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Budget and Budgetry

Budget and Budgetry

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Published by ram sagar
to planning the business how to control the business and management
to planning the business how to control the business and management

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Published by: ram sagar on Dec 09, 2009
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MCM- Syllabus: -
 Nature, scope and importance, Method of finalization of master budget and Functional budgets.
Meaning of Budget:
Planning is the primary function of management. Budgets are the expressions in financial terms of management’s plans for operating and financing the business. Budgetary control is essential tool of management for controlling cost and maximizing profit.Meaning of budget: Budget is defined as a financial and or quantitative statement prepared prior to a defined period of time of the policy to be persuade during that period for the purpose of attaining a given objective.A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time,usually one year.In other words a budget is a systematic plan for the utilization of manpower and material resources. Budgetis prepared in advance and it is based a future plans of actions.It relates to a future period and it is based on objectives to be fulfilled .it is a statement expressed inmonitory and or physical units.In a business organization, a budget represents an estimate of future costs and revenues. Budgets may bedivided into two basic classes: Capital Budgets and Operating Budgets.Capital budgets are prepared for estimating proposed expenditures for new projects and requirement of special financing.The operating budgets are prepared for achieving short-term operational goals of the organization. Operating budgets may be sub-divided into various functional budgets. Different types of operating budgets are prepared for different purposes for ex. Cash budget sales budget, purchase budget, production budget etc.
The Nature and Scope of budget:
1. It is prepared in advance and is derived from the long-term strategy of the organization.2. It relates to future period for which objectives or goals have already been laid down.It is expressed in quantitative form, physical or monetary units, or both.Different types of budgets are prepared for different purposed e.g. Sales Budget, Production Budget,Administrative Expense Budget, Raw-material Budget etc. All these sectional budgets are afterwardsintegrated into a master budget, which represents an overall plan of the organization.
Importance and Utility of Budgets:
A budget helps us in the following ways:1. It brings about efficiency and improvement in the working of the organization.2. It is a way of communicating the plans to various units of the organization. By establishing the divisional,departmental, sectional budgets, exact responsibilities are assigned. It thus minimizes the possibilities of  buck passing if the budget figures are not met.3. It is a way or motivating managers to achieve the goals set for the units.4. It serves as a benchmark for controlling on-going operations.5. It helps in developing a team spirit where participation in budgeting is encouraged.6. It helps in reducing wastage and losses by revealing them in time for corrective action.7. It serves as a basis for evaluating the performance of managers.8. It serves as a means of educating the managers.
Meaning, Importance and scope of Budgetary control:
It is defined as the establishment of budget relating to the responsibility of executive to the requirement of a policy, and a continuous comparison of actual with budgetary results either to secure by individual action theobjective of policy or to provide a basis for its revision. The budgetary control includes the following – 
Establishment of budget
Continuous comparison of actual with budgeted target
Revision of budget in the light of changed circumstancesBudgetary control technique includes the science of planning the budget and utilization of such budget for  business planning and control. It corrects the deviations from the pre-planned targets and helps in performance of future activities.
 No system of planning can be successful without having an effective and efficient system of control.Budgeting is closely connected with control. The exercise of control in the organization with the help of  budgets is known as budgetary control.A system of budgetary control should not become rigid. There should be enough scope of flexibility to provide for individual initiative and drive. Budgetary control is an important device for making theorganization. More efficient on all fronts. It is an important tool for controlling costs and achieving theoverall objectives.
Having understood the meaning and significance of budgetary control in an organization, it will be useful for you to know how a budgetary control system can be installed in the organization. This requires, first of all,finding answers to the following questions in the context of an organization:· What is likely to happen?· What can the objectives to be achieved?· What are the constraints and to what extent their effects can be minimized?Having found answers to the above questions, the following steps may be taken for installing an effectivesystem of budgetary control in an organization.1 Organization for Budgeting:The setting up of a definite plan of organization is the first step towards installing budgetary control systemin an organization.2. Budget Manual: "A document which set out, the responsibilities of the persons engaged in the routine of  budgetary control." a budget manual should be prepared giving details of the powers, duties, responsibilitiesand areas of operation of each executive in the organization.3Authority: The authority of granting approval should be stated in explicit terms. Whether one, two or moresignatures are to be required on each document should also be clearly stated.3. Timetable for all stages of budgeting.4. Reports, statements, forms and other records to be maintained.5. The accounts classification to be employed. It is necessary that the framework within which the costs,revenues and other financial amount are classified must be identical both in accounts and the budgetdepartment.Fixation of the budget periodBudget period mean the period for which a budget is prepared and employed. The budget period dependsupon the nature of the business and the control techniques. For example, a seasonal industry will budget for each season while an industry requiring long periods to complete work will budget for four, five or evenlarger number of year.Classification according to function:1.Sales budget – It forecasts total sales in the terms of quantity, value, period etc.2.Production budget – It is based on sales budget. It forecasts quantity of production in terms oitems, period etc.
Cost of production budget – It forecasts the cost of production. Separate budgets are prepared for different elements of costs such as direct material budget, direct labour budget, and factory over headed budget etc.4.Purchase budget The budget forecasts the quantity and value of purchases required fo production.5.Cash budget – The budget is a forecast of the cash position. It states the estimated amount of cashreceipts and cash payments and the likely balance of cash in hand at the end of different periods.
Master budget – It is a summary budget incorporating all functional budgets, it covers the preparation of projected income statement and projected balance sheet.Classification according to flexibility:1.Fixed budget: A budget prepared on the basis of a standard or fixed level of activity is called a fixed budget. It does not change with the change in the level of activity. It does not provide for automaticadjustments with volume changes.2.Flexible budget – A budget designed in a manner so as to give the budget cost of any level of activityis called flexible budget. Thus the budget is prepared so as to give the cost at different levels of activity. It is
 prepared after considering the fixed and variable elements of cost and the changes that may be expected atvarious levels of populations.
Sales Budget :
Sales budget generally forms the fundamental basis on which all other Budgets are built. The budget is basedon projected sales to be achieved in a budget period.The sales manager is directly responsible for the preparation and execution of this budget.The sales budget shows the expected sales in units at their expected selling prices. A business firm will prepare the sales budget for a given period of time based on the forecasted sales level, production capacity,and long and short term goals.The sales budget must be done first in the process of preparing the master budget because it must identifythe expected sales level before it plans for any other activities.Usually takes into consideration the following factors while preparing the sales budget:1 Organizational Factors 2 Past sales (figure and trends)3 Salesmen's estimates 4 Plant capacity5 Order on hand 6 Proposed expansion or discontinuation of products7 Availability of material of supplies 8 Financial aspect9 Cost of distribution of goods 10 Degree of competition Government controls,etc.
Production Budget
This budget provides an estimate of the total volume of production Distributed product-wiseGenerally, the production budget is based on the sales budget. The responsibility for the overall production budget ties with works manager and that of with departmental works managers.Production budget may be expressed in physical or financial terms or both in relation to production. The production budgets attempt to answer questions like :-(I)What is to be produced? (II) When it is to be produced ?(III) How is to be produced? (IV) Where it is to be produced?The production budget contains the production program for achieving the sales target. It serves as a basisfor preparation of related cost budgets, e.g., materials cost budget, labour cost budget, etc.it also facilities the preparation of a cash budget. The production budget is prepared after taking into consideration several factors like - Inventory policies, sales requirements, production stability, plant capacity, availability of materials and labour, time taken in production process etc.Basically, there are three elements of costs, namely direct material, Direct labour and overheads. Separate budgets for each of there elements have to be prepared. The estimated after taking into account the closingand the opening inventories and the materials from which orders have already been placed.Budgeted sales in units XXXXXAdd desired ending inventoryXXXXXTotal need-XXXXXless beginning inventoryXXXXXRequired productionXXXXXPurchase Budget:
The purchase budget is another functional budget that estimates the purchase requirement of materials utilized in the production process. The purchase budget is based on the productionbudget and the standard material consumption requirement for the production estimates.
Method of preparing (Finalizing ) a Purchases Budget1.Calculate the ending inventory for each quarter.2.Enter projected unit sales for the quarter from the sales budget schedule.3.Add ending inventory units and projected sales units to determine total units needed per quarter.4.Enter beginning inventory, which is the same as ending inventory for the preceding quarter.5.Subtract beginning inventory from total units needed to determine total unit purchases for the quarter.6.Enter the unit cost for each quarter.7.Multiply the unit purchases each quarter to determine the cost of purchases

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