Budgeting & Budgetary Control

8/13/2019 Budgeting & Budgetary Control

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BUDGETING &BUDGETARY

CONTROL

Group 3


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CO O

DEFINITION & MEANING

OF BUDGETARY SYSTEMBudgeting is a management tool used for short-term planning& control.

Budgets have been employed as devices to limit expenditure,but a much more useful & constructive view is to treat thebudgeting process as a means for obtaining the most effective& profitable use of the companys resources viaplanning &

control.


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Budget

Budget is a financial statement, prepared & approved prior to a definedperiod of time, of the policy to be persued during that period for the purposeof attaining a given objective.


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PLANNING PROCESS

The planning process involves:

Setting Objectives :

They are motivational and directional in nature.

Specifying Goals:

It represents targets, specific in quantitative terms, to be

achieved in a specific period of time

Laying down Strategies:

They denote courses of action to achieve the goals.


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Plans/ Budgets

Final step is finalization of budgets.


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PURPOSES OF

BUDGETS1) Explicit Statement of Expectations :

Expectations need to be stated in formal terms so

that most of the underlying assumptions may beidentified

2) Communication :

Another purpose is to communicate or inform othersthe goals and methods selected by top management

The managers and lower level employees have tounderstand the goals and support them and

coordinate their efforts to attain them


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3) Co ordination :

It implies a harmonious relationship between variousdepartments to ensure smooth operations

If there is no coordination imbalances will be createdwhich will hinder the smooth operation and stand inthe way of accomplishment of goals


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ADVANTAGES OF

BUDGETINGIt forces management to plan ahead so that long term goals are achieved.

Communication is increased throughout the firm & coordination should beimproved.

Scarce resources should be allocated in an optimal way, thus controllingexpenditure.


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Areas of efficiency & inefficiencies are identified.

People are made responsible for items of cost & revenue, i.e., areas of

responsibility are clearly delineated.


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PROBLEMS IN

BUDGETINGBudget are perceived by the work force as pressure devices imposed bythe top management. This can have an adverse effect on labor relations.

It can be difficult to motivate an apathetic force.

The pressure in the budgeting system may result in inaccurate recordkeeping.


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Departmental conflicts arises because of competition for resourcesallocation. Departments blame each other if targets are not achieved.

Uncertainties can occur in the system, e.g., uncertainty over demand,inflation, technological change, weather, etc.

They compare current costs with estimates based only on historical

analysis.


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KINDS OFBUDGETS


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SALES BUDGET

Begins with the forecasting of the sales of each product.

Starting point of most master budget.

This forecasting of sale is a very difficult task.


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PRODUCTION BUDGETEstimate of the quantity of goods that are to be produced during thebudget period.

Aim of production function is to supply finished goods.

Production requirements = Sales + closingstock-opening stock


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CAPITAL BUDGET

Deals with choice of best capital structure.

Evaluation of alternate disposition of capital funds.


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MASTER BUDGET

Firms formal plan of action for the forthcoming budget period.

Complete financial presentation.

Presents information regarding cost & profits in depth to topmanagement.

Cost are accurately classified.


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TYPES OF BUDGETS

A master budget consists of :-

1. Operating budgets

2. Financial budgets

3. Special decision budgets

Another classification of a master budget is :-

1. Fixed/static budget2. Flexible/variable/sliding budget.


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OPERATING BUDGETS

Relate to physical activities/operation such assales, production, purchasing, debtors collectionand creditors payment schedules.

It has the following components:-

1. Sales budget

2. Production budget

3. Purchase budget4. Direct labor budget

5. Manufacturing expenses budget.


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FINANCIAL BUDGETS

Concerned with expected cash receipts/disbursements,financial position and results of operations.

It has the following components:-1. Budgeted income statement

2. Budgeted statement of retained earnings

3. Cash budget

4. Budgeted balance sheet.


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CASH BUDGET

The principal aim of the cash budget , as a tool of planning isto ascertain whether, at anytime there is likely to be an excessor shortage of cash.

First element is planning horizon which means the time spanand the sub-periods within that time span over which the cashflows are to be projected.

The period coverage will differ from firm to firm depending

upon its nature and the degree of accuracy with which theestimates can be made


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If it is too long, estimates will be upset as we cannot visualizethem at the time of preparation.

If it is too small the disadvantages are:-1. Failure to take into account important events which lie just

beyond the period covered by the budget.

2. Heavy workload in preparation.

3. Abnormal factors that may be operative.


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Second element is the factors that have a bearing on cashflows.

Items included are cash items only, non cash items areexcluded.

The factors that generate cash flow are generally divided forpurpose of constructing a cash budget into two broadcategories

1. Operating.

2. Financial.


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FLEXIBLE BUDGETS

Estimates costs at several levels of activity.

It contains several estimates/plans in different assumed

circumstances.Due to the uncertainty of business conditions this type ofbudget forms a very useful tool in real business situations.

It is based on levels and volumes of capacity. Wherevolume/level of activity refers to the usage of capacity.


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Volume/level of activity signifies percentage use of capacity.

Capacity means the installed capacity of plant and personnel

that is fixed amount invested in these.Eg: capacity of plant when built is 5000units of production,assuming 2500 units of production in a given period, thevolume/level of activity is 50per cent.


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ADVANTAGES OF FLEXIBLE

BUDGET

Helps in profit planning and cost control

It is possible to establish budgeted cost at any level

of activity

Techniques like standard costing can be effectivelyimplemented

Enable more accurate assessment of managerialand organizational performance

It helps predict an organizations performance andincome levels at a given range of sales level


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ZERO BASE BUDGETING

Zero-base budgeting is a method of budgetingwhereby all activities are re-evaluated each time a

budget is formulated.

It can be defined as a planning and budgetingprocess which requires each manager to justify his

entire budget request in detail from scratch and shiftsthe burden of proof to each manager to justify whyhe should spend any money at all.


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FEATURES ;

Concentration of efforts is not simply of how mucha unit will spend but why it needs to spend

Choices are made on the basis of what each unitcan offer for a specific cost

Individual unit objects are linked to corporate targets

Participation of all levels in decision-making


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ADVANTAGES OF ZBB

Inefficient and obsolete operations are identified andremoved

Helps in close monitoring of cost behavior patternsin order to decide the effect of alternative courses ofaction

The scarce resources will be allocated more

efficientlyIt requires participation of all managers inpreparation of budgets


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DISADVANTAGES OF ZBB

Will lead to enormous increase in paper workcreated by the decision packages

It emphasizes more on short term benefits

When objectives are difficult to quantify, it does notoffer any significant control advantage

It encourages the false idea that all decisions haveto be made in the budget


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Thank You

Documents

Budgeting & Budgetary Control