PROJECT REPORT

ON

“BUDGET AN TYPES OF BUDGET”

MASTER OF COMMERECE (ACCOUNTANCY)

PART-1 (SEMESTER-1)

(2014-2015)

INTERNAL ASSESSMENT

ADVANCED COST ACCOUNTING

Submitted To:-

Prof. C. A. KINJAL JOTA

Submitted By:-

KANCHAN PABLE

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ROLL NO – 38

K. J. SOMAIYA COLLEGE OF ARTS AND COMMERCE

VIDYAVIHAR (E)

AFFILIATED TO UNIVERSITY OF MUMBAI

K. J. SOMAIYA COLLEGE OF ARTS AND COMMERCE

VIDYAVIHAR (E)

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CERTIFICATE

(2014 - 2015).

This is to certify that the project entitled “BUDGET AND TYPES OF BUDGET ” is a project work done by

KANCHAN ANIL PABLE , ROLL NO. – 38 in fulfillment of the requirements for the MCOM in ACCOUNTANCY

(PART-1) (SEMESTER-1) during the academic year 2014-2015 is the original work done of the candidate and completed

under guidance of C. A. KINJAL JOTA.

Date: -

Place: - MUMBAI

……..…………… ..………………… Internal Examiner External Examiner

……………………… ……………………

(Mrs. Sonali Deogirikar) (Dr. SUDHA VYAS)

MCOM Coordinator Principal

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DECLARATION BY STUDENT

I, KANCHAN ANIL PABLE, ROLL NO:-38, the student of MCOM in ACCOUNTANCY (Part-I) (SEMESTER-I) (2014-2015)

hereby declares that I have completed the project on “BUDGET AN TYPES OF BUDGET” under the supervision of the

internal guidance of C. A. KINJAL JOTA and that the contents of the project are not copied from any other source such as

internet, earlier projects, textbooks etc.

The information submitted is true and original to best of my knowledge.

Thank you,

Yours faithfully,

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KANCHAN PABLE

ROLL NO:-38

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ACKNOWLEDGEMENT

I would like to thank all the people who helped me in undertaking the study and completing the project, by

imparting me with valuable information and guidance that was required at every stage of my project work.

I would like to thank our principal, Dr. SUDHA VYAS and MCOM Co-ordinate, for giving me an opportunity and

encouragement to prepare the project.

Last but not the least, I would like to thanks my project guide C. A. KINJAL JOTA for guiding and helping me

throughout the preparation of my project, right from selection of the topic till its completion.

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Kanchan pable.

Roll No : 38.

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INDEX

SR. NO. TOPIC PAGE NO.

1 Introduction to Budget 6

2 In an effective budget system 9

3 Definition of budget 11

4 Meaning of budget 13

5 Objectives of budget 15

6 Advantages of budgeting 17

7 Disadvantages of budgeting 19

8 Classification of budget 22

9 Types of budget 26

10 Conclusion 29

11 References 31

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INTRODUCTION TO “BUDGETS”.

A budget is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers.

Budgetary control is the process by which financial control is exercised within an organisation. 

Budgets for income/revenue and expenditure are prepared in advance and then compared with actual performance to establish any variances.

Managers are responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances arise and they are considered excessive.

There are many management uses for budgets.  For example, budgets are used to:

Control income and expenditure (the traditional use)

Establish priorities and set targets in numerical terms

Provide direction and co-ordination, so that business objectives can be turned into practical reality

Assign responsibilities to budget holders (managers) and allocate resources

Communicate targets from management to employees

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Motivate staff

Improve efficiency

Budgets are part of a company's long‐range planning system. While some portions of a long‐range plan are concerned with the organization in five to ten years, the budget is the short‐range portion of the plan. Mostbudgets are prepared for a twelve‐month period, sometimes on a rolling basis. A rolling budget is updated quarterly (or as often as management requires the data) by dropping the three months just ended and adding one quarter's data to the end of the remaining nine months already budgeted (see following figure). Rolling budgets require management to keep looking forward and to anticipate changes.

The master budget consists of all the individual budgets required to prepare budgeted financial statements. Although different textbooks group the budgets differently, the main components of a budget are operating budgets for revenues and expenses, capital expenditures budget, cash budget, and finally the budgeted financial statements, which include the income statement, balance sheet, and cash flow statement.

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" Budgeting as an activity ranges in extent from managing household finances on up to the preparation of the Budget of the United States, undertaken yearly by Congress; that document is nearly 1,400 pages in length. This article will focus principally on "formal budgeting" as practiced in corporations, sometimes called the "budget process.”

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IN AN EFFECTIVE “BUDGET”SYSTEM.

Managerial responsibilities are clearly defined – in particular the responsibility to adhere to their budgets

Individual budgets lay down a plan of action

Performance is monitored against the budget

Corrective action is taken if results differ significantly from the budget

Departures from budgets are permitted only after approval from senior management

Unaccounted for variances are investigated

Budgets are part of a company's long‐range planning system. While some portions of a long‐range plan are concerned with the

organization in five to ten years, the budget is the short‐range portion of the plan. Most budgets are prepared for a twelve‐month period,

sometimes on a rolling basis. A rolling budget is updated quarterly (or as often as management requires the data) by dropping the three

months just ended and adding one quarter's data to the end of the remaining nine months already budgeted (see following figure). Rolling

budgets require management to keep looking forward and to anticipate changes.

The master budget consists of all the individual budgets required to prepare budgeted financial statements. Although different textbooks

group the budgets differently, the main components of a budget are operating budgets for revenues and expenses, capital expenditures

budget, cash budget, and finally the budgeted financial statements, which include the income statement, balance sheet, and cash flow

statement.

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DEFINITION OF “BUDGET”.

An estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, family, group of or just

about anything else that makes and spends money. A budget is a microeconomic concept that shows the tradeoff made when one good is

exchanged for another.

Budgeting has always been part of the activities of any business organization of any size, but formal budgeting in its present form, using

modern budgeting disciplines, emerged in the 1950s as the numerical underpinning of corporate planning. Modern corporate planning owes

much to operations research and systems theory. A pioneer in that field, Russell L. Ackoff, worked closely with General Electric, Anheuser-

Busch, and other major corporations. His first book on the subject, the first of four, A Concept of Corporate Planning, had a major impact.

Modern formal budgets not only limit expenditures; they also predict income, profits, and returns on investment a year ahead. They have

evolved into tools of control and are also used as a means of determining such rewards as profit-sharing and bonuses. Unless the budgetary

process is managed with extreme skill and care, the very virtues of budgeting can turn into negatives and have, of late, emerged into a movement

actively working to change this process.

Measure actual operating results, for the allocation of funding, and as a plan for future operations.

A budget is a set of interlinked plans that quantitatively describe an entity's projected future operations. A budget is used as a yardstick against

which to measure actual operating results, for the allocation of funding, and as a plan for future operations.

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The budgeting process typically begins with a strategy planning session by senior management. The management team then applies the

agreed strategic direction to a series of plans that roll up into a master budget. The plans include a  sales budget, production budget, direct

materials budget, direct labor budget, manufacturing overhead budget, sales and administrative budget, and fixed assets budget. All of these

plans roll up into the master budget, which contains a budgeted income statement, balance sheet, and cash forecast. There may also be a

financing budget in which is itemized the debt and equity structure needed to ensure that the cash requirements of the budget can be met.

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MEANING OF “BUDGET”.

A budget is a financial document used to project future income and expenses. The budgeting process may be carried out by individuals or by

companies to estimate whether the person/company can continue to operate with its projected income and expenses.

A budget may be prepared simply using paper and pencil, or on computer using a spreadsheet program like Excel, or with a financial application

like Quicken or QuickBooks.

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OBJECTIVES OF “BUDGETING”.

Provide structure . A budget is especially useful for giving a company guidance regarding the direction in which it is supposed to be going. Thus, it forms the

basis for planning what to do next. A CEO would be well advised to impose a budget on a company that does not have a good sense of

direction. Of course, a budget will not provide much structure if the CEO promptly files away the budget and does not review it again until

the next year. A budget only provides a significant amount of structure when management refers to it constantly, and judges employee

performance based on the expectations outlined within it.

Predict cash flows.

A budget is extremely useful in companies that are growing rapidly, that have seasonal sales, or which have irregular sales patterns. These

companies have a difficult time estimating how much cash they are likely to have in the near term, which results in periodic cash-related

crises. A budget is useful for predicting cash flows, but yields increasingly unreliable results further into the future. Thus, providing a view

of cash flows is only a reasonable budgeting objective if it covers the next few months of the budget.

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Provide structure. Predict cash flows. Measure performance. Allocate resources.Model scenarios

Measure performance.

A common objective in creating a budget is to use it as the basis for judging employee performance, through the use of variances from the

budget. This is a treacherous objective, since employees attempt to modify the budget to make their personal objectives easier to achieve

(known as budgetary slack).

Allocate resources .

Some companies use the budgeting process as a tool for deciding where to allocate funds to various activities, such as fixed asset purchases.

Though a valid objective, it should be combined with capacity constraint analysis (which is more of an industrial engineering function than a

financial function) to determine where resources should really be allocated.

Model scenarios .

If a company is faced with a number of possible paths down which it can travel, you can create a set of budgets, each based on different

scenarios, to estimate the financial results of each strategic direction. Though useful, this objective can result in highly unlikely results if

management lets itself become overly optimistic in inputting assumptions into the budget model.

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Conversely, budgeting may not be of much use for a well-established business that has a consistent track record of performance. In this case, a

better approach may be to manage the organization from a rolling forecast that is updated on a regular basis. Doing so reduces the work

associated with financial predictions, and also allows the business to shift its operational focus on short notice.

ADVANTAGES OF "BUDGETING”.

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Think about and plan for the future .

Compels management to think about the future. Management should look ahead and set

out plans for each business unit, anticipating change and giving the organisation clear

direction. It encourages management to be forward-looking and working within the

framework of a budget encourages good decision-making.

Means of Allocating Resources .

During the budgeting process many resource allocation decisions are made. Different

segments may require resources for capital expenditure that the organisation can’t fully

meet. The organisation will make decisions based on the various rates of return.

Uncover Potential Bottlenecks .

Have I the resources to meet my revenue projections in terms of manpower, material

resources and capital equipment?

Coordinate Activities .

The budgeting process brings together the plans and financial budgets of each business

unit. It encourages communication up the organisation from subordinates to superiors.

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Performance Criteria .

Provide a basis for variance analysis and enable remedial action to be taken as variances

occur. The budget is a yardstick against which actual performance is assessed.

DISADVANTAGES OF “BUDGETING”.

Inaccuracy.  

A budget is based on a set of assumptions that are generally not too far distant from the operating conditions under which it was formulated.

If the business environment changes to any significant degree, then the company’s revenues or cost structure may change so radically that

actual results will rapidly depart from the expectations delineated in the budget.

Rigid decision making.  

The budgeting process only focuses the attention of the management team on strategy during the budget formulation period near the end of

the fiscal year. For the rest of the year, there is no procedural commitment to revisit strategy.

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Time required.

 It can be very time-consuming to create a budget, especially in a poorly-organized environment where many iterations of the budget may be

required. The time involved is lower if there is a well-designed budgeting procedure in place, employees are accustomed to the process, and

the company uses budgeting software.

Blame for outcomes.

 If a department does not achieve its budgeted results, the department man ager may blame any other departments that provide services to it

for not having adequately supported his department.

Gaming the system.

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 An experienced manager may attempt to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing

expense estimates, so that he can easily achieve favorable variances against the budget. This can be a serious problem, and

requires considerable oversight to spot and eliminate.

Expense allocations.

 The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those

departments may take issue with the allocation methods used. This is a particular problem when departments are not allowed to substitute

services provided from within the company for lower-cost services that are available else where.

Use it or lose it.  

If a department is allowed a certain amount of expenditures and it does not appear that the department will spend all of  the funds during the

budget period, the department manager may authorize excessive expenditures at the last minute, on the grounds that his budget manager may

authorize excessive expenditures at the last minute, on the grounds that his budget tends to make managers believe that they are entitled to a

certain amount of funding each year, irrespective of their actual need for the funds.

Only considers financial outcomes.  

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The nature of the budget is numeric, so it tends to focus management attention on the quantitative aspects of a business; this usually means

an intent focus on improving or maintaining profitability. In reality, customers do not care about the profits of a business – they will only buy

from the company as long as they are receiving good service and well-constructed products at a fair price. Unfortunately, it is quite difficult

to build these concepts into a budget, since they are qualitative in nature. Thus, the budgeting concept does not necessarily support the needs

of customers.

The discussion of budgeting has cast serious doubts on the need for a detailed and rigorously-enforced budgeting system, especially one that

integrates the budget model with bonus plans. Nonetheless, the decision to install a budget is up to the reader.

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CLASSIFICATION OF “BUDGET”.

They are resources and expenditure groups, which are gathered according to different criteria based on common aspects and distinguished from

government transactions.

As these classifications organize and present the public income and expenditure from a different standpoint, they constitute a basic information

system to satisfy government and international agencies needs.They keep record of federal public sector statistics enabling an objective

breakdown of the transactions performed by the public sector.

Therefore, they represent an essential tool for the registering of the information related to the resource and expenditure process of public activity.

CLASSIFICATION OF RESOURCES

By item:

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Resources are classified per items that organize them according to the nature of the transactions.

Examples: Tax revenues ( income tax, asset tax, import duties, VAT) non- revenue income ( royalties, revenue penalty,

premiums ;Contributions ( payroll tax, ANSES); Goods and Service sales.

CLASSIFICATION OF EXPENDITURE.

They are the financial transactions performed by public agencies to acquire goods and services required by public production, or to transfer

collected revenues to different destinations.

By Purpose of Expenditure:

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The classification by Purpose of expenditure is defined as a systematic and homogeneous order of goods and services, transfers and the

variation of assets and liabilities which the public sector applies in the development of its activity.

Examples: Personnel expenditure (permanent, temporary, family allowances) Consumer goods (food, stationery, cleaning products), Non

Personal Services (electricity, car maintenance).

COMMON CLASSIFICATION TO EXPENDITURE AND RESOURCES

Classification by Agencies:

The classification by agencies organizes public expenditure according to the public sector structure and reflects the agencies to which

the budget is assigned to perform the government actions.

Examples: President's, Ministry of Justice, the Legislative. The Public Debt System and the Treasury obligations are two jurisdictions

with special features.

Geographic Classification:

The geographic or location classification establishes the economic financial transactions of space distributions performed by public

agencies, taking as basic unit of classification the political partition of the country.

Examples: Capital City, Cordoba, Tierra del Fuego.

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LASSIFICATION ACCORDING TO THEIR ECONOMIC NATURE.

Expenditures:

The economic classification of the expenditure allows to identify the nature of the transactions performed by the public sector, with the purpose

of evaluating the impact and the consequential effect of the fiscal actions in the economy.

Current expenditure:

The segregation of current expenditure allows to know how much the different elements inputs and factors which take part in the

production of goods and services produced by the State are. Consequently, it enables to determine the value added by the public sector.

Furthermore, it includes the payment of retirement and pensions (social security benefits ), public debt interests (property income) and

grants (transfers).

Examples: Consumption expenditures ( goods and services).

Capital expenditures:

Capital expenditures show the investment performed by the public sector and its contribution to the increase of installed capacity.

Examples: Real direct investment ( constructions), capital transfers ( to the private sector).

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Financial appropriations:

This classification includes the financial appropriations that do not appear in the chart.

Examples: Amortization of the external and Internal Debt and decrease of other liabilities.

 

Resources:

From the economic point of view, resources are classified according to current revenues, capital revenues and financial sources.

Current revenues:

They include receipts which do not suppose a certain service delivered. Examples of current revenues are: taxes and received transfers;

classified resources are tax revenues according to the nature of the flow of funds: goods sale, service delivery, rate collections, duties,

social security contributions,and property income..

Capital revenues:

These revenues are originated in the sale of assets, sale of shares in enterprises and in the recovery of loans.

Financial sources revenues:

These revenues are mainly constituted by public indebtnesss.

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Loans:

These resources come from short or long term borrowing from the private sector, public and external.

Public indebtness:

They are resources which are financed out of securities and bonds issues, and the taking of loans obtained according to legislative

regulations.

TYPES OF “BUDGET”

Master Budget.

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A master budget is a comprehensive projection of how management expects to conduct all aspects of business over the budget period, usually a

fiscal year. The master budget summarizes projected activity by way of a cash budget, budgeted income statement and budgeted balance sheet.

Most master budgets include interrelated budgets from the various departments. Managers typically use these subset budgets to plan and set

performance objectives. Master budgets are generally used in larger businesses to keep many managers on the same page.

Operational Budgets . The operational budget covers revenues and expenses surrounding the day-to-day core business of a company. Revenues represent sales of

products and services; expenses define the costs of goods sold as well as overhead and administrative costs directly related to producing goods

and services. While budgeted annually, operating budgets are usually broken down into smaller reporting periods, such as weekly or monthly.

Managers compare ongoing results to budget throughout the year, planning and adjusting for variations in revenue.

Cash Flow Budget.

A cash flow budget examines the inflows and outflows of cash in a business on a day-to-day basis. It predicts a company's ability to take in more

money than it pays out. Managers monitor cash flow budgets to pinpoint shortfalls between expenses and sales -- times when financing may be

needed to cover overheads. Cash flow budgets also suggest production cycles and inventory levels so that a company's resources are available

for activity, not sitting idle on warehouse shelves.

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Financial Budget.

A financial budget outlines how a business receives and spends money on a corporate scale, including revenues from core business plus income

and costs from capital expenditures. Managing assets such as property, buildings, investments and major equipment may have a significant effect

on the financial health of a company, particularly through the peaks and troughs of daily business. Executive managers use financial budgets to

leverage financing and value the company for mergers and public offerings of stock.

Static Budget.

A static budget contains elements where expenditures remain unchanged with variations to sales levels. Overhead costs represent one type of

static budget, but these budgets aren't confined to traditional overhead expenses. Some departments may have a fixed amount of money set in

budget to spend, and it is up to managers to make sure such amounts are spent without going over-budget. This condition occurs routinely in

public and nonprofit sectors, where organizations or departments are funded largely by grants.

Sales budget.

An estimate of future sales, often broken down into both units and currency. It is used to create company sales goals.

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Marketing budget.

An estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

Project budget.  

A prediction of the costs associated with a particular company project. These costs include labour, materials, and other related expenses. The

project budget is often broken down into specific tasks, with task budgets assigned to each. A cost estimate is used to establish a project

budget.

Revenue budget.  

Consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other

duties that the government levies.

Expenditure budget.  

Includes spending data items.

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CONCLUSION OF “BUDGETING”.

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Budgeting is an important component of financial success and one that's not difficult to implement. Let's recap what we've learned in this

tutorial:

Budgeting isn't just for poor people or for times when money is tight or your life is undergoing a major transition. Budgeting is for

everyone because it makes it easier to achieve financial goals of all shapes and sizes, whether that goal is to stay out of debt next month

or to pay cash for a sports car.

Budgeting allows you to make long- and short-term projections about your financial situation, prevent crises, get the most out of your

money, plan for major life changes and enjoy peace of mind.

Budgeting systems - ranging from a simple notepad and pen to online financial management software - are available for all needs and

preferences.

Budgeting monthly, rather than by the paycheck, can help you learn to take a longer-term view of your finances. (For related reading,

see The Beauty of Budgeting.)

Keep track of all your expenses, not just the big ones. Those daily lattes can add up!

Getting a basic sense of your financial picture is an important component of budgeting. Make sure you know how much you make after

taxes and how your required and optional expenses fit into that picture.

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Being flexible with your budget categories and allowing yourself affordable rewards will prevent budgeting from being a drag and help

you stick with it.

A well-maintained budget can help you meet short-term goals, like saving for a vacation, as well as long-term goals, like saving for

retirement.

As long as you're spending within your means each month, a budget is a great tool for helping you sleep soundly at night. You know where

your money's going, you know that you're on track to meet your financial goals and you know that you've planned to weather the storms that

will arise from time to time. If your spending is too high for your income, a budget serves as a pesky but necessary reminder that you need to

change things - and the sooner you listen to those irksome numbers, the better off you'll be. Living paycheck to paycheck only works

temporarily - sooner or later you will have an expense you can't meet or a goal you can't achieve if you don't learn how to budget.

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REFERENCES TO “BUDGET”.

Organizations   Related to Budgeting and their Web Sites.

American Association for Budget and Program Analysis .  AABPA has links to other budget sites and to some job announcements.  The

site announces AAPBA monthly meetings and regular seminars, activities carried out in Washington, D.C.

 

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Association for Budgeting and Financial Management  (ABFM), a section of the American Society of Public Administration (ASPA), is

dedicated to promoting wider recognition of the importance of budgeting and financial management in public policy and management

decisions.  ABFM has links to state, local, and city budget sites.

 

National Association of State Budget Officers  (NASBO) has materials specific to state and local budget analysts.  It also lists jobs.

 

The National Academy of Public Administration’ Center for Improving Government Performance provides access to sites related to

various aspects of GPRA.

 

The Association of Government Accountants (AGA) and the Government Finance Officers Association (GFOA) are focused on

accounting and finance work.  Their sites provide access to conferences, training, and other resources for those interested in state and

local finance or financial management in the Federal government.

 Organization for Economic Cooperation and Development (OECD) provides information on international budget related issues.

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