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1) Organisation for budgeting The setting up of a definite plan of organisation is the first step to be taken prior to beginning the real work of installing budgetary control. The responsibility of each executive must be clearly defined. There should be no uncertainty regarding the point where the jurisdiction of one executive ends and that of another begins. 2) Budget manual The budget manual is a written document or booklet which specifies the objectives of the budgeting organisation and procedures. The chartered institute of management accountants, London defines it as “a document which sets out, the responsibilities of the persons engaged in, the routine of, and the forms and records required for, budgetary control.” Following are some important matters covered in a budget manual: 1) A statement regarding the objectives of the organisation and how they can be achieved through budgetary control. 2) A statement regarding the functions and responsibilities of each executive by designation both regarding preparation and execution of budgets. 3) Procedures to be followed for obtaining the necessary approval of budgets. 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. 4) Time-tables for all stages of budgeting. 5) Reports, statements, forms and other records to be maintained. 6) The accounts classification to be employed. It is necessary that the framework within which the costs, revenues and other financial accounts are classified must be identical both in the accounts and the budget departments. There are many advantages attached to the use of budget manual. It is a formal record defining the functions and responsibilities of each executive. The methods and procedures of budgetary control are standardised. There is synchronisation. There is synchronisation of the efforts of all which results in maximisation of the profits of the organisation. 3) Responsibility for budgeting 1) Budget controller- the chief executive is ultimately responsible for the budget programme but it will be better if the large part of the supervisory responsibility is delegated as budget controller or director. The budget controller or director should have knowledge of the technical side of the business and should report directly to the president. 2) Budget committee- the budget controller will be assisted in his work by the budget committee. The budget committee will consist of heads of the various departments such as production, sales, finance etc. with budget controller as its chairman. It will be the duty of the department will have his own subcommittee with executives working under him as its members.
The procedure followed in designing and operating a budgetary control system largely depends upon the nature of the business. Coordinated plans should be finally approved. 2) Shortage of trained sales personnel. labour. therefore . The budget period will depend upon (i) the nature of the business and (ii) the costing techniques to be applied . However. a longer budget period will be suitable. import restrictions etc. which can be one or more in any organisation: Internal (a) Materials 1) Non-availability of supply in terms of quality 2) Non-availability of supply in terms of quantity due to restrictions imposed by licences. It is essential to consider this factor before preparing the budgets. The budget relating to this particular factor should be prepared first and other budgets should be base upon it.3) Fixation of the budget period-“budget period” means the period for which a budget is prepared and employed. the usual pattern is as follows: 1) Determination of key factor – key factor is that factor the extent of whose influence must first be assessed in order to ensure that functional budgets are reasonably capable of fulfilment. while governs the whole process of materials. This is also termed as ‘principal budget’ or ‘limiting’ or ‘governing’ factor.the budget period should be short one. (b) Labour (c) Plant capacity (d) Sales . But in case of a structural or heavy engineering works.for example. quotas. prolonged strike by transporters. The following is a list of principal budget factors. 1) Non-availability of skilled labour 2) Problem of high labour turnover 3) Non-availability of labouring required quantity. Similar is the case of a garment manufacturer as his business depends on the vagaries of taste and fashion. 1) Constrains of finance 2) Constrains of space 1) Low demand due to tough competition. and . In some concerns the key factor may be sales. This most important factor which governs the whole process of preparation of budgets should be predetermined. 4) Budget procedure After the establishment of budget organisation and fixation of the budget period the actual work of budgetary control begins. machinery or capital. in case of continuous or mass production industries it is necessary to compare continuously the actual with budgets.
4) Limited scope. The key factors shall be correctly identified and diagnosed. being statements of future events. . change in fashions and buying behaviour of consumers. purchasing power of consumers etc. government policy. Forecasts are converted into budgets.A budget is a tool of control since it represents actions which can be shaped according to will so that it can be suited to the conditions which may or may not happen.Forecast is a mere estimate of what is likely to happen. 2) Tool of control. 4) Wider scope. 3) Preliminary step. It is a statement of probable events which are likely to happen under anticipated conditions during a specified period of time.Forecasts can be made in those spheres also where budgets can’t interfare.Forecasts. changing material mix etc. dealing in more profitable products. does not denote any sense of control. DIFFERENCE BETWEEN FORECAST AND BUDGET FORECAST 1) Mere estimate. 3) Later step.Budget shows the policy and programme to be followed in a future period under planned conditions.It begins when forecasting ends. These factors are not of a permanent nature and they can be overcome by the management in the long run if an effort is made in this direction by selecting optimum level of production.Forecasting is a preliminary step for budgeting. BUDGET 1) Planned event.External General business conditions. introducing new methods. fiscal measures. 2) No sense of control . It ends with the forecast of likely events.Budgets can be made of only that phenomenon which are capable of being expressed quantitatively.
d) Financial budgets. c) Profit budgets. labour etc in terms of physical units are known as physical budgets. labour cost. materials. capital expenditure budget and budgeted balance sheet. the budgets can be prepared for long-term and short-term periods. b) Cash budgets. Both have their respective utilities and sphere of operation. while a budget relating to current conditions and established for use over a shot span of time is termed as current budget. budgets may be classified as basic budgets and current budgets. These can be further grouped as under: a) Physical budgets.g.As per conditions.Budgets containing targets of production. whereas if the period is more than one year. selling etc are cost budgets.Types of budgets: 1) Capacity. office. Material and labour budgets can be both in terms of physical units and costs. 2) Conditions. Business policy for a defined period is represented by the master budget. the budgets can be functional budgets and master budget. sales. .Budgets which direct the financial position are financial budgets such as cash budget. The budget remaining unaffected by length of time is a basic budget.As per capacity. 3) Period. the budget is a short-term budget. the budget is a long-term one. Details of master budget are contained in a number of budgets relating to individual functions in an organisation.According to coverage. if the period of preparation is one year or less. overhead cost-manufacturing. 4) Coverage.Budgets comprising information about the cost e. the budgets may be fixed budgets and flexible budgets. profit and loss budget are examples of such budgets. Sales budget.According to periodicity. The same are called functional budgets.Budgets enabling profit ascertainment can be designated as profit budget. material cost.
5) Forecasting difficult. 6) Several fixed budgets. .It assumes that conditions would remain same. 3) Cost classification.Flexible budget clearly shows the impact of various expenses on the operational aspect of the business.All conditions will remain unaltered is an unrealistic expectation on the part of management.FIXED BUDGET 1) Rigidity. 2) Static conditions. 7) Cost non-ascertainable. semi-variable.Accurate forecasting of results is difficult.Costs are classified according to the nature of the variability. The task of fixing prices becomes smooth. 5) Easy forecasting. FLEXIBLE BUDGET 1) Adaptability-It can be suitably recast quickly to suit changed conditions. 4) Realistic comparisonsComparisons are realistic since the changed plan figures are placed against actual ones.Actual and budgeted performances can’t be correctly compared if the volume of output differs.Costs are not classified according to fixed. 7) Cost ascertainment possibleCosts can easily be ascertained at different levels of activity.It is designed to change according to a change in the level of activity. variable. 2) Dynamic conditions.It is inflexible and remains the same irrespective of the volume of business activity.Under flexible budgeting series of fixed budgets are prepared for different levels of activity. 3) Behavioural classification of costs. 6) Unrealistic expectation.Cost cannot be ascertained if there is a change in the circumstances. 4) False comparisons.
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