Budgetary Control2

8/9/2019 Budgetary Control2

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BUDGETARY CONTROLAS A CONTROL TOOL

Presented byTonmoy Haldar

MBA-2nd year

MAGNETS


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Topics to be covered


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INTRODUCTION:

For effective running of a business, management mustknow:

where it intends to go i.e. organizationalobjectives

how it intends to accomplish its objective i.e. plans

whether individual plans fit in the overallorganizational objective. i.e. coordination

whether operations conform to the plan of operations relating to that period i.e. control

Budgetarycontrol is the device that a company

uses for all these purposes.


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WHAT ISA BUDGET?

A plan expressed in money. It is

prepared and approved prior to the

budget period and may show income,

expenditure and the capital to beemployed. May be drawn up showing

incremental effects on former budgeted

or actual figures, or be compiled by Zero-based budgeting.


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WHAT IS BUDGETARY CONTROL?

Budgetary control is the use of the comprehensive system of budgeting to aid management in carrying out its functions likeplanning, coordination and control.


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Classification of Budgets

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TIME

Long term

Short term

Current

Rolling

FUNCTION

Sales

Production

Cost of production

Purchase

Personnel

R&D

Capital Expenditure

Cash

Master

FLEXIBILITY

Fixed

Flexible


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1. SALES BUDGET:

Sales budget is the most important budget based on which all

the other budgets are built up. This budget is a forecast of

quantities and values of sales to be achieved in a budget period.

2. PRODUCTION BUDGET:

Production budget involves planning the level of production which

in turn involves the answer to the following questions:

a. What is to be produced?

b. When is it to be produced?

c. How is it to be produced?

d. Where is it to be produced?


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3. COST OF PRODUCTION BUDGET:

This budget is an estimate of cost of output planned for a

budget period and may be classified into Material Cost Budget

Labour Cost Budget

Overhead Cost Budget

4. PURCHASE BUDGET:

This budget provides information about the materials tobe acquired from the market during the budgetperiod.


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5. PERSONNEL BUDGET:

This budget gives an estimate of the requirements of

direct labour essential to meet the production target.This budget may be classified into

a. Labour requirement budget

b. Labour recruitment budget6. RESEARCHAND DEVELOPMENT BUDGET:

This budget provides an estimate of expenditure to be

incurred on R & D during the budget period.A R&D budget is prepared taking into consideration the

research projects in hand and new R & D projects to betaken up.


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7. CAPITAL EXPENDITURE BUDGET:

This is an important budget providing for acquisition ofassets necessitated by the following factors:

a. Replacement of existing assets.

b. Purchase of additional assets to meet increased production

c. Installation of improved type of machinery to reduce

costs.

8. CASH BUDGET:

This budget gives an estimate of the anticipated receipts and

payments of cash during the budget period.Cash budget makes the provision for minimum cash balance to

be maintained at all times.


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9. MASTER BUDGET:

CIMA defines this budget as The summary budgetincorporating its component functional budget and which isfinally approved, adopted and employed.

Thus master budget is a summary of all functional budgets incapsule form available in one report.

10. FIXED BUDGET:

This is defined as a budget which is designed to remainunchanged irrespective of the volume of output or turnover

attained.This budget will, therefore, be useful only when the actual levelof activity corresponds to the budgeted level of activity.


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11. FLEXIBLE BUDGET:

CIMA defines this budget as one which, by recognising thedifference in behaviour between fixed and variable costs inrelation to fluctuations in output, turnover or other variablefactors such as number of employees, is designed to changeappropriately with such fluctuations.

12. PERFORMANCE BUDGETING:

These days budgets are established in such a way so that eachitem of expenditure is related to specific responsibility centreand is closely linked with the performance of that standard.


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13. ZERO BASE BUDGETING:

The zero base budgeting is not based on the incremental

approach and previous figures are not adopted as the base.

Zero is taken as the base and a budget is developed on thebasis of likely activities for the future period.

A unique feature of ZBB is that it tries to helpmanagement answer the question, Suppose we are tostart our business from scratch, on what activities would

we spent out money and to what activities would we givethe highest priority?


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Costs involved in a business

A classification

Fixed

Committed

Discretionary

Variable

Discretionary

Engineered


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The cost which varies directly in proportion with every increase ordecrease in the volume of output or production is known asvariable cost. Some of its examples are as follows:

Wages of labourers Cost of direct material

Power

The cost which does not vary but remains constant within a givenperiod of time and a range of activity in spite of thefluctuations in production is known as fixed cost. Some of its

examples are as follows: Rent or rates

Insurance charges

Management salary

The cost which does not vary proportionately but simultaneouslydoes not remain stationary at all times is known as semi-variable cost. It can also be named as semi-fixed cost. Some ofits examples are as follows:

Depreciation

Repairs


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Committed fixed costs consist largely of thosefixed costs that arise from the possession ofplant, equipment and a basic organization

structure. For e.g

once a building is erected and a plant is installed,nothing much can be done to reduce the costs

such as depreciation, property taxes, insuranceand salaries of the key personnel etc. withoutimpairing an organizations competence to meetthe long-term goals.

Fixed Costs::Committed Costs


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Fixed Costs::Discretionary

Costs Discretionary fixed costs are those which are

set at fixed amount for specific time periodsby the management in budgeting process.These costs directly reflect the top

management policies and have no particularrelationship with volume of output. Thesecosts can, therefore, be reduced or entirelyeliminated as demanded by the

circumstances For e.g.

R&D costs, Mgmt Costs, ADV & promo


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Variable Costs::Engineered

Costs

Engineered variable costs are those variable

costs which are directly related to the

production or sales level. These costs exist inthose circumstances where specific

relationship exists between input and output.

For e.g.

in an automobile industry

Relation between parts & final car


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Variable

Costs::Discretion

ary costs

Discretionary costs is generally linked with

the class of fixed cost. However, in the

circumstances where management haspredetermined that the organization would

spend a certain percentage of its sales for the

items like research, donations, sales

promotion etc., discretionary costs will be ofa variable character.


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Thus, an increase in discretionary variable

costs is due to the authorization of

management whereas an increase inengineered variable costs is due to the

volume of output or sales.


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QUESTIONS

???


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Thank

You!!!!

Documents

Budgetary Control2