MANAGEMENT ACCOUNTING TERM PAPER

MGT225
Topic: BUDGETARY CONTROL ANALYSIS OF
J. K TYRE LTD
Submitted to: Dr. V K Sasekala

SUBMITTED BY: Amal Alex Kuruvilla

20192MBA0481
MBA-SECTION: I

PRESIDENCY UNIVERSITY
INTRODUCTION

ABOUT THE COMPANY

Part of the JK Organization, JK Tyre & Industries Ltd is a leading tyre manufacturer in
India and amongst the top 25 manufacturers in the world with a wide range of
products catering to diverse business segments in the automobile industry. JK Tyre is
the only tyre manufacturer in India to be included in the list of Superbrand in 2017,
the sixth time the honour has been conferred upon the company
JK Tyre has global presence in 100 countries across six continents, backed by
production support from 12 plants - 9 in India and 3 in Mexico. Currently, the
capacity across all its plants is about 35 million tyres per annum. In April 2016, JK
Tyre acquired Cavendish India Limited from Birla Tyres. While acquisition added
three modern plants to its portfolio taking the total count to 12, it helped the tyre
major foray into the two/three wheeler segment as well. In 2018, the company
inaugurated its state-of-the-art Raghupati Singhania Centre of Excellence (RPSCOE)
at Mysore.

Vision
 To be amongst the most trusted companies with a global tyre brand

 Mission
Be a Customer Obsessed Company - Customer First 24x7
Most profitable tyre company in India - deliver enhanced value to all
stakeholders
 No. 1 tyre brand in India and amongst leading tyre brands globally
 Lead with premium products through technological edge
 Enhance global presence through acquisitions/JV/strategic partnerships
 Be a socially responsible corporate citizen
 Be a learning & innovative organization with a motivated team
BUDGETARY CONTROL

Budgetary control is the process by which budgets are prepared for the future period and are
compared with the actual performance for finding out variances, if any. The comparison of
budgeted figures with actual figures will help the management to find out variances and take
corrective actions without any delay.
OBJECTIVES OF BUDGETARY CONTROL

The main objectives of budgetary control are given below:

1. Defining the objectives of the enterprise.

2. Providing plans for achieving the objectives so defined.

3. Coordinating the activities of various departments.

4. Operating various departments and cost centres economically and efficiently.

5. Increasing the profitability by eliminating waste.

6. Centralizing the control system.

7. Correcting variances from sit standards.

8. Fixing the responsibility of various individuals in the enterprise.

ADVANTAGES OF BUDGETARY CONTROL

Budgetary control has become an important tool of an organization to control costs and to
maximize profits. Some of the advantages of budgetary control are:

 It defines the goals, plans and policies of the enterprise. If there is no definite aim then
the efforts will be wasted in achieving some other aims.
 Budgetary control fixes targets. Each and every department is forced to work efficiently
to reach the target. Thus, it is an effective method of controlling the activities of various
departments of a business unit.
 It secures better co-ordination among various departments.
 In case the performance is below expectation, budgetary control helps the management in
finding up the responsibility.
 It helps in reducing the cost of production by eliminating the wasteful expenditure.
 By promoting cost consciousness among the employees, budgetary control brings in
efficiency and economy.
  Budgetary control facilitates centralized control with decentralized activity.
 As everything is planned and provided in advance, it helps in smooth running of business
enterprise.
 It tells the management as to where action is required for solving problems without delay.

DISADVANTAGES OR LIMITATIONS OF BUDGETARY CONTROL

The following are the limitations of budgetary control:

 It is really difficult to prepare the budgets accurately under inflationary conditions.

 Budget involves a heavy expenditure which small business concerns cannot afford.
 Budgets are prepared for the future period which is always uncertain. In future,
conditions may change which will upset the budgets. Thus, future uncertainties minimize
the utility of budgetary control system.
 Budgetary control is only a management tool. It cannot replace management in decision-
making because it is not a substitute for management.
 The success of budgetary control depends upon the support of the top management. If
there is lack of support from top management, then this will fail.

TYPES OF BUDGETARY CONTROL

(A) Classification According to Time:

1. Long Term Budget:

The budgets are prepared to depict long term planning of the business. The period of long term
budgets varies between five to ten years. The long term planning is done by the top level
management; it is not generally known to lower levels of management. Long time budgets are
prepared for some sectors of the concern such as capital expenditure, research and development,
long term finances, etc. These budgets are useful for those industries where gestation period is
long i.e., machinery, electricity, engineering, etc.

2. Short-Term Budget:
These budgets are generally for one or two years and are in the form of monetary terms. The
consumer’s goods industries like sugar, cotton, textile, etc. use short-term budgets.

3. Current Budget:

The period of current budgets is generally of months and weeks. These budgets relate to the
current activities of the business. According to I.C.W.A. London, “Current budget is a budget
which is established for use over a short period of time and is related to current conditions.”

(B) Classification on the Basis of Functions:

1. Operating Budget:

These budgets relate to the different activities or operations of a firm. The number of such
budgets depends upon the size and nature of business.

The commonly used operating budgets are:

(a) Sales Budget

(b) Production Budget

(c) Production Cost Budget

(d) Purchase Budget

(e) Raw Material Budget

(f) Labour Budget

(g) Plant Utilization Budget

(h) Manufacturing Expenses or Works Overhead Budget

(i) Administrative and Selling Expenses, Budget, etc.

The operating budget for a firm may be constructed in terms of programmes or responsibility
areas, and hence may consist of:

(i) Programme Budget, and

(ii) Responsibility Budget.

(i) Programme Budget:

It consists of expected revenues and costs of various products or projects that are termed as the
major programmes of the firm. Such a budget can be prepared for each product line or project
showing revenues, costs and the relative profitability of the various programmes. Programme
budgets are, thus, useful in locating areas where efforts may be required to reduce costs and
increase revenues. They are also useful in determining imbalances and inadequacies in
programmes so that corrective action may be taken in future.

(ii) Responsibility Budget:

When the operating budget of a firm is constructed in terms of responsibility areas it is called the
responsibility budget. Such a budget shows the plan in terms of persons responsible for
achieving them. It is used by the management as a control device to evaluate the performance of
executives who are in charge of various cost centres. Their performance is compared to the
targets (budgets), set for them and proper action is taken for adverse results, if any. The kinds of
responsibility areas depend upon the size and nature of business activities and the organizational
structure.

However, responsibility areas may be classified under three broad categories:

(a) Cost/Expense Centre

(b) Profit Centre

(c) Investment Centre.

We have discussed the concept and technique of responsibility budgeting in detail under a
separate chapter on ‘Responsibility Accounting’ latter in this book.

2. Financial Budget:

Financial budgets are concerned with cash receipts and disbursements, working capital, capital
expenditure, financial position and results of business operations.
The commonly used financial budgets are:

(a) Cash Budget

(b) Working Capital Budget

(c) Capital Expenditure Budget

(d) Income Statement Budget

(e) Statement of Retained Earnings Budget

(f) Budgeted Balance Sheet or Position Statement Budget.

3. Master Budget:

Various functional budgets are integrated into master budget. This budget is prepared by the
ultimate integration of separate functional budgets. According to I.C.W.A. London, “The Master
Budget is the summary budget incorporating its functional budgets”. Master budget is prepared
by the budget officer and it remains with the top level management. This budget is used to co-
ordinate the activities of various functional departments and also to help as a control device.

(C) Classification on the Basis of Flexibility:

1. Fixed Budget:

The fixed budgets are prepared for a given level of activity, the budget is prepared before the
beginning of the financial year. If the financial year starts in January then the budget will be
prepared a month or two earlier, i.e., November or December. The changes in expenditure
arising out of the anticipated changes will not be adjusted in the budget.

2. Flexible Budget:

A flexible budget consists of a series of budgets for different level of activity. It, therefore, varies
with the level of activity attained. A flexible budget is prepared after taking into consideration
unforeseen changes in the conditions of the business. A flexible budget is defined as a budget
which by recognizing the difference between fixed, semi-fixed and variable cost is designed to
change in relation to the level of activity.
ZERO BASED BUDGETARY CONTROL

Zero based budgets allows top-level strategic goals to be implemented into the budgeting process
by tying them to specific functional areas of the organization, where costs can be first grouped
and then measured against previous results and current expectations.

Because of its detail-oriented nature, zero-based budgeting may be a rolling process done over
several years, with a few functional areas reviewed at a time by managers or group leaders. Zero-
based budgeting can help lower costs by avoiding blanket increases or decreases to a prior
period's budget. It is, however, a time-consuming process that takes much longer than traditional,
cost-based budgeting. The practice also favors areas that achieve direct revenues or production,
as their contributions are more easily justifiable than in departments such as client service and
research and development.

BUDGETARY CONTROL IMPORTANCE

A budgetary control is a mechanism that helps senior managers ensure that spending limits are
adequate. This control is important because spending excesses have an unfavorable impact on
corporate profits.

 Budgetary Control and Income Statement

A budgetary control helps corporate leaders monitor revenue and expense levels in operating
activities. Revenue is income through operations.

 Budgetary Control and Cash Flows

A budgetary control also ensures that corporate cash outflows (payments) and inflows (receipts)
remain at adequate levels. A statement of cash flows indicates cash flows from operating
activities, investing activities and financing activities.
 CONCLUSION

A business budget is a detailed plan covering phases of operations for a definite future period. It
is lying down of policies, plans, objectives and goals set in advance by the top management for
the enterprise as a whole and for each segment.

The budgetary control system should have continuous support of top management which can
ensure its all-round acceptance. The accounting system should provide the required information
in time. Efficient system has to be devised to reduce the differences between the budgets and
actual performance. The targets set should be realistic so that they are achievable and budgets
should not frustrate the workers by fixing unrealistic targets. Budgets are to be set for all the
departments so that their participation in implementation will be effective.