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. Budget is 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 in monitory and or physical units. In a business organization, a budget represents an estimate of future costs and revenues. Budgets may be divided 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 afterwards integrated 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 the objective 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 circumstances Budgetary 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 the organization. More efficient on all fronts. It is an important tool for controlling costs and achieving the overall objectives. INSTALLING A BUDGETARY CONTROL SYSTEM 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 effective system 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 system in 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, responsibilities and 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 more signatures 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 budget department. Fixation of the budget period Budget period mean the period for which a budget is prepared and employed. The budget period depends upon 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 even larger 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 of items, period etc. 3. 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 for production. 5. Cash budget – The budget is a forecast of the cash position. It states the estimated amount of cash receipts and cash payments and the likely balance of cash in hand at the end of different periods. 6. 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 automatic adjustments with volume changes. 2. Flexible budget – A budget designed in a manner so as to give the budget cost of any level of activity is 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 at various levels of populations. Sales Budget : Sales budget generally forms the fundamental basis on which all other Budgets are built. The budget is based on 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 identify the 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 capacity 5 Order on hand 6 Proposed expansion or discontinuation of products 7 Availability of material of supplies 8 Financial aspect 9 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-wise Generally, 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 basis for 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 closing and the opening inventories and the materials from which orders have already been placed. Budgeted sales in units Add desired ending inventory Total needless beginning inventory Required production XXXXX XXXXX XXXXX XXXXX XXXXX

Purchase 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 production budget and the standard material consumption requirement for the production estimates. Method of preparing (Finalizing ) a Purchases Budget 1. 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

Example of Purchase Budget: 8. f Technology Particulars Materials A Quantity Consumption Desired stock 108000 113000 121000 Expected stock at commencement Material to be purchased 9. Madras 12000 109000 15 2 Price 2 2 Materials B Quantity 163000 15000 178000 15000 163000 15 2 Price 3 3

Direct Material Budget: The directed material budget will show the direct materials your business needs for production and the budgeted cost. Direct Labor Budget: The production budget is needed to prepare a direct labor budget as well as the direct materials budget. It enables the personnel department to plan for new hires and repositioning employees. A good labor budget will help businesses avoid emergency hiring and will also help prevent labor shortages. Factory Overhead Budget: Your factory overhead budget will include all the production costs except for the direct materials and direct labor budgets. Factory or manufacturing overheads includes the cost of indirect material, indirect labour and indirect expenses. Manufacturing overheads may be classified into. Fixed overheads i.e., which tend to remain constant irrespective of change in the volume of output, Variable overheads i.e., which tend to vary with the output, Semi-variable overheads, i.e., which are partly variable and partly fixed. The manufacturing overhead budget will provide an estimate of these Overheads to be incurred during the budget period. Fixed manufacturing overhead can be estimated on the basis of past Information and knowledge of any changes which may occur during the ensuring budget period. Variable overheads are estimated after considering the scheduled production and operating conditions in the budget period. Selling and administrative expenses budget: The selling and administrative expenses budget is a plan for all non-manufacturing expenses. This particular budget gives you a guideline for selling and administrative activities during your budget period. Factory or manufacturing overheads includes the cost of indirect material, indirect labour and indirect expenses. Manufacturing overheads may be classified into i. Fixed overheads i.e., which tend to remain constant irrespective of change in the volume of output, j. Variable overheads i.e., which tend to vary with the output, k. Semi-variable overheads, i.e., which are partly variable and partly fixed. The manufacturing overhead budget will provide an estimate of these Overheads to be incurred during the budget period. Fixed manufacturing overhead can be estimated on the basis of past Information and knowledge of any changes which may occur during the ensuring budget period. Variable overheads are estimated after considering the scheduled production and operating conditions in the budget period. Administrative overheads budget

This budget covers the administrative expenses including the salaries Of administrative expenses including the salaries of administrative the managerial staff. This budget includes all the expenses relating to selling, advertising, delivery of goods to customers etc. The preparation of the budget would depend on analysis of the market situation by the management, advertising policies, research programmes, and the fixed and variable elements. Cash budget The cash budget is a summary of the firm's expected cash inflows and Outflows over a particular period of time. In other words, cash budget involves a projection of future cash receipts and cash disbursements over various time intervals. A cash budget helps the management in : Determining the future cash needs of the firm. Planning for financing of those needs. Exercising control over cash and liquidity of the firm. The overall cash budget can be prepared by any of the following methods 1. Receipts and payments method 2. The adjusted profit and loss method 3. The balance sheet method Receipts and payments method : In case of this method the cash receipts From various sources and the cash payments to various agencies are estimated. In the opening balance of cash estimated cash receipts are added and from the total, the total of estimated cash payments are deducted to find out the closing balance. The adjusted profit and loss method : In case of this method the cash Budget is prepared on the basis of opening cash and bank balances, projected profit and loss account and the balances of the various assets and liabilities. The balance sheet method : With the help of budgeted balances at the End except cash and bank balances, a budgeted balance sheet can be prepared and the balancing figure would be the estimated closing cash/bank balance. Thus, under this method, closing balances other than cash/bank will have to be found out first to be put in the budgeted balance sheet. This can be done by adjusting the anticipated transactions of the year in the opening balances. Master Budget: The master budget is a summary of company's plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. In short, this budget represents management's plans for future and how these plans are to be accomplished. A master budget is usually classified into two individual budgets: the Operational budget and the Financial budget. It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. The figures of one budget is usually used in the preparation of other budget.Therefore these budgets are called interdependent budgets. THE MASTER BUDGET INTERRELATIONSHIP Sales Budget ↓ ↓ ↓ ↓ ↓ ↓ Ending → Inventory ← Budget ↓ Direct Materials Budget ↓ Production Budget ↓ Direct Labor Budget ↓ Cash Budget ↓ ↓ Overhead Budget ↓ ↓ ↓ ↓ ↓ ↓

Budgeted Income Statement

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Budgeted Balance Sheet

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Selling and Admn. Budget

Advantages and Disadvantages of a Master Budget: Some advantages of a master budget are that it can give an idea of where a company wants to go and what it has to do in order to get there. It will also allow the company to realistically project future cash flows which in turn would help in getting certain types of financing. Some disadvantages of a master budget include the time involved in producing such a budget. This is primarily the reason a smaller company may not make a master budget if the company has a very small managerial staff. The operation budget consists of eight individual budgets: • Budgeted income Statement: The last part of operational part of your master budget is the budgeted income statement. It estimates the expected operating income from budgeted operations. It also gives management a vision of the likely operating result upon completing the budgeted operation. Once this part is complete it will become the benchmark against which the budget is evaluated. The second part of your master budget will include your financial budget. The financial budget consists of two individual budgets: Budgeted Balance Sheet: The last step in preparing a master budget is the budget balance sheet. This is the sheet that will show the expected financial position at the end of the fiscal year or budget period.

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