PPT:- Budgeting & Cost Control

7/28/2019 PPT:- Budgeting & Cost Control

1/17

BUDGETING & COST CONTROL


2/17

What is budgeting?

Basically, it's making sure that you're spending less than

you're bringing in and planning for both the short- and long-

term.

Provide a forecast of revenues and expenditures, that is,

construct a model of how a business might perform

financially if certain strategies, events and plans are carried

out.

Enable the actual financial operation of the business to be

measured against the forecast.

Establish the cost constraint for a project, program,

or operation.


3/17

WHAT IS A BUDGET?

A budget is one of the most basic and probably most useful things you can do to

get in control of your finances. It is simply a snapshot of your financial situation

at a particular point in time, which can help you keep track of what you're

earning, what you're spending, and what happens to the leftovers (if there are

any). You can then use your budget to set some guidelines for yourself when it

comes to how you spend what you earn.

A budget is the most fundamental and most effective financial management tool

available to anyone. It is extremely important to know how much money you

have to spend and where you are spending it. Some of your "spending" might be

for investments, but there is an important distinction between creating a

personal budget and deciding where to invest your extra income. A budget is the

first and most important step towards maximizing the power of your money.


4/17

WHAT IS BUDGETARY CONTROL?

Budgetary control is the use of the comprehensive system ofbudgeting to aid management in carrying out its functionslike planning, coordination and control. This system involves:Division of organization on functional basis into different

sections known as a budget centre. Preparation of separate budgets for each budget centre.

Consolidation of all functional budgets to present overallorganizational objectives during the forthcoming budgetperiod.

Comparison of actual level of performance against budgets.

Reporting the variances with proper analysis to providebasis for future course of action.


5/17


6/17

According to Function

SALES BUDGET: Sales budget is the most important budget based on which all the other budgets are builtup. This budget is a forecast of quantities and values of sales to be achieved in a budget period.

PRODUCTION BUDGET: Production budget involves planning the level of production which in turn involvesthe answer to the following questions:

What is to be produced?

When is it to be produced?

How is it to be produced?

Where is it to be produced?

COST OF PRODUCTION BUDGET: This budget is an estimate of cost of output planned for a budget periodand may be classified into Material Cost Budget, Labor Cost Budget, Overhead Cost Budget.

PURCHASE BUDGET: This budget provides information about the materials to be acquired from the marketduring the budget period.

PERSONNEL BUDGET: This budget gives an estimate of the requirements of direct labor essential to meetthe production target. This budget may be classified into

a. Labor requirement budget

b. Labor recruitment budget

RESEARCH AND DEVELOPMENT BUDGET: This budget provides an estimate of expenditure to be incurredon R & D during the budget period.

R&D budget is prepared taking into consideration the research projects in hand and new R & D projects to

be taken up.


7/17

CAPITAL EXPENDITURE BUDGET: This is an important budget providing for

acquisition of assets necessitated by the following factors:

a. Replacement of existing assets.

b. Purchase of additional assets to meet increased productionc. Installation of improved type of machinery to reduce costs.

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.

MASTER BUDGET: CIMA defines this budget as The summary budget

incorporating its component functional budget and which is finally approved,

adopted and employed. Thus master budget is a summary of all functional

budgets in capsule form available in one report.


8/17

According to FLEXIBILITY

FIXED BUDGET: This is defined as a budget which is designed toremain unchanged irrespective of the volume of output or turnover

attained. This budget will, therefore, be useful only when the actual level

of activity corresponds to the budgeted level of activity.

FLEXIBLE BUDGET: CIMA defines this budget as one which, byrecognizing the difference in behavior between fixed and variable costs in

relation to fluctuations in output, turnover or other variable factors suchas number of employees, is designed to change appropriately with such

fluctuations.


9/17

Preparation of budgets is the first step in the budgetary control

system. Implementation of budgets is the second phase. But

preparation and implementation of budgets alone will not

achieve much unless a comparison is made regularly between

the actual performance and the budgeted performance.

Continuous and proper reporting makes this possible. To

ensure the success of budgetary control system, proper follow

up action has to be taken immediately for the reportssubmitted.


10/17

CAPITAL BUDGETING

Capital budgeting is a decision situation where large funds are committed (invested) inthe initial stages of the project and the returns are expected over a long period of

time. These decisions are related to allocation of investible funds to different long-

term assets. Capital budgeting is a continuous process and it is carried out by different

functional areas of management such as production, marketing, engineering, financial

management etc.

BASIC FEATURES OF CAPITAL BUDGETING:

a. Capital budgeting decisions have long-term implications.

b. These decisions involve substantial commitment of funds.

c. These decisions are irreversible and require analysis of minute details.

d. These decisions determine and affect the future growth of the firm.

CAPITAL BUDGETING DECISION INVOLVES THREE STEPS

i. Estimation of costs and benefits of a proposal or of each alternative.

ii. Estimation of the required rate of return, i.e., the cost of capital

iii. Selection and applying the decision criterion.


11/17

The costs and benefits for a capital budgeting decision

situation are measured in terms of cash flows. An important

point is that all cash flows are considered on after tax basis.The rule is that all financial decisions are subservient to tax

laws. The cash flow from the project is compared with the

cost of acquiring the project.


12/17

Cost Control

The process or activity on controlling costs associated with anactivity, process, or company.

Cost control typically includes

(1) investigative procedures to detect variance of actualcost from budgeted cost,

(2) diagnostic procedures to ascertain the cause(s) of variance,

and

(3) corrective procedures to effect realignment between actualand budgeted costs.


13/17

Four Requirements for Effective Cost Control

Many businesses use cost control strategies to keep expenses downand increase profits. Cost control is used to curb costs associatedwith many areas of business, including processes and projects. Costcontrol is an important goal, but if the necessary aspects are notimplemented correctly, a business may lose money instead.

Expectations and Frequent Review

Before a project is started, all involved must have a clear and specific

definition of the project's needs, goals and requirements. These needs,goals and requirements must be reviewed frequently to make sure theproject is going in the right direction. Failure to get all the necessary

information about a project can seriously impact cost control efforts.


14/17

Budgeting

Creating a realistic, thorough budget helps keep costs down. With a budget

in place once the project's details are set, everyone involved in the project

can make decisions about items that add to the cost, such as materials and

labor.


15/17

Variable Evaluation and Action

Any unexpected variables in a budget where actual cost is exceedingthe estimated cost by a significant percentage must be addressedimmediately for cost control. Those working on the project must worktogether to come up with a solution that will stop the expense fromspiraling out of control. Other variables from the project itself, such asan unexpected design flaw, must be handled the same way. If all thoseinvolved collaborate to find creative solutions to unexpected problems,they can keep costs down.


16/17

Proper Information Use andCommunicationThose involved in a project must use all the information available,

including the project details and project budget, and coordinate effortsto keep costs down. Use of other cost-control strategies, such asbudgeting, won't work well without information sharing and opencommunication among all those involved on the project. For example,if a business and project manager decide to eliminate part of a newbuilding design to save money, the architect must adjust for thechange and give the new plans to the construction crew. Otherwise,the crew will proceed with the original, more costly design.


17/17

Conclusion Without proper planning of cost management,

deliverables may happen, but chances of over shootingthe budget always remain.

It is very critical that we nee to keep a strict vigil on

various process involved in estimation, budgeting and

control in a project so as to ensure its completion withinthe allotted time frames and budget.

Documents

PPT:- Budgeting & Cost Control