BUDGETING & BUDGETARY CONTROL

Group 3

DEFINITION & MEANING OF BUDGETARY SYSTEM

Budgeting is a management tool used for short-term planning & control.

Budgets have been employed as devices to limit expenditure, but a much more useful & constructive view is to treat the budgeting process as a means for obtaining the most effective & profitable use of the companys resources via planning & control.

Budget Budget is a financial statement, prepared & approved prior to a defined period of time, of the policy to be persued during that period for the purpose of attaining a given objective.

PLANNING PROCESS
The planning process involves: Setting Objectives : They are motivational and directional in nature. Specifying Goals: It represents targets, specific in quantitative terms, to be achieved in a specific period of time Laying down Strategies: They denote courses of action to achieve the goals.

Plans/ Budgets Final step is finalization of budgets.

PURPOSES OF BUDGETS
1) Explicit Statement of Expectations : Expectations need to be stated in formal terms so that most of the underlying assumptions may be identified 2) Communication : Another purpose is to communicate or inform others the goals and methods selected by top management The managers and lower level employees have to understand the goals and support them and coordinate their efforts to attain them

3) Co ordination : It implies a harmonious relationship between various departments to ensure smooth operations

If there is no coordination imbalances will be created which will hinder the smooth operation and stand in the way of accomplishment of goals

ADVANTAGES OF It forces management to plan ahead so that long term goals are achieved. BUDGETING
Communication is increased throughout the firm & coordination should be improved.

Scarce resources should be allocated in an optimal way, thus controlling expenditure.

Areas of efficiency & inefficiencies are identified.

People are made responsible for items of cost & revenue, i.e., areas of responsibility are clearly delineated.

PROBLEMS IN Budget are perceived by the work force as pressure devices imposed by BUDGETING the top management. This can have an adverse effect on labor relations.
It can be difficult to motivate an apathetic force.

The pressure in the budgeting system may result in inaccurate record keeping.

Departmental conflicts arises because of competition for resources allocation. Departments blame each other if targets are not achieved.

Uncertainties can occur in the system, e.g., uncertainty over demand, inflation, technological change, weather, etc.

They compare current costs with estimates based only on historical analysis.

KINDS OF BUDGETS

SALES BUDGET
Begins with the forecasting of the sales of each product.

Starting point of most master budget.

This forecasting of sale is a very difficult task.

Estimate of the quantity of goods that are to be produced during the budget period.

PRODUCTION BUDGET
finished goods.

Aim of production function is to supply

Production requirements = Sales + closing stock-opening stock

CAPITAL BUDGET
Deals with choice of best capital structure.

Evaluation of alternate disposition of capital funds.

MASTER BUDGET
Firms formal plan of action for the forthcoming budget period.

Complete financial presentation.

Presents information regarding cost & profits in management.

depth to top

Cost are accurately classified.

TYPES OF BUDGETS
A master budget consists of :1. 2. Operating budgets Financial budgets

3.

Special decision budgets

Another classification of a master budget is :1. Fixed/static budget

2.

Flexible/variable/sliding budget.

OPERATING BUDGETS
Relate to physical activities/operation such as sales, production, purchasing, debtors collection and creditors payment schedules. It has the following components:1. Sales budget 2. Production budget 3. Purchase budget 4. Direct labor budget 5. Manufacturing expenses budget.

FINANCIAL BUDGETS
Concerned with expected cash receipts/disbursements, financial position and results of operations. It has the following components:1. 2. 3. 4. Budgeted income statement Budgeted statement of retained earnings Cash budget Budgeted balance sheet.

CASH BUDGET
The principal aim of the cash budget , as a tool of planning is to ascertain whether, at anytime there is likely to be an excess or shortage of cash. First element is planning horizon which means the time span and the sub-periods within that time span over which the cash flows are to be projected. The period coverage will differ from firm to firm depending upon its nature and the degree of accuracy with which the estimates can be made

If it is too long, estimates will be upset as we cannot visualize them at the time of preparation. If it is too small the disadvantages are:1. 2. 3. Failure to take into account important events which lie just beyond the period covered by the budget. Heavy workload in preparation. Abnormal factors that may be operative.

Second element is the factors that have a bearing on cash flows. Items included are cash items only, non cash items are excluded. The factors that generate cash flow are generally divided for purpose of constructing a cash budget into two broad categories 1. 2. Operating. Financial.

FLEXIBLE BUDGETS
Estimates costs at several levels of activity. It contains several estimates/plans in different assumed circumstances. Due to the uncertainty of business conditions this type of budget forms a very useful tool in real business situations. It is based on levels and volumes of capacity. Where volume/level of activity refers to the usage of capacity.

Volume/level of activity signifies percentage use of capacity. Capacity means the installed capacity of plant and personnel that is fixed amount invested in these. Eg: capacity of plant when built is 5000units of production, assuming 2500 units of production in a given period, the volume/level of activity is 50per cent.

ADVANTAGES OF FLEXIBLE BUDGET

Helps in profit planning and cost control It is possible to establish budgeted cost at any level of activity

Techniques like standard costing can be effectively implemented

Enable more accurate assessment of managerial and organizational performance It helps predict an organizations performance and income levels at a given range of sales level

ZERO BASE BUDGETING

Zero-base budgeting is a method of budgeting whereby all activities are re-evaluated each time a budget is formulated. It can be defined as a planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch and shifts the burden of proof to each manager to justify why he should spend any money at all.

FEATURES ;
Concentration of efforts is not simply of how much a unit will spend but why it needs to spend Choices are made on the basis of what each unit can offer for a specific cost Individual unit objects are linked to corporate targets Participation of all levels in decision-making

ADVANTAGES OF ZBB
Inefficient and obsolete operations are identified and removed Helps in close monitoring of cost behavior patterns in order to decide the effect of alternative courses of action The scarce resources will be allocated more efficiently

It requires participation of all managers in preparation of budgets

DISADVANTAGES OF ZBB
Will lead to enormous increase in paper work created by the decision packages It emphasizes more on short term benefits

When objectives are difficult to quantify, it does not offer any significant control advantage
It encourages the false idea that all decisions have to be made in the budget

Thank You