BUDGETING AND BUDGETARY CONTROL

Prepared By Supriya Sehgal

Budget And Budgeting

Budget is defined as a short term financial plan which acts as a guide to achieve the predefine targets. Budgets is a collection of forecasts and plans expressed in financial terms.

Budget And Budgeting

The Charted Institute of Management accountants, London, defines Budget as a, A financial and /or quantitative statement, prepared and approved prior to a definite period of time , of the policies to be pursued during that period for the purpose of attaining a given objective.

Objectives of Budgets

To aid the planning of annual operations To communicate plans to different responsibility centre managers To coordinate the activities of various parts of the firm To motivate managers to strive to achieve organizational goals To control and evaluate the performance of managers.

Budgetary Control

The use of budget to control a firms activities is called Budgetary control. It is a system in which budgets are prepared and the actual results are compared with the forecasted ones in order to fix up the responsibility for the deviation.

Steps in Budgetary Control

There are five steps in the process of budgetary control. These are: 1. The establishment of budget for each department. 2. The measurement of the actual performance. 3. The continuous comparison of actual performance with the budgeted one. 4. To detect the deviation and fixing up the responsibility for failure to achieve targets. 5. Assessment and revision of targets (or plans) in the light of actual performance and changed circumstances.

Classification of Budgets
Types of Budgets
According to Time According to Function According to Flexibility

Long term Budget Short Term Budget Rolling Budget Current Budget

Sales Budget Production Budget Purchase Budget Personnel Budget Advertisement Budget Cash Budget Master Budget

Flexible Budget Fixed Budget

Types of Budgets
1.Sales budget
Sales budget is the most important budget based on which all the other budgets are build up. This budget is a forecast of quantities and values of sales to be achieved in a budget period. Within a Time Horizon of a year , sales budget may be prepared quarter wise or month wise.

Product Wise Sales Budget

Sales units Sales Revenue I 1000 Rs. 5000 II 1400 7000 III 1200 6000 IV 1600 8000 ---------------------------------------------------------------------------------------------------------Total 5200 26000 ----------------------------------------------------------------------------------------------------------B@Rs 10 I 2000 20000 II 3000 30000 III 5000 50000 IV 4500 45000 -------------------------------------------------------------------------------------------------------Total 14500 145000 ---------------------------------------------------------------------------------------------------------Yearly sales 19700 171000 Product A @Rs 5 Quarter

Types of Budgets
2.Production Budget
Production budget involves planning the level of production which in turn involves the answer to the following questions: What is to be produced? When is it to be produced? How is it to be produced? Where is it to be produced?

Prodction Budget of A Product

Quarter I Sales (forecasted) Add: Desired inventory at the end 1000
800

Quarter II 1400
800

Quarter III 1200

800

Quarter IV 1600
800

----------------------------------------------------------------Total Requirement 1800 2200 2000 2400 Less: Inventory in the beginning 600 800 800 800 -----------------------------------------------------------------Budgeted Production 1200 1400 1200 1600 --------------------------------------------------------------------

Types of Budgets
3.Purchase Budget
This Budget provides information about the materials to be acquired from the market during the budget period. 4. Personnel Budget This Budget gives an estimate of the requirements of direct labour essential to meet the production target.This budget may be further classified into: Labour requirement budget Labour recruitment budget.

Labour Budget
I Budget Production Per unit Labour hours =Total Labour hours Rate per Labour hour =Total Labour Cost Total Labour hours required Labour hours available Labour hours to be procured Department II III

Types of Budgets
5.Cash Budget
Cash budget gives an estimate of the anticipated receipts and payments of cash during the budget period. Cash Budget makes a provision for minimum cash balance to be maintained at all times.

6. Master Budget
CIMA defines this budget as The summary budget incorporating its component functional budget and which is finally approved, adopted and employed. The Master budget is a summary of all functional budgets in capsule form available in one report.

Cash Budget

March

April

May

June

July

August

Opening balance Receipts -cash sales -Cash received from debtors -------------------------------------------------------------------------------------Total receipts --------------------------------------------------------------------------------------Payments -Cash purchases -Payment to creditors -Installment -wages -Office expenses ------------------------------------------------------------------------------------------Total payment -------------------------------------------------------------------------------------------Closing Balance

Types of Budgets
7.Fixed Budget
Fixed Budget is defined as a budget which is designed to remain unchanged irrespective of the volume of output or turnover attained. Fixed Budget will, therefore, be useful only when the actual level of activity corresponds to the budgeted level of activity.

8. Flexible Budget:
CIMA defines the Flexible Budget as one which, by recognizing the difference in behavior between fixed and variable costs in relation to fluctuations in output, turnover or other variable factors such as number of employees, is designed to change appropriately with such fluctuations.

Types of Budgets

Zero Based Budgeting Zero based budgeting is not based on incremental approach and previous figures are not adopted as the base. Zero is taken as the base and a budget is developed on the basis of likely activities for the future period. In ZBB all activities are evaluated every time a budget is prepared. The budgeting manager has to justify all costs as if the programs and activities are being initiated for the first time. A unique feature of Zero Based budgeting is that it tries to help management answer the question, suppose we are to start our business from scratch, on what activities would we spent out money and to what activities would we give the highest priority?

Flexible Budget
APS Ltd produces watches.for production of 10000 watches, following are the budgeted expenses:
Direct material Rs 60 Direct Labour( 50% of Direct material) Variable overheads Rs.25 Fixed overheads ( Rs. 150000) Rs.15 Direct variable Expenses Rs. 5 Selling Expenses( 10% fixed) Rs.15 Administrative expenses ( Rs.50000 fixed) Rs. 5 Distribution expenses ( 20% fixed) Rs. 5 Prepare a budget for the production of 6000 units, 7000 units, 8000 units.

Flexible Budget- Solution

6000 units 7000 units Total Per unit Total Per unit Direct material 360000 60 420000 60 Direct Labour 180000 30 210000 30 Direct Variable Expenses 30000 5 35000 5 Variable overheads 150000 25 175000 25 Selling expenses (variable) 81000 13.50 94500 13.50 Distribution expenses(variable) 24000 4 28000 4 -------------------------------------------------------------------------Total variable Cost 825000 137.50 962500 137.50 --------------------------------------------------------------------------Fixed overhead 150000 25 150000 24.43 Fixed administrative expenses 50000 8.33 50000 7.14 Fixed selling expenses 15000 2.50 15000 2.14 Fixed distribution expeses 10000 1.67 10000 1.43 --------------------------------------------------------------------------Total fixed cost 225000 37.50 225000 32.14 -----------------------------------------------------------------------------Total cost 1050000 175 1187500 169.64 -----------------------------------------------------------------------------