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1. FIXED CAPITAL
Part of total capital to purchase fixed assets Features: 1. 2. 3. 4. 5. 6. 7. Permanent Existence Long Term effect Substantial outlay Low Liquidity Obtained From capital market Long gestation period Appreciation /Depreciation Depreciation machinery Appreciation land 8. Long Term planning Determinant of fixed capital 1. 2. 3. 4. 5. 6. 7. 8. Nature of industry Direct business Types of product Method of production Scope of Activities Cost of unproductive assets(goodwill,trademark,patents etc) Method of purchasing fixed assets Government subsidy

Importance of fixed capital 1. 2. 3. 4. 5. Not possible to start business without fixed capital Imp for expansion of business Facilitates outdated assets Helpful for survival of growth Useful for future successful business

Sources of fixed capital 1. 2. 3. 4. Issue of equity shares Issue of preference share Issue of debentures Self financing(retained profits)
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5. Loans from financial institutions

Capitalization:
It is the amount at which the companys business can be valuedWhen the book value of the companys shares is greater than realvalue the company is over capitalized. On the other hand if book value of the share is less than real value then the company is undercapitalized. Two concepts of capitalization: 1. Over capitalization 2. Under capitalization 1. Over capitalization: Company raises more capital than resources Indicators of over capitalization: 1. Capital raised is much higher than its earning capacity/power 2. Low earnings 3. Company pays low dividend 4. Book value of shares is greater than real value 5. Existence of ideal capacity Causes /Reasons for Over capitalization: 1. 2. 3. 4. 5. 6. 7. 8. 9. Promotion during boom(more prices for fixed assets) Heavy expenses on advertisements and intangible assets. Shortage of funds/borrowing at high rate of interest. Defective financial planning (issued more shares than needed) Faulty depreciation policy Liberal dividend policy Payment of heavy taxes Over estimation of earnings Delay in execution of projects

Consequences /effect of over capitalization: 1. Company cannot pay timely dividend due to low profits 2. Decline in credit rating of the company 3. Manipulation of accounts 4. Compelled to borrow more funds at high rate interest 5. Company may go into liquidation 6. Shareholders lose confidence 7. Companies may charge higher price to customers 8. Company may find difficult to obtain bank loan. Under Capitalisation: Profit earning rate is much higher as compared to rate of profit earned by similar companies in similar company (book value of shares and real value) Causes of under capitalization 1. 2. 3. 4. 5. 6. 7. Under estimation of future earnings Company promoted during depression(assets at low price) Conservative dividend policy followed(high reserves) Company use its past savings Liberal depreciation policy Benefit of favorable business conditions Rise in the price level 8. Use of retained profit for expansion Effects of under capitalization: 1. High profit encourages other companies to enter the market(competition) 2. Workers demand higher wages 3. Strict government control 4. Rise in the equity share price
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5. Speculation in the market(may be created) 6. Exploitation of consumers

CHAPTER2 :SOURCES OF FINANCE

Definition of Finance:

BusinessFinance is a activity concerned with acquisition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise(B.O.Wheeler)
Need of BusinessFinance 1. 2. 3. 4. Promotional finance(preliminary expenses) Long term finance(acquisitioned permanent/fixed asssets) Short-term finance(current day to day expenses) Development finance-expansion/modernization and rationalization Of business.

Principles of BusinessFinance 1. 2. 3. 4. Strategic principle (corporate objective) Optimization principle Risk return principle (balance between risk and return) Marginal principle (marginal revenue equal to marginal cost) (marginal revenue is greater than marginal cost) 5. Suitability principle 6. Flexibility principle 7. Timing principle 8. Ploughing back principle 9. Principle of Diversification 10. Review principle

Sources of finance: 1. Internal- savings reserves plus in back of profits

2. External sources banks

financial institutions
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capital market issued shares and debentures

Objectives of finance: 1. 2. 3. 4. 5. 6. Obtaining funds at reasonable cost Profit maximization Risk management (unforseen risk) Financial control (inflow and outflow of funds) Capital budgeting(long financial decisions) Working capital management(short term survival is essential Recruitment for long term success) 7. Disposing of profit(fair dividend policy) 8. Wealth maximization (valued assets/shares) Term lending institutions: Banks 1. IFCI (Industrial Financial Corporation 1-7-1948) To provide medium long term loan to industries 2. IDBI (1-7-1964) by govt of India to co-ordinate regulate and Supervise the activities of other financial institutions IFCI,ICICI,UTI,LIC and Commercial Banks To plan and promise key industries To devise system of industrial growth ICICI industrial credit Investment Corporation of India established on 5th Jan 1955 started by Govt of India, world bank And private businessmen (Representatives of private industries) Objectives: 1. To assert in formation, expansion and modernization of industrial units in private sector. 2. To stimulate and promote the participation of private capital 3. To encourage expansion of investment in india 4. To give technical and managerial aid to increase production and employment opportunities.
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CHAPTER 3 :ELEMENTS OF COSTING

CONTENTS: A. INTRODUCTION B. DIRECT COST C. INDIRECT COST D. FORMAT OF COST SHEET E. QUESTIONS

A. INTRODUCTION: Cost refers to the expenses incurred in the manufacture of a product. These are different types of cost

cost

direct

indirect

labour

material

overheads

factory

office

selling & distribution

prime cost

factory cost
/working cost

cost of production

Total cost of goods + profits= selling price

B. DIRECT COST Fixed expenses incurred on manufacture, sale, distribution and production Classified as: 1. Factory overheads indirect material/ labour 2. Office overheads office salary, lighting, telephone. 3. Selling and distribution overheads salaries to salesmen, Advertising cost, commission, rent etc C. INDIRECT COST Fixed expenses incurred on manufacturing, distribution & sale of the product. They are classified as under (a) Factory Overheads Indirect Material like lubricants supervision etc. (b) Office Overheads office rent, salary , lighting etc. (c) Selling & Distribution Overheads Sales promotion experts salary to salesman commission, rent of show room. D. ELEMENTS OF TOTAL COST
In every manufactured product or operation, there are three cost elements (or its integral). These are materials, labours and overhead. These primary elements provide management with information necessary for income measuring and product pricing. These are being explained as un der: Materials Materials indicate principal substances used in production. Examples are cotton, jute, iron -ore. silicon, etc. The cost of material is further divided into direct and indirect materials. Direct materials.These include all material directly used in production and easily traceable to a finished product. In other words, it is the material which can be measured and charged directly to the cost of the product. Direct material includes the following: 1. All materials specially purchased for a particular job, order or process. 2. All materials including primary materials and raw materials purchased and subsequently issued from the stores for
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particular job, order, etc. 3. Components purchased or produced. 4. Materials passing from one operation or process to anotherparty finished goods. 5. Primary packing materials, e.g. cartons, wrappings, cardboard boxes, etc. Items such as import duties, dock charges, transport of materials, storing of materials, cost of purchasing and receiving materials and cost of rectifying materials are added to the invoice price of materials and it is at this enhanced initial cost that the material is charged. Indirect materials.These are materials which are used ancillary to manufacture and cannot be traced into the finished product. These form a part of manufacturing overhead. Examples are glue, thread, nails, consumable stores, printing and stationery material, etc. Labour Labour is the physical or mental effort expended on the production of an item. It is the active factor of production as against material which is a passive factor. The cost of labour is further divided into direct and indirect labour. Direct labour. Direct labour cost consists of wages paid to workers directly engaged in manufacturing or handling a product or engaged in a particular job or process. It can be associated directly with the product. It is also known as process, labour, productive labour or operating labour. Indirect labour.This includes wages paid for all labour which is not directly engaged in changing the shape or composition of raw materials. It cannot be traced directly to the product. Like indirect material, indirect labour forms part of the manufacturing overheads. Examples of indirect labour cost are wages paid to foremen, supervisors, store -keepers, timekeepers, salaries of office executives and the commission payable to sales representatives. The above direct and indirect classification is not strict enough. The classification of cost based on relationship to the product will change as the relationship changes. For example, iron and steel used in the manufacture of an automobile is direct material but that used in containers for shipping them is an indirect material cost. So is the maintenance and supervisory personnel in a manufacturing plant as their function is not directly related to production. But the maintenance personnel employed in a company that provides maintenance services to others would be considered a direct costs.

Direct Expenses Direct expenses, also known as "chargeable expenses', include any expenditure other than direct material or direct labour directly incurred on a specific cost unit. Examples of direct expenses are as follows: 1. Hire of a special machinery or equipme nt for a particular order or product. 2. Cost of special layout, designs or drawings. 3. Maintenance cost of such equipment. Indirect Expenses Indirect expenses are those incurred for the business as a whole rather than for a particular order, job or product. Examples of such expenses are rent, lighting, insurance charges, etc.

Overheads Overheads may be defined as the aggregate of indirect material, indirect labour and indirect expenses. Thus, all indirect costs are overheads.These cannot be associated directly with specific products. Hence, the amount of overheads has to be allocated and apportioned to products and services on some reasonable basis. The synonymous term is 'burden'. Overheads may be sub divided into the following groups: 1. Factory overhead s. 2. Administrative overheads. 3. Selling and distribution overheads. Factoryoverheads.These include indirect material, indirect labour and indirect expenses incurred in the factory till that stage when goods are ready for despatch. Examples of factory overheads are as follows: 1. Indirect material such as consumable stores, cotton waste, grease and oil, small tools, etc. 2. Indirect wages such as salary of the factory manager, wages of the foremen, supervisors, time -keepers, store-keepers, etc. Administrative overheads.These consist of all the expenses incurred in connection with the management functions of planning, directing and controlling the operations of an organisation. The examples of administrative overheads are as follows:
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2.Indirectlabour such as sal aries of clerks, secretaries and accountants, general manager, directors, executives, etc. 3.Indirect expenses such as office rent, lighting, heating and air-conditioning, depreciation, repairs and maintenance of office machines, legal charges, bank charge s, audit fees, etc. Administrative overheads are also known as office on cost, establishment expenses, etc. Selling and distribution overheads Selling Overheads.These are costs incurred to create and stimulate demand for the product, to secure orders etc. It includes catalogues and price lists salaries and commission of sales manager, travellers and agents, showroom expenses, advertising, cost of preparing tenders and estimates for special selling projects, after -sale service, etc. Distribution Overheads. Under this heading would be included warehouse expenses, carriage outwards, upkeep and running of delivery vehicles, packing cases, wages of despatch clerks and labourers, etc. Selling and distribution overheads are also known as marketing cost and are generally grouped together because of the overlapping nature of the two functions. The elements of cost are shown diagrammatically in Fig. 2.5.

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Fig. 2.5 Elements of cost. Notes: 1.Figure 2.5 is based on the absorption costing principle. 2. In the case of marginal costing, the amount of production overhead absorbed would relate to the variable element only. TOTAL COST COMPONENTS The computation of total cost of a product or service passes through several stages. The successive stages through which the costs flow give rise; to major divisions of cost are given below: (i) Prime cost. Also called basic, first or flat cost, it consists of costs of direct material, direct labour and direct or chargeable expenses. (ii)Factory cost.Also known as works cost or manufacturing cost, it includes prime cost and the proportionate factory overheads.
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(iii)Office cost. Also called cost of production or gross cost, it is made up of factory cost plus office and administrative overheads. (iv) Total cost. Cost of production and selling and distribution overheads constitute the cost of sales or total cost. COST SHEET The statement of cost according to element -wise is known as cost sheet. The preparation of cost-sheet is one of the most important and primary function of cost accounting. The statement discloses the following: 1. Prime cost 2. Work cost 3. Cost of production 4. Total cost When the total cost is divided by the number of units produced, quotient is the average cost per unit of the work performed. Separate columns could be provided for the total and unit cost of each clement of cost. Columns could also be drawn for the current and the past periods. Cost sheet is prepared at weekly, monthly or other interv als. The specimen of a cost sheet is given in Fig. 2.6. COST SHEET FOR THE PERIOD...

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CHAPTER 4:

BUDGETARY CONTROL

Budgetary Control Budget furnishes a device for correlated planning and a means whereby authority maybe broadly delegated without loss of control" Koontz &O'Donell LEARNING OBJECTIVES Objective of Budgetary Control System Procedure to be followed in Designing and Operating Budgetary Control System Essentials of Good Budgetary Control System Meaning of Fixed Budget and Flexible Budget Various kinds of Functional Budget Limitations of Budgeting Control Systems Planning and Budget Concept of Budget and Budgeting Control Nature of Budget and Budgeting Control Objectives of Budget and Budgeting Control Advantages of Budget and Budgeting Control Classification of Budgets Limitations of Budget and Budgeting Control Essentials of Effective Budgeting

INTRODUCTION A budget is defined as a quantitative and/or financial statement prepared prior to a defined period period of time reflecting the policy to be pursued during that period for the purpose of attaining a given objective. Budgetary control is the establishment of budgets relating to the responsibilities of the executives to the requirements of a policy and the continuous comparison of ac tual with budgeted result, either to securebyindividual action the objectives of that policy or to provide a basis of its revision. Budget is thus, the plan of operations in form of statement in financial terms. Budgeting involves the preparation of budgets. Budgeting should be departmentalized in order to attract personal interest of the departmental heads. To illustrate, the producti on department should prepare production budget while salesdepartment should prepare sales budget. Thus,
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1. BUDGET: It is a detailed plan and operations for some specific future date. It is prepared in advance and based on future plan of action. 2. CONTROL: Comparing current performance with some pre determined plan. It helps to know about proper utilization of available resources. 3. BUDGETARY CONTROL: It is the system of management control and accountancy in which all operations are forecasted as far as possible a nd the actual results copared with the forecasted and planned ones. It involves: (i)Preparation of budget. (ii) Continuous comparison of actual with budget figures. (iii) Revision of budget in the liquid charged circumstances. Thus when budget and budgeting becomes a means of planning and controlling the operations of an enterprise it is called as budgetary control. OBJECTIVE OF BUDGETARY CONTROL SYSTEM Following are the main objectives of a budgetary control system: 1. To forecast operating act ivities. It provides definite targets for income and expenditure of eachdepartment. 2. To provide co-ordination of the various activities of the business. Various divisions of a business like production, sales, etc., are co -ordinated by co-ordinating the activities of different functional heads. The system, thus provides valuable service to the co -ordination function of themmanagement. 3. To serve as an ideal means of communication. 4. To serve as a measure of performance. The system sets down plans of integration of departmental performances. 5. To serve as a means of control. The system thus contributes very much in the co -ordination, communication and control functions the management.

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Procedures to be Followed in Designing and Operating Budgetary Control System Before mentioning the procedures to be followed for the design and operation of the Budgetary Control System, let us clear the following two matters: (i) Procedures vary from one business to another. Under mentioned are merely the general p rocedures to be followed. (ii) The commencement of procedures presupposes the existence of positive backing by directors and managers with active participation of all key personnel in computing forecast and budgets. Procedures to be Followed A. To make Forecasts for the following

1. Sales of product or services 2. Production 3. Stock 4. Production cost, Selling and Distribution cost, Administration cost and Development cost 5. Cash 6. Credit - Debtors and Creditors 7. Purchasing 8. Capital Expenditure 9. Profit and Loss Forecast 10. Balance Sheet Forecast B. To compare Alternative Combination of Forecast

This involves, 1. The consideration of principal budget factor (if any) and limiting factors (key factors) 2. The actions needed to overcome them 3. Cost of such actions 4. Selection of the optimum combination of forecasts Under this step, it would not be out of place to mention some of the principle budget factors (alsoknown as limiting or governing factors) I. Materials: 1. Availability of supply 2. Restriction imposed by license, Quota etc.
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II.Labour i. General shortage ii. Shortage in Key processes III.Sales: i. Low market Demand ii. Shortage of experienced salesmen iii.Insufficient advertising IV.Capacity of plant: i. Lack of capital ii.Lack of place iii.Lack of markets V.Management: i. Lack of capital ii. Lack of knowhow iii. Insufficient executive etc C. To prepare Budgets This step can be taken only after aforementioned steps have been taken. Following points should be noted in this connection: i. They should be prepared with as much accuracy as possible. ii. They should be departmentalised. iii. They should be prepared on the basis of reliable estimates of the past and present factors. iv. They should be prepared either on a flexible or on a fixed basis. D. To set up Organisation for Budgetary Control The proper operation of the Budgetary Control system generally involves the following matters: 1. Establishment of budget centres: alternatively cost centres. A budget related to a particular bud get centre is referred to a departmental budget. There should be a departmental budget for each department. 2. Preparation of an organisation chart defining functional responsibility of each member of man agement. Such a chart depends upon the nature and size of the business undertaking. 3. Establishment of a Budget Committee to formulate a programme for preparing budgets and to exercise overall control.
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4. Introduction of appropriate accounting system. Accounts should be suitably classified. There should be a chart of accounts corresponding with the budget centres. There should be a mechanism for various analysis and reporting thereon. Moreover, there should be regular and continuouscomparisons of budgeted and actual figures. 5. Preparation of Budget Manual setting out : 1. The responsibilities of the persons concerned 2. Form and reports. 6. Determination of the key factor for priorities in functional budgets. 7. Establishment of normal level of activity. After considering key factor and the net probability, the management decides and lays down the normal level of activity which is important for productionplanning. 8. Determination of Budget period. Before the budgets are actually prepared, the length of periodfor which they are to be prepared should be determined. BB ESSENTIALS OF GOOD BUDGETARY CONTROL SYSTEM There should be effective budgetary control system. Following are the essential requirements of an effectivesystem. 1. Plan of operation should be well -defined. 2. There should be adequate system of Financial and Cost Accounting. The system should be accurate. 3. Budgets should be prepared in the light of what is called business policy. Both the Planning and Budgeting should be made within the frame world afforded by policy. 4. Budgeting should be supported by Top Management. As mentioned earlier, the budgets should have positive backing by directors and managers. There should be active participation of all key personnel. 5. All these persons who are concerned with the operation of the system should be properly and continuously instructed with all the techniques of the system. 6. Budgets should be responsible executive. 7. There should be adequate provisions for the comparison of budgeted and actual figures. In other words, the actual expenses and actual output, should be constantly compared with pre-determined costs. 8. There should be complete co -ordination between all levels of management. 9. Procedures for the design and operation of the system should be properly established (keeping in view the nature of business, organisationetc) and followed. 10. The system should be flexible, it should provide for all possible unforeseen circumstances. Budget Centre
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Budget centres (or Cost centres) are the areas selected for the purpose of controlling the costs at the point at which they are incurred.Following points should be noted while selecting the budget centre: 1. Areas to be selected should be suitable for the purpose. In case of production cost, control point lies at supervisor and operator level. 2. Budget or cost centres should not be too large. 3. Areas to be selected should comply with the natural responsibilities of supervisors and executives. 4. Budget should be prepared for each budget centre. Such a budget is referred to as a departmental budget. Budget Committee It is generally established in case of large companies where personal touch is impossible without co ordination. It is the budget committee that maintains the necessary co ordination. The committee consists of the Chief Executive (may be Chairman, the Budget Controller or Budget Officer or the Committee Secretary). The Committee consists of the Chief Executive (may be Chairman, General Manager, etc) of the Company, the Budget Controller (or Budget Officer or the Committee Secretary) and heads of each functional division of the business (i.e Sales Manager, Production Manager etc) The Chief Executive of the company guides on the matter and delegates the responsibility for operat ing the system to the Budget Officer.The Committee should be of reasonable size. A very large committee may become unproductive. Functions of the Committee are as follows: 1. To put the policy determined by the Board of Directors into practical terms. 2. To ensure the achievement of the objectives. 3. To plan, operate, co-ordinate and control the activities. 4. To receive forecasts and budgets and to discuss them 5. To discuss the periodic results for the budgets 6. To consider special problems (for example, fall in sales, increase in cost etc). 7. To advise and also act upon the capital ex penditure projects. The main functions of budget officer (who in Budget Committee, stands next to the Chief Executive of a Company) are as follows: 1. To prepare schedules of estimates, revised budget schedules and budget report and also to review the periodic budget report. 2. To arrange for meeting of the Budget Committee and the preliminary programme for the com pilation of the budgets.
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3. To co-ordinate the budget data of all the divisions and departments. 4. To confer with the executives of functional divi sions as to the results shown in periodic budget reports. 5. To deliberate with the chief executive or Board of Directors as regards the policies to be pursued after review and interpretation of the budget reports. Budget Manual It has been defined as a document which sets out the responsibilities of persons engaged in the routine of and the forms and records required, for budgetary control. Budget manual or booklet. It organisation and of a good budget may be in the form of a document, schedule shows, in written form, the budgeting procedures. Following are the requirements manual.

1. It should be well-written 2. It should be indexed for quick and easy location on information 3. It should be divided into distinct sections to facilitate the issue of appropriate sec tion to the executives of functional divisions or departments. 4. It should be on loose leaf form to facilitate. i.Alterations to be made as and when required ii.Division into distinct sections iii.Distribution to the persons effected. Budget manual includes the information on the following matters: (List of only most important matters is given below). 1.Explanation of the principles of the budgetary control system. 2.Description of the objectives of the Budgetary Control Systems and the benefits to be diff erent from its use. 3.Procedure to be adopted for the operation of the budgetary control system. 4.Definition of the responsibilities of functional anddepartmental budget centres. 5.Statement of the authority given to each manager. 6.Time tables for all stages of budgeting. 7. Forms, number, copies and the purposes of the Reports and Statements to be employed. 8. Definition of the budget periods and control periods. 9. The accounts code and classification to be employed. Considering the above, we may say that theBudget Manual
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renders valuable services to the management in budgeting. It is an invaluable document in the Budgetary Control System.

Budget Period Budget period is a period covered by Budget. We may not form rigid rules on the length of period to becovered by budgets, as we may not be sure about the stability of the business. Selection of budget period depends upon many factors, like external economic conditions, internal circumstances, nature of the plan? to be made, etc. However, we may generally write on budget periods as follows 1. Some forecasts like capital expenditure may be made for a long period i.e.upto 10 years or more. Hence it is obvious that long-term budget period is necessary for them. However, in actual practice % the budget period is restricted to a year in such cases also. And this step, is no doubt advisable; It does not mean that long -term forecasts are in this connection restricted to relatively short -term but the process of budgeting them is carried out annually. 2. Viewing from the standing point of certainty which may be the limiting factor for the budget period, the budget period should be short in case of the uncertainty. It should be noted that )greater the uncertainty, the shorter shou ld be the length of the budget period. Longer period of i the budget may not give the reliable results (except in the case where fluctuations are averaged I out in long period this sometimes happens). Instead shorter the period, the more reliable will be the figures obtained. 3.Selection of the budget period also depends upon the accounting year of a concern (which is usually a year). That is why the budgets are generally prepared for a period which is either a year or a multiple of a year. 4.Under the static budgets plan, the budget period is usually a year, similarly, in case of flexible budgets, (explained in this chapter), the budget period is generally a year. Budgets may be classified in the light of the budget period such as long-term budget (budget p eriod of 5 to 10 years), short-term budget (a year or two) and current budget (less than a year i.e. in months). Control Periods After selection of budget period, say a year, the division of budget into quarters is done and in turn, each quarter is subdivided into its respective three separate months. The division of the budget period into shorter periods is made for the purpose of achieving control. Such shorter periods are known as control period. In case of budgets prepared for every quarter, the control periods may be one
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month which may, in turn be sub -divided into four respective separate weeks. Again here also, there are no rigid rules in this connection. For more accuracy (i.e to avoid the effect of holidays, etc.), some accountants determine the length of control period by dividing the net working days in a year by twelve (instead of using one calendar month as a monthly control period). This again requires the calculation of calendar variances to adjust the differences in the number of working days from one period to another period. To conclude, the Control Period may be a quarter, a week, a day or even in hours. In actual practice, a combination of periods of different lengths is used after consideration of the nature of costs from the viewpo int of control. For example, direct labour, materials etc. may often be matched daily, while overhead costs may be controlled each four -weekly, period. Key Factor Net Probability Key factor, also called principal budget factor, is of great importance in the process of budgeting. Budgets should be prepared after considering all the key factors. For example, in the case of materials, availability of supply or restrictions imposed by licenses, quotas etc. may act as limiting factor. Similarly, adver tisement capacity, demand of goods in market are the limiting factors to be considered while preparing sales budget. Examples of key factors under each aspect (i.e Material labour etc.), have already been mentioned. Sales demand is the most important key factor to be considered in budgeting. The extents of the influence of this factor must first be assessed. Net Probability Net probability is the number of products that can be produced or sold after considering the extent of influence of the limiting factor. This is why the word probability is joined with the adjective Net. For example. Net Probability for the following two products (A&B) will be 4,000 units and 10,000 units respectively: TABLE 20.1

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SSMEANINGOF FIXED BUDGET AND FLEXIBLE BUDGET Budgets may be classified in the light of the flexibility as Fixed Budget and Flexible Budget. Fixed Budget is based on rigidly fixed targets. Such budget is designed to remain unchanged irre spective of the level of activity attained. It shows only one volume of output and related costs. Such budgets are prepared in advance (1 to 3 months advance) of the budget period covered by them. In case of uncertainty, fixed budgets may not enable costs to be controlled effectively as the volume ascertained in the budget may not re main the same in practice. Fixed budget is also known as Static Budget. Flexible Budget is a budget which is designed to change in accordance with the level of activity attained. It is also known as variable budget or sliding scale budget. It takes into account, the probable levels of activities. For example, possible output at 60 per cent le vel of activity, at 80 per cent level of activity and so on. In case of uncertainty, flexible budget is prepared as it is the only type of budget which can enable costs to be controlled effectively. Technique of flexible budget requires the classification the related expenses into fixed, variable semi -variable. case, there are semi -variable expenses, these would separated into fixed expensesand variable expenses, adopting various methods e .g. least squares regression scatter graph chart. of In be by or

In practice, it is advisable to use both type of budges. Fixed budgets are prepared in case the sales of the concern can be most accurately forecast. In case of uncertainty, flexible budgets are preferred. For the purpose of control, the flexible budget is the only way a concern or a firm, may also, at first prepare fixed budgets only and then may split them up into short-term flexible budgets. VARIOUS KINDS OF FUNCTIONAL BUDGET Following are the commonly used functional budgets: 1. Sales Budget: It shows total anticipated sales (in quantities and in value). Classified according to groups of products, salesmen of geographical locations. 2. Selling and Distribution Cost Budget: It shows the estimated cost of selling and distribution of goods. 3.Manufacturing Budget: This budget may be sub-divided into the following budgets: (a) Production Budget (b) Purchase Budget (c) Personnel Budget (d) Factory overhead Budget (e) Research Budget (f) Office and Administration Budget
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(g)Capital Budget (h)Plant Utilization Budget These are described as below: 1. Production Budget It is a forecast of production based on sales, productive capacity, inventories etc. 2. Purchase Budget It shows the purchases required for the anticipated sales and production. Purchases include both direct and indirect materials. ' 3. Personnel Budget This shows the estimates of remuneration payable to workers both direct and indirect. 4. Factory overhead Budget It covers all factory overheads. It classifies factory overheads into Fixed; Variable and semi -Variable factory overheads. 5. Research Budget It includes research costs incurred in developing and proving the products. 6. Office and Administration Budget It covers all administrative expenses such as staff salaries lighting etc. 7. Capital Budget This is generally a long-term budget and covers capital expenditure on replacement of obsolescent plant, acquisition of new machinery etc. 8. Plant Utilisation Budget This budgets showsthe requirements of plant and machinery to meet the budgeted produ ction. 9. Cash Budget It shows anticipated receipts and payments of cash. It is based on the operating budget and the statement of financial position at the beginning of the budget period. 10. Master Budget It is an integration of separate budgets and include the estimated profit and loss account for the future period and the estimated balance sheet at the end of that period. As its name indicates, it is a summary of all other principal budgets. BENEFITS AND WEAKNESSES OF THE BUDGETARY CONTROL SYSTEM There are various benefits to be derived from the budgetary control system. These are mentioned below: 1. The system co-ordinates and controls the policy, plans and action. This facilitates an achievement of the budget goal. 2. Existence of efficient budgetary c ontrol system is an indication of sound management. 3. All personnel know the part they have to play to achieve the targets set. 4. Corporate planning and budgetary control can be linked.
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(That is why an efficient budgetary control system is an indication of sound management). Planning does not cover the present, but also covers the future. In other words, it takes into account the past results with an eye to the future. 5. Budgetary control system is very helpful in the standard costing system. 6. On account of an efficient operation of the system, the costs may be reduced and wastage in manpower and material may be eliminated. 7. Comparison of alternative courses of action, constant maximum utilisation of resources, com parison of the actual output and expenses with the budgeted figuresall these help in achieving the maximum profits. 8. On account of budgetary control system, the concern may be able to utilise the liquid capital in a proper manner. 9. The system serves as an effective control over stores and stocks. 10.The Cash Budget enables the management to know the need for additional cash or the availability of excess cash. This helps the management to arrange for the credit (bank overdraft, etc) or to invest surplus cash in advance, (as the case may be). 11.The sale forecast enables the management to key the economic balance between plant and machinery, storage, warehouse and inventories. Weaknesses (or Limitations) of the System Every system may not bestow all the advantages mentioned above. This is due to the following reasons: 1. All the systems may not be equally efficient. 2. Person operating the systems may also vary in efficiency. 3. The concern operating the system may have some problems limiting the efficiency of the concern. Thus, efficiency of the system itself, (its org anisation etc.), efficiency of the persons handling the system, and also the problems related to the concern, may limit the advantages or add to the weaknesses of the system. Inaccuracy Absolute accuracy is impossible in the budget plan. In actual practice, the forecasting and budgetingarenot as easy as one may think. However, a high standard should always be aimed at. All pertinent facts should be considered before setting the targets. Targets set should be realistic. In the absence of reality in the budgeted figures, the system is likely to be of very limited value. Lack of Support Budgetary control system, in order to be successful, must have the whole hearted support of management. The success of budgetary control system is dependent upon the energies
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and efforts of the management. Mere operation of Budgetary control system in an organisation does not ensure its success. Similarly,does not guarantee future profits. Instead, the system is only a way or a medium that brings to light the fact that a mistake has been made and allows corrective action to be taken within a reasonable time. It is then the duty of the management to concentrate on the mistake enlightened by the system and to takecorrective action within a reasonable time. If no steps are taken in this connection, the system itself willnever avoid the mistakes. Thus, the budgetary control system comparing does not replace sound management. It is only an impersonal approach. One should understand the fact that mere passing the examination and getting the degree does not give us anything, it is upto the degree holder to achieve the maximum benefit of this degree. If he does not at all take any chances enlightened by his degree, the degree itself then becomes of a very limit value from the vi ewpoint of the degree holder. Similar is the case with the budgetary control system comparing the system with the degree and the management with degree holder. Excessive Cost The cost of installing and operating the budgetary control system sometimes limits the utility of the system. The cost of the system should always be considered in the light of benefits to be received from the system. No hard and fast rules can be laid down, for this depends on the size and nature of the activities of the individual business. However, the following may be done to minimise cost: i. To fix a percentage for comparing the total cost of the accounting function with the direct labourcost or with the value of sales (keeping in view the size and nature of business) ii. Also to obtain comparative costs through a trade association from other business. iii. To employ qualified men and women who understand budgeting. iv. To mechanise the accounting function (again keeping in view the size and nature of the business. The cost of mechanisation should also be considered. Lack of Compromise between Flexibility and Rigidity To become useful, the budgetary control system should allow flexibility in its structure keeping in view the changing business conditions. Degree of flexib ility should always be considered. The system should not be too rigid nor it should
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be too much flexible. The following may be noted in this connection. i. It should be flexible enough to allow the implementation of any decisions to be made. ii. Plans should be made very carefully in order to avoid frequent changes therein. iii. Budgets should be revised only if there are significant changes in conditions and circumstances. The above rules are important to note as the system loses its usefulness on account of too much rigidity and too much flexibility may also result in loss of control. Hence, there should be a compromise between the two. Overlapping of Duties In Budgetary Control System, the responsibilities of the executives and personnel for the achievement of the policy are defined. Theoretically, this may be one of the advantages of the system. But, in actual practice, the task of putting the appropriate responsibilities on the executive and personnel is not so simple as one may assume. Quite often, there may be overlapping of responsibilities. Improper definition of responsibilities causes many problems and limits the efficiency of the system. It should, therefore, be noted that responsibilities should be clearly understood and stated. Illustration 1: Assuming the following overhead expenses in a factory when operating at 50% of normal capacity draw up a flexible budget on the basis of 75%, 100% and 125% of normal capacity. Against each expense, indicate the principle upon which you have revised it, if at all for the different operating volumes. TABLE 20.2

Foreman Assistant foreman Inspectors Shop Labourers Machinery repairs Defective work Consumable Stores Machine depreciation

600 400 650 400 1,000 250 200 1,10 Rs.4,600

FLEXIBLE BUDGET (For overhead expenses) Cost Centre Machine Shop

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Month

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Normal Capacity (Units)

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A]

CASH FLOW STATEMENT

CASH FLOW STATEMENT IS PREPARED AT THE END OF THE YEARS & ITS ADDITION TO FINAL ACCOUNT. CSSH FLOW STATEMENT SHOW THE MOVEMENT OFCASH & CASH EQUIVALENT DURING THE YEARS CASH EQUIVALENT MEANS HIGHLY LIQUID INVESTMENT WHICH CAN BE EASY COVERTED INTO CASH . CASH FLOW STATEMENT IS COMPUSOLY FOR ALL THE COMPAY. IT NEED TO PREPARED ALONG WITH FINAL ACCOUNT AND IT IS TO SSUPPILES BY WAY OF INFORMATION

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