BUDGETS AND BUDGETORY CONTROL
Question 1 Define budget and
Question 1 Define budget and budgeting?budgeting? Budget
Budget = quantitative expression of a plan for future period e.g. planned sales volume & cash flows = quantitative expression of a plan for future period e.g. planned sales volume & cash flows Budgeting =
Budgeting = Process of making budgets & making use of budgets for further planning, coordination & control.Process of making budgets & making use of budgets for further planning, coordination & control. Question 2 Discuss essential elements, characteristics and objectives of a budget?
Question 2 Discuss essential elements, characteristics and objectives of a budget? Essential Elements:-
Essential Elements:- Budget should beBudget should be
Flexible for revision + broken inti various functional budgets + compared with actual, variances analysed & Flexible for revision + broken inti various functional budgets + compared with actual, variances analysed & corrective action taken + linked to reward system + fix responsibility to mgt persons
corrective action taken + linked to reward system + fix responsibility to mgt persons Characteristics:-
Characteristics:- Budget is Budget is
Prepared on past basis + prepared for future period + detailed plan of all financial activities + of different types Prepared on past basis + prepared for future period + detailed plan of all financial activities + of different types (production/purchase/exp. Budget) + written document
(production/purchase/exp. Budget) + written document Objectives:-
Objectives:- Budget should Budget should
Reflect organisation plan (Sales budget) + fix responsibility to mgt persons + motivate EEs to attain goals with Reflect organisation plan (Sales budget) + fix responsibility to mgt persons + motivate EEs to attain goals with reward + co-ordinate all business activities to achieve profit targets + compared with actual, variances analysed reward + co-ordinate all business activities to achieve profit targets + compared with actual, variances analysed & corrective action taken
& corrective action taken
Question 3 Discuss Budgetary Control system, its features, objectives, advantages, limitations
Question 3 Discuss Budgetary Control system, its features, objectives, advantages, limitations and stepsand steps involved in budgetary control system?
involved in budgetary control system? Answer
Answer :-:- Budgetary ControlBudgetary Control
::
InvolvesInvolves budgets making, continuous comparison of actual with budgets forbudgets making, continuous comparison of actual with budgets for achievement of targets & Place responsibility for failure to achieve budget targets.achievement of targets & Place responsibility for failure to achieve budget targets. Features
Features:- Budget helps in:- Budget helps in
Determination of Obj. to be achieved + List of activities to be undertaken for Obj. achievement + Plans activities Determination of Obj. to be achieved + List of activities to be undertaken for Obj. achievement + Plans activities in physical & monetary terms (Sales Qty & Value) + Compare actual performance with target, find discrepancies in physical & monetary terms (Sales Qty & Value) + Compare actual performance with target, find discrepancies + take corrective action.
+ take corrective action. Objectives
Objectives:- Budget should:- Budget should
Reflect organisation plan (Sales budget) + fix responsibility to mgt persons + motivate EEs to attain goals with Reflect organisation plan (Sales budget) + fix responsibility to mgt persons + motivate EEs to attain goals with reward + co-ordinate all business activities to achieve profit targets + compared with actual, variances analysed reward + co-ordinate all business activities to achieve profit targets + compared with actual, variances analysed & corrective action taken
& corrective action taken Advantages
Advantages 1.
1. Efficiency:-Efficiency:- Conduct Conduct business activities in targeted business activities in targeted manner (Sales Target)manner (Sales Target) 2.
2. Control on expenditure:-Control on expenditure:- CoContntrorol el eacach dh depept. t. exexp. p. (p(proroduductctioion cn cosost bt bududgeget at and nd wawageges bs bududgeget)t) 3.
3. Finding deviations:-Finding deviations:- Reveal deviation between target & actual performanceReveal deviation between target & actual performance 4.
4. Effective utilisation of resources:-Effective utilisation of resources:- men, money, material in best utilisationmen, money, material in best utilisation 5.
5. Implementation of Standard Costing System:-Implementation of Standard Costing System:- Std. costing system implemented Std. costing system implemented 6.
6. Cost Consciousness:-Cost Consciousness:- Encourage cost control & cost reduction.Encourage cost control & cost reduction. Limitations
Limitations 1.
1. Based on Estimates:-Based on Estimates:- estimates becomes useless if future business conditions changes.estimates becomes useless if future business conditions changes. 2.
2. Time factor:-Time factor:-Top mgt has to devote considerable time in budget implementation.Top mgt has to devote considerable time in budget implementation. 3.
3. Co-operation Required:-Co-operation Required:-Staff co-operation not available since it directly identifies responsible person.Staff co-operation not available since it directly identifies responsible person. 4.
4. Expensive:-Expensive:- as it needs proper organisation structure with responsibility (much Time & much money)as it needs proper organisation structure with responsibility (much Time & much money) 5.
5. Not a substitute for management:-Not a substitute for management:- Budget is not a substitute for management.Budget is not a substitute for management. 6.
6. Rigid document:-Rigid document:- budget not consider expected change in internal & external factors.budget not consider expected change in internal & external factors. Steps involved in the
1.
1. Definition of objectivesDefinition of objectives:- properly define items of revenue & expenditure to be achieved.:- properly define items of revenue & expenditure to be achieved. 2.
2. Location of the key factor Location of the key factor :- Identify in advance limiting factor for proper budgeting.:- Identify in advance limiting factor for proper budgeting. 3.
3. Appointment of controller Appointment of controller :- Appoint a whole time:- Appoint a whole time senior executive known as budget controller senior executive known as budget controller 4.
4. Budget Manual:-Budget Manual:- Prepare a BM (collection of key informations) Prepare a BM (collection of key informations) 5.
5. Budget periodBudget period:- should be decided considering business cycle.:- should be decided considering business cycle. 6.
6. Past statistics:-Past statistics:- Consider past data only when similar conditions likely to repeat in future.Consider past data only when similar conditions likely to repeat in future. Question 4 What is zero base budgeting? What are the advantages of zero base budgeting? Question 4 What is zero base budgeting? What are the advantages of zero base budgeting? Answer:-
Answer:- ZBB means making of budgets without any reference to past budgets & actual figures. Features:-ZBB means making of budgets without any reference to past budgets & actual figures. Features:- 1.
1. Critically evaluate each budget item whether old or new.Critically evaluate each budget item whether old or new. 2.
2. Concentration on "Concentration on "whywhy" needs to spend (not simply on "" needs to spend (not simply on "how muchhow much" to spend)" to spend) 3.
3. Effective utilisation of limited resources like cash & corporate target is superior to individual dept target.Effective utilisation of limited resources like cash & corporate target is superior to individual dept target. Advantages
Advantages 1.
1. Allocation of limited resources in order of priority. Allocation of limited resources in order of priority. 2.
2. Budgets on costBudgets on cost – – benefit analysis. No arbitrary cuts or increases in budget items. benefit analysis. No arbitrary cuts or increases in budget items. 3.
3. Link budget to corporate target.Link budget to corporate target. 4.
4. Identify and eliminate areas of wasteful expenditure.Identify and eliminate areas of wasteful expenditure. 5.
5. Implementation of Management by ObjectivesImplementation of Management by Objectives
DISTINCTION BETWEEN TRADITIONAL BUDGETING AND ZERO BASE BUDGETING DISTINCTION BETWEEN TRADITIONAL BUDGETING AND ZERO BASE BUDGETING
Traditional Budgeting / Conventional Budgeting
Traditional Budgeting / Conventional Budgeting Zero Base BudgetingZero Base Budgeting Accounting Oriented.
Accounting Oriented. Main stress on previousMain stress on previous expenditure level
expenditure level
Decision Oriented (N
Decision Oriented (Not consider previous level ofot consider previous level of expenditure)
expenditure) Main stress is on
Main stress is on how muchhow much will will be be spend. spend. Main Main stress stress is is onon whywhy needs to spend.needs to spend. D
Does not promoteoes not promote Operating Efficiency.Operating Efficiency. PromotesPromotes Operating Efficiency.Operating Efficiency.
ItIt does notdoes not identify identify activities activities involving involving wasteful wasteful exp. exp. IIdentifiesdentifies activities involving wasteful exp.activities involving wasteful exp. ItIt does notdoes not fix fix any any priority. priority. ItIt fixesfixes the priorities.the priorities.
Question 5 Discuss Fixed and Flexible budget. Briefly state the circumstances in which there arises Question 5 Discuss Fixed and Flexible budget. Briefly state the circumstances in which there arises need for preparation of flexible
need for preparation of flexible budget. Distinction between fixed and flexible budgets?budget. Distinction between fixed and flexible budgets? Answer:-
Answer:- Fixed Budget
Fixed Budget:- It is a budget designed to remain unchanged irrespective of the level of activity actually obtained.:- It is a budget designed to remain unchanged irrespective of the level of activity actually obtained. Flexible budget:-
Flexible budget:- It is a budget which by recognising the difference between fixed, semiIt is a budget which by recognising the difference between fixed, semi – – variable and variable variable and variable costs is designed to change In relation to the level of activity obtained.
costs is designed to change In relation to the level of activity obtained.
The need for preparation of flexible budgets arises in the following circumstances:- The need for preparation of flexible budgets arises in the following circumstances:-
1.
1. In case of industries where there are seasonal fluctuations in sales / production e.g soft drinks industry.In case of industries where there are seasonal fluctuations in sales / production e.g soft drinks industry. 2.
2. In case of company which keeps on doing new changes in design of its products e.g. mobile company.In case of company which keeps on doing new changes in design of its products e.g. mobile company. 3.
3. In case of industries engaged inIn case of industries engaged in made-to-order made-to-order business like ship building. business like ship building. 4.
4. In case of an industry which is influenced by changes in fashion.In case of an industry which is influenced by changes in fashion. 5.
5. In the case of labour intensive industry.In the case of labour intensive industry.
DISTINCTION BETWEEN FIXED BUDGET AND FLEXIBLE
DISTINCTION BETWEEN FIXED BUDGET AND FLEXIBLE BUDGETBUDGET FIXED /
FIXED / rigid rigid / / inflexible inflexible BUDGET BUDGET FLEXIBLE FLEXIBLE BUDGETBUDGET Not
Not change change with with actual actual volume volume of of activity. activity. Changes Changes on on the the basis basis of of activity activity level level to to be be achieved.achieved. It operates on one level of activity & assumes no
It operates on one level of activity & assumes no change in the prevailing conditions.
change in the prevailing conditions.
It operates on various activity levels. It operates on various activity levels.
Since all costs like
Since all costs like – – fixed, variable and semi - fixed, variable and semi - variable are related to only one level of activity, variable are related to only one level of activity, variance analysis does not give useful information. variance analysis does not give useful information.
Here analysis of variance provides useful information as Here analysis of variance provides useful information as each cost is analysed according to its behaviour.
each cost is analysed according to its behaviour. Comparison of actual performance with budgeted
Comparison of actual performance with budgeted targets will be meaningless specially when there is a targets will be meaningless specially when there is a difference between the two activity levels.
difference between the two activity levels.
It provides a meaningful basis of comparison of the actual It provides a meaningful basis of comparison of the actual performance with the budgeted targets.
performance with the budgeted targets.