Budgeting control ppt farah mam
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Transcript of Budgeting control ppt farah mam
Budgetary Control
What is Budget
A Budget is a detail plan of operations for a specific period of time. In the present era every one is with the term budget because it is essential in life. A budget is prepared for the effective utilization of resources, which will help in achieving the set objectives. Budget are also very important in individual life as it important in business firms.
Budgetary Control
Every business firms have main objective to maximize the profits and to minimize the cost. An organization cannot run properly without a good budgetary system. Budgetary Control system is very helpful in bringing economy in business. It is applied to a system of management and accounting control by which all the operations and output are forecasted in a proper manner to achieve the best possible profit.
Budgetary is Define
“Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating the department and establishing responsibilities, comparing actual performance with the budgeted and acting upon to achieve maximum profitability.”
By Brown and Howard
Features of Budgetary Control
• 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
Objectives of Budgetary Control• Basic Purpose• Cooperative Spirit• Maximum Profitability• Centralized Control• Optimum Use of Resources• Coordination• Execution• Remedial Measures• Revision.
Advantages of Budgetary Control• Maximization of Profit• Co-ordination• Specific Aims• Tool for Measuring Performance• Economy• Determining Weaknesses• Corrective Action• Consciousness• Reduces Costs• Introduction of Incentive Schemes
Disadvantages of Budgetary Control
• Uncertain Future• Budgetary Revisions Required• Discourage Efficient Persons• Problem of Co-ordination• Conflict among Different Departments• Depends upon Support of Top Management
Classification of Budget
• Classification According to Time• Classification on the Basis of Function• Classification to Flexibility
Classification According to Time
• Long Term Budgets• Short Term Budgets• Current Budgets
Classification on the Basis of Function
1.) Operating Budgets Production Budget Material Budget Labour Budget Overhead Budget
2.) Financial Budgets Cash Budget Capital Expenditure Budget Income Statement of Retained Earnings Budget Budgeted Balance Sheet or Position Statement Budget
3.) Master Budget
Classification to Flexibility
• Fixed Budget• Flexible Budgets
Sales Budget
Sales Budget is an estimate of expected sales during a budget period. It is the starting point on which other budgets are also based.
Factors considered in Preparing a Sales Budget
• Past Sales figures and Trend• Salesmen's Estimates• Plant Capacity• General Trade Prospects • Orders in Hand• Seasonal Fluctuations• Potential Market• Availability of Material and Supply• Financial Aspect
Format of Sales BudgetFormat of Sales Budget
Period/ Area
Budgeted in the current Period
Actual Sales Budgeted for the future Period
Units Rate (Rs.)
Amt (Rs.)
Units Rate (Rs.)
Amt (Rs.)
Units Rate (Rs.)
Amt (Rs.)
Northern Area Product – XProduct – Y
Southern Area Product – XProduct – Y
Grand Total
Production Budget
• It is a component of the master budget that establishes the level of production planned for the budget period. It fixes the target for the future output.
• Production budget attempts to estimate the number of units of each product that the company is planning to produce during the budget period.
Factors while preparing a Production Budget
• Sales• Inventory Policies• Availability of Production Resources• Key Factor• Plant Factor• Plant Maintenance• Technological Obsolescence• Production Control• Time Lag• Time Involved• Change Over• Economic Batch Qauntity
Format of Production BudgetParticulars January February March
Sales in quantity (as per sales budget)
XXX XXX XXX
Add: Desired inventory at the end
XXX XXX XXX
Total quantity required
XXX XXX XXX
Less: Stock at beginning
XXX XXX XXX
Quantity to be produced
XXX XXX XXX
Material Budget
The process of preparing material budget or purchase budget in terms of quantity and money value of materials to be procured in given period of time.
Benefits of Material Budget
• Help to estimate material prices during a year
• Help to analysis material requirement• Reduced risk of inventory planning• Maximum purchase lead time• Reduces transportation cost• Better supplier relations.
Factors Considered in Preparing a Material Budget
• Raw material required for the budget output.• The Percentage of raw material to total cost of products should be
calculated on the basis of previous records. On the basis of this percentage a rough total value of raw materials for the budgeted output will be ascertained.
• Consideration must be given to the companys stocking policy. Figures related to anticipated raw material stock to be held at different time should be known.
• Consideration must be given to the lag between the placing of the order of the purchase of materials and the receipt of materials.
• The seasonal nature in the availability of raw material should be considered.
• The price trend in the market.
Direct Labour Budget
The direct labour budget is developed from the production budget. Direct labour requirements must be computed so that the company will know whether sufficient labour time is available to meet the budgeted production needs. By knowing in advance how much labour will be needed throughout the budget year, the company can develop plans to adjust the labour force as situation requires. Companies that neglect to budget run the risk of facing labour shortages or having to hire and lay off workers at awkward times
Department Labour BudgetCost Center: Product Output Quantity Month: Standard Hours
A
B
C
Workers Number Hours Rate of Wages Direct Labour Cost Total Male: Skilled Semi-skilled Unskilled Female: Skilled Semi-skilled Unskilled Total
Availability of Workers in Each Grade
• Overtime working.• Second shift working – full or partly• Transfer from one department to another
department• Recruitment.• Sub – contracting• Reduce idle time.• To investigate possible increased sales.• Retrenchment in case of excess on the long –
term basis.
Overhead Budget OVERHEAD BUDGET shows the expected cost of all
production costs other than direct materials and direct labour. Budgeted variable overhead costs are based on a budgeted variable overhead rate multiplied by budgeted activity. Budgeted fixed overhead costs remain unchanged as the activity level changes within the relevant range.
Format of Overhead Budget
Production BudgetParticulars Original Budget (Rs.) Budget for Next Year
(Rs.)Direct Labour XXX XXX
Direct Material XXX XXX
Prime Cost XXX XXX
Factory Overhead: XXX XXX
Fixed XXX XXX
Variable XXX XXX
Total Cost XXX XXX
Cash Budget A cash budget is extremely important, especially for small
businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems. For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems fairly unimpressive. However, upon setting a cash budget to account for regular annual cash expenditures, this seemingly small daily expenditure comes out to an annual total of $365, which may be better spent on other things. If you frequently visit specialty coffee shops, your annual expenditure will be substantially more.
Characteristics of Cash Budget
• Is a statement of anticipated cash receipts and payments.
• Is related to predetermine future period.• Is expressed in terms of monetary values.• Is forecast of financial aspirations of the
enterprise.• Is an outline of future plans, policies and
actions of the management.
Items in Cash Budget
Cash Receipts Cash PaymentsCash sales Cash PurchaseCollection from Debtors Payment to creditorsSales of fixed assets Labour costIssue of share and debenture Factory overheadLoans and Borrowings Loan repaymentInterest and dividend Purchase of market securitiesMiscellaneous receipts Interest and dividend
Tax paymentPayment for wages and salaries, rent and other expenses.Miscellaneous expenses
Format of Cash BudgetParticulars Jan Feb March
1.) Opening Cash Balance
2.) Estimates Cash Receipts
3.) Total Receipts available during the month (1+2)4.) Estimated Cash Payments
5.) Total Cash Payments6.) Closing Cash Budget (3-4)
Master Budget
• It is summary of various functional budgets. It is prepared by integrating various budget into one consolidated budget so as to represent the budgeted profit and loss account and the budgeted balance sheet as at the end of the budget period.
Steps Involved in Preparation of Master Budget
• Sales budget, as the starting point,• Production budget,• Cost of production budget,• Cash budget• Projected income statement and the balance
sheet.
Advantages of Master Budget• All summary report is prepare in one report.• The accuracy of al.• l the functional budgets is checked because the
summarized information of all functional budgets should agree with the information given in the master budgets.
• Estimated profit of the organization.• Information relating to forecast balance sheet is
available in the master budget.• It reveals the managerial goals regarding revenues,
expenses, profits and cash flows etc.
Format of Master BudgetParticulars January February For the Period
Budget Previous Period
Budget Previous Period Budget Previous Period
Previous period
Less: Purchase as per material budget.
Direct labour as per direct labour budget.
Gross Profit
Less: Factory overhead-variable
Repairs and maintenance
Factory overhead- fixed
Research and development expenses
Administrative overheads
Selling and distribution overheads
Operating Profit
Flexible Budget
Is based upon different levels of activity. It is a very useful tool for comparing actual costs experienced to the cost allowable for the activity level achieved, i.e. it is dynamic in nature as compared to static. A series of budgets can be readily developed to fit any activity level. Flexible budgeting distinguishes between fixed and variable cost, thereby allowing for a budget that can be automatically adjusted to the level of activity actually attained.
Features of Flexible Budget
• Cover a Range of Activity• Dynamic in nature• Facilitate Performance Measurement
Advantages of Flexible Budget
• A flexible budget makes it possible to establish budget cost for any level of activity within the relevant range even after the periods activity is over.
• Helpful in assessing the performance of the department heads,
• Ascertain the cost• Evaluating the effects of varying volumes of activities
on profits and cash position. It helps in production planning as well as profit planning.
• It control overheads.
Disadvantages of Flexible Budget
• Linearity of cost and not maintain record of e.g. discounts of bulk purchase of goods or material.
• It make on assumption of continuity, but in future it may be stop.
• Determining the fixed and variable elements• It tend to maintain fixed cost at the same
level of output or sales.
Format of Flexible BudgetParticulars Capacity 60% Capacity 80% Capacity 100%
Prime cost
Variable Overheads
Marginal Cost (A)
Sales (B)
Contribution C= (B-A)
Fixed Cost (D )
Profit (C-D)
Zero Based Budgeting (ZBB) A method of budgeting in which all expenses must be justified
for each new period. Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.
ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations.
Definition: Zero Based Budgeting (ZBB)
ZBB is a method of budgeting whereby all activities are re-evaluated each time a budget is set. Discrete levels of each activity are valued and combination chosen to match funds available.
By CIMA
Features of ZBB• Decision completely justify by manager.• Activities are identified in decision packages.• Decision packages are ranked in order of priority,• Packages are evaluated by systematic analysis.• There should be good relation between superior
and subordinates. So that they can discuss and plan for future step they are going to take.
• Corporate objective should be clear.• Arrange the order on priority basis for good
results or output.
Important Aspects of ZBB
• It emphasises on all requisites of budgets.• Evaluation on the basis of decision packages and
systematic analysis, i.e., in view of cost benefit analysis.• Planning the activities, promotes operationai efficiency
and monitors the performance to achieve the objectives.
Steps Involved in ZBB• No Previous year performance of inefficiencies are to be
taken as adjustments in subsequent year.• Identification of activities in decision packages.• Determination of budgeting objectives to be attained.• Extent to which Zero Base Budgeting is to be applied.• Evaluation of current and proposed expenditure and
placing them in order of priority.• Assignment of task and allotment of sources on the basis of
cost benefit comparison.• Review process of each activity examined afresh.• Weightage should be given for alternative course of
actions.
Advantages of ZBB• Utilization of resources at a maximum level.• It serves as a tool of management in formulating production
planning.• It facilitates effective cost control.• It helps to identify the uneconomical activities.• It ensures the proper allocation of scarce resources on priority
basis.• It helps to measure the operational inefficiencies and to take the
corrective actions.• It ensures the principles of Management by Objectives.• It facilitates Co-operation and Co-ordination among all levels of
management.• It ensures each activity is thoroughly examined on the basis of cost
benefit analysis.
Disadvantages of ZBB• It is not suitable for all the activities in an
organization.• It has limited application in a profit making
organization. It applied in case of workers welfare measures.
• It is not apply in R&D activities .• ZBB is indifferent as to whether total budget is
increasing or decreasing.• More paper work• It takes more time and efforts.
Performance Budgeting
“The Process of analyzing, identifying, simplifying and crystallizing specific performance objectives of a job to be achieved over a period, in the framework of the organizational objectives, the purpose and objectives of the job.“
BY National Institute of Bank Management
Features of Performance Budgeting
• Classification into functions, activities or programme.
• Specifying objectives of each programme.• Establishing appropriate methods for
measurement of work.• Setting work target for each programme.
Importance of Performance Budgeting
• It correlates the financial and physical aspects of every programme or activity
• It improves budget formulation.• It facilitates better appreciation and review of
the organization activities by the top management.
• It measures progress towards long term goals.• It helps in making effective performance audit.
Steps of Performance Budgeting
• Classification of Activities• Specification of Objectives.• Analysis of Activities.• Establishing Control Norms.• Clears Lines of Authority and Responsibility.• Evaluation.
Advantages of Performance Budget
Disadvantages of Performance Budget
• Rapid Organizational Activities not Considered• Difficulties in Comparison.• Quality is Ignored.• External Factors not Considered.
END CHAPTER