Budgeting & Budgetary Control
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Transcript of 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