SUBMITTED TO : Mrs.

MEERU

PREPARED BY: VIDHUR BANSAL

ROLL NO: 8130

An estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals .One of the most important administrative tools, a budget serves also as a (1) plan of action for achieving quantified objectives, (2) standard for measuring performance, and (3) device for coping with foreseeable adverse situations.

According to CIMA A financial and quantitative prepared and approved prior to a defined period of time of the policy to pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital.

PLANNING: A set target is often necessary to guide and focus individual and group actions. DIRECTING: once the budget plans are place they can be used to direct and coordinate operations in order to achieve the stated targets. CONTROLLING: In this actual performance is compared with planned target and taking measures to correct this in future.

FUNCTIONAL BUDGET

COVERAGE

MASTER BUDGET CONDITIO N BASIC BUDGET

CAPACITY

BUDGET

FIXED BUDGET

FLEXIBLE BUDGET

PERIOD

CURRENT BUDGET

LONG TERM

SHORT TERM

1. 2. 3. 4. 5.

6.
7. 8.

SALES BUDGET: In this we make budget for sales and while making this budget the following things are to be considered: Past sale figures and trends Salesmans estimate Plant capacity Available of raw material and other supplies Orders in hand Financial aspect Adequate return on capital employed Competition

PRODUCTION BUDGET
1. 2. 3. 4. 5.

It shows the production for the budget period based upon : Sales budget Production capacity of the factory Planned increase or decrease in finished stocks Production should be carefully coordinated with sales budget Planning the level of production involves the answer of four question: What is to be produced? When is to be produced? How is to be produced? Where is to be produced?

Month
January February March

Sales (units) +closing stock(units)

60000 48000 72000 24000 36000 40000

-opening stock(units)
30000 24000 36000

Production (units)
54000 60000 76000 1,90,000

1. 2. 3.

In drawing up the production budget one of the first requirement to be considered is material. As we know material may be direct or indirect. Thus it deal with the requirement of direct material. Indirect materials are dealt with under the work overhead budget. The period of the budget should be short duration because this has an important bearing on cash budget. It include : Estimates of diff. types of raw material needed for various products. Purchasing raw material on time. Cost of that material.

This is mainly depend on production budget and material requirements budget. This provide the information about the material to be acquired from the market during the budget period. The following factors should be taken into consideration while preparing this budget: Quantity of each type of material. Quality of that material. Capital items required. The present stock position. The date on which the material is required.etc

XYZ company Direct material purchase budget for the year ending march 31,20.
Desired closing stock(units) Units required for production ADD: Total needs LESS: Opening stock(units) Units produced Unit price(RS.) Purchase cost(RS.) Material X 30000 156000 Material Y 500 34000 Total

159000
4000 155000 1.50 232500

34500
300 34200 2.50 85500

318000

Once sale budget and production budget are compiled and thereafter plant utilization budget is settled, detailed amount of the various machine operations involved and services required. This will help in preparation of an estimate of different grades of labour required. From this standard hours required to be worked can be prepared.

XYZ COMPANY Direct-labour cost budget for the year ending march 31,20
Units to be produced Product A Product B 4000 9000 Direct labour hour, per unit 7 10 Total hours 28000 90000 -------------1,18,000 Total budget cost (RS.) @RS. 2 per hour 56000 180000 -----------------2,36,000

1.

2.

It consist of all items such as indirect material, indirect labour and indirect expenses. Indirect expenses include fuel, fringe benefits, depreciation etc. This budget usually include the total estimated cost for each item of this overhead. Few EXAMPLE of how the expenses are estimated: Fixed expenses are policy cost and hence they r based on policy matters. In regard to the estimate of consumption of indirect material, the age and condition of the plant and machinery are taken into consideration.

XYZ COMPANY Factory overhead budget for the year ( activity of 118000 direct labour hour)
Supplies Indirect labour Cost of fringe benefits Power (variable proportion) Maintenance cost(variable) TOTAL VARIABLE OVERHEAD Depreciation Property taxes Property insurance Supervision Power(fixed proportion) Maintenance(fixed proportion) TOTAL FIXED OVERHEAD TOTAL FACTORY OVERHEAD RS. 12000 30000 10000 22000 15000 10000 2000 1000 12000 800 3200 29000 --------------------1,18,000 RS.

89000

FACTORY OVERHEAD RECOVERY RATE IS : 1,18,000 1,18,000 labour hours =Rs. 1 per direct labour hour

Selling cost is define as the cost of seeking to create and stimulate demand and of securing orders. These costs are, therefore, incurred to maintain and increase the level of sales. All expenses connected with advertising, sales promotion, sales office, salesmen, credit collection, market research, after sales service, etc. are generally grouped together to form part of the responsibility of the sales manager. This cost are also divided in fixed and variable. The problem faced in the preparation of selling cost budget are: Heavy expenditure on selling and sales promotion may have to be incurred when the volume of sales is falling off. Sometimes intensive sales and promotion efforts are called for one year and the benefit of such efforts accrue in the subsequent years. Sometime relation b/w selling cost and volume of sales has to be establish

XYZ COMPANY selling and distribution cost budget for the year ending march 31,20.
DIRECT SELLING EXPENSES salesmans salaries salesmans commission travelling expenses DISTRIBUTION EXPENSES warehouse wages warehouse rent, rates, electricity lorry expenses SALES OFFICE EXPENSES salaries rent, rates, electricity depreciation ADVERTISING press radio and television AMOUNT 14000 7000 19000 6000 4000 11000 16000 12000 2000 5000 20000 --------------------1,16,000

This cost are mostly policy costs and are, therefore, fixed in nature. The most practical method to follow in preparing estimate of these is to follow the past experience with due regard to anticipated changes either in general policy or in the volume of business. To control this cost is necessary to review them regularly. EXAMPLE: audit fees, depreciation of office equipment, insurance, postage, telephone, etc.

ABC COMPANY administrative expenses budget for the year ending march 31,20.
Salaries of clerical staff Executive salaries Audit fee Depreciation on office equipment Insurance Stationary Postage and telegrams Telephone Miscellaneous Total administrative expenses RS. 28000 8000 600 800 250 1250 950 850 5300 ---------------46,000

Research is required in order to develop or improve product and methods. When research is definite benefit to the company, development function begins. After development, formal production can commence on commercial scale and then production function starts. Since the area of research cannot be defined, the cost incurred under the both function are clubbed together as r and d cost.

1.

2.

IT represents the planned outlay on fixed assets like land, building, plant and machinery during the budget period. This budget is subject to strict magt. Control because it required large amount. The preparation of this is based on: Future development plans to increase output by expansion of plant facilities. Replacement request from the concerned department. etc..

Cash budget represents the cash requirement of the business during the budget period. It is the plan of receipts and payments of cash for the budget period, analyzed to show the monthly flow of cash drawn up in such a way that the balance can be forecasted at regular intervals. It is one of the most important elements of the budgeted balance sheet. Information from various budget effect the cash budget.

When all the necessary functional budgets have been prepared, the budget officer will prepare the master budget which may consist of budgeted profit and loss account and budgeted balance sheet. This are in fact the budget summaries. When this budget is approved by board of directors, it represents a standard for the achievement of which all the departments will work.

ABC COMPANY budgeted income statement for the year ending march 31,20..
RS. Sales Less: cost of good sold Gross Margin Less: selling and distribution expenses Less: administrative expenses Profit before interest and taxes Interest expenses(assumed) Profit before tax Income tax (50% assumed) Net profit Amount (RS.) 1175000 775000 400000 182500 217500 50000 167500 83750 ----------------83750

136500 46000

RS. Share capital Retained earning REPRESENTED BY: Plant and machinery Less :provision for dep. Raw material Finished goods Debtors Cash LESS: creditors 350000 129000 340000 60000 5750 77500 110000 37750

RS.

RS.

479000

280000

231000 32000

199000 ----------------4,79,000

According to CIMA of England, A fixed budget, is a budget designed to remain unchanged irrespective of the level of activity actually attained. A fixed budget shows the expected results of a responsibility center for only one activity level. Once the budget has been determined, it is not changed, even if the activity changes. This is used by many companies for purchasing, engineering, and accounting. It is used as an effective tool of cost control. It is also known as static budget.

1.
2. 3.

Unlike static budget, flexible budget shows the expected results of a responsibility center for several activity level. You can think of a flexible budget as a series of static budgets for different levels of activity. Such budget are especially useful in estimating and controlling factory costs and operating expenses. It is more realistic and practicable because it gives due consideration to cost behavior at different levels of activity. While preparing this budget it is classified into 3 : Fixed Variable Semi variable

The budgets which are prepared for period longer than a year are called long term budgets. Such budgets are helpful in business forecasting and forward planning. Capital expenditure budget and research and development budget are examples of long term budgets.

Budgets which are prepared for period less than a year re known as short term budgets. Cash budget is an example of short term budget. Such types of budgets are prepared in cases where a specific action action has to be immediately taken to bring any variation under control, as in cash budgets.

IT is defined as a budget which is prepared for use unaltered over a long period of time. This does not take into consideration current conditions and can be attainable under standard conditions.

It is define as a budget which is related to the current conditions and is prepared for the use over a short period of time. This budget is more helpful then the basic budget as it gives correct information about current conditions.

This budget is the preparation of budget starting from zero or from clean state. As a new technique it was proposed by PETER PYHER of Texas instruments inc., U.S.A. this technique was introduced in the budgeting in the state of Georgia by Mr. JIMMY CARTER who was the governor of that state. When Mr. CARTER later on become president of the U.S.A., ZBB was tried in federal budgeting as a means of controlling state expenditure. This become popular tool since the early 1970s. Now this is accepted in business world because it is proving its utility.

A planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch(hence zero base) and shifts the burden of proof to each manager to justify why he should spend ant money at all. The approach requires that all activity be analyzed in decision packages which are evaluated by systematic analysis and ranked in order of importance.

It help the management in the following question supposing we are to start our business from scratch, on what activities would be spend our money and to what activities would give the highest priority? Thus ZBB tries to overcome the weakness of conventional budgeting, especially in those areas in which flexible budget is not applicable. This is helpful in govt. expenditure, data processing, quality control, etc.

Identification of decision units in order to justify each item of expenditure in their proposed budget. Preparation of decision packages. Each package is a separate. Ranking of decision packages on cost benefits analysis. Allotment of funds based on the above resulting by following pyramid ranking system to ensure optimum results.

It promotes operational efficiency because it requires manager to review and justify their activities or the funds requested. It always find out alternatives to do a job. It analysis and decision making because it require manager to review their activities. It help in optimum utilization of scarce resources. Coordinate within the firm is improved. It is useful in service department.

The paper work will increase due to large no. of decision packages. The cost of the various packages may be very high in large firms. Ranking of packages is very often subjective and may be risk to conflicts. Bad managers may resist new ideas and changes as they want.

It can be define as the establishment of budgets to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide base for its revision.

Determining the objective to be achieved, over the budget period. Determining the variety of activities that should be undertaken for the achievement of the objectives. Drawing up a plan or a scheme of operation in respect of each class of activity, in physical as well as in monetary terms. Ensuring that corrective action will be taken where the plan is not being achieved.

Portraying with precision the overall aims of the business and determining target of performance for each section. Budgetary control is one of the few ways in which an objective assessment of executives or department is possible. Providing a basis for the comparison of actual performance with the predetermined targets. Ensuring the best use all available recourses to maximize profit. Coordinating the various activities of the business.

It enables the business to conduct its activities in efficient manner. It is powerful instrument used by business to control their expenditure. Effective utilization of various resources like- men, material, machinery, money. It helps in the review of current trends and framing of future of future policies. It creates suitable conditions for the implementation of standard costing.

Budgets may or may mot be true, as they are based on estimates. Budgets are considered as rigid documents. Budget cannot be executed automatically. Staff co-operation is usually not available during budgetary control exercise. Its implementation is quite expensive.