8/3/2019 Manageral Accounting and Finance
1/17
MANAGERAL ACCOUNTING
AND FINANCE
Unit 6 : Budgeting and Budgeting Control
8/3/2019 Manageral Accounting and Finance
2/17
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.
8/3/2019 Manageral Accounting and Finance
3/17
Meaning of Budgetary Control
Its the process of determining various budgeted
figures for the enterprise and then comparing it
with the actual performance.
8/3/2019 Manageral Accounting and Finance
4/17
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.
8/3/2019 Manageral Accounting and Finance
5/17
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
8/3/2019 Manageral Accounting and Finance
6/17
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
8/3/2019 Manageral Accounting and Finance
7/17
Operating budget
Types1. Sales budget
2. Production budget
3. Labour budget4. Purchase budget
8/3/2019 Manageral Accounting and Finance
8/17
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
8/3/2019 Manageral Accounting and Finance
9/17
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.
8/3/2019 Manageral Accounting and Finance
10/17
Factors of sales budget
Past sales figures
Assessment and reports by salesmen
Availability of raw materials
Seasonal fluctuations
Availability of finances
Plant capacity
8/3/2019 Manageral Accounting and Finance
11/17
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?
8/3/2019 Manageral Accounting and Finance
12/17
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.
8/3/2019 Manageral Accounting and Finance
13/17
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
8/3/2019 Manageral Accounting and Finance
14/17
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.
8/3/2019 Manageral Accounting and Finance
15/17
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
8/3/2019 Manageral Accounting and Finance
16/17
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.
8/3/2019 Manageral Accounting and Finance
17/17
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.
Top Related