Budgeting and Budgetary Control

Learning Objective :
Meaning of Budget and Budgeting
Meaning and Nature of Budgetary Control
Requisites of Budgetary Control System
Essential Step for Installation of Budgetary Control System.
Advantage and Disadvantages of Budgetary Control
Classification of Budget
Steps in Preparation of Flexible budget
Difference between Fixed and Flexible Budget
Preparation of Cash Budget
Zero Base Budgeting
Difference between Zero Base Budgeting and Traditional
Budgeting
Steps for Preparation of Zero Base Budgeting


Meaning of Budget and Budgeting
A Budget is a monetary and or quantitative
expression of business plans and policies,
prepared in advance, to be pursued in the future
period of time.
According to CIMA(Certified Institute of
Management Accountants) Budget is defined as
A budget is a Financial and or Quantitative
statement prepared prior to a define period of
time, of the policy to be perused during the
period for the purpose of attaining the objective.
Characteristics of a Budget
A Comprehensive business plan showing what
the enterprise wants to achieve
Prepared in Advance
For a Definite Period of time
Expressed in quantitative form, physical or
monetary terms
For Achieving a given objective
A proper system of accounting is essential
System of proper fixation of authority and
responsibility has to be in place.
Meaning of Budgetary Control
Budgetary control is the process of deterring various
figures for the enterprise and then comparing the
actual performance with the budgeted figures for
calculating the variance if any.
In this Process:
First ,budget are prepared
Second, Actual results are to be recorded
Third, Comparison is to be made between the actual
with planned action for calculating the variances.
So Budget is a means and budgetary control gives
the end result.


Objective of budgetary control
To Co-ordinate the activates of different department
To operate various cost centers and department with the
efficiency and economy.
Fixation of responsibility of various individuals in the
organization
To ensure a system for correction of deviation from
established standards.
To centralized the control system
To ensure Planning for future by setting up various budget.


Requisites for Successful Budgetary Control System
1. Determination of objectives
A. Laying down the plan for implementation
B. Co-ordination among the Department
C. Controlling
2. Proper Delegation of Authority and responsibility
3. Proper Communication System
4. Participation of employees
5. Flexibility
6. Motivation
Essential Steps For Installation of budgetary control system
Budget Manual
Budget Centres (Budget Department)
Budget Committees
Budget officer
Budget Period
Determination of key factor


Library work
Advantages and Disadvantages of Budgetary
Control
Budget Preparation is the Wastage of
Management Time and Efforts. Are you agree
with this point. Discuss.
Discuss why Flexible Budget is most useful in
corporate sector not Fixed budget.
Difference between Fixed and Flexible
budget.

Classification of Budget
A. Classification of the basis of Time
i) Long term ii) Short Term
B. Classification on the basis of Function
i) Sales Budget ii) Production Budget
iii) Purchase Budget iv)Direct Labor Budget
v)Overheads Budget vi) Cash Budget
C. Classification on the Basis of Flexibility
i) Fixed Budget
ii) Flexible Budget

Fixed Budget and Flexible Budget

Fixed Budget is prepared on the basis of fixed level of activity.
Fixed Budget remains unchanged irrespective of the changes in
volume or level of activity.
This type of budget occurs where the statics condition occurs
correctly.
Flexible Budget: is a good budgeting techniques as well as tool of
control. Flexible budgets are prepared where the level of activity
cannot be estimated with accuracy.
This type of budget is prepared for a range of production activity
say 15,000 to 25, 000 units
A flexible budget recognizes the difference between fixed, Semi
fixed and Variable cost and is designed to change in relation to
the change in level of activity
Question
Following are the estimates of a repairs and maintains
department, which are to be used to construct a flexible
budget for the ensuring year.
1. Prepare a Flexible Budget for the department up to activity level of
10,000 direct repairs hour using increment of 1000 hours ?
2. What would be the budget allowance for 9500 direct repairs hours?


Details of Cost Planned at 6000 direct hours Planned at 9000 direct hours
Employees Salaries 28000 28000
Indirect Repair material 42,000 63,000
Miscellaneous cost 16,000 20,500
Solution
FLEXIABLE BUDGET OF REPAIRS AND MAINTENANCE DEPARTMENT

DETAILS OF COST
6000
HOURS
7000
HOURS
8000
HOURS

9000
HOURS

9500
HOURS

10000
HOURS
Fixed Cost
Employees Salaries 28000 28000 28000 28000 28000 28000
Variable Cost
Indirect Repair material @Rs.7
42000/6000 = 7 , 63000/9000=7
42000 49000 56000 63000 66500 70,000
Semi fixed Cost
Miscellaneous cost
(9000 HR-6000HR) = 3000HR
(Rs.16000-Rs. 20500) = Rs. 4500
Per 1000 hour = Rs.1500 (+)
16000 17500 19000 20500 21250 22000
TOTAL COST 86000 94500 103000 111500 115750 120000
At 9500 hours for the incremental increase of 500 hours the cost
increase by Rs. 4250 due to following
Variable cost = (Rs.500*7) = Rs. 3500
Semi-variable = (Rs.1.50*500) = Rs. 750
Total incremental cost = Rs. 4250
Library Work
For starting a new Manufacturing entity prepare a Flexible budget
plan for these different level of forecasted demand of your product.
Demand level 6,000 7,000, 8,000.showing distinctly marginal cost and
total cost per unit with finding the possible area to reduce the cost to
match with your competitors market price below @7.5% to 10%.
For the same level of demand your competitors are well enough to
produce 6000 unit at Rs. @ Rs. 175 per unit. For 7000 unit @ 169.64
unit and 8000 unit Rs. 165.63 per unit.
For 10,000 unit you have following budgeted expenses
Direct Material Rs. 60 Per unit
Variable Overheads Rs. 25 Per unit
Variable Cost(direct) Rs. 5 Per unit
Distribution cost (20% fixed) Rs. 5 Per unit
Direct Labor Rs. 30 Per unit
Fixed Overheads (Rs. 1,50,000) Rs. 15 Per unit
Selling Expenses(10% fixed) Rs. 15 Per unit
Administrative expenses Rs. 5(fixed for all level Rs. 50,000)




Cash budget
Cash budget is an estimates of cash receipts and disbursement
during a future period. The anticipated cash receipts from various
sources are taken into accounts. Similarly, the amount to be spent
on various heads both revenue a and capital are taken into cash
budget.
In short it is a summary of cash intake and outlay.
The first Element of a cash budget is the selection of the period of
time to be covered by the budget. Alternatively it is know as
Planning Horizon.
The Planning Horizon means the time span and the Sub-period
within that time span over which the cash flow are to be projected.
The period of Cash Budget will differ from firm to firm depending
upon its nature and the degree of accuracy with which the
estimates can be done. It should not be too long and too short.

Prepare a Cash-budget of a company for April May and June 2003 in a
columnar form using the following information.







You are further informed that:
a) 10% of the purchase and 20% of the sales are cash
b) The average collection period of the company month and the credit purchase
are paid off regularly
c) Wages are paid half monthly and the rent of Rs. 500 included in expense is paid
monthly
d) Cash and bank Balance as on April was Rs. 15,000 and the company wants to
keep it at the end of every month approximately this figure, the excess cash
being put in fixed deposit in bank.
Month Sales Purchase Wages Expenses
January (Actual ) 80,000 45,000 20,000 5,000
February (Actual) 80,000 40,000 18,000 6,000
March (Actual) 75,000 42,000 22,000 6,000
April (budgeted ) 90,000 50,000 24,000 7,000
May (Budgeted ) 85,000 45,000 20,000 6,000
June (Budgeted) 80,000 35,000 18,000 5,000