Budgets & Budgetary Control
Budgets & Budgetary Control
Budgets & Budgetary Control
ASSIGNMENT ON
Budgets&BudgetaryControl
SUBMITTED TO SUBMITTED BY
ALISHA SABRI VIPUL GUPTA
ROLL NO: 1730111411
DATE:13.06.2020
ACKNOWLEGDEMENT
Secondly I Would Like To Thank My Parents And Friend Who Also Helped Me In
Completing My Project Work.
I’m making this project Not Only for Marks but Also to Increase My Knowledge.
Thanks Again To All Who Helped Me.
Budgets & Budgetary Control
Topics to be enlighten…
• Introduction Budgets and Budgetary Control
• Meaning and Definition
• Objectives of Budgetary Control
• Advantages of Budgetary Control
• Limitations of Budgetary Control
• Essentials of Effective Budgeting
• Types of Budget
• Cash Budget
• Master Budget
• Fixed and Flexible Budget
• Performance Budgeting (PB)
• Zero Base Budgeting (ZBB)
• Budget Reports
• Practical Problems
Introduction:
The term ‘Budget’ appears to have been derived from the French word
‘baguette’ which means ‘little bag' , or a container of documents and
accounts. A budget is an accounting plan. It is a formal plan of action
expressed in monetary terms. It could be seen as a statement of
expected income and expenses under certain anticipated operating
conditions. It is a quantified plan for future activities – quantitative blue
print for action.
One can elicit the explicit characteristics of budget after observing the
above definitions. They are…
• It is mainly a forecasting and controlling device.
• It is prepared in advance before the actual operation of the
company or project.
• It is in connection with adefinite future period.
• Before implementation, it is to be approvedby the management.
• It also shows capital to be employed during the period.
Budgetary Control:
Budgetary Control is a method of managing costs through preparation
of budgets. Budgeting is thus only a part of the budgetary control.
According to CIMA, “Budgetary control is the establishment of budgets
relating to the responsibilities of executives of a policy and the
continuous comparison of the actual with the budgeted results, either to
secure by individual action, the objective of the policy or to provide a
basis for its revision.”
The main features of budgetary control are:
Classification of Budget
Functional Classification:
SALES BUDGET:
The sales budget is an estimate of total sales which may be articulated in
financial or quantitative terms. It is normally forms the fundamental
basis on which all other budgets are constructed. In practice,
quantitative budget is prepared first then it is translated into economic
terms. While preparing the Sales Budget, the Quantitative Budget is
generally the starting point in the operation of budgetary control
because sales become, more often than not, the principal budget factor.
The factor to be consider in forecasting sales are as follows:
➢ Study of past sales to determine trends in the market.
products.
➢ Changes of business policy and method.
PRODUCTION BUDGET:
The production budget is prepared on the basis of
estimatedproduction for budget period. Usually, the production
budget is based on the sales budget. At the time of preparing the
budget, the production manager will consider the physical facilities
like plant, power, factory space, materials and labour, available for the
period. Production budget envisages the production program for
achieving the sales target. The budget may be expressed in terms of
quantities or money or both. Production may be computed as follows:
Units to be produced = Desired closing stock of finished goods +
Budgeted sales – Beginning stock of finished goods.
purchases.
➢ Requirement of raw‐materials is decided on the basis of
production budget.
➢ It provides data for raw material control.
PURCHASE BUDGET:
Strategic planning of purchases offers one of the most importantareas
of reduction cost in many concerns. This will consist of direct and
indirect material and services. The purchasing budget may be
expressed in terms of quantity or money.
The main purposes of this budget are:
➢ It designates cash requirement in respect of purchase to be made
LABOUR BUDGET:
Human resourcesare highly expensive item in the operation of an
enterprise. Hence, likeother factors of production, the management
should find out in advance personnel requirements for various jobs in
the enterprise. This budget may be classified into labour requirement
budget and labour recruitment budget. The labour necessities in the
various job categories such as unskilled, semi‐skilled and supervisory
are determined with the help of all the head of the departments. The
labour employment is made keeping in view the requirement of the
job and its qualifications, the degree of skill and experience required
and the rate of pay.
Methods:
1. Receipt and payment:It is most popular and is universally used for
preparing cash budget. The assumption of statistical data is arrived at
calculated on the basis of requirements like monthly, weekly or
fortnightly. On account of elasticity, this method is used in forecasting
cash at different time periods and thus it helps in controlling cash
distributions.
(a) Cash receipts from customers are based on sales forecast. The term
of sale, lag in payment etc., aregenerally taken intoconsideration.
(b) Cash receipts from other sources, such as dividends and interest on
trade investment, rent received, issue of capital, sale of investment
and fixed assets.
(c) Cash requirements for purchase of materials, labour and salary cost
and overhead expenses based on purchasing, personnel and
overhead budgets.
(d) Cash requirements for capital expenditure as per the capital
expenditure budget.
(e) Cash requirements for other purposes such as payment of
dividends, income‐tax liability, fines and penalties.
(i) Estimating Cash Receipts: Generally main sources of cash receipts are
sales, interest anddividend, sales of assets andinvestments, capital
borrowings etc.The Company estimates time‐lag on the basis of
past experience of cash receipts on credit sales while cash sales can
be easily determined.
(ii) Estimating Cash Payments: It can be decided on the basis of various
operating budgets prepared for the payment of credit purchase,
payment of labour cost, interest and dividend, overhead charges,
capital investment etc.
2. Adjusted Profit and Loss Account: This method is based on cash and
non‐cash transactions. This method estimates closing cash balance by
converting profit into cash. The hypothesis of this method is that the
earning of profit brings equal amount of cash into the business. The net
profit shown by profit and lossaccount doesnotsignify the actual cash
flow into the business. This also leads to another assumption, that is the
business will remain static, i.e. there will be no wearing out or increase
of assets and changes of working capital so that the total cash on hand
for the business would be equal to the profit earned.
3. Budgeted Balance Sheet Method: This method looks like the Adjusted
Profit and Loss Account method only, except that in this method a
Balance Sheet is projected and in that method Profit and Loss Account is
adjusted. In this method Balance Sheet is prepared with the projected
amount of all assets and liabilities except cash at the end of budget
period. The cash balance will find out balancing amount. If assets side is
higher than liability side it would be the bank overdraft while liability
side is higher than assets side it gives bank balance. This method is used
by the stable business houses.
4. Working Capital Differential Method:It is based on the estimate of
working capital. It begins with the opening working capital and is added
to or deducted from any changes made in the current assets except cash
and current liabilities. At the end of the budget period balance shows
the real cash balance. This method is quite similar to the Balance Sheet
method.
Model of Cash Budget
Budgets Reports:
Ascertaining budget in itself is of no use unless there is a constant
flowof budget reports showing assessment of the actual and the
budget figures. It should be prepared at regular intervalslike every
month showing results of the difference between actual and
budgeting figure. The reports should be prepaid in such a way that
they establish responsibility for the variances. Reports should also
disclose whether or not variances are favourable and that they
arecontrollable.
The contents of the budget report vary according to the
need of the managerial level. Reports are prepared in such a way
that the concerned manager is directly concerned to be provided
with detailed information. As the level grows higher, the amount
of detail becomes less although the coverage of the report will
widen.
Essentials of a Budget Report:
The following essentials should be kept in view while preparing
budget reports:
✓ The budget reports should be simple, appropriateand
understandable for the concerned person.
✓ The report should be presented in time.
✓ Thereport should be precise. However, its accuracy should notbe
at the cost of clarity.
✓ The principle of exemption should be utilized, where possible.
✓ Itshould contain only necessary information according to the
need of the concerned person.