PROJECT ON BUDGETARY CONTROL Masters of Commerce (Accounts) 2012-2013 Semester I

Submitted In Partial Fulfilment of the requirements For the Award of Degree of Masters of Commerce - Accounts By MALVIKA PANDE University of Mumbai S.I.E.S (NERUL) COLLEGE OF ARTS, SCIENCE & COMMERCE Plot 1-C, Sector V, Nerul, Navi Mumbai-400706.

CERTIFICATE

This is to certify that Malvika Pande of M.Com Accounts Semester I (2012-13) has successfully completed the project of banks under the guidance of Mr. Dhanabalu R. Naikar.

________________ Course Coordinator

________ Principal

______________________ Project Guide/ Internal Examiner

________________ External Examiner

DECLARATION

I, Malvika Pande, a student of M.com Accounts Semester I (2012-13) hereby declare that I have completed the project on Budgetary Control.

The information submitted is true and original to the best of my knowledge.

Signature Malvika Pande

ACKNOWLEGEMENT I would sincerely like to give my heartfelt acknowledgement and thanks to my parents. Any amount of thanks given to them will never be sufficient. I would like to thank the University of Mumbai, for introducing M.com (Accounts) course, thereby giving the student a platform to abreast with changing business scenario, with the help of theory as a base and practical as a solution. I would sincerely like to thank our Principal Mrs. Rita Basu. I would also like to thank my project guide Mr. Dhanabalu R. Naikar. for his valuable support and guidance whenever needed. I also feel heartiest sense of obligation my library staff members & seniors who helped in collection of Data and materials and also in this processing as well as in drafting manuscript. Last, but not the least, I would like to thank my friends & colleagues for always being there.

Malvika Pande

Project objectives
This project is intended to provide: An indication and explanation of the importance of budgetary control in marketing as a key marketing control technique. An overview of the advantages and disadvantages of budgeting. An introduction to the methods for preparing budgets An appreciation of the uses of budgets.

Sr. No. 1 2 3 4 5 6 7 8

Topic Introduction Objectives of Budgeting Different types of budgets Budget preparation Budgetary Control Functional Budget Advantages and limitations of budgeting Bibliography

Page No. 6 7 8-11 11-14 15-24 25-33 33-34 35

BUDGETARY CONTROL

BUDGET : A budget is a financial plan for the future concerning the revenues and costs of a business. Budgetary control and standard costing are two essential tools essentially used by business executives for the purpose of planning and control. In the case of budgetary control the entire exercise starts with setting up of budgets or targets and ends with the taking of an action, in case the actual figures differed with the budgetary ones. Budgetary control is the process by which financial control is exercised within an organisation. It is a financial and quantitative statement, prepared and approved prior to a defined period of time, of policy to be pursued during that period for purpose of attaining a given objective. It may include income, expenditure and employment capital. In other words it is a pre-determined detailed plan of action developed and distributed as a guide to current operations and as a partial basis for the subsequent evaluation of performance. MEANING OF BUDGETING: The process of planning all flows of financial resources into, within and from an entity during some specified future period. It includes providing for the
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detailed allocation of expected available future resources to projects, functions, responsibilities and time periods. From above definition it is clear that budgeting is the actual act of preparing the budget. It is the process of evolving the final statement. Budget is the end product of budgeting. ESSENTIALS OF A GOOD BUDGET: 1. It is prepared prior to a defined period of time. 2. It is prepared for the definite future period. 3. The policy to be followed to attain the given objectives must be laid before the budget is prepared. 4. It is monetary and/or quantitative statements of the policy.

CHARACTERISTICS OF A BUDGET A good budget is characterised by the following: Participation: involve as many people as possible in drawing up a budget. Comprehensiveness: embrace the whole organisation. Standards: base it on established standards of performance. Flexibility: allow for changing circumstances. Feedback: constantly monitor performance. Analysis of costs and revenues: this can be done on the basis of product lines, departments or cost centres.

OBJECTIVES OF BUDGETING

The objectives of Budgeting are 1.To encourage self study in all aspects of a Company's operations.

2. To get all members of management to put their heads to the basic question of how the business should be run, to make them of a coordinated team operating in unison towards clearly defined objectives. 3. To promote the planning process and provide a sense of direction to every member of the organization. 4. To force a definition and crystallization of Company policies and aims. 5. To increase the effectiveness with which people and capital are employed. 6. To disclose areas of potential improvement in the Companys operations. 7. To stimulate study of relationship of the Company to its external economic environment for improving the effectiveness of its direction. 8. To direct and coordinate business activities and units to achieve stated targets of performance. 9. To facilitate the control process, by comparing actual results with plan, and provide feedback to the employees about their performance.

DIFFERENT TYPES OF BUDGETS Budgets may be classified on the following bases

1. Functional basis of budgets.

a. Sales budget: Sales budget is the primary budget. It is the most important budget to prepare and the other budgets are prepared on the basis of sales budget. In this budget the in charge or expert forecast the future expected sales of the firm. The sales manager is responsible for the accuracy of the budget. The sales budgets may prepare on basis of product, type of customers, salesman, locality etc. for the preparation of sales budget the following things should be take under care like past sales, sales man estimates, plant capacity, raw material, orders in hand, seasonal fluctuations, competition etc.

b. Production budget: After preparing sales budget the next budget will be production budget. In this budget works manager prepare schedule of production by breaking large production in small units to fulfill the target production. A properly operated budgets leads to inventory control, improved maintenance of production schedules and production targets. Suppose, if the estimated opening stock is 5000 units and estimated sales are 25000 units and closing stock of the product is 3000 units the estimated production will be 25000 + 3000 5000 =23000 units (sales + closing stock opening stock).

c. Material budget: In the production budget material is the first requirement to be considered. Materials are basically divided into two categories as direct and indirect material. It includes the preparation of estimates of different types of the raw material needed for various products and purchasing raw material in required number at a required time. There are few factors which should be taken under care like requirement of raw material; companys stocking policies, price trend, and cost of raw material.

d. Labour budget: labour is an important factor in every production organization. Labour plays an important role in converting raw material into finished product. The labour requirement budgets prepared on basis of production budget. Labour may be of two types direct and indirect labour. In this budget company has to budget the required number of hours and the expected pay scales of the employees. This budget gives information about personnel specifications for the job for which workers are to be recruited, the degree of skill and experience required and rates of pay.

e. Manufacturing Overhead budgets: this budget gives the works overhead expenses to be incurred in a budget period to achieve the production target. The cost of indirect material, indirect labour etc can be calculated with the help of this budget. For making proper control it can be divided into departmental overhead budget. Variable expenses are estimated on the basis of the budgeted output because these expenses are bound to change with the change in output.

f. Administration Expenses budget: The budget covers the expenses incurred in framing policies, directing the organization and controlling the business operations. In budget an estimate of expenses is prepared regarding central office and of management salaries. The budget may be prepared at department level for effectiveness in budgeting system. The budget can be prepared with the past experience and anticipated changes. g. Selling and Distribution budgets: This expense is related to the selling and distribution of material. In this budget experts have to plan for the expected selling and distribution expenses of the firm. Certain items of selling and distribution costs as cost of transportation, salesman salaries etc.

h. Cash budget: this budget is prepared to predict the inflow and outflow of cash during the budget period. In cash receipt we consider cash sales, credit collection and other receipts in cash payments we consider cash payments, tax payable, dividend payable etc. Without cash organizations cannot work so prediction about cash is very important. A cash budget makes provision for a minimum cash balance which will be available at all times.

2. On the basis of flexibility

a. Fixed budget: This is the rigid budget and it is drawn on the assumption that there will be no change in the budgeted time period. A fixed budget will be helpful only when actual level of activity is equal to budgeted level of activities. According to charted institute of management accountants. A fixed budget is defined as a budget designed to remain unchanged irrespective of activity actually attained. b. Flexible budget: It is also called as variable budget. A flexible budget gives different budgeted costs for different budgeted costs for different levels of activities. This budget is applicable in where activity levels vary from period to period. Where the business is new and it is difficult to predict. Where industry is influenced by change in fashion. Where there are changes in sales.

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3. On the basis of period:

a. Long time budgets: long-term budgets are prepared for those organizations, which deal in regular product line. Here organizations are not suppose to change their proceedings in short time periods. b. Short time budgets: Short-term budgets are prepared for small time periods which work for seasonal product line. Here products may change in near future.

FIXED BUDGET V/S FLEXIBLE BUDGET 1. A fixed budget is established for a specific level of activity whereas flexible budget is prepared for various levels of activity.

2. Fixed budget cannot be changed after the period commences, whereas a flexible budget can be changed after the period commence.

3. Fixed budget is more suitable for fixed expenses whereas flexible budget takes both fixed as well as variable expenses in account.

4. Fixed budget includes only fixed costs, whereas a flexible budget includes fixed costs, variable costs and semi variable costs.

5. Fixed budget is mainly used in planning stage whereas flexible budget is used in controlling stage.

BUDGET PREPARATION Firstly, determine the principal budget factor. This is also known as the key budget factor or limiting budget factor and is the factor which will limit the activities of an undertaking. This limits output, e.g. sales, material or labour.

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a) Sales budget: this involves a realistic sales forecast. This is prepared in units of each product and also in sales value. Methods of sales forecasting include: sales force opinions market research statistical methods (correlation analysis and examination of trends) mathematical models. In using these techniques consider: company's pricing policy general economic and political conditions changes in the population competition consumers' income and tastes advertising and other sales promotion techniques after sales service credit terms offered. b) Production budget: expressed in quantitative terms only and is geared to the sales budget. The production manager's duties include: analysis of plant utilisation work-in-progress budgets. If requirements exceed capacity he may: subcontract plan for overtime introduce shift work hire or buy additional machinery The materials purchases budget's both quantitative and financial. c) Raw materials and purchasing budget:

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 The materials usage budget is in quantities. The materials purchases budget is both quantitative and financial. Factors influencing a) and b) include: production requirements planning stock levels storage space trends of material prices. d) Labour budget: is both quantitative and financial. This is influenced by: production requirements man-hours available grades of labour required wage rates (union agreements) the need for incentives. e) Cash budget: a cash plan for a defined period of time. It summarises monthly receipts and payments. Hence, it highlights monthly surpluses and deficits of actual cash. Its main uses are: to maintain control over a firm's cash requirements, e.g. stock and debtors to enable a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises to show the feasibility of management's plans in cash terms to illustrate the financial impact of changes in management policy, e.g. change of credit terms offered to customers. Receipts of cash may come from one of the following: cash sales payments by debtors the sale of fixed assets
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 the issue of new shares the receipt of interest and dividends from investments. Payments of cash may be for one or more of the following: purchase of stocks payments of wages or other expenses purchase of capital items payment of interest, dividends or taxation.

BUDGETARY CONTROL Meaning of budgetary control : Every business firms have main objective to maximize the profits and to minimize the cost. An organization cannot run properly without a good budgetary system. Budgetary control system is very helpful in bringing economy in business. Budgetary control is applied to a system of management and accounting control by which all the operations and output are forecasted in a proper manner to achieve the best possible profits.

ESSENTIAL OF BUDGETARY CONTROL: 1. Budgeting, or the process of preparing the budget, is the starting point for budgetary control. .2. Distribution of budgets pertaining to each function to all the relevant sections within the organization. .3. Collection of actual data pertaining to all budgeted activities. 4. Continuous comparison of actual performance with budgeted performance. 5. Analysis of variances in actual performance and budgeted performance.

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6. Initiation of corrective action to ensure that actual performance is in line with budgeted performance. 7. Revision of budgeted if it is felt that the budgets prepared are no longer relevant on account of unforeseen developments.

Budgetary control involves: 1. Establishment of budgets. 2. Continuous comparison of actuals with budgets for achievement of targets. 3. Revision of budgets after considering changed circumstances. 4. Placing responsibility for failure to achieve the budget targets.

Salient features of such a system are as follows: a. Objectives: Determining the objectives to be achieved, over the budget period, and the policy(ies) that might be adopted for the achievement of these ends. b. Activities: Determining the variety of activities that should be undertaken for achievement of the objectives. c. Plans: Drawing up a plan or a scheme of operation in respect of each class of activity, in physical a well as monetary terms for the full budget period and its parts. d. Performance Evaluation: Laying out a system of comparison of actual performance by each person section or department with the relevant budget and determination of causes for the discrepancies, if any. e. Control Action: Ensuring that when the plans are not achieved, corrective action are taken and when corrective actions are not possible, ensuring that the plans are revised and objective achieved.

OBJECTIVES OF BUDGETARY CONTROL SYSTEM The primary objective of budgetary control's to help the management in systematic planning and in controlling the operations of the enterprise. The primary objective can be met only if

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there is proper communication and coordination amongst different within the organization. Thus the objectives can be stated as: 1.Definition of Goals: Portraying with precision, the overall aims of the business and determining targets of performance for each section or department of the business.

2. Defining Responsibilities: Laying down the responsibilities of each individual so that everyone knows what is expected of him and how he will be judged.

3. Basis for Performance Evaluation: Providing basis for the comparison of actual performance with the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures. It helps to take timely corrective measures.

4. Optimum use of Resources: Ensuring the best use of all available resources to maximize profit or production, subject to the limiting factors.

5. Coordination: Coordinating the various activities of the business and centralizing control, but also making a facility for the Management to decentralize responsibility and delegate authority. Co-ordination is a managerial function under which all factors of production and all departmental activities an balanced and integrated to achieve the objectives of the organization. Budgeting provides the basis for individuals in all departments to exchange ideas on how best the organizations objectives can be realized. 6. Planned action: Business requires planning to ensure efficient and maximum use of their resources. The first step in planning is to define the broad aims and objectives of the businesses. Then, strategies to achieve the desired goals are formulated and tentative schedule of the proposed combinations of the various factors of production, which is the most profitable for the defined period. Budget influences strategies that need to be followed by the originations. It cultivates forced planning aiming managers. It helps in engendering a spirit of careful forethought, assessment of what is possible and an attempt at it. It leads to dynamism without recklessness. It also helps to draw up long range plans with a fair measure of accuracy. 7. Basis for policy: Providing a basis for revision of current and future policies.
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8. Communication: All people in the organization must know the objectives, policies and performances of the organizations. They must have a clear understanding of their part in the organizations goals. This is made possible by ensuring their participation in the budgeting process.

9. Controls and performance evaluation: Control ensures control by continuous comparison of actual performance with the budgeted performance. Variances are highlighted and corrective action can be initiated. Budgets also from the basis of performance evaluation in an organization as they reflect realistic estimates of acceptable and expected performance.

STEPS IN INSTALLATION OF A SYSYTEM OF BUDGETARY CONTROL: A system of budgetary control in firm should be installed after taking care of following requisites of budgeting. (i) (ii) (iii) (iv) What is likely to happen? What are the objectives to achieve? How to minimize the cost? What is the allotted time to complete the production?

In order to make an effective system of budgetary control following steps should take under care:

Organization chart: An organization should have a proper chart from where authority and responsibility of each executive get clear. If organization chart is not clear then there may be conflicts among the employees. if duties are clear among the workers then every person will be answerable for his performance. Nobody can blame to other for the poor performance.

Determination of objectives: it is very important that the objectives should be very clear to all the executives in the organization. Having determined the objectives of budgetary control the following future problems will have to be sorted out:
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Laying down a plan for the implementation of the firms objectives. Coordination of the activities of the different departments. Controlling each function to get best possible results.

Budget manual: The budget should be in writing. It should be like a rulebook in which objectives should be clear. Following of the some important matters covered in budget manual. A statement regarding the objective that how that objective can be achieved. Functions and responsibilities should be clear. Timetable for all stages of budgeting. Reports, statement and other records to be maintained.

Responsibility for budgeting: Budget controller: there should be someone budget controller. Chief executive should be responsible in the form of budget controller for budget programme. Budget controller should be technically sound person.

Budget committee: budget controller by his own may not be successful in all the process. There should be a proper to assist him all the time. There should be members from all the departments of the organization like production, finance, sales etc. each head of the department will have his own subcommittee and person will be responsible to his respective head.

Fixation of budget period: By budget period we mean the period for which we are going to prepare a budget. Period of budget depends on so many factors as (i) nature and size of

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business (ii) the controlling techniques applied. A seasonal nature business need short term budget and for a regular nature business we can opt a long-term budget plan.

Determination of key factors: key factors always very important for every organization. Budgetary control system should be capable of using key factors in a proper manner. Key factors may b the raw material, labour; finance etc. budgetary control system must give guidance to select a profitable unit among more than one option if any. Motivation: budgetary control should be motivating to the employees. The system should be applicable to those only ho are responsible about their duty. The budget should cover all the phases. Making of forecasts: after studying all the steps then forecast should start for the future. There should be alternative forecast for the future. The best forecast should send to top management for converting that forecast in budget.

Approval from top management: The top management should approve the final budget. Without the approval of top authorities budget controller cannot pass the budget.

MASTER BUDGET A master budget is a set of interconnected budgets of sales, production costs, purchases, incomes, etc. and it also includes pro forma financial statements. A budget is a plan of future financial transactions. A master budget serves as planning and control tool to the management since they can plan the business activities during the period on the basis of master budget. At the end of each period, actual results can be compared with the master budget and necessary control actions can be taken.

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COMPONENTS OF MASTER BUDGET The master budget consists of two sections, the operations budget and the financial budget. The operating budget is also known as the profit. The operating budget analyzes the income statement and all schedules supporting this statement and includes the sales budget, operating expense budget and the cost of goods sold. In the event the organization does not have sales revenue, the focus would be on budgeted expenses and their supporting schedules. The financial budget analyzes the impact of the operations budget has on the cash of the organization and include the cash budget, capital budget and the budgeted balance sheet. They have following components: Operational Budget 1. Sales Budget 2. Production Budget 3. Direct Material Purchases Budget 4. Direct Labour Budget 5. Overhead Budget 6. Selling and Administrative expenses Budget 7. Cost of goods manufactured Budget Financial Budget 1. Schedule of Expected Cash Receipts from Customers 2. Schedule of expected cash payments to Suppliers 3. Cash Budget 4. Budgeted Income Statement 5. Budgeted Balance Sheet

REASONS FOR CREATING A MASTER BUDGET A budget provides managers with an opportunity to communicate quantitatively their financial strategy and expectations up to senior management and below to their subordinates Budgets also allow managers to receive feedback from subordinates regarding capabilities and opportunities. The master budget expands this process to a corporate wide analysis,

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providing senior management with a very comprehensive view of the corporations short and long-term financial strategies, opportunities and potential challenges, to be avoided.

ADVANTAGES AND DISADVANTAGES OF THE MASTER BUDGET There are four main advantages of using a master budget; re-evaluation, forethought, communication and coordination. The master budget allows managers to re-evaluate their plans by either starting with their current activities or, start from zero (zero-based budgeting), justifying all activities that do not start at zero. Most budgeting processes start someone in between the zero level and the current level of activities. Re-evaluating allow the managers to analyze the activities to determine what adjustments are needed (if any) to ensure they are enhancing the organizations chances for success by maximizing opportunities and the use of all resources available resources. The master budget requires managers to analyze future activities and develop policies and procedures that may be needed to support the new or adjusted strategy. For example, managers are forced, in most cases, to deal with day-to-day challenges, preventing them from investing proper time and attention to every aspect of their team, group, department or organization. The budget provides guidelines and parameters that the manager and subordinates can operate within to achieve their objectives. The budget is a form of communication up-channel and down channel and a catalyst for coordination between departments within an organization. For example, the financial managers understand that the sales forecasts depend on production, and production relay on purchasing and delivery schedules. Therefore, communicating (as mentioned above) strategy and expectations down-channel and communicating feedback and opportunities up-channel along with coordinating activity between departments and divisions allow managers to not only provide a quantitative view, but also a visual of how the master budget and policies and procedures will facilitate the success of the strategy. The master budget can also be used as a form of benchmarking. In essence, the master budget allow managers to compare and contract activities and how the activities should be or were adjusted to account for technology, economic conditions, personnel
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and competition, among other environmental conditions such as governmental regulations, state , local and federal.

DISADVANTAGES Disadvantages of the maser budget include the lack of participating from subordinates, misleading information, and difficulty of acquiring accurate and reliable information. Managers tend to resent budgets as they are typically seen as a tool to restrict spending. Participate measures (i.e., participative budgeting) is a tool used to enhance participating and spreading ownership and responsibility to those impacted by the budget. When budgets are applied and managers are provides bonuses based on performance; the results can sometimes promote managers to embellish information, leading to misleading results to improve their chances for higher bonuses. For example, managers may not resist the opportunity to create slack budgets (or padding) to either increase expenses or reduce revenue preventing cost cutting by upper level management and creating goals that are easier to reach. In terms of inaccurate information, sales forecasts and sales budgets are essential. The forecasts are predictions of the upcoming sales period and the budget help to represent the conditions and or circumstances that will be needed to facilitate success by reaching or exceeding the forecasted numbers. The difficulty in creating a master plan can be attributed to the enormous need for data . For example, managers have to analyze past performances, economic conditions, competitor actions and reactions, sales predictions, changes in organizational prices/product mixes, marketing research and advertising activities. As mentioned earlier, the budget can be the organizations masterpiece, designed for success however; it does not come without difficulty. Senior managers must be mindful of the advantages and disadvantages and develop strategies that will enable it to administer the budgeting process in a way that will employ its resources, maximizing potential benefits.

KEY FACTORS FOR SUCCESSFUL ESTABLISHMENT OF BUDGETS

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 There should a clear effective communication of the companys objectives and strategy to those responsible for preparing budgets. This is quite critical otherwise there is no proper focus on the overall companys goal like achieving X revenue or XX profitability and others. The strategy document should be clear as to the overall objectives of the organization and should able to reflect the impact on the various division. There should be a clear effective communication of the overall and detailed procedures for preparation of the budgets. Preferably a budget manual should be set up to communicate all the essential procedures like the time line to complete the budget, formats to be used, organization chart and others. Determine the key and/ limiting factors which normally comprise sales to be achieved, availability of materials, capital and others. The organization need to ensure the proper setting up of budget centres or department. Who to do what is the basic otherwise the relevant managers might be confused of their roles. There should be availability of adequate/detailed accounting records. If the accounting systems does not maintain the correct detailed past records of transactions, it will make the forthcoming budgeting very difficult and cumbersome. It is important to set up a proper budget committee to coordinate all the work connected with the budgets. This committee can assist to. formulate a general program for preparing the budgets and exercising overall control. review and co-ordinate the budgets. negotiate budgets with line managers. finally accept the final form of the budgets.

FUNCTIONAL BUDGET DEFINITION: A functional budget is a budget of income and/or expenditure applicable to a specific function. A function may refer to a process or department. Functional budgets frequently include the following: production cost budget ( based on a forecast of production and plant utilisation); marketing cost budget; sales budget; personnel budget; purchasing budget; and research and development budget. It is the cost and income plan created for a particular process or department operating within a business. For example, a functional
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budget for the manufacture of a product line might include estimated costs of production, marketing, sales, labor, equipment and materials, as well as projected sales income. FORECASTING V/S BUDGET A forecast looks the same as a plan or budget and the mechanics of putting a forecast together are the same as for a plan or budget. However a forecast is really quite different from a budget, principally because of the way it is used, and the data it contains. If you use them wisely forecasts will be the major tool in ensuring you never run out of cash. Unlike a budget, a forecast is not intended to be a goal - it is more passive. A forecast is really just a vehicle to allow you to peer into the future and make predictions about what is likely to happen. The sales you put into a forecast will normally be those you believe you are most likely to make over the coming months. The table below summarises the main differences between a budget and a forecast. Budget

The financial expression of your target. This is the course you have actively decided upon and set for yourself; it is your intention.

It is where you want to go. It is normally prepared just once for each financial year. This is your latest expectation of what really will happen over the next few months, based on what is happening in your business now.

Forecast

It is where you are going. It is your financial radar. Is most useful if prepared every month.

TYPES OF FUNCTIONAL BUDGETS: SALES BUDGET : A sales budget is a valuable tool that gives a direction to a company with regard to its targeted sales. It helps to improve the profitability of a company. The
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company makes a financial plan with regard to the amount of goods and services that it plans to sell in a year and the price at which the goods and services are to be sold. This plan is its sales budget. The sales budget is the first component of the master operating budget. This is because sales affect all other parts of the master budget. It includes the total sales valued in quantity. It consists of three parts; break even, target and projected sales. The budget also includes sales by product, location, customer density and seasonal sales patterns. It provides a plan for both cash and credit sales. The basis of a sales budget is the sale price per unit of goods to be sold multiplied by the quantity of goods to be sold. A sales budget is planned around the competition, the material available, cost of distribution, government controls and the political climate.

PRODUCTION BUDGET: A film production budget determines how much money will be spent on the entire film project. It involves the identification and estimation of cost items for each phase of filmmaking(development, pre-production, production, post-production and distribution). 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 goods inventory to have on hand (usually as safety stock to cover for unexpected increases in demand). 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 - Beginning finished goods inventory = Products to be manufactured

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PURCHASE BUDGET : A purchases budget report allows business owners to determine how much money and goods are needed to reach desired goals. This particular budget is used for companies that have products in stock or inventory, as the value of inventory plays a large role in a complete purchases budget. A purchases budget provides a representation of what the business plans to buy for the inventory and how much inventory it plans to grow or hold over a given period of time. A purchases budget is created by using a simple formula. The formula is the desired ending inventory plus the cost of goods sold minus the value of the beginning inventory. This equation gives you the total purchases budget. For example, if you want $10,000 worth in ending inventory and your cost of goods sold is around $3,000, add these two values and subtract the value of your beginning inventory from the $13,000 total, according to the equation. If the value of the beginning inventory is $2,000, for example, the final amount if your total budget will be $11,000.

LABOUR BUDGET : Labour budget deals with the cost management or estimation with the employees and labours working within the boundaries of an organization with the details of project carried out . The labour cost are directed two ways i.e. Direct cost: here it is cost of wages, salaries, commissions, etc. of the employee which are directly concerned with the manufactured product. And next is Indirect Cost: it is the cost of labour required for the massive movement and handling of the product. This budget gives as estimate of the requirements of direct labour essential to meet the production target. This budget may be classified into labour requirements budget and requirement budget. The labour requirement budget is developed on the basis of requirem ent of the pro ducti on budget gi v en and det ail ed inform ati on regardi ng t he fit ters, wel d ers , turner, m il l ers , and grinders and drillers etc., required for each department, their scales of pay and hours to be spent. This budget is prepared with a view to enable the personnel department to carry out programmers of training and training and transfer and to find out sources of labour needed so that every of effort may be made to remove difficulties arising in production the available workers in each department, the expected changes in the labour force during the budget period due to the labour turnovers. This budget gives information about the personnel specification for the jobs for which workers are to be recruited, the degree for skill and experience required and the rates of pay. Where standard costing system is applied, the labour cost
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budget is developed on the basis of standard in the production budget . if standard costing system is not being followed in the organization, the information of labour cost may be obtained from past records or estimated cost.

COST OF PRODUCTION BUDGET: After determining the volume of output the cost of procuring the output must be obtained by preparing a cost of production budget. This budget is an estimate of cost of output planned for a budget period and may be classified into material cost budget, labour cost budget and overhead budget because cost of production includes material, labour and overheads.

MATERIALS BUDGET; In drawi ng up the producti on budget , one of t he fi rst requi rem ent s to be consi dered is m at erial . As we know, m ateri als m a y be di rect or fi n di rect . The materials budget deals with the requirements and procurement of direct materials .Indirect materials are dealt with under the works overhead budget. The budget should be related to the production budget and the period of the budget should be of short duration because this budget has an important bearing on the cash budget.

MANUFACTURING OVERHEADS BUDGET: This budget gives an estimate of the works overhead expenses to be in creed in a budget period t o achi eve t he product ion t arget . The budget i ncl udes t he cost o f indirect material indirect works expenses. The budget may be classified into fixedcost , charit abl e cost and sem ivari abl e cost. It can be broken i nt o depart m ent al overhead budget to facilitate control. In preparing the budget, fixed works overhead can be estimated on the basis of past information after taking into consideration the expected changes which may occur during the budget period. Variable expenses are estimated on the bases of the budgeted output because these expenses are bound to change with the change in put.

ADMINISTRATIVE EXPENSES BUDGET:

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This budget covers the expenses incurred in framing policies, directing theorganiz at ion and control li ng t he business operations. In ot her words, t he budget provides as estimate of the central office and of management salaries. The budget can be prepared with the help of past experience and anticipated changes. Budget may be prepared be prepared for each administration department so that responsibility for i ncreasi ng such expenses. This budget covers t he expenses i ncurred in f ormi n g policies, directing the organization and controlling the business operations.

RESEARCH AND DEVELOPMENT COST BUDGET While developing research and development cost budget, it should be clear in mind that work relating to research and development is different from that relating to t he m anufact uri ng function. Manufact uri ng function gives qui cker resul ts t h an Research and development which may go on for several years. Therefore, these budgets are establi shed on a l ong term basi s: sa y for 5 t o 10 years whi ch can be further subdi vi ded i nt o short -term budget s on annual basi s. As a rul e research workers are l ess cost conscious: so the y are not s uscepti bl e to st ri ct cont rol. A research and development budget is prepared taking into consideration the research proj ects i n hand and t he new res earch proj ect s in hand and t he new search and development projects to be taken up. Thus this budget provides an estimate of the expenditure to be incurred on research and development during the budget period.

CASH BUDGET: The cash budget is prepared after the operating budgets (sales, manufacturing expenses or merchandise purchases, selling expenses, and general and administrative expenses) and the capital expenditures budget are prepared. The cash budget starts with the beginning cash balance to which is added the cash inflows to get cash available. Cash outflows for the period are then subtracted to calculate the cash balance before financing. If this balance is below the company's required balance, the financing section shows the borrowings needed. The financing section also includes debt repayments, including interest payments. The cash balance before financing is adjusted by the financing activity to calculate the ending cash balance. The ending cash balance is the cash balance in the budgeted or pro forma balance sheet.
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A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems.

For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs.

For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems fairly unimpressive. However, upon setting a cash budget to account for regular annual cash expenditures, this seemingly small daily expenditure comes out to an annual total of $365, which may be better spent on other things. If you frequently visit specialty coffee shops, your annual expenditure will be substantially more.

ZERO-BASED BUDGETING - ZBB A method of budgeting in which all expenses must be justified for each new period. Zerobased budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.

ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations. Because of its detail-oriented nature, zero-based budgeting may be a rolling process done over several years, with only a few functional areas reviewed at a time by managers or group leadership.

Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period's budget. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting. The practice also favours areas that achieve direct revenues

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or production; their contributions are more easily justified than in departments such as client service and research and development.

PERFORMANCE BUDGETING A budget that reflects the input of resources and the output of services for each unit of an organization. This type of budget is commonly used by the government to show the link between the funds provided to the public and the outcome of these services. Decisions made on these types of budgets focus more on outputs or outcomes of services than on decisions made based on inputs. In other words, allocation of funds and resources are based on their potential results. Performance budgets place priority on employees' commitment to produce positive results, particularly in the public sector.

EXAMPLE A company estimate sales of its product 'X' during the last five months of 2006 as under. Months August September October November December Units 21600 31200 24400 20800 19600

Inventory of product 'X' at the end of every month is to be equal to 50% of sales estimate for the next month. Closing inventory of July was maintained on the above basis. There was no work in progress at the end of any month. Every unit of product requires two types of materials in the following quantities. Materials - 5 ltr. Material B - 6 ltr

Materials equal to 25% of the requirement for the next month consumption are kept as closing stock. The stock position on 31st July was as under. Material A - 32000 ltr. Material B - 28000 ltr.

The purchase price of material A is Rs 3/- per ltr. and Material B is Rs 2/- per ltr. There was no closing stock of material A and B on 30th November 2006. From the above prepare following budgets for the period august to november.
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1. Production budget 2. Material consumption budget 3. Purchase Budget showing quantity and value.

SOLUTION

(A) Production Budget Particulars Aug. Sept. Oct. Nov.

Materials: A (5 litre/unit) B (6 litre/unit) 132000 139000 158000 166800 113000 135600 101000 121200

Total Material Consumption

290400 305800

248600

222200

(B) Particulars

Material consumption budget Aug. Sept. Oct. Nov.

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Units required to sale ADD: Closing stock (50% of next month sale) Total units required (-) Opening stock (50% of current sales) Production units

21600 15600

31200 12200

24400 10400

20800 9800

37200

43200

34800

30600

10800 26400

15600 27800

12200 22600

10400 20200

Purchase budget (quantity and value)

Particulars

August Mat A 1320 Mat B 1584 00

September Mat A 1390 00 Mat B 1668 00

October Mat A 1130 00 Mat B 1356 00

November Mat A 1010 00 Mat B 1212 00

Material Consumption ADD:

00

3475 Closing stock (25% of next month consumption) LESS : 3200 Opening stock (25% of current month) 0 0

4170 0

2825 0

3390 0

2525 0

3030 0

1225 0

1470 0

2800 0

3475 0

4170 0

2825 0

3390 0

2525 0

3030 0

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1347 Purchase of material (Ltr.) Rate/Litre 50 3 4042 Purchase Price 50

1721 00 2 3442 00

1325 00 3 3975 00

1590 00 2 3180 00

1100 00 3 3300 00

1320 00 2 2640 00

5800 0 3 2640 00

1056 00 2 2112 00

Working notes: Material consumption for December: Material A Material B 9800 x 5 = 49000 9800 x 6 = 58800

ADVANTAGES OF BUDGETING AND BUDGETARY CONTROL:

There are a number of advantages to Budgeting and budgetary control:

1) Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system, Forces management to look ahead, to set up detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organization purpose and direction.

2) Promotes coordination and communication. 3) Clearly defines area of responsibility, requires managers of budget centres to be made responsible for the achievement of budget targets for the operation sunder their personal control. 4) Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and noncontrollable factors. 5) Enables remedial action to be taken as variances emerge. 6) Motivates employees by participating in the setting of budgets.
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7) Improves the allocation of scarce resources. 8) Economizes management time by using the management by exception principle.

LIMITATIONS OF BUDGETING AND BUDGETARY CONTROL: Whilst budgets are widely used to in business, you should appreciate that they have some important limitations. In particular:

Budgets are only as good as the data being used to create them. Inaccurate or unreasonable assumptions can quickly make a budget unrealistic

Budgets can lead to inflexibility in decision-making Budgets need to be changed as circumstances change Budgeting is a time consuming process in large businesses, whole departments are sometimes dedicated to budget setting and control

Budgets can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget

Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers

Budgets can also create some behavioural challenges in a business

Budgeting has behavioural implications for the motivation employees Budgets are de-motivating if they are imposed rather than negotiated Setting unrealistic targets adds to de-motivation Budgets contribute to departmental rivalry - battles over budget allocation Spending up to budget: it can result in a use it or lose it mentality - spend up to the budget to preserve it for next year

Budgetary slack occurs if targets are set too low A name, blame and shame culture can develop - but managers should be answerable only for variations that were under their control

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BIBLIOGRAPHY

www.gntmasterminds.com/BUDGETARY www.businessdictionary.com/definition/budgetary-control.html www.tutor2u.net/business/presentations/.../budgetcontrol/default.htm expertscolumn.com/content/advantages-budgetary-control www.strategic-control.24xls.com/en211 www.ehow.com Business www.businessdictionary.com/definition/functional-budget.htm www.tutorsonnet.com Accounting Cost Accounting

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