BUDGETING

1. BUDGETING Reference – Mgmt Accounting –Reddy and Sharma

2. What is a Budget and Budgeting? • It is the monetary or quantitative expression of business plans and policies in the future period of time. • Budgeting is preparing budgets and other procedure for planning , coordination and control of business enterprise. • It involves a detailed study of business environment clearly grasping the management objectives , available resources and capacity of the enterprise. • Features of Budgeting : • Financial statement with or without monetary data • Prepared for a particular period and also prepared in advance • Detailed plan • Function : to attain a specific objective

3. Budgetary Control • Process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any which are to be eliminated in future. • Budgetary control is the end result • Estimates : Predetermination of future events either through guess work or scientific procedures • Forecast : Assessment of possible future events • Budget : Planning of future events • Objectives : • Planning • Coordination • Efficiency and economy • Increase in profitability • Anticipation – future capital expenditure • Control and Deviations

4. Advantages of Budgetary Control • Maximization of Profits • Effective coordination • Evaluation of Executive Performance ( on the basis of goals set for each department) • Clear cut goals and targets • Economy in operations • Correction of Performance continuously • Introduction of Incentive schemes of remuneration • Shutting down of unprofitable products and activities

5. Limitations of Budgetary Control • Prediction of uncertain future • Changes of conditions • Complacence • Difficulty in coordination • Conflict among different departments

6. Preparation of Budgets • Determine the Key factor • Making forecasts • Evaluation of alternative combination of factors • Preparation of various financial budgets Most important are : Cash and Master Budget • Preparation of Master Budget

7. Classification of Budget • Classification according to time • Long-term budgets • Short-term budgets • Current budgets • Classification based on functions • Functional/Subsidiary budgets • Master budget • Classification on the basis of flexibility • Fixed budget • Flexible budget

8. On the basis of Time and Function TIME • Long term Budget : They are prepared by top management to reflect the long-term planning for special activities like capital expenditure, R&D etc • Short term Budget : Budgets generally for a duration of 1 yr and expressed in monetary terms. • Current Budget: Duration – 1 month and are prepared for current operations of the business FUNCTION • Functional Budget : Budgets that relate to various functions of the concern - Purchase budget , Cash budget , Production budget etc • Master Budget : Summary of various functional budgets – it encompasses activities of the whole organization.

9. On the basis of Flexibility • Fixed Budget : prepared for a given level of activity and remains same irrespective of change in activity. • Flexible Budget : prepared for a various levels of activity – fixed , variable and semi-variable. Other important Budgets : • Sales Budget : shows quantity of finished products to be sold and the price at which they are sold. • Production Budget : it is based on sales budget and it shows the budgeted quantity of output to be produced during a specific period. • Material and Labour Budget • Overhead Budget – Production , Administration , Selling and Distribution and R&D.

10. Cash Budgets • It estimates the amount of cash receipts and payments and the balance of cash during a specific budget period • Objective : To provide for all cash requirements in time and avoid accumulation of excess cash. • Methods of preparing Cash Budget : • Receipts and Payment Method • Balance Sheet Method • Adjusted P and L Account Method

11. Receipts and Payment Method • General receipts of cash: • Cash Sales • Cash received from debtors • Dividends • General Payments of cash : • Cash purchases • Payment to creditors • Payment of wages, expenses, dividend , fixed assets, tax and bonus Method : • Starts with Opening Balance of cash and all receipts are added. • From the total all payments are reduced. • Result is : Closing balance of cash for the period

12. Balance Sheet Method • This method is good for long term or annual forecasts. Opening Balance of cash Add : Decrease in asset items Increase in liability items Less : Decrease in liability items Increase in asset items Balance is cash at the end of the period

13. Adjusted P and L A/C • It is based on the analogy that, profit made during the period should increase the cash balance. Net Profit Add : Depreciation Provisions / reserves Accrued expenses Capital receipts Issue of shares , debentures Reduction in stocks , debtors Less : Dividends Prepayments Increase in stock, debtors Decrease in liabilities Balance being cash

14. Master Budgets • A comprehensive one, prepared for the entire organization • All functional budgets are integrated. • An overall plan for the guidance of the management • P and L A/C + Balance Sheet • Helps in coordinating activities of various functional departments. Procedure • Preparation of sales budget – determines the scope of operations of a firm • Preparation of production budget – helps in estimating the material required , labour hours and machine hours necessary for production. • Cost of production budget – elements of cost of production – helps in estimating the cash requirements • Preparation of cash budget – estimates the cash required for payments and different sources of funds to be mobilized.

15. Cost of Production Budget • The production budget determines the number of units to be produced. When these units are converted into monetary terms, it becomes a “cost of production” budget. • The physical units are broken into elements i.e.. Material, quantity, labour time etc. • Cost of production budget = Material cost + Labour Cost + Overheads

16. Zero Base budgeting • Concerned with all requisites of budgets • Evaluation of existing and newly proposed activities • Planning the resources , prioritization , redeployment. Process • Specification of decision units • Development of decision packages • Prioritization of activities , projects , programmes • Approval and allotment of funds