Manageral Accounting and Finance

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MANAGERAL ACCOUNTING

AND FINANCE

Unit 6 : Budgeting and Budgeting Control


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Meaning of a Budget

A Budget is the monetary or quantitativeexpression of business plans and policies to be

pursued in the future period of time.

A budget is the pre-determined statement of

management policy during a given period whichprovides a standard for comparison with the resultactually achieved.


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Meaning of Budgetary Control

Its the process of determining various budgeted

figures for the enterprise and then comparing it

with the actual performance.


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Objective of Budgetary control

To ensure planning for the future by setting upvarious budget.

To coordinate the activities of differentdepartments.

To operate various cost centers and departmentswith efficiency and economy.

Elimination of waste and increase in profitability. To anticipate capital expenditure for future To centralize the control system

Correction of deviation from the establishedstandards

Fixation of responsibility of various individuals inthe organization.


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Characteristics of goodbudgeting

It should involve persons at different levels

Proper fixation of authority and responsibility It should be realistic

Good system of accounting is essential

Budgeting should have support from the topmanagement


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Types of budget

Classification according to Time1. Long term budgets2. Short term budgets3. Current budgets

Classification on the basis of functions1. Operating budgets2. Financial budgets3. Master budgets

Classification on the basis of flexibility1. Fixed budget2. Flexible budget


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Operating budget

Types1. Sales budget

2. Production budget

3. Labour budget4. Purchase budget


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Financial budget

Types1. Cash budget

2. Working capital budget

3. Capital expenditure budget4. Income statement budget

5. Statement of retained earnings budget

6. Budgeted balance sheet


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Sales Budget

It is an estimate of sales during thebudget period

It is the nerve center or back bone of

the enterprise A sales budget is the starting point on

which other budgets are also based

Sales budget lays down potentialsales figures in value as well as inquantity

Sales manager is made responsible

for sales budget.


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Factors of sales budget

Past sales figures

Assessment and reports by salesmen

Availability of raw materials

Seasonal fluctuations

Availability of finances

Plant capacity


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Production budget

It is prepared in relation to the salesbudget.

It is a forecast of the production for thebudget period.

It is prepared for the number of units tobe produced and also for the cost to beincurred on materials, labour and factoryoverheads.

Two important considerations involved inthe preparation of production budget what is to be produced?When is to be produced?


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Stages of production budget

The preparation of production budget involves the followingstages

PRODUCTION PLANNING:

A proper planning is required for thepreparation of production budget. The utilization of optimumplant capacity and avoidance of bottlenecks due to shortageof materials and labour is considered while preparing aproduction plan.

CONSIDERATION OF PLANT CAPACITY:

The number of units of different products to beproduced should be determined and the capacity which theplant will be able to work throughout the budgeted periodshould be decided. One should not fix the capacity too high ortoo low.


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Purchase budget

It is concerned with determining thequantity of raw materials required forproduction.

Materials are purchased as per therequirements of productiondepartment.

The number of units to be produced to

be multiplied by the rate ofconsumption will give the figure ofmaterials required.

Purchase budget is also called as


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The purchase budget will serve the followingpurposes:

The purchase department will be able to plan

the purchase of raw materials at differenttimes.

It will enable the fixation of minimum stocklevel, maximum stock level and reordering

level. The raw materials purchase budget will be

determined.

The budgeted cost of raw materials will be

determined.


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Labour budget The labour required for production may be

classified in to direct and indirect labour.

The labour required for manufacturing the productis known as direct labour. The labour which cannotbe specified with production is called indirectlabour.

The labour time needed for each job, process andoperation is determined with the help of time andmotion study.

The rates of pay including all allowances aremultiplied by labour time for calculating labour cost.

Labour budget is useful for anticipating labour timerequired for production.

The personnel department is also able to make


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Cash budget

The cash budget is an analysis of flow of cash in abusiness over a future, short or long period of time. It isa forecast of expected cash intake and outlay

This is a sum total of the requirements of cash in

respect of various functional budgets as well asanticipated cash receipts.

The amount to be spent on purchase of materials,payment to creditors and meeting various other revenueand capital expenditure needs should be considered.

Cash forecast will include all possible sources fromwhich cash will be received and the channels in whichpayments are to be made so that consolidated cashposition is determined.


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Flexible budget

A flexible budget is defined as a budgetwhich by recognizing the differencebetween fixed, semi-fixed and variablecost is designed to change in relation to

the level of activity.

The cost can be easily ascertained underdifferent levels of activity. This helps in

fixing prices.

Flexible budget is changed if the level ofactivity varies.

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