Accounting For Managers: Budgeting
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Accounting for Managers
Budgeting
MBA - 0905 - AFM
Budgeting
1
Budgeting
A budget is a monetary and quantitative expression of a
business plans and policies to be pursued in the future period of time. In the words of Crown and Howard “A budget is a pre-
determined statement of management policy during a given period which provides a standard for comparison with the results actually achieved
MBA - 0905 - AFM
Budgeting
2
Budget, budgeting and budgetary control
A budget is a blue print of a plan expressed in quantitative terms.
Budgeting is technique for formulating budgets.
Budgetary control refers to the principle, procedures and practices of achieving given objectives through budgets.
MBA - 0905 - AFM
Budgeting
3
Budget, budgeting and budgetary control
Rowland and William have differentiated the three terms as “budgets are the individual objectives of a department etc., whereas budgeting may be said to be the act of building budgets. Budgetary control embraces all and in addition includes the science of planning the budgets to effect an overall management tool for the business planning and control”
MBA - 0905 - AFM
Budgeting
4
Objectives of budgetary control
To ensure planning for future by setting up various budgets
To co-ordinate the activities of different departments
To operate various cost centers and departments with efficiency and economy
Elimination of waste and increase in profitability
To anticipate capital expenditures for future
To centralize the control system
Correction of deviations form the established standards
Fixation of responsibility of various individuals in the organization.
MBA - 0905 - AFM
Budgeting
5
Requisites for a successful budgetary control system
Clarifying objectives
Proper delegation of authority and responsibility
Proper communication system
Participation of all employees
Flexibility
Motivation
MBA - 0905 - AFM
Budgeting
6
Essentials of budgetary control
Organization for budgetary control
Budget centers
Budget manual
Budget officer
Budget committee
Budget period
Determination of key factor
MBA - 0905 - AFM
Budgeting
7
Advantages of budgetary control
Maximization of profit Co-ordination Tool for measuring performance Economy Determining weakness Corrective action Consciousness Reduces cost Introduction of incentive schemes
MBA - 0905 - AFM
Budgeting
8
Limitations
Uncertain future
Revision required
Discourages efficient persons
Problem of co-ordination
Conflict among different departments
Depends upon support of top management
MBA - 0905 - AFM
Budgeting
9
Types of budgets
Fixed budget
Flexible budget
Cash budget
MBA - 0905 - AFM
Budgeting
10
Fixed budget
According to I.C.W.A London “Fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained”
The fixed budgets are prepared for a given level of activity, he budget is prepared before the beginning of the financial year. If the financial year starts in January then the budget will be prepared a month or two earlier.
The changes in expenditure arising out of the anticipated changes will not be adjusted in the budget.
MBA - 0905 - AFM
Budgeting
11
Flexible budget
A flexible budget consists of a series of budgets for different level of activity. It therefore varies with the level of activity attained. A flexible budget is prepared after taking into consideration unforeseen changes in the conditions of the business.
A flexible budget is defined as a budget which by recognizing the difference between fixed, semi- fixed, and variable cost is designed to change in relation to the level of activity. The flexible budget will be useful where the level of activity changes from time to time.
MBA - 0905 - AFM
Budgeting
12
Cash Budget
A cash budget is an estimate of cash receipts and payment during a future period of time.
“ The cash budget is an analysis of flow of cash in a business over a future, short or long period of time.it is a forecast of expected cash intake and outlay.
The cash receipts from various sources are anticipated. The estimated cash collections for sales, debts, bills receivables, interests, dividends and other income and sale of investments and other assets will be taken into account.
MBA - 0905 - AFM
Budgeting
13
Cash Budget The amounts to be spent on purchase of materials, and
payment to crs and meeting various other revenue and capital expenditure should be considered. Cash forecast will include all possible sources from which cash will be received and the channels in which payments are to be made so that a consolidated cash position is determined. The cash budget should be coordinated with other activities of
business. The functional budgets may be adjusted according to the cash budget. The available funds should be fruitfully used so that the concern will not suffer for want of funds.
MBA - 0905 - AFM
Budgeting
14
Difference between Fixed and Flexible budget Fixed Budget
Flexible Budget
A fixed budget remains the
A flexible budget is recast to suit
same irrespective of changed situations. It remains inflexible even if volume of business is changed.
the changed circumstances. Suitable adjustments are made if the situation demands.
A fixed budget assumes that the
This budget is changed if the
In fixed budget costs are not
The costs are studied as per
conditions will remain constant.
classified according to their nature.
MBA - 0905 - AFM
level of activity varies.
their nature. I.e. fixed, variable, semi-variable. Budgeting
15
Difference between Fixed and Flexible budget Fixed Budget
Flexible Budget
If the level of activity changes then budgeted and actual results cannot be compared because of change in basis.
The budgets are redrafted as per the changed volume and a comparison between budgeted and actual figures will be possible.
Forecasting of accurate results is difficult
Under changed circumstances cost cannot be ascertained
Flexible budgets clearly show the impact of expenses on operations and it helps in making accurate forecast.
The cost can be easily ascertained under different level of activity.
MBA - 0905 - AFM
Budgeting
16
Practical Problems
Problems 1,2,3,4,13,14 and 15 Management accounting –R K Sharma and Shashi K Guptha
MBA - 0905 - AFM
Budgeting
17
Budgeting
MBA - 0905 - AFM
Budgeting
1
Budgeting
A budget is a monetary and quantitative expression of a
business plans and policies to be pursued in the future period of time. In the words of Crown and Howard “A budget is a pre-
determined statement of management policy during a given period which provides a standard for comparison with the results actually achieved
MBA - 0905 - AFM
Budgeting
2
Budget, budgeting and budgetary control
A budget is a blue print of a plan expressed in quantitative terms.
Budgeting is technique for formulating budgets.
Budgetary control refers to the principle, procedures and practices of achieving given objectives through budgets.
MBA - 0905 - AFM
Budgeting
3
Budget, budgeting and budgetary control
Rowland and William have differentiated the three terms as “budgets are the individual objectives of a department etc., whereas budgeting may be said to be the act of building budgets. Budgetary control embraces all and in addition includes the science of planning the budgets to effect an overall management tool for the business planning and control”
MBA - 0905 - AFM
Budgeting
4
Objectives of budgetary control
To ensure planning for future by setting up various budgets
To co-ordinate the activities of different departments
To operate various cost centers and departments with efficiency and economy
Elimination of waste and increase in profitability
To anticipate capital expenditures for future
To centralize the control system
Correction of deviations form the established standards
Fixation of responsibility of various individuals in the organization.
MBA - 0905 - AFM
Budgeting
5
Requisites for a successful budgetary control system
Clarifying objectives
Proper delegation of authority and responsibility
Proper communication system
Participation of all employees
Flexibility
Motivation
MBA - 0905 - AFM
Budgeting
6
Essentials of budgetary control
Organization for budgetary control
Budget centers
Budget manual
Budget officer
Budget committee
Budget period
Determination of key factor
MBA - 0905 - AFM
Budgeting
7
Advantages of budgetary control
Maximization of profit Co-ordination Tool for measuring performance Economy Determining weakness Corrective action Consciousness Reduces cost Introduction of incentive schemes
MBA - 0905 - AFM
Budgeting
8
Limitations
Uncertain future
Revision required
Discourages efficient persons
Problem of co-ordination
Conflict among different departments
Depends upon support of top management
MBA - 0905 - AFM
Budgeting
9
Types of budgets
Fixed budget
Flexible budget
Cash budget
MBA - 0905 - AFM
Budgeting
10
Fixed budget
According to I.C.W.A London “Fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained”
The fixed budgets are prepared for a given level of activity, he budget is prepared before the beginning of the financial year. If the financial year starts in January then the budget will be prepared a month or two earlier.
The changes in expenditure arising out of the anticipated changes will not be adjusted in the budget.
MBA - 0905 - AFM
Budgeting
11
Flexible budget
A flexible budget consists of a series of budgets for different level of activity. It therefore varies with the level of activity attained. A flexible budget is prepared after taking into consideration unforeseen changes in the conditions of the business.
A flexible budget is defined as a budget which by recognizing the difference between fixed, semi- fixed, and variable cost is designed to change in relation to the level of activity. The flexible budget will be useful where the level of activity changes from time to time.
MBA - 0905 - AFM
Budgeting
12
Cash Budget
A cash budget is an estimate of cash receipts and payment during a future period of time.
“ The cash budget is an analysis of flow of cash in a business over a future, short or long period of time.it is a forecast of expected cash intake and outlay.
The cash receipts from various sources are anticipated. The estimated cash collections for sales, debts, bills receivables, interests, dividends and other income and sale of investments and other assets will be taken into account.
MBA - 0905 - AFM
Budgeting
13
Cash Budget The amounts to be spent on purchase of materials, and
payment to crs and meeting various other revenue and capital expenditure should be considered. Cash forecast will include all possible sources from which cash will be received and the channels in which payments are to be made so that a consolidated cash position is determined. The cash budget should be coordinated with other activities of
business. The functional budgets may be adjusted according to the cash budget. The available funds should be fruitfully used so that the concern will not suffer for want of funds.
MBA - 0905 - AFM
Budgeting
14
Difference between Fixed and Flexible budget Fixed Budget
Flexible Budget
A fixed budget remains the
A flexible budget is recast to suit
same irrespective of changed situations. It remains inflexible even if volume of business is changed.
the changed circumstances. Suitable adjustments are made if the situation demands.
A fixed budget assumes that the
This budget is changed if the
In fixed budget costs are not
The costs are studied as per
conditions will remain constant.
classified according to their nature.
MBA - 0905 - AFM
level of activity varies.
their nature. I.e. fixed, variable, semi-variable. Budgeting
15
Difference between Fixed and Flexible budget Fixed Budget
Flexible Budget
If the level of activity changes then budgeted and actual results cannot be compared because of change in basis.
The budgets are redrafted as per the changed volume and a comparison between budgeted and actual figures will be possible.
Forecasting of accurate results is difficult
Under changed circumstances cost cannot be ascertained
Flexible budgets clearly show the impact of expenses on operations and it helps in making accurate forecast.
The cost can be easily ascertained under different level of activity.
MBA - 0905 - AFM
Budgeting
16
Practical Problems
Problems 1,2,3,4,13,14 and 15 Management accounting –R K Sharma and Shashi K Guptha
MBA - 0905 - AFM
Budgeting
17
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