Budget, Budgetary control and Budgetary Process
What is Budget??
The term ‘Budget’ is derived from a FRENCH word ‘BOUGETTS’ which means the purse in which funds are collected for meeting the anticipated expenses.
Definition
Budget defined as:-
Any financial Plan serving as an estimate of and a control over future operations.
Any systematic plan for the utilization of manpower, material or other resources.
It is an estimate of future needs.
Budget is a cost plan for a period of time.
A budget is a planned result that an organization aims to achieve which is set by the management.
Budgetary Control
Budgetary control is a process of comparing actual results with the corresponding budget in order to;
Approve accomplishments
To remedy differences by either adjusting the budget estimates or correcting the causes of differences.
In short, if budget is the means then budgetary control is the end result
-BY Terry.
Stages Involved in Budgetary Control
Fixing the responsibilities on executives/managers.
Establishment or setting up of various budgets.
Recording of actual performance.
Comparison of actual results with the budgets.
Calculation of budget deviations
Investigations into the causes of deviations
Taking corrective measures if and where necessary, to bring the actuals close to the budgets
Objectives of Budgetary Control
Co-ordination:
Proper co-ordination requires joint thinking & effort.
A department, while planning cannot work in isolation, therefore there has to be effective communication.
A budgetary control system helps to have effective communication and co-ordination.
Control:
Control is necessary to see that performance takes place according to the plan.
The function of controlling cannot be performed unless the standards are set i.e. pre-determined.
Budgetary control system helps in the establishment of standards and finding out the deviations.
This will help the management in taking corrective measures.
Communication:
A budget is a communications device.
It communicates plans about the plans and policies of the organization.
Advantages to budgetary control
Budgetary control aims at maximization of profits through effective utilization of resources.
It provides information about the objectives and policies of the organization.
It results in co-ordination and co-operation between the various members of the organization in their activities
It reveals weak points and deficiencies and helps management to take corrective actions.
Incentives to Executives
It ensures availability of working capital whenever it is required.
Provides a basis for internal check.
Disadvantages to budgetary control
Budgetary control is based on estimates and not accurates.
It is based on certain assumptions.
It is a costly system particularly for small concerns.
It may lead to lukewarm human effort resulting in failure.
It may be resented by executives as it places control over human activities.
Essential conditions for budgetary control
Organizational structure:
The organizational chart should clearly define the responsibility of each executive.
Well defined objectives:
The objectives/policies should be well defined.
System of accounting:
An effective system of accounting shall provide relevant data quickly whenever required.
System of communication:
There should be an proper system of communication & feedback between the top management and the employees.
Acceptance of systems:
Co-operation assurance from top management is essential for the success of budgetary control.
Cost:
The cost of the system should not exceed the gain/benefits accruing.
The budget should be complete, continuous and realistic.
Budget manual:
Effective budgetary control system depends upon budget manual, which gives detailed information about the plans, procedures and operations of the management.
Preparation of budget:
It requires interaction between the management and other responsible executives,therfore a committee needs to be formed.
ABC Ltd. Manufactures two products B & T. It is gong to prepare its budget for the year ending 31st December, 2005. Expectations for the year 2006 include the following:
Other Expectations
Direct labour :
Labour is paid at the rate of Rs. 2 per hr., 3 direct labour hrs. are required to produce one unit of B and 5 labour hrs. are required for one unit of T
Other Expectations
Factory Overheads:
It has been estimated that factory overheads will be Rs. 33,750 in cluding Rs. 11,750 for depreciation. Factory overheads are absorbed on a direct labour hour basis.
Other Expectations
Work in Progress:
This is negligible and can be ignored
( i.e. no opening or closing stocks.)
Other Expectations
Administration Overheads:
These are estimated to be Rs. 11,625. They are charged to goods leaving work – in – progress and entering finished goods stocks and are absorbed as a percentage of factory cost.
Other Expectations
Selling and Distribution overheads:
These are estimated to be Rs. 20,000. They are charged to the cost of sales on the basis of a percentage of the selling price.
Other Expectations
Stock Pricing :
Goods are priced on FIFO basis. Opening Stock of raw Materials are 2,000 kgs. Of P at Re. 0.50 ( Rs. 1,000) and 2,00 kgs. Of Q at Re. 1 (Rs. 2,000)
Other Expectations
Taxation in 2005 on profit is estimated at Rs. 30,000. Overdraft interest in 1998 is expected to be Rs. 595. Rs. 500 of which will be paid during the third quarter of the year.
Sales Budget
This budget is prepared by sales manager. Preparation of sales budget is the most difficult job since it is very difficult to estimate the future demands for a product. This probably the most important budget as all the other budgets depend on the sales budget.
Sales Budget
Production Budget
This Budget is prepared by the production Manager. It shows the quantity of products to be manufactured.
Production Budget ( Units)
Material Budgeting
This budget is prepared by the production manager and it is used to estimate the material requirement for the production.
Material Budget
Direct Labour Budget
This budget is prepared to estimate the Labour Requirement.
Direct Labour Budget
Overhead Absorption Rate:
Rs. 33,750 Overheads
22,500 direct labour hours
Closing stock budget
Mat. Cost + Lab. Cost + Fac. Ovhds.+ Admn. Ovhds.
Budgeted Production
Closing Stock Budget
Cost of goods sold budget
Budgeted Profit & Loss Statement
What is Budget??
The term ‘Budget’ is derived from a FRENCH word ‘BOUGETTS’ which means the purse in which funds are collected for meeting the anticipated expenses.
Definition
Budget defined as:-
Any financial Plan serving as an estimate of and a control over future operations.
Any systematic plan for the utilization of manpower, material or other resources.
It is an estimate of future needs.
Budget is a cost plan for a period of time.
A budget is a planned result that an organization aims to achieve which is set by the management.
Budgetary Control
Budgetary control is a process of comparing actual results with the corresponding budget in order to;
Approve accomplishments
To remedy differences by either adjusting the budget estimates or correcting the causes of differences.
In short, if budget is the means then budgetary control is the end result
-BY Terry.
Stages Involved in Budgetary Control
Fixing the responsibilities on executives/managers.
Establishment or setting up of various budgets.
Recording of actual performance.
Comparison of actual results with the budgets.
Calculation of budget deviations
Investigations into the causes of deviations
Taking corrective measures if and where necessary, to bring the actuals close to the budgets
Objectives of Budgetary Control
Co-ordination:
Proper co-ordination requires joint thinking & effort.
A department, while planning cannot work in isolation, therefore there has to be effective communication.
A budgetary control system helps to have effective communication and co-ordination.
Control:
Control is necessary to see that performance takes place according to the plan.
The function of controlling cannot be performed unless the standards are set i.e. pre-determined.
Budgetary control system helps in the establishment of standards and finding out the deviations.
This will help the management in taking corrective measures.
Communication:
A budget is a communications device.
It communicates plans about the plans and policies of the organization.
Advantages to budgetary control
Budgetary control aims at maximization of profits through effective utilization of resources.
It provides information about the objectives and policies of the organization.
It results in co-ordination and co-operation between the various members of the organization in their activities
It reveals weak points and deficiencies and helps management to take corrective actions.
Incentives to Executives
It ensures availability of working capital whenever it is required.
Provides a basis for internal check.
Disadvantages to budgetary control
Budgetary control is based on estimates and not accurates.
It is based on certain assumptions.
It is a costly system particularly for small concerns.
It may lead to lukewarm human effort resulting in failure.
It may be resented by executives as it places control over human activities.
Essential conditions for budgetary control
Organizational structure:
The organizational chart should clearly define the responsibility of each executive.
Well defined objectives:
The objectives/policies should be well defined.
System of accounting:
An effective system of accounting shall provide relevant data quickly whenever required.
System of communication:
There should be an proper system of communication & feedback between the top management and the employees.
Acceptance of systems:
Co-operation assurance from top management is essential for the success of budgetary control.
Cost:
The cost of the system should not exceed the gain/benefits accruing.
The budget should be complete, continuous and realistic.
Budget manual:
Effective budgetary control system depends upon budget manual, which gives detailed information about the plans, procedures and operations of the management.
Preparation of budget:
It requires interaction between the management and other responsible executives,therfore a committee needs to be formed.
ABC Ltd. Manufactures two products B & T. It is gong to prepare its budget for the year ending 31st December, 2005. Expectations for the year 2006 include the following:
Other Expectations
Direct labour :
Labour is paid at the rate of Rs. 2 per hr., 3 direct labour hrs. are required to produce one unit of B and 5 labour hrs. are required for one unit of T
Other Expectations
Factory Overheads:
It has been estimated that factory overheads will be Rs. 33,750 in cluding Rs. 11,750 for depreciation. Factory overheads are absorbed on a direct labour hour basis.
Other Expectations
Work in Progress:
This is negligible and can be ignored
( i.e. no opening or closing stocks.)
Other Expectations
Administration Overheads:
These are estimated to be Rs. 11,625. They are charged to goods leaving work – in – progress and entering finished goods stocks and are absorbed as a percentage of factory cost.
Other Expectations
Selling and Distribution overheads:
These are estimated to be Rs. 20,000. They are charged to the cost of sales on the basis of a percentage of the selling price.
Other Expectations
Stock Pricing :
Goods are priced on FIFO basis. Opening Stock of raw Materials are 2,000 kgs. Of P at Re. 0.50 ( Rs. 1,000) and 2,00 kgs. Of Q at Re. 1 (Rs. 2,000)
Other Expectations
Taxation in 2005 on profit is estimated at Rs. 30,000. Overdraft interest in 1998 is expected to be Rs. 595. Rs. 500 of which will be paid during the third quarter of the year.
Sales Budget
This budget is prepared by sales manager. Preparation of sales budget is the most difficult job since it is very difficult to estimate the future demands for a product. This probably the most important budget as all the other budgets depend on the sales budget.
Sales Budget
Production Budget
This Budget is prepared by the production Manager. It shows the quantity of products to be manufactured.
Production Budget ( Units)
Material Budgeting
This budget is prepared by the production manager and it is used to estimate the material requirement for the production.
Material Budget
Direct Labour Budget
This budget is prepared to estimate the Labour Requirement.
Direct Labour Budget
Overhead Absorption Rate:
Rs. 33,750 Overheads
22,500 direct labour hours
Closing stock budget
Mat. Cost + Lab. Cost + Fac. Ovhds.+ Admn. Ovhds.
Budgeted Production
Closing Stock Budget
Cost of goods sold budget
Budgeted Profit & Loss Statement