concept based notes business budgeting · definite future period. (ii) budgeting- according to j....

Business Budgeting 1

Biyani's Think Tank

Concept based notes

Business Budgeting

BBA

Shiv Jhalani

Dept. of Commerce & Management

Biyani Girls College, Jaipur

2

Published by :

Think Tanks

Biyani Group of Colleges

Concept & Copyright :

Biyani Shikshan Samiti

Sector-3, Vidhyadhar Nagar,

Jaipur-302 023 (Rajasthan)

Ph : 0141-2338371, 2338591-95 Fax : 0141-2338007

E-mail : [email protected]

Website :www.gurukpo.com; www.biyanicolleges.org

Edition : 2012

Leaser Type Setted by :

Biyani College Printing Department

While every effort is taken to avoid errors or omissions in this Publication, any

mistake or omission that may have crept in is not intentional. It may be taken

note of that neither the publisher nor the author will be responsible for any

damage or loss of any kind arising to anyone in any manner on account of

such errors and omissions.


Preface

I am glad to present this book, especially designed to serve the needs of the

students. The book has been written keeping in mind the general weakness in

understanding the fundamental concepts of the topics. The book is self-explanatory and

adopts the “Teach Yourself” style. It is based on question-answer pattern. The language

of book is quite easy and understandable based on scientific approach.

Any further improvement in the contents of the book by making corrections,

omission and inclusion is keen to be achieved based on suggestions from the readers

for which the author shall be obliged.

I acknowledge special thanks to Mr. Rajeev Biyani, Chairman & Dr. Sanjay Biyani,

Director (Acad.) Biyani Group of Colleges, who are the backbones and main concept

provider and also have been constant source of motivation throughout this endeavour.

They played an active role in coordinating the various stages of this endeavour and

spearheaded the publishing work.

I look forward to receiving valuable suggestions from professors of various

educational institutions, other faculty members and students for improvement of the

quality of the book. The reader may feel free to send in their comments and suggestions

to the under mentioned address.

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Unit-1

Operating Business Budgets

Q. 1 Define – (i) Budget, (ii) Budgeting, (iii) Business Budgeting

Ans. (i) Budget- Budget is a written document which incorporates all the

business activities for a definite period. It is an instrument for the

management.

Definitions-

(a) According to CIMA, London- “Budget is defined as „Budget

is a financial and/or 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 attaing a given

objective. If may include income, expenditure and the

employment of capital”.

(b) According to Barfizal- “A budget is a forecast in detail of

results of an officially reorganized programme of operations

based on the highest reasonable expectation of operating

efficiency.”

(c) According to Clarence L Van Sickle- “The budget is an

estimate prepared in advance of the period to which it

applies.”

(d) According to H. J. Wheldon- “A budget is thus a standard

with which to measure the actual achievements of people,

departments etc”.

(e) According to Brown and Howard- “A budget is a

predetermined statement of management policy during a

given period which provides a standard for comparison with

the results actually achieved”.

(f) According to Harry L. Whytie- “Budgets are finished

products they are formed programmes of future operations

and expected results. Budget results from forward thinking

and planning”.


On the bases of above mentioned definitions, we conclude that

budget refers to a plan covering all the sectors of operations

expressed in monetary and/or quantitative terms for a definite

future period of time. Budget exhibits managerial plans and

policies, for the organization as a whole or a part there of, to

achieve business goals and objectives in quantitative terms for a

definite future period.

(ii) Budgeting- According to J. Batty- “The entire process of preparing

the budgets is known as budgeting”. Therefore, the term budgeting

refers to the act of preparing budgets. It is the managerial action of

formulating budgets.

(iii) Business Budgeting-

a. When a budget is prepared for a business firm then it is

termed a s business budget.

b. Business budget is a financial document.

c. Business budget depicts and shows the plans in action for the

achievement of predetermined objectives.

d. Business budget can be prepared both in physical units and

financial units.

e. It period may be a year, or half year or quarter or even a

month.

f. Business budget is prepared by a business

firm/institution/organization on the basis of budgeting

principles, and budget techniques for a specific period the all

related business activities.

Q. 2 Write short notes on the following-

i. Budget Characteristics

ii. Nature of a Budget

iii. Objectives of a Budget

iv. Limitations of a Budget

Ans. i. Budget Characteristics-

a. It should reflect the managerial plans and policies to achieve

business goals and objectives.

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b. It is a comprehensive plan for a definite future period.

c. It is expressed either in monetary terms or quantitative terms or

both.

d. Thought it is basically an instrument of planning, it still

provides the basis for performance evaluation and control.

e. It is a detailed plan.

f. It is conclusion of budgeting.

g. It is a written document.

h. It is standard

i. In preparing a business budget all the departments of business

units coordinate with each other.

ii. Nature of Budget-

a. It is a means of communication.

b. It is an integrated plan.

c. It is prepared in a specific format.

d. It is a technique.

e. It is prepared for all activities of a business.

iii. Objectives of a Budget-

a. Most effective tool to the management for the performance

evaluation of the business activities.

b. Defining responsibilities.

c. Coordinating

d. Help in communicating

e. Useful motivating device

f. Tool for controlling costs of an organization

g. Increasing business efficiency

h. Profit maximization

i. cost reduction

j. increase competitive strength of the business

k. Low production cost

l. Minimum waste of time, energy and money


m. It is a tool of management

n. It helps management in planning, coordination and control

o. It is prepared every year by a business firms

p. It helps in checking the performance.

iv. Limitations of a Budget-

1. Effected by personal bias & prejudices.

2. Its success depends on the efficiency of the employees of the

firm.

3. Budget forecasts may prove to be wrong when the business

situations and conditions changes.

4. It leads to restriction on the freedom of work.

5. Budget is a success only when it is based on appropriate and

correct information.

Q. 3 Write short notes on the following-

i. Characteristics of Budgeting

ii. Objectives of Budgeting

iii. Techniques or/process of Budgeting

iv. Principles of Budgeting

v. Advantages of Budgeting

vi. Limitations of Budgeting.

Ans. Budgeting is a technique relating to formulate, implement and evaluate

a budget.

i. Characteristics of Budgeting-

a. Budgeting is a means of preparing a budget

b. Budgeting is a technique

c. Budgeting is a standard

d. Budgeting is used for future forecasting

e. Budgeting is based on aims/objectives/goals of a business unit

f. Budgeting is for a definite period

g. Budgeting is a continuous managerial process.

ii. Objectives of Budgeting- Budgeting help in-

a. Increasing managerial efficiency

b. Improving competitive strength

c. delegation of authority

d. diversion of work

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e. Cost control

f. Cost reduction

g. Fixing standards

h. Comparison

i. Performance evaluation

j. Communication

k. Controlling

l. Coordination

m. Planning

iii. Techniques or/Process of Budgeting-

a. Formulation of business policies- for example-

Purchase policy

Production policy

Inventory/logistics policy

Sales policy

Finance/Money policy

b. Drafting Budget forecasts- Budget forecasts includes-

Sales forecast

Purchase forecasts

Production forecasts

Capital expenditure/investment forecast

Research and development expenses forecasts

c. Budgets alternative plans and selection one best among them.

d. Coordination among various departmental budgets

e. Budget committee formulates master budget

f. Approval of master budget in the meeting of the

shareholders/owners.

iv. Principles of Budgeting-

a. Sponsored by the top management

b. Determination of responsibility centers

c. Determination of controllable costs

d. Organizing budget seminars and training

e. Pre determination of appropriate time period of budget

f. Terminology of budget should be uniform

g. Goals shall be one which can be achieved

h. Economical cost of budget


i. It should be flexible

j. Top management approval

k. Budget program evaluations

l. Timely corrective action shall be taken

v. Advantages of Budgeting-

a. Helps in planning, organizing, coordination, motivating and controlling.

b. Helps in future profitability projection.

c. Helps in making decision of all employees

1. There functions to be performed

2. There responsibilities

d. Helps in comparison of actual figures with budgeted ones.

e. Helps in participation of workers in management process.

f. Best and maximum utilization of business resources.

g. Helps in regular and up-to-date accounting records

maintenance

h. Helps in development of cooperation and inter dependence

vi. Limitations of Budgeting-

a. Effected by personal bias and prejudices

b. Preparation of frailty budgets due to lack of appropriate

information.

c. Budget failure due to lack of departmental cooperation.

d. Extra burden and cost increase due to budget preparation.

e. More attention on budget objectives and less attention on

employees.

f. Budgets are simply estimates of future activities.

g. Budget decision taken mostly at high level.

h. Ignorance of lower level employees.

On the basis of Flexibility- On the basis of flexibility the budget may

be classified into two categories namely-

1. Fixed or Static Budget, and

2. Flexible Budget

1. Fixed or Static Budget-

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a. Definition- According to ICWA, London- “Fixed Budget is a

budget which is designed to remain unchanged irrespective of

the level of activity actually attained”.

b. The budget in which the objectives and targets are fixed is

known as fixed or static budget.

c. Prepared when?

3. It is prepared after a long discussion before the beginning of

the year.

d. In fixed budget preparation the essential conditions are-

a. Business nature is not seasonal

b. No effect of external factors on business conditions.

c. Product demand is certain and fixed

d. Regular issue of supply orders

e. Regular supply of inputs

f. Price stability trend is there

e. Characteristics of a Fixed Budget-

a. Targets achievement is a must, as instructions issued by the

management authorities.

b. Fixed aim/objectives/targets of the business firm/unit.

c. It is prepared in normal conditions of business.

d. It assumes that other factors will remain constant in future.

f. Fixed Budget: Merits/ Advantages/Benefits-

i. Time saving

ii. Easy to prepare

iii. Easy to control

iv. Easy to forecast about production and sales more accurately

Fixed Budget: Demerits/Disadvantage/Losses-

i. Based on wrong assumption of other things remaining the

same

ii. Change is not possible

iii. In accurate estimates and data

iv. Other factors have great impacts on sales & production

activity.

2. Flexible Budget-


a. Definition- ICWA London, “Flexible budget is a budget which,

by recognizing the difference between fixed, semi-variable, and

variable costs, is designed to change in relation to the level of

activity attained”.

b. Flexible budget is the budget in which adjustment is possible

according to change in business conditions.

c. Flexible budget is prepared for various capacity/activity levels

of production i.e. from minimum to maximum level like- 10%,

20%, 30%, 40%, ………… 100%

d. Flexible Budget Characteristics-

a. A Flexible budget consists of a series of budgets prepared in

respect of different levels of activity during a budget period.

b. It can be changed and adjusted as per the changes in the

business conditions.

c. Prepared in advance

d. Prepared for various levels of activity

e. Its nature is dynamic

f. Concerned with a particular period of time

g. Production possible at all levels of productions.

h. Easy to control unfavorable effects of the changes.

e. Utility of Flexible Budget for the types business and industry.

a. Seasonal nature business

b. Business of dynamic nature

c. Business concern operating on international or multinational

level.

d. A business in which demand of product is not regular and

fixed.

e. A business unit in which lot changes takes places frequently.

f. A business effected by changing government policy.

g. A business unit or firm in which-

1. Consumers income is changing

2. Consumer habits are changing

3. Consumer interests are changing

4. Fashion changing

f. Flexible Budget: Advantages/Importance/Merits/Benefits

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a. Easy to calculate sales, cost, profits at various levels of

production capacity.

b. Helps in comparison of actual figure with the budget

figures.

c. Help in cost control by finding the variances in actual figures

and budget figures. Steps may be taken to minimum the

variance.

d. In flexible budget, adjustment is very simple according to

change in business conditions.

e. It is very easy to know the effects of cost factors on business

profits.

f. It helps in determination of production level.

g. It is prepared to free from the disadvantages of fixed budget.

h. Know the impact of external environmental factors on the

activities of business.

g. Flexible Budget- Disadvantages/demerits/loss-

a. Can be prepared in an industry/firm where the appropriate

accounting rules and procedures are followed.

b. System of standard costing is a must in a business

organization for preparing it.

c. Expensive

d. Hard work and calculations required for preparing it.

e. Perfect knowledge of factors of production is a must for

preparing this budget.

Nature and Behavior of Cost-

For the preparation of Flexible Budget costs may be divided into three

categories-

1. Fixed Costs-

a. There are the costs that remain constant at all levels of

production.

b. They do not increase with changes in the volume of production.


c. Cost that does not vary but remains constant within a given

period of time and a given range of activity in spite of

fluctuations in production is known as fixed cost.

d. Examples-

1. Rent or rates

2. Insurance charges

3. Management salary

2. Variable Costs-

a. There costs tend to vary with the volume of output. Any

increase in the volume of production results in an increase

invariable cost and vice versa.

b. Cost that varies directly in proportion with every increase or

decrease in the volume of output or production is known as

variable cost.

c. Example-

1. Wages of labours

2. cost of direct material

3. Direct material

4. Direct labour

5. Direct expenses

3. Semi variable Cost-

a. These costs are partly fixed and partly variable in relation to

output.

b. The cost that does not vary proportionately but simultaneously

does not remain stationary at all times is known as semi-

variable costs.

c. It can also be named as semi-fixed cost.

d. Examples-

1. Telephone Bill

2. Electricity Bill

3. Depreciation

4. Repairs

Methods of preparing Flexible Budget-

1. Multi Activity Method

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2. Formula Method

3. Graphic Method

Format of the Flexible Budget-

Flexible Budget A & Company

(Flexible Budget for the period ending on ……….)

Particulars Level of Capacity

60% (Rs.)

80% (Rs.)

100% (Rs.)

A. Fixed Expenses- i. Management Salaries ii. Rent and Taxes iii. Sundry Office Expenses iv. Depreciation of Machinery

Total (A) B. Semi-variable Expenses-

i. Plant Maintenance ii. Selling Expenses iii. Distribution Expenses iv. Indirect labor v. Salesman salary vi. Sundry Expenses

Total (B) C. Variable Expenses

i. Material ii. Labor iii. Direct Expenses iv. Variable overhead

Total (C) Total Cost (A+ B + C)

Profit ( + ) or Loss ( ) ( D – TC ) D. Sales

Total (D)

Q. 4 Write distinction between fixed and flexible budget.

Ans.

S. No. Fixed Budget Flexible Budget


Q. 5 Give names of budgets prepared by there authorities.

(i) Purchase Manager

(ii) Sales Manager

(iii) Production Manager

(iv) Finance Manager

(v) Marketing Manager

(vi) Accountant

(vii) Budget Officer

(viii) Costing Department

(i) Purchase Manager-

1. It does not change with the actual volume of activity achieved. Thus, it is known as rigid or inflexible budget.

It can be recanted on the activity level to be achieved. Thus, it is not rigid.

2. It operates on one level of activity and under one set of conditions. It assumes that there will be no change in the privilege conditions, which is unrealistic.

It consists of various budgets for different level of activity.

3. Here, as all costs like fixed, variable and semi variable costs are related to ones one level of activity, variance analysis does not give useful information

Here, analysis of variance provides useful information as each cost is analyzed according to its behaviors‟.

4. If budgeted and actual activity level differs significantly, there aspects like cost ascertainment and price fixation do not give a correct picture.

Flexible budget at different levels of activity facilities the ascertainments of cost, fixation of selling price and tendering of quotations.

5. Comparison of actual performance with budget targets is meaningless typically when there is a difference between the two activity levels.

It provides a meaningful basis for the comparison of actual performance with budgeted targets.

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a. Purchase Budget

b. Material Budget

c. Stock Budget

(ii) Sales Manager-

a. Selling and distribution budget

b. Advertising budget

(iii) Production Manager-

a. Production Budget

b. Production cost budget

c. Material budget

d. labor budget

e. production overheads budget

f. Repairs budget

g. Wastage budget

h. Quality budget

i. Plant utilization budget

(iv) Finance Manager-

a. Expenditure budget

b. Revenue budget

c. Return budget

d. Administration overhead budgets

(v) Marketing Manager-

a. Advertisement budget

b. Brand budget

(vi) Accountant-

a. Master budget

b. Cash budget

c. Capital expenditure budget

(vii) Costing Department-

a. Material budget

b. Labor budget

c. Production overhead budget

Q. 6 Write a short note on „Budget Manual‟

Ans. Budget Manual-

1. Budget manual is also called budget handbook.


2. it is a book which contain all those

1. Ruler

2. Sub rules

3. Principles

4. Procedures

All these are a must for budget

1. Preparation

2. Implementation

3. Appraisal

3. A guide for budget committee

4. A guide for budget officer

Contents of Budget Manual/Budget hand book

1. Budgeting objectives

2. Formats of master budget department budgets and all other

budget

3. Budget schedules

4. Details of budget organization or committee

5. List of all important budgets to be prepared a must

6. Authority and responsibility of the budget officer and other

member of the budget committee.

7. Payments, pays and allowance of budget officer and other

member of the budget committee.

Q. 7 What are the functions of budget committee?

Ans. Budget committee or organization-

1. Who is responsible for preparing a business budget?

Managing Director or General Manager.

2. What is formed to overcome the complexities of budgeting?

A separate organization or budget committee.

3. Members of budget committee appointed on what basis?

On the basis of the nature and size of the business.

4. Members of budget committee status?

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One member appointed as budget officer. Other members are

known as members of budget committee.

5. Budget officer has authority and responsibility

All members of budget committee work under the supervision

and leadership of the budget officer.

6. Budget officer

1. A well qualified

2. Experienced

3. Responsible for getting prepared the budget and its

approval

7. Budget office functions

a. Top management issues instructions, give guidance or

advice for budget preparation.

b. He studies the palm policies and strategy prepared by the

management.

c. He analysis the past, present and future business conditions

and environment for finding the decision making criteria‟s

for budget preparation.

d. Budget officer issues instructions to various departments

heads for preparation of departmental budgets drafts and

there submission.

e. He supplies essential data and information‟s required by

those drafting budgets.

f. Budget officer prepare a master budget on the basis of

departmental budgets received from different department

heads.

g. Budget officer attends meeting of Board of Directors/top

management, and presents master budget with explanations

as essential.

h. It is duty of budget officer to get budget approved from top

management.

i. After approval from top management, copies of the

approved budget are sending to the concerned departments.


j. Budget officer coordinates in implementation of the budget

in the organization.

k. After budget implementation, its performance analysed.

Actual compared with budgeted figures. Difference

analyzed.

l. If required necessary changes, Adjustments and

readjustments are done in budget.

8. Rights of budget officer/committee-

a. Get appropriate remuneration for his services in budgeting

work.

b. Get money required for preparing budget.

c. Budget committee member given responsibility as per his

decision budgetary criteria.

d. It is duty of all departments head to coordinate and support

budget officer in his work.

e. Get all information required for data preparation

Q. 8 What is key budget factor?

Ans. Key Budget factor-

1. Other names-

1. Prime budget factor

2. Limiting factor

3. Governing factor.

2. Affects- All types of business budgets

3. How determination done?

1. Determined after intensive study and discussion at large.

4. Key budget factor-

1. May be one or more than one factor

2. Vary from business to business

3. Nature stable or instable

4. Should be kept in mind while budget formulation

5. Key budget factors/ are as-

A. In the Area of Finance-

1. Improper use of working capital.

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2. Limited supply of capital or finance

3. Unorganized capital market and money market.

4. Less number of long term invests

5. Low rate of return on investment

6. Risks involved in investment.

B. In the Area of Production-

1. Limited supply/availability of Raw material

2. Supply of specific labour examples- skilled (technical)

3. Policies of government

4. Technique of production

5. Specific plant

6. Technical factor

C. In the area as of sales-

1. Casual shortage in demand

2. Lack of experienced and expert marketing executives

3. Product/services selling skills

4. Packaging of goods, style, design etc.

5. Advertisement

6. Publicity of product

7. Specific consumers/customers

8. Price cycle – ups and down

9. Quality of goods/product

10. Prevailing competition in market

D. In the area of management-

1. Lack of efficient administration.

2. Lack of capital

3. Lack of technical knowledge expertise

4. Lack of research on product design and production

process.

E. In the Area of labours-

1. Lack of trained labours

2. Lack of experience

3. Due to strikes reduction in the labour number.

F. In the area of material-

1. Availability of raw material

2. Restriction due to license and quote fixation


G. In the area of working capital-

1. Improper of working capital

2. Lack of funds.

Techniques- Key budget factor

Minimization or removal techniques

1. New research and development

2. Improving labor-

1. Productivity

2. Efficiency

3. Quality

4. Standard

5. Living standard

3. Finding alternatives of supply of raw material.

4. Improve product

1. Quality

2. Design

3. Contents/Mixture/Combination

4. Specific packaging

5. Reduction in-

1. Cost

2. Price

6. Organizing training and workshop for labor and employees

7. Issue of new-

1. Debentures

2. Bonds

3. Equity shares

4. Preference shares

8. Giving customers better and easy credit facility

9. Expend the marketing area of the product

10. Selection of trained and experienced sellers/agents/marketing

executives.

11. Effective advertisement and publicity keeping in mind

customer‟s behavior and psychology.

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12. Improving the efficiency, and expertise of the management

team

Q. 9 Explain essentials of an effective budgeting.

Ans. Effective budgeting- Essentials are-

1. Budget should not be rigid. It should be flexible enough to accommodate appropriate changes as required by changed situations.

2. Budget expenses should not be greater than budget gains/profits.

3. Master budget should be formulated

4. A budget committee of experts is formed and assigned the task of budgeting.

5. Budget is effective if it is prepared for a fixed time period which may be for example- one year or a quarterly.

6. Budget should be based on forecasts prepared (a) on sound information system (b) statistical methods.

7. Business must follow proper accounting system based on standard accounting principles.

8. Budget should be based on both- (a) Financial accounting, (b) Cost accounting.

9. Organization for budgeting example- Budget committee should be efficient and effective.

10. Authority and responsibility of the workers/employees must be well defined and clear cut.

11. Well defined business policies of all departments.

Q. 10 What is surplus budget?

Ans. Surplus Budget- Meaning- When forecasts about budget shows greater revenue to be received or generated than the expenses to be incurred during budgeted period that is known as surplus budget.

When it is possible?- When business conditions are favorable.

Benefits- To provide safety from business fluctuations, risks and uncertainties.


Surplus budgets and government- Only developed countries prepare surplus budget. It is not possible to prepare surplus budget in developing country.

Merits of Surplus Budget- 1. Adequate working capital situation.

2. Minimum/less dependence on external capital.

3. Safety and security from future uncertainties, business risks and fluctuations.

4. Goodwill increase.

5. Helpful in business expansion, development and reconstruction.

Disadvantages of surplus budget- 1. Surplus budget is not good for developing countries.

2. Surplus funds may be misused.

3. Increase in price due to increase its cost.

4. Increase in cost of production.

5. Increase is cost of capital

Q. 11 Write a note on „Deficit Budget‟.

Ans. Deficit Budget-

Meaning- The deficit budget highlights that the expenditures to be incurred in budget period will be greater than the revenues to be received during the same period.

When possible?- When-

1. Business conditions are unfavorable. 2. Decrease in efficiency of management. 3. Decrease in efficiency of employees.

Good for whom- Government of developing nations to meet out the extra requirements for developments and welfare programmes.

Good or bad for business concerns- It is not good in business concerns expect in specific circumstances.

Conditions in which Deficit Budget becomes necessary to be prepared

1. In business beginning when huge investment is done.

2. When there are higher fixed investments in business.

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3. Increase in the competition level.

4. In business when positive situation becomes negatives.

5. Policy changes. 1. Privatisation in place of nationalization.

2. Policy of protection and control replaced by policy of the globalization.

6. Seasonal business changes and fluctuations.

Merits of Deficit Budget- 1. Deficit budget has its effects for long term, so business earn

abnormal profits (huge profits) in long term duration.

2. It is long term strategy for marked control. By this budget firms are able to control over the marked in long term.

3. The government can execute the policy of welfare state and development and growth. The government main duty is development.

Disadvantages of Deficit Budget- 1. Decrease in company own capital.

2. It is very difficult to mobilize the extra capital from the marked for long run.

3. Downfall of comparing goodwill in market.

4. Decrease in price of debenture in market.

5. Decrease in price of share in market.

6. Investors may withdraw capital from company.

7. More dependence on outside capital.

Balanced Budget

Q. 1 Write a short note on balanced budget.

Ans. Balanced Budget- 1. It is a budget in what the total revenue to be generated will be

equal to total expenditure to be increased during the budget period.

2. Balanced Budget- Shows- Normal profits only. Normal profit means no profit no loss. For any company no profit no los situation is not good

3. In balance sheet capital shown position will be stagnant.


4. Company having surplus budget will not able to attract investors and investment in company shares and debentures.

5. Shares and debentures price of the company will fall down. This situation is not favorable for the company.

6. This budget is not appropriate for any firm/company.

Q. 2 What are the advantages and disadvantages of production budges.

Ans. Production Budget

Advantages/Merits- 1. Basis of master budget and other budgets.

2. Timely supply of orders.

3. Possibility of earning expected or desired profits.

4. Better coordination among different factors of production.

5. Optimum/best utilization of available resources.

6. Reduction in production cost.

7. Appropriate control on production process possible.

8. Business efficiency improvement

9. Coordination between- “Goods demanded and quantity of product supplied”.

10. Sufficient closing stock of finished goods maintenance possible.

Disadvantages of production budget-

1. Competition in business world

2. New inventions and discoveries in technology of production. 3. Staff may be trained or untrained. 4. Price fluctuation in market. 5. Government policy changes in budgets etc.

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Unit-II

Operating Business Budgets

Q. 1 What is Sales Budget?

Ans. Sales Budget or Revenue Budget- 1. Sales Budget states the value of sales and the volume of sales

during the budget period.

2. Sales budget is really a sales forecast of a plan period.

3. Sales budget is the budget which shows the volume and value of sales of a business/firm/company during the budget period.

4. We can call sales budget, by another name „Revenue budget‟. We call it so because it is regular source of revenue in the business.

Factors to be considered in preparing a sales budget are-

1. Analysis, interpretation, and evaluation of sales of previous years.

2. Production capacity of business firm.

3. Sales forecasts

4. Study about business fluctuations, cycles like- 1. Boom 2. Recession 3. Depression 4. Recovery 5. Prosperity

5. Changes of season, climate.

6. Effects on demand due to increase/decrease in price.

7. Output 1. Quality 2. Quantity 3. Volume

8. Techniques of production 1. labour intensive technique


2. Capital intensive technique

9. Availability of raw material

10. Type of market situation

11. Knowledge updated about 1. Capital market 2. Money market 3. Share market

12. Advertisement, publicity, climate

13. Government policies change

14. Kind of product 1. Comfort 2. Luxury 3. Necessity

15. Population size

16. Types of customers and there nature 1. Urban 2. Rural 3. Illiterate 4. literate 5. Woman 6. Man

17. Privatisation impacts

18. Globalisation impacts

19. Quality of salesman, marketing executives, sales agents

20. Area of sales 1. International 2. National 3. Regional 4. Local

21. Sales Policy 1. Sale by cash 2. Sale on credit 3. Time period of credit given

22. Availability of infrastructure i.e. water, electricity, banking, insurance, transportation, communication

Q. 2 What are the objectives of preparing sales budget?

Ans. Objectives of preparing sales budget- a. Timely supply of orders received from customers

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b. Earning maximum profits/desired profit c. Increase the sales in the market d. Sell all products produced by the company e. Customer satisfaction achievement-

1. Providing better quality product 2. With minimum cost/reasonable cost 3. Better customer services

Q. 3 Write a note on process/method of preparing sales budget.

Ans. Process/method of preparing sales budget-

1. Sales forecast in a prescribed format.

2. Sales forecast given to branch manager.

3. Study of sale forecast by Branch Manager.

4. Regional Manager after receiving all forecasts from different Branch Manager preparing a „consolidated sales forecast‟ and sends it to sales manager (top level).

5. Preparation of sales budget by the sales manager.

It may be prepared according to- 1. Area wise- East, West, North, South

2. Market wise- International, National, Regional, Local

3. Production wise- Viz, A, B, C or X, Y, Z……. etc.

4. Customer wise- Individual customer, Government departments, Private/Public companies

5. Salesman wise – Agents – Salesman – Retailers – Wholesaler

6. Period wise - Weekly, monthly - Quarterly - Monthly

Generally it is prepared area wise or product wise.

Q. 4 What are the merits and demerits of a sales budget?

Ans. Sales Budget

Merits/Importance/Advantages-


1. Earning of desired profits is possible through thus.

2. Knowledge about product demand.

3. Knowledge of customers nature

4. Managerial success depends on achievement of sales targets fixed in sales budget.

5. Safety from business fluctuations.

6. Optimum/best utilization of available resources.

7. Regular and permanent source of money revenue.

8. Basis of master budget

9. Basis of other budgets as materials budget, labour budget, cost budgets.

Demerits/Disadvantages of sales budget- 1. Preparing it is a difficult task 2. Expensive 3. Labour consuming 4. Time consuming 5. If no use for small business 6. Impacts of internal and external factors cannot be easily

ascertained

Q. 5 What is production budget?

Ans. Production budget- 1. Production budget is prepared in relation to the sales budget for

the budgeted period of the concern.

2. It establishes the level of production planned for the budget period.

3. It is prepared for the number of units that are to be produced in conformity with the sales as projected by the sales budget.

4. It is expressed both in unit as well as values.

Q. 6 What are the objectives of preparing production budget?

Ans. Objectives of preparing production budget- 1. To produce the units of various products timely at minimum

cost as per requirements of sales budget.

2. Optimum utilization of plant/production capacity.

3. Production cost reduction.

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4. Continuity in production process.

5. Best utilization of production inputs

6. Regular and timely supply of orders

7. Proper and appropriate sufficient finished stock maintenance

8. Efficiency increament

9. Help in preparation of other budgets

10. Best utilization of factors of production

Q. 7 Write a note on the factors to be considered in preparing production budget.

Ans. Factors to be considered in preparing production budget- 1. Analysis of production budget

a. Production wise - X, Y, Z b. Process wise - A, B, C c. Period wise – Weekly, monthly, Quarterly, Half yearly,

Annually

2. A study of business policies example- purchase policy, labor policy, sales policy.

3. Information and data in relation of production of previous years

4. Availability of factors of production costs/price of factors of production in market.

5. Technique of production available and used.

6. Plant capacity

7. Products duty about: type, quality of products and substitutes

8. Business environment

9. Labor union

10. Kind of market

11. Time lag in production process

12. Finished goods units required

13. Normal loans in production process

14. Regular flow of production process


Material Budget-

Q. 8 What is material budget? What are its objectives, advantages?

Ans. Material Budget- 1. It is concerned with the estimation of quantity (and also value)

of material required for the product wise budged production.

2. It exhibits per unit as well as the total consumption of materials and cost of materials that are required for the budgeted production.

Objectives of Material Budget- 1. To determine the requirement of materials of all kinds

quantitatively (physically) and financially for desired budgeted production during the plan period.

2. Control on Scrap of material Wastage of material 3. Help in preparing other budgets

4. Establish coordination among - Purchase department - Production department - Sales department

5. Continuity in production process

6. Determine cost of materials

Advantages of Material Budget- 1. Pre-determination of required material for budgeted

production.

2. Predetermination of cost of each material to be purchased.

3. Safety stock maintenance.

4. Production process goes on without interruption or stoppage.

5. Production as per required/desired

6. Minimization of cost

7. Maximization of profit

8. Better coordination among different department

Factors to be considered in preparing Materials Budget- 1. Raw Material

- Availability in market - Quality - Quantity

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- Price - Condition

2. Godown/Stores/logistic/warehouse managements.

3. Business cycles/fluctuations

4. Market conditions

5. Unit required for production

6. Budgeted period

7. Volume/quantities of production

Labour Budget-

Q.9 What do you understand by labour budget? What are the factors to be considered in preparing labour budget? What are the advantages of labour budget?

Ans. Labour Budget- Labour budget is concerned with the estimation of direct labour hours

(and also labour cost) required for the product wise budgeted production. It exhibits per unit as well as total labour hours and labour cost that are required for the budgeted production.

Factors to be considered in preparing labour budget- 1. Labour and wage policy & government of concerned state.

2. Wage payment methods to labor

3. Labor- working hours

4. Incentives and facilities to be given to labor

5. Expenditure to be incurred on training to be given to new labour

6. How many labour hours required for production of one unit.

7. Different labor rates for different kinds of labours.

8. Number of desired labor (quantity)

9. Quality of desired labor, for example- technical, skilled, unskilled

Objects of labor budget- 1. Determination-

- Labour hours required - Per unit of production

2. Determination-


- Standard labour rate

3. Determination- - Desired number of various kinds of labour required

4. Determination- - Total labour cost

5. Increase in performance, efficiency and profitability of the company minimizing labor cost.

Advantages labour cost- 1. Cost minimization

2. Profit maximization

3. Cost contro possible

4. Idle hours minimization

5. Determination of- - Total labour hours - Per unit labour hours required - Total labour cost - Labour rate per unit

6. Labour efficiency increment

7. Training to labour

8. Incentives to labour

9. Continuous production nonstop

10. Control over labour unrest

11. Helpful in preparation of other production cost budget

Overhead Budget

Q. 10 What is production overhead budget?

Ans. Production overhead budget/manufacturing expenses budget. Production overhead consists of-

a. Indirect Materials

b. Indirect Labour

c. Indirect Expenses

That are required for the production. Therefore, it is concerned with the estimation of indirect materials, indirect labor, and indirect expenses required for the product wise budgeted production. It exhibits per unit as well as total production overhead cost required for the budgeted

34

production. In a production overhead budget, generally production overhead cost is classified into. Fixed cost, Semi-variable cost, variable cost.

Q. 11 What is financial budget?

Ans. Financial budget- Financial budget relates to all expected financial transaction that are to be incurred during the budget period. It may generally, be of two types- A. Cost budget: and, B. Capital expenditure budget

A. Cash Budget- A cash budget is an estimate of the expected cash receipts and expected cash payments, whether of revenue or capital nature, of operating or non operating nature during the budget period. it is therefore, summary of the future cash boo./ Finally, it discloses both cash in hand and cash at bank, at the end of the budget period.

B. Capital Expenditure budget- A capital expenditure budget lays down a plan of the estimated future expenditure that is to be incurred by the concern during the budget period on fixed assets. This budget is based on the forecast of capital expenditure that is required for the various division of a concern during a budget period.

Functions of financial budget- 1. Planning of „working capital management‟.

2. To give actual position about the economic and financial position of business.

3. To cooperate in preparation of long term capital requirement planning (capital budget techniques).

4. To highlight about a required change in capital structure.

5. To estimate and forecast about - Cash - Profit and Loan account - Balance Sheet

6. To Cooperate financial manager in proper planning relating to cash management.

7. Find probable profits to be earned during the budgeted period.


Master Budget or Co-coordinating Budget- 1. According to ICWA, London, „Master Budget is the summary

budget, incorporating its component functional budgets and which is finally approved, adopted and employed.”

2. This budget coordinates the various activities of the business.

3. Master budget is the summary of the entire functional budget.

4. Master budget is the overall budget of a concern which includes the summary of all the functional activities of the concern.

5. Master budget is the summary budget that incorporates the key figures and total of all functional budgets.

6. A master budget generally includes- a. Sales budget b. Production budget c. Production cost budgets

d. Cash budget e. Administrative/office expenses budget f. Research and development budget g. Selling and distribution expenses budget h. Projected income statement. i. Projected balance sheet

7. Approaches regarding master budget- i. Traditional approach

ii. Modern approach

i. Traditional approach- According to this approach, the budgeted Profit & Loss account and Balance Sheet is known as master budget. In other words, the profit & loss account, and balance sheet both are known as „Master Budget‟ that is prepared on the basis of financial statement (profit & loss account and balance sheet) of the previous year and future estimates.

ii. Modern Approach- Master Budget is a broader/wider concept. The master budget is prepared incorporating all the functional/departmental budgets is a summarized form. Master budget includes all the key figure and total of all the functional departmental budgets.

8. Importance/Advantages/Merits of Master Budget- 1. It gives detail information about the business unit/firm all

departments.

36

2. Large Industrial Enterprises and business establishment use it for there objectives achievement.

3. Helps management in - Evaluation - Control - Monitoring - Decision making - Managing activities- economic and operating

4. Production process goes on continuously without any breakdown.

5. Establish coordination and cooperation among all the departments

6. Helps indetermination of rights and duties of all the departments.

7. Helps in efficiency evaluation.

8. Helps in quick and fast execution of budget.

9. Reduces time waste, energy waste of employer and employees both.

10. Disadvantages/Demerits of the master budget- a. No utility for small business enterprise b. Time consuming c. More expensive

d. Impartiality is not possible

e. Difficult to draft and prepare

f. Delay in preparation due to non receiving of information in time.

Human Resource Budget

Q. 11 Write a detailed note on Human Resource Budget.

Ans. Human Resource Budget- Human Resource Budget includes all those expenses that are to be incurred on various types of labour (Physical or mental both) at various levels of management whether related to output directly or indirectly.

Expenses to be included in preparing Human Resource Budget- 1. Top Level Management-

- Salary


- Dearness Allowance (DA) - Travelling Allowance (TA) - Conveyance Allowance - Housing facility - Medical facility

- Other incentives

2. Middle Level Management- - Salary - Other allowances, incentives, facilities of departmental heads - Supervision - Foremen - Accountants

- Clerk

3. Lower Level of Management- - Wages - Allowances - Other facilities of labour class

4. Expenses on- - Welfare of employees

- Compensation

- Legal expenses 5. Bonus/additional records/ incentives to be provided to the

employees

Advantages of Human Resource Budget- 1. Selection and recruitment of efficient employees and labour.

2. Better planning for Human Resources in the company.

3. Control and check on excess surplus labour.

4. Employees working skills improvement also given emphasis.

5. Improving the efficiency of management.

6. Proper division of authority and responsibility possible.

7. Division of work according to talent, ability and capacity of workers.

8. Helpful in managerial decisions quickly and fastly without delays.

9. Best use of human resources

Disadvantages of Human Resource Budget- 1. Expensive work

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2. Labour oriented

3. Time waste/time consuming

4. Only useful for big companies or enterprises

5. Difficult to prepare

6. Labour come/go/changing

Research and Development Budget

Q. 12 Write a short note on „Research and Development Budget.‟

Ans. Research and Development Budget- Research and development Budget signifies all those expenses (may be

called investment) which are to be incurred on the works undertaken for further research & development searching new techniques and methods for the enlargement of the business.

Forecast about the expenses incurred in budget period. On research and development to search new methods and technique of production, sales/marketing is known as Research and development budget.

Research and development expenses covers materials, equipments and supplies, salaries and other expenses relating to design, development and technical research projects.

Essential- For big companies and industries

Why? To provide new life to the company up to long-term

Time duration effects- Long term benefits to company

Expenses treatment- Treated as investment

Research and Development Budget takes into consideration the following-

1. Research- - Type of research - Area of research - Research materials - Quality of research

- Objectives of research

2. Eligibility criteria of research experts.

3. Expenses on research and development work

4. Research benefits/gains/profits

5. Research methodology


6. Methods and technique to be developed by research activity

7. New product with better quality

8. Competition quality details comparative analysis

Advantages of Research and Development Budget- 1. Better customer, relations/services.

2. Possibility of new techniques of production to be used.

3. Long term profits/gains/benefits.

4. Mostly used in big/large companies.

5. New life for the company.

6. Helps Company in survival for long time.

7. Increase in sales quantity possible

8. Expansion of sales area, zones

9. Changes in product possible as per the requirements of the time, consumer, fashion, trends, style.

10. Improvement in quality of goods and services.

Disadvantages of research and development budget- 1. Increase in cost of production 2. Increase in selling price of the product 3. Small business/company this budget of no the/l 4. Consumer dissatisfaction 5. Low quality 6. Short time changes not possible in quality and design of the

product.

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Unit-III

Capital Budgeting

Q. 1 Write other names of „Capital budgeting‟.

Ans. i. Capital expenditure decision ii. Capital expenditure management iii. Long-term investment decision. iv. Management of fixed assets.

Q. 2 Write a short note on concept of capital budgeting. Ans. Capital budgeting refers to the total process of generating, evaluating,

selecting and follow up capital expenditure alternatives.

Capital budgeting decisions features- 1. There decisions have long term effects on the profitability and

cost structure of the firm.

Capital budgeting decisions determine the future destiny of the

firm.

2. High degree of risk.

3. Capital expenditure decision require large amount of funds.

4. Capital budgeting decisions are irreversible and the amount

invested cannot be realized back.

5. Most difficult decisions.

6. Impact on firm‟s competitive strength.

7. Impact on cost structure.

Objectives/significance of capital budgeting-

1. Wealth maximization of shareholders.

2. Cost control

3. Determination of priority

4. Evaluation of proposed capital expenditure.


5. Analysis of post decisions.

6. Valuation of fixed assets.

7. Capital structure planning

8. Managing sources of finance

9. Analysis of uncertainty and risk

10. To avoid long

11. Selection of the best project

12. Co-ordination between various capital expenditures

Factors effecting capital budgeting decisions-

1. Cash flows

2. Type of management

3. Forecasting of demand

4. Competition strategy

5. Technology change

6. Various tax policies of the government

7. Return expected from investment

8. Non economic factors

Q. 3 Write a note on& “Types of capital expenditure”.

Ans. Types of capital expenditure (Projects)

Projects/Capital expenditure can be classified on the following basis-

a. Their age

b. Experience

c. The purpose for which the project is being taken up.

There projects falls under two categories-

I. Profit oriented projects

II. Service oriented projects

I. Profit oriented projects- Such projects are as follows-

1. New projects

2. Expansion projects

3. Modernization project

4. Replacement project

5. Diversification project

6. Extension project

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7. Product/process improvement project

8. Housekeeping projects

II. Service oriented projects-

1. Research and development projects

2. Welfare projects

3. Educational projects

4. Prestige project

1. New Project- New project is one which identies a new

product for which there is demand from customers.

2. Expansion Projects- When a business expands its existing

projects, then expansion decision are taken. For examples-

1. Purchase of new machines and building

2. Expansion of present plants and building

3. Purchase of other business units

4. Merger of other units

3. Modernization project- New technology is involved and

becomes commercially operative; the existing technology

becomes outdated or obsolete.

4. Replacement project- Means project involves some of the

old machinery with new machinery of the same capacity.

a. High maintenance costs, poor quality and quantity of

output.

b. Breakdown etc.

c. Reduce the maintenance cost of old machinery.

d. Objective is to restore the same or higher capacity.

5. Diversification Projects- When a manufacturer work to

offer more than one product, it is described as product

diversification and the project meant for this purpose is the

diversification project.

6. Extension Projects- Extension projects includes and

signifies the following activities-

A. Change in the quality of the product

B. Change in the size of the product


C. Search of new market

D. Supply of the product in various market

E. Market survey and

F. Incentives for customers to increase the sale of the

product.

7. Product/Process Improvement Project- Such projects are

started with the objective of cost reduction or profit

improvement by developing new products or improving

the process of manufacturing old products. Process

improvement projects are implemented to provide latest

technological and modernized process of production

rather than existing one.

8. Housekeeping project-

- There projects do not provide direct return on

investment

- It provides indirect return by increasing the efficiency

and morale of the employees.

- Examples-

a. Residential facility provided to employees: they feel

mental relax and motivated to work none for the

concern.

b. Safety and health projects

c. Housing projects

d. Education projects

II. Service Oriented Project-

1. Research and development projects- Research and

development work like- research of new product or

process improvement, market research etc are carried out

in different operating sectors of the firm are known as

research and development projects. The expected return

from such projects is never an important basis for their

approval since it is difficult to measure.

2. Welfare projects-

a. are essential to fulfill the legal formalities given in the

law.

44

b. To motivate employees by realizing them that they are

the important part of the organization.

c. To promote the morale of the employees.

These projects include-

a. Health projects

b. Safety projects

c. Cold and pure mineral water projects

d. Education projects

e. Park

f. Play ground

g. Entertainment house

h. Rest house

i. Air conditioning office

3. Educational projects- Investment is also to be made for

education and training projects for improving the

efficiency of employers. Evaluation of result of project is

also difficult.

4. Prestige projects- In order to create a favourable image

among the public, investment is made in such type of

profits i.e. a guest house, splendid administration office.

Q. 4 Write steps involved in capital budgeting.

Ans. The steps of capital budgeting are-

1. Origin of the investments proposals

2. Presentation of proposals

3. Screening of proposals

4. Economic evaluation of the proposals

5. Project selection

6. Final decision on the projects

7. Formulation of the capital budget

8. Authorization of capital expenditure

9. Project execution

10. Feedback

Q. 5 Write a short note on information‟s required for capital budgeting.

Ans. Information‟s required for capital budgeting are-

1. Costs and benefits of proposal


2. Rate of return required

3. Projects economic life

4. Funds available

5. obsolescence risk

6. Intangible assets.

Q. 6 Write the „detail note on payback period method‟ technique of capital

budgeting.

Ans. Capital budgeting technique-

Payback period method

1. This is the easiest method to be used for evaluation of capital

expenditure.

2. This method is also called pay-out and pay-off method.

3. The period in which we get the invested amount back is called

pay-back period.

4. The annual income received from the invested capital or

whatever savings are there, they are called „cash earnings‟ or

net cash inflows.

5. On the basis of net cash inflows the pay have period of

investment is known.

6. If in all the year the net cash inflow remark the same, and then

the investment amount is divided by the annual amount of net

cash inflows which gives the pay-back period of investment.

Decision rule in payback period method-

1. A project is accepted if its payback period is less than the

maximum payback period set by the top management.

2. A ranking of the number of projects is housekeeping the

project of least payback period on first rank and others on

second and third etc ranks are increasing there payback period.

3. If the management has to choose one project between two

mutually exclusive projects, the project with the shortest

payback period will be chosen.

Merits of payback period method-

1. Simple technique

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2. Import method for cash shortage firm

3. Risk of obsolescence.

4. More accurate and real estimates

5. Less risk

6. Economical

7. Method requires less time and effort of project evaluator

Demerits of payback period method-

1. More importance to pay back of invested funds.

2. Does not consider the income received after payback period

3. Ignore cost of capital

4. Does not consider the time factor

5. Does not consider the scrap value

6. Does not measure risk

7. More emphasis on cash flow/inflows of initial years.

Computation of payback period-

For the use of this method, the knowledge of two things is

essential-

a. The total invested amount

b. „Net annual cash inflows‟.

Usually in every project proposal the estimated amount of investment

is given and net annual cash inflow is calculated.

I. When annual cash inflows are equal-

When cash inflows generated by a project per year are equal or

constant, the payback period in computed by dividing the

initial investment or cash outlay the net annual cash inflows

symbolically.

Payable period =

Or=


P =

P = Payback period

I = Initial Investment

C = Net annual cash inflows

II. When Annual cash inflows are UN equal-

Formula-

P = N + 12

P = Payback period

N = No. of years where cash inflows fully required

R = Required cash inflows or required remaining cost of project

Improvement in payback method-

1. Post payback profitability-

Post payback profitability = Total cash inflows in life - Initial

cost

OR = Annual cash inflows (Total life-payback

period)

2. Payback reciprocals-

Payback reciprocal = 100

Or = 100

3. Bail out payback period-

Cash flows and salvage value taken together for determination

of bail-out payback period.

Average Rate of Return Method

Q. 7 Write a detailed note on Average Rate of Return Method.

Ans. Average Rate of Return Method- other names-

48

1. “Accounting Rate of Return Method- because the data

required for its calculation are drawn from accounting records.

2. “Un-adjusted Rate of Return Method”- As it does not

consider present value of cash inflows.

3. According method

4. Return on investment

In this method the safe of return on investment is calculated and the

time factor is not taken into consideration

1. If profits after tax and depreciation are given-

ARR = 100

2. If Annual cash inflows are given-

ARR = 100

3. If value of original investment is used-

ARR = 100

4. Replacement project-

ARR =

5. Average Investment-

Average inv. = (Initial investment-salvage value) + salvage

value

= (Initial investment-salvage value)

ARR = 100

Average investment=(Initial investment-salvage

value)+salvage NWC

= (Initial investment-salvage value) +

NWC

Decision Criteria-

1. When evaluation of different –

- One of them has to be chosen.


- Then the return on all projects to calculated separately

and

- The project of higher return is chosen.

2. If there is only one project.-

- It has to be evaluated by this method, and then we have

to find out at average rate of return.

- comp are it units minimum rate prescribed by the top

management for the acceptance of the project.

- The project can be accepted if it‟s are safe rate of return

is equator more than the prescribed rate.

- Cons tern investment projects are evaluated by this

method.

Average Rate of Return Method-

Merits/Advantage-

1. Considers the income of whole life of the project.

2. Comparison of different projects is possible.

3. In this method, profitability of different projects‟ is evaluated.

4. Consider net income after depreciation.

5. Simple and easy to calculate.

6. Wealth beat use possible by investment of his wealth in the

most profitable sector.

Demerits/Disadvantage-

1. This method uses the income and investment words which

have got many meanings. It leads to uncertainty.

2. Use of accounting profits.

3. Gross length of project life.

4. An unscientific method as money changes its value which

should be taken not of.

5. Profits affected by micro factors are not tested.

Net Present Value Method-

Following steps are taken in this method-

50

1. Determination of minimum rate of return- In this method, the

management authorities has to decide the minimum required

rate of return on firm investment. This prescribed rate is used

as discount rate for cash and inflows.

2. Computation of Present Value of cash inflows and outflows-

By using the present value tables the firm calculates present

values of future cash flows.

3. Computation of net present value-

Method I- From the total of present value of all future cash

inflows total of present value of cash inflows is deducted and

remained is known as net present value.

NPU = PU – C

Where, NPV = Net Present Value

PV = Present value of cash inflows

C = Initial investment.

Method II- from NPV can also be calculated by using the

following formula-

NPV = – 1

Where-

NPV = Net Present Value

C₁, C₂. C₃ = cash inflows for n year

I = Initial investment

r = Discount factor or interest rate

n = number of years

Note- In practice, present value cannot be calculated by the above

formula and as such, “Present value “are used which are given

at the end of the book.

Decision criteria-

1. The decision rules are accept the proposal of the NPV is

positive and reject the proposal if the NPV is negative.


2. An investment proposal will be accepted if the NPV is either

positive or to the most equal to zero.

3. In case of ranking mutually exclusive projects the proposal

with the highest positive NPV is given the top priority. The

proposal with the negative NPV should be out rightly being

rejected.

4. Benefits of entire life span.

5. Maximum welfare of shareholders of the company.

6. Enabled the comparison of relative profitability between

project of different life span and cash flour incurring at

different times.

7. This method best in care of uneven cash flows in the life of the

project.

Disadvantages of NPV-

1. Difficult to determine cost of capital.

2. Difficult to understand.

3. Difficult to determine expected rate of return.

4. Uniform discount rate is not good.

5. Not appropriate for projects having uneven life.

6. Not appropriate for projects having different cost.

Internal Rate of Return Method

Q. 8 Explain the concept “Internal Rate of Return Method”.

Ans. Internal Rate of Return-

1. Known by several other names

- “Time adjusted Rate of Return”.

- “Marginal Rate of Return”

- “Marginal Efficiency of Capital”.

2. It is based on discounting techniques

52

3. Internal rate of return is a rate which actually equates the

present value of expected cash inflows with the present value

of expected cash outflows.

4. As a formula, it can be expressed as-

– 1 = 0

Where I = Initial investment

C₁ C₂ C₃ = Net cash inflow in 1,2, 3, …. n year

r = Internal rate of return or discount rate

Note-

1. Many calculations are required to ascertain the internal rate of

return by this formula.

2. This rate is calculated with the help of present value tables.

Situation- When even cash inflows

Step-1 PV Factor =

OR =

Step-2 Present Value = Annual cash inflows PV factor for an

annuity

Step-3 Find out the exact IRR between the two rates by

interpolation.

The formula used for interpolation is-

IRR = LDR + (HDR-LDR)

Where-

LDR = Lower Discount Rate

P₁ = Present Value at Lower rate of interest

P₂ = Present value at higher rate of interest


Q = Net cash outlay

HDR = Higher Discount Rate

Situation- Uneven cash inflows- IRR to calculation trial and error

method

1. For this, first trial rate will be calculating as following-

PV factor =

2. Actual IRR calculated by interpolation formula given in this

question earlier.

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Unit- IV

Performance Budgeting

Q. 1 Write other names of performance budgeting.

Ans. Performance budgeting is known by following name-

1. Programme Budgeting

2. Programme-cum-performance budgeting

3. Planning and programming budgeting system (PPBS).

Q. 2 Define performance budgeting. Explain the characteristics of

performance budgeting.

Ans. Performance Budgeting-

Definition-

1. According to the P.K. Ghosh and S.S. Gupta- “Performance

Budgeting may be defined as a technique for presenting

operations in terms of functions programme, activities and

projects.”

2. According to S.S. Vishvanathan- “Performance budgeting is a

comprehensive operational document conceived, presented

and implemented in term of programmes, projects and

activities, with then financial physical aspects closely intern-

woven,

3. According to Mohinder N. Kaura- The PBS (Performance

Budget System) represents a proper blending of corporate

planning, management by objectives and the physical and

financial evaluation system for management control purposes.”

From the above stated definitions we can give conclusive

definition as-


“Performance budgeting is a technique for presenting operations in

term of functions, program, activities and physical aspects closely

inter-woven.

Performance Budgeting-

1. Is based on functions, programme and activities.

2. Its focus is to work cost measurement and managerial

efficiency.

3. It is mainly related to objectives or goals to be achieved by an

organization.

4. It is based on-

- Functions

- Activities

- Projects

5. It immediate stress on the achievement of specific goals over a

period of time.

Characteristics of performance budgeting-

1. More stress on attainment of objectives/targets.

2. A function divided into program and activities.

3. It is based on cost benefit analysis.

4. Resources arrangements

5. Decentralization of responsibility.

6. Performance is evaluated relating to each activity/program.

7. Attainable objectives are related to long term concept in this

budgeting.

8. Coordinated system.

9. It is a technique based on the “Principle of Management by

objectives”.

10. It is a financial plan.

11. It helps in fixing accountability and control.

12. It is a means and not the end, in achievement of department

wire goals/objectives.

56

13. Resources proper allocation and possible.

Q. 3 Explain the objectives of performance budgeting.

Ans. Objectives of performance budgeting are-

1. Profits increase

2. Leads to efficiency increase of business.

3. Work assignment on division of labour.

4. Encourage spirit of cooperation

5. Develop team spirit

6. Better control

7. Future plans preparation made easy

8. Long term planning linked with budgets

9. Increases accountability

10. Rights and duties are delegated and decentralized.

Q. 4 Write a note on uses of performance budgeting in business decision

making.

OR

Write a note on significance/advantages/merits/utility/importance of

performance budgeting.

Ans. Significance/Advantages/Utility/Merits/Importance of Performance

Budgeting-

1. Future oriented

2. It enables forward looking to the management.

3. It helps in establishment of goals, objectives and policies.

4. It helps in Analysis of Budget

5. It helps in performance appraisal of staff, management &

business.

6. It is an important instrument of management to fulfill. Long

term objectives of an institution.


7. It amalgamates all system of an institution to fulfill the

objectives like planning system, accounting system, reporting

system, standard costing method.

8. Improvement in the institution both quantitative and

qualitative.

9. Useful for developing countries.

10. Helps in evaluation of efficiency of the employees.

11. Profit maximization by setting priorities in the order of

preference of work.

12. It is helpful in execution of Principle of Management by

objectives.

13. It helps in coordination between target and objectives.

14. Performance budgeting answers the following questions

relating to employee-

- What to do?

- How to do?

- When to do?

- For whom to do?

- Why to do?

- For what he is accountable in the organization? etc

15. Rationale allocation of resource.

16. Evaluation and selection of alternative programmes.

Q. 5 Write note on disadvantages of performance budgeting.

Disadvantages of performance budgeting.

Ans.

1. Expensive

2. Time oriented

3. It abolishes individual freedom.

4. Complicated process and technique

5. Team spirit/cooperation is essential. It not then this budgeting

will fail.

58

6. In on company administration weakness one there due to

human being nature and behavior, so performance of human

being cannot be measured in laboratory.

7. No accurate measurement of several activities, police, laws

order, research and development, personnel etc.

8. This budgeting helps in quantitative evaluation of programme

and activities. It does not help in qualitative evaluation.

Q. 6 Explain the process of performance budgeting.

OR

Describe the steps used in the preparation of performance

budgeting.

Ans. Process of Performance Budgeting-

1. Establishment of goals, objectives and policies- Collect various

data-proper analyses-for the goal/objective and policy

establishing.

Management expects to get reply about the following-

What to be achieved?

Why to be achieved?

When to be achieved?

How to be achieved?

2. Formulation of activities programmes and functions- Whole

business should be classified and analysed into functions,

programmes and activities.

3. Setting up of standards- It involves comparative study of

actual performance with the budgeted one.

4. Resource allocation- After classification and analysis of

programme and activities. The next step is rational, reasonable

and logical allocation of resources available.

5. Earliler decision about determinants of performances

parameters (a) Ration all, (b) determination of work load and

accountability.


6. Budget Execution- Budget sends for approval, after approval it

will be ready for execution. Steps should be taken to start the

programme to decide the flow of resources, to control

unproductive expenses etc. In this step of budgeting, it is

considered that budget amount is utilizing for the objectives

for which it is provided.

7. Performance Appraisal-

There should be-

a. Well organized accounts department, b. Well organized

and managed budget section, c. Proper indexes, d.

Reporting formats, e. Program reports.

60

Unit-V

Zero Based Budgeting

Q. 1 What are the main features of Zero Based Budgeting?

OR

Define Zero Based Budgeting.

Ans. Zero Based Budgeting (ZBB)- ZBB cannot be easily defined in exact

words indeed it is a concept which joins the planning, budgeting and

review to each other. It is a technique which emphasize. On the

rationality of each stern of expenditure in current budget.

Definitions of Zero Based Budgeting- According to Peter A. Pylirr-

“Zero based budgeting has been defined as an operating, planning

and budgeting process which require, each manager to justify his

entire budget request each period in detail from scratch (hence zero

base). Each manager states why he should spend any money at all?

This approach requires that all activities be identified as decision

packages which will be evaluated by systematic analysis and ranked

in order of importance.”

Zero Based Budgeting- Features/characteristics-

1. Each justifies aspect of the budget taking zero as base.

2. This technique ensures optimum utilization of scarce resources

by ranking of decisions.

3. Under this technique-

- Goals are determined as per company policy

- Efforts are made to achieve there goals.

4. A flexible technique

5. Budget may be adjusted according to the availability of

resources.

6. ZBB is a technique of management and not a management as

such


According to Horngren, Charles T. – “Zero Base Budgeting ZBB is an

elaborate, time consuming practice of having justified activities and

cost as if they were being undertaken, for the first time.”

We concluse, Zero Base Budgeting (ZBB) is a technique which link the

existing planning, budgeting, operating and review processes. It also

identifies effective and alternative methods of utilizing scarce

resources in the attainment of selected benefits. ZBB provide a

creditable rationale for reallocation of given resources.

Objectives of Zero Base Budgeting-

1. Appropriate and best utilization of available resources.

2. Expenditure on projects justified.

3. Control wastagefull expenses.

4. Increase of managerial resources.

5. Increase profitability

6. Competitive spirit

7. Projects resources are allocated rationally.

8. Establish proper coordination between planning, budgeting

and revaluation mutually.

9. ZBB is a link of planning, operating, and review process.

10. Rationale distribution of given resources.

Essentials of an effective Zero Base Budgeting-

1. It must be supported by top management for execution in an

organization.

2. Implementation charges should be less than the profit earned

by this technique.

3. Budget should be prepared well in time. Best proposed

proposal of budget should be selected well at right time.

4. MIS must be proper, effective and appropriate.

5. Coordination among all levels of management.

6. Budget manual should be prepared and it should be

distributed among all concerned persons.

62

7. Open discussion on any scheme among the employee.

8. Budgeting staff must be sincere and confident in the

implementation and success of ZBB technique.

Advantages of Zero Base Budgeting-

1. More systematic

2. More logical

3. Reduces undesirable political interference

4. Develop cost-consciousness

5. Profit tendency

6. Duplication and overlapping of the activities can be eliminated.

7. Helps to coordinate, integrate, and balance the activities of

various departments.

8. Rejection of less productive and less profitable activities may

be done easily through this.

9. Transfer the resources from-

Unproductive-to-productive

Unviable-to-viable

Unprofitable-to-profitable

10. Determines the proper utilization of economic resources.

11. Applies ranking method of projects

12. It is a mixed system of three management function.

a. Planning

b. Budgeting

c. Review

13. Deep study on the rationale of new proposals along with

review and revaluation of current activities.

Disadvantages of Zero Base Budgeting-

1. Not Universal technique

2. Focus only on expenditure. Avoids the revenue aspect.

3. It is an instrument of management.


4. It is not a substitute of management or administration.

5. This ZBB technique fails when proper and effective

information system is not there.

6. Helps in measuring the efficiency of employees

7. ZBB requires computerization. In lack of computerization this

system fails.

8. It requires high efficiency and it is not available in general

situations.

9. This system based on ranking and sometimes ranking becomes

very difficult.

10. It cannot solve all the problems of an organization.

Q. 2 State the reasons of failures of ZBB technique in India.

Ans. The reasons of failures of ZBB technique in India are given below-

1. Time consuming technique, ZBB technique requires more time

in adoption of ZBB technique.

2. ZBB technique opposed by-

- Employees

- Trade union members.

- Trade union leaders

- Administration

- Officers

- Employees

3. Lack of basic infrastructure

4. Lack of technical experts at various administration and

management levels.

5. Lack of computerization in departments.

6. Central and state government.

7. Lack of proper work culture.

8. Lack of mental revolution of an administrators, officers and

employees of central and state governments.

9. Lack of proper knowledge of concept and technique of ZBB to

administrators, Officers and employees of the governments.

64

10. ZBB technique was also failed in America when it was adopted

for the first time. ZBB technique is theoretically good but

practically it is not appropriate in India context. It requires

restructuring the present structure.

Q. 3 Explain the procedure of formulation of Zero Base Budgeting.

Ans. The procedure of formulation of Zero Base Budgeting may be

classified in the following three steps.

1. Identification of Decision Units

2. Formulation of Decision Package

3. Ranking and Funding of Decision Packages

1. Identification of Decision Units-Decision Unit represents the

programme or activity of an organization for which budget is

prepared.

Decision unit may be-

a. Project

b. Cost Centre

c. Budget Unit

d. Programme

e. Or any other activity which may be analyzed and for which

budget decision is to be taken.

Formulation of decision units is to be completed considering

the-

1. Objects and size of organization.

2. Number of alternatives available.

3. Distribution of resources.

4. Functions to be executed.

5. Organization level of decision making and time factor.

2. Formulation of decision Packages- The description of whole

aspects of a decision unit is known as „Decision Package‟.

Decision Package includes-

1. Decision unit functions

2. Activity description

3. Decision unit activity goals or objectives.


4. Resources required for the decision unit/or activity.

5. Benefits/gains/profits from the investment in the activity.

6. How to perform the same activity by the alternative

measures.

Decision Packages-

1. Alternative packages list prepared.

2. Alternatives are ranked.

3. The best package is selected rejecting other packages.

4. Decision packages for the current activities.

Decision packages for the new activities review by top

management.

5. First, a minimum level decision package is prepared which

is known as base package.

After that the additional packages are prepared showing

the high level of activity programme and functions which is

also known is increase mental packages.

3. Ranking and funding of Decision Packages-

Final step of Zero Base Budgeting is ranking and funding of

decision packages.

Ranking provides the proper base to the management for the

distribution of resources due to concentration on following

important questions.

1. Goals/objectives to be achieved first

2. Resources to be allotted to achieve these objectives.

ZBB technique- 1. The identification of decision units is done at the

top management level, 2. Decision packages are formulated at the

lowest level of management, 3. The process of ranking is comleted at

the top level.

66

Case study

Prepare a Budget draft for the following real life situations that

you face in your life .Compare actual expenditure with the budget

amount. Analyse it and find reasons of difference. Discuss with

your classmates.

[1] You are monitor of your class BCom Part III .You are told to

prepare a budget for a picnic to be organized in September ,2012 .

Submit it to your classteacher. Analyse the budgeted figures

with actual expenditures done after the picnic .

[2] A Marriage of your Brother or Sister is going to take place in the

month of December. Being an educated member of your family you

are told by your parents prepare a draft budget for the marriage.

Prepare it. After the marriage compare the actual with the

budgeted figures.Analse it .

[3] You have passed your CA CPT exams. Prepare a draft budget for

expenditure going to incur on your CA studies. Give it to your

father for money funding.

[4] Your college new session begins in july .Your parents tell you to

give a budget for the expenses on your studies this year .kindly

prepare and give at the end of the year compare the actual with the

budget figures. Analyze it.


Keyterms/Terminology

Capacity utilization : is a concept in economics and managerial accounting

which refers to the extent to which an enterprise or a nation actually uses its

installed productive capacity. Thus, it refers to the relationship between actual

output that 'is' produced with the installed equipment and the potential output

which 'could' be produced with it, if capacity was fully used.

Fore cast : This is your latest expectation of what really will happen over the next

few months, based on what is happening in your business now. It is your

financial radar. It is most useful if prepared every month.

Standard :When you want to measure some thing, you must take some parameter or yardstick for measuring. We can call this as standard.

VARIANCE ANALYSIS is the analysis of performance by means of variances. Used to promote management action at the earliest possible stages. After a budget (based on standard costs) has been set, its usefulness lies in the review procedures which compare actual results against the budget. Variance analysis is the process of examining in detail each variance between actual and budgeted/expected/standard costs to determine the reasons why budgeted results were not met (material costs too high, sales prices too low, etc.).

http://en.wikipedia.org/wiki/Economics

http://en.wikipedia.org/wiki/Productive_capacity

http://en.wikipedia.org/wiki/Output

http://en.wikipedia.org/wiki/Gross_Output

68

Risk : A probability or threat of a damage , injury, liability , loss, or other

negative occurrence that is caused by external or internal factors, and that may

be neutralized through action.

Management information system (MIS): Provides information that is needed to

manage organizations effectively and efficiently . It involves three primary

resources: people, technology, and information or decision making. These

systems are distinct from other information systems in that they are used to

analyze operational activities in the organization. The term is commonly used to

refer to the group of information management methods tied to the automation or

support of human decision-making.

Value analysis: is an approach to improving the value of a product or process by understanding its constituent components and their associated costs. It then seeks to find improvements to the components by either reducing their cost or increasing the value of the functions. Amethodology to increase the value of an object – the object to be analysed could be an existing product or a new product or process, and it is usually accomplished by a team following a workplan.

Overhead business : The ongoing operating costs of running a business

Zero based budget :Start each budget period afresh-not based on historical data. Budgets are zero unless Managers make the case for resources-the relevant manager must justify the whole of the budget allocation. It means that each activity is questioned as if it were new before any resources are allocated to it. Each plan of action has to be justified in terms of total cost involved and total benefit to accrue, with no reference to past activities. Zero based budgets are designed to prevent budgets creeping up each year with inflation

Budget Adjustment document:It is a financial planning tool that allows an organization to adjust the current and/or base budget figures for a given account as circumstances may change throughout the fiscal year. It may be used to create a budget for a new account established after the beginning of a new fiscal year, and it may also be used to transfer funds between general fund accounts belonging to the same chart of accounts.


Base budgets: are established during the budget construction process, and designate an ongoing fiscal commitment.

Current budgets designate the budget commitment only for the current fiscal year.

Long-Range Budget :A budget with a term usually longer than one year. A long-

range budget involves more uncertainty than a short-term budget because,

typically, market movements and the business cycle are more easily predictable

in the short term. On the other hand, planning for the long-term is necessary in

order to ensure sustainable profitability. Thus, while planning for the long term

is necessary, one's plan must be flexible to account for the uncertainty inherent to

it.

Long Term: Describing a plan, strategy, security, or anything else with a term of

longer than one year. The exact number of years varies according to the usage.

Anything long term involves more uncertainty than anything short term because,

generally speaking, market trends are more easily predictable in the short term.

Thus, while planning for the long term is necessary, ones plan must be flexible to

account for its inherent uncertainty.

short term :A plan for a person or company's expenditures. Making a budget

involves looking at one's revenue or income and matching that to expenses such

that the person or company pays for all necessary expenses. A budget is in

balance if revenues equal expenditures, in deficit if the person or company must

resort to borrowing to meet expenses, and in surplus if money is left over to be

used for .

Budget officer

1) Directs and coordinates activities of personnel responsible for formulation,

monitoring and presentation of budgets for controlling funds to implement

program objectives of public and private organizations: Directs compilation of

data based on statistical studies and analyses of past and current years to prepare

budgets and to justify funds requested.

2) Correlates appropriations for specific programs with appropriations for

divisional programs and includes items for emergency funds.

http://financial-dictionary.thefreedictionary.com/Budget

http://financial-dictionary.thefreedictionary.com/Year

http://financial-dictionary.thefreedictionary.com/Short-Term

http://financial-dictionary.thefreedictionary.com/Business+Cycle

http://financial-dictionary.thefreedictionary.com/Security

http://financial-dictionary.thefreedictionary.com/Year

http://financial-dictionary.thefreedictionary.com/Short+Term

http://financial-dictionary.thefreedictionary.com/Market+Trends

http://financial-dictionary.thefreedictionary.com/Expenditures

http://financial-dictionary.thefreedictionary.com/Revenue

http://financial-dictionary.thefreedictionary.com/Income

http://financial-dictionary.thefreedictionary.com/Expenses

http://financial-dictionary.thefreedictionary.com/In+Balance



http://financial-dictionary.thefreedictionary.com/Deficit

http://financial-dictionary.thefreedictionary.com/Borrowing

http://financial-dictionary.thefreedictionary.com/Money

70

3) Reviews operating budgets periodically to analyze trends affecting budget needs.

4) Consults with unit heads to ensure adjustments are made in accordance with program changes in order to facilitate long-term planning.

5) Directs preparation of regular and special budget reports to interpret budget directives and to establish policies for carrying out directives.

6) Prepares comparative analyses of operating programs by analyzing costs in relation to services performed during previous fiscal years and submits reports to director of organization with recommendations for budget revisions.

7) Testifies regarding proposed budgets before examining and fund-granting authorities to clarify reports and gain support for estimated budget needs.

8) Administers personnel functions of budget department, such as training, work scheduling, promotions, transfers, and performance ratings.

Budget manual :

collection of procedures that describe how a budget is to be prepared. Items usually appearing in a budget manual include a budget planning calendar and distribution instructions for all budget schedules. Distribution instructions are important because, once a schedule is prepared, other departments in the organization use the schedule to prepare their own budgets. Without distribution instructions, someone who needs a particular schedule might be overlooked.

Traditional budget :

The traditional budget is the most common tool used by money experts in working out how to get your financial situation on track. Have a look at the example below before reading any further.

Fixed Budget :

A fixed budget is a financial plan that does not change through the budget period, irrespective of any changes from the plan in actual activity levels experienced.

Budgetary deficit - Occurs when expenditures are greater than revenues.

http://www.tuition.com.hk/dictionary/e.htm#Expenditure

http://www.tuition.com.hk/dictionary/r.htm#Revenue


Budgetary control – A business system which involves making future plans. comparing the actual results with the planned objectives and then investigating causes of any differences.

Budgeting - The planning of intended revenues and expenditures over a specified time period.

Budget - A quantitative economic plan prepared and agreed in advance. It is used for planning and control purposes.

Budget (government) - The annual statement by the government of its financial plan, it itemizes spending programmes and their costs, tax revenues and the proposed deficit or surplus.

Balanced budget - One in which total expenditures equal total revenue. An entity has a budget surplus if expenditures are less than revenues. It has a budget deficit if expenditures are greater than revenues.

Capital budget - Plan of proposed acquisitions and replacements of long-term assets and their financing. A capital budget is developed using a variety of capital budgeting techniques such as the payback method, the net present value (NPV) method, or the internal rate of return (IRR) method.

Capital structure - The way in which funds are raised by a business.

Cash dividend - The payment of a share of earnings to the individual shareholders.

Cost-based pricing - Where a pricing is based on cost of production.

Cost-benefit analysis - A technique which involves taking into account all social costs and benefits. when deciding on a course of action.

Cost centre - Is used to describe a location to which overhead costs are assigned.

Cost driver - Any activity or series of activities that takes place within an organization and causes costs to be incurred. Cost drivers are used in a system of activity-based costing to charge costs to products or services. Cost drivers are applied to cost pools, which relate to common activities. Cost drivers are not



http://www.tuition.com.hk/dictionary/q.htm#Quantitative_factors

http://www.tuition.com.hk/dictionary/c.htm#Cost

http://www.tuition.com.hk/dictionary/t.htm#Tax


http://www.tuition.com.hk/dictionary/d.htm#Deficit_%28accounting%29

http://www.tuition.com.hk/dictionary/s.htm#Surplus



http://www.tuition.com.hk/dictionary/b.htm#Budget

http://www.tuition.com.hk/dictionary/s.htm#Surplus


http://www.tuition.com.hk/dictionary/d.htm#Deficit_%28accounting%29

http://www.tuition.com.hk/dictionary/a.htm#Asset

http://www.tuition.com.hk/dictionary/c.htm#Capital_%28Accounting%29


http://www.tuition.com.hk/dictionary/p.htm#Payback_period

http://www.tuition.com.hk/dictionary/n.htm#Net_present_value_%28NPV%29

http://www.tuition.com.hk/dictionary/i.htm#Internal_rate_of_return_%28IRR%29

http://www.tuition.com.hk/dictionary/s.htm#Share

http://www.tuition.com.hk/dictionary/s.htm#Shareholders

http://www.tuition.com.hk/dictionary/p.htm#Production

http://www.tuition.com.hk/dictionary/o.htm#Overheads



72

restricted to departments or sections, as more than one activity may be identified within a department.

Cost effective - When a judgment is made that something is economical in terms of the goods or services received for the money spent.

Cost-effectiveness analysis - Analysis of program costs with the purpose of finding the least-cost way to achieve a given result.

Costing - The process of measuring the likely economic consequences of a particular business activity or operation.

Cost minimization - An implication of profit Maximization that the firm will choose the method that produces specific output at the lowest attainable cost.

Cost object - Anything for which cost data is desired, e.g., products, product lines, customers, jobs, and organizational sub-units such as departments or divisions of a company.

Cost of capital –Rate of return that is necessary to maintain the market value (or stock price) of a firm also called hurdle rate. Or Iis the rate of return that a business could earn if it so chose other investments with the equivalent risks. Also can be stated as opportunity cost of the funds used due to the investment decision.

Cost of debt - The interest rate times 1 minus the marginal tax rate (because interest is a tax deduction). An increase in the tax rate decreases the cost of debt.

Cost of equity (COE) - The minimum desired rate of return on invested capital that is determined by calculating net income as a percentage of invested capital

Cost of finished goods - Refers to the valuation or cost of manufactured goods as shown in the business's manufacturing account.

Cost of Goods Sold (COGS) - A formula that is used to work out the direct costs associated with the items sold. It is calculated as opening Inventory plus purchases (an freight in) minus closing inventory. (same as cost of sales)

Cost-plus pricing (full-cost pricing) - When firms price their product by adding a certain profit or mark-up to average cost or unit cost of the item.

Cost plus pricing – A method of determining payment based on the actual cost of production or service provisioning plus an agreed-upon fee or rate of profit ; for example, a cost-plus government contract.


http://www.tuition.com.hk/dictionary/o.htm#Output

http://www.tuition.com.hk/dictionary/c.htm#Company

http://www.tuition.com.hk/dictionary/i.htm#Investment_%28Accounting%29

http://www.tuition.com.hk/dictionary/r.htm#Risk

http://www.tuition.com.hk/dictionary/o.htm#Opportunity_cost


http://www.tuition.com.hk/dictionary/i.htm#Interest_rate

http://www.tuition.com.hk/dictionary/d.htm#Debt


http://www.tuition.com.hk/dictionary/i.htm#Income

http://www.tuition.com.hk/dictionary/a.htm#Account

http://www.tuition.com.hk/dictionary/d.htm#Direct__cost_or_prime_cost

http://www.tuition.com.hk/dictionary/i.htm#Inventory

http://www.tuition.com.hk/dictionary/c.htm#Cost_of_Sales

http://www.tuition.com.hk/dictionary/p.htm#Profit

http://www.tuition.com.hk/dictionary/a.htm#Average_cost_or_unit_cost




Cost of Sales - A formula that is used to work out the direct costs associated with the items sold. It is calculated as opening Inventory plus purchases (an freight in) minus closing inventory. (same as cost of goods sold)

Cost principle (historical cost) - The principle where a company is obliged to record its fixed assets at their actual purchase price or production cost.

Cost-push inflation - Inflation that has its origin in cost increases. This Inflation which occurs as a result of , businesses facing increased costs, which are then passed on to consumers in the form of higher prices.

Cost synergy - The savings in operating costs expected after two companies, who compliment each other's strengths, join.

Cost unit - A functional cost unit which establishes standard cost per workload element of activity, based on calculated activity ratios converted to cost ratios.

Cost volume profit analysis (break even analysis) (CVPA) - Examines the behaviour of total revenue, total costs and profit as changes occur in the output level, selling price and variable

C.P.A. - certified public accountant.

CPI - Consumer Price Index.

Credit card - A card authorising purchases on credit at a predetermined interest rate and/or payment conditions.

Credit control - The process of monitoring and collecting the money owed to a business.

Credit line - The maximum credit that a customer is allowed.

Credit multiplier (Money multiplier): Is a measure of the extent to which the creation of money in the banking system causes the growth in the money supply to exceed growth in the monetary base.

Creditors - Are suppliers that the business owes money to.

Current cost - The cost which would be incurred for replacement of an asset.

Current cost accounting - A method of accounting which replaces all historic cost values with current valuations.

http://www.tuition.com.hk/dictionary/d.htm#Direct__cost_or_prime_cost


http://www.tuition.com.hk/dictionary/c.htm#Cost_of_Goods_Sold_%28COGS%29


http://www.tuition.com.hk/dictionary/f.htm#Fixed_assets_%28net%29


http://www.tuition.com.hk/dictionary/i.htm#Inflation


http://www.tuition.com.hk/dictionary/s.htm#Saving


http://www.tuition.com.hk/dictionary/s.htm#Standard_cost

http://www.tuition.com.hk/dictionary/r.htm#Ratio/s


http://www.tuition.com.hk/dictionary/t.htm#Total_cost


http://www.tuition.com.hk/dictionary/o.htm#Output

http://www.tuition.com.hk/dictionary/c.htm#Certified_public_accountant_%28CPA%29

http://www.tuition.com.hk/dictionary/c.htm#Consumer_price_index_%28CPI%29

http://www.tuition.com.hk/dictionary/c.htm#Credit




http://www.tuition.com.hk/dictionary/c.htm#Credit


http://www.tuition.com.hk/dictionary/a.htm#Accounting

http://www.tuition.com.hk/dictionary/h.htm#Historical_Cost



74

Curriculum vitae (resume) - A list of the applicant's personal details, experience and qualifications. .

Customers - Individuals who buy goods and services supplied by businesses.

Performance-based budgeting :-

Performance-based budgeting is the practice of developing budgets based on the relationship between program funding levels and expected results from that program. The performance-based budgeting process is a tool that program administrators can use to manage more cost-efficient and effective budgeting outlays.

Data – A collection of information.

Factors of production (or resources) - Resources used to produce goods and services to satisfy wants; frequently divided into the basic categories of land, labour, and capital

Factor mobility - The ease with which factors can be transferred between uses.

Financial analysis - Use and transformation of financial data into a form that can be used to monitor and evaluate the firm's financial position, to plan future financing, and to designate the size of the firm and its rate of growth.

Financial budget - Is one that embraces the impacts of the financial decisions of the firm. It is a plan including a budgeted balance sheet, which shows the effects of planned operations and capital investments on assets, liabilities, and equities. It also includes a cash budget, which forecasts the flow of cash and other funds in the business.

Financial capital - Money that a firm raises to carryon its business, including both equity capital and debt. Also called money capital.

Financial decisions - Decisions that involve: (1) determining the proper amount of funds to employ in a firm; (2) selecting projects and capital expenditure analysis; (3) raising funds on the most favourable terms possible; and (4) managing working capital such as inventory and accounts receivable.

Financial statement analysis - Is a method used by interested parties such as investors, creditors, and management to evaluate the past, current, and projected conditions and performance of the firm. ratio analysis is the most common form of financial analysis. It provides relative measures of the firm's conditions and performance. When using the financial ratios, a financial analyst makes two

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types of comparisons: (1) Industry comparison. The ratios of a firm are compared with those of similar firms or with industry averages or norms to determine how the company is faring relative to its competitors. Industry average Or (2) trend analysis. A firm's present ratio is compared with its past and expected future ratios to determine whether the company's financial condition is improving or deter

Variance analysis is usually associated with explaining the difference (or variance) between actual costs and the standard costs allowed for the good output. For example, the difference in materials costs can be divided into a materials price variance and a materials usage variance. The difference between the actual direct labor costs and the standard direct labor costs can be divided into a rate variance and an efficiency variance. The difference in manufacturing overhead can be divided into spending, efficiency, and volume variances. Mix and yield variances can also be calculated.

Variance analysis helps management to understand the present costs and then to control future costs.

Standard :-

When you want to measure some thing, you must take some parameter or yardstick for measuring. We can call this as standard

Preference shares. Sec. 85(1) of the Companies Act defines preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. Thus, both the preferential rights viz. (a) preference in payment of dividend and (b) preference in repayment of capital in case of winding up of the company, must attach to preference shares.

Equity shares :Equity shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares. These share holders do not enjoy preference regarding payment of dividend and repayment of capital.Equity shareholders are paid dividend

out of the profits made by a company. Higher the profits, higher will be the dividend and lower the profits, lower will be the dividend.


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Project appraisal is a generic term that refers to the process of assessing, in a structured way, the case for proceeding with a project or proposal. In short, project appraisal is the effort of calculating a project's viability. It often involves comparing various options, using economic appraisal or some other decision analysis technique.

Project appraisal :-

Systematic and comprehensive review of the economic, environmental, financial, social, technical and other such aspects of a project to determine if it will meet its objectives.

http://en.wikipedia.org/wiki/Economic_appraisal

http://en.wikipedia.org/wiki/Decision_analysis



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http://www.businessdictionary.com/definition/objective.html


Bibliography

1. M R Agarwal, Business Budgeting, Garima publications

2. G A Welsch, Business Budgeting

3. Agarwal, Vijay, and Surolia, Business Budgeting

4. Clark and others, Capital Budgeting

5. EL Altman, Financial Handbook

6. J BATTY, Corporate planning and Budgetary control

7. Harold & Seymour CapitaL, Budgeting Decisions

8. Man Mohan & Goyal, Principles of Management Accounting

9. Nk Kulshrestha, Theory & Practice of Management

10. SP Gupta, Management Accounting

Website:

1. www.slideshare.net

2. http://en.wikipedia.org

3. www.books.google.co.in

4. www.scribd.com

5. www.managementparadise.com

http://www.slideshare.net/

http://en.wikipedia.org/

http://www.books.google.co.in/

http://www.scribd.com/

http://www.managementparadise.com/

concept based notes business budgeting · definite future period. (ii) budgeting- according to j....

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