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BUDGETBUDGET

A Financial and/or Quantitative Statement, prepared & approved prior to a defined period of time, of the policies to be pursued during the period for the purpose of attaining a given objective.

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CHARACTERISTICSCHARACTERISTICS

Budget is expressed in Quantity or Money or Both.

Budget is prepared in advance of the period during

which it is to operate.

Budget relates to a definite future period.

It is prepared for the implementation of policy

formulated by the management.

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TYPES OF BUDGETTYPES OF BUDGET Budgets are classified on the following basis

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FUNCTIONAL BUDGETSFUNCTIONAL BUDGETSRelates to a specific function of Business:

1. Sales Budget2. Production Budget3. Purchase Budget4. Personnel Budget5. Capital Expenditure Budget6. Administration Budget7.Cash Budget8. Research & Development Budget

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MASTER BUDGETMASTER BUDGET

Master Budget is a consolidated summary of all functional budgets.

PURPOSE:To produce Budgeted Profit & Loss A/C

&Budgeted Balance Sheet

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Definition

The establishment of budgets relating the responsibilities of the executives to the requirement of a policy, and the continuous comparison of actual with the Budgeted results, either to secure by individual action, the objectives of that policy or to provide a firm basis for its revision.

BUDGETARY CONTROLBUDGETARY CONTROL

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1 Establishment of Budgets for each function &

section of the Organization.

2. Recording of the Actual Performance.

3. Continuous comparison of the Actual Performance

with Budgeted performance.

CHARACTERISTICS OF CHARACTERISTICS OF BUDGETARY CONTROLBUDGETARY CONTROL

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4. Ascertaining Deviations of Actual Performance

with Budgeted Performance.

5. Analyzing the causes of deviations.

6. Reporting to the Management for corrective

Action.

7 Revision of the Budgets under the changed

circumstances.

CHARACTERISTICS OF CHARACTERISTICS OF BUDGETARY CONTROLBUDGETARY CONTROL

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OBJECTIVES OF BUDGET OBJECTIVES OF BUDGET CONTROLCONTROL

1.Planning A budget is a plan of the policy to be pursued during

the defined period of time to attain a given objectiveProduction schedulesSales goalsInventory levelsLabourCapital, Advertising , etc.

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OBJECTIVES OF BUDGET OBJECTIVES OF BUDGET CONTROLCONTROL

2. Co-ordination:The Budgetary Control co-ordinates the various activities of the firm and secure co-operation of all concerned, so that the common objective of the firm may be successfully achieved.

3. Control:Control consists of the action necessary to ensure that the performance of the organization conforms to the plan and objective.

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ESSENTIALS OF AN EFFECTIVE ESSENTIALS OF AN EFFECTIVE BUDGET CONTROLBUDGET CONTROL

1.Co-operation of top management. 2. Maximum profit3. Budget committee4. Preparation of budgets by responsible executives.5. Constant vigilance6. Reasonable attainable goals7.Adequate accounting system8.Clearly defined organization chart9. Cost of operation

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STEPS IN INSTALLATION OF A STEPS IN INSTALLATION OF A BUDGET CONTROL SYSTEMBUDGET CONTROL SYSTEM

1. Establishment of Budget centers.

2. Preparation of an organization chart.

3. Preparation of Budget Manual.

4. Appointment of Budget Officer.

5. Formation of Budget committee.

6. Fixation of the Budget period.

7. Determination of the Key Factor.

8. Determination of the Level of the Activity.03/27/15 13S Kacker,IHM Mumbai

ZERO BASE BUDGETINGZERO BASE BUDGETING

The Zero Base budgeting starts from zero it is not on the basis of trends or historical levels of expenditure.

1.Responsibility of the Manager to spend money.2.It shows which activity is essential.3.It gives choice of alternatives.4.Important to events.

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ADVANTAGES OF ZERO ADVANTAGES OF ZERO BASE BUDGETINGBASE BUDGETING

1.Out of date and inefficient areas of operations are

identified.

2.Allows managers to promptly respond to changes.

3. It creates a challenging attitude.

4.Allocation of resource as per the needs and benefits.

5.Psychological impact on all levels of management.

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PROBLEMPROBLEM

Jack and Jill are equal partners and operators of a “Bucket Restaurant”. They started a business in December__________________ each partner paid Rs 1,50,000 into their Bank A/C

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SUMMARY OF INITIAL CASH SUMMARY OF INITIAL CASH TRANSACTIONTRANSACTION

Capital by Jack 1,50,000Capital by Jill 1,50,000 Total 3,00,000

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EXPENSESEXPENSESBuilding (life 20 yrs) 1,50,000Furniture (life 10yrs) 40,000Equipment (life 10yrs) 80,000China, Silver 10,000Food Inventory 5,000Total Expenses 2,85,000

Bal Cash 15,000In Bank

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Given are Budgeted figures for Given are Budgeted figures for first 6 Monthsfirst 6 Months

Food sales: 40,000 in Jan 80,000 in Feb

1,20,000 in March, April, May. June respectively.

50% of sales are in Cash. Other 50% is Credit Credit Period is 1 Month

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Gross profit : 60%

Purchases: Half the food cost is paid in cash, other half is on credit of one month.

Inventory level : Rs. 5,000

Wages and Salaries : Rs 25,000/month

Depreciation: 1. Bldg, furniture and equipment on straight line.2. China & glassware on 20%

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Other Expenses:

Rs 20,000 per month paid in time lag of 1 Month.

Prepare Cash budget ,

Budgeted P & L Statement and

Budgeted Balance sheet for first 6 Months.

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Solutions

Cash Budget for 6 Months- JFMAMJ

Opening Bal : 15,000

Cash inflow:Cash Sales __________Credit Sales__________ Total __________

Cash Outflow:Cash Purchases Credit PurchasesWages & SalariesOther Expenses Total ________________ Closing Balance

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Budgeted Profit & Loss Statement for 6 months ending

1) Food Sales:2) Less Cost of Sales:________3) Gross Profit:_________4) Expenses:a) Salaries & Wages:b) Other Expenses:5) a+b Total Expense __________ 3-5 Profit before Depri _________6) Dep : Bldg + furniture + kitchen equip +

china ______7) Total Dep __________

5- 7 Total Net profit _________

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Budgeted Balance sheet as on ___________a)Assets Current Assets CashA/C Receivable Food inventories ________Total Current Assets_________

b) Fixed AssetsBuilding – depFurniture --- depEquipment--- depChina, glass– dep______ Net fixed assets__________ a+ b Total Assets _________________

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Liabilities

1)A/C Payable Total liabilities _______________2)Partnership Cap Jack Cap Jill Total Equity ________________3) Net income Profit __________________1+2+3

Total liabilities & equity _____________

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