PRESENTATION - BY SATHYA NARAYANAN

 

 

 

Presentation by :       SATHYA NARAYANAN

Course :                     PCC

Place                           Kumbakonam

 

 

BUDGETS AND BUDGETARY CONTROL

 

 

INTRODUCTION:-

 

                   Budgetary control and Standard costing systems are two essential tools frequently used by business executives for the purpose of planning and control. In the case of budgetary control, the entire exercise starts with the setting up of budgets or targets and ends with the taking of an action, in case the actual figures differed with the budgetary ones.

The Chartered Institute of Management Accountants of England and Wales has defined the terms 'budget' and 'budgetary control' as follows :

Budget: "A financial and/or quantitative statement, prepared and approved prior to a defined period of time of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital".

Ø     Budgets are usually, set up in the light of past experience after taking into account the changes that are expected to occur in the future.

Ø     It is, therefore, to be expected that actual figures will correspond to the budget unless there is some important change in the conditions.

Ø    Since budgets assume the optimum efficiency attainable, the system of budgetary control helps to increase efficiency and enables the concern to achieve the targets which are considered attainable.

OBJECTIVES:-

 

       The process of budgeting is initiated with the establishment of specific targets of performance and is followed by executing plans to achieve such desired goals and from time to time comparing actual results with the targets of performances/goals. These targets include both the overall business targets as well as the specific targets for the individual units within the business. Establishing specific targets for future operations is part of the planning function of management, while executing actions to meet the goals is the directing function of management.

 

Ø       Planning :-   

ü       set of targets/goals is often necessary to guide and focus individual and group actions.

ü       budgeting supports the planning process by requiring all organizational units to establish their targets for the upcoming period. The targets, in turn, motivate individuals and groups to perform at high levels.

ü      Planning not only motivates employees to attain goals but also improves overall decision making.

ü      During the planning phase of the budget process, all viewpoints are considered, options identified, and cost reduction opportunities assessed.

 

Ø      Directing:-

ü      Once the budget plans are in place, they can be used to direct and coordinate operations in order to achieve the stated targets.

ü      For example, your target to receive "90%" in an exam would result in certain activities, such as reading books, completing assignments, participating in class, and studying for exams. Such actions are fairly easy to direct and coordinate.

ü       The budgetary units of an organization are called responsibility centers.

ü       Each responsibility center is led by a manager who has the authority over and responsibility for the unit's performance.

Ø     Controlling:-

ü      The actual performance of an operation can be compared against the planned targets.

ü      This provides prompt feedback to employees about their performance. If necessary. employees can use such feedback to adjust their activities in the future.

ü       For example, a salesperson may he given a quota to achieve Rs10,00,000 in sales for a particular period. If the actual sales are only Rs 8,75,000, the

BUDGETARY CONTROL:-

                             It can be defined as "the establishment of budgets relating 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 objective of that policy or to provide a base for its revision".

 

The salient features of such a system are the following :

(i) Determining the objectives to be achieved, over the budget period, and the policy or policies that might be adopted for the achievement of these ends.

(ii) Determining the variety of activities that should be undertaken for the achievement of the objectives.

(iii) Drawing up a plan or a scheme of operation in respect of each class of activity, in physical as well as monetary terms for the full budget period and its parts.

(iv) Laying out a system of comparison of actual performance by each person, section or department with the relevant budget and determination of causes for the discrepancies, if any.

(v) Ensuring that corrective action will be taken where the plan is not being achieved and, if that be not possible, for the revision of the plan.

 

 Advantages of Budgetary Control System :-

1. The use of budgetary control system enables the management of a business concern to conduct its business activities in the efficient manner.

2. It is a powerful instrument used by business houses for the control of their expenditure. It infact provides a yardstick for measuring and evaluating the performance of individuals and their departments.

3. It reveals the deviations to management, from the budgeted figures after making a comparison with actual figures.

4. Effective utilisation of various resources like—men, material, machinery and money—is made possible, as the production is planned after taking them into account.

5. It helps in the review of current trends and framing of future policies.

6. It creates suitable conditions for the implementation of standard costing system in a business organisation.

7. It inculcates the feeling of cost consciousness among workers.

Limitations of Budgetary Control System :-

                 The limitations of budgetary control system are as follows :

1. Budgets may or may not be true, as they are based on estimates.

2. Budgets are considered as rigid document.

3. Budgets cannot be executed automatically.

4. Staff co-operation is usually not available during budgetary control exercise.

5. Its implementation is quite expensive.

Components of Budgetary Control System :- The policy of a business for a defined period is represented by the master budget the details of which are given in a number of individual budgets called functional budgets. These functional budgets are broadly grouped under the following heads :

(i) Physical budgets - Those budgets which contains information in terms of physical units about sales, production etc. for example, quantity of sales, quantity of production, inventories, and manpower budgets are physical budgets.

(ii) Cost budgets - Budgets which provides cost information in respect of manufacturing, selling, administration etc. for example, manufacturing costs, selling costs, administration cost, and research and development cost budgets are cost budgets.

(iii) Profit budgets - A budget which enables in the ascertainment of profit, for example, sales budget, profit and loss budget, etc.

(iv) Financial budgets - A budget which facilitates in ascertaining the financial position of a concern, for example, cash budgets, capital expenditure budget, budgeted balance sheet etc.

 DIFFERENT TYPES OF BUDGETS

Budgets may be classified by :

v     Capacity,

v     coverage they encompass,

v     periods which they cover and

v     Conditions on which they are based.

 

Capacity:-

·        Fixed Budgets

·        Flexible Budgets

 

 Coverage:-

·         Functional Budgets

·        Master Budgets

Periods:-

·         Long term Budgets

·         Short term Budgets

Conditions:-

·        Basic Budgets

·         Current Budgets   

 

 

 

Fixed budget –

§        According to Chartered Institute of Management Accountants of England, "a fixed budget, is a budget designed to remain unchanged irrespective of the level of activity actually attained". A fixed budget shows the expected results of a responsibility center for only one activity level.

§        Once the budget has been determined, it is not changed, even if the activity changes.

§         Fixed budgeting is used by many service companies and for some administrative functions of manufacturing companies, such as purchasing, engi-neering, and accounting.

§         Fixed Budget is used as an effective tool of cost control. In case, the level of activity attained is different from the level of activity for budgeting purposes, the fixed budget becomes ineffective.

§        Such a budget is quite suitable for fixed expenses. It is also known as a static budget.

 

Flexible budget:-

§        Unlike static budgets, flexible budgets show the expected results of a responsibility center for several activity levels.

§        Such budgets are especially useful in estimating and controlling factory costs and operating expenses.

§         It is more realistic and practicable because it gives due consideration to cost behavior at different levels of activity.

§         While preparing a flexible budget the expenses are classified into three categories viz.

(i) Fixed,

(ii) Variable, and

(iii)Semi-variable.

 

 

 Semi-variable expenses are further segregated into fixed and variable expenses.

Functional budgets:-

§        Budgets which relate to the individual functions in an organisation are known as Functional Budgets.

§         For example, purchase budget; sales budget; production budget; plant-utilization budget and cash budget.

§        A functional budget is one which is related to function of the business as for example, production budget relating to the manufacturing function.

§        Functional budgets are prepared for each function and they are subsidiary to the master budget of the business.

§        The various types of functional budgets to be prepared will vary according to the size and nature of the business.

 The various commonly used functional budgets are :

(i) Sales budget

(ii) Production budget

(iii) Plant utilisation budget

(iv) Direct-material usage budget

(v) Direct-material purchase budget

(vi) Direct-labour (personnel) budget

(vii) Factory overhead budget

(viii) Production cost budget

(ix) Ending-inventory budget

(x) Cost-of-goods-sold budget

(xi) Selling and distribution cost budget

(xii) Administration expenses budget

(xiii) Research and development cost budget

(xiv) Capital expenditure budget

(xv) Cash budget

(xvi) Budget summaries/Master budget - Budgeted income statement and Budgeted balancesheet.

Master budget :-

§        It is a consolidated summary of the various functional budgets. It serves as the basis upon which budgeted P & L A/c and forecasted Balance Sheet are built up.

Long-term budgets:-

§        The budgets which are prepared for periods longer than a year are called long-term budgets.

§         Such budgets are helpful in business forecasting and forward planning. Capital expenditure budget and Research and Development budget are exam-ples of long-term budgets.

Short-term budgets:-

§        Budgets which are prepared for periods less than a year are known as short-term budgets. Cash budget is an example of short-term budget. Such types of budgets are prepared in cases where a specific action has to be immediately taken to bring any variation under control, as in cash budgets.

Basic budgets :-

§        A budget which remains unaltered over a long period of time is called basic budget.

Current budgets :-

§        A budget which is established for use over a short period of time and is related to the current conditions is called current budget.