budgeting and control.pptx

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BUDGETING

FEATURES

• Act as tool for planning & control.

• It is formal process of financial planing using

estimated financial & actual data.• Budgeting is a process of preparing budget and

further control aspects in its procedure.

• Budgeting is a forecasting a particular event

• Budget preparation is a line function whileorganisation of budgeting is staff function.

• A budget is future profit plan.

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Advantage of budget • Budget compels & motivates organisation to make an early & timely

investigate its problem that compel the management to force for planning

for future.• Provides valuable means of control the income and expenditure of business

• Budget provides managerial polices & goals are periodically evaluated ,

test & establish guidelines for entire organisation

• Budget helps in directing capital & other resources into the most possible

channels• Budget coordinates & correlates all business activities

• Enables the management to decentralize responsibilities without loosing

control of business

• Simulative the effective use of resources & create an environment of profit

mindless through out the organisation

• Provides norms , basic yard stick for measuring performance of dept

• Budget provides a systematic & disciplined approach to the solution of

problem to organisation

•

Budget provides an effective communication in respect of objectives, goals, plans, authority, procedure to implement.2



Limitations

• Budget Planning is not exact science, useappropriate judgment may not be accurate

• Success of budget depends on cooperation,coordination & participate of all members

• A budget is only a tool & does not eliminate nor takes over the place of management

• Time consuming in preparing budget

•

Excessive emphasis on budget may result inattempt to buck the system by lower levelmanagement.

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Types of budget

• Operating budget – provide details about thefirm operation like production sales , purchase

etc. : releated to planning of all activities of theenterprise

• Financial budget – Include profit & lossstatement , balance sheet and cash budget

• Capital budget – provide details aboutinvestment , projects the amount of capitalexpenditure planned by the firm

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Budgeting process • Obtain estimates of sales ,production levels, exported costs

& availability of resources.

• Coordinating the estimates• Communicating the budget to responsible managers &

concerned department

• Implementing budget plan

•

Reporting interm progress towards budget objectivesELEMENT OF A SUCCESSFULBUDGETING PLAN

– Accurate forecasting of business activities

– Coordinating business activities

– Communicating the budget

– Acceptance and co-operation

– Reasonable flexibility

– Providing a framework for evaluation

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ESSENTIAL OF EFFECTIVE

BUDGETING

Sound organisational structure (authority &

responsibility in clearly defined)

Research analysis- provides realistic goals that

contribute to growth & profit of company Acceptance at all levels of management

Budgeting & human behaviour

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BUDGETING & HUMAN BEHAVIOUR

– Significant impact in human performance

– If not prepared adequately , lead to pull down morale of managers

– Participative management with bottom to top approach in preferred in budget planning or

business planning

– Budget fails when managers intestinally under estimate budget.

– Requires careful reviewers & checks



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MASTER BUDGET1. Operating budget

– Individual budget prepared by sales production to establish the goals of individual division

2. Financial budget

–Capital budget

– Cash budget

– Budget balance sheet

Operating budget

1. Sales budget

–Planned sales units & the expected reverse

– Derived from sales forecast

– Represents management best estimate of sales revenue for budget period

– Sales budget based on analysis forecast & market conditions, business capital



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MASTER BUDGET

2. Production budget

– Shows the units to be produced to meet the anticipated sales

– Produce requirement

– Required product = budget sales units + (derived ending finished goods – Beginning finish goods

(units)



Example

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Fixed budgeting

• Used when budgeted part is close enough to actualoutput

• Fixed budget remain unchanged irrespective of thelevel of activity and is based on single level of activity

• Fixed budget don't change when production levelchanges

• Rarely used since actual output is significantly differ

from budget output & cannot be used for costcontrol(Eg. Actual production 10,000 units budget12,000 units – cost increased cannot be complied in the

budget which lead to distortion of activity.

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Flexible budgeting

• Budget that is prepared for a range for more than one levelof activity

• Set of alternative budget to different expected level of activity

•

Called by different – variable budget, dynamic budget,sliding scale budget

• Principle of flexible budget is that business is dynamic ever changing or static

• Provides a reliable basis for comparison because it is

automatically geared to change in production activity• Relevant range – 800-10,000 units

• Budget cost 9 00 units- automatically to changes in production activity

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Features• It covers a range of activity

• More flexible – easy to change or adjust with variation in production levels

• Facilities performance measurement & evaluation in these budgeting

Steps/stage• Decide the range of activity to which budget in to be

prepared

• Determine the cost behaviour pattern (fixed, variable , semivariable) for e ach element of cost to be included

• Selecting the activity levels to prepare budget at there levels

• Prepare the budget at each activity level selected byassociating the activity level with corresponding cost

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Advantages of Flexible budgeting

• Accurate budgeting – since all cost don’t behavein the same manner

• Accurate performance measurement – more

meaningful comparison & evaluation betweenactual & budgeted data are compared

• Coordination – flexible budgeting results incoordination between all activities . Facilities are

provided to budgetary goals• Control tool- flexible budgeting in an effective

managerial units

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Participative budgeting

A process in which personnel at all level of anorganisation activity engage in on taking decisionabout budgeting

More activities like production, sales, employeetraining take place at lower level information isnecessary for budgeting

Without input at all levels of operations , the

budget will be unrealistic & impossible to attain. Joint participation creates better motivation &

committed to budget

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Static/ fixed budget

Prepared once in a year & do not change during

budget period

Continuous budget

For hard rolling budget that summarizes budget for

next 12 months . Each month manages change the budget for next year, causing continuous reviewing

& revising



Zero- base budget

FEATURES1. It requires every item be justified not just changes .

2. Each year budget in built from scratch

3. Method of budgeting where by all activities re-evaluated

each time the budget is formulated where the expenditure

are fully justified

4. ZBB involves starting the budgeting activities from

scratch or zero

5. Traditional budgets permits increases and the incremental

addition in automatically allocated while under zero based

budgeting concept each departmental functions are

received completely & all expenditure are justified before

sanction



Methodology of ZBB• Each activity of the organisation is identified & is called decision

package

• Describe specific activity in such a manner that management can

evaluate it & rank it against other activities (b) decide whether to

approve or disapprove

• Decision package must be justified – enquires about whether a

decision package promotes the goal of enterprise

• If justified , cost minimum efforts needed for the decision package is

determined

• Alternative decision package are considered to select better &

cheaper option• Incremental decision package are justified & costed as above

method

• Manager rank their decision packages in the order of priority for

resources allocation

• Resources are allocated to the package19



Advantages of ZBB • Allocation of resources need & benefits resulting efficient collection

of resources• Identifies & eliminates wastage & obsolete operation

• Ensures best possible method of performing the jobs are usedleading to next ideas creation

• Creates questioning attitudes rather than one which accepts the

current practices represent value money• ZBB Leads increased staff involvement which may lead to improved

motivation & greater interest in job

• Improves communication & coordination with in the organisation

• Manager become more aware of cost inputs that help identifying priorities

• Documentation of decision package provides management with adeep ,coordinated knowledge of all level of organisational activities

• More useful to service department where sometimes difficult toidentify the output

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Limitations of ZBB

• Cost involving in preparing a vast number of decision package is high

• Time consuming & large documentation & paper work

• Develop a fear of threatening by ZBB& therefore theassociates may oppose new ideas & changes

• Ranking of decision package & allocation of resourcesis subjective to certain degree which may result in dept

conflict• Administrative & communication of ZBB process may

cause critical problem.

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Budgetary control Budgetary control It is a means of control in which the actual stage of affairs is compared with the

budget so that appropriate action may be taken with regard to any deviations.

Budgetary control relates expenditure to a section or department who incomes theexpenditure in compared with budget one thus providing convent method of control

Features1. Make use of budget for planning & controlling all aspects of product & selling products / services

2. Attempts to show the plan in financial term

3. Planning in advance of various function of business so that business can becontrolled

4. Includes forecast of income & expenditure on equipment , machinery , material,necessary for efficient production & distribution of estimated sales volume

5. Attempts to bring actual performance at part with predicated performance byenforcing strict supervising control on actual performance

6. Control factors the planning & coordinating the variance in analysis & actiontaken quickly at right time & correction taken quickly.



Objectives of Budgetary control

1.To provide an organised procedure for planning

2.To coordinate all activities of various dept. of a business of a firm in such a manner thatmaximum profit will be achieved for the

minimum use of resources3.To provide means of determining the

responsibility for all deviation

budgeting and control.pptx

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