Budgetary control-A technique of performance evaluation.

Submitted By:

Soumil Popat-Roll no 3

Vaibhav Karia-Roll no 19

Sandeep Mishra-Roll no 25

Pushkar Pande-Roll no 27

Anamta Shaikh- Roll no 47

Sneha Tyagi-Roll no 50

Ajinkya Totla-Roll no 56

A Report Submitted to The METs Institute Of Management in partial

fulfilment of the requirement for the award of PGDM for 2014-2016.

Under the Guidance of:

Prof. L.N. Chopde.

CERTIFICATE

This is to certify that this project titled Budgetary Control-A technique of

performance evaluation. Is Based on the original study conducted by:

Soumil Popat-Roll no 3 Vaibhav Karia-Roll no 19 Sandeep Mishra-Roll no 25 Pushkar Pande-Roll no 27 Anamta Shaikh- Roll no 47 Sneha Tyagi-Roll no 50 Ajinkya Totla-Roll no 56

of METs Institute of computer science, PGDM (E-Business) under my guidance

and this had not formed a basis for the award of any other degree of this

institute/university.

Place: METs INSTITUTE COMPUTER SCIENCE.

Date: 06/04/2015

Prof. L.N. Chopde.

PREFACE

This report is the practical part of the most vital practice of our MBA-two year

program. The sole objective of this project is to familiarize the students with

understanding the procurement function of a business organization. This report has

been written to analyze and understand the Budgetary Control - A technique

of performance evaluation in industry.

ACKNOWLEDGEMENT

We take this opportunity to express our profound gratitude and deep regards to

our guide Prof. L. N. Chopde for his exemplary guidance, monitoring and

constant encouragement throughout the course for this project. The knowledge,

help and guidance given by him from time to time helped us understand the

topic precisely.

EXECUTIVE SUMMARY

Objective: To Study the Budgetary control.

Flow of the Project: The Project starts with a brief introduction on meaning of Budget, its need, types of budget and budgetary control. The project continues with the case introduction and the information provided by the company such as the details of the various estimated budgets and the comparison between the two.

CONTENTS

Sr.

No

Contents

Page No.

1. Introduction-Budget 7

2. Need for budget 8

3. Types of budget 9

4. Company 1: Silver Touch Smelting Industries 11

5. Company 2: MX-MDR Technologies Limited

13

6. Comparison between the Company 14

Introduction

BUDGET

Budget is derived from a French word Bougetts which means the purse in which funds are

collected for meeting the anticipated expenses. It is a financial plan serving as an estimate of

and control over future operations. It is any estimate of future costs. It is any systematic plan

for the utilization of manpower, material or other resources. .It is a financial and/or quantitative

statement prepared 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 is an estimate of future needs arranged

according to an orderly basis, covering some or all of the activities of an enterprise for a definite

period of time. Budgets are made up of statistical data which establish measurements of

reasonable operating expectations. It is a cost plan for a period of time.

Kohler, in his Dictionary for Accountants defines budget as:

a) Any financial plan serving as an estimate of and a control over future operations.

b) Hence, any estimate of future costs.

c) Any systematic plan for the utilization of manpower, material, or any other resources.

The objective of budgeting is to:

Budgets communicate managements plans throughout the organization.

Budgeting forces managers to give planning top priority.

Budgets provide a means of allocating resources to their most effective uses.

Budgeting uncovers potential bottlenecks.

Budgeting coordinates the activities of the entire organization.

Budgeting provides goals that serve as benchmarks for evaluating subsequent

performance.

NEED FOR BUDGET

Budget provides a means of communication. It facilitates centralized control. It defines the

objectives / targets for executives at all levels of the management. It serves as a declaration of

policies. Budget helps to aid the planning of actual operations by forcing managers to

consider how the conditions might change and what steps should be taken now and by

encouraging managers to consider problems before they arise. It also helps co-ordinate the

activities of the organization by compelling managers to examine relationships between their

own operation and those of other departments. Other essentials of budget include

controlling activities. -To communicate plans to various responsibility center managers. -To

motivate managers to strive to achieve budget goals. -To evaluate the performance of

managers.

TYPES OF BUDGET

1. Materials and Utilities Budget:

This budget also known as operations budget includes budgeting for raw material required

for production, spare parts for maintenance, labour time, machine time, energy

consumption etc. The labour time and machine time is usually related to what a unit of time

is budgeted to

yield. It is the output per unit of time.

2. Control of Liquidity:

This involves cash flow and is very important in controlling cash and meeting current

financial obligations. This budget forecasts cash receipts and outlays on a set time basis

and is necessary to control the income and expenses, so that

there is no shortage of cash to pay bills and also there is no excessive unused cash which

may be unproductive.

3. Revenue and Expense Budgets:

The revenue budgets should show anticipated sales by product or by geographical territory

or department etc. The expense budgets should cover all necessary and relevant areas such

as rent, utilities, supplies, security etc.

4. Cash flow/cash budget:

A prediction of future cash receipts and expenditures for a particular time period is a cash

budget. It usually covers a period in the short term future. The cash flow budget helps the

business determine when income will be sufficient to cover expenses and when the

company will need to seek outside financing.

4. Capital Expenditure Budgets:

These budgets plan for long-term investments and include expenditure for new plant and

equipment, major installations replacement of existing equipment, building etc. Capital

budgeting is a part of long-range planning and must be broken into well-defined phases of

the programme, known as milestones, each phase being budgeted for cost, time and success

in a self-contained way.

5. Balance-sheet Budget:

It is a composite budget and reflects anticipated assets, liabilities and owner's equity or net

worth at the end of a given period in the future. It provides forecast of the anticipated

financial status of the company at a future date.

6. Flexible Budget:

Flexible or variable budget reflects and combats the changes in expenditure as a result of

changes in volume of production and revenues. These expenditures are primarily variable

costs since the fixed costs are not generally affected by changes in revenues. The basic idea

of flexible budget is to establish a relationship of changes in variable cost as affected by

changes in revenues due to changes in sales.

7. Project budget:

A prediction of the costs associated with a particular company project. These costs include

labour, materials, and other related expenses. The project budget is often broken down into

specific tasks, with task budgets assigned to each. A cost estimate is used to establish a

project budget.

Company 1: Silver touch smelting industries:

Silver touch smelting industries is a private firm that assembles soldering irons by acquiring different raw

materials required for it.

The company produces 2 types of product based on its capacity and standards

Expected sales, Selling price and Invetory

Product Sales unit Selling price Inventory(Begining) inventory(Ending)

Product SRN25 30000 100 3000 2500

Product SRN35 35000 120 2500 2500

Material usage

Raw Materials Product SRN25 Product SRN35

Iron Rod 1 1

Heater coil 1 1

Plastic Cap 1 1

Metal Ring 1 1

Extension wire 1 1

Insulator 1 2

Anticipated raw material price and Inventories

Raw Materials

Unit

Price (In Rs.)

Inventory(Begining) inventory(Ending)

Desired

Iron Rod Each 10 2000 2500

Heater coil Each 30 2500 2500

Plastic Cap Each 3 2300 2500

Metal Ring Each 0.25 2000 2500

Extension wire metres 2 1600 2500

Insulator Each 5 4500 5000

Sales Budget

Products

Sales unit

Selling price per unit

Total (In Rs. )

Product SRN25 30000 100 3000000

Product SRN35 35000 120 4200000 Total 7200000

Raw Materials

Iron Rod

Heater coil

Plastic Cap

Metal Ring

Extension wire

Insulator

Material Requirement 65000 65000 65000 65000 65000 100500

Desired closing stock 2500 2500 2500 2500 2500 5000

Total Requirement 67500 67500 67500 67500 67500 105500

Opening Stock 2000 2500 2300 2000 1600 4500 Budgeted Purchases(Units)

65500

65000

65200

65500

65900

101000

Price per unit (In Rs.) 10 30 3 0.25 2 5 Budgeted Purchases (In Rs.)

655000

1950000

195600

16375

131800

505000

Total (In Rs.) 3453775

Production budget

Product SRN25 Product SRN35

Budgeted Sales 30000 35000

Add:

Desired Closing 2500

2500

Total Requirement 32500 37500

Less:

Opening Stock of F.G.

3000

2500

Budgeted production 29500 35000

Raw Material Purchase Budget in Rs.

Add:

Less:

Product SRN25 (29500

Units)

Product SRN35 (35500

Units)

Total Material

Required

Raw

Materials

unit

Total

unit

Total

Iron Rod 1 29500 1 35500 65000

Heater coil 1 29500 1 35500 65000

Plastic Cap 1 29500 1 35500 65000

Metal Ring 1 29500 1 35500 65000

Extension wire

1

29500

1

35500

65000

Insulator 1 29500 2 71000 100500

Performance Budget

Budgeted Plan

Actual Position

Sales Revenue 7200000 7150000 Sales Variance 50000 Adverse Raw material Req.

3453775

3500000

Raw material Variance

46225

Adverse

Company 2: MX-MDR Technologies Limited:

MX-MDR Technologies ltd is a private firm that assembles copper by acquiring different raw materials required for it.

SALES BUDGET

Product A Product B Product C Product D

Budgeted sales (units) ............... 20,000 50,000 30,000 100,000

Selling price per unit ................. 10 10 10 10

Total sales.................................. 200,000 500,000 300,000 1,000,000

=20, 00,000

PRODUCTION BUDGET

Additional data:

The company desires to have inventory on hand at the end of each month equal to 20% of the following months budgeted unit sales.

On March 31, 4,000 units were on hand.

Product A Product B Product C Product D

Budgeted sales [TM 9-4]........................ 20,000 50,000 30,000 25,000

Add desired ending inventory ................ 10,000 6,000 5,000 3,000*

Total needs ............................................. 30,000 56,000 35,000 28,000

Less beginning inventory ....................... 4,000 10,000 6,000 5,000

Required production ............................... 26,000 46,000 29,000 23,000

* Budgeted sales of product D = 15,000 units.

Desired ending inventory of Product D = 15,000 units 20% = 3,000 units.

DIRECT MATERIALS BUDGET

Additional data:

Rs. 5 of material are required per unit of product.

Management desires to have materials on hand at the end of each month equal to 10% of the following months production needs.

The beginning materials inventory was 13,000 Rs.

The material costs 0.40 per rupee.

Required production in units

[TM 9-6] ................................................

Raw materials per unit (Rs) ......................

Production needs (Rs) ...............................

Add desired ending inventory (Rs)* .........

Total needs (Rs) ........................................

Less beginning inventory (Rs) ..................

Raw materials to be purchased (Rs)..........

Cost of raw materials to be purchased at

0.40 per rupee ........................................

Product A

26,000

5

130,000

23,000

153,000

13,000

140,000

56,000

Product B

46,000

5

230,000

14,500

244,500

23,000

221,500

88,600

Product C

29,000

5

145,000

11,500

156,500

14,500

142,000

56,800

Product D

101,000

5

505,000

11,500

516,500

13,000

503,500

201,400

* For June: 23,000 units produced in July [TM 9-6] 5 rupees per unit = 115,000 rupees;

115,000 Rupees 10% = 11,500 Rupees

COMPARISON of Silver touch smelting industries and MX-MDR Technologies ltd:

From the above Companies we can analyses the below:

The Silver touch smelting industries has a sales of Rs 72, 00,000out of 2 products while the

MX-MDR Company is only making Rs 20, 00,000 out of 4 products. The Silver touch

smelting industries expected raw material cost is around 40% whereas the MX-MDR

Companys raw material cost is around 48% which is higher as compared to Silver touch.

Silver touch inventory is also 10% of the total cost whereas the inventory of the MX-MDR

Company is 20%. Also Company Silver touch will sell 35000 units whereas the MX-MDR

Company sales will be around 200,000 units. We can also conclude from the above that the

profit margin of Silver touch company is greater than that of MX-MDR Company.

Hence if we compare both the companies we feel that Silver touch Company will be the

best company to choose from both the Companies.