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MBA Information Systems 1st Year - AssignmentAnnamalai University

3: Accounting and Finance for Managers

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Question #1: Explain the accounting concepts that are being followed in organization and how they are useful in preparing financial statements.

Answer:-IntroductionAccounts are financial recordsof an organization thatregisterallfinancial transactions. More generally, anarrangementbetween abuyerand asellerin whichpaymentsare to be made in thefuture. This helps with financial planning. From there the information will be entered into A book in which the monetary transactions of a business are posted in the form of debits and credits called the ledger. Information will then be extracted so that it can be presented in a financial report.

Basic accounting rules group all finance related transactions/things into five fundamental types of accounts. That is, everything that accounting deals with can be placed into one of these five accounts: Assets Any property owned by a person or business. Liabilities debt or obligation that a company must pay. Equity overall net worth. Income increases the value in accounts. Expenses decreases the value from accounts.Net worth is calculated by subtracting liabilities from the assets:Assets Liabilities = EquityEquity can be increased through income, and decreased through expenses. This means income make "richer" and expense make "poorer". This is expressed mathematically in what is known as the Accounting Equation:Assets Liabilities = Equity + (Income Expenses)

Accounting Concepts

The Basic rules of accounting that are followed in preparation of all accounts and financial statements. It is a collection of rules and procedures and conventions that define accepted accounting practice; includes broad guidelines as well as detailed procedures.

The following are the important accounting concepts:- Business entity concept Money Measurement concept Going Concern Concept Accounting period concept The cost concept Dual Aspect concept Realisation concept Accrual concept Matching conceptBusiness Entity Concept It is one of the main accounting principle. In accounting we treat a business or an organization and its owners as two separately identifiable parties. This concept is called business entity concept. In simple words owner of the business should be treated separately from the business and whatever profits come in to the business should be taken in company account.it is treated as a separate entity from its owners. A distinction is made between business transactions and personal transactions. A distinction is also made in private property and business property of owners.Example: A CPA has 3 rooms in a house he has rented for $3,000 per month. He has setup a single-member accounting practice and uses one room for the purpose. Under the business entity concept, only 1/3rd of the rent or $1,000 should be charged to business, because the other 2 rooms or $2,000 worth of rent is expended for personal purposes.

Significance This concept helps to clear the profit of the business as only the business expenses and revenues are recorded and all the private and personal expenses are ignored. These concept restraints accountants from recording of owners private/ personal transactions. It also facilitates the recording and reporting of business transactions from the business point of view It is the very basis of accounting concepts, conventions and principles.

Money Measurement ConceptThemoney measurementconceptunderlines the fact that inaccounting, every recorded event or transaction is measured in terms of money. Using this principle, a fact or a happening which cannot be expressed in terms of money is not recorded in the accounting books. Thus, it is not acceptable to record such non-quantifiable items as employee skill levels or the quality of customer service.Example: Talent of a manager or employee has no easily identifiable monetary value.

Significance This concept guides accountants what to record and what not to record. It helps in recording business transactions uniformly. If all the business transactions are expressed in monetary terms, it will be easy to understand the accounts prepared by the business enterprise. It facilitates comparison of business performance of two different periods of the same firm or of the two different firms for the same period.

Going Concern ConceptThe going concern concept assumes that an enterprise or the accounting entity has an indefinite or unlimited life or existence. It means that the intention of the business is to carry for a sufficiently long period of time to carry out its existing activities and commitments. It will not be liquidated or dissolved in the immediate future unless there is clear evidence or a specific instruction to the contrary.Example:- where the venture is for a specific purpose like setting up a stall in an exhibition or fair or the construction of a building or bridge etc. under a contract, the business comes to an end on the completion of the project.Experience indicates that in spite of several business failures, enterprises have a fairly high continuance rate; certain entities have been in existence for more than a century even though the owners have changed. The business entities are therefore going concerns in the majority of the cases and it has proved useful to adopt continuity assumption for accounting purposes.

Significance It provides a sound basis for the income or profit measurement. It means that the items which provide future economic benefit or which are used for more than one year are recorded a fixed assets rather than as expenses only because of the going concern assumption. The going concern assumption facilitates the classification of assets and liabilities into short-term and long-term respectively It is due to the going concern concept that the assets and liabilities appear in the books at cost or book value, as the case may be and not at the market price since the assets are not intended for sale. This assumption is of great help to the investors because they are assured that the business enterprise will continue to function in the expected manner performing all the business activities in accordance with the pre-determined goals. Current assets are valued at lower of cost or market value in the normal course of the business Information about the consequences of the liquidation is not given.

Accounting Period conceptEven though it is assumed that business will continue to exit for a long time, it is necessary to keep accounts in such a manner that the results are known at frequent intervals. Generally business concern adopt twelve months period for measuring the income of the concern.This time interval is called 'Accounting Period'. At the end of each accounting period an Income and Expenditure Account and Balance Sheet are prepared. The Income and Expenditure Account disclose the income or loss sustained by the business during the accounting period. Similarly balance sheet reveals the financial position of the business on the last day of accounting period.Significance It helps in predicting the future prospects of the business. It helps in calculating tax on business income calculated for a particular time period. It also helps banks, financial institutions, creditors, etc to assess and analyze the performance of business for a particular period. It also helps the business firms to distribute their income at regular intervals as dividends.

The Cost ConceptThe cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use. The concept of cost is historical in nature as it is something, which has been paid on the date of acquisition and does not change year after year. Example:if a building has been purchased by a firm for $50000, the purchase price will remain the same for all years to come, though its market value may change.Significance This concept requires asset to be shown at the price it has been acquired, which can be verified from the supporting documents. It helps in calculating depreciation on fixed assets. The effect of cost concept is that if the business entity does not pay anything for an asset, this item will not be shown in the books of accounts.

Dual Aspect ConceptThis state that there are two aspects of accounting, one represented by the assets of the business and the other by the claims against them. The concept states that these two aspects are always equal to each other. In other words, this is the alternate form of the accounting equation.Assets=Liabilities+CapitalDual aspect concept is known as "Double Entry Book Keeping System".Example: Tom started business with a sum of $50000; the amount of money brought in by Tom will result in an increase in the assets (cash) of business by $ 50000. At the same time, the owners equity or capital will also increase by an equal amount. It may be seen that the two items that got affected by this transaction are cash and capital account. In the same way suppose tom buy goods of $20000 on credit then at one hand assets will increase by $20000 and on other hand liabilities will increase by $20000Significance This concept helps accountant in detecting error. It encourages the accountant to post each entry in opposite sides of two affected accounts.

Realisation conceptThe income or the profit of a business is defined as The increase in Net Assets measured by excess of Revenues over Expenses. The term Net Assets means excess of Assets over Liabilities.Revenues result from the sale of goods and services and include gains from the sale and exchange of assets other than inventories, interest and dividends earned on Investments and other increases in owners equity during a period other than capital contribution and adjustments.A major problem in the determination or measurement of Income is related to the point at which the revenue is recognized. It is possible to recognize the revenue at different points in the production/selling levels. Example:i. When the goods are producedii. When an order is received from a customeriii. When the goods are delivered to a customer and accepted by himiv. When cash is received from the customerSignificance It helps in making the accounting information more objective. It provides that the transactions should be recorded only when goods are delivered to the buyer.

Accrual conceptThis concept is also known as the accrual theory of accounting or accrual accounting. This concept applies equally to revenues and expenses. In the accrual basis of accounting Revenue is recognized when it is realized, that is, when the sale is complete or not.Similarly, the expenses are recognized in the accounting period in which they assist in earning the Revenues, whether the cash has been paid for them or not. Recognition of revenues and expenses for the income determination, therefore, does not depend upon the time when the cash is actually received for expenses or paid for expenses.The essence of revenue is that a mere promise on the part of a customer to pay the money for the sale or service or Interest, Commission, Rent etc. in future is considered as Revenue. Similarly, a promise on the part of the business entity to make payment for salaries, rent etc. ion future is considered as an Expense. Income (excess of Revenue or Expenses) is associated with the change in the owners equity and that is not necessarily related to changes in cash.Example:A business entity may sell goods for $20000 on December 25, 2004 and the payment is not received until January 25, 2005. The sale of goods would result in an increase in the assets (debtors) of the firm of $20000 and increase in the capital by the same amount (of course to be reduced by the cost of the goods sold) although no cash has been received. However, when the Cash is received on January 25, 2005, this would not result in Revenue. It would result in increase in one asset (cash) and a decrease in another asset (debtors). Similarly expenses and cash payments are not the same because a distinction is made between Capital and Revenue Expenditures.

Matching ConceptIncome determination or measurement of Income is a matter of matching the revenues earned during the accounting period with the expenses that were incurred in the process of earning these Revenues. Accountants call their attempt to match revenues against the appropriate expenses as the matching concept. Once the Revenues are realized (i.e. recognized), the next step is to allocate it among the different accounting periods if necessary and this is achieved with the help of the accrual concept which related the expenses to the Revenues for a given accounting period. It means that after the Revenues have been determined or measured for a given accounting period, the expenses incurred to earn that Revenue must be deducted to calculate the Net Income. The term matching, therefore, refers to a close relationship that exists between certain expired costs (expenses) and revenues realized as a result of incurring these costs.The essence of matching is that Revenues and Incomes shown in an Income Statement must belong to the Accounting period for which the Income is to be calculated or measured. Obviously the accrual concept is often described as matching concept.There is not much of a difficulty when the Expenses can be directly associated with the revenues but trained judgment is frequently needed for estimates where direct association is not possible. In this category are included the costs of the fixed assets. The costs in these cases must be carefully allocated with their service benefits. There is still another category of expenses which cannot be traced to particular goods or services generating the Revenue.For Example: - the salaries of the manager or the administrative staff. The best course is to charge these expenses in the Income Statement of the Accounting period in which they are incurred. Such expenses are designated as period expenses as distinct from those expenses known as product expenses which can be related to products.The justification for the matching concept arises from the accounting period concept. The profits of the accounting period are calculated after deducting the costs of the period from the Revenues of the same period. Any costs which cannot be associated with the future revenues are written off as they are incurred.

Significance It guides how the expenses should be matched with revenue for determining exact profit or loss for a particular period. It is very helpful for the investors/shareholders to know the exact amount of profit or loss of the business.

Accounting Concepts for Financial Statement PreparationThe Financial Statements are found to be more useful to many people immediately after presentation only in order to study the financial status of the enterprise in the angle of their own objectives. The preparation of Final accounts the business firm involves two different stages, Preparation of Accounting and Positioning Statement of the enterprises. The preparation of accounting statement involves two different category, Trading account and Profit and Loss account. The preparation of the positional statement involves only one statement, Balance sheet.

The following Financial Statement is prepared by considering the accounting concepts:1. Trading Account2. Profit and Loss Account3. Balance Sheet

1. Trading Account An account similar to a traditionalbank account, holding cash and securities,and is administered by an investment dealer. This is first Financial Statement prepared by the owner of the enterprise to determine the gross profit during the year through the matching Concept of Accounting. The gross profit of the enterprise is calculated through the comparison of purchase expenses, manufacturing expenses, and other direct expenses with the sales. It is prepared normally for one year in accordance with Accounting Period Concept i.e., operating cycle of the enterprise which should not exceed 15 months with reference to the Companies Act 1956.

Trading Account of XYZ Co. for the year endingDrCr

Rs.Rs.Rs.Rs.

To Opening Stock xxxxxBy Cash Sales xxxxx

To Cash Purchase xxxxxAdd Credit Sales xxxxx

Add Credit PurchasexxxxxBy Total Sales xxxxx

To Total Purchase xxxxxLess Sales return xxxxx

Less Purchase Return xxxxxBy Net Salesxxxxx

To Net Purchases xxxxxBy Closing Stockxxxxx

To Wages xxxxxBy Gross Loss C/dxxxxx

To Carriage Inward xxxxx

To Factory Lightingxxxxx

To Fuel, Coal, Oilxxxxx

To Duty on Import of Materials xxxxx

To Gross Profit C/dxxxxx

Balancing Process: Gross profit is the resultant of an excess of the credit side total over the total of debit side. It means that the gross profit is the excess of incomes in the credit side over the expenses in the debit side. Gross Loss is the outcome of an excess of the debit side total over the total of credit side. It means that the gross loss is the excess of expenses in the debit side over the incomes in the credit side. The purpose of crediting the closing stock in the trading account is to find out the materials or goods consumed for trading purposes. Material consumed could be calculated Material consumption = Opening stock + Purchases - Closing stock

2. Profit & Loss Account Afinancial statement that summarizes therevenues, costsand expenses incurredduring a specific period of time - usually a fiscal quarter oryear. These recordsprovide information that shows the ability of a company to generate profit byincreasing revenue andreducing costs. The P&L statement isalso known as a "statement of profit and loss", an "income statement" or an"income and expense statement".

The purpose of the profit and loss account is to Show whether a business has made PROFITorLOSSover a financial year.Describe how the profit or loss arose e.g. categorising costs betweencost of salesandoperating costs.A profit and loss account starts with theTRADING ACCOUNTand then takes into account all the other expenses associated with the business. It is a second statement of accounting in connection with the earlier to determine the Net profit/loss of the enterprise out of the early found Gross profit/loss. This is an accounting statement matches the administrative, selling and distribution expenses with the gross profit and other incomes of the enterprise. This is an account prepared for one Operating Cycle of the firm i.e. 12 months in period. The transactions are recorded in accordance with golden rules of nominal account. In the profit & loss account, the expenses and losses are debited and incomes and gains are credited.The expenses which are matched with the credit total of the profit and loss account. Classified into various categories 1. Administrative Expense2. Selling & Distribution Expenses 3. Financial Expenses 4. Legal Expense. Profit and Loss account of XYZ Company for the year ending.DrCr

Rs.Rs.

To Gross Loss B/dBalancing figureOffice and Administrative ExpensesTo SalariesTo Rent, Rates and TaxesxxxxxBy Gross Profit

By Rent Receivedxxxxx

To Office Expenses

To general Expenses

To Miscellaneous Expenses

Selling and Distribution ExpensesTo Salary to Sales staffTo Commission chargesTo Advertising expenses

By Commission received

To Carriage outwards

To Bad debts

Packing Expenses

Financial ExpensesTo Interest on capitolBy Increase on drawing

To Interest on LoanBy interest on investment

To trade discount allowedBy trade discount received

Maintenance ExpensesTo Depreciation of Fixed assets

To loss on sale of assetsOther ExpensesTo provision for debtsTo Net profit c/dTo profit on sale of assets

By Net loss c/d

Balancing process of the profit and loss account leads to two different categories:Net profit is the resultant of excess of income in the credit side over the expenses in the debit side of the Profit and Loss account.Net Loss is an outcome of excess of expenses in the debit side over the incomes in the credit side.

3. Balance Sheet Abalance sheetorstatement of financial positionis a summary of the financial balances of asole proprietorship, abusiness partnership, acorporationor other business organization, such as anLLCor anLLP.Assets,liabilitiesandownership equityare listed as of a specific date, such as the end of itsfinancial year. A balance sheet is often described as a "snapshot of a company's financial condition".[1]Of the four basicfinancial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.Balance sheet is the third Financial Statement which reveals the financial status of the enterprise through the total amount of resources raised and applied in the form of assets. This is the fundamental statement of the firm which explores the firm financial stature through the resources mobilized and investments applied i.e. Liabilities and Assets respectively. From the early, according to Double Entry Concept or Duality Concept, the balance sheet can be divided into two distinct sides, known as liabilities and assets. The balance sheet can be disclosed in two different orders:1. In the order of long lastingness permanence.2. In the order of liquidity.

Balance Sheet of XYZ Company as at datedLiabilitiesRs.AssetsRs.

CapitalxxxxLand & Buildingxxxxx

Less: DrawingsxxxxPlant & Materialxxxxx

Add: Net ProfitxxxxFurniture & fittingsxxxxx

xxxxxFixtures & toolsxxxxx

Long Term BorrowingxxxxxMarketable securitiesxxxxx

Sundrey CreditorsxxxxxClosing stockxxxxx

Bills PayablexxxxxSundry debtorsxxxxx

Bank OverdraftxxxxxBills receivablexxxxx

Outstanding expensesxxxxxPre paid expensesxxxxx

Pre received incomexxxxxCash at Bankxxxxx

Cash in handxxxxx

Total liabilitiesxxxxxTotal Assetsxxxxx

Cash in handxxxxx

Total LiabilitiesxxxxxTotal Assetsxxxxx

Methods of determining the accounting income includes:

Cash Method of Accounting: Under this method, cash receipts are matched with the cash payments irrespective of the time period in order to determine the income.Mercantile Method of Accounting: Under this method, time period is given greater importance than the actual receipts and payments. It records the receipts and expenses pertaining to the specified period whether them are actually received /paid or not. The receipts as well as payments of the other periods should be ignored /eliminated in determining the income of the stipulated duration. It is popularly known in other words as "Accrual Accounting System". ConclusionTrading Account is first financial statement prepared by the owner of the enterprise to determine the gross profit during the year through the matching concept of accounting. In order to find out the total amount of goods or materials consumed during a year, three different components to be separately considered i.e. Opening stock, Purchases and Closing Stock;Profit & Loss Account is a second statement of accounting in connection with the earlier to determine the Net profit/loss of the enterprise out of the early found Gross profit/loss.Balance sheet is the third financial statement based on Duality Concept; which reveals the financial status of the enterprise through the total amount of resources raised and applied in the form of assets.

Question #3: Budgeting is the one of the main tool to control the cost Give your views.

Answer:-

Budgeting Abudgetis a set of interlinked plans that quantitatively describe an entity's projected future operations. A budget is used as a yardstick against which to measure actual operating results, for the allocation of funding, and as a plan for future operations.The budgeting process typically begins with a strategy planning session by senior management. The management team then applies the agreed strategic direction to a series of plans that roll up into a master budget. The plans include asales budget,production budget,direct materials budget,direct labor budget, manufacturing overhead budget, sales and administrative budget, and fixed assets budget. All of these plans roll up into the master budget, which contains a budgeted income statement,balance sheet, and cash forecast. There may also be a financing budget in which is itemized the debt and equity structure needed to ensure that the cash requirements of the budget can be met. Processof expressing quantifiedresourcerequirements(amountofcapital, amount ofmaterial, number of people) into time-phasedgoalsandmilestones. ABudgetis a plan that outlines an organization's financial and operational goals. So a budget may be thought of as an action plan; planning a budget helps a business allocate resources, evaluate performance, and formulate plans.While planning a budget can occur at any time, for many businesses, planning a budget is an annual task, where the past year's budget is reviewed and budget projections are made for the next three or even five years.The essential features of a budget are: It is prepared for a definite period well in advance. It may be stated in terms of money or quantity or both. It is a statement defining the objectives to be attained and the policy to be followed to achieve them in a future period.

Businesses use budgets to plan for future activities and to set various goals and objectives within the company. They help the organization set specific expectations which aid in evaluating performance throughout the company. Budgeting helps organizations implement specific strategies to meet goals and objectives. It is important to note that a budget is an estimate and will often need to be adjusted over time.In order to properly plan and set goals, several different budgets must be created. This article discusses some of the more common budgets used by businesses.Sales Budget- The sales budget is an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals.Production Budget- Product oriented companies create a production budget. It is an estimate of the number of units that must be manufactured in order to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, such as labor, material, and other expenses.Cash Flow Budget- The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. 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.Marketing Budget- The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.Project Budget- The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.Capital Budget- The capital budget is a prediction of company needs in regard to fixed assets, such as buildings, vehicles, machinery, and other equipment. It includes the cost of upgrading present assets, the cost of acquiring new assets, costs associated with maintenance of the assets, and fees associated with the assets. The capital budget helps the company plan for the acquisition and upkeep of these assets, which may include use of available cash or outside financing.Master Budget- The master budget is a summary of the plans created for the subunits of the company. It is used to create projected financial statements. The master budget results in the creation of a pro forma income statement and a pro forma balance sheet. These are also referred to as a budgeted income statement and a budgeted balance sheet. Potential investors and lenders want to see the projected financial statements in order to make decisions that will ultimately affect the company.Category budget:Like an event budget, you might find that a complicated or problematic category needs additional detail. One example in our own budget is the subscription category, where we budget for 5-10 sub-categories and are able to spot changes or make decisions about trimming unneeded services.Event budget:You might not realize it, but you create a mini-budget every time you plan for a vacation, a new baby, buying a house, or moving. Each event has multiple expenses associated with itboth required and optional, large and small. Being able to make decisions on a micro-level has profound effects on your overall budget and financial health.

The Budget PreparationThere are two type of budgeting process:1. Top-down Budgeting: TOP-DOWN BUDGETING is where budgets are created by starting from the highest level working towards the bottom using parametric relationships. A monetary value is placed on an individual unit (product, service, materials, and labor hour). An estimate of the number of units required is then converted to currency by multiplying the quantity of units by the unit price. Many traditional companies use, a process of developing budgets in which top management outlines the overall figures and middle and lower-level managers plan accordingly. The top-down process has certain advantages: Top managers have comprehensive knowledge of the organization and its environment, including their familiarity with the company's goals, strategic plans, and overall resources availability. Thus, the top-down process enables managers set budget targets for each department to meet the needs of overall company revenues and expenditures. Bottom-up Budgeting:an approach to budget-setting in which managers determine how much is needed to achieve each of their planned objectives; these amounts are then combined to establish the total operating budget. The bottom-up approach builds on the specialized knowledge of operating managers about environment and marketplace, which they have gleaned from day-to-day operations. In reality, the budgetary process usually involves a mixture of both styles.

Budgetary Control It is control technique whereby actual results are compared with budgets.Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.

Budgets are the most widely used control system, because the plan and control resources and revenues are essential to the firm's health and survival.

"The establishment of budgets relating to the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a basis for its revision. ICMA, England

"Budgetary control is a system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities and services." J. Batty

The main steps in budgetary control are: Establishment of budgets for each section of the organization. Recording of actual performance. In case there is a difference between actual and budgeted performance taking suitable remedial action Monitoring of the actual performance with the budget and revise budgets if necessary.Objectives of Budgetary ControlThe objectives, of budgetary control are: To define the goal and provide long and short period plans for attaining these goals. To co-ordinate the activities of different departments. To operate various cost centers and departments with efficiency and economy. To estimate waste and increase the profitability. To estimate future capital expenditure requirements and centralize the control system. To correct deviations from Established standards. To fix the responsibility of various individual in the organization. To indicate to the management as to where action is needed to solve problems without delay.The following steps should be taken in a sound system of budgetary control:1. Organization Chart;2. Budget Centre;3. Budget Committee;4. Budget Manual;5. Budget Period;6. Key Factor;1. Organization Chart: There should be a well defined organization chart for budgetary control. This will show the authority and responsibility of each executive.2. Budget Centre: A, budget centre is that part of the organization for which the budget is prepared. A budget centre may be a department, or a section of the department. (Say production department or purchase section). The establishment of budget centre is essential for covering all parts of the organization. The budget centre" are also necessary for cost contra] purposes. The evaluation of performance becomes easy when different centers are established.3. Budget Committee: In small companies, the budget is prepared by the cost accountant. But in big companies, the budget is prepared by the committee. The budget committee consists of the chief executive to managing director, budget officers and the managers of various departments. The Manager of various departments prepares their budgets and submits to this committee. The committee will take necessary adjustments, co-ordinate all the budgets and prepare a master Budget. The main functions of the committee are: To receive and scrutinize all budgets and decide the policy to be followed. To suggest revision of functional budgets if needed and approve finally revised budgets. To prepare the Master Budget after functional budget are approved. To study variations of actual performance from the budget. To recommend corrective action if and when required.4. Budget Manual: Budget Manual is a book which contains the procedure to be followed by the executives / concerned with the budget. It guides all executives in preparing various budgets. It is the responsibility of the budget officer to prepare and maintain this manual.The budget manual may contain the following particulars: A brief explanation of objectives and principles of budgetary control. Duties and powers and functions of the budget officer and the budget committee. Budget period, account classification, Reports, statements form and charts to be used. Procedure to be followed for obtaining approval.5. Budget Period: A budget period is the length of time for which a budget is prepared and deployed. It may be different for different industries or even it may be different in the same industry or business. The budget period depends upon the following factors. The type of budget whether it is a sales budget, production budget, raw material purchase budget, by capital expenditure budget. A capital budget may be for a longer period i.e. 3 to 5 years; purchase and sales Budget may be for one year. The nature of the demand for the producer and timings for the availability of finance.6. Key Factor: It is also known as limiting factor or governing factor or principal budget factor. A key factor is one which restricts the volume of production. It may arise due to the shortage of material, labor, capital, plant capacity or sales. It is a factor which affects all other budgets. Therefore the budget relating to the key factor is prepared before other budgets are framed. The following are the requirements of a good budgetary control system: Budgetary control system should have the whole-hearted support of the top management. A budget committee should be established consisting of the budget director and the executives of various departments of the organization. There should be a proper fixation of authority and responsibility. The delegation of authority should be done in a proper way. The budget figures should be realistic and easily attainable. Variation between actual figures and budgeted figures should be reported properly and clearly to the appropriate levels of management. A good accounting system is essential to make budgeting successful. The budget should not cost more to operate than is worth.

Advantages of Budgetary ControlBudgetary control has become an essential tool of the management for controlling costs and maximizing profits. It acts as a friend, philosopher, and guide to the management.The following are the advantages of budgetary control: Budgetary control defines the objectives and policies of the undertaking as a whole. It is an effective method of controlling the activities of various departments of a business unit. It fixes targets and the various departments have efficiently to reach the targets. It helps the management to fix up responsibility to reduce wasteful expenditure. This leads to reduction in the Cost of production. It brings in efficiency and economy by promoting cost consciousness among the employees and facilitates introduction of standard costing. It acts as internal audit by a continuous evaluation of departmental results and costs. It helps in estimating the financial needs of the concern. Hence the possibility of under capitalization is eliminated. It provides a basis for introducing incentive remuneration plans based on performance. It helps in the smooth running of the business unit. There will be no stoppage of production on account of shortage of raw materials or working capital. The reason is that everything is planned and provided in advanced. It indicates to the Management as to where action is needed to solve problems without delay.

Budgeting as a Control Tool A budget serves as a control tool to provide standards for evaluating performance.A budget can cover any of the following: Profit planning forecast of revenues and expenses Cash budgeting forecast of cash needs and sources Balance sheet forecasting anticipating future assets, liability and net worth position of the business Profit Planning: The sales forecast and corresponding costs and expenses are the major inputs to a Profit Plan. Why is profit planning important? It enables the entrepreneur to see the complete picture and to analyze how each cost and expense item behaves in relation to changes in the level of sales. Budgeted amounts are then compared with actual results and variances are analyzed and corrected.Cash Budgeting: A Cash Budget is used to determine anticipated cash inflows and outflows so that the business maintains the optimum level of cash. It also provides information on whether or not additional financing is required to address cash shortfalls.The first step in preparing a Cash Budget is to list down all transactions having cash flow implications.Cash Disbursements, on the other hand, may include cash operating expenses, raw material purchases, equipment and other asset purchases, and repayments on bank loans. From this exercise, a Net Cash Balance is derived. This is then carried over to the next as the beginning cash balance. Some businesses choose to have a pre-determined minimum required cash balance which they maintain at all times.Balance Sheet Forecasting: This involves estimating asset levels to support the forecasted sales targets. For example, if the higher sales targets would necessitate opening more retail outlets, then necessarily, investments in fixed assets are a must. Moreover, changes in the funding mix (i.e., a higher level of long-term loans vs. short-term borrowings) may also occur.

Example: The Sales Director of a manufacturing company reports that next year he expect to sell 50,000 units of a particular product.The production Manager consults the Storekeeper and casts his figures as follows:

Two kinds of raw materials A and B are required for manufacturing the product. Each unit of the product requires 2 units of A and 3 units of B. The estimated opening balances at the commencement of the next year are:Finished product : 10,000 unitsRaw Materials A: 12,000 units, B: 15,000 unitsThe desirable closing balances at the end of the next year are: Finished product 14,000 units, A: 13,000 unitsB: 16,000 unitsPrepare Production Budget and Materials Purchase Budget for the next year

Solution:PRODUCTION BUDGET (Units)Estimated sales50,000

Add: Desired closing stock14,000

64,000

Less: Opening Stock10,000

Estimated Production54,000

MATERIALS PURCHASE OR PROCUREMENT BUDGET. (Units)Material AMaterial B

Estimated consumption 2 x 540003 x 540001,08,000

1,62,000

Add: Desired closing stock13,00016,000

1,21,0001,78,000

Less: Opening Stock12,00015,000

Estimated Purchase1,090001, 63,000

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