Module 14. Budgeting Dr. Varadraj Bapat 1 Index Introduction - - PowerPoint PPT Presentation

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Module 14. Budgeting Dr. Varadraj Bapat 1 Index Introduction - - PowerPoint PPT Presentation

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Module 14. Budgeting Dr. Varadraj Bapat 1 Index Introduction Objectives Advantages Components of Budgetary Control System Types of Budget Zero Base Budgeting Management Accounting Dr. Varadraj Bapat, IIT Mumbai 2

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Budgeting

  • Dr. Varadraj Bapat

Module 14.

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Management Accounting Dr. Varadraj Bapat, IIT Mumbai

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Index

 Introduction  Objectives  Advantages  Components of Budgetary Control

System

 Types of Budget  Zero Base Budgeting

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Budget

Budget refers to an estimated

  • statement. It is prepared by companies

as well as government. It is for the purpose of attaining some goal.

Management Accounting Dr. Varadraj Bapat, IIT Mumbai

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Budget

Budget can be defined as a financial and /

  • r

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.

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Budget

It may include income,

expenditure and employment of

  • capital. It is often used for

control purpose.

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It is a process in which budget is set and actual is compared with budget to analyse variances.

Budgetary Control

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It means the establishment of budgets relating the responsibilities of executives to the prerequisite of policy and the continuous evaluation of actual with budgeted results

Budgetary Control

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either to secure by individual action the objective of that policy or to provide a base for its revision.

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Objectives

  • f Budget

 Planning:

A set of targets/goals is often essential to lead and focus individual and group

  • actions. Planning not only motivates the

employees but also improves overall decision making.

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 Directing:

Business is very complex and requires more formal direction and coordination. Once the budgets are in place they can be used to direct and coordinate

  • perations in order to achieve the

stated targets.

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 Controlling:

The actual performance can be compared with the planned targets. This provides prompt feedback about performance. budget also prevents unplanned adhoc expenditure.

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Advantages

  • f Budgetary

Control System

 Enables the managers/ administrators

to conduct activities in efficient manner.

 Provides yardstick for measuring and

evaluating the performance

  • f

individuals and their departments.

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 Reveals the deviations, from the budget

by comparing with actuals; Helps in prompt review process

 Creates suitable conditions for the

implementation

  • f

standard costing system

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 Acts as systematic base for framing

future policies and targets

 Inculcates

the feeling

  • f

cost consciousness and goal orientation

 Leads to effective utilization of various

resources, as the activities are planned and executed effectively.

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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.

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These functional budgets are broadly grouped as physical, cost and profit budgets.

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 Physical Budgets- Those budgets which

contains information in terms

  • f

physical units about sales, production

  • etc. for example, quantity of sales,

quantity of production, inventories and manpower budgets are physical budgets.

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 Cost budgets- Budgets which provides

cost information in respect

  • f

manufacturing, selling, administration

  • etc. for example, manufacturing cost,

selling cost, administration cost and research and development cost budgets are cost budgets.

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 Profit budgets- Budgets which enables

in the ascertainment of profit, for example, sales budget, profit and loss budget, etc.

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Fixed Budget Flexible Budget Master Budget Functional Budget Long Term Budget Short Term Budget Current Budget

Types of Budget

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A fixed budget is the budget designed to remain unchanged irrespective of level of activity actually attained. Such budget is suitable for Fixed

  • Expenses. It is also known as Static

budget.

Fixed Budget

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A fixed budget is not suitable in dynamic environment and for a longer period because of its rigidity. It is not suitable where labour cost, material cost and other factors are constantly changing.

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Flexible budget show the expected results of responsibility centre for several activity level. Flexible budget is the series of static budgets for different level of activity.

Flexible Budget

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While preparing flexible budget the revenues and expenses are classified into Fixed, Variable and Semi-variable categories.

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In most cases, the level of activity

during the period varies from period to period due to change in demand

  • r

seasonal nature

  • r

changing

  • circumstances. In such industries/

government

  • rganisations

flexible budget is suitable.

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Budgets which relate to the individual function/task in an organisation are known as Functional Budgets. For example, purchase budget, sales budget, production budget, plant utilization budget, cash budget.

Functional Budget

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It is a consolidated summary of

the various functional budgets. It is based on goals set. It serves as the basis upon which budgeted P & L A/c and forecasted Balance Sheet are built up.

Master Budget

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The budget which are prepared for periods longer than a year are called long-term budget. Such budgets are helpful in business forecasting and strategic planning. E.g. Capital expenditure budget, Research and Development budget.

Long-Term Budget

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Budgets which are prepared for periods less than a year are known as short term

  • budgets. E.g. Cash Budget. Such budgets

are prepared regular comparison and action to bring variation under control.

Short-Term Budget

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

Current Budget

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It refers to budgeting from scratch.

Zero Base Budgeting (ZBB)

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ZBB is a method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time.

ZBB

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To receive funding during budgeting

process, each activity must be justified in terms of continued usefulness.

Under ZBB, the budget for virtually

every activity is initially set to zero.

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Advantages

 Provides a systematic approach for

evaluation of different activities and ranks them in

  • rder
  • f

preference for allocation of scare resources.

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 Ensures that the every activity/

function undertaken is critical for the achievement of objectives.

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 Provides an opportunity to allocate

resources for various activities / functions

  • nly

after having a thorough cost benefit analysis.

 Wasteful expenditure can be easily

identified and eliminated.

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  • Ex. Material

purchase budget

 Calculate the raw material required to

be purchased: Budgeted sales: 5000 units stock of finished stock in hand is 500 units Material A and B units (per finished stock unit) : 12 and 10 respectively

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Opening stock of Raw material in

hand A: 5000units B:3500 units Closing stock

  • f

1000 units

  • f

finished goods is required to maintain.

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Solution

Budgeted Sales 5000 + Desired Closing Stock 1000 Total Requirement of finished stock 6000

  • Opening Stock

(500) Units to be produced 5500

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Raw Material A B 5500 x 12 66000 5500 x 10 55000

  • Opening Stock

(5000) (3500) Total requirement of raw material 61000 51500

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There is no need to keep stock of

raw material in hand, hence company will have to purchase 61000 units of material A and 51500 units of material B

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