing.

� Provides yardstick against which actual results can be compared.� It assists in delegation of authority and assignment of responsibility.



Limitations of Budgetary Control

� Absolute accuracy is not possible in Budgetary Control.

� The estimation of BC is a costly affair.

� It is only a tool in the hands of mgmt. and it cannot be

regarded as a master.� It is a time consuming process.

� It must be continuously adopted to fit the changingcircumstances. Budgets will lose its usefulness if rigidityis adhered and are not revised with changing

circumstances.� Budgetary Control is essential tool of decision making

and helps the mgmt. in taking sound decisions. But itcannot replace the mgmt.



Essentials of successful budgetary

control� No control system can be effective without the consideration of top mgmt.

Therefore a BC system must be fully supported by the top mgmt.

� For the success of BC there should be participation of the executivesfollowed by clear cut delegation of authority and responsibility.

� The figures in the budget should be realistic and attainable.

� The staff involved in the process should be properly motivated to achievethe goals.

� In order to derive the benefits the goals must be clearly defined.

� There should be a close relationship between the accounting andbudgeting as budgets have to be prepared based on historical facts.

� The budgeted figures should be compared with the actuals to ensure the

results and to take necessary remedial action.� The budgets should be flexible enough to allow the adjustments under

changed circumstances.



Steps Reqd. in BC

� Establishments of budgets for each section of

the organization.

� Comparison of actual performance with the

budget.

� Ascertainment of the reasons for such

variations of actual from the budgeted

performance.

� Taking remedial action wherever necessary.



Types of Budget

� Coverage:- a) Functional & b) Master.

� Capacity:- a) Fixed & b) Flexible.

� Condition:- a) Basic & b) Current.

� Period:- a) Long term & b) Short term.

Following are the budgets that come under the above categories:-1) Sales Budget.

2) Production Budget.

3) Purchase Budget.

4) Labour Cost Budget.

5) Cash Budget.6) Fixed Budget.

7) Flexible Budget.

8) Master Budget.

cost & management accounts iii

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