Cost Benefit Analysis

The key item in development planning is investment. This includes not merely
how much to invest but in what proportion in each sector and in which projects in
each sector.

The technique most popular for making decision in respect of

inclusion/exclusion of a project is based on an analysis of cost and benefits, and
accordingly labeled as SOCIAL COST BENEFIT ANALYSIS.

Though used in economics, it was originated by engineers. It was first used in

1930 in USA. It was develop by Jules Dupit of France in 1844.

The Technique sets out and evaluates cost and benefits to society as
distinguished from costs and benefits to an individual.

Needs:-
1. Helps to overcome distortions in economy.
2. To ensure optimum use of investment.
3. Aids promotion of optimum planning.

Problems:-
1. There would be problem inlisting of all items that are to be considered.
2. Incidence of double costing cannot be ruled out.
3. Incorrect market prices in the market will be another problem of evaluation.
 Management by Exception

Meaning and definition:- It is a system of identification and communication of those

signals to the managers where his attention is needed most.

Ingredients:-
1. Measurement
2. Projection
3. Selection
4. Observation
5. Comparison
6. Decision Making

Advantages:-
1. Saves time
2. Concentrates efforts on major problems
3. Facilitates better delegation of authority

Internal Audit

It is a critical review of financial and operating activities by staff of Auditors

functioning as full time salaried employees.
(Walter B. MEIGS)
Deference between Internal Audit and Statutory Audit:-

1. Scope Internal Audit is determined by management while Statutory Audit by

CAG.
2. Responsibility Internal Audit is responsible to management while Statutory
Audit is responsible to CAG.
3. Approach Internal Audit ensures that Internal Check and accounting is
efficient and management gets accurate information.
Similarity:- Both Internal Audit and Statutory Audit uses the same means:-
1. They check to see whether accounting is based on sound principles and
practices.
2. Verify books of account and statements.
3. Verify assessed and liability.
4. Use observations, inquiries, Statistics and other means to ensure the
correctness of Profit and Loss account and Balance sheets.
 Thus work of two i.e. Internal Audit & Statutory Audit is similar and if they co-
operate duplication can be avoided and each can improve their respective efficiency
by:-
1. Internal Auditor can take the advice of independent auditor as how to install
and improve Internal Audit.
2. Independent Auditor can take the internal knowledge from the Internal
Auditor in respect of accounting and technical details of business.
Internal Check

It is a system of accounting arrangement where by no one is made incharge of

the transaction from the beginning to end. It is so arranged that one is a check on the
other. It prevents frauds and errors.
Internal Control

It is a comprehensive term and covers whole system of controls. It ensures

that the business is carried in an orderly manner in order to secure accuracy and
reliability of records and to safe guard the assets.

It includes Internal Check, Internal Audit and other accounting and non-
accounting controls.
 Zero Based Budgeting

It is more of a concept, an approach to budgeting than a methodology of

budgeting.

The words Zero Base signifies starting from scratch.

Zero based budgeting was modelled by PETER A. PHYER.

Jimmy Carter adopted this system for government budgeting.

Definition:- It is an operating, planning and budgeting process which requires

justification of the entire budget request from scratch and shifts the burden of proof
to each manager/department to justify why any funds should be provided at all. It
further requires the activities be identified as Decision Packages which will be
systematically evaluated and arranged in the order of importance.

In July, 1986, it was announced by the Govt. of India that zero based
budgeting would be adopted for the year 1987-88 budget. Provocations are:-
1. 9th plan listed out a no. of measures on the expenditure side which can be
achieved only through zero based budgeting.
2. Shortage of revenue.
3. Perpetuation of schemes which were outdated/unproductive.

Problems:- It is difficult to give up schemes in a democratic country like India.

Conclusion:- Political will is needed to efficiently implement it and avoid its

becoming ritual.
 Cost Sheet

It is prepared at given interval of time showing various elements of cost

incurred in production. It also shows total cost and cost per unit.

Some times, corresponding figures of previous years are also shown enabling
comparison to detect inefficiency and wastage.

Time Sheet

It is a record that shows time for which wages are earned by workman during
a wage period as distributed over different work orders on which he was engaged
during that wage period.

It forms basis for reconciliation.

Wrong Works Orders

These are issued to carry out provisional adjustment in respect of those ISSUE
NOTES for which work order no. cannot be ascertained before the close of months
accounts, should be cleared as early as possible by adjusting to final work orders. The
balance will be appearing in Part II of outturn statement as balance under WMS
account.
 Labour Productivity

Definition:- It can be defined as the amount of output per unit of input (man hours)

Arithmetically Labour productivity = Total output

Total man hours

Steps to improve:-
1. Recruitment of right type of workers.
2. Avoiding labour shortage.
3. Having and adhering to production planning.
4. Steady flow of quality materials.
5. Better factory layout.
6. Proper maintenance of machines and tools.
7. Better and congenial working conditions.
8. Standardisation and simplification of work.
9. Proper and regular refresher training.
10. Proper wages.
11. Very good incentive schemes in place.
 Responsibility Centre

Definition:- It can be defined as a department or unit of a department headed by a

responsible person.

Kinds:- Responsibility centre can be classified into 3 different kinds, namely:-

1. Cost Centre
2. Profit Centre
3. Investment Centre

Cost Centre

Meaning:- It is the smallest segment of an activity for which costs are accumulated.
Here only costs are measured but not the output.

Definition:- It can be defined as a location, person or an item of equipment (or a

combination of these) for which costs are accumulated for the purpose of control.

Kinds:- Cost centre can be classified into different kinds namely:-

1. Personnel
2. Impersonal
3. Process
4. Operation

Size and no. of cost centres differ from firm to firm.

Advantages:- 1. It delineates spheres of responsibility.

2. Assembles Cost at one recovery area.

Profit Centre

Meaning & Definition:- It is a responsibility centre where the performance of it is

measured both in terms of revenue it earns and expenses it incurs.
In financial accounting revenue is recognised only when it is realised, while in
responsibility accounting it is the measure of output whether it is realised or not.
Advantages:-
1. It is a powerful tool in the area of performance evaluation. It has salutary
effect of putting the manager for himself in a business in which he can earn
profits.
2. Profitability is the simplest way of analysing the effectiveness of a segment of
a complex business.
3. Managers understand well what profit is and dynamic managers always
welcome the opportunity of having their performance measured by real
entrepreneurial yardstick.
4. Manager will be motivated to take decision about inputs and outputs to
increase profits.
5. As the managers would act as if he is running his own business it is a good
training ground for general management responsibility.

Investment Centre

Meaning & definition:- It is the responsibility centre where the manager is held
responsible for the use of assets, revenue and expenditure.
It is the ultimate extension of the responsibility ideas. Manager is expected to
earn satisfactory return on the assets employed.
Investment centre are normally used for relatively large units such as division,
which both manufactures and markets a line of products.
 Budget

Definition & Meaning:- It is a financial plan and a control over the future operations.
It is an authorisation to spend for a particular object. It is through the budget money
is drawn out of public purse.
The traditional budget is based on:-

1. Extrapolating past expenditure trend or previous levels into next year.

2. Providing for expansion of the existing activities or on new ones.
Traditional budgets are handicapped by in adequate information, lack of
comprehensive analysis. They are functionally oriented as-well-as accounting
oriented but not result oriented.
 Linear Programming
Origin:- It was first formulated by Russian Mathematician, L.V. Kantorovich. But in a
superior form it was develop by an American George B. Dantzig in 1947.
Meaning:- It refers to mathematical methodology of solving business and trade
problems with equations based on linear relationship.
For simple two dimensional problems graphic system is followed. Where
many variables are involved simplex system with the help of interactive or trial and
error method is useful.
It helps in profit gearing by determining the best combination of interacting
variables which would give the desired objective of maximisation of sales and/or
profits, minimisation of costs and reduction of idle time.
The application of this technique was greatly facilitated with development of
electronic computers which made extensive and complicated computations very
easy.
 Bracket Budgeting

Bracket Budgeting is relatively a new technique for line budgeting staff. It uses
sophisticated analysis to assess the profitability of programmes benefits being
achieved. Basic logic emanates from the fact that while all expenses will be incurred,
the benefits may not be achieved.
Bracket budget is the budget at higher and lower levels than the base estimate.
Essentially bracket budgets are contingency expense plans for downside risks. For
example, such budgets allow management to estimate an impact of decreased sales
on earnings. In bracket budgeting, management identifies potential problems and
acceptable profit. In this way, management can test different alternatives and
improve planning process.
Activity-based budget is the budget for the costs of individual activities. In activity-
based budgeting, all costs are allocated to cost centres and then are assigned to
activities. Products or customers are allocated the costs based on the amount of
activity they consume. Activity-based budgets ensure cost reduction and
performance improvement. As activity-based budgeting requires a new budgeting
model, it requires careful planning and implementation.
Add-on budget is the budget based on the previous years budgets adjusted for
current information. For example, add-on budgets can be adjusted for new levels of
inflation, employee wage rates, or new requirements.
Continuous (rolling) budget is the budget revised on a regular basis. As the period
ends, a new budget period is added. For example, the budget can be regularly
extended for another month (or quarter) at the end of each month (or quarter). As
the result, continuous budgets are based on the most recent information and ensure
proper planning and performance. The drawback of continuous budgets is that they
require continuous planning.
Incremental budget is the budget adjusted for incremental increases in terms of
rupees or percentages. Historically incremental budgeting has been the most
common budgeting method. It is based on the priors year expenditures. In
incremental budgeting, each budget line receives the same increment (e.g., 10%
percent) increase or decrease for the next budget cycle. Projects can also be
segregated in multiple increments, and each increment is then allocated labour and
other resources to complete the project. Incremental budget are easy to prepare.
However, they have multiple drawbacks. Incremental budgets are based on
aggregate data. They might not match companys targets. Incremental budgets can
potentially cause over- or underfunding of certain areas.
Strategic budget is the budget adjusted for strategic planning. Strategic budgets are
used under conditions of uncertainty or instability. Strategic budgeting is the mixture
between the top-down approach when top management allocates resources and
the bottom-up approach when lower management participates in resource
allocation.
Stretch budget is the budget based on sales and marketing forecasts that are higher
than estimates. Stretch budgets are not used for estimating expenditures; expenses
are estimated at the budget target. Stretch budgets can be too subjective or
complex.
Supplemental budget is the budget for an area that is not included in the main
(base) budget.
Target budget is the budget that matches major expenditures to companys goals.
 Profit Planning

Meaning:- It is a comprehensive system to co-ordinate various manufacturing

processes, to carefully knit the loose ends of managements and operations.

Profit planning is the process of developing a plan of operation that makes it possible
to determine how to arrange the operational budget so that the maximum amount
of profit can be generated. There are several common uses for this process, with
many of them focusing on the wise use of available resources. Along with the many
benefits of this type of planning process, there are also a few limitations.
The actual process of profit planning involves looking at several key factors relevant
to operational expenses. Putting together effective profit plans or budgets requires
looking closely at such expenses as labour, raw materials, facilities maintenance and
upkeep, and the cost of sales and marketing efforts. By looking closely at each of
these areas, it is possible to determine what is required to perform the tasks
efficiently, generate the most units for sale, and thus increase the chances of earning
decent profits during the period under consideration. Understanding the costs
related to production and sales generation also makes it possible to assess current
market conditions and design a price model that allows the products to be
competitive in the marketplace, but still earn an equitable amount of profit on each
unit sold.
Fundamentals:-
1. Managerial involvement and commitment.
2. Organisation adaptation.
3. Responsibility accounting.
4. Flexibility.
5. Realistic expectation.
6. Full communication.
7. Timeliness.
8. Individual and group recognition.
9. Follow up.

Advantages:-
1. Early consideration of basic policies.
2. Compels all members from top down to participate in the establishment of
objectives.
3. Pinpoints efficiency or inefficiency.
4. Checks progress or lack of progress towards objectives.
 5. Reduces costs by increasing span of control.
6. Forces periodic self analysis of the company.
7. Promotes understanding among the members of management and of the co-
workers problems.
Limitations:-
1. It is based on estimates.
2. Should be frequently changed.
3. Cannot replace sound management and administration.
 Financial Planning

Definition:- According to J.H. Bonneville, it refers not only to corporate capital

structure but also the policies which the firm has adopted or intends to adopt.
Financial Planning is the process of estimating the capital required and
determining its competition. It is the process of framing financial policies in relation
to procurement, investment and administration of funds of an enterprise.
Objectives of Financial Planning:-
Financial Planning has got many objectives to look forward to:

a. Determining capital requirements- This will depend upon factors like cost of
current and fixed assets, promotional expenses and long- range planning.
Capital requirements have to be looked with both aspects: short- term and
long- term requirements.
b. Determining capital structure- The capital structure is the composition of
capital, i.e., the relative kind and proportion of capital required in the
business. This includes decisions of debt- equity ratio- both short-term and
long- term.
c. Framing financial policies with regards to cash control, lending, borrowings,
etc.
d. A finance manager ensures that the scarce financial resources are maximally
utilized in the best possible manner at least cost in order to get maximum
returns on investment.

Needs:-

1. To provide sufficient cash.

2. Maintain liquidity.
3. To indicate the points of time when funds are needed and how much.
4. To indicate surplus to plan for expansion or external investment.
5. To increase confidence in the minds of investors.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures,
programmes and budgets regarding the financial activities of a concern. This ensures
effective and adequate financial and investment policies. The importance can be
outlined as-
1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between outflow
and inflow of funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in
companies which exercise financial planning.
4. Financial Planning helps in making growth and expansion programmes which
helps in long-run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing market
trends which can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a
hindrance to growth of the company. This helps in ensuring stability an d
profitability in concern.
 Line Item Budget

Definition:- A budget in which the individual financial statement items are grouped
by cost centres or departments. It shows the comparison between the financial data
for the past accounting or budgeting periods and estimated figures for the current or
a future period.

Advantages:- Line-item budgeting offers decision-makers an incremental, or step-by-

step, approach to budgeting. Budget makers can use a line-item budget to make
specific decisions, such as changing funding levels of programs being phased out to
provide money for new programs or making cuts to budgeted expenses because of
changes in organizational policies.

Easy to Make:- From a technical standpoint, it's easy to create a line-item budget.
With a piece of lined paper and a pencil, you can list all expenses, giving each item its
own line and specific rupee amount. This is why many organizations, especially very
small businesses, choose line-item budgeting. It is straightforward and does not
require linking budgeting to advanced accounting, such as activity-based costing, or
management practices, such as performance-based budgeting.

Micro-Level Expense Control:- Line-item budgets offer advantages for managers

seeking to control expenses at the operational level. For example, the executive in a
human resources department might want to trim expenses on applicant drug testing.
So he can give employees in HR a reduced line item for testing for the next year to
reinforce a new policy that only an applicant who has accepted a job offer and
agreed to a start date can take a drug test at the employer's expense.

Disadvantages:-

1. Lack of Analysis:- A potential disadvantage of line-item budgeting is that it

may create only a superficial analysis of expenditures. Budget preparers may simply
accept the status quo, using the thought process that since this budgeting method
worked well in previous fiscal years, it should continue to be effective for the coming
year. This may eliminate the opportunity to take an in-depth look at each line item to
determine if the proposed expenditure is truly necessary or if funds could be
allocated more efficiently.
2. Spending Rush:- A line-item budget may result in your departments
unnecessarily spending unused funds near the end of the fiscal year. Employing the
concept of "use it or lose it," department heads may feel that if they have too much
money left over at the end of the year, their budget could be slashed in the
upcoming year. It's possible that the excess funds could have been put to better use
in other areas of the company.
 Programme Budget

Definition:- A budget with programme descriptions instead of expense line items.

Origin:- Programme budgeting, developed by U.S. president Lyndon Johnson, is

the budgeting system that, contrary to conventional budgeting, describes and gives
the detailed costs of every activity or programme that is to be carried out in a
budget.
Objectives, outputs and expected results are described fully as are their necessary
resource costs, for example, raw materials, equipment and staff. The sum of all
activities or programmes constitute the Programme Budget. Thus, when looking at a
Programme Budget, one can easily find out what precisely will be carried out, at
what cost and with what expected results in considerable detail.
History:- This programme budgeting system was first introduced by the United
States Secretary of Defense Robert S. McNamara in the Pentagon in the 1960s.
McNamara allegedly wanted to control the many costly weapons development
programmes that were plagued by ever-increasing costs and delays. He called this
new system the Planning, Programming and Budgeting System (PPBS). The system
was taught at the John F. Kennedy School of Government of Harvard University but it
evoked little interest except from critics.
This new approach introduced an unprecedented transparency into management
operations together with a concomitant precise pinpointing of managers'
responsibilities, and so was widely resisted throughout the entire public
sector.[citation needed] However, in the eighties, the UN Inspectorate General
picked up the idea and recommended that the United Nations use it to improve its
performance. A few institutions tried half-heartedly but only the International
Atomic Energy Agency (IAEA) went about it seriously and introduced a complete
programme budgeting system that is still in place today.
However, over the years, strong opposition by managers and lack of interest by top
management as well as member States have taken the sting out of the system and
reduced its transparency. A few years later, the Government of New Zealand was the
first to introduce it with great success: within a few years it had solved an
intractable stagflation problem. More recently, the United Kingdom government
discovered it and now, one government after another is following suit. The need to
improve public sector and government performance has worked wonders for
programme budgeting.
The Disadvantages of a Programme Budget:- A programme budget is often used for
ongoing services offered by a company or municipality. The primary difference
between a programme budget and most other budget formats is that the
programme budget is focused on the requirements to get the job done and not on
making sure there are the financial resources to do so. The programme budget is
developed to determine if the project can be financed or if it should be discontinued.
There are several disadvantages to a programme budget that you should be aware of
before using one.
Adjustment Period:- Because a program budget is developed without regard to
available financial resources, it can take several years before you find ways to
properly fund a program budget. Program budgets are developed with specific goals
in mind, and the finances outlined in a program budget are difficult to alter. It can
take a company or municipality years to make sure that there is sufficient funding
available to maintain a program budget. During that adjustment period, other
budget items may suffer, and there will be difficulties in creating a balanced budget.

Overlapping:- Organisations that develop several program budgets may wind up

overlapping their efforts and causing budget planning issues. For example, the
streets department may include temporary street repair in its program budget, and
the city summer employment program may also include street repair for its
temporary seasonal employees. The overlapping of services causes an inefficiency in
the budgeting process that can lead to double-spending.

Over Budgeting:- A program budget lays out the costs to run a program and what
goes into those costs. When a program budget is approved, it is done so with the
intention of providing services to a group. If the budget is incorrect, it cannot be
adjusted. For example, if the program budget estimate for city snow removal is low
for a particular year, then the budget must be supplemented by other funds. Those
other funds may mean the city has to borrow money or shut down programs that are
not covered under a program budget. In this way, bad planning in a program budget
can have a wide-sweeping effect on the financial health of the organization.

Evaluation:- A program budget that supplies a critical service to the community can
be difficult to analyze. It can be challenging to try and place concrete performance
measures on services that have multiple layers of administration. For example, the
summer reading program in a school system seems to be a required service, but it
can be difficult to gauge the effectiveness of program budget elements, such as the
number of teachers, the number of books available and the number of hours the
program is available to the students.
 Planning - Programming - Budgeting System (PPBS)

Origins of PPB

The rudiments of PPB first appeared in the private sector in1924 at General
Motors Corporation. It was first applied in the public sector during World War II by
the War Production Board to develop a Controlled Materials Plan. During the 1950s
the RAND Corporation, under contract to the United States Air Force, refined and
developed the PPB concepts in the form of systems abalysis.

PPB Definitions and Descriptions

PPB has been defined and described in various ways. A fundamental definition
involves definitions of the components of planning, Programming, and budgeting.
Planning refers to the production of the range of meaningful potentials for selection
of courses of action through a systematic consideration of alternatives. Programming
is defined as the more specific determination of the manpower, material, and
facilities necessary for accomplishing a program. A program represents a
combination of activities designed to fulfil a particular objective. Budgeting is a
process of systematically relating expenditure of funds to accomplishment of
planned objectives.

According to Leonard Merewitz and Stephen Sosnick, PPB has five distinguishing
features: (1) program accounting, (2) multiyear costing, (3) detailed description,
measurement of activities, (4) zero-base budgeting, and (5) quantitative evaluation
of alternatives. Program accounting involves organising information by purpose or
task. It differs from financial accounting, which is oriented toward object or class of
expenditure. Multiyear costing involves the building of budgetary requests for not
just the approval year but also years into the future. This may include the life cycle of
the proposal. Detailed description and measurement of activities must cover six
program components: objectives, targets, choices made, alternatives considered,
outputs, and effectiveness. Zero-based budgeting involves defense and review of the
total expenditure proposed for a program, instead of incremental changes from the
previous year or base appropriation. Quantitative evaluation of alternatives involves
the use of special studies, which may take the form of cost-benefit analysis, among
others. Central to cost-benefit analysis is primacy of the quantitative factor.
 Elements

A description of the Planning-Programming-Budgeting System (PPBS), a management

tool to provide a better analytical basis for decision making and for putting such
decisions into operation. A PPBS is constituted, basically, of five elements: (1) a
program structure a classification of the courses of action open to an organisation
for attaining its objectives, (2) an approved program document that includes precise,
quantitative data on needs, resource inputs, and program outputs extending a
number of years into the future, (3) a decision making process that establishes the
functions, rules, and timetables for the actions required by teh PPBS, (4) an analysis
process for measuring effectiveness and for weighing alternatives, and (5) an
information system that supplies the data required to implement the system.
 Planning, Programming and Budgeting system Models (PPBS)

Summary: Planning, programming and budgeting system (PPBS) is a very important

and effective way to need the some objective. I have tried to present this model for
the learner/the persons who are related with the Planning, programming and
budgeting system (PPBS) through an easy way. My goal is to make these persons to
understand the value in the way of implantation of PPBS

Planning, Programming and Budgeting System (PPBS) applies to public services

organizations such as local authorities and hospitals, these organisations will run
short-term departmentally based budgeting system to control expenditure within a
financial year.

The PPBS is a formal, systematic structure for making decisions on policy, strategy,
and the development of forces and capabilities to accomplish anticipated missions.
The PPBS is a cyclic process containing three distinct but interrelated phases

Introduction: In the 1980s and early 1990s, the PPBS model was in favor in many
institutions of higher education, it is based on an intensive planning process that
defines all activities within the unit and provides an analysis of the cost effectiveness
of those activities.

PPBS are about how resources are going to be achieve the various objectives of the
organization for example, the care of the elderly, once the objectives have been
established programs are identified to meet those objectives and the cost/benefits of
alternative programs are assessed.

Planning, programming and budgeting system (PPBS) is a middle type of budget

between the traditional character and object budget, on the one hand, and the
performance budget on the other. The major contribution of PPBS lies in the
planning process, i.e- the process of making program policy decisions that lead to a
specific budget and specific multi-year plans.

The preferred programs form in effect a long term plan to be pursued over a number
of years; each program budget will disclose the cost of providing a service to satisfy
an objective.

Broken down into time periods, it therefore informs management in a manner

allowing them to make judgments about such effectiveness that would not be
possible it programs were fragmented in the departmental of budget
concerned.
Planning: which produces the Defense Planning Guidance
(DPG); programming: which produces approved Program Objective Memorandums
(POM) for the Military Department and Defense Agencies; and budgeting: budget is
a budget in which expenditures are based primarily on programs of work and
secondarily on character and object.

Conclusion: Planning, programming and budgeting system (PPBS) is a budgeting

system that Makes sense in theory is very difficult to implement and manage higher
education selling
 Types of Budget

Add-on budget is the budget based on the previous years budgets adjusted for
current information. For example, add-on budgets can be adjusted for new levels of
inflation, employee wage rates, or new requirements.
Continuous (rolling) budget is the budget revised on a regular basis. As the period
ends, a new budget period is added. For example, the budget can be regularly
extended for another month (or quarter) at the end of each month (or quarter). As
the result, continuous budgets are based on the most recent information and ensure
proper planning and performance. The drawback of continuous budgets is that they
require continuous planning.
Incremental budget is the budget adjusted for incremental increases in terms of
rupees or percentages. Historically incremental budgeting has been the most
common budgeting method. It is based on the priors year expenditures. In
incremental budgeting, each budget line receives the same increment (e.g., 10%
percent) increase or decrease for the next budget cycle. Projects can also be
segregated in multiple increments, and each increment is then allocated labour and
other resources to complete the project. Incremental budget are easy to prepare.
However, they have multiple drawbacks. Incremental budgets are based on
aggregate data. They might not match companys targets. Incremental budgets can
potentially cause over- or underfunding of certain areas.
Strategic budget is the budget adjusted for strategic planning. Strategic budgets are
used under conditions of uncertainty or instability. Strategic budgeting is the mixture
between the top-down approach when top management allocates resources and
the bottom-up approach when lower management participates in resource
allocation.
Stretch budget is the budget based on sales and marketing forecasts that are higher
than estimates. Stretch budgets are not used for estimating expenditures; expenses
are estimated at the budget target. Stretch budgets can be too subjective or
complex.
Supplemental budget is the budget for an area that is not included in the main
(base) budget.
Target budget is the budget that matches major expenditures to companys goals.
 Leverage

Definitions:-
1. In the words of J.C. Vanhorne, it may be define as the employment of assets or
funds for which the firm pays a fixed cost.
2. It may also defined has the relative change in profits due to change in sales.

Meaning:- In finance, leverage (sometimes referred to as gearing in the United

Kingdom and Australia) is a general term for any technique to multiply gains and
losses. Most often it involves buying more of an asset by using borrowed funds, with
the belief that the income from the asset will be more than the cost of borrowing.
Almost always this involves the risk that borrowing costs will be larger than the
income from the asset causing a reduction in profits.

Types:- Leverage may be classified as (i) Financial Leverage

(ii) Operating Leverage

Financial leverage

Financial leverage refers to the use of debt to acquire additional assets.

Financial leverage is also known as trading on equity.

Operating Leverage

A measurement of the degree to which a firm or project incurs a combination

of fixed and variable costs.

1. A business that makes few sales, with each sale providing a very high gross
margin, is said to be highly leveraged. A business that makes many sales, with each
sale contributing a very slight margin, is said to be less leveraged. As the volume of
sales in a business increases, each new sale contributes less to fixed costs and more
to profitability.

2. A business that has a higher proportion of fixed costs and a lower proportion
of variable costs is said to have used more operating leverage. Those businesses with
lower fixed costs and higher variable costs are said to employ less operating
leverage.

Leverage Ratio

1. Any ratio used to calculate the financial leverage of a company to get an

idea of the company's methods of financing or to measure its ability to meet financial
obligations. There are several different ratios, but the main factors looked at include
debt, equity, assets and interest expenses.

2. A ratio used to measure a company's mix of operating costs, giving an idea of how
changes in output will affect operating income. Fixed and variable costs are the two
types of operating costs; depending on the company and the industry, the mix will
differ.
 Operational Research

Origin:- As a formal discipline, operational research originated in the efforts of

military planners during World War II. In the decades after the war, the techniques
began to be applied more widely to problems in business, industry and society. Since
that time, operational research has expanded into a field widely used in industries
ranging from petrochemicals to airlines, finance, logistics, and government, moving
to a focus on the development of mathematical models that can be used to analyse
and optimize complex systems, and has become an area of active academic and
industrial research
Meaning:- Operational Research (OR) is the use of advanced analytical techniques to
improve decision making. It is sometimes known as operations research,
management science or industrial engineering, decision science. It is often
considered to be a sub-field of mathematics

Definition:- Operation research can be defined as the application of modern science

to complex managerial problems so as to help the management in determination
policies and actions
It is a tool of planning rather than control.

Need:- Employing techniques from other mathematical sciences, such

as mathematical modelling, statistical analysis, and mathematical optimization,
operations research arrives at optimal or near-optimal solutions to complex decision-
making problems. Because of its emphasis on human-technology interaction and
because of its focus on practical applications, operations research has overlap with
other disciplines, notably industrial engineering and operations management, and
draws on psychology and organization science. Operations research is often
concerned with determining the maximum (of profit, performance, or yield) or
minimum (of loss, risk, or cost) of some real-world objective.

Methods and Techniques:-

Computer simulation: allowing you to try out approaches and test ideas for
improvement.
Optimisation: narrowing your choices to the very best when there are so many
feasible options that comparing them one by one is difficult.
 Probability and statistics: helping you measure risk, mine data to find valuable
connections and insights in business analytics, test conclusions, and make
reliable forecasts.
Problem structuring: helpful when complex decisions are needed in situations
with many stakeholders and competing interests.

Problems Addressed:-

Critical path analysis or project planning: identifying those processes in a complex

project which affect the overall duration of the project
Floor planning: designing the layout of equipment in a factory or components on
a computer chip to reduce manufacturing time (therefore reducing cost)
Network optimization: for instance, setup of telecommunications networks to
maintain quality of service during outages
Allocation problems
Facility location
Assignment Problems:
Assignment problem
Generalized assignment problem
Quadratic assignment problem
Weapon target assignment problem
Bayesian search theory : looking for a target
Optimal search
Routing, such as determining the routes of buses so that as few buses are needed
as possible
Supply chain management: managing the flow of raw materials and products
based on uncertain demand for the finished products
Efficient messaging and customer response tactics
Automation: automating or integrating robotic systems in human-driven
operations processes
Globalization: globalizing operations processes in order to take advantage of
cheaper materials, labour, land or other productivity inputs
Transportation: managing freight transportation and delivery systems
(Examples: LTL Shipping, intermodal freight transport)
Scheduling:
Personnel staffing
Manufacturing steps
Project tasks
Network data traffic: these are known as queuing models or queuing systems.
 Sports events and their television coverage
Blending of raw materials in oil refineries
Determining optimal prices, in many retail and B2B settings, within the disciplines
of pricing science
Operational research is also used extensively in government where evidence-
based policy is used.
 JUST-IN-TIME
Origin:- The basic elements of JIT were developed by Toyota in the 1950's, and
became known as the Toyota Production System (TPS). JIT was well-established in
many Japanese factories by the early 1970's. JIT began to be adopted in the U.S. in
the 1980's (General Electric was an early adopter), and the JIT/lean concepts are now
widely accepted and used.

Definition:- An inventory strategy companies to increase efficiency and decrease

waste in the production process, thereby reducing inventory costs. This method
requires that producers are able to accurately forecast demand.

Just-in-time (JIT) is defined in the APICS dictionary as a philosophy of manufacturing

based on planned elimination of all waste and on continuous improvement of
productivity. It also has been described as an approach with the objective of
producing the right part in the right place at the right time (in other words, just in
time). Waste results from any activity that adds cost without adding value, such as
the unnecessary moving of materials, the accumulation of excess inventory, or the
use of faulty production methods that create products requiring subsequent
rework. JIT (also known as lean production or stockless production) should improve
profits and return on investment by reducing inventory levels (increasing the
inventory turnover rate), reducing variability, improving product quality, reducing
production and delivery lead times, and reducing other costs (such as those
associated with machine setup and equipment breakdown). In a JIT system,
underutilized (excess) capacity is used instead of buffer inventories to hedge against
problems that may arise.

JIT applies primarily to repetitive manufacturing processes in which the same

products and components are produced over and over again. The general idea is to
establish flow processes (even when the facility uses a jobbing or batch process
layout) by linking work centres so that there is an even, balanced flow of materials
throughout the entire production process, similar to that found in an assembly
line. To accomplish this, an attempt is made to reach the goals of driving all
inventory buffers toward zero and achieving the ideal lot size of one unit.

Meaning:- Just-in-time manufacturing was a concept introduced to the United

States by the Ford motor company. It works on a demand-pull basis, contrary to
hitherto used techniques, which worked on a production-push basis.

To elaborate further, under just-in-time manufacturing (colloquially referred to as JIT

production systems), actual orders dictate what should be manufactured, so that the
exact quantity is produced at the exact time that is required.
Just-in-time manufacturing goes hand in hand with concepts such as Kanban,
continuous improvement and total quality management (TQM).

Just-in-time production requires intricate planning in terms of procurement policies

and the manufacturing process if its implementation is to be a success.

Highly advanced technological support systems provide the necessary back-up that
Just-in-time manufacturing demands with production scheduling software and
electronic data interchange being the most sought after.

Advantages:-

Following are the advantages of Adopting Just-In-Time Manufacturing Systems:

Just-in-time manufacturing keeps stock holding costs to a bare minimum. The release
of storage space results in better utilization of space and thereby bears a favourable
impact on the rent paid and on any insurance premiums that would otherwise need
to be made.

Just-in-time manufacturing eliminates waste, as out-of-date or expired products; do

not enter into this equation at all.

As under this technique, only essential stocks are obtained, less working capital is
required to finance procurement. Here, a minimum re-order level is set, and only
once that mark is reached, fresh stocks are ordered making this a boon to inventory
management too.

Due to the aforementioned low level of stocks held, the organizations return on
investment (referred to as ROI, in management parlance) would generally be high.

As just-in-time production works on a demand-pull basis, all goods made would be

sold, and thus it incorporates changes in demand with surprising ease. This makes it
especially appealing today, where the market demand is volatile and somewhat
unpredictable.

Just-in-time manufacturing encourages the 'right first time' concept, so that

inspection costs and cost of rework is minimized.

High quality products and greater efficiency can be derived from following a just-in-
time production system.

Close relationships are fostered along the production chain under a just-in-time
manufacturing system.

Constant communication with the customer results in high customer satisfaction.

Overproduction is eliminated when just-in-time manufacturing is adopted.

Disadvantages:-

Following are the disadvantages of Adopting Just-In-Time Manufacturing Systems:

Just-in-time manufacturing provides zero tolerance for mistakes, as it makes re-

working very difficult in practice, as inventory is kept to a bare minimum.

There is a high reliance on suppliers, whose performance is generally outside the

purview of the manufacturer.

Due to there being no buffers for delays, production downtime and line idling can
occur which would bear a detrimental effect on finances and on the equilibrium of
the production process.

The organization would not be able to meet an unexpected increase in orders due to
the fact that there are no excess finish goods.

Transaction costs would be relatively high as frequent transactions would be made.

Just-in-time manufacturing may have certain detrimental effects on the environment

due to the frequent deliveries that would result in increased use of transportation,
which in turn would consume more fossil fuels.

Precautions:-
Following are the things to remember When Implementing a Just-In-Time
Manufacturing System:

Management buy-in and support at all levels of the organization are required; if a
just-in-time manufacturing system is to be successfully adopted.

Adequate resources should be allocated, so as to obtain technologically advanced

software that is generally required if a just-in-time system is to be a success.

Building a close, trusting relationship with reputed and time-tested suppliers will
minimize unexpected delays in the receipt of inventory.

Just-in-time manufacturing cannot be adopted overnight. It requires commitment in

terms of time and adjustments to corporate culture would be required, as it is starkly
different to traditional production processes.

The design flow process needs to be redesigned and layouts need to be re-
formatted, so as to incorporate just-in-time manufacturing.

Lot sizes need to be minimized.

Workstation capacity should be balanced whenever possible.

Preventive maintenance should be carried out, so as to minimize machine
breakdowns.

Set-up times should be reduced wherever possible.

Quality enhancement programs should be adopted, so that total quality control

practices can be adopted.

Reduction in lead times and frequent deliveries should be incorporated.

Motion waste should be minimized, so the incorporation of conveyor belts might

prove to be a good idea when implementing a just-in-time manufacturing system.

Conclusion:-
Just-in-time manufacturing is a philosophy that has been successfully implemented in
many manufacturing organizations.

It is an optimal system that reduces inventory whilst being increasingly responsive to

customer needs, this is not to say that it is not without its pitfalls.

However, these disadvantages can be overcome with a little forethought and a lot of
commitment at all levels of the organization.