BUDGETING

AFTERSCHO☻OL
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AFTERSCHO☺OL's MATERIAL
MATERIAL 1
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 BUDGETING

Dr. T.K. Jain.

AFTERSCHO☺OL
Centre for social entrepreneurship
Bikaner M: 9414430763
tkjainbkn@yahoo.co.in
www.afterschool.tk, www.afterschoool.tk

www.afterschoool.tk AFTERSCHO☺OL's
AFTERSCHO☺OL's MATERIAL
MATERIAL 2
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 WHAT IS BUDGETING ?

• IT IS A DETAILED PLAN OF
OPERATIONS PREPARED IN
ADVANCE. IT GIVES DETAILED
FINANCIAL PROJECTIONS. IT HELPS
US IN IDENTIFYING THE MONETARY
AND PHYSICAL UNITS OF
OPERATIONS REGARDING THE
PROJECTED FUTURE.

www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 3

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 What is control?

• When we compare actual performance to the

planned performance and evaluation the
deviations (if any) and take corrective action, this
entire process is called control. Control is just to
ensure that we are on the right track and doing
the right things as planned. Control is a means
of comparing actual performance to the standard
performance. Controls are standards, which
have been carefully set, well in advance.

www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 4

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 What is budgetary control?

• When budgeting is used as a means of

control, we called it budgetary control.
Here we establish budgets and fix
responsibilities of executives in terms of
targets, working, objectives, results etc. it
helps us in comparison of actual
performance with the planned
performance. Budgets may be revised as
per changed circumstances.
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 5
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 How is budgetary control established?

• Determine the objectives

• Prepare action plan for the objectives
• Prepare detailed budget and discuss it with all
key executives and finalise it.
• Define the constraints, assumptions, and
precautions in advance.
• Prepare budget manual and circulate it to all
concerned
• Review the performance periodically and modify
the budget if required.
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 6
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 What are the key issues in budgeting?

• Fix budget period

• Prepare an estimate of planned activities (a
forecast is just an enstimate, but budget is more
than an estimate, it is a plan document and
specifies how we will achieve what we wish to
achieve).
• Fix responsibilities for budget implementation
• Determine key factor
• Appoint budget committee and budget controller

www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 7

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 Types of budgets :

• As per time: (long term, short term, medium

term, very short period / current period)
• As per function: (marketing, finance, HR, sales,
production, operations, research, cash,
personnel, master, & capital expenditure
budget).
• As per flexibility : (fixed budget v/s flexible
budget).
• Others : zero base budget, performance
budgeting etc.

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 Operating budgets…

1. Programme budget: this budget is

prepared around a product / project. It
identifies revenues and expenditure to be
undertaken. It is complete budget relating
to a project / product. There are various
persons involved in this budget = therefore
it is not a very good control device for
individual performance. It is a good tool for
organisational performance assessment.
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 9
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 2. Responsibility budgeting…

• Here we fix individual responsibilities relating to

the work to be accompalished. It is a very good
tool for individual performance assessment and
evaluation. It is used along with other tools of
management like Balanced Scorecard, in order
to assess the performance of the employee.
• It can be used along with the tools like
responsibility centre, cost centre, revenue
centre, profit centre, expense centre etc. here
we are fixing the budgets relating to revenues
and costs along with individuals responsible for
achieving it.
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 10
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 Zero base budgeting…

• Peter A Pyhrr used it for the first time in

1970 in its present form, although it was
used by US dept. of Agriculture in 1961
and by some other agencies earlier also.
• The basic assumption is that we start a
fresh. Historical elements in budgets are
minimised.

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 Definition… of ZBB

• the manager preparing ZBB reviews each

activity from scratch. Nothing is allowed
just because it was done in the past. Each
activity / work is reviewed from the
beginning. We try to make a budget for
each activity from the beginning.
• Here each activity is critically examined
and reviewed in order to fix responsibilities
and duties.

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 Steps in ZBB?

• Decide about objectives…

• Decide the extent to which ZBB will be
implemented
• Identify decision units
• List down and formulate decision
packages
• Review and rank decision packages
• Prepare the budget
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 Advantages of ZBB

• Identifies wastes, unnecessary activities

etc.
• It is a pre-curser to the BPR exercise
• It links each activity to the organisational
corporate mission, objectives and plans
• It is a systematic way to evaluate the
performance of the organisation on
different dimensions.
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 14
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 Limitations of ZBB

• More time, more cost, more resources are

required
• It is difficult to rank different decisional
packages
• Implementation is not always easy

www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 15

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 A factory makes two products - A and B. A
takes 10 hours to make and B takes 20 hours
to make. In a month (25 days of 8 hours) 500
units of A and 300 units of B are produced.
Budgeted hours are 8500 per month. 60
workers are working. Compute various ratios.
• Standard hours for actual work:
• Actual production * no. of hours
• A = 500 * 10 = 5000 hours
• B = 300 * 20 = 6000 hours
• Total std. hours = 11000
• Budgeted hours = 8500 hours
• Actual hours = 25*8*60 = 12000
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 16
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 Solution…

• Activity ratio : std. hours for actual perofrmance

/ budgeted hours * 100
• = 11000/8500*100 = 129%
• Capacity ratio :
• Actual hours / budgeted hours * 100
• = 12000/85000 * 100 = 141%
• Efficiency ratio :
• Std. hours / actual hours * 100
• 11000/12000 * 100 = 91.6% answer.

www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 17

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 Z Ltd. had a profit plan approved for selling 5,000
units per month at an average price of Rs. 10 per
unit. The budgeted variable cost of production was
Rs. 4 per unit and the fixed costs were budgeted at
Rs. 20,000, the planned income being Rs. 10,000
per month, Due to shortage of raw materials, only
4,000 units could be produced and the cost of
production increased by 50 paise per unit. The
selling price was raised by Re. 1.00 per unit. In
order to improve the production process, an
expenditure of Rs. 1,000 was incurred for research
and development activities.
You are required to prepare a Performance Budget
and a Summary Report.

www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 18

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 Solution…

Particulars Original Adjusted Actual

plan plan position
Sales 5000*10 4000*10 4000*11
Variable 5000*4 4000*4 4000*4.5
cost
Contribution 30000 26000 26000
Fixed cost 20000 20000 21000
Profit 10000 6000 5000

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 Performance analysis

• Selling price variance

• (act. Price – std. price) * act. Qty
• =(11-10) * 4000 = 4000
• Variable cost variance =
• (std. – act) * act. Production
• =(4 – 4.5) * 4000 = - 2000
• Fixed cost variance = 20000-21000=-1000
• Profit volume variance =reduction in volume * actual
profit per unit= 1000 *6 = -6000
• Total variance = - 5000
• Actual difference = 5000 – 10000 = -5000 answer.
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 20
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 Prepare cash budget from the following figures: first row is for
material received, second column is for sales and third column is
for other expenses. We receive payment from debtors after 3
months and we make payment after 2 months to suppliers.
Balance of cash on 1 april is 10000.
january 20,000 30,000 9,500

february 22,000 33,000 10,000

March 24,000 36,000 10,500

april 26,000 39,000 11,000

may 28,000 42,000 11,500

june 30,000 45,000 12,000

july 32,000 48,000 12,500

august 34,000 51,000 13,000

www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 21
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Solution… it is clear that we have to withdraw more cash in the
month of August to meet our cash requirements in September.

cl.
opening Balanc
balance receipts payments e
april : 10,000 30,000 33,000 7,000
May 7,000 33,000 35,500 4,500
June 4,500 36,000 38,000 2,500
July 2,500 39,000 40,500 1,000
August 1,000 42,000 43,000 0
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 22
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 A company requires you to calculate and
present thø budget for the next year from the
following information
• SALES : Toughened glass . 3,00,000 Bent toughened
glass Rs. 500000
• Direct material cost 60% of sales
• Direct wages 20 workers © As. 150 per month.
• Factory overheads:
• Indirect labour:
• Works managerRs. 500 per month
• Foreman Rs. 400 per month
• Stores and spares 2.5 % of sales
• Depreciation on machinery Rs. 12,600
• Light and power 5,000
• Repairs and maintenance 10% on direct wages
• Administration, selling and distribution expenses
Rs.14,000 per year.
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 23
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 Solution…

• Sales (3+5) 800000

• Direct material : 480000
• Direct labour : 36000
• Prime cost = 516000
• Add : factory overhead:
• Stores 2.5% of 8 lakhs : 20000
• Repairs : 3600
• Foreman+works manager 10800
• Power : 5000
• Depreciation : 12600
• Works cost : 570000
• Gross profit : 230000
• Less selling exp : 14000
• Net profit : 216000 (answer)

www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 24

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 Flexible budget …

• a company produces 1,000 units at 100%

capacity, and the costs at this level are as
follows:
• Fixed Rs. 5,000 Variable Rs. 3 per unit
• Semi-variable Rs. 4 per unit (40%
variable)
• In case the budgeted levels of activity are
80%, 90% and 100%, prepare the flexible
budget.
www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 25
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 Solution… (flexible budget)

particulars 100% 90% 80%

No. of units 1000 900 800
Fixed cost 5000 5000 5000
Variable cost 3000 2700 2400
Semi variable : fixed : 2400 2400 2400
Semi variable : variable 1600 1440 1280

Total cost : 12000 11540 11080

www.afterschoool.tk AFTERSCHO☺OL's MATERIAL 26
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 Question on financial budgeting…
• Jitu International sells goods on a gross profit of 25%.
Depreciation Ii taken into account as a part of cost of
production. The following are the annual figures given to you:
Sales (two month’s Credit) 18,00,000
• Materials consumed (one month’s credit) 4,50,000
• Wages paid (one month lag in payment) 3,60,000
• Cash manufacturing expenses (one month lag in payment)
4,80,000
• Administration expenses (one month lag in payment)
120,000
• Sales promotion expenses (paid quarterly in advance)
60,000
• Income tax payable in 4 instalments of which one lies in the
next year 1 ,50,000
• The company keeps on month’s stock each of raw materials
and finished goods. It alnu keeps Rs.1 00,000 in cash. You are
required to estimate the working capital requirements
assuming 15% safety margin.
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 Solution…

• Current assets :
• Debtors : 18 *2/12 = 300000 sales
• Cost of sales : 300000*100/125 =240000
• Cash : 100000
• Raw material : 37500
• Finished goods: 120000
• Advance payment : 15000 (60000/4)
• Less current liabities :
• Tax : 37500 Creditors : 37500 admn. 10000
• Wages 30000,
• Working capital = 394500 + 15%
• Total working capital requirement: 453675 answer.
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 About AFTERSCHO☺OL

• PGPSE - World’s most comprehensive

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 Branches of AFTERSCHO☺OL

• PGPSE programme is open all over the

world as free online programme.
• Those who complete PSPSE have the
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• A few branches have already started -
one such branch is at KOTA (Rajasthan).

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• We conduct workshop on social

entrepreneurship – all over India and out
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 Pursue professional courses along with
PGPSE

• AFTERSCHO☺OL permits you to pursue

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