Introduction to Budgeting &
Budgetary control
Lecturer – CA. Sonali Jagath Prasad
Budget
What is a Budget?
- A plan expressed in money. It is prepared and approved prior to
the budget period and may show income, expenditure and the
capital to be employed
–Budget Period
– Annual, normally
– Annual budget may be broken up into quarterly or even monthly
budget
– Sometimes, need to prepare to 3 to 5 year Budget, which may not
be as detailed and is called a strategic plan
A BUDGET HELPS IN MEETING LONG TERM GOALS
Budgetary control
Purposes of Budgets
Planning
– Forces organisations to look at future
– Allows inputs of ideas from multiple viewpoints
– Provide ideas for achieving goals more efficiently
Communication and co-ordination
– Helps in communicating plans of different departments to each other
– Results in better co-ordination and efficient working
– Everyone is aware of Company’s objectives and goals
Monitoring
– Budgets sets standards which help monitor organisation’s progress
– Helps in individual departments meeting their targets along with the organisation
Performance measurement and evaluation
– Budgets help set responsibilities and targets on managers
– These targets serve as benchmark for performance evaluation
– Evaluation helps in motivation and rewarding good performance
Budget Cycle
How to set Goals?
Types of Budgets
Master Budget
The master budget Sales
is a detailed and
comprehensive analysis
Production
of the first year of the
long-range plan.
It summarizes the Distribution
planned activities
of all subunits of Finance
an organization.
Master Budget
Operating budget Financial budget. . .
(Profit plan). . .
Focuses on the Income Focuses on the effects that the
Statement and supporting operating budget and other
schedules or budgeted plans will have on cash
expenses. balances.
Types of Budgets
Operating Budgets - Examples
Types of Budgets
Operating Budgets - Examples
Operating Budgets - Examples
Operating Budgets - Examples
Operating Budgets - Examples
Operating Budgets - Examples
Operating Budgets - Examples
Financial Budgets
Financial Budgets
Financial Budget
The cash budget is a
statement of planned
cash receipts and
disbursements.
The Cash budget contains these major sect
available cash balance
net cash receipts and disbursements
financing
Cash Budget - Example
Static and flexible budget
Static Budget
A projection of budget data
at one level of activity.
Barton Steel (Forging Department)
Manufacturing Overhead Budget (Static)
For the Year Ended December 31, 2002
Budgeted
BudgetedProduction
Productionin
inunits
units(steel
(steelingots)
ingots) 10,000
10,000
Budgeted Costs
Budgeted Costs
Indirect
Indirectmaterials
materials $$250,000
250,000
Indirect labor
Indirect labor 260,000
260,000
Utilities
Utilities 190,000
190,000
Depreciation
Depreciation 280,000
280,000
Property
Propertytaxes
taxes 70,000
70,000
Supervision
Supervision 50,000
50,000
$1,100,000
$1,100,000
Flexible Budget
A projection
of budget
data for
various
levels of
activity.
Flexible budget – the steps
Revise the budget to reflect the volume that
actually or now expected to occur
Identify what costs are related to the level of
output (variable costs)
Identify the fixed costs
Can now make more valid comparison between
this budget and the actual one
This is known as the volume variance
The other variances can now be investigated
Flexible Budget
Fox Manufacturing Company (Finishing Department)
Flexible Monthly Manufacturing Overhead Budget
For the Month Ended January 31, 2002
Activity
Activitylevel
level
Direct
Direct laborhours
labor hours 8,000
8,000 9,000
9,000 10,000
10,000 11,000
11,000 12,000
12,000
Variable costs
Variable costs
Indirect
Indirectmaterials
materials($1.50)
($1.50) $12,000
$12,000 $13,500
$13,500 $15,000
$15,000 $16,500
$16,500 $18,000
$18,000
Indirect
Indirectlabor
labor($2.00)
($2.00) 16,000
16,000 18,000
18,000 20,000
20,000 22,000
22,000 24,000
24,000
Utilities ($.50)
Utilities ($.50) 4,000
4,000 4,500
4,500 5,000
5,000 5,500
5,500 6,000
6,000
Total
Totalvariable
variable 32,000
32,000 36,000
36,000 40,000
40,000 44,000
44,000 48,000
48,000
Fixed costs
Fixed costs
Depreciation
Depreciation 15,000
15,000 15,000
15,000 15,000
15,000 15,000
15,000 15,000
15,000
Supervision
Supervision 10,000
10,000 10,000
10,000 10,000
10,000 10,000
10,000 10,000
10,000
Property
Propertytaxes
taxes 5,000
5,000 5,000
5,000 5,000
5,000 5,000
5,000 5,000
5,000
Total fixed
Total fixed 30,000
30,000 30,000
30,000 30,000
30,000 30,000
30,000 30,000
30,000
Total
Totalcosts
costs $62,000
$62,000 $66,000
$66,000 $70,000
$70,000 $74,000
$74,000 $78,000
$78,000
Flexible Budgeting - Example
Zero based budgeting
Advantages of Budgets
The major strength of budgeting is that it coordinates activities
across departments.
Budgets translate strategic plans into action. They specify
theresources, revenues, and activities required to carry out the
strategic plan for the coming year.
Budgets provide an excellent record of organizational activities.
Budgets improve communication with employees.
Budgets improve resources allocation, because all requests are
clarified and justified.
Budgets provide a tool for corrective action through reallocations.
Disadvantages of Budgets
The major problem occurs when budgets are applied
mechanically and rigidly.
Budgets can demotivate employees because of lack of
participation. If the budgets are arbitrarily imposed top down,
employees will not understand the reason for budgeted
expenditures, and will not be committed to them.
Budgets can cause perceptions of unfairness.
Budgets can create competition for resources and politics.
A rigid budget structure reduces initiative and innovation at
lower levels, making it impossible to obtain money for new
ideas.
Advantages of Budgetary
control…
1) The objectives of the organization as a whole & the results which should be achieved by
each department within this overall framework are defined by the budgetary control.
2) When there is a difference between actual results & budget, then the extent by which
actual results have exceeded or fallen short of the budget is revealed by the budgetary
control.
3) The variances or other measures of performance along with the reasons of difference
between the actual results with those from budgeted is indicated by the budgetary
control. Also, the magnitude of differences is established by it.
4) As the budgetary control reports on actual performance along with variances & other
measures of performance; for correcting adverse trends, a basis for guiding executive
action is provided by it.
5) A basis by which future budget can be prepared or the current budget can be revised is
provided by the budgetary control.
Advantages of Budgetary
control
6. A system whereby in the most efficient way possible the resources of the
organization are being used is provided by the budgetary control.
7. The budgetary control indicates how efficiently the various departments of the
organization are being coordinated.
8. Situations where activities & responsibilities are decentralized, some centralizing
control is provided by the budgetary control.
9. The budgetary control provides means by which the activities of the organization can
be stabilized, where the organization’s activities are subject to seasonal variations.
10. By regularly examining the departmental results, a basis for internal audit is
established by the budgetary control.
11. The standard costs which are to be used are provided by it.
12. For the purpose of paying a bonus to employees, a basis by which the productive
efficiency can be measured is provided by the budgetary control.
Disadvantages of Budgetary
control
(1) It used the estimates as a basis for the budget plan.
(2) In order to fit with the changing circumstances the budgetary
programme must be continually adapted. Normally for attaining a
reasonably good budgetary programme, it takes several years.
(3) A budget plan cannot be executed automatically. Enthusiastic
participation is required by all levels of management in the
programme.
(4) The necessity of having a management & administration will not be
eliminated by any budgetary control system. The place of the
management is not taken by it; rather it is a tool of the
management.