final budgeting and budgetary control

8/10/2019 Final Budgeting and Budgetary Control

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BUDGETING ND BUDGET RY

CONTROL

Presented By :

Sakshi Girdhar

Utsav De


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Budget

Budget refers to a plan relating to a definitefuture period of time expressed in monetaryand/ or quantitative terms.

It is a formal expression of the expectedincomes and expenditures for a definite

future period.


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Characteristics of Budget

Planning and performance evaluation Device

Quantitative and /or monetary terms

Definite future period

Policies formulated to attain given objectives.


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Concept of Budgetary Control

Budgetary Control is the establishment ofbudgets relating to the responsibilities ofexecutives of a policy and the continuouscomparison of the actual with the budgetedresults, either to secure by individual action

the objective of the policy or to provide a basis

for its revision.


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Characteristics of budgetary

Control

Establishment of budgets for eachfunction/department of the organization

Comparison of actual performance with budgetson a continuous basis

Analysis of variations of actual performancefrom that the budgeted performance to know

the reasons thereof. Taking suitable remedial action, where necessary

Revision of budgets in view of changes incondition


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Objectives

Planning-

A budget provides a detailed plan of action

for a business over a definite period of time. Relating to production, sales, raw materials

requirements, labour needs, advertising andsales promotion.

It helps to anticipate many problems andprepare for solutions


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Co-ordination

Budgeting helps managers to harmonize theobjectives of the division with the objectivesof the organization as a whole

Planning and organizing contribute a lot inachieving co-ordination.

Example-Budget of sales should be in co-ordination with the budget of production


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Communication

A budget is a communication device.

The vital information associated with budget

is communicated in the act of preparingbudgets and participation of all responsibleindividuals


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Motivation

Budget is a useful device for motivatingmanagers to perform in line with thecompany objectives.

Active participation of employees inpreparing budget, acts as a strong motivatingforce to achieve companys objectives


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Control

Control is a systematic effort to keep themanagement informed of whether theplanned performance is being achieved or not

Control is necessary to ensure plans andobjectives mentioned in the budget are beingachieved

It helps in comparing plans and actualperformance and in taking correctivedecisions


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Performance evaluation

A budget helps managers to evaluate theirperformance in achieving targets which theyhad set earlier in their budget.

In many companies there is a practice ofrewarding their employees for achieving thairbudget targets


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Limitation of Budgetary

ControlThe budget plan is based on estimates-

Budgets are based on forecasts and forecasting

cannot be an exact scienceAbsolute accuracy is not possible in budgeting

The strength and weakness of budgetarycontrol totally depends on accuracy withwhich estimates are made


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Danger of rigidity

A budget program must be dynamic andcontinuously deal with the changing businessconditions

Budget will loose their usefulness if they arerigid and are not revised with the changingtimes.


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Budgeting is only a tool of

management Budgeting cannot take the place of

management but is only a tool ofmanagement

Introduction of budget is not alone necessaryfor success

The entire organization must participate

enthusiastically in the programme for therealization of the budgetary goals


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Opposition from staff

Some employees may not liked to beevaluated thus oppose introduction ofbudgetary control system

Inefficient managers create difficulties in theway of introducing this system


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Expensive Technique

The cost of installing and operatingbudgetary control system is very high

It is essential to check that the cost ofintroducing budgetary system should notexceed the benefits


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Classification of budgets

FUNCTIONAL BUDGETS-

Functional budget mainly deals with a

particular function of the business Eg-sales budget, production budget stc.


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Types of Functional Budgets

Sales Budget-

It is one of the most important and difficult

budgets to be prepared It is a statement of planned sales in terms of

quantity and value

It is prepared to show sales classifiedaccording to production, salesman,customers, territories and periods


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Production Budget

The production budget is a plan of productionfor the budget period

It shows the quantities of production It is the initial step in budgeting

manufacturing operations


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Production Cost Budget

It shows the estimated cost of production

The quantities of production are expressed in

terms of cost in production cost budget It is shown in details in respect of material

cost, labour cost and factory overheads


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Raw Material Budget

It shows the estimated quantities of all theraw materials required for productiondemanded by the production budget

Raw materials assists purchasing departmentin planning the purchases

Also provides data for raw material control


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Purchase Budget

It is the detailed plan of purchases for thebudget period

It is prepared mainly by the purchasemanager

It helps in cost saving in many companies


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Labour Budget

It represents the forecast of labourrequirements to meet the demands of thecompany during the budget period

It includes both direct and indirect labour

It is prepared by ascertaining the directlabour hrs of each grade of labour required

for each unit of output and standard wagerate for each grade of labour


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Production Overheads Budget

Represents the forecast of all the productionoverheads

The budget expenses for each sub-periodshould be indicated

The budgeted overhead costs of servicedepartments are totaled and apportioned to

production department.


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Selling and Distribution Cost

Budget

Represents the forecast of all costs incurredin selling and distributing the companysproduct

As a general rule, the sales budget and theselling and distribution cost budgets areprepared simultaneously.

Advertizing may or may not be included


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Administration Cost Budget

Forecasts of all administration expenses.

Are fixed


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Capital Expenditure budget

Represents the expenditure on all assets.

Items not directly related to profit and loss

Is planned a number of years in advance Involves large amount of expenditure


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Cash Budget

Detailed of cash receipts from all sources andcash payments for all purposes.

Ensures solvency Covers deficiency


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Master budget

Master budget is a summary budgetincorporating its component functionalbudgets and which is finally approved,adopted and employed

It has 2 parts

operating budget

financial budget

Prepared by director or budget officer


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Classification of budgets

FLEXIBILITY

Fixed budget

Flexible budget


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Fixed Budget

Is designed to remain unchanged irrespectiveof the level of activity attained.

Based on assumption that output and salescan be estimated with a fair degree ofaccuracy


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Flexible Budget

Which is designed to change in relation tothe level of activity attained.

Prepared when sales are difficult to predict Sales affected by weather conditions, or

change in fashion

Introduction of a new product

Exports

Distinction between fixed and


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Distinction between fixed and

flexible BudgetsS. No Bases Fixed

Budget

Flexible

Budget1 Assumption of

businessenvironment

Static changing

2 Consideration One level ofactivity

Different levels ofactivity

3 Changes in figures no Accordingly

4 Differences inactual andbudgeted levels ofactivity

No comparison Meaningfulcomparison

5 Use Limited More useful


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Zero Base Budgeting (ZBB)

A method of budgeting whereby all activities

are revaluated each time a budget is set.Discrete levels of each activity are valued anda combination chosen to match funds

available


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Main features

Both old and newly proposed, are consideredafresh

Amount to be spent on each budget is to be

totally justified Cost benefit analysis and compete for scare

resources

Departmental objectives are linked to corporategoals

Why we should spend

Managers at all levels participate


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Advantages of Zero Base

Budgeting All activities included in the budget are justifiedon cost benefit considerations which promoteeffective allocation resources

In ZBB process, inefficient and loss-makingoperations are identified and may be removed

It gives psychological push to employees toavoid wasteful expenditure

It helps to promote talented and skillful mangerswho promptly respond to changes in businessenvironment


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Advantages of Zero Base

Budgeting Cost behavior patterns are more closely

explained through ZBB

Deliberately inflated budget getautomatically weeded out in the ZBB process


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Disadvantages of Zero Base

Budgeting

ZBB leads to increase in paper work a lotwhich results in high cost in preparingbudgets

In ZBB all expenditures are questioned and isneeded to be justified which may make thosemangers fell threatened who resist new ideasand changes

In ZBB, there is a danger of emphasizingshort-term gains at the expense of long termbenifits


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Disadvantages of Zero Base

Budgeting

For introducing ZBB, managers need to begiven proper training about al pros and consof this new concept

It may not be easy to properly rank decisionpackages and this may give rise to conflicts


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Performance Budgeting

It mainly focuses on functions, program andactivities

In traditional budgeting everything is based onmonetary terms while performance budgetingmainly emphasizes on achievement of physicaltargets.

It answers questions like what is to be achieved?How is to be achieved and when is to be

achieved? Government of India has decided to introduce

performance budgeting in all its department


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Steps in performance

budgetingEstablishment of responsibility centre- First of all responsibility centres are

established

It is that segment where an individualmanager is responsible for the performanceof that segment


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Establishment of performance

targets

For each responsibility centre targets aresetup in form of physical performance to beachieved

Eg-In sales department targets are set up interms of number of units to be sold duringthe budget period


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Estimating financial

requirements Here financial support needed to achieve the

physical targets is estimated

Forecasting of the amount of expenditureinvolved under various heads to achieve thephysical performance is done here


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final budgeting and budgetary control

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