CHAPTER - I

1.1 INTRODUCTION ABOUT THE STUDY ON BUDGET AND

BUDGETARY CONTROL

INTRODUCTION

A budget is the pre-determined the future events. The word budget is derived
from a French term “Bougetfe” which denoted a Leather pouch in which finds are
appropriates for meeting anticipates Expanses.

The same meaning applies to the business management. A budget is a

numerical statement expressing the plans. Polices and goals of the enterprise for a
definite period in the future. It is a plan laying down the target to be achieved with in
specified period. It is a final and approved share of a forecast when forecasts are
approved by the management as a tentative plan for the future they become budget.

DEFINITION

“Budget us an estimate of future needs arranged according to an orderly basis,

covering, some or all of the activities of an enterprise for definite period of time”

- George R.Terry.

“A Budget is a comprehensive and Co-iodinated plan, Expressed in financial

terms, for the Operations and resources of an enterprise for some specific period in the
future”

A Budget is a predetermined statement of management policy during a given

period of which provides a standard for comparison with the results actually archived.

- Brown and Howard

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BASIC ELEMENTS OF A BUDGET

 Budget is a comprehensive plan of what the enter pries endeavors to achieve.

 It is a statement in terms or quantity or both.

 It is a prepared for a definite future period.

 It is prepared period to the defined period.

 It Provides yardsticks and measures for the purpose of comparison

 It is prepared in Advance and refers to the future course of action.

PURPOSE OF A BUDGET

 It directs the attention of all concerned to the afffainment of a common goal

 It leads to the disclosure of organizational weakness. The budgets are

Compare with actual performance, and variances. It any investigations this

Step helps in taking corrective and remedial measures

 It aims at careful control over the performance and cost of every function.

 It co ordinates efforts of all department in order to achieve an integrated order to

Achieve an integrated goal. Budget grows from bottom and are controlled from

Top level

CHARACTERISTICS

ESTABLISHMENT

Budget is prepared for each department and then the plans and objectives are
presented before the management.

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CONTINUOUS COMPARISON

The essential feature of budgetary control is conduct continuous comparison of

Actual performance with budgeted figure, revealing the variations.

Revision budgets are revised. It necessary according to changed conditions.

ESSENTIALS OF A SUCCESSFUL BUDGETARY CONTROL

 The budgetary control system should have full support of top management

 There should be well – planned organizational set – up, with responsibility and

Authority clearly demarked.

 The accounting system should provide accurate and timely information.

 Budgets have no meaning unless they lead to control action as a consequence of

Feedback provided.

 Staff should be strongly and properly motivated towards the system.

 The budget should lay down the target, which are realistic and attainable.

 Budget should actually aim as a co-coordinating device rather than control device.

CLASSIFICATION OF BUDGETS

BUDGET

On the Basis of time On the basis of flexibility On the basis of function

• Long term * Fixed * Sales
• Short term * Flexible * Production
• Current * Material
* Labor
* Overheads

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 * plant utilization

* Cash
* Capital
* Expenditure

1.2 INDUSTRY PROFILE

A mainstream cooperative comprises a legal entity owned and

democratically controlled by its members, with no passive shareholders, unless they hold
non-voting shares. It thus combines the equal control characteristic of many partnerships
with the legal personality conferred on corporations.

In the United States most cooperatives are organized as limited liability

companies (LLCs) but other legal entities may also be used. Co operative may or may not
pay dividends. For Co-operatives failing in the latter category, any surplus may be
returned to members by way of a rebate or bonus on their activity width the cooperative
or a dividend on their shareholding in the cooperative.

In the United Kingdom the traditional corporate form taken by

cooperatives is the bonafide co-operative’ under the Industrial and Provident Societies
Acts. Since the 1980’s,however, many have incorporated under the Companies acts,
limited either by shares or ‘common ownership’ and have a zero or nominal share capital,
along with a clause stipulating altruistic dissolution. This means that the cooperative
cannot be wound up and its assets distributed for personal profit (see: asset stripping).
The facility to legally lock a cooperative’s assets in this way was brought into force in
2004.

In the European Union, the European Co-operative Statute provides a corporate

form for cooperatives with individual or corporate members in at least two of the EU
member’s states.

In the European Union and in large regions of America, cooperatives, with

associations, foundations and mutual funds, are considered parts of the Social economy
or Third Sector.

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 A Co-operative (also cooperative or co-operative or co-op) has been defined in
the international Co-operative Alliance (ICA) Statement on the Co-operative Identity as

“an autonomous association of persons united voluntarily to meet their common

economic, social, and cultural needs and aspirations through a jointly-owned and

Democratically-controlled enterprise.” They “are based on the values of self-help, self-

responsibility, democracy, equality, equity and solidarity.

In the tradition of their founders, co-operative members believe in the

ethical values of honesty, openness, social responsibility and caring for others. Such
enterprises are the focus of study in the field of Co-operative.

CO-OPERATIVE IDENTITY

Main article: Statement on the Co-operative Identity

Such legal entities have a range of unique social characteristics.

Membership is open, meaning that anyone who satisfies certain non-discriminatory
conditions may join, Unlike a union, in some jurisdictions a cooperative may assign
different numbers of votes to different members. However most cooperatives are
governed on a strict “one member, one vote”basis, to avoid the concentration of control
in an elite. Economic benefits are distributed proportionally according to each member’s
level of economic interest in the cooperative, for instance by a dividend on sales or
purchases. Co-operative may be generally classified as either consumer or producer
cooperatives, depending largely on the mutual interest (see mutual organizations) that
there membership shares.

POPULARITY AND PHILOSOPHY

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 Worldwide, some 800 million people are members of cooperatives, and it is
estimated that cooperatives employ some 100 million people.

Co-operatives have been presented as an ideal organizational form for proponents of a

number of socio-political philosophies, including Co-operative Individualism and co-
operative Federalism; such literature often cities the achievement of a Co-operative
Commonwealth as an ultimate objective. The cooperative movement often has links and
association with Green politics or Socialist Politics, with socially responsible investing,
and with the social enterprise movement.
Alternatively, the term may be used loosely to signify its members ‘ideology.

HISTORY OF THE CO-OPERATIVE MOVEMENT

Main article: History of the co-operative movement
Robert Owen (1771-1858) fathered the cooperative movement. A Welshmen
who made his fortune in the cotton trade, Owen believed in putting his workers in a good
environment with access to education for themselves and their children.

These ideas were put into effect successfully in the cotton mills of New Lanark,
Scotland. It was here that the first co-operative store was opened. Spurred on by the
success of this, he had the idea of forming “Villages of co-operation” where workers
would drag themselves out of poverty by growing their own food, making their own
clothes and ultimately becoming self-governing. He tried to form such communities in
Orbiston in Scotland and in New Harmony, Indiana in the United States of America, but
both communities failed.

Although Owen inspired the co-operative movement, other-such as Dr William

King (1786 – 1865) took his ideas and made them more workable and practical. Kint
believed in starting small, and relized that the working classes would need to set up co-
operatives for themselves, so he saw his role as one of instruction. He founded a monthly
periodical called the cooperator, the first edition of which appeared on May 1,1828. This

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gave a mixture of co-operative principles. King advised people not to cut themselves off
from society, but rather to form a society within a society, and to start which a shop
because, “We must go to a shop every day to buy food and necessaries-why should we
not go to our own shop?” He proposed sensible rules, such as having a weekly account

Audit, having 3 trustees, and not having meetings in pubs (to avoid the temptation of
drinking profits). A few poor weavers joined together to form the Rockdale Equitable
Pioneers Society at the end of 1834. The Rockdale pioneers, as they became known, set
out the Rockdale Principles in 1844, which have highly influential through the
cooperative movement.
Co-operative communities are now widespred, with one of the largest and most
successful examples being at Modaragon in the Basque country of Spain (See link
technically not cooperatives, were also successful in Yugoslavia under Tito where
worker’s councils gained a significant role in the management.
In many European countries, cooperative institutions have a predominant
market share in the retail banking and insurance businesses. An annual general of retail
co-operative in England, 2005.
In the UK, Co-operatives formed the Co-operative party in the early 20th
century to represent members of co-ops in parliament who were elected at the 2005
General Election as Layout and Co-operative’ MPs. UK Co-operatives retain a significant
market share in food retail, insurance, banking, funeral services, and the travel industry in
many parts of the country.

TYPES OF CO-OPERATIVES
Housing Co-operative
Main article: Housing Co-operative
A housing Co-operative is a legal mechanism for ownership of housing
where residents either own shares (share capital co-op) reflecting their equity in the co-
operative’s real estate, or have membership and occupancy rights in a not-for-profit co-
operative (non-share capital co-op), and they underwrite their housing through paying
subscriptions or rent.

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 Housing cooperatives come in three basic equity structures. In market- rate
Housing co-ops, members can sell their in the co-op whenever they like for whatever
price the market will bear, much like any ither residential property. Market-rate Co-ops

Is very common New York City limited equity co-ops. Which are often used by
affordable housing developers, allow members to own some equity in their home, but
limit the sale price of their membership share affordable to future members. In the third
structure, called zero-equity or “Group Equity” by the North American Students of
Cooperation (NASCO), one of the proponents of this model, individual members do not
build up equity in the co-op the co-op is not owned by its members, but by itself.

Housing cooperatives may occupy various types of physical structure. Co-ops

can be structured as individual housing units grouped together, such as in an apartment
building, or they can be groups of people living together in one housing unit, as an
alternative to the traditional family structure.

BUILDING CO- OPERATIVE

Main article: Building Co-operative

Members of a building cooperative in Britain known as a self-build housing

co-operative pool resources to build housing, normally using a high a proportion of their
homestead, and the co-operative may be dissolved.

This collective effort was at the origin of many of Britain’s building societies,
which persisted in some of their names (such as the former Leeds permanent). Nowadays
such self-building may be financed using a step-by-step mortgage which is released in
stages as the building is completed. The term also refers to worker’s co-operatives in the
building trade.

RETAILER CO-OPERATIVE

Main article: Retailer’s Co-operative

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 A retailer’s Co-operative (often known as a secondary or marketing co –
operative in the UK) is an organization, which employs economics of scale on behalf of
its members to get discounts from manufactures and to pool marketing. It is common for
locally owned co-operative are businesses rather than individuals.

The well-known Best Western hotel chain is actually a giant co-operative,

although it now prefers to call itself a nonprofit membership association” It gave up on
the “Co-operative” label after the courts kept insisting on calling it a franchiser despite its
nonprofit status.

UTILITY CO-OPERATIVE
Main article: Utility Co-operative
A utility co-operative is a public utility that is owned by its customers. It is a
type of customer co-operative, in the US many such co-operatives were formed to
provide rural electrical and telephone service as part of the New Deal. See Rural Utilities
Service.

WORKER CO-OPERATIVE
Main article: Worker Co-operative
A worker Co-operative or producer co-operative is a cooperative that is
wholly owned and democratically controlled by its “worker-owners”. There are no
outside, or consumer owners, in a workers’ cooperative-only the workers own shares of
the business. Membership is not compulsory for employees, and employees can become
members.

SOCIAL CO-OPERATIVE
Main article: Social Co-operative
A Particularly successful form of multi-stakeholder co-operative is the Italian
“Social Co-operative”, of which some 7,000 exist. “Type A social cooperative bring
together providers and beneficiaries of a social service as members. “Type B” social
cooperatives bring together permanent workers and previously unemployed people who
wish to integrate into the lab our market.

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SOCIAL CO-OPERATIVES ARE LEGALLY DEFINED AS FOLLOWS:

o The objective is the general benefit of the community and the social
integration of citizens.

o Type A cooperatives provide health, social or educational services

o Those of Type B integrate disadvantage people into the labor market. The
categories of disadvantage they target may include physical and mental
disability, drug and alcohol addiction, developmental disorders and
problems with the law. They do not include other factors of disadvantage
such as race, sexual orientation or abuse.

o Various categories of stakeholder may become members, including paid

employees, beneficiaries, Volunteers (up to 50% of members), financial
investors and public institutions. In Type B Co-operative at least 30% of
the members must be form the disadvantaged target groups.

A good estimate of the current size of the social co-operative sector in Italy is
given by updating the official ISATAT figures from the end of 2001 by an annual growth
rate of 10%(assumed by the Direzione Generate per gli Ente Cooperative). This gives
totals of 7,100 social co-operatives, with 267,000 members, 223,000 paid employees,
31,000 volunteers and 24,000 disadvantaged people undergoing integration. Combined
turnover is around 5 billion euro. The co-operatives break into three types: 59% type A
(social and health services), 33% type B (Work integration) and 8% Mixed. The average
size is 30 workers.

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CONSUMER’S CO-OPERATIVE
Main article: Consumer’s Co-operative
The term co-operative also applies to business owned by their customers: a
consumer’s co-operative. Employees can also generally become members. Members vote
on major decisions, and elect the board of directors from amongst their own number. A
well-known example in the US is the REI (Recreational Equipment Incorporated) Co-
operative and in Canada: MEC (Mountain Equipment Co-op).

The world’s largest consumer co-operative is the co-operative Group in the

United Kingdom, which has a variety of retail and financial services. There are also a
number of other, independent consumer co-operative societies in the UK, such as the East
of England Co-operative society and Miscounted Co-operative. In fact the Co-operative
Group is actually something of a hybried, having both corporate (other consumer co-
operatives) and individual members.

Japan has a very large and well developed consumer co-operative movement
with over 14 million members; retail co-ops alone had a combined turnover of 2.519
trillion yen (21.184 billion US Dollars (market exchange rates as of 11/15/2005) in
2003/4.(Japanese Consumer’s Co-operative Union., 2003) As well as retail co-ops there
are medical,housing,insurance co-ops alongside institutional(workplace based) co-ops for
school teachers and university based co-ops.

Around 1 in 5 of all Japanese households belong to a local retail co-op and

90% of all co-op members are women. (Takamura, 1995). Nearly 6 million households
belong to one the 1,788,000 Han groups (Japanese Consumer’s cooperative Union.,
2003).These consist of a group of five to ten members in a neighborhood who place a
combined weekly order which is then delivered by truck the following week. A

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particular strength to Japanese’s consumer co-ops is recent years has been the growth of
community supported agriculture where fresh produce is sent direct to consumers from
producers without going through the market.

AGRICULTURAL CO-OPERATIVE
Main article: Agricultural Co-operatives
Agricultural Co-operatives are widespread in rural areas.
In the United States, there are both marketing and supply co-operatives.
Agricultural marketing co-operatives, some of which are government sponsored, promote
and may actually distribute specific commodities. There are also agricultural; supply co-
operatives, which provide inputs into the agricultural process.

In Europe, there are strong agricultural/agribusiness co-operatives, and

agricultural co-operative banks. Most emerging countries are developing agricultural co-
operatives. Where it is legal, medical, marijuana is generally produced by co-operatives.

CO-OPERATIVE BANKING (Credit unions and Co-operative Savings Banks)

Main articles: Co-operative banking and credit union.

The Co-operative Bank’s head office, I Ballon Street, Manchester. The statue
in front is of Robert Owen, a pioneer in the Co-operative banking.

In North America, the caisse popularize movement started by Alphonse

Discarding in Quebec, Canada pioneered credit unions. Discarding wanted to bring
desperately needed financial protection to working people. In 1990. From his home in
levis, Quebec, he opened north America’s first credit union, marking the beginning of the
movement Discarding.

While they have not taken root so deeply as in Ireland or the USA, credit
unions are also established in the UK. The largest are work – based, but many are now
offering services in the wider community. The Association of British Credit unions Ltd

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(ABCUL) represents the majority of British Credit Unions. British Building Societies
developed into general purpose savings & banking institutions with “one member. one
vote” ownership and can be seen as a form of financial cooperative(although many’de-
mutualised’ into conventionally-owned banks in the 1980’s & 1990). The UK Co-

Operative Group includes both an insurance provider CIS and the Co-operative Bank,
both noted for promoting ethical investment.

Other important European banking co-operative include the Credit Agricole in

France, Migros and Coops bank in Swizerland and the Raiffeisen system in many Central
and Eastern European countries. The Netherlands, Spain, Italy and various European
countries also have strong cooperative banks. They play an important part in mortgage
credit and professional (i.e. farming) credit.

Co-operative banking networks, which were nationalized in Eastern Europe,

work now as real cooperative institutions. A remarkable development has taken place in
Poland, where the SKOK (Spoldzielcze Kasy Oszczednosciowo – Kredytowe) network
has grown to serve over 1 million members via 13,000 branches, and is larger than the
country’s largest conventional. Bank.

In Scandinavia, there is a clear distinction between mutual savings banks(Spar

bank) and true credit unions(Andelsbank).

CAR SHARING
Main article: Car sharing

Car sharing is an arrangement by which individuals and groups share

vehicles, which are stored in convenient common locations. It may be thought of as a
very short term, locally based care hire, run on a member’s only basis. It is most
prevalent in Swizerland (Where the Mobility Car Sharing cooperative has more than
50,000 clients), but is also common in Germany, Austria, and the Netherlands, and is fast
growing in popularity in other European countries, Asia and North America. Car sharing

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operations may be for profit or non – profit organizations. Zipper and Flex car are
examples.

In Britain, where the term ‘car sharing’ has also been used for carpools or
ride sharing, some people prefer the term ‘car clubs’.

FEDERAL OF SECONDARY CO-OPERATIVES

Main article: Co – operative Federation

In some cases, Co-operative societies find it advantages to form Federal or

Secondary Co-operatives in which all members are themselves Co-operatives.
Historically, these have predominantly come in the form of Co-operative Wholesale
Societies, and co-operative unions. Co-operative Federations are a means through which
co-operative Societies can fulfill the sixth Rockdale principle, co-operation amongst co-
operatives, with the ICA nothing that “Co-operatives serve their members most
effectively and strengthen the co-operative movement by working together through local,
national, regional and international structures.

See Also: List of Co-operative Federations

CO-OPERATIVE WHOLESALE SOCIETY

Main article: Co-operative wholesale society

According to Co-operative economist Charles Gide, the aim of a Co-operative

wholesale society is to arrange “bulk purchases, and if possible, organize production.”
The best historical examples of this were the English EWS and the Scottish CWS, which
were the forerunners to the modern co-operative Group.

CO-OPERATIVE UNION
Main article: Co-operative Union

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 A Second common form of Co-operative Federation is a Co-operative union,
whose objective (according to Gide) is “to develop the spirit of solidarity among societies
and in a word, to exercise the functions of a government whose authority, it is needless to
say, is purely moral. “Co-operatives UK and the International Co-operative Alliance are
examples of such arrangements.

CO-OPERATIVE PARTY
Main article: Co-operative Party

In some coutries with a strong Co-operative sector, such as the UK,

Cooperatives may in some countries with a strong cooperative away find it advantages to
form a parliamentary political party to represent their interests. The British Co-operative
Party is a prime example of such an arrangement.

1.3 PROFILE OF THE COMPANY

Arrival of the Tamil Nadu dairy development Corporation team. In the

year of October 2nd 1974 and it is the starting of the first set of societies November 10th
1974. The Registration of Salem district Co-operative milk producer’s union ltd., on July
10th 1978 and it starts from October 7th 1978.

The scope (or) the co-operative societies are covered only two districts. i.e.
Salem at Namakal districts and it includes the societies 1101 of affiliated. The Salem
district Co-operative milk producers union ltd., are start with authorized share capital of
Rs.50 Laksh and paid-up Share capital of Rs.36, 41,100/-

VISION OF THE COMPANY

o To give Quality milk to the customers

o To give Quality of milk product like butter, Ghee

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 o Remuneration prices to milk producers through out the years

o Giving loans/ Dividend to members

o Loan arrangement for purchase of cattle’s by members through banks

Members

o Can repay the loan by installments.

o Excess milk recited from the various places, stored and processed for skin

Milk Powder.

o Co-operative development programme started by National Dairy

Development

o Board to implement in unions to milk procurement.

o Supply of quality cattle to members in the societal at reasonable price.

o Manage the (or) maintain the standard price

o To meet the competitions with private sections.

o To Covered in all area customer.

QUALITY POLICTY(OBJECTIVE)

 To improve the quality of raw (Material) milk being received by

union.

 To ensure that all batches of packed milk, and milk product to be

sent to the

 Market, conforms to the stipulated under BIS, PEA Act and

agmark

 To maintain a high standard of house keeping and adopting GMP

 To improve consumer satisfactions.

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ACTIVITIES

i. No of the functional societies 1015 for the year 2006-2007 upto December

2006.

ii. Total No of the former member=3,21,652

(a) Women members – 408,672

(b) Scheduled Caste at trebles –48,532

(c) Pouring members –47,910

iii. No of Milk collection Routes: 56

iv. AV Quality of milk

COW BUFFALO

FAT %4.4 7.0

SNF%8.2 8.8

v. Procurement Price Paid to producers Buffalo milk per kg price: 178.57-12.50

vi. Milk payment schedule=every once in 10 days.

vii. Daily Average procurement in liters in 3,71,877 litters

viii. No of mobile veterinary unit –8

ix. No of cases treated 47,020

x. No of emergency veterinary unit 12.s

xi. No of emergency cases treated 2,877.

xii. Processing capacity in VPD

(a) Salem Dairy - 3,00,000

(b) Chilling center Attur - 1,30,000

Namakkal - 50,000

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 P.Velur - 50,000

Xiii Handling at present

(a) Salem Dairy - 1,70,000

(b) Chill ting center - Attur - 1,30,000

Namakkal - 50,000

P.Velur - 50,000

Xiv Production Capacity per day

AUTTER - 9MT

GHEE - 6MT

SMP - 10 MT

XV. Milk sent to Chennai in LPD: 2,14,279 per days.

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 SALEM DISTRICT CO-OPERATIVE MILK PRODUCER’S UNION LTD

SL.NO UNION CHAIRMAN FROM UPTO DATE

1 Thiru.P.Kannan, B.com, BL 07.10.78 30.04.80
2 Thiru.S.R.Karuppannan IAS 01.05.80 31.05.82
3 Thiru.p.Kannan, B.com, BL 01.06.82 06.10.84
4 Thiru.M.Periyasamy 07.10.84 31.10.85
5 Thiru.P.Palanisamy 01.04.85 15.05.85
6 Thiru.K.Kandasamy 16.05.86 09.06.82
7 Thiru.Velurajamani B.Sc., BL 10.06.87 22.02.88
8 Thiru.M.F.Parukthi IAS 26.10.88 09.07.89
9 Thiru.Surjith K.Sowthi IAS 10.07.89 16.07.91
10 Thiru.P.A.Ramaiya IAS 17.04.91 20.09.91
11 Thiru. P.A.Ramaiya IAS 21.10.92 24.10.93
12 Thiru.Prjkesosher prasanth IAS 05.11.93 04.11.93
13 Thiru.K.Palanisamy MLA 05.11.93 30.03.96
14 Thiru. Hansraj varma 12.04.96 31.05.96
15 Thiru.G. Muthusamy IAS 31.05.96 19.04.98
16 Thiru.MohamaduNasimuthin IAS 20.04.98 01.11.98
17 Thiru.M.Chinnathambi 02.11.98 25.05.01
18 Thiru.MohamaduNasimuthin IAS 26.05.01 06.06.01
19 Thiru.N.Dhajsazlyin IAS 07.06.01 25.07.01
20 Thiru.Dr.J.Radhakrishnan IAS 26.07.01 17.07.01
21 Thiru.Seduramachanderan IAS 18.07.03 05.06.03
22 Thiru.A.Sugumar IAS 06.06.04 06.05.03
23 Thiru.Therajkumar IAS 07.05.06 21.05.06
24 Thiru.N.Mathivanan IAS 22.05.06 Till Date

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 SALEM DISTRICT CO-OPERATIVE MILK PRODUCER UNION’S LTD

SL.NO MANAGING DIRECTOR &GM FROM UPTO DATE

1 Dr.R.Radhakrishnan M.Vsc., PG 27.07.73 03.06.84

2 Dr.T.Ramamurthy M.Vsc., IAICOA 07.05.88 15.09.88

3 Thiru.T.Jackap IAS 19.09.88 20.10.89

4 Dr.P.Periyasamy DEE PDR 21.10.89 02.11.89

5 Dr.M.Jasusavarinathan BE, DEE 03.11.89 07.04.91

6 Dr.Velusamy DE 04.04.91 18.04.91

7 Dr.A.Karpagavinayagam B.Vsc., PGDPM, MBA 19.04.91 24.07.94

8 Thiru.A.Manikkamvasagam M.A., M.Com, RD 25.07.94 21.10.94

9 Thiru.S.Elangovan B.Sc., MBA 22.10.94 13.12.94

10 Dr.M.K.Ramasamy B.Vsc., 14.10.94 06.09.95

11 Thiru.Gothandaraman IDD 06.09.96 31.12.98

12 Dr.P.Suppaiya BE 01.01.99 13.06.99

13 Dr.P.Chadiramohan IAS 14.06.99 13.04.00

14 Dr.P.Suppaiya BE 14.04.00 17.09.00

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 CHAPTER – 2

2.1 OBJECTIVES OF STUDY

 To analysis the income & expenditure Budgets

 To Identify the budgeting methods for new projects & investment

 To identify the unwanted expenses in Salem District Co-operative milk

producer’s

 Union ltd.

 To ensure the availability of working capital

2.2 SCOPE OF THE STUDY

The scope of the study is analysis only with Salem District Co-operative milk
producer’s Union Ltd., budget and budgetary control from 01.04.2006 to 31.03.2007

2.3 LIMITATIONS OF STUDY

Budgeting is time Consuming process during the preparation period, the business
conditions may change and estimates may go working by that time.

The successful operation and execution of budgets depends upon the efficiently of
the executive personnel.

Budgetary control is essentially a tool of decision-making and it helps the

management in taking sound decisions. But it cannot replace the management.

Budgeting necessitates the employment of specialized staff and this involves

expenditure which small concerns may not afforded.

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 The success of the budgetary control largely depends upon willing, co-operation or
teamwork of all concerned. It there is no Co-operation, the whole systems Collapses.

CHAPTER – 3

REVIEW OF LETERATURE

Modern business world is full of competition, uncertainty and exposed to

different types of risks. This complexity of managerial problems has to the development
of various managerial tools, techniques and procedures useful for the management in
managing the business successfully. Budgeting is the most common. Useful and widely
used standard device of planning and control. The budgetary control has now become an
essential tool of the management for controlling costs and maximizing profit. Costs can
be reduced, wastage can be prevented and proper relationship between costs and incomes
can be established only when the various factors of production are combined in profitable
way. The resources of a business can be effectively utilized by efficient conduct of its
operations. This requires careful working out of proper plans in advance, Co-ordination
and control of activities on the part of management.

A Proper planning and control are essential for an efficient management.

A good number of tools and devices are available. Of all these, the most important
device used in budget. Cost accounting aims not only at cost ascertainment, but also
greatly at cost control and cost reduction. Thus the management aims at the proper and
maximum utilization of resources available. It is a possible when there is a pre-planning.
Modern management aims that all types of operations should be predetermined in
advance, so that the cost can be controlled at every step. The more important point is that
the actual programme is compared with the pre-planned programme and the variances are
analyzed and investigated. All are familiar with the idea of budget, at every walk of life-
state, firm, business etc.,

BUDGET MEANING

22
 Budget is an estimate of future needs arranged according to an orderly basis,
covering some or all of the activities of an enterprise for definite period of time.

FORECAST AND BUDGET

Forecast is mainly concerned with probable events; but budget is

concerned with planned events. Forecast may be done for longer time; but budget is
prepared for shorter periods. Forecast is only a tentative estimate and can be revised; but
budget remains unchanged for the budget period. Forecast is a predication or an estimate
of changes, if any, in characteristics, economic phenomena that may affect one’s business
plans. It is a study into the future, when the forecasts are given a shape and approved by
the management as a commitment, they become budgets. For example, sales forecast is
an estimate for future sales, while a sales budget is a commitment with an objective to
reach certain sales figures.

Objectives of a Budget
o It directs the attention of all concerned to the attainment of a common
goal.
o It leads to the disclosure of organizational weakness. The budgets are
compared with actual performance; and variances, if any, are investigated.
This step helps in talking corrective and remedial measure.
o It aims at careful control over the performance and cost of every function.
o It contributes to co-ordinate efforts of all departments in order to achieve
an integrated goal. Budgets grow from bottom and are controlled from
top-level.

BUDGETARY CONTROL
Budgetary control means the establishment of budgets relating to the
responsibilities of executives to the requirements of a policy, and continuous comparison
of actual with budgeted results either to secure by individual action the objective of that
policy or to provide basis for its revision.

23
CHARACTERISTICS

o Establishment budgets are prepared for each department and then the plans
and objectives are presented before the management.
o The budgetary control co-ordinates the plans of various departments and
master budget is prepared.
o Continuous comparison. The essential feature of budgetary control is to
conduct continuous comparison of actual performance with budgeted
figures, revealing the validations
o Budgets are revised, if necessary, according to changed conditions.

ADVANTAGES

 Budgets fix, the goals targets, without operation lacks direction.

 Reduction in cost and elimination of inefficiency is achieved automatically.
 The budget facilitates to maintain ordered effort and brings about efficiency in
Results.
 An effective system of budgetary control results in co-coordinated effort of all
persons involved.
 Budgetary control enables the management to decentralize responsibility without
closing control of the business since it pinpoints inefficiency.
 The Budgetary control and standard costing go hand and the co-operation of the
Two gives the most effective result. It promotes mutual co-operation and team
Spirits among the person involved.
 Budgetary control ensures that the capital employed at a particular level is kept at
A minimum level.
 It facilitates and intelligent and planned forecast for future.

24
 CHAPTER – 4

RESEARCH METHODOLOGY

4.1 RESEARCH DESIGN

The methodology used in this study is both analytical and
descriptive. The study is primarily is abased on the secondary data collective from Salem
District Co-operative Milk Producers union Ltd., The data are extracted from the annual
reports for a one year. The data collected were tabulated separately and received by
managing data analysis and interpretation for the one year from 2006 to 2007.

4.2 SOURCE IF DATA

The study is based on secondary data from publishes source like

annual reports and balance sheet of the Salem District Co-operative Milk Producers
Union Ltd., additional information was also obtains from the officials of the accounts
departments and other officers of the company.

4.3 TOOLS OF ANALYSIS

The tool of analysis followed in the study is monthly analytical
and partly descriptive in nature. For the financial analysis the financial statements of the
company have been used. The following techniques were adopted.

According to time
Long term budget
Short term budget
Current budget
Flexible
Cash budget

25
 Sales budget
Material Budget
Capital Budget

CHAPTER – 5

DATA ANALYSIS AND INTERPRETATION

CLASSIFICATION OF BUDGET

ACCORDING TO TIME

I long term budgets

The budgets are prepared to depict long term planning of the business.
The period of long term budgets various five to ten years. Long-term budgets are
prepared for some sectors of the concern such as capital expenditure, research and
development. Long term finances etc., The long term planning is done by the top level
management.

ii short term budgets

These budgets are generally for one on two years and are in the form
of monetary terms. The Consumer Goods industries. Like sager cotton testiles,etc use
short term budgets.

III current budgets

The period of current budgets is generally of months and weeks. The

budgets are related are to the current activities of the business. Current budget is a
budget, which is established for use over a short period of time and is related to current
conditions.

(B) CLASSIFICATION ACCORDING TO FLEXIBILITY FIXED

BUDGET

DEFINITION

“a budget which is designed to remain unchanged irrespective of

the level of the activity actually attained”

26
 This is a budget, which is designed to remain unchanged
irrespective of the level of activity actually attained. This is prepared for definite

production and capacity level. It is not adjusted according to activity level

attained. The fixed budgets are not effective tools of cost control.These types of budgets
have limited use.

FLEXIBLE BUDGET

DEFINITION

“A Budget, which by recognizing the difference between fixed,

Semi-fixed and variable costs, is designed to change in relation to the level of

Activity”

This is a dynamic budget. It is budget, which is designed to

change in accordance with level of activity. Actual output may differ from the budgeted
output as such, It is necessary to modify the budget on the basis of changed output. The
budget is prepared in such a way as to present the budgeted cost for different levels of
activity. It is more realistic and practical, because changes expected at different levels of
activity. It is more realistic and practical, because changes Expected at different levels of
activity are given due considerations. It is also called variable budget or sliding scale
budget. The expenses are divided into three categories such as
o Fixed

o Variable

o Semi-Variable

PREPARATION OF FLEXIBLE BUDGET

 Decide the range of activity to develop a flexible budget

27
  Determine the cost behavior fixed, variable and semi-
variable to each

 element of cost

 Select the activity level

Prepare the flexible budget of Salem district co-operative milk producer’s

union ltd., as on 01.04.2006 to 31.03.2007 capacity of units 3,08,000

Packing materials 612.35

Fuel & furnance oil(fixed) 260.51

Power(Steem water) 60%(fixed) 251.22

Consumables(Variables) 29.53

Spares P&M(80% Variables) 25.62

Repairs and maintanance(Fixed 70%) 4.07

Water charges(fixed(40%) 23.48

Insurance(fixed) 1.99

Rate & Tax 1.60

Wages 5.34

Labour Contract (20% variable) 12.32

Labour Contract for Sachet (Fixed) 8.39

Chemicals 2.51

Others 2.48

Analytical Charges 7.07

1246.48

28
You have prepare the flexible budget for the following capacity 3,00,000 unit and 3,16,00
units. The working hours of estimated for the C0-operative milk powder damaged
6,16000 hours

FLEXIBLE BUDGET SALEM DISTRICT

CO-OPERATIVE MILK PRODUCER’S UNION LTD

PARTICULARS Units 3,00,000 Units 3,08,000 Units 3,16,000

Fixed Expenses 240.67 270.09 253.51
Fule of Furance oil 62,696.94 70,361.44 66,041.89
Power (Sleem Water) 36,276.18 40,711.19 38,211.56
Spares(Palm)20% 1232.23 1383.94 1297.97
Repairs 70% 683.50 769.48 719.96
Water Charges 40% 2259.89 2536.68 2380.45
Insurance 40% 242.66 537.47 504.48
Labour contract 20% 592.04 665.50 623.63
Labour Contract for Schet 401.92 453.21 423.36
20%
1,04,365.36 1,17,418.61 1,10,203.30
VARIABLES
Packing Material 1,47,374.27 1,65,389.61 1,55,236.84
Power(steem water)40% 24,182.42 27,140.80 25,472.68
Consumables 7,106.98 7,975.75 7,486.15
Spares(prem)40% 4,931.32 5,535.75 5,194.42
Repairs month 30% 293.62 329.77 309.28
Water Charges 60% 3,388.63 3805.03 3,569.94
Rate and taxes 385.07 432.14 405.62
Wages 1,285.18 1,442.28 1,353.74
Labour Contract 80% 2,370.60 2662.01 2,479.07
Labour Contract for shet 1,614.89 1812.84 1701.05
80%
Chemicals 122.74 137.74 129.29
Others 596.86 669.82 1,799.64
Analytical Charge 1,701.54 1,909.53 1,779.64
1,95,534.22 2,19,243.07 2,05,764.42

29
 Actual Expense Actual Expense Actual Expense

Cost Per Unit = ----------------- -------------------- --------------------

Estimated Hours Estimated Hours Estimated Hours

2,99,719.58 3,36,661.68 3,15,967.72

Cost Per Unit = ----------------- -------------------- -------------------

6,00,000 6,16,000 6,32,000

Inference

The production of 308000 units is produced the cost per units is 0.54 and
it may be changed the units the cost per unit is not changed i.e 0.499.

30
Sales Budget

Generally sales factor becomes a key factor in the majority of cases, and

therefore It is the starting point. This is the most important budget as it is usually the

most difficult to forecast. It is prepared by the sales manager. In the preparation the sales

of the previous year.

o Analysis of the sales of the previous year.

o Salesman’s assessment

 General Trade conditions

 Availability of raw materials

 Availability of funds

 Phant capacity

 Seasonal fluefunctions

 Restrictions imposed by the Govt

 Efficiency advertising

The Sales district Co-op milk items SMP Batter, Ghee, the company has

divided its maryet into two zones a (Chennai) and zone(Salem) the actual figures for the

previous year sales were as under.

Zone(A) Zone(B)

Chennai Salem

31
 Units U.P Units U.P

SMP 4,00,000 85 2,50,000 85

Butter 2,50,000 95 3,50,000 95

Ghee 3,00,000 120 3,00,000 120

For the current year 2006 – 07 it is estimated that sale of SMP will go up by
25,000 units in Zone A. The company plans to introduce a publicity film for butter in the
TV network. The budgeted figures for butter are to be incased by 20% in both Zone. The
process of the two product are to be maintained but for butter a bonus cut of Rs 5 will be
announced.

You are required to prepare quantitative cum financial budget for sales in the
current year 2006 –07.

SALES BUDGET SALEM DISTRICT CO –OPERATIVE MILK

PRODUCER’S UNION LIMITED

Product SMP(Skin Milk BUTTER GHEE

Powder)
Sales Rs 85 Rs 90 Rs 120
Price Units Amount Units Amount Units Amount
Zone(A) 4,00,000 3,40,00,00 3,00,000 2,70,00,00 3,25,000 3,90,00,000
Chennai 0 0
Zone(B) 2,75,000 2,33,75,00 4,20,000 3,78,00,00 3,00,000 3,60,00,000
Salem 0 0
Total 6,75,000 5,73,75,00 7,20,000 6,48,00,00 6,25,000 7,50,00,000
0 0

Inference

When comparing the Zones A & B Zone A(chennai) is better than the Zone
B(Salem) because sale amount higher sales at zone A(chennai).

Production Budget

32
 The production Budget are prepared by the [roduction manager showing the
forecast of output. The objective is to determine the quantity of production for a budgeted
period. If is quantity of units to be produced to be produced during the budget period it is
based on the on Sales budget.

It is in two parts first part connecting and the other part shows the cost of
production. A part from the sales budget optimum utilization of plant availability of raw
materials labour etc. are to be considered. It must avoid work in rush seasons. It must
maintain a minimum stock ocf finished goods.

PRODUCTION BUDGET

It is devided in to material cost budget labour cost budget and overhead cost
budget because cost of production introduces material layout and overheads. Therefore
separate budgets are required for each items.

The Salem district Co-op milk producer’s union’s ltd at the production
details

Product Sales in units Estimated stock in units

Jan December
SMP 75,00,000 90,000 95,000
GHEE 3,05,000 80,000 75,000
BUTTER 1,50,000 40,000 60,000

33
 PRODUCTION BUDGET SALEM DISTRICT CO -OPERATIVE MILK

PRODUCER’S UNION LTD

Production Budget

Solution SMP

Sales as per sales budget = 7,50,000

= 95,000
(+) Estimated stock on closing Stock of Dec 2006 ------------
8,45,000

(-) Estimated stock on opening stock in Jun 2006 90,000

----------

Budget production 7,55,000

-----------

GHEE

Sales as per sales budget = 3,25,000

(+) Estimated stock on closing stock of December 2006 = 75,000

----------
4,00,000
80,000
------------
Budgeted production 3,25,000
------------

BUTTER

Sales as per sales budget = 1,50,000

34
(+)Estimated stock on closing Stock of Dec 2006 = 60,000
------------
2,10,000
(-)Estimated stock on opening stock in June 2006 40,000
-------------
Budgeted production 1,70,000
-------------

Source – Annual Report Salem District Co- opereative milk producer’s union Ltd.,

Inference

The Production budget are considered only three product lie SMP(Skin milk
powder) , butter, and Ghee. The skin milk powder are need to next year 7,55,000 units
and butter 1,70,000 units and Ghee is 3,20,000 units.

MATERIAL BUDGET

The Material budget to carry out the production satisfactorily regular supply
of materials during the budget period is ensured by preparing a budget. In this the
decision regarding the Quantity of materials as shown at different times during that
period is followed.

Only direct materials are taken into account. Intercede materials are not
taken in to account and they are considered under over heads. The materials budget helps
proper planning of purchases.

It shown the estimated quantities as well as the cost of raw materials

required for production as per production budget.

SUM
Prepare the salem district Co – op milk produces union ltd of the
materials budget. The sales director of a manufacturing company report that next year the
experts to sell the 1,30,000 units of a particulars product.

35
 The prodction manager consults the store keeper and costs his figures as
follows two kinds of raw materials Ghee and Butter are required for manufacturing the
products each units of the product required 10 units of Ghee and 15 units of Butter. The
estimated opening balances at the commencement at the next year area.

Furnished product = 40,000 units

Materials(Ghee) = 22,000 units

Materials(Butter) = 22,000 units

The desirable closing balances at the end of the next year.

Furnished product = 60,000 units

Materials (Ghee) = 25,000 units

Materials (Butter) = 30,000 units

Each unit of the product requires 2 units of Ghee and 3 Units of Butter.

MATERIAL BUDGET SALEM DISTRICT CO – OPERATIVE MILK

PRODUCER’S UNION LIMITED

Units to be produced = Sales + desired closing stock – opening stock

= 1,20,000 + 60,000 – 40,000

36
 = 1,40,000 units

= 1,40,000 * 2 = 2,80,000

= 1,40,000 * 3 = 4,20,000

Materials procurment budget

Particulars Finished product Materials

units Ghee units Butter units
Budgeted 1,40,000 2,80,000 4,20,000
production
(+)Estimated 40,000 22,000 25,000
opening
Balance 1,80,000 3,02,000 4,45,000
(-)Estimated closing 60,000 25,000 30,000
balance

Inference

The materials budget are ato be based on the only two commuditys such as
Ghee and Butter. The needed up the materials of Ghee 2,77,000 units and butter 4,15,000
units. The finished goods are 1,20,000 units needed to next years.

37
LABOUR BUDGET

It is a part of the production budget. The budget is prepared by the

personnel departement and it shows and estimate of the requirement of labour to meet the
production target on the basis of previous records and budgeted production this
budget gives detailed information relating to the number of workers ,rates of the
wages and cost of labour hours to be employed.

The Salem district Co-Op milk producer’s Union ltd., labour budget.

S.No Particulars Amount Ratio

1. Salary 3,82,56,000 40.78%
2 Dearness allowance 3,12,00,000 33.26%
3 Other allowance 53,04,000 5.65%
4 EPF contribution 57,60,000 6.14%
5 Local pension contribution 25,000 0.026%
6 Inspection Charges to FPF 40,000 0.042%
7 Bonus 30,00,000 3.198%
8 Gratuity 45,00,000 4.79%
9 Group Insurance 10,00,000 1.06%
10 Double wages 40,000 0.042%
11 Night shift allowance 2,54,250 0.27%
12 Put of pucket allowance 25,000 0.042%
13 Heave travel concession 8,62,500 0.919%
14 Surrender leave salary 17,25,000 1.839%
15 T.A 18,00,000 1.919%
Total 9,37,91,750 100%

38
WORKS OVERHEAD BUDGET

It work overhead budgets sets out the estimated casts of indirect

materials, indirect labour and indirect factory expenses during the budget period in order
to achieve the target this is classified into Raced, Variable, and semi-variable. This
facilities preparation of budgets and further department wise and sub – division to have
effective control. The preparation of budget is based on the previous year’s record for
fixed overheads and budget forgets are verified for variable expenses,which are bound to
change of output and it can be classified into the following ways.

ADMINISTRATION OVERHEAD BUDGET

This budget cover the expenditure of administrative office and

management salaries. It is prepared with the help of past experiences and expected
changes in future. The administration cost of each budget center is drawn separately and
incorporated in administrative cost budget.

SELLING AND DISTRIBUTION OVERHEADS BUDGET

This budget relates to selling and distribution of products for the budget
period and is based on sales budget. It is generally prepared territory – wise by the sales
manager of each territory. The costs are divided into fixed, variable and semi – variable
and estimate is taken on the basis of past records.

39
CAPITAL EXPENDITURE BUDGET

This budget shows the estimated expenditure on fixed assets – land, building,
pland, machinery etc, It is as long – term budget.

The capital Expenditure is necessitated on account of replacement of old

machines, increased demand of products. Expansion of industry adoption of new
Technological progress.

The Salem district Co-op milk producer’s union ltd of the capital budget.

Particulars Amount Ratio

1 Dairy 10,80,000 0.83%

Maintance 4,50,82,000 35.00%

Pre – Pack 13,00,000 10.01%

Procurement and input 3,33,10,000 25%

Marketing 3,56,20,000 27.65%

------------------- ----------------
12,87,80,500 100%

40
 -------------------- -----------------

CASH BUDGET

This budget represents the amount the cash of receipts and payments and a
balance during the budgeted period. It is preopared after all the functional budgets are
prepared by the chief accountant either monthly or weekly giving the following hints.

 It ensures sufficient cash for business requirement

 It proposes arrangements to be made overdraft to meet any

shortage of

 cash

 It reveals the surplus amount and the effect up fluctuations on cash

 position.
The objective of cash budget of the proper co ordination of total working
capital sales investment and credit.
The following Transaction of the Salem Co-op milk producers ltd of the cash budget as
per the 2006 – 07 cash balance bank of Rs.

The Salem Co – operative milk prod ltd of the cash budget

Months Sales Purchase Wages Factory Administrative

Expenses Selling

41
 Expenses
May 35,00,000 15,00,000 7,50,000 55,000 65,500
June 2,00,000 13,50,000 90,000 60,000 63,000
July 30,00,000 16,00,000 85,000 65,000 70,000
August 32,00,000 16,00,000 82,000 60,000 95,000
September 40,50,000 18,00,000 86,000 90,000 90,000
October 38,50,000 18,55,000 83,000 63,000 85,000

Cash Balance of July of Rs.15,00,000

The payment period allowed to the customer is 2month and suppliers allowed by

month

The Salem district Co – op milk producer’s union ltd has purchased a power plant

machine of Rs.20,25,000 Janauary but it the payment is to the settled in august

All Expenses are paid in deluged in days or week and commission of 5% on sales.
You have the prepare the cash budget during the period 2006- 07 of the Salem
district Co – op milk producers union ltd.

The cash budget of the Salem District Co – op milk producers union ltd

Particulars July August September

Payment 15,00,000 32,69,500 20,60,500
Cash Balance
Sales 35,00,000 28,00,000 30,00,000
Total 50,00,000 60,69,500 50,60,500
Receipts
Purchase 15,00,000 17,50,000 16,30,000
Wages 90,000 85,000 82,000
Factory Expenses 60,000 65,000 60,000
Administrative 63,000 70,000 25,000
Expenses
Commission on Sale 17,500 14,000 15,000
5%
Purchase the - 20,25,000
powder plant
Receipts total 17,30,500 40,09,000 18,62,000
Cash Balance of 32,69,500 20,60,500 31,98,500
ltd.,

42
INFERENCE

The Salem District Co – operative milk producer’s union ltd of the cash
position is changes from one month to next month lie july month cash position shown of
Flexible budget of Rs.32,62,500 and it is the cash position decreased the month of august

of by 12,09,000. The following monthly September the cash was increased by of

Rs.11,38,000 the cash position will be flexible from month to month.

ZERO BASE BUDGETING

In common proactive building the functional budgets is to base the budget

year’s figures on the previous year’s budget. Taking the previous figures as the base the
required Adjustment are made for the impart of inflation proposed or decreased level of
activity etc in the light of experience thus in the traditional budgeting system, budget are
based on trends of historical level of expenditure thus a budget is developed on the
concept of incremental basis.

Mostly what is done is to add some percentage to the figures of previous

year to determine the budget figure is under the increment budgeting system, the figures
of the previous budget on the basis of which future budget is drawn, are considered to be
acceptable. It is the Experience of many, particularly in the govt departments and public
undertaking that the actual expenditure should be in line with the budgeted amount
otherwise the higher authorities will reduce the future budgeted and allocated amounts.

The managers justify the need to spend more of these of the previous
budget but they do not review their past activities and thus expenditure and inefficiencies
are brought forward to the subsequent period lie the incremental budgeting perpetual
inefficiency instead of promoting operational efficiency in order therefore the
expenditure with budgeted figure and to control the cost a new technique called zero base

43
budgeting under this technique no spiritual budget is prepared but the approach is
changed.

The use of Zero – base budgeting as a managerial tool has become

increasingly popular since the 1970 is it first come into being when ex-president carter of
the united states of America introduced it as a means of controlling stock expenditure.

The under taking idea of 2 BB is that there is no given base figure for a budget. A fresh
budgeted figure is to be determined keeping the circumstances and requirements this
basic concept of 2BB is simple budgeting starts from search is every activity in an
organization must be examined and justified any alternative must be considered and the
Results evaluated. It is method whereby all activities are re- evaluated each time when a
budget is formulated.

IMPLIES THAT 2BB

 Every budget starts with a zero base

 No previous figure is to be taken as a base figure for adjustments

 Each activity is to be examined afresh

 Every budget allocation is to be justified in the light of anticipated

 circumstances.

 Alternatives are to be given due consideration.

BENEFITS OF 2BB

The benefits of 2BB are as given bellows.

 Effective cost control can be exercised

 Careful planning is facilitation

44
  Management by objectives becomes a reality

 Uneconomical activities are identified

 Inefficiencies are controlled

 Scarce resources are allocated and used beneficially

 Each activity is thoroughly Examined and justified.

CAPITAL BUDGETING

Capital budgeting is the process of making investment decision in the capital

expenditure a progressive business firm always moves ahead its fixed assets and other
resources continue to expand or there comes a need for expanding them. Capital
Budgting actually the process of making investment decision in capital expenditure or
fixed assets. A capitals expenditure may be as on expenditure the benefits of which are
one which is intened to benefit figure periods and normally includes investment in fixed
assets and other development project. It is essentially a long term function and it is also
known as investment decision making capital expenditure decision planning capital
expenditure etc.,

Capital budgeting is the must important and complicated problem of

management decision because it is concerned with designing and carrying out through a
systematic investment programme. It involves the planning of such expenditures which
provide yields over a number of years.

DEFINITION

Charles T.Horngreen has defined capital budgeting as “Capital budgeting is

long term planning for making and financing proposed capital out lays.

45
 Richard and green have defined capital budgeting as acquiring inputs with
long term return.

According to lynch Capital budgeting consists in planning development of

available capital for the purpose of maintaining the long term profitability of the
concerns.

FEATURES OF INVESTMENT DECESION

 The features of investment decisions are as given bellow

 Huge funds are invested in long term assets

 The future benefits will occur to the firm over a series of years.

 They involve the Exchange of current funds for the benefits to be

achieved in future

 They have a significant effect on the profitability of the concerns

They are strategic

They are irreversible decisions.

46
IMPORTANT OC CAPITAL BUDGETING
Capital budgeting means planning for capital assets capital budgeting
decisions are among the most crucial and critical business decisions. It is the most
important single area of decision making for the management. Unused investment
decision may prove to be fatal to the very existence of the concern. The significance of
capital budgeting arises mainly due to the following

LARGE INVESTMENT
Capital budgeting decisions generally involve large investment of
funds. The funds available with the firm are always limited and the demand for the funds
for the resources. There funds are raised by the firm from various internal and external

resources at substantial cost of capital A Wrong decision prove disastrous for the
continued survival of the firm. Hence it is very important for a firm to plan and control its
capital expenditure.

LONG – TERM COMMITMENT OF FUNDS

The funds involved in capital expenditure are not only large but
more or less permanently blocked also in long term investment. The longer the time, the
greater the risk involved greater the risk involved Greater is the need for careful planning
of capital expenditure capital budgeting. The long term commitment of funds increases
the financial risk involved in the investment decision. Firm’s decision to invest in long
term assets has a decision influence on the rate and direction of its growth an unsound
investment decision may prove to be fatal to the very Existence of the firm. Hence a
careful planning is essential.

IRREVERSIBLE IN NATURE

47
 Next investment decisions are irreversible. Once the decision for
accepting a permanent asset is taken it is very difficult to reverse that decision. It is
difficult to find a market of such capital goods once they have been acquired. The only
alternative will be to scrap the capital assets so purchased or sell them at a substantial loss
in the event of the decision being proved wrong.

COMPLICATION OF INVESTMENT DECISIONS

The long term investment decisions are more complicated in nature. The
Capital budgeting decisions require and assessment of future event which are uncertain.
It is really a difficult task to estimate the portable future events. In most projects the
investment of funds has to be made immediately but the return are expressed over a
number of future years both return as well as the length of the period over which they
will accrue are uncertain.

LONG – TERN EFFECT ON PROFITABILITY

Capital budgeting decision have a long – term and significant effect on

the profitability of a concern. Capital budgeting is of utmost importance to avoid. Over
investment or under investment in fixed assets. An inwise decision may prove disastrous
and fatal to the very Existence of the concern. The future growth and profitability of the
firm deponds upon the investment decision taken today. Capital expenditure projects
exercise a great impact one the profitability of the firm for a very long time.

NATIONAL IMPORTACE

Investment decision taken by individual concern is of national importance

because it determines employement, Economic activities and economic growth.

CAPITAL BUDGETING PROCEDURE

The capital budgeting procedure are as given bellows.

48
 Identification of investment proposal

Screening the proposal

Valuation of various proposal

Establishing priorities

Final Approval

Implementing proposal

Performance Review

CLASSIFICATION OF CAPITAL BUDGETING

CAPITAL BUDGET

Traditional Methods Time Adjusted Method

Pay Back Period Net Present Value method

Rate of return method Internal Rate of return

Improvement in Traditional Approach Profitability Index method

To pay back period method

49
 PAY – BACK PERIOD METHOD

The term pay back raters to the period in which the project will generate the
necessary cash to recoup ht initial investment Business units, while selecting investment
projects, would consider the recovery of cost as the first and foremost concern even
though earning maximum profits is their ultimate goal. This method describes in terms
of period of time the relationship between annual savings and total amount of capital

expenditure, pay back period is defined as the number of years required for the savings in
costs for cash inflow(Net) to recoup the original cost of the project.

In simple sentence, it represent the number of years in which the investment is

Expected to “Pay for Itself” under this method, various, investments are ranked according
to the length of their pay back period in such a manner that theh investment with a shorter
pay back is preferred to one which has longer pay back period.

The Salem Co- op milk producer’s ltd is producing articles mostly by manual
labour and is considering to Replace it by new machine.

There are two alternate model machine(Power Plant) A & B of the new machine.
Estimated Life of Machine

A 3 years B 3 years

Cost of Machine Rs.3,27,000 Rs.30,00,000

Estimated Savings in Scarp Rs.12,75,000 Rs.11,90,000

Estimated Savings in Direct Wages Rs.4,50,000 Rs.4,48,000

Additional cost Maintance Rs.4,75,000 Rs.6,50,000

Additional cost supervision Rs.4,18,000 Rs.4,19,500

The salem co-op milk producer’s union ltd., of payback method

50
Inference A B

Estimated savings in scarp Rs.12,75,000 Rs.13,90,000

Estimated savings in Direct wages Rs. 4,50,000 Rs. 4,80,000

--------------- --------------
A Total Savings
17,25,000 18,70,000
--------------- --------------
Additional cost maintance Rs.4,75,000 Rs.6,50,000

Additional cost supervision Rs.4,18,000 Rs.4,19,500

-------------- ---------------
A total savings 8,93,500 10,69,000
-------------- ---------------

A B
Net Cash inflow Rs.8,31,500 Rs.10,69,500

Original Investment
Pay Back Period = -------------------------------------(5.2)
Annual Average Cash inflow

A B
32,70,000 30,00,000
-------------------- =3.93 ------------------ =3.74
8,31,500 8,00,000

Inference
Machine B is better than the Machine A because B is 3.74

ADVANTAGES

• It saves in costs as if requires lesser times and labors as compared to other

methods

• This method is useful to a concern which is short so cash and is eager to bet back
the cash invested in a capital expenditure project

• As the method considers the cash flows during the pay back period of the project
the estimates would be reliable and the result may be comparatively more
accurate.

LIMITATIONS

51
 • It does not take into account cash inflows earned after the pay back period and
hence the true profitability of the project cannot be correctly assessed.

• This method does not consider the amount of profit earned on investment after the
recovery of cost of investment

II IMPROVEMENT IN TRADITIONAL APPROACH THE PAYBACK PERIOD

One of the most commonly used techniques for evaluating capital investment proposal is
the cash pay – back method. Some authorities on accountancy, in order to make up the
deficiencies of the pay back period, evolved new concepts. It is discussed.

(A) POST PAY – BACK PROFITABILITY

One of the limitations of the pay – back period method is that neglects the profitability of
investments beyond the pay – back period. According to this period. The project which
gives the greatest post pay back period profiles may be accepted. It has been explaned in
the following ways.

FORMULAS

Post pay back probitability = Annual cash inflow(Estimated life pay back period)

POST PAY BACK PROFITABILITY

The Salem Co-operative Milk producer’s ltd., are considering two project X
and Y(power plant)

A B

52
Cost of Project Rs.32,70,00 Rs.30,00,000

Life of time 3 years 3 years

Estimated Scrap Rs.75,000 Rs.90,000

Estimated Savings Rs.15,00,000 Rs.18,00,000

Pay Back Period

32,70,000 30,00,000
A= ------------------=2.18 years B=-------------------- = 1.67 years
15,00,000 18,00,000

Surplus Life A=(3-2.18) * 15,00,000

B=(3-1.67) * 18,00,000
Post pay back = A 0.82 * 15,00,000 = 12,30,000
= B 1.23 * 18,00,000 =23,94,000
Index of post back profit

12,30,000 23,94,000
A = ------------------*100 =37.61% B = ---------------*100 =79.8%

30,00,000 32,70,000

Inference

Machine is B is best because the return period is 1.67 years and of the profit
rate is 79.8% so the machine is selected.

(B) PAY BACK RECIPROCAL

Sometome Pay back reciprocal method is employed to estimate the internal

rate of return generated by a project.

Annual Cash inflow

Pay back Reciprocal : =------------------------------------(5.3)

53
 Total Investment

However this method of ranking Investment proposals should be used only when

* Annual savings are even for the entire period

* The economic life of the project is at least twice of the pay back period.

III RATE OF RETURN METHOD

This method is also known as Accounting Rate of Return. Accounting to this

method various projects are ranised inorder of the rate of earnings. Projects which yield
the highest earning are selected and others are ruled out/. The return on Investment can be
expressed in several ways.

(A) AVERAGE RATE OF RETURN METHOD

Here average profit, after tax are depreciation, is calculated and there
it is divided by total capital in the project. This method establishes the ratio between the
average annual profits to total outlay.

The project giving a higher rate of return will be preferred over those
giving lower rate of return. In this way following formula.

Average Annual Profits

= Average Rate of Return = ---------------------------------- * 100(5.4)
Outlay of the project

(B) RETURN PER UNIT OF INVESTMENT METHOD

In this method the total profit after tax and depreciation is divided by
the total investment this gives us the average ratre of return per unit of amount invested in
the project.
Total Profit
= Project per unit of investment = ----------------------------- * 100(5.5)
Net Investment

(C) RETURN ON AVERAGE INVESTMENT METHOD

Under this method, the percentage return on average amount of

investment is calculated to the average investment the outlay of the project is divided by
two

Total Profit depreciation and taxes

54
Return on average Investment = -------------------------------------------- * 100 (5.6)
Total Net Investment

(D) AVERAGE RETURN ON AVERAGE INVESTMENT METHOD

Under this method, average profit after depreciation and taxes in divided
by the average amount of investment. This is an appropriate method of rate of return on
investment

Average Annual Profit

= Average Return on Average Investment = ---------------------------- * 100 (5.7)
Net Investment

RATE OF RETURN METHOD

A B

Investment 32,27,000 30,00,000

(power plant)

life time 5 years 5 years

Project income(Net)

(After Interest,depreciation and taxes)

Years project project

A B
1 1,86,000 1,60,000
2 1,80,000 1,70,000
3 2,25,000 2,05,000
4 2,05,000 1,85,000
5 1,90,000 2,00,000

If the required of return is 10% which project should be undertaken?

No of Years project project

55
 B
1 1,86,000 1,60,000
2 1,80,000 1,70,000
3 2,25,000 2,05,000
4 2,05,000 1,85,000
5 1,90,000 2,00,000
Total 9,86,000 9,20,000

AV Profit = 1,97,200 1,84,000

(A) AVERAGE RATE OF RETURN METHOD

Average Profit(Annual)
Average rate of return = ------------------------------* 100
Out lay of the project

1,97,200
=------------- * 100
32,70,000

=6.03%

1,84,000
=------------------- * 100
30,00,000

= 6.13%

56
 (B) RETURN PER UNIT OF INVESTMENT METHOD

Total Profit

Return per unit of investment method = ------------------ * 100

Net Investment

9,86,000
= ----------- * 100
32,70,000

= 30.15%

9,20,000
=-------------- * 100
30,00,000

=30.66%

(C) RETURN ON AVERAGE INVESTMENT

Total Profit after depre taxes

return on average investment = -------------------------------------- * 100
Total Investment

57
 9,86,000
= ------------- *100
32,70,000/2

= 60.30%

9,20,000
=--------------- * 100
30,00,000/2

=61.33%

(D) AVERAGE RETURN ON AVERAGE INVESTMENT

Average Annual Profit

average return on average investment = ------------------------------- * 100
Net investment

1,97,200
= ---------- * 100
32,70,000

=12.06%

1,84,000
= --------- * 100
30,00,000

=12.26%

58
MERITS OF RATE RETURN

• It takes into consideration the total earnings from the project during its life time.
Thus this method gives a better view of profitability as compared to pay back
period method.

• It is based upon accountancy concept of profit. It can be calculated form the

Financial data.

LIMITATIONS

• It ignores the time of money profits earned in different periods are valued equally.

• This method may not reveal true and fair view in the case of long term

• It does not take into consideration the cash flows which is more important than the
accounting profits.

• It ignores the fact that profits can be reinvested

• There are different methods for calculating the accounting Rate of return. Each
method gives different results. This Reduces the reliability of the method.

TIME ADJUSTED METHOD NET PRESENT VALUE METHOD

This method is also known as excess present value or not Gain method. Under
this method, cash inflows and cash outflows associated with each project are first worked
out. The present values of these cash inflows and outflows are there calculated at the rate
acceptable to the management. This rate of return is considered as the Cut –off rate and is

59
generally determinated on the basis of cost of capital suitably adjusted to allow for the
risk element involved in the project.

The present values of total cash inflows should be compared with present
values of cash outflows. It the present values of cash inflows are greater this or equal to
the outflows the project would be accepted. It will be rejected.

THE SALEM CO-OP MILK PRODUCER’S UNION LTD., IS CONSIDERING

THE PURCHASE OF THE TWO POWER PLANT MACHINES WITH THE
FOLLOWING DETAILS

MACHINE – I MACHINE - II

Estimated life time 3 YEARS 3 YEARS

Capital Cost Rs.3,27,000 Rs.30,00,000

Net Earning

I Rs.12,50,000 Rs.11,00,000

II Rs.1,50,000 Rs.12,55,000

III Rs.13,50,000 Rs.10,00,000

The interest rate is 10% P.A which machine should be preferable suggest to
the organization.

Powder Plant Machine

Years PV Factor Cash inflow Present value

1 0.909 12,50,000 11,36,250
2 0.826 15,00,000 14,19,000
3 0.751 15,50,0001 10,13,850
33,89,100

60
 A Net Present value = 33,89,100

(-) Cost of Machine = 32,70,000

--------------
Loss of machine 1,19,100
--------------

Machine (B) (Powder plant)

Years PV Factor Cash inflow Present value

1 0.909 11,50,000 9,99,900
2 0.826 12,55,000 10,36,630
3 0.751 10,00,000 7,51,000
27,87,530

Net present value = 27,87,530

Cost of Machine =30,00,000

------------
Profit of Machine 2,12,470
-----------

61
Inference

The machine B is Better than the machine A because the machine B is

earning profit but A machine is earning the loss of the same duration. So the machine B
is selected.

MERITS OF NET PRESENT VALUE METHOD

• This method considers the entire economic life of projec

• It takes into account the objective of maximum profitability

• It recognizes the time values of money

• This method can be applied where cash comparison between the project

DEMERITS OF THIS METHOD

• It is not easy to determine an appropriate discount rate.

• It involves a great deal of calculation. It is more difficult to under stand and

operate

• It is very difficult to forecast the economic life of any investment Exactly.

62
 • It may not give good results while comporting projects with in equal investment
of funds.

INTERNAL RATE OF RETURN METHOD

This method is popularly known as time adjusted rate of return method or

discounted rate of return method. The internal rate of return is defined as the interest rate
that equates the present value of the expected future receipts to the cost of investment
outlay. This internal rate of return is found by trial and error. First, we compute the
present value of the cash flows from and investment using an arbitrarily selected interest
rate. Then we compare the present value so obtained with the investment cost. It the
present value is higher than the cost figure, we try higher rate of interest and go through
the procedure again, conversely, it the present value is lower than the cost lower the
interest rate and repeated the process.

The interest rate that brings about this equality is defined as the internal rate
of return. This rate of return is compared to the cost of capital and the project having
higher difference. If they are mutually exclusive, is adopted and other one is rejected. As
this determination of internal rate of return in values a number of attempts to make the
present value of earnings equal to the investment. This approach is also called the trial
and error method.

The Salem Co-op milk producer’s union ltd., are considering the initial
investment of Rs.62,70,000/-

Estimated Net Annual Cash Flows.

4 1 years of Rs. 10,85,000
05 2 years of Rs. 10,60,000
06 3 years of Rs. 19,80,000
7 4 years of Rs. 16,55,000

63
CALCULATE THE INTERNAL RATE OF RETURN

Year Annual PV PV PV PV PV PV PV Pv
Cash Factor Factor Factor Factor
flow 10% 12% 14% 15%

1 20,85,00 0.909 18,95,26 0.892 18,59,82 0,877 18,28,54 0.869 18,11,865

0 5 0 5

2 20,60,00 0.856 17,63,36 0.797 16,41,82 0.769 17,63,36 0.756 15,57,360

0 0 0

3 19,80,00 0.751 14,86,98 0.711 14,07,78 0.674 13,34,52 0.657 13,00,869

0 0 0

4 26,55,00 0.683 18,13,36 0.635 16,85,92 0.592 15,71,76 0.571 15,15,005

0 5 5 0

Total 69,58,97 65,95,34 64,98,18 61,86,090

0 5 5

Inference

64
 The initial investment is Rs.62,70,000. Hence internal rate of return must be
between 14% to 15% (64,98,185 and 61,86,090) the difference comes to Rs. 3,12,095 for
different of Rs. 8,12,095. the difference rate is 1%(64,98,185-62,70,000) = 2,28,185

Therefore Exact internal rate of return

2,28,185
= 14%--------------- * 1%(5.8)
3,12,095

=14% + 0.73% = 14.73%

PROFITABILITY INDEX NUMBER

It is also a time adjusted method of evaluating the investment

proposals. The profitability index also called benefit cost ratio or desirability factor. It is
the ratio of the present value of cash inflows at the required rate of return to the initial
cash outflow of the investment. The proposal is accepted if the profitability index is more
than one. By computing profitability indexes for various projects, the financial manager
can rank then in order of their respective ratio of profitability

PV of Cash inflows
PROFITABILITY INDEX = --------------------------------(5.9)
Initial cost of outlays

The initial cash outlay of the project of Rs.62,70,00

Estimated:

04: Years Rs.23,85,000

05: Years Rs.15,60,000

06: Years Rs.19,80,000

07: Years Rs.26,55,000

Compare the profitability index. The interest rate is at 10% P.A

65
Calculation of Profitability

Years Cash inflows PV Factor 10% PV

1 23,85,000 0.905 21,67,965
2 15,60,000 0.826 12,88,560
3 19,80,000 0.751 14,86,980
4 26,55,000 0.683 18,13,365
Total 67,56,870

Total present Value = 67,56,870

(-)Initial Outlay = 62,70,000

-------------
Net present value = 4,86,870

PV of Cash inflow
Profitability Index (Gross) = --------------------------------(5.10)
Initial cash outflow

67,56,870

=-------------------

62,70,000

= 1.077

Net Present Values

Profitability Index (Net) = --------------------------------(5.11)

Initial cash outlay

= 4,86,870
--------------
62,70,000

66
 = 0.077

= 1.077 – 0.077

= 0.077

Net Profitability Index is positive, the proposal can be accepted.

CHAPTER – 6

6.1 FINDINGS

After analyzing the various relationship between the budget and

budgetary control with help of immense tools of analysis and method of financial
statements of the salem district milk producer’s union ltd., The firm has got the status as
non – profit making concern during the study period 2006 – 2007. Accounting year that’s
relationship enables the most to predict the future over able range of volume and this
knowledge useful in flexible budget during the necessarily period.

For immense help to management the analysis of various budget helps in

finding right solution at right time. Which also helps for optimum utilization of available
of the resources of the company.

• The Flexible budget are to be give the cost per unit of the increase ie 316000 units
and decrease the 3,00,000 units cost per unit is 0499.
• The Sales budget are to the analysis two zones the company is selected zone
chennai. It is give more sales.

67
 • The production budget are considered only three product SMP(skin milk powder)
butter and ghee. The SMP are need to next year 7,55,000 units and butter 1,70,00
units,and ghee is 3,20,00 units.
• Cash Budget are to be analysis of the cash positions of the company. The july
month cash position is 32,69,500 but August month position is
decreased,20,60,500 from previous month coming month up the September of the
cash position increased 31,98,500
• Capital budget are to be based an that following method
• Pay – Back period given the investment period of the project
• The rate of return method are analysis of the return from the interest rate of the
investment money

• The Net present value model are to be analysis the Net value of the project with
profit
• The internal rate of return are to be find out the original interest rate.
• The profitability method are analysis only profit rate.

6.2 SUGGESTIONS

The firm no need for holding much amount of cash. They can invest the money
in various sources ideal funds earn nothing.

I Various budget and budgeting methods of the firm helps to reduce the payment
of interest to the outsiders.

II It is suggested that average contribution of the stock in trade with the current
assets should not exceed the actual even though the stock in trade has been hire
contribution.

III It is suggests that the firm may produce relevance budget and budgetary control
methods for utilizing the available Resources without eliminating the waste.

68
 IV It is suggest that they can be contribuite that more attentions of prepare the wide
range of budget when approaching the contract labors.

V Aavin is the veteran in milk producers in salem district even it has proved it
efficiency in the past years. It is suggest that they can invest their profit with its on
coming new project to agreement is profitable in future.

6.3 CONCLUSION

Identification of investment opportunities is a strategic question salem

district co-op milk producer’s union ltd., of (firms) desire to maintain high credit
worthiness for their debentures and bonds. In formulating financial policy, Minising the
Financial risk and financial flexibility budget and Budgetary Control provided necessary
conservative policy.

Risk analysis of investment is an important task the budget and budgetary

control methods provides and suggestion only a systemizing risk of investment. In real
world the concern of strategic management and budgetary control is total of risk and
comparing the company product, market, Scope and complexity and environment.

It may not be possible for the diversified unique risk. The firm is
threatened by competions, Technologyobsolecences, Govt. Investment and so on.

69
6.4 BIBLOGRAPHY

• Dr.N.MAHESHWARI : Principles of Management Accounting Sultan chand &

sons, publication, New Delhi – 2001

• Dr.R.M.SRIVASTA : Financial Management pragati prakasham publications,

meerut.

• P.V.KULKARANI: Financial Management, Himalaya Publishing house,1987.

Dr.S.P.GUPTA : Financial Management Sultan Chand & Sons Publication, New

Delhi 2002

Annual Report provided by the Salem District Co- op milk producer’s union lt from 2006
– 2007.

70
Annexure

71
THE SALEM DISTRICT CO OPERATIVE MILK PRODUCERS UNION LTD
Abstract of capital budget 2006 – 2007
S.NO Particulars Amount
1 Civil Section 1345000
2 Quality Control 308000
3 Dairy milk sweets 186500
4 Training center 2191000
5 Attur CC 250000
6 P-Velur 599000
7 Namakkal cc 820000
8 Transport Section 3200000
9 Stores 20000
10 APS 17152000
11 Powder Plant 6270000
12 Dairy 1080000
13 Maintenance Section 45082000
14 Pre Pack 1300000
15 Procurement and input 33310000
16 Marketing 3562000
Grand Total 128780500

72
STAFF SALARY AND ALLOWANCES FOR THE YEAR 2006 –2007

S.No Particulars Amount

1 Salary 38256000
2 Dearness Allowance 31200000
3 Other Allowance 5304000
4 EPF Contribution 5760000
5 LSC&Pension 25000
Contribution
6 Inspection Charges to 40000
FPF
7 Bonus 3000000
8 Gratuity 4500000
9 Group Insurance 1000000
10 Double Wages 40000
11 Night Shift Allowance 254250
12 Out of Packet expenses 25000
13 Leave Travel 862500
Concession
14 Surender Leave Salary 1725000
15 T.A 1800000
16 Total 93791750
17 Allocation Salary
No.of Employees 690

73
Cost of Employees 135930
Weighted Avg cost per 11328
employee

74