Budget and Budgetary Control1

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  Budget and Budgetary Control : The first important task in front of the management is to have clearly defined objectives. Objectives are short term as well as long term and they should be defined in clear terms. It is necessary to prepare a comprehensive plan to transform these objectives into reality and planning without controlling will not be effective and hence there is a need of effective control system. While planning helps an organization to work systematically towards achieving the objectives, controlling helps to review the progress made and to monitor whether the work is progressing as per the  plan or not. udgeting is one such techni!ue that helps in planning as well as controlling. It is a techni!ue of cost accounting with the twin objectives of facilitating planning and ensuring controlling. arious aspects of budgets and  budgetary control, the types of budgets and the preparation of the same are discussed in detail in this chapter.  finitions To begin with, let us try to understand the definitions of budget and budgetary control. udget has been defined by #I$% &.'. as, ( % financial and)or !uantitative statement prepared prior to a defined period of time, of the policy to  be pursued during that period for the purpose of achieving a given objective.* If we analyze the definition, the following features of budget emerge. I. % budget is a statement that is always prepared prior to a defined period of time. This means that budget is always  prepared for future period and not for the past. +or eample, a budget for the year -/ 0 regarding the sales will  be prepared in the year -12/. %nother important point is that the time for which it is prepared is certain. Thus a  budget may be prepared for net 3 years)4 year) 5 months)4 month or even for a week, but the point is that the time frame for which it is prepared is certain. It cannot be prepared for indefinite period of time.II. udget is prepared either in !uantitative details or monetary details or both. This means that budget will show the  planning in terms of rupees or in !uantity or both. +or eample, a production budget will show the production target in number of units and when the target units are multiplied by the anticipated production cost, it will be a production cost budget that is epressed in terms of money. 6imilarly purchase budget is prepared in !uantity to show the anticipated purchases in the net year and when the !uantity is multiplied by the epected price per unit, it will  become a purchase cost budget that is epressed in monetary terms. 6ome budgets are prepared only in monetary terms, for eample, cash budget, capital ependiture budget etc. III. 7very organization has well defined objectives, which are to be achieved in a particular span of time. It is of  paramount importance that there should be systematic efforts to bring them into reality. %s a part of these efforts, it is necessary to formulate a policy and it is reflected in the budget. Thus if a firm has to launch a massive drive for recruitment of people, this policy will be reflected in the manpower planning budget as well as other relevant  budgets. Thus the policy to be pursued in future for the purpose of achieving well2defined objectives is reflected in the budget. udgetary #ontrol is actually a means of control in which the actual results are compared with the  budgeted results so that appropriate action may be taken with regard to any deviations between the two. udgetary control has the following stages. 8  Developing Budgets: The first stage in budgetary control is developing various budgets. It will be necessary to identify the budget centers in the organization and budgets will have to develop for each one of them. Thus budgets are developed for functions like purchase, sale, production, manpower planning as well as for cash, capital ependiture, machine hours, labor hours and so on. &tmost care should be taken while developing the budgets. The factors affecting the planning should be studied carefully and budgets should be developed after a thorough study of the same. 8  Recording Actual Performance: There should be a proper system of recording the actual performance achieved. This will facilitate the comparison between the budget and the actual. %n efficient accounting and cost accounting system will help to record the actual performance effectively. 8 Comparison of Budgeted and Actual Performance: One of the most important aspects of budgetary control is the comparison between the budgeted and the actual performance. The objective of such comparison is to find out the deviation between the two and provide the base for taking corrective action. 8 Corrective Action: Taking appropriate corrective action on the basis of the comparison between the budgeted and actual results is the essence of budgeting. % budget is always prepared for future and hence there may be a variation  between the budgeted results and actual results. There is a need for investigation of the same and take appropriate action so that the deviations will not repeat in the future. 9esponsibilities can be fied on proper persons so that they can be held responsible for any such deviations. Objectives of Budgeting  %n effective budgeting system plays a crucial role in the success of a business organization. The budgeting system has the following objectives, which are of paramount importance in the overall efficiency and effectiveness of the  business organization. These objectives are discussed below. 8  Planning: :lanning is necessary for doing any work in a systematic manner. % well2 prepared plan helps the organization to use the scarce resources in an efficient manner and thus achieving the predetermined targets  becomes easy. % budget is always prepared for future period and it lays down targets regarding various aspects like  purchase, production, sales, manpower planning etc. This automatically facilitates planning. 8 Co-ordination: +or achieving the predetermined objectives, apart from planning, coordinated efforts are re!uired. udgeting facilitates coordination in the sense that budgets cannot be developed in isolation. +or eample, while developing the production budget, the production manager will have to consult the sales manager for sales forecast and purchase manager for the availability of the raw material. :roduction budget cannot be developed in isolation. 6imilarly the purchase and sales budget as well as other functional budgets like cash, capital ependiture, manpower  planning etc cannot be developed without considering other functions. ;ence the coordination is automatically facilitated. 8 Control: :lanning is looking ahead while controlling is looking back. :reparation of budgets involves detailed  planning about various activities like purchase, sales, production, and other functions like marketing, sales  promotion, manpower planning. ut planning alone is not sufficient. There should be a proper system of controlling which will ensure that the work is progressing as per the plan. udgets provide the basis for such controlling in the sense that the actual performance can be compared with the budgeted performance. %ny deviation between the two can be found out and analyzed to ascertain the reasons behind the deviation so that necessary corrective action can  be taken to rectify the same. Thus budgeting helps immensely in controlling function. Benefits of Budgeting udgeting plays an important role in planning and controlling. It helps in directing the scarce resources to the most  productive use and thus ensures overall efficiency in the organization. The benefits derived by an organization from an effective system of budgeting can be summarized as given below.I. udgeting facilitates planning of various activities and ensures that the working of the organization is systematic and smooth.II. udgeting is a coordinated eercise and hence combines the ideas of different levels of management in  preparation of the same.III. %ny budget cannot be prepared in isolation and therefore coordination among various departments is facilitated automatically.I . udgeting helps planning and controlling income and ependiture so as to achieve higher profitability and also act as a guide for various management decisions. . udgeting is an effective means for planning and thus ensures sufficient availability of working capital and other resources. I. It is etremely necessary to evaluate the actual performance with predetermined parameters. udgeting ensures that there are well2defined parameters and thus the performance is evaluated against these parameters. II. %s the resources are directed to the most productive use, budgeting helps in reducing the wastages and losses. 13.5 Preparation for Budgetary Control % budgetary control is etremely useful for planning and controlling as described above. ;owever, for getting these  benefits, sufficient preparation should be made. +or complete success, a solid foundation should be laid down and in view of this the following aspects are of crucial importance.I.  Budget Committee: +or successful implementation of budgetary control system, there is a need of a budget committee. In small or medium size organizations, the budget related work may be carried out by the #hief %ccountant himself. <ue to the size of the organization, there may not be too many problems in implementation of the budgetary control system. ;owever, in large size organization, there is a need of a budget committee consisting of the chief eecutive, budget officer and heads of main departments in the organization. The main functions of the  budget committee are to get the budgets prepared and then scrutinize the same, to lay down broad policies regarding the preparation of budgets, to approve the budgets, to suggest for revision, to monitor the implementation and to recommend the action to be taken in a given situation.II.  Budget Centers: 7stablishment of budget centers is another important pre2re!uisite of a sound budgetary control system. % budget center is a group of activities or a section of the organization for which budget can be developed. +or eample, manpower planning budget, research and development cost budget, production and production cost  budget, labor hour budget and so on. udget centers should be defined clearly so that preparation becomes easy.III.  Budget Period: % budget is always prepared prior to a defined period of time. This means that the period for which a budget is prepared is decided in advance. Thus a budget may be prepared for three years, one year, si  months, one month or even for one week. The point is that the period for which the budget is prepared should be certain and decided in advance. =enerally it can be said that the functional budgets like sales, purchase, production etc. are prepared for one year and then broken down on monthly basis. udgets like capital ependiture are generally prepared for a period from 4 year to 3 years. Thus depending upon the type of budget, the period of the same is decided and it is important that it is decided well in advance.I .  Preparation of an Organization Chart: There should be an organization chart that shows clearly defined authorities and responsibilities of various eecutives. The organization chart will define clearly the functions to be  performed by each eecutive relating to the budget preparation and his relationship with other eecutives. The organization chart may have to be adjusted to ensure that each budget center is controlled by an appropriate member of the staff. .  Budget Manual: % budget manual is defined by I#$% as ( a document which sets out the responsibilities of the  person engaged in, the routine of and the forms and records re!uired for budgetary control*. The budget manual thus is a schedule, document or booklet, which contains different forms to be used, procedures to be followed, budgeting organization details, and set of instructions to be followed in the budgeting system. It also lists out details of the responsibilities of different persons and the managers involved in the process. % typical budget manual contains the following. 8 Objectives and managerial policies of the business concern. 8 Internal lines of authorities and responsibilities. 8 +unctions of the budget committee including the role of budget officer. 8 udget period 8 :rincipal budget factor  8 <etailed program of budget preparation 8 %ccounting codes and numbering 8 +ollow up procedures. I.  Principal Budget Factor or e! Factor: % key factor or a principal budget factor >also called as constraint? is that factor the etent of whose influence must first be assessed in order to prepare the functional budgets. @ormally sales is the key factor or principal budget factor but other factors like production, purchase, skilled labor may also  be the key factors. +or eample, a company has production capacity to produce 3, tones per annum but if the sales forecast tells that the market can absorb only -, units, there is no point in producing 3, units. Thus the sale is the key factor in this case. On the other hand, if the company has capacity to produce 3, units and the market has the capacity to absorb the entire production which means that sales is not the key factor but if raw material is available in limited !uantity so that only -A, units can be produced, the raw material will become the key factor. The key factor puts restrictions on the other functions and hence it must be considered carefully in advance. 6o continuous assessment of the business situation becomes necessary. In all conditions the key factor is the starting point in the process of preparation of budgets. % typical list of some of the key factors is given below. 8   ales: #onsumer demand, shortage of sales staff, inade!uate advertising 8  Material: %vailability of supply, restrictions on import 8  #a$or: 6hortage of labor  8  Plant: %vailability of capacity, bottlenecks in key processes 8  Management: Back of capital, pricing policy, shortage of efficient eecutives, lack of know2 how, faulty design of the product etc. II.  %sta$lishment of Ade&uate Accounting Records: It is essential that the accounting system should be able to record and analyze the transactions involved. % chart of accounts or accounts code should be maintained which may correspond with the budget centers for establishment of budgets and finally control through budgets.
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