BUDGETARY CONTROL

1. BUDGETARY CONTROL A TOOL FOR PLANNING AND COST CONTROL

2. Definition of a Budget “A plan quantified in monetary items, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective” - ICMA

3. Budget… A projection or estimate of future output, costs & revenue Guide or blueprint for the forthcoming period Expressed in monetary terms

4. Features of a budget Indicates and declares the business policies Communicates the objectives and policies in numerical terms Specifies time frame to achieve them. Tool of management control. Provides an yardstick for comparison. Helps in fixing responsibilities. Means of coordination of the business as a whole. Provide direction towards the goals

5. Budgeting Refers to the management’s action of formulating the budget. Budgeting helps in : Obtaining economical use of resources Reduce waste Control on expenses Coordination of all depts. Good business practice of planning well.

6. Budgetary control Budgetary control is a system of controlling costs which includes the preparation of budgets coordinating the departments and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability

7. Characteristics Establishment of budgets Comparison of actual performance with the budgets Analysis of variations Remedial action Revision of budget in view of changes in condition

8. Advantages of Budgetary control Helps anticipate and prepare for changing conditions Coordinates activities of various departments Increases production efficiency, eliminates waste and controls cost Aims at maximization of profits through careful planning. Provides a yardstick against which actual results are compared Shows mgmt where remedial action is required Pinpoints efficiency or lack of it

9. Limitations of Budgetary Control Budget plan is based on estimates Danger of rigidity Budgeting is only a tool of management Opposition from staff Expensive technique

10. Types of Budgets DURATION - Short term, Long term CONDITION- Basic, Current COVERAGE – Functional, Master CAPACITY- Fixed, Flexible.

11. Types of functional budget Sales budget Production budget Production cost budget Raw materials budget Purchase budget Labour budget Production Overhead budget Selling & Distribution Cost budget Cash Budget Capital Expenditure budget

12. Flexible Budget or Variable budget Recognizes the difference between fixed and variable cost behaviour in relation to fluctuations in output, turnover, number of employees and other variable factors and is designed to change appropriately with such fluctuation. Prepared for various levels of activity – say 70%, 80 %, 90% Prepared by companies who cannot forecast sales and output with accuracy

13. SUM ABC Ltd. produces 10000 units at 100 % capacity utilization & its cost structure is as follows: Fixed costs Rs. 50000 Variable costs Rs. 3 per unit Semi-Variable Costs Rs. 4 per unit (40% variable) Prepare a flexible budget at 80%, 90% & 100 % level.

14. For production of 10000 articles the following are budgeted expenses per unit: Direct materials Rs. 60.00 Direct labour Rs. 30.00 Variable OH Rs. 20.00 Fixed OH (Rs.160000) Rs. 16.00 Variable expenses (direct) Rs. 5.00 Selling expenses (20% fixed) Rs. 15.00 Administration expenses( Rs. 50000) Rs. 5.00 Distribution expenses (20% fixed) Rs. 5.00 Prepare a flexible budget for a production of 6000, 7000 and 8000 units, showing clearly VC, FC and total cost

15. For production of 10000 articles the following are budgeted expenses per unit: Direct materials Rs. 60.00 Direct labour Rs. 30.00 Variable OH Rs. 20.00 Fixed OH (Rs.160000) Rs. 16.00 Variable expenses (direct) Rs. 5.00 Selling expenses (20% fixed) Rs. 15.00 Administration expenses( Rs. 50000) Rs. 5.00 Distribution expenses (20% fixed) Rs. 5.00 Prepare a flexible budget for a production of 6000, 7000 and 8000 units, showing clearly VC, FC and total cost

16. CAPACITY 50% -10000 UNITS SELLING PRICE PER UNIT Rs. 200 Materials per unit Rs 100 Labour per unit Rs 30 Factory overheads- Fixed Rs. 12 Variable Rs. 18 Administrative overheads - Fixed Rs. 10 Variable Rs. 10 At 60% material cost p.u. increases by 2% and SP p.u falls by 2% At 80%material cost p.u. increases by5% and selling price per unit falls by 5 % Prepare a flexible budget at 60 % and 80 % capacity utilization.

17. ABC Ltd. have prepared the budget for the production of 1 lakh units of a commodity manufactured by them for a costing period as under: Raw materials Rs. 2.52 per unit Direct labour Rs. 0.75 per unit Direct expenses Rs. 0.10 per unit Works OH (60% fixed) Rs.2.50 per unit Administration OH (80% fixed) Rs. 0.40 per unit Selling OH (50 % fixed) Rs.0.20 per unit The actual production during the period was only 60000 units. Calculate the revised budgeted cost perunit

18. Sales Budget • A statement of planned sales in terms of quantity and value and analyzed by products • Difficult to forecast & attain • Factors to be considered: • Past year sales • Market analysis • Assessment by sales dept – product wise, area wise, salesmen wise, customer wise, period wise • Seasonal fluctuations • Population changes • Business conditions • Advertising, • Marketing strategies

19. Production Budget Prepared by the production manager showing the forecast of output Objective is to determine the quantity of production for a budgeted period Two parts – Volume of production Cost of production

20. Cash Budget • A summary of the firm’s expected cash inflows & outflows over a particular period of time • Involves a projection of future cash receipts & cash disbursements over various time intervals • Cash receipts- collection from debtors, cash sales, dividend received, sale of assets, loans received, issue of shares & debentures • Cash Payments- wages & salaries, payment to creditors & suppliers, rent, taxes, dividend payable, commission payable, repayment of loans & debentures

21. Purpose of a cash budget To indicate the probable cash position as a result of planned operations To indicate cash excess or shortage To indicate need for borrowing or the availability of idle cash for investment

22. Traditional Method of Budgeting Past performance Concept of incrementalism – “incremental budgeting” Previous cost base Carries forward previous inefficiencies and extravagance

23. Zero Based Budgeting (ZBB) A method of budgeting whereby all activities are re-evaluated each time a budget is formulated. Each functional budget starts with the assumption that the function does not exist and is at zero cost. A planning & budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base) More useful in governmental budgeting but can also be used in factories for non- manufacturing activities e.g. administration & selling & distribution

24. Steps in implementing ZBB Identify each function & activity of the organization – “decision package” Evaluate each package so as to ensure that it is cost effective Compare each activity with possible alternatives Rank each activity – Profitability Cost – Benefit analysis Allocate resources

25. Advantages of ZBB Cost conscious Promotes coordination & motivation Promotes efficiency as it requires justification Inefficient and loss making operations are justified and may be removed Focus on optimum allocation of resources Helps management team to perform better

26. Disadvantages of ZBB Leads to enormous increase in paper work leading to higher costs of preparation Managers may resist new ideas & changes need to be justified Danger of emphasizing on short-term gains Ranking subjective Decisions vast