unit 14 budgetary control

7/23/2019 Unit 14 Budgetary Control

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Budgetary Control

Learning Objectives..............................................................................................................2

1. Introduction to Budgeting.................................................................................................3

2. Budgetary Control.............................................................................................................5

3. Types of Budgets...............................................................................................................

!. "reparation of Budgets.....................................................................................................#

!.1 $ales Budget................................................................................................................ #

!.2 "roduction budget.......................................................................................................%

!.3 &aterial "urc'ase Budget..........................................................................................1(

!.! Cas' Budget..............................................................................................................11

!.5 Ot'er functional budget.............................................................................................13

!.) &aster Budget...........................................................................................................13

!. *i+ed and *le+ible budgets........................................................................................1!

5. ,ero Based Budgeting....................................................................................................15

). $olved illustration...........................................................................................................1)

. $u--ary........................................................................................................................21

#. +ercises......................................................................................................................... 21

#.1 &ultiple C'oice /uestions.........................................................................................21

#.2 T'eory /uestions.......................................................................................................23

#.3 +ercises.................................................................................................................... 23


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Learning Objectives

0fter learning t'is unit you ill be able

To understand t'e basic concepts of Budgets and Budgetary Control

To prepare various types of budgets

To learn concept of ero Based Budgeting


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1. Introduction to Budgeting

0 budget is a plan e+pressed in 4uantitative usually -onetary ter-s covering a

speci6c period of ti-e usually one year. In ot'er ords a budget is a syste-atic

plan for t'e utilisation of -anpoer and -aterial resources. In a business

organisation a budget represents an esti-ate of future costs and revenues. Budget

is prepared eit'er in 4uantitative details or -onetary details or bot'.

Objectives of Budgeting

0n e7ective budgeting syste- plays a crucial role in t'e success of a business

organiation. T'e budgeting syste- 'as t'e folloing objectives 'ic' are of

para-ount i-portance in t'e overall e8ciency and e7ectiveness of t'e business

organiation. T'ese objectives are discussed belo.

Planning: 0 ell9 prepared plan 'elps t'e organiation to use t'e scarce

resources in an e8cient -anner and t'us ac'ieving t'e pre9 deter-ined targets

beco-es easy. 0 budget is prepared for future period and it lays don targets

regarding various aspects li:e purc'ase production sales -anpoer planning

etc.

Co-ordination: *or ac'ieving t'e predeter-ined objectives apart fro- planning

coordinated e7orts are re4uired. Budgeting facilitates coordination in t'e sense

t'at budgets cannot be developed in isolation. *or e+a-ple 'ile developing t'eproduction budget t'e production -anager ill 'ave to consult t'e sales -anager

for sales forecast and purc'ase -anager for t'e availability of t'e ra -aterial.

Control:"lanning is loo:ing a'ead 'ile controlling is loo:ing bac:. "reparation of

budgets involves detailed planning about various activities li:e purc'ase sales

production and ot'er functions li:e -ar:eting sales pro-otion -anpoer planning.

But planning alone is not su8cient. T'ere s'ould be a proper syste- of controlling

'ic' ill ensure t'at t'e or: is progressing as per t'e plan. Budgets provide t'e

basis for suc' controlling in t'e sense t'at t'e actual perfor-ance can be co-pared

it' t'e budgeted perfor-ance. 0ny deviation beteen t'e to can be found out

and analyed to ascertain.

Benets of Budgeting


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Budgeting plays an i-portant role in planning and controlling. It 'elps in directing t'e

scarce resources to t'e -ost productive use and t'us ensures overall e8ciency in t'e

organiation. T'e bene6ts derived by an organiation fro- an e7ective syste- of

budgeting can be su--aried as given belo.a; Budgeting facilitates planning of various activities and ensures t'at t'e or:ing of

t'e organiation is syste-atic and s-oot'.

b; Budgeting is a coordinated e+ercise and 'ence co-bines t'e ideas of di7erent levelsof -anage-ent in preparation of t'e sa-e.

c; 0ny budget cannot be prepared in isolation and t'erefore coordination a-ong various

depart-ents is facilitated auto-atically.d; Budgeting 'elps planning and controlling inco-e and e+penditure so as to ac'ieve

'ig'er pro6tability and also act as a guide for various -anage-ent decisions.e; It is e+tre-ely necessary to evaluate t'e actual perfor-ance it' predeter-ined

para-eters. Budgeting ensures t'at t'ere are ell9de6ned para-eters and t'us t'e

perfor-ance is evaluated against t'ese para-eters.f; 0s t'e resources are directed to t'e -ost productive use budgeting 'elps in reducing

t'e astages and losses.

2. Budgetary Control

0 budgetary control is e+tre-ely useful for planning and controlling 'oever for getting

t'ese bene6ts su8cient preparation s'ould be -ade. *or co-plete success a solid

foundation s'ould be laid don and in vie of t'is t'e folloing aspects are of crucial

i-portance. *olloing steps -ay be ta:en for installing an e7ective syste- of budgetary

control in an organisation.

Organisation for Budgeting

T'e setting up of a de6nite plan of organisation is t'e 6rst step toards installing

budgetary control syste- in an organisation. 0 Budget &anual s'ould be prepared giving

details of t'e poers duties responsibilities and areas of operation of eac' e+ecutive in

t'e organisation.

es!onsibility for Budgeting

T'e responsibility for preparation and i-ple-entation of t'e budgets -ay be 6+ed as

underero Based Budgeting

,ero Base Budgeting is t'e latest tec'ni4ue of budgeting. 0 budget is a representation of

4uanti6cation of t'e 6r-Vs objectives. 0n accurate budget can be fra-ed 'en a

relations'ip beteen t'e inputs and outputs can be establis'ed. In all t'e activities suc'

relations'ip cannot be establis'ed. In suc' areas it is di8cult to develop standard costs.

'ere it is di8cult to co-pare t'e resources allocation it' t'e output ,BB is -ore

appropriate in controlling.,ero based budgeting Halso :non as priority based budgeting

actually e-erged in t'e late 1%)(s as an atte-pt to overco-e t'e li-itations of incre-ental

budgeting. T'is approac' re4uires t'at all activities are justi6ed and prioritied before

decisions are ta:en relating to t'e a-ount of resources allocated to eac' activity. in ,ero

Based Budgeting t'e beginning is -ade fro- scratc' and eac' activity and function is

revieed t'oroug'ly before sanctioning t'e sa-e and all e+penditures are analyed and

sanctioned only if t'ey are justi6ed.

Besides adopting a W,ero BasedV approac' t'e ,ero Based Budgeting also focuses on

progra-s or activities instead of functional depart-ents based on line ite-s 'ic' is a feature

of traditional budgeting.

Benets of >ero Based Budgeting

,BB facilitates revie of various activities rig't fro- t'e scratc' and a detailed cost

bene6t study is conducted for eac' activity. T'us an activity is continued only if t'e cost


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bene6t study is favourable. T'is ensures t'at an activity ill not be continued -erely

because it as conducted in t'e previous year. 0 detailed cost bene6t analysis results in e8cient allocation of resources and

conse4uently astages and obsolescence is eli-inated. 0 lot of brainstor-ing is re4uired for evaluating cost and bene6ts arising fro- an activity

and t'is result into generation of ne ideas and also a sense of involve-ent of t'e sta7. ,BB facilitates i-prove-ent in co--unication and co9ordination a-ongst t'e sta7.

0areness a-ongst t'e -anagers about t'e input costs is created 'ic' 'elps t'e

organiation to beco-e cost conscious. 0n e+'austive docu-entation is necessary for t'e i-ple-entation of t'is syste- and it

auto-atically leads to record building.

imitations o (ero Based Budgeting: T'e folloing are t'e li-itations of ,ero Based

Budgeting.

It is a very detailed procedure and naturally if ti-e consu-ing and lot of paper or: is

involved in t'e sa-e. Cost involved in preparation and i-ple-entation of t'is syste- is very 'ig'.

&orale of sta7 -ay be very lo as t'ey -ig't feel t'reatened if a particular activity

is discontinued. an:ing of activities and decision9-a:ing -ay beco-e subjective at ti-es.

It -ay not advisable to apply t'is -et'od 'en t'ere are non 6nancial considerations

suc' as et'ical and social responsibility because t'is ill dictate rejecting a budget clai-

on lo ran:ing projects.

9. ,olved illustration

Illustration 9

$peciality 0uto follos a policy of -anufacture of auto spares evenly t'roug'out t'e year

[ 1((((( units per -ont' for utiliing its labour force properly. >oever de-ands in

di7erent -ont's are not unifor-. T'e co-pany follos a policy of -aintaining 2 ee:s

ra &aterials in stoc: to facilitate s-oot' production process production process. It pays

to supplier it'in 1 -ont' of purc'ase and collects fro- custo-ers it'in one -ont' of

sale. Cost esti-ates of t'e co-pany are as follos 3((((( 3((((( 3((((( 3((((( 3((((( 3(((((*actory

cost

1%11111 1%11111 1%11111 1%11111 1%11111 1%11111


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0dd 2!((( 2)(((( 25(((( 2)(((( 2(((( 2#((((Cost of

$ales

221)5+1 21+5+1) 249+4+ 225)+9 225)+5 2)41)2

pro6t 2##5% 13# 12#%53 1!)!5! 1)5(2 1#%#)#

Calculation of closing stoc(

CO" 2511111 2)#23#1 2%(52#( 32(23! 33%%15 3!%5532"roductio

n Q

opening

stoc:

units

1!(((( 1!3((( 153((( 1)#((( 1#((( 1#3(((

eig'ted

average

cost per

unit Ds.;

1.%! 1#.) 1#.%% 1%.() 1%.(% 1%.1(

@otes:

i. =irect -aterial P &aterial re4uire-entZ "er unit -aterial costii. =irect labour P "roduction unitsZ Labour cost unit of productioniii. =irect e+pense P "roduction units Z +pense per unit of productioniv. *actory over'eads P s. 2((((( *i+edpluse. 1 Z production unitsv. 0d-inistrative over'ead is 6+ed s. 2(((((

vi. $elling distribution over'ead P s. #(((( Q s. 2 per unit soldvii. Closing stoc: of 6nis'ed goods is valued at eig'ted average cost.

Financial Budgets: *inancial Budgets include^ Budgeted pro6t and loss account

T'is 'as already been presented along it' production cost budget. Budgeted balance s'eet

T'is is esti-ated cas' Ao report against 'ic' actual cas' Ao is co-pared. Cas' budget

Cas' budget reAects t'e cas' inAos and outAos arising out of operations

invest-ent and 6nancing activities. e 'ave already learnt t'e tec'ni4ue of

preparation of 'istorical cas' Aos. In t'is paragrap' let us learn t'e tec'ni4ue of

preparation of budget. Cas' budget is projected cas' Aos. Cas' budget is generally


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prepared on -ont'ly basis. *or t'e purpose of our e+a-ple e s'all prepare cas'

budget on -ont'ly basis. *or t'e purpose of our e+a-ple e s'all prepare cas'

budget on -ont'ly basis. or:ing capital budget

=i7erent co-ponents of or:ing capital are9 a -aterial stoc: 6nis'ed goods stoc:

=ebtors

C,A B


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( ( ( ( ( (ross

C

3#2%!2

5

3#12

5

!(3%%

1

!3)!35

%(

!5%(%

!2(%)

1Less

Crs.

9

111111

1

9

111111

1

9

111111

1

9

111111

1

9

111111

1

9

111111

1@et 6C 215)1

+

29491

+

22595

4

)23)2+

5

)+59

3

)9453

4

Illustration

On t'e basis of t'e folloing infor-ation prepare Ae+ible budget.

Capacity DS; 5( )( ( #( %( 1(($ales Xnits 5((( )((( ((( #((( %((( 1(((($elling price p u

Ds.;

!( !( !( 3%.5 3% 3#.5

Gariable cost p u

Ds.;

22 22 22 22 22 22

=irect -aterial p uDs.;

1( 1( 1( 1( 1( 1(

=irect ages p u

Ds.;

# # # # # #

=irect e+penses p u

Ds.;

2 2 2 2 2 2

Gariable over'eads

p u Ds.;

2 2 2 2 2 2

Contribution per

unit Ds.;

1# 1# 1# 1.5 1 1).5

"JG atio !5 !5 9!5 !!.3( !3.5% !2.#)

*i+ed cost Ds.; %(((( %1#(( %3)(( %5!(( %2(( %%(((

,olution:

$ales

Ds.;

2((((( 2!(((( 2#(((( 31)((( 351((( 3#5(((

Gariable

cost Ds.;

11(((( 132((( 15!((( 1)((( 1%#((( 22((((

=irect

-aterial

5(((( )(((( (((( #(((( %(((( 1(((((

=irect

ages

!(((( !#((( 5)((( )!((( 2((( #((((

=irect

e+penses

1(((( 12((( 1!((( 1)((( 1#((( 2((((

Gariable

over'ead

s

1(((( 12((( 1!((( 1)((( 1#((( 2((((

Contributi

on Ds.;

%(((( 1(#((( 12)((( 1!(((( 153((( 1)5(((

*i+ed cost %(((( %1#(( %3)(( %5!(( %2(( %%(((


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Ds.;B" Ds.; 2((((( 2(!((( 2(#((( 215331.! 222%## 231(((&argin of

$afety

Ds.;

( 3)((( 2((( 1(())#.) 12#(12 15!(((

"ro6t

Ds.;

( 1)2(( 32!(( !!)(( 55#(( ))(((

Kotes

unit 14 budgetary control

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