BUDGETARY CONTROL

SUBMITED BY
NAME Kimberley Pinto Shamika Sawant Rohit Kamble Siddhesh Pitale Ajlan Inamdar ROLL NO. 31 39 13 33 10

CLASS
S. Y. BBI

SUBJECT
MANAGEMENT ACCOUNTING

COLLEGE
VARTAK COLLEGE

SUBMITED TO
PROF. BHAVNA

INTRODUCTION
Of all business activities, budgeting is one of the most important and, therefore, requires detailed attention. The project looks at the concept of responsibility centers, and the advantages and disadvantages of budgetary control. It then goes on to look at the detail of budget definition, types of budget, its objectives, budgetary control methods, problems etc A system of budgetary control should not become rigid. There should be enough scope of flexibility to provide for individual initiative and drive. Budgetary control is an important device for making the organization. More efficient on all fronts. It is an important tool for controlling costs and achieving the overall objectives. Budgetary control is a system of planning and controlling cost. The purpose of budgetary control is planning and coordinating and control. Budgetary control is a technique of cost control. Budgetary control helps in developing a basis of measurement to evaluate the efficiency of operations. The use of a budget to control a firms activity is known as budgetary control. In case of budgetary control the actual state of affairs is compared with the budget so that the appropriate action may be taken with regard to any deviations before it is to late.

DEFINATION.
Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as:

"The establishment of budgets relating 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 a basis for its revision".

PROCESS OF BUDGETARY CONTROL:

1. Preparation of various budgets. 2. Continuous comparison of actual performance with budgetary performance.

3. Revision of budgets in the light of changed circumstances.

MAIN OBJECTIVES BUDGETARY CONTROL

OF

1. To provide a detailed plan of action for a 2.

3. 4. 5.
6.

7.
8.

9.

business firm over a definite period of time To coordinate all the activities of various departments in such a way that with the minimum use of resources, maximum profits can be achieved An overview of the elements required for manager to make informed decisions among alternative courses of action An explanation of the relevant costs for decision making purposes The construction of Cost-Volume-Profit analyses and Breakeven charts and their usefulness in decision making The factors affecting the economic choice of whether to make components in-house or buy from outside How to make decisions on shutdown, additions or deletions to product lines or ranges, important to marketing managers. To determine deviations from the plan (budget) and to supply information on the basis of which necessary corrective actions can be take and thereby costs can be controlled To de-centralise responsibility and to centralise control

STEPS INVOLVED BUDGETARY CONTROL

1) Establishment of budgets

IN

Budgets are prepared for each function (such as sales, cash, production etc) relating to the responsibilities of individual executives. Functional budgets should cover the area of responsibility of specified persons which will enable to measure their performance at the end of the budget period.

2) Measurement performance

of

actual

Performance of individuals / departments is measured periodically. Necessary reports or tables are prepared to indicate the performance of individual/ departments. These reports may be prepared period wise, section wise, and activity wise

3) Comparison of actual performance with budgeted performance to develop variances or deviations

Actual data are compared with budgets. In this case adjusted fixed budgets or flexible budgets are used because comparison with fixed budgets may not serve any useful purpose. Such comparison enables the top management to know the deviations or variances, if any.

4) Analysis of the causes variation and reporting

of

When deviations are noticed between actual performance and the budgets the causes of such deviations is found out. The causes of such variations are reported in order to motivate the right people to take the right corrective action at the right time.

BUDGET
The institute of cost and management accountants (UK) defines a budget as,

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

A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material resources.

In a business organization, a budget represents an estimate of future costs and revenues. Budgets may be divided into two basic classes: Capital Budgets and Operating Budgets.

Capital budgets are directed towards proposed expenditures for new projects and often require special financing. The operating budgets are directed towards achieving short-term operational goals of the organization, for instance, production or profit goals in a business firm. Operating budgets may be sub-divided into various departmental of functional budgets.

MAIN CHARACTERISTICS OF BUDGET ARE:

1. It is prepared in advance and is derived from the long-term strategy of the organization. 2. It relates to future period for which objectives or goals have already been laid down.

It is expressed in quantitative form, physical or monetary units, or both.

Different types of budgets are prepared for different purposed e.g. Cash budget, Sales Budget, Production Budget, Administrative Expense Budget, Raw-material Budget etc. All these sectional budgets are afterwards integrated into a master budget, which represents an overall plan of the organization.

CASH BUDGET
Cash budget is probably the most important tool in cash management. It is a device to help a firm to plan and control the use of cash. It is a statement showing the estimated cash in flows over the planning horizon in other words the net cash position (surplus or deficiency) of a firm as it moves from one budgeting sub period to another is highlighted by the 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:

1. To maintain control over a firm's cash

requirements, e.g. stock and debtors 2. To enable a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises 3. To show the feasibility of management's plans in cash terms 4. 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

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.

Cash budget can be prepared by the following methods;

1. Receipts and payments method 2. The adjusted profit and loss method 3. The balance sheet method.

1. Receipts and payments method:

In case of this method the cash receipts from various sources and the cash payments to various agencies are estimated. In the opening balance of cash, estimated cash receipts are added and From the total, the total of estimated cash payments are deducted to find out the closing balance.

2. The adjusted profit and loss method:

In case of this method the cash budget is prepared on the basis of opening cash and bank balances, projected profit and loss account and the balances of the various assets and liabilities.

3.

The balance sheet method :

With the help of budget balances at the end except cash and bank balances, a budgeted balance sheet can be prepared and the balancing figure would be the estimated closing cash/ bank balance. Thus under this method, closing balances other than cash/bank will have to be found out first to be put in the budgeted balance sheet. This can be done by adjusting the anticipated.

SALES BUDGET

Sales budget generally forms the fundamental basis on which all other Budgets are built. The budget is based on projected sales to be achieved in a budget period. The sales manager is directly responsible for the preparation and execution of this 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 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 first step in the preparation of the sales budget is to estimate as accurately as possible, the sales anticipated during the budget period. Sales estimate indicated the quantity of anticipated sales of the various products at different estimated price level. The total profit as well as the profit contribution of individual products, wit each of the estimated sales when materialized is likely to yield, are computed. The expected sales forecast are converted into the sales budget. The sales estimates are based upon certain assumptions regarding the enterprise objective, level of advertisement, sales promotion and other selling efforts, etc. sales budget, however carries an imprint of management judgment and strategy and takes into account the planned management objective and strategy and future commitments.

Description
1. Past sales figures and trend:
The record of previous experience forms the most reliable guide as to future sales as the past performances related to actual business conditions. However, the other factors such as seasonal fluctuations, growth of market, trade cycles etc., should not be lost sight of.

2. Salesmen's estimates:
Salesmen are in a position to estimate the potential demand of the customers more accurately because they come in direct contact with the customers. However, proper discount should be make for overoptimistic or to conservative estimates of the salesmen depending upon their temperament.

3. Plant capacity:
It should be the endeavor of the business to ensure proper utilization of the plant facilitates and that the seal budget provides an economic and balanced production on the factory.

4. General trade prospects:

The general trade prospects considerably affect the sales. Valuable information can be gathered in this connection from trade papers and magazines.

5. Orders on hand:
In case of industries where production is quite a lengthy process, orders on hand also have a considerable influence in the amount of sales.

6. Potential market:
Market research should be carried out for ascertaining the potential market for the company's products. Such an estimate is made on the basis of expected population growth, purchasing power of consumers and buying habits of the people.

7. Availability of material and supply:

Adequate supply of raw materials and other supplies must be ensured before drafting the sales programme.

8. Financial aspects:
Expansion of sales usually require increase in capital outlay also, therefore, sales budget must be kept within the bounds of financial capacity.

Features
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.

Significance
A sales budget controls the finances allocated for achieving sales targets of a company. It is the standpoint for comparing the actual sales performance and the budgetary sales performance of a company. The budget guides the company with regard to how much money should be allocated to selling distribution and sometimes for advertising and marketing. A sales budget that sets realistic targets will help the company make a profit.

Effects
A good sales budget should serve as a guide to company with regard to its sales target. It should be flexible and resilient to the volatile changes in the market. The budget should not put too many restraints on the sales functions of the company. A sales budget is a financial plan for the sales of goods and services of a company. It is the basis on which all the financial decisions of a company with regard to sales are taken. The budget also controls the general sales prospects of a company. Online and off line marketing, marketing in the media and other advertising expenditures are planned around a sales budget.

Benefits
A sales budget helps a company achieve its sales targets. It helps prevent sales losses and provides a basis for sales evaluation. A sales budget helps to integrate all departments in a company because achieving a sales target is the secret of making profits. It helps each department to assess their performance and correct any mistakes in function. It helps a company distribute goods and services in a cost effective way. It also helps the company to keep its marketing expenditure within affordable limits.

Warning
A sales budget comes with inherent limitations and a good sales budget is made by overcoming these limitations. A sales budget cannot effectively forecast the future trends of events. It may not be easily accepted by all people in the organization. Preparing a sales budget takes up too much managerial time.

Usually sales budgets shy away from expenditure that will give returns in the long run.

PRODUCTION BUDGET
Definition of Production Budget:
Product oriented companies create a production budget which estimates the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labour and material. This budget provides an estimate of the total volume of production Distributed product-wise with scheduling of operations by days, weeks and months, and a forecast of the inventory of finished products. Generally, the production budget is based on the sales budget. The responsibility for the overall production budget ties with works manager and that of with departmental works managers.

The production budget is prepared after the sales budget. The production budget lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending. Production budget may be expressed in physical or financial terms or both in relation to production. Production budget expressed in quantitative terms only and is geared to the sales budget. Production budget is an estimate of the production for the budget period. Production budget is prepared into two parts, viz. production volume budget for the physical units of the products to be manufactured and the cost of production or manufacturing budget detailing the budgeted cost under material, labour, and factory overhead in respect of the product.

In order to prepare a production budget production budget level of expected sales and the desired level of stock of finished goods is required.

PRODUCTION = SALES + CLOSING STOCK OPENING STOCK

1.) Inventory policies. Inventory standards should be predetermined as that neither there is a shortage nor over-stocking of goods.

2.) Sales requirements. The quantity of goods to be sold would decide to a great extent how much is to be

produced. Therefore, this budget depends upon the sales budget.

3.) Production stability. For reduction of costs, stability in employment and better utilization of plant facilities, the production should be evenly distributed throughout the year. In case of seasonal industries, since it is not possible to have stable levels of production or inventory, an effort should be made to have the optimum balance between the two.

4.) Plant capacity. How much can be produced depends upon the available plant capacity. There must be sufficient capacity to precede the annual requirements and also to meet seasonal high demands.

5). Availability of material and labour. Adequate and timely supply of raw material and labour should have an important effect on the planning of production. 6). Time taken in production process. The production should commence well in time deeping in view how much time it would take in the factory to translate the raw materials into finished goods.

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.

PERSONAL BUDGET
A personal budget is a finance plan that allocates future personal income towards expenses, savings and debt repayment. Past spending and personal debt are considered when creating a personal budget. There are several methods and tools available for creating, using and adjusting a personal budget.

CONCEPTS
Personal budgeting, while not particularly difficult, tends to carry a negative connotation among many consumers. Sticking to a few basic concepts helps to avoid several common pitfalls of budgeting.

Purpose
A budget should have a purpose or defined goal that is achieved within a certain time period. Knowing the source and amount of income and the amounts allocated to expense events are as important as when those cash flow events occur.

Simplicity
The more complicated the budgeting process is, the less likely a person is to keep up with it. The purpose of a personal budget is to identify where income and expenditure is present in the common household; it is not to identify each individual purchase ahead of time. How simplicity is defined with regards to the use of budgeting categories varies from family to family, but many small purchases can generally be lumped into one category (Car, Household items, etc.).

Flexibility
The budgeting process is designed to be flexible; the consumer should have an expectation that a budget will change from month to month, and will require monthly review. Cost overruns in one category of a budget should in the next month be accounted for or prevented. For example, if a family spends $40 more than they planned on food in spite of their best efforts, next month's budget should reflect an approximate $40 increase and corresponding decrease in other parts of the budget. "Busting the budget" is a common pitfall in personal budgeting; frequently busting the budget can allow

consumers to fall into pre-budgeting spending habits. Anticipating budget-busting events (and under spending in other categories), and modifying the budget accordingly, allows consumers a level of flexibility with their incomes and expenses.

Budgeting for irregular income

Special precautions need to be taken for families operating on an irregular income. Households with an irregular income should keep two common major pitfalls in mind when planning their finances: spending more than their average income, and running out of money even when income is on average. Clearly, a household's need to estimate their average (yearly) income is paramount; spending, which will be relatively constant, needs to be maintained below that amount. A budget being an approximate estimation, room for error should always be allowed so keeping expenses 5% or 10% below the estimated income is a prudent approach. When done correctly, households should end any given year with about 5% of their income left over. Of course, the better the estimates, the better the results will be. To avoid running out of money because expenses occur before the money actually arrives (known as a cash flow problem in business jargon) a "safety cushion" of excess cash (to cover those months when actual income is below estimations) should be established. There is no easy way to develop a safety cushion, so families frequently have to spend less than they earn until they have accumulated a cushion. This can be a challenging task particularly when starting during a low spot in the earning cycle, although this is how most budgets begin. In general, households that start out with expenses that are 5% or 10% below their average income should slowly develop a cushion of

savings that can be accessed when earnings are below average. Whether this rate of building a cushion is fast enough for a given financial situation depends on how variable income is, and whether the budgeting process starts at a high or low point during the earnings cycle.

FLEXIBILITY BUDGET
It is also known as control budget or variable budget or sliding scale budget. It is based on the knowledge of cost behaviour patterns. It is the budget designed to change appropriately with fluctuation in output or turnover and to furnish budgeted cost for any level of activity actually attained. Flexible budget may also be used for adjusting budget to current conditions arising out of seasonal variations or changes in the length of the working period. A flexible budget is more elastic useful and practical. It takes into account the changes in the actual circumstances and is useful for the purpose of performance evaluation and controls since it segregates the activity factor, which is beyond the control of the operating manager and highlights those costs for which he is responsible. Such a budget shows the planned behaviour of costs at various volume

levels. The flexible budget is usually expressed in terms of cost volume relationships i.e. a fixed amount for a specified time period plus a variable amount per unit of volume. Flexible budget is actually a series of budgets fixed for various levels of activity. The flexible budget is a performance evaluation tool. It cannot be prepared before the end of the period. A flexible budget adjusts the static budget for the actual level of output. The flexible budget asks the question: If I had known at the beginning of the period what my output volume (units produced or units sold) would be, what would my budget have looked like? The motivation for the flexible budget is to compare apples to apples. If the factory actually produced 10,000 units, then management should compare actual factory costs for 10,000 units to what the factory should have spent to make 10,000 units, not to what the factory should have spent to make 9,000 units or 11,000 units or any other production level.

MASTER BUDGET
Master budget is also known as summary budget or finalised profit plan. It combines all the budget for a period into one unit and thus, it shows the overall budget plan. As profit planning it is the main objective of a budget programme, all the subsidiary budgets are coordinated and projected into a master or summary budget showing the final projected results of the plan. The master budget incorporates all the subsidiary functional budgets and the budgeted profit and loss account and balance sheet. The master budget aggregates related budgets, or a family of budgets, which are produced by most

organizations. A business is likely to have a range of budgets for varying departments within the organization.

Some examples of the different budgets are:

Sales budgets, for the sale of products. These budgets may be broken up by department or state office. Cash flow budgets, which are based on the expected cash from sales and other revenue generating sources and include payments of expenses, loans and capital equipment purchases. Budgets predicting the financial position at the end of the budget period, which includes expected assets, liabilities, planned inventory and cash at hand. General expense budgets covering all overheads, such as rents, plant and equipment and general administrative expenses. A further list is provided in the next major section under Budget Planning Processes

Definition and Explanation:

The master budget is a summary of company's plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. In short, this budget represents a comprehensive expression of management's plans for future and how these plans are to be accomplished.

It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate effects other budget estimates because the figures of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets.

Advantages and Disadvantages of a Master Budget:

Some advantages of a master budget are that it can give an idea of where a company wants to go and what it has to do in order to get there. It will also allow the company to realistically project future cash flows which in turn would help in getting certain types of financing. Some disadvantages of a master budget include the time involved in producing such a budget. This is primarily the reason a smaller company may not make a master budget if the company has a very small managerial staff.

ADVANTAGES OF BUDGETARY CONTROL

There are a number of advantages to budgetary control:

 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 out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction. Promotes coordination and communication. Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control. 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 non-controllable factors. Enables remedial action to be taken as variances emerge. Motivates employees by participating in the setting of budgets. Improves the allocation of scarce resources. Economises management time by using the management by exception principle.

PROBLEMS IN BUDGETARY CONTROL

Whilst budgets may be an essential part of any marketing activity they do have a number of disadvantages, particularly in perception terms. Budgets can be seen as pressure devices imposed by management, thus resulting in: a) bad labour relations b) inaccurate record-keeping. Departmental conflict arises due to: a) disputes over resource allocation b) departments blaming each other if targets are not attained. It is difficult to reconcile personal/individual and corporate goals. Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is often coupled with "empire building" in order to enhance the prestige of a department. Responsibility versus controlling, i.e. some costs are under the influence of more than one person, e.g. power costs. Managers may overestimate costs so that they will not be blamed in the future should they overspend.