Budgeting

Budgeting provides a powerful tool to the management for the efficient performance of its functions, viz. planning co-coordinating and controlling activities. Budget: A budget is a financial and /or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objectives.

Analysis of this definitions reveals the following points. 1. It is expressed in financial and quantitative terms. 2. Prepared prior to defined period of time. 3. It is prepared for definite future period 4. The policy to be followed to attain the objectives must be laid before the budget is prepared. Advantages of a budget 1. It brings efficiency and improvement in the working of the organization. 2. It is a way of communicating the plan s to various units of the organization.

4.It is a way of motivating managers to achieve the goals set for the units. 5. It helps in developing team sprit where participation in budgeting is encouraged. 6.It helps in reducing wastage and losses by revealing them intime for corrective action. 7.It serves as a basis for evaluating the performance of managers. 8.It serves as a means of educate the managers.

Types of budget A Classification according to time: 1.Short time budget 1-2 years 2.Long term budget 5-10 years 3.Current budget 1-2 weeks B Classification on the basis of functions. 1.Operating budget: Sales,Production, labour Purchase 2.Financial budget: Cash, Income, CE, Income 3.Master budget. C Classification on the basis of flexibility 1.Fixed budget 2.Flexible budget.

Flexible budget Flexible budget ( also known as variable or sliding scale budget) is a budget which is designed to change appropriately with fluctuations in output or turnover and furnish budgeted costs for any level of activity actually attained. Fb may also be used for adjusting budgets to current conditions arising out of seasonal variations or changes in the length of the working period. A fb is more elastic, useful and practical. It takes into account the changes in the actual circumstance and is useful for the purpose of control

Zero Base Budgeting Traditional budgeting process generally assumes that the allocation of financial resources in the past were correct and will continue to hold good for the future as well. In most cases, an addition is made to the current figures of costs to allow for expected increase. Consequently, the budget generally takes an upward direction year after year, inspite of generally declining efficiency. Such system of budgeting cannot to promote operational efficiency and create several problems to the top management.

Disadvantages of traditional budgeting 1.Activities involving wasteful expenditure are not identified. 2.Inefficiencies of prior years are carried forward in determining subsequent years level of performance. 3.Managers are not encouraged to identify and evaluate alternative means of accomplishing the same objectives. 4.Decision making is irrational in the absence of rigorous analysis of all proposed cost and benefits. 5.Key problems and decision area are not highlighted, thus no priorities are established throughout the organization. 6.Managers tend to inflate their budget request resulting in more demand for funds than their availability.

Zero base budgeting

ZBB as the term suggests, examines or reviews a programme or function or responsibility from scratch (no base figures). The reviewer proceeds on the assumption that nothing is to be allowed. The manager proposing the activity has, therefore, to justify that the activity is essential and the various amounts asked for are reasonable taking into account the outputs or results or volume of activity envisaged .No activity or expense is allowed simply because it was being allowed or done in the past.

It involves (1) dealing with practically all elements of manager's budget request. (2) critical examination of ongoing activities along with the new proposed activities. (3) Providing each manager a range of choice in setting priorities in respect of different activities and in allocating resources.

Process of ZBB 1.Determining the objectives of budgeting; The objectives may be cost reduction, staff overhead, achieving sales target or elimination of project which do not fit into achievements of the organization. 2.Deciding on scope of application: The extent of Application needs to be decided, i.e all the units in the organisation or a particular unit, 3.Developing decision units: Cost benefit analysis is to be prepared for decision units, whether they should be allowed to continue or be dropped each decision unit. All decision units should be independent of other unit so that it can be dropped at if CBA proves negative

4.Developing decision units: A decision packages for each unit should be developed. While developing decision package, answer to the following questions would be desirable. 1.Is it necessary to perform a particular activity at all? If the answer is negative there is no need to proceed further . 2.How much has been the actual cost of the activity and what has been the actual benefit both in the terms of tangible and intangible forms. 3.What should be the estimated cost of the level of activity and the estimated benefit from such activity.

4.Should the activity be performed in the way in which it is being performed and what should be the cost? 5.If the project or activity is dropped, can the unit be replaced by an out sided agency? After completing decision packages for each unit the units are ranked according tot the findings of CBA. Ess ential projects are identified are given the highest ranks. The last state is that of implementing the decision taken in the light of the study made.

Advantages of ZBB 1.It enables management to allocate resources according to priority of the programmes. 2.It ensures that each and every programme undertaken by managers is really essential for the organization and is being performed in the best possible way. 3.It enables the management to approve departmental budgets on the basis of CAB. No arbitrary cost or increase in budget estimates are made. 4.It links budget with corporate objectives. 5.It helps in identifying areas of wasteful expenditure 6.It helps in implementation of MBO.

Disadvantages of ZBB 1.It is complex and time consuming. 2.Short term benefits may be emphasized to the detriment of long term plans. 3.Affected by internal politics- can result in annual conflicts over budget allocation

Master budget is a comprehensive integrated financial plan developed for a specific period e.g., for a month, quarter of a month. The master budget has two major parts including the operating budget and the financial budget. The operating budget begins with the sales budget and ends with budgeted income statement. The financial budget includes the capital budget as well as cash budget and budgeted balance sheet

Advantages of master budget 1.It presents overall profit position of the concern. 2.It enables the planning and control of the profit of the business. 3.It enables the investigation of causes for variance 4.The accuracy of all the budgets are automatically checked. 5.It integrates and coordinates various functional activities. 6.It communicates and motivates employees 7.It promotes continuous improvement 8. It guides for performance

Limitations of master budget 1.It is time consuming process 2.At the end of the year bias crept in

Process costing
Process costing is the type of costing applied in industries where there is continuous or mass production of standard products. In such industries all goods produced are for stock, units produced are identical, goods move down the production line in a continuous Stream and all factory procedure are standardised.Costs are compiled for each process or department by preparing a separate account for each process.

Application : Chemical works, Flour mill, Oil refining,,Textile mills, Cement manufacture, Paper manufacture, food manufacture , Paint manufacture, Distilleries, Soap making, Milk dairy, Breweries, Sugar works, Confectionaries, Plastic manufacture. Process Costing Procedure: 1.The factory is divided into a number of processes and an account is maintained for each process. 2.Each process account is debited with material cost, labour cost, direct expenses and overhead allocated or apportioned to the process.

3.The output of a process is transferred to the next process in the sequence. In other words, finished output of one process becomes input for the next process. 4.The finished output of the last process ( the final product) is transferred to the finished goods account. Cost Per Unit = Cost incurred during the period Number of units produced

Standard costing Standard cost: In the words of Brown and Howard, The Standard cost is a predetermined cost which determines what each product or service should cost under given circumstance. Thus standard costs are planned costs that should be attained under a given set of operating conditions. The main object of standard cost is to look forward and assess what the cost should be as distinct from what the cost has been in the past. Standard costing: Brown and Howard have defined standard costing as a technique of cost accounting which compares the standard cost of each product or service with the actual costs, to determine the efficiently of the operations so that any remedial action may be taken immediately

Application : Job Industries