L23 Budgeting

Budget & Budgeting Budget• Plan expressed in Quantitative Terms. • Usually prepared for one year, hence called short term plan. • Usually structured around a product or an activity “Budgeting is a technique for formulating budgets.” Budgetary ControlIn addition to above it encompasses its use as management tool for the business planning and control. 10/17/08

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Why Budgeting? •It helps in fine tuning of strategic plan. •It estimates profit potential of BU in quantitative terms. •It ensures management’s commitment. •It is useful tool for performance appraisal. •It helps co-ordination of efforts of all functional units. •It helps in assigning responsibility. •It gives basis for performance evaluation. 10/17/08

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Limitations of Budgeting • It deals with uncertain future. • Budgetary revisions are usually unavoidable. • Discourages efficient person. • Problems of coordination. • Conflict among different departments. • Lot depends on top managements support.

10/17/08

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Budget – Classification

• Operating Budgets and Financial Budgets • Fixed Budget and Flexible Budget • Zero Base Budget • Program Budget and Responsibility Budget

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Operating Budgets – Classification • Production Budget – How much to produce? • Purchase Budget – What & How much to procure? (Value in Quantity & Rs) • Labor Budget –Requirement of labor force? (Value in Hours & Rs. ) • Manufacturing Expenses Budget – What would be the cost of production ? • Administrative and Selling Expenses Budget – What would be the admn. and slg. Expenses? • Sales Budget – How much to sell? 10/17/08

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Financial Budget – Classification

• Cash Budget – What would be cash inflow & outflow? • Working Capital Budget – • Capital Expenditure Budget – • Income Statement Budget – Projected P&L • Budgeted Balance Sheet – Projected B/S

10/17/08

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Fixed and Flexible Budget – Classification • Fixed Budget – Budget prepared for given level of activity, which will not be changed for period under consideration. • Flexible Budget – Budget prepared for varying activity levels.

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Zero Base Budget – Classification • Starting from scratch. • Activity has no memory. • Budget for current year need to be justified on current situation. • No inefficiency of past will be carried to future • Justification and priority plays vital role in ZBB

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Zero Base Budget – Advantages • Priority of the program is taken care of. • Improves the efficiency of the management. • Identifies economical and wasteful areas. • Ensures optimum use of resources. (cost benefit analysis) • Best suited for activities whose output is not related with production. (since performance evaluation is difficult) • Helps in achieving organizational goal. 10/17/08

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Zero Base Budget – Limitations • Cost benefit analysis is a difficult task in case of non financial matters. • Analyzing and ranking the activities may need special expertise. • No scope to adjust for changes, Flexible budgeting is not possible. • Involves high cost in terms of time and efforts.

10/17/08

[email protected]; VIM Pune

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Thanks…

10/17/08

[email protected]; VIM Pune

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