Presentation on theme: "BUDGETING Reference – Mgmt Accounting –Reddy and Sharma."— Presentation transcript:
BUDGETING Reference – Mgmt Accounting –Reddy and Sharma
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 : 1. Financial statement with or without monetary data 2. Prepared for a particular period and also prepared in advance 3. Detailed plan 4. Function : to attain a specific objective
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 : 1. Planning 2. Coordination 3. Efficiency and economy 4. Increase in profitability 5. Anticipation – future capital expenditure 6. Control and Deviations
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
Limitations of Budgetary Control Prediction of uncertain future Changes of conditions Complacence Difficulty in coordination Conflict among different departments
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
Classification of Budget Classification according to time 1. Long-term budgets 2. Short-term budgets 3. Current budgets Classification based on functions 1. Functional/Subsidiary budgets 2. Master budget Classification on the basis of flexibility 1. Fixed budget 2. Flexible budget
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.
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.
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 : 1. Receipts and Payment Method 2. Balance Sheet Method 3. Adjusted P and L Account Method
Receipts and Payment Method General receipts of cash : 1. Cash Sales 2. Cash received from debtors 3. Dividends General Payments of cash : 1. Cash purchases 2. Payment to creditors 3. Payment of wages, expenses, dividend, fixed assets, tax and bonus Method : 1. Starts with Opening Balance of cash and all receipts are added. 2. From the total all payments are reduced. 3. Result is : Closing balance of cash for the period
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
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
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 1. Preparation of sales budget – determines the scope of operations of a firm 2. Preparation of production budget – helps in estimating the material required, labour hours and machine hours necessary for production. 3. Cost of production budget – elements of cost of production – helps in estimating the cash requirements 4. Preparation of cash budget – estimates the cash required for payments and different sources of funds to be mobilized.
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
Zero Base budgeting Concerned with all requisites of budgets Evaluation of existing and newly proposed activities Planning the resources, prioritization, redeployment. Process 1. Specification of decision units 2. Development of decision packages 3. Prioritization of activities, projects, programmes 4. Approval and allotment of funds