budgeting concepts

Budgeting ConceptsBudgeting Concepts Profit Plan ( Budget)Profit Plan ( Budget)

Realistic plan for future/Realistic plan for future/ in Quantitative terms.in Quantitative terms.

Planning Tool Planning Tool • Written PlanWritten Plan• Anticipate problems in advance. Eg without knowing Anticipate problems in advance. Eg without knowing

budgeted sales and demand units are produced budgeted sales and demand units are produced which can cause severely overproduction. which can cause severely overproduction.

• Targeted Goals.Targeted Goals.

Budgeting ConceptsBudgeting Concepts Control Tool:Control Tool:

• Controls cost through cost guidelines and in turn Controls cost through cost guidelines and in turn shows usage efficiently or inefficiently.shows usage efficiently or inefficiently.

• Variances are verified if controllable cost are over Variances are verified if controllable cost are over budget.budget.

• Reveals Progress of effective Managers who uses Reveals Progress of effective Managers who uses budget as self evaluation tool.budget as self evaluation tool.

• Overestimations are avoided.Overestimations are avoided.• Integration with Accounting system segment wise.Integration with Accounting system segment wise.• Motivational tool. Manager must be positive always. Motivational tool. Manager must be positive always.

Flexibility must be depending on circumstances. Flexibility must be depending on circumstances.

Budgeting ConceptsBudgeting Concepts Means of Communication.Means of Communication.

Updates the goals to be accomplished.Updates the goals to be accomplished. No Budget would be taken as Different GoalsNo Budget would be taken as Different Goals Eg without purchase budget procurement will Eg without purchase budget procurement will

purchase on their own and without limit to get purchase on their own and without limit to get maximum discounts.maximum discounts.

Corporation and non profit organizations too Corporation and non profit organizations too have their own goals which cannot be achieved have their own goals which cannot be achieved without planning for Allocation of Resources and without planning for Allocation of Resources and Expected Results.Expected Results.

For corporations budgets are usage v/s For corporations budgets are usage v/s outcomes.outcomes.

Budgeting ConceptsBudgeting Concepts Role in Planning /EvaluatingRole in Planning /Evaluating

Planning is setting objectives , goals and approach to achieve Planning is setting objectives , goals and approach to achieve them ethically.them ethically.

Formulation of mission Statement. Eg Shareholders wealth Formulation of mission Statement. Eg Shareholders wealth maximization. maximization.

Strategic plans are made (long term objectives) .eg Double the Strategic plans are made (long term objectives) .eg Double the production and profit.production and profit.

Setting up clear priorities i.e. allocation of limited resources eg Setting up clear priorities i.e. allocation of limited resources eg how to make double production with same quality.how to make double production with same quality.

Short Term Objectives follows then eg how many new machines Short Term Objectives follows then eg how many new machines and man power would be required to do above. and man power would be required to do above.

Quantification is necessary while evaluating progress.Quantification is necessary while evaluating progress. Variance analysis after comparison A v/s BVariance analysis after comparison A v/s B

Budgeting ConceptsBudgeting Concepts External Factors effects on budget processExternal Factors effects on budget process

Economic conditions eg inflation effect on costs.Economic conditions eg inflation effect on costs. Industry situation eg due to increase costs the effect Industry situation eg due to increase costs the effect

on profits will be shown by budgets with compared to on profits will be shown by budgets with compared to industry average.industry average.

Does Budget could be in Loss ?Does Budget could be in Loss ? Specific Revenue achievement and Limiting Specific Revenue achievement and Limiting

Expenses for strategic business units monthwise. Expenses for strategic business units monthwise.

Budgeting ConceptsBudgeting Concepts Successful Process.Successful Process.

Sufficient Lead time Sufficient Lead time for preparationfor preparation

Budget Planning Budget Planning Calendar.Calendar.

Budget Manual.Budget Manual. Interdependencies and Interdependencies and

instructions.instructions. Employee subordinate Employee subordinate

participation.participation.

12 week cashflow reporting requirement

Starting bank balance

First week endin

g

Last week endin

g Due Date

104 January

201010 January

201028 March

201006 January

2010

218 January

201024 January

201011 April

201020 January

2010

3

4

Budgeting ConceptsBudgeting Concepts

Performance measurement while Performance measurement while comparison and base is variance analysis.comparison and base is variance analysis.

Goal Congruence – segment wise / Goal Congruence – segment wise / subunit wise budget.subunit wise budget.

Coordination of various activities.Coordination of various activities.


Controllability depends upon efficiencies of Controllability depends upon efficiencies of Managers can influence.Managers can influence. Controllable costControllable cost Non Controllable cost.Non Controllable cost. Efficient allocation of resources is must.Efficient allocation of resources is must.


Time FrameTime Frame Strategic – Senior managers – 10 years or Strategic – Senior managers – 10 years or

more.more. Intermediate – Middle managers- 2 yearsIntermediate – Middle managers- 2 years Operational – Lower level – 1year or less.Operational – Lower level – 1year or less.


ParticipationParticipation Board of directors formulate mission Board of directors formulate mission

statementstatement Senior Management converts into stratgic Senior Management converts into stratgic

plans.plans. Budget committee forms Budget calendar n Budget committee forms Budget calendar n

Budget ManualBudget Manual Middle and Lower level draw their own Middle and Lower level draw their own

Budgets on basis of above.Budgets on basis of above.

Budgeting ConceptsBudgeting Concepts Cost Standards : cost of an activity or unit Cost Standards : cost of an activity or unit

input cost or unit output costs. input cost or unit output costs. It is guideline for non deviation from It is guideline for non deviation from

standard.standard. Basis is detailed studies of Basis is detailed studies of

accounting/engineering/statistics quality accounting/engineering/statistics quality controlcontrol

Flexible budgeting is must to implement Flexible budgeting is must to implement standard costing due to fixed costs impact.standard costing due to fixed costs impact.

Budgeting ConceptsBudgeting Concepts Theoretical or ideal standards : Maximum Theoretical or ideal standards : Maximum

efficiency or perfection standards for production efficiency or perfection standards for production under optimal conditions.under optimal conditions.

Based on most skilled labor who work on no Based on most skilled labor who work on no waste or machine breakdown basis.waste or machine breakdown basis.

Tight standards , positive when taken to attain Tight standards , positive when taken to attain excellence but taken negative if goals are excellence but taken negative if goals are unachievable. unachievable.

Ideal standards are replaced by perfect current Ideal standards are replaced by perfect current attainable standards or financial planning will be attainable standards or financial planning will be impossible.impossible.


Practical or currently attainable standards :Practical or currently attainable standards :Performance achievable by skilled employee Performance achievable by skilled employee

with reasonable allowance for wastage with reasonable allowance for wastage and downtime .and downtime .

Other way round possible but difficult to Other way round possible but difficult to attain result.attain result.


Grass roots or participative Grass roots or participative standards prepared at middle standards prepared at middle n lower leveln lower level

Acceptance n more Acceptance n more commitment to goals in budgetcommitment to goals in budget

Broader information base Broader information base about operational realities.about operational realities.

Performance rewards and Performance rewards and penaltiespenalties

Can be drafted on achievable Can be drafted on achievable basis.basis.

Top down or authoritative Top down or authoritative approach :prepared at top approach :prepared at top level.level.

consistent across all functional consistent across all functional areas.areas.

Less informed about Less informed about operational areas.operational areas.


Steps of preparation of budget standards:Steps of preparation of budget standards: Direct material depends upon input cost n Direct material depends upon input cost n

quality n wastagequality n wastage Direct labor : complexity of production Direct labor : complexity of production

process n restriction on pay scale also process n restriction on pay scale also affect the cost standards.affect the cost standards.


Activity analysis – determining resources n Activity analysis – determining resources n activities used for given output n process activities used for given output n process aids in development of standard cost.aids in development of standard cost.

Historical data is used where company Historical data is used where company lacks the resources.lacks the resources.

Budgeting ConceptsBudgeting Concepts Revisions in Budget : If any changes are seen in Revisions in Budget : If any changes are seen in

the assumptions on which basis budgets were the assumptions on which basis budgets were sketched ,then policy for revision has to be sketched ,then policy for revision has to be made as budgets must be flexible.made as budgets must be flexible.

A v/s B = V = efficient or inefficient of companies A v/s B = V = efficient or inefficient of companies resources. resources.

Steps :Steps : Establish standards of performanceEstablish standards of performance Measure actual performanceMeasure actual performance Compare the actual with standardsCompare the actual with standards Implement corrective actionsImplement corrective actions Review n revise the budget.Review n revise the budget.

Budgeting ConceptsBudgeting Concepts Budgetary Slack participation in preparation of Budgetary Slack participation in preparation of

budget sometimes results in padding.budget sometimes results in padding. Excess of budgeted resource over required Excess of budgeted resource over required

resource to achieve the target goal. It is done resource to achieve the target goal. It is done due to overestimation and for safety of due to overestimation and for safety of managers himself from variances.managers himself from variances.

Eg : estimation of tax payment is over due to Eg : estimation of tax payment is over due to which provision for cash is kept in excess where which provision for cash is kept in excess where tax is calculated quite less. Where as under tax is calculated quite less. Where as under where provision was short and tax is more.where provision was short and tax is more.

Learning CurveLearning Curve

Due to experience rate at which people Due to experience rate at which people perform their tasks.perform their tasks.

Time taken to perform a task shortens in Time taken to perform a task shortens in early stage of production.early stage of production.

Curve is expressed as % of reduced time Curve is expressed as % of reduced time to complete a task for each doubling of to complete a task for each doubling of cumulative production i.e. generally 80 %cumulative production i.e. generally 80 %

budgeting concepts

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