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CONCEPT OF BUDGET
CONCEPTOFBUDGET
TheCharteredInstituteofManagementAccountants(CIMA)London,hasdefineda
budgetasafinancialand/orquantitativestatement,preparedpriortoadefinedperiod
g
/ q
,p p
p
p
oftime,ofthepolicytobepursuedduringthatperiodforthepurposeofattaininga
givenobjective.Itmayincludeincome,expenditureandemploymentofcapital.
Characteristics
(a)
( )
(b)
(c)
(d)
Abudgetisprimarilyaplanningdevicebutitalsoservesasabasisfor
performanceevaluationandcontrol.
f
l ti d
t l
Abudgetispreparedeitherinmoneytermsorinquantitativetermsorinboth.
Abudgetispreparedforadefinitefutureperiod.
Purposeofabudgetistoimplementthepoliciesformulatedbymanagementfor
attainingthegivenobjectives.
Characteristics
(a)
(b)
(c)
(d)
(e)
Establishmentofbudgetsforeachfunction/departmentoftheorganization.
Comparisonofactualperformancewiththebudgetsonacontinuousbasis.
Analysisofvariationsofactualperformancefromthatthebudgetedperformancetoknowthe
A l i f i ti
f t l f
f
th tth b d t d f
t k
th
reasonsthereof.
Takingsuitableremedialaction,wherenecessary.
Revisionofbudgetsinviewofchangesinconditions.
definiteperiodof
time.
Budgetingaids
managersinco
ordinatingtheirefforts
di i h i ff
sothatobjectivesof
theorganization.
Abudgetisacommunication
device.Itprovidesnotonly
adequateunder
d
d standingand
di d
knowledgeoftheprogrammesand
policiestobefollowedbutalso
alertsabouttherestrictionstobe
adheredto.
Planning
Coordination
Communication
Abudgetisauseful
deviceformotivating
managerstoperform
i li i h h
inlinewiththe
companyobjectives.
Controlisnecessary
toensurethatplans
andobjectivesaslaid
d
downinthebudgets
i h b d
arebeingachieved.
Motivation
Control
Abudgetprovidesauseful
meansofinforming
managershowwelltheyare
performinginmeeting
f
i i
i
targetstheyhavepreviously
helpedtoset.
Performance
evaluation
ESSENTIALSOFEFFECTIVE
BUDGETING
Supportoftop
S
f
management
Participation
byresponsible
executives
Reasonable
R
bl
goals
Clearlydefined
organization
Continuous
budget
education
Adequate
accounting
system
Constant
vigilance
Maximum
profits
Costofthe
system
Integration
withstandard
costs
PRELIMINARIESINTHEINSTALLATION
OFBUDGETSYSTEM
Creationofbudgetcentres
Budgetcentreissectionoforganizationforwhichabudgetisprepared.
d
f
f
h h b d
d
Introductionofadequateaccountingrecords
Systemisdesignedtobeabletorecordandanalyseinformationrequired.
Preparationofanorganizationchart
Organizationchartshouldbepreparedwhichshowstheplanoforganization.
Establishmentofbudgetcommittee
Inlargeconcerns,thedirectionandexecutionofthebudgetisdelegatedtoa
Inlargeconcerns thedirectionandexecutionofthebudgetisdelegatedtoa
budgetcommitteewhichreportsdirectlytothetopmanagement.
Preparationofbudgetmanual
AbudgetmanualhasbeendefinedbyCIMA,Londonasadocumentwhich
g
y
setsouttheresponsibilitiesforthepersonsengagedintheroutineofandthe
formsandrecordsrequiredforbudgetarycontrol.
Budgetperiod
Budgetperiodisalengthoftimeforwhichabudgetispreparedandoperated.
Budgetperiodisalengthoftimeforwhichabudgetispreparedandoperated
Determinationofthekeyfactor
Thekeyfactormeansthefactorwhichlimitsthesizeofoutput.
CLASSIFICATION OF BUDGETS
CLASSIFICATIONOFBUDGETS
Onthebasisof
functionand
scope:
Onthebasisof
flexibility:
y
Functional
budgets
Fixed
budget
Master
g
budget
Flexible
g
budget
FUNCTIONAL BUDGETS
FUNCTIONALBUDGETS
Afunctionalbudgetisonewhichrelatestoaparticularfunctionofthebusiness.
SalesBudget:Thesalesbudgetisastatementofplannedsalesintermsof
quantityandvalue.
ProductionBudget:Theproductionbudgetisaplanofproductionforthebudget
period.
ProductionCostBudget:Thisbudgetshowstheestimatedcostofproduction.
Theproductionbudgetshowsthequantitiesofproduction.Thesequantitiesof
productionareexpressedintermsofcostinproductioncostbudget.
RawMaterialBudget:Thisbudgetshowstheestimatedquantitiesofalltheraw
materialsandcomponentsneededforproductiondemandedbytheproduction
budget.
PurchaseBudget:Thepurchasebudgetprovidesdetailsofthepurchaseswhich
areplannedtobemadeduringtheperiodtomeettheneedsofthebusiness.
FUNCTIONAL BUDGETS(Contd.)
FUNCTIONALBUDGETS(Contd.)
LabourBudget:Labourcostisclassifiedintodirectandindirect.Somecompaniespreparea
labourbudgetthatincludesbothdirectandindirectlabour,whileothersincludeonlydirect
g
labourcostandincludetheindirectlabourintheoverheadcostbudget.
ProductionOverheadsBudget:Theproductionoverheadsbudgetrepresentstheforecast
ofalltheproductionoverheads(fixed,variableandsemivariable)tobeincurredduringthe
budgetperiod.
SellingandDistributionCostBudget:Thisiscloselyrelatedtosalesbudgetand
representstheforecastofallcostsincurredinsellinganddistributingthecompanys
productsduringthebudgetperiod.
AdministrationCostBudget:Thisbudgetrepresentsforecastofalladministration
expenses,likedirectorsfees,managingdirectorssalary,officelighting,heatingandair
conditioning,etc.
CapitalExpenditureBudget:Thisbudgetrepresentstheexpenditureonallfixedassets
duringthebudgetperiod.Itincludessuchitemsasnewbuildings,machinery,landand
intangibleitemslikepatents,etc.
CashBudget: Itisadetailedestimateofcashreceiptsfromallsourcesandcashpayments
forallpurposesandtheresultantcashbalancesduringthebudgetperiod.
CASHBUDGET
C S U G
Itisadetailedestimateofcashreceiptsfromallsourcesandcashpaymentsforall
purposesandtheresultantcashbalancesduringthebudgetperiod.
PreparationofCashBudget
P
i fC hB d
Receipts Thismethodisusuallyusedforshorttermcash.Thecashbudgetbeginswiththeopeningbalance
and
p
ofcashinhandandatbank.Tothisareaddedthecashreceiptsfromvarioussourcesandfrom
Payments thisaredeductedallpaymentsofcash,whetheroncapitalorrevenueaccount.Theresultant
figureistheclosingcashbalance.
Method
Adjusted Thismethodissuitableforlongtermcashforecast.Itisbasedontheviewthatitisthe
profitthatisthesourceofcashinthebusiness.TheprofitasperP&Laccountsisconvertedinto
Profitand cashfigurebypreparinganAdjustedProfitandLossAccount.Allthoseitemsofincomeand
Loss
expenditure,whichdonotinvolveaninfloworoutflowofcash,areadjustedintheforecasted
Method
profitfiguretoarriveatthefigureofcashmadeavailablebyprofit
profitfiguretoarriveatthefigureofcashmadeavailablebyprofit.
Balance
Sheet
Method
Thi
Thismethodisalsousedforforecastingcashrequirementsforlong.Underthismethodbudgeted
h di l df f
i h
i
f l
U d hi
h db d
d
balancesheetispreparedwithallitemsofassetsandliabilities,exceptingcashorbankbalance.
Thetwosidesofthebalancesheetarethentotalledandthebalancingfigureistakenascash.
MASTER BUDGET
MASTERBUDGET
AccordingtoCIMA,London,masterbudgetisasummarybudgetincorporatingits
A
di CIMA L d
b d i
b d i
i i
componentfunctionalbudgetsandwhichisfinallyapproved,adoptedandemployed.
Amasterbudgethastwoparts
(i)operatingbudget,i.e.,budgetedprofitand
lossaccount,
(ii)financialbudget,i.e.,budgetedbalance
sheet.
Themasterbudgetispreparedbythebudgetdirector(orbudgetofficer)andis
presentedtothebudgetcommitteeforapproval.Ifapproved,itissubmittedtotheBoardof
Di
Directorsforfinalapproval.TheBoardmaymakecertainamendments/alterations
f fi l
l Th B d
k
i
d
/ l
i
beforeitisfinallyapproved.
FIXEDANDFLEXIBLEBUDGETS
U G S
FixedBudget:Afixedbudgetisonewhichispreparedkeepinginmindonelevelofoutput.
Itisdefinedasabudgetwhichisdesignedtoremainunchangedirrespectiveofthelevelof
activityattained.
FlexibleBudget:Incontrasttoafixedbudget,aflexiblebudgetisonewhichisdesignedto
Fl ibl B d
I
fi db d
fl ibl b d i
hi hi d i
d
changeinrelationtothelevelofactivityattained.Theunderlyingprincipleofflexible
budgetisthatabudgetisoflittleuseunlesscostandrevenuearerelatedtotheactual
volumeofproduction.
DistinctionbetweenFixedandFlexibleBudgets
g
Fixedbudgetassumesstatic
businessconditionswhereas
flexiblebudgetisbasedon
theassumptionofchanging
businessconditions.
Fixedbudgetispreparedfor
onlyonelevelofactivitybut
l
l l f ti it b t
flexiblebudgetsmaybe
preparedfordifferentcapacity
levelsorforanylevelof
activity.
Whenactuallevelofactivitydiffers
frombudgetedlevelofactivity,then
infixedbudgetsmeaningful
comparisonbetweenactualand
budgetfiguresisnotpossible.Butin
flexiblebudgets,suchcomparisons
arequiterealistic.
Fixedbudgetfiguresarenot
g
changedwhenactuallevelof
activitychanges.Butin
flexiblebudgets,thefigures
areadjustedaccordingtothe
actuallevelofactivity
attained.
Underchangingbusiness
environments,fixedbudgetshave
verylimiteduseforcontrol.But
flexiblebudgetsareveryusefulfor
costcontrolandperformance
evaluationunderchangingbusiness
environments.
BUDGETREPORTS
U G
O S
Establishingbudgetsinitselfisofnouseunlessthereisacontinuousflowofbudgetreports
showingcomparisonofactualandbudgetfigures.Budgetreportsshouldbepreparedat
regularintervals(say,everymonth)showingthereasonsforthedifferencesbetweenactual
andbudgetfigures
andbudgetfigures.
EssentialsofaBudgetReport
(a)Thebudgetreportsshouldbesimpleandsuitableforthelevelofunderstandingfortheuser.
(b)Reportsshouldbepresentedpromptly.
(c)Reportsshouldbeaccuratebuttheextremeaccuracyshouldnotbeatthecostofpromptness.
(d)Th i i l f
(d)Theprincipleofexceptionshouldbeutilized,wherepossible.
ti h ldb tili d h
ibl
(e)Thereportsshouldcontainonlyessentialinformationaccordingtotheneedsoftheuser.
MainFeaturesofZeroBaseBudgeting(ZBB)
1.Allbudgetitems,both
oldandnewlyproposed,
areconsideredtotally
areconsideredtotall
afresh
2.Amounttobespenton
eachbudgetitemistobe
g
totallyjustified
3.Adetailedcostbenefit
analysisofeachbudget
programmeisundertaken
andeachprogrammehas
tocompeteforscarce
resources
4.Departmental
objectivesarelinkedto
corporategoals
5.Themainstressinnot
onhowmucha
departmentwillspendbut
p
p
onwhyitneedstospend
6.Managersatalllevels
participateinZBBprocess
andtheyhave
corresponding
accountabilities.
PERFORMANCEBUDGETING
Performancebudgetingisarelativelynewconceptwhichfocusesonfunctions,programmes
andactivities.Performancebudgetsareestablishedinsuchamannerthateachitemof
expenditurerelatedtoaspecificresponsibilitycentreiscloselylinkedwiththe
performanceofthatcentre
performanceofthatcentre.
StepsinPerformanceBudgeting
p
y
p
y
g
EstablishmentofresponsibilitycentreResponsibilitycentres,asegmentofan
organizationwhereamanagerisresponsiblefortheperformanceareestablished.
EstablishmentofperformancetargetsForeachresponsibilitycentre,targetsareset
intermsofphysicalperformancetobeachieved.
EstimatingfinancialrequirementsInthisstep,thefinancialsupportneededto
achievethephysicaltargetsisestimated.
ComparisonofactualwithbudgetedperformanceThisisausualstepin
budgetarycontroltoevaluatetheactualperformance.
ReportingandactionVariancesfrombudgetedperformanceareanalysedand
reportedforcorrectiveactiontobetaken.