BUDGETARY CONTROLAS A CONTROL TOOL

Presented byTonmoy HaldarMBA-2nd year MAGNETS

Topics to be covered

Revision of

Budgets

ZBB

Budgetary control

approach w.r.t. Engineering

costs & Discretionary

Costs

Committed costs

3

INTRODUCTION:

For effective running of a business, management must know:

• where it intends to go i.e. organizational objectives

• how it intends to accomplish its objective i.e. plans

• whether individual plans fit in the overall organizational objective. i.e. coordination

• whether operations conform to the plan of operations relating to that period i.e. control

“Budgetary control is the device that a company uses for all these purposes.”

4

WHAT IS A BUDGET?

“ A plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure and the capital to be employed. May be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by Zero-based budgeting.”

5

WHAT IS BUDGETARY CONTROL?Budgetary control is the use of the comprehensive system of budgeting to aid management in carrying out its functions like planning, coordination and control.

Classification of Budgets

6

TIME

Long term

Short term

Current

Rolling

FUNCTION

Sales

Production

Cost of production

Purchase

Personnel

R&D

Capital ExpenditureCash

Master

FLEXIBILITY

Fixed

Flexible

7

1. SALES BUDGET:

Sales budget is the most important budget based on which all the other budgets are built up. This budget is a forecast of quantities and values of sales to be achieved in a budget period.

2. PRODUCTION BUDGET:

Production budget involves planning the level of production which in turn involves the answer to the following questions:

a. What is to be produced?

b. When is it to be produced?

c. How is it to be produced?

d. Where is it to be produced?

8

3. COST OF PRODUCTION BUDGET:

This budget is an estimate of cost of output planned for a budget period and may be classified into –

• Material Cost Budget

• Labour Cost Budget

• Overhead Cost Budget

4. PURCHASE BUDGET:

This budget provides information about the materials to be acquired from the market during the budget period.

9

5. PERSONNEL BUDGET:

This budget gives an estimate of the requirements of direct labour essential to meet the production target.

This budget may be classified into –

a. Labour requirement budget

b. Labour recruitment budget

6. RESEARCH AND DEVELOPMENT BUDGET:

This budget provides an estimate of expenditure to be incurred on R & D during the budget period.

A R&D budget is prepared taking into consideration the research projects in hand and new R & D projects to be taken up.

10

7. CAPITAL EXPENDITURE BUDGET:

This is an important budget providing for acquisition of assets necessitated by the following factors:

a. Replacement of existing assets.

b. Purchase of additional assets to meet increased production

c. Installation of improved type of machinery to reduce costs.

8. CASH BUDGET:

This budget gives an estimate of the anticipated receipts and payments of cash during the budget period.

Cash budget makes the provision for minimum cash balance to be maintained at all times.

11

9. MASTER BUDGET:

CIMA defines this budget as “ The summary budget incorporating its component functional budget and which is finally approved, adopted and employed”.

Thus master budget is a summary of all functional budgets in capsule form available in one report.

10. FIXED BUDGET:

This is defined as a budget which is designed to remain unchanged irrespective of the volume of output or turnover attained.

This budget will, therefore, be useful only when the actual level of activity corresponds to the budgeted level of activity.

12

11. FLEXIBLE BUDGET:

CIMA defines this budget as one “ which, by recognising the difference in behaviour between fixed and variable costs in relation to fluctuations in output, turnover or other variable factors such as number of employees, is designed to change appropriately with such fluctuations”.

12. PERFORMANCE BUDGETING:

These days budgets are established in such a way so that each item of expenditure is related to specific responsibility centre and is closely linked with the performance of that standard.

13

13. ZERO BASE BUDGETING:

The zero base budgeting is not based on the incremental approach and previous figures are not adopted as the base.

Zero is taken as the base and a budget is developed on the basis of likely activities for the future period.

A unique feature of ZBB is that it tries to help management answer the question, “Suppose we are to start our business from scratch, on what activities would we spent out money and to what activities would we give the highest priority?”

Costs involved in a businessA classification

Fixed

Committed

Discretionary

The cost which varies directly in proportion with every increase or decrease in the volume of output or production is known as variable cost. Some of its examples are as follows:

Wages of labourers Cost of direct material Power The cost which does not vary but remains constant within a

given period of time and a range of activity in spite of the fluctuations in production is known as fixed cost. Some of its examples are as follows:

Rent or rates Insurance charges Management salary The cost which does not vary proportionately but

simultaneously does not remain stationary at all times is known as semi-variable cost. It can also be named as semi-fixed cost. Some of its examples are as follows:

Depreciation Repairs

Committed fixed costs consist largely of those fixed costs that arise from the possession of plant, equipment and a basic organization structure.

For e.gonce a building is erected and a plant is

installed, nothing much can be done to reduce the costs such as depreciation, property taxes, insurance and salaries of the key personnel etc. without impairing an organization’s competence to meet the long-term goals.

Fixed Costs::Committed Costs

Fixed Costs::Discretionary Costs Discretionary fixed costs are those which

are set at fixed amount for specific time periods by the management in budgeting process. These costs directly reflect the top management policies and have no particular relationship with volume of output. These costs can, therefore, be reduced or entirely eliminated as demanded by the circumstances

For e.g.R&D costs, Mgmt Costs, ADV & promo

Variable Costs::Engineered Costs

Engineered variable costs are those variable costs which are directly related to the production or sales level. These costs exist in those circumstances where specific relationship exists between input and output.

For e.g. in an automobile industryRelation between parts & final car

Variable Costs::Discretionary costs Discretionary costs is generally

linked with the class of fixed cost. However, in the circumstances where management has predetermined that the organization would spend a certain percentage of its sales for the items like research, donations, sales promotion etc., discretionary costs will be of a variable character.

Thus, an increase in discretionary variable costs is due to the authorization of management whereas an increase in engineered variable costs is due to the volume of output or sales.

QUESTIONS

???

Thank

You!!!!