Budgeting and Budgetary Control System

7/31/2019 Budgeting and Budgetary Control System

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Budgeting and Budgetary

Control System


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Prepared by:-

Vaghajiani Chaitali

Poonater Hiral

Pathak Maitri

Thobhani Vidhi Nakum Harish

Guided by:-

Prof. Kaushal Bhatt


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Learning Objectives

Budgeting as a tool of management planning andcontrol.

Application of budget.

Organization for budget development andimplementation.

Budgeting process.

Types of budget.

Budgetary control system as an effective tool.

Contemporary developments in budgeting.


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Definition

Budget is 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.

-CIMA


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Features of a budget

One year duration

Estimation of Business Units Profit Potential

Appraisal of Performance

Monetary terms

Alteration of Approved Budget Under Specified Conditions

Review and Approval by a Higher Authority

Managerial Commitment


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Role of a Budget Officer

Functional Budget Preparation

Communication to Responsibility Centres

Co-ordination

Follow-up

Budget Committee Review

Board Review.


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Steps involved in preparation of

Budget

1. Definition of objectives

2. Identification of key(or budget) factor

3. Budget Committee and controller

4.

Budget Manual

5. Budget Period

6. Standard of Activity or output


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Elements of a successfulbudgeting plan

Elements ofa successfulbudgeting

plan

Coordinating businessactivities

Communicating thebudgets

Acceptance&

Cooperation

ReasonableFlexibility

Providing a

frameworkfor

evaluation

Accurateforecastingof business

activities.


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Types of Budget

Budgets

Time period

Long-termBudget

Short-termBudget

Conditions

Basic Budget

CurrentBudget

Capacity

FixedBudget

FlexibleBudget

Coverage

FunctionalBudget

MasterBudget


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Sales Budget

Meaning

The following facts have to be considered for

preparing the sales budget:

(a) Pricing policies.

(b) Quality of sales force.

(c) General economic and political conditions etc.


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Classification of sales budget

The sales budget is prepared on the following bases

to facilitate control:

(a) Products or group of products.

(b) Areas, towns, salesmen, and agents.

(c) Types of customers, e.g. (i) Government, (ii) Export,

(iii) Local sales, (iv) Retail Depots.

(d) Period- months, weeks, etc.


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Production Budget

Meaning

Production budget shows the production for the

budget period based upon:

(a) Sales budget,

(b) Production capacity of the factory,

(c) Planned increase or decrease in finished stocks, and

(d) Policy governing outside purchase.


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Plant utilization budget

Plant utilization budget represents, in terms of

working hours, weight or other convenient units the

plant facilities required to carry out the programme

laid down in the production budget.

Purposes :

(a) To determine the loads on each process, cost or

groups of machines for the budget period.

(b) To take steps to increase sales in order to utilise

available surplus capacity.


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Direct material usage budget

Quality Quantity Prices


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Purchase budget

Purchase budget represents the purchases that must

be made during the budget period to meet the needs

of the business.

Purposes

Components

Considerations


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Direct Labor Budget

This budget shows the number of direct workers

required. The following budgets are prepared in

relation to direct labor costs:

(a) Labor hour requirement budget

(b) Labor cost budget

(c) Manpower recruitment budget


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Selling Costs Budget

The following factors are to be taken into account:

Nature of costs

Relationship between cost and sales volume

Time period of benefit

Trend factors


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Advertising cost budget


Best method of advertisement

Amount to be spent

Co-ordination between advertising and sales

Effectiveness

The amount of expenditure may be decided based on:

A fixed sum per unit of output can be fixed and added tocost.

An advertisement plan is decided upon and the amount to

be spent on advertising.


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Research and DevelopmentExpense Budget Introduction

The following are some methods of allocation of R&D

expenses:

(a) A percentage on net profit

(b) A sum is fixed on the basis of cash resources

available with the company etc.


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Capital Expenditure Budget

Capital Expenditure Budget represents the planned

outlay on fixed assets, such as land, building, plant

and machinery, etc. during the budget period.


(a) Sales potential to absorb the increased output;

(b) Possibility of price reductions;

(c) Replacement requests from the concerned

departments.


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Steps involved in preparation ofoperating budgets Sales budget

Production budget

Direct labor budget

Direct materials usage budget

Direct materials purchase budget

Factory overhead budget

Inventory budget

Cost of goods sold budget Administration overhead budget and selling &

distribution overhead budget

Budgeted profit and loss statement

Budgeted balance sheet


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Rolling Budget

A rolling budget is a budget which is continuously

updated by adding a further period, say a month or a

quarter, and deducting the earliest period. It is also

known as continuous budgeting.


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Cash Budget

Cash budgets are a tool for forecasting short-term

cash requirements of a firm. They provide a blueprint

of the cash inflows and outflows that are expected to

occur in the immediate future.


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Advantages of budgeting

Compels and motivates

A valuable means of controlling

Managerial policies and goals

Directing capital

Decentralize responsibility

Cost consciousness

Yardstick for measuring the performance

Systematic and disciplined approach


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Disadvantages of Budgeting

Not an exact science

Success and utility of budgeting

No substitution

Time consuming


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Budgetary Control System

Definition:

Budgetary control is the establishment of budgets

relating the responsibilities of executives to the

requirements of a policy and the continuous

comparision of actual with budgeted results either to

secure by individual action the objective of that

policy, or to provide a basis for its revision.

-CIMA


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Budgetary Control System

The system works as follows:

(a) Establishment of budgets

(b) Comparison on continuous basis of actual results

with budgets,

(c) Ascertainment of variances by responsibility

centres,

(d) Investigation of variances to highlight causes, and

(e) Corrective action to remedy the causes in order to

ensure the defined objectives are attained.


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Prerequisites

Top management support

Proper organizational structure

Realistic nature of goals

Flexibility

Participative process

Conducive environment


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Features

Objectives

Activities

Plans

Performance evaluation

Control action


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Objectives

Definition of goals

Defining responsibilities

Basis for performance evaluation

Optimum use of resources

Co-ordination

Planned action

Basis for policy


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Advantages

Efficiency

Cost control

Performance evaluation

Standard costing and variance analysis

Policy formulation


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Disadvantages

Estimates

Rigidity

False sense of security

Lack of co-ordination

Time and cost


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Zero-base budgeting (ZBB)

The features of ZBB is are as follows:

(a) Holistic

(b) Analytical

(c) Priority based

(d) Review based

(e) Rational


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Modus operandi

ZBB involves the following steps:

Ranking

Decision Areas

Coverage

Objectives

Budgeting


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Advantages of ZBB

Priority allocation

Maximum efficiency

Cost-benefit analysis

Goal congruence

Management by objective


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Disadvantages of ZBB

Lack of co-ordination

Old-is-gold attitude

Time consuming


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Activity-based budgeting

Activity-based budgeting applies activity-based

costing principles to budgeting. It focuses on the

numerous activities necessary to produce and

market goods and services.


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Life-cycle budgeting

Life-cycle budgeting adopts a life-cycle cost

approach. It is intended to account for the costs at all

stages of the value chain (R&D, design, production,

marketing, distribution, and customer service).


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Kaizen budgeting

The Japanese term kaizen means continuous

improvement, and kaizen budgeting assumes the

continuous improvement of products and processes,

usually by way of many small innovations rather than

major changes.


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Planning, Programming andBudgeting system (PPBS) Planning, Programming and Budgeting system is

used in non-profit or non-commercial organizations

to enable them to make more informed decisions

about resource allocation. PPBS differs from

traditional non-profit and non-manufacturing

budgets.


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Steps involved in PPBS

(a) Identify and define the objectives of programme.

(b) Select performance or output measures to asses the

effectiveness of the programme.

(c) Identify and evaluate alternative methods of achieving

the objectives laid down for each specific programme.

(d) Select the appropriate programmes on the basis of cost-

benefit analysis.

(e) Implement the selected alternative and monitor its

performance to ensure that the objectives of the

programmes are achieved.


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Advantages

PPBS has certain advantages as under:

Effective allocation of resources

Identify and evaluate the activities

Asses the effectiveness of plan

Long-term perspective


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Government budgeting

Government budgeting differs from private sector

budgeting. A governmental budget is not only a

financial plan and a basis for evaluating performance

but also an expression of public policy and a form of

control having the force of law.


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Bibliography

Management Accounting by PareshShah


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Documents

Budgeting and Budgetary Control System