Budget has been defined by CIMA U. K.

as, A financial and or quantitative statement prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of achieving a given objective. BUDGETARY CONTROL Budgetary control is actually a means of control in which the actual results are compared with the budgeted results so that appropriate action may be taken with regard to any deviations between the two.

Objectives of a Budgetary Control System

1. Definition of Goals: portray with precision, the overall aims of the business and determining targets of performance for each section or department of the business. 2. Defining Responsibilities: Laying down the responsibilities of each individual so that everyone knows what is expected from him and how he will be judged. 3. Basis for Performance Evaluation: Providing basis for the comparison of actual performance with the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures. It helps to take timely corrective measures.

4. Optimum use of Resources: Ensuring the best use of all available resources to maximize profit or production, subject to the limiting factors. 5. Coordination: Coordinating the various activities of the business and centralizing control, but also making a facility for the Management to decentralize responsibility and delegate authority. 6. Planned action: Engendering a spirit of careful forethought, assessment of what is possible and an attempt at it. It leads to dynamism without recklessness. It also helps to draw up long range plans with a fair measure of accuracy.
7. Basis for policy: Providing a basis for revision of current and future policies.

Advantages of Budgetary Control System

1. Maximization of Profit: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and co-ordination of different functions is undertaken. There is proper control over various capital and revenue expenditures. The resources are put to the best possible use. 2. Co-ordination: The working of the different departments and sectors is properly coordinated with budgets. The budgets of different departments have a bearing on one another. The co-ordination of various executives and subordinates is necessary for achieving budgeted targets. 3. Specific Aims: The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving some specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.

4. Tool for Measuring Performance: By providing targets to various departments, budgetary control provides a tool for measuring managerial performance. The budgeted targets are compared to actual results and deviations are determined. The performance of each department is reported to the top management. This system enables the introduction of management by exception. 5. Economy: The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.

6. Determining Weakness: The deviations in budgeted and actual performance will enable the determination of weak spots. Efforts are concentrated on those aspects where performance is less than the stipulated.

7. Corrective Action: The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system the deviation can determined only at the end of the financial period. 8. Consciousness: It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted. 9. Reduces Costs: In the present day competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more. 10. Introduction of Incentive Schemes: Budgetary control system also enables the introduction of incentive schemes of remuneration. The comparison of budgeted and actual performance will enable the use of such schemes.

Limitations of Budgetary Control System 1. Estimates: Budgets may or may not be true, as they are based on estimates. The assumptions about future events may or may not actually happen. 2. Rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may affect day to day operations and ignores the dynamic state of organizational functioning. 3. False Sense of Security: Mere budgeting cannot lead to profitability. Budgets cannot be executed automatically. It may create a false sense of security that everything has been taken care of in the budgets. 4. Lack of coordination: Staff cooperation is usually not available during Budgetary Control exercise. 5. Time and Cost: The introduction and implementation of the system may be expensive.

Process of Budgetary Control

Budgetary control has the following stages: A. Developing Budgets: The first stage in budgetary control is developing various budgets. It will be necessary to identify the budget centers in the organization and budgets will have to develop for each one of them. Thus budgets are developed for functions like purchase, sale, production, manpower planning as well as for cash, capital expenditure, machine hours, labor hours and so on. Utmost care should be taken while developing the budgets. The factors affecting the planning should be studied carefully and budgets should be developed after a thorough study of the same. B. Recording Actual Performance: There should be a proper system of recording the actual performance achieved. This will facilitate the comparison between the budget and the actual. An efficient accounting and cost accounting system will help to record the actual performance effectively.

C. Comparison of Budgeted and Actual Performance: One of the most important aspects of budgetary control is the comparison between the budgeted and the actual performance. The objective of such comparison is to find out the deviation between the two and provide the base for taking corrective action. D. Corrective Action: Taking appropriate corrective action on the basis of the comparison between the budgeted and actual results is the essence of budgeting. A budget is always prepared for future and hence there may be a variation between the budgeted results and actual results. There is a need for investigation of the same and take appropriate action so that the deviations will not repeat in the future. Responsibilities can be fixed on proper persons so that they can be held responsible for any such deviations

TYPES OF BUDGETS

On the basis of Time Period

On the basis Coverage

On the basis Conditions

On the basis Capacity

Long term Budget

Short term Budget

Functional Budget

Master Budget

Basic Budget

Current Budget

Fixed Budget

Flexible Budget

1. ON THE BASIS OF TIME-PERIOD

1. (I) LONG TERM BUDGET Budgets which are prepared for periods longer than a year are called Long Term Budgets. Such Budgets are helpful in business forecasting and forward planning. Examples: Capital Expenditure Budget and R&D Budget. 1. (II) SHORT TERM BUDGET Budgets which are prepared for periods less than a year are known as Short Term Budgets. Such Budgets are prepared in cases where a specific action has to be immediately taken to bring any variation under control. Example: Cash Budget.

2. ON THE BASIS OF COVERAGE 2. (I) FUNCTIONAL BUDGETS The Functional Budgets are prepared for each function of the organization. These budgets are normally prepared for a period of one year and then broken down to each month. The following budgets are included in this category. i. Sales Budget: A Sales budget shows forecast of expected sales in the future period and expressed in quantity of the product to be sold as well as the monetary value of the same. A Sales Budget may be prepared product wise, territories/ area/ country wise, customer group wise, salesmen wise as well as time like quarter wise, month wise, weekly etc.

Sales Budget (In units & Value) For the Budget Period ending.

Product Period Units

Product A

Product B

Rate

Amount

Units

Rate

Amount

1st quarter 2nd quarter 3rd quarter 4th quarter Total

-------

--------

--------

--------

ii. Production Budget: This budget shows the production target to be achieved in the year or the future period. The production budget is prepared in quantity as well as in monetary terms. Before preparation of this budget it is necessary to study the principal budget or the key factor. The principal budget factor can be sales demand or the production capacity or availability of raw material. The policy of the management regarding the inventory is also taken into consideration. The production budget is normally prepared for a period of one year and broken down on monthly basis. Production targets are decided by adding the budgeted closing inventory in the sales forecast and subtracting the opening inventory from the total of the same. Production Cost Budget is prepared by multiplying the production targets by the budgeted production cost per unit.

Production Budget (in Units) Product & Period Particulars

A. Budgeted Sales B. Add: Budgeted Closing Stock of Finished goods C. Less: Budgeted opening stock of Finished goods

Product Y

Product Z

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ## ##

D. Budgeted Production (A+B-C)

##

##

##

##

##

##

##

##

iii. Material Purchase Budget: This budget of materials to be purchased during the coming year. For the preparation of this budget, production budget is the starting point if it is the key factor. If the raw material availability is the key factor, it becomes the starting point. The desired closing inventory of the raw materials is added to the requirement as per the production budget and the opening inventory is subtracted from the gross requirements. This budget is prepared in quantity as well as the monetary terms and helps immensely in planning of the purchase of raw materials. Availability of storage space, financial resources, various levels of materials like maximum, minimum, re-order and economic order quantity are taken into consideration while preparing this budget. A separate material utilization budget may also be prepared as a preparation of material purchase budget.

Material Purchase / Procurement Budget For the budgeted period.

Particulars Material X Material Y
******* ******* ******* ******* *******

A. Budgeted Usage (for production) Product A ******* Product B ******* Total B. Add: Closing Stock of material C. Less: Opening stock of material ******* ******* *******

D. Budgeted Purchases in units (A+B-C)

E. Rate per unit

*******
*******

*******
******* *******

F. Budgeted Purchase In Value (D*E) *******

(iv) Cash Budget: a cash budget is an estimate of cash receipts and cash payments prepared for each month. In this budget all expected payments, revenue as well as capital and all receipts, revenue and capital are taken into consideration. The main purpose of cash budget is to predict the receipts and payments in cash so that the firm will be able to find out the cash balance at the end of the budget period. This will help the firm to know whether there will be surplus or deficit at the end of budget period. It will help them to plan for either investing the surplus or raise necessary amount to finance deficit. Cash budget is prepared in various ways, but the most popular form of the same is by method of Receipt and Payment method.

Particulars Opening cash balance b/f ## Cash receipts Receipts from debtors Sales of capital items Loans received

Month 1

Month 2

Month 3

Month 4

Proceeds from share issues

Any other cash receipts Deficit c/f ** (If balance is negative) Cash payments Deficit b/d ## Payments to creditors

Wages and salaries

Loan repayments Capital expenditure Taxation Dividends Receipts less payments Closing cash balance c/f** (If balance is positive)

2. (II) MASTER BUDGET

All the budgets described previously are called as Functional Budgets that are prepared for the planning of individual function of the organization. For example, Budgets are prepared for Purchase, Sales, Production, Manpower Planning, and so on. A master budget which is also called as Compressive Budget is a consolidation of all the functional budgets. It shows the projected Profit and Loss account and Balance sheet of business organization. For preparation of this budget, all functional budget are combined together and the relevant figures are incorporated in preparation of the projected Profit and Loss Account and Balance Sheet. Thus Master Budget is prepared for the organization and not for individual functions.

3. ON THE BASIS OF CONDITIONS 3. (I) BASIC BUDGETS: Budget, which remains unaltered over a long period of time, is called Basic Budget. 3. (II) CURRENT BUDGETS: A Budget, which is established for use over a short period of time and is related to the current conditions, is called Current Budget. It cover a very short period, say a month or a quarter. They are essentially short term budgets adjusted to current conditions.

4. ON THE BASIS OF CAPACITY 4. (I) FIXED BUDGET: When a budget is prepared by assuming a fixed percentage of capacity utilization, it is called as a fixed budget. For example, a firm may decide to operate at 90% of its total capacity and prepare a budget showing the projected profit or loss at that capacity. This budget is defined by The Institute of Cost and Management Accountants of [U.K.] as the budget which is designed to remain unchanged irrespective of the level of activity actually attained. It is based on a single level of activity. 4. (II) FLEXIBLE BUDGETS: a Flexible budget is a budget that is prepared for different levels of capacity utilization. It can be called as a series of fixed budgets prepared for different levels of activity. For example, a budget can be prepared for capacity utilization levels of 50%, 60%, 70%, 80%, 90% and 100%.

ZERO BASE BUDGET Zero base Budgeting ( ZBB ) examines a programme or function or responsibility from scratch. Nothing is allowed simply because it was being done in the past. The manager proposing the activity has, therefore, to prove that the activity is essential and the various amounts being asked for, are reasonable taking into account the volume of the activity. Zero Base Budgeting is method of budgeting whereby all activities are revaluated each time budget is formulated and every item of expenditure in the budget is fully justified. Thus the Zero Base Budgeting involves from scratch or zero.

Zero Base Budgeting actually emerged in the late 1960s as an attempt to overcome the limitations of incremental budgeting. This approach requires that all activities are justified and prioritized before decisions are taken relating to the amount of resources allocated to each activity. In incremental budgeting or traditional budgeting, previous years figures are taken as base and based on the same the budgeted figures for the next year are worked out. Thus the previous year is taken as the base for preparation of the budget. Whereas in Zero Base Budgeting, the beginning is made from scratch and each activity and function is reviewed thoroughly before sanctioning the same and all expenditures are analyzed and sanctioned only if they are justified.

Process of Zero Base Budgeting

Determination of objectives of Budgeting : The objective may be to effect cost reduction in staff overheads or analyze and drop the projects which do not fit in the organizational structure etc. Determination of the extent to which ZBB is to be introduced: Whether it is to be introduced in all areas of activities or only in a few selected areas on a trial basis. Development of decision units : Decision units refer to units regarding which a cost benefit analysis will be done to decide whether they should be allowed to continue or not. It may be a functional department, a programme, a product line or a sub-line.

Development of decision packages: After identification of decision units, the manager of each decision unit reviews the activities of his unit and examines alternative ways of accomplishing the objectives. He does a cost benefit analysis and selects the best alternative. He then prepares a decision packages which effectively summarize his plans and the resources required to achieve them.

Review and ranking of decision packages: The management ranks the decision packages in order of increasing benefit or importance to the organization. Preparation of Budgets: After the choice of decision package to be implemented is made, resources are allocated to different decision units and budgets relating to each unit are prepared.

BENEFITS FROM ZBB Benefits from ZBB can be summarized as follows: i. ZBB facilitates review of various activities right from the scratch and a detailed cost benefit study is conducted for each activity. Thus an activity is continued only if the cost benefit study is favorable. This ensures that an activity will not be continued merely because it was conducted in the previous year. ii. A detailed cost benefit analysis result in efficient allocation of resources and consequently wastages and obsolescence is eliminated. iii. A lot of brainstorming is required for evaluating cost and benefits arising from an activity and this results into generation of new ideas and also a sense of involvement of the staff. iv. ZBB facilitates improvement in communication and coordination amongst the staff. v. Awareness amongst the managers about the input costs is created which helps the organization to become cost conscious. vi. An exhaustive documentation is necessary for the implementation of this system and it automatically leads to record building.

LIMITATIONS OF ZERO BASE BUDGETING The following are the limitations of Zero Base Budgeting: i. It is very detailed procedure and naturally is time consuming and lot of paper work is involved in the same. ii. Cost involved in preparation and implementation of this system is very high. iii. Morale of staff may be very low as they might feel threatened if a particular activity is discontinued. iv. Ranking of activities and decision-making may become subjective at times. v. It may not advisable to apply this method when there are non financial considerations, such as ethical and social responsibility because this dictate rejecting a budget claim on low ranking projects.

Performance Budgeting Performance budgeting is a relatively new concept which focuses on functions, programmes and activities. Performance budgets are established in such a manner that each item of expenditure related to a specific responsibility centre is closely linked with the performance of that centre. Performance budgeting involves evaluation of the performance of the organization in the context of both specific as well as overall objectives of the organization. According to the National Institute of Bank Management, performance budgeting technique is, the process of analyzing, identifying, simplifying and crystallizing specific performance objectives of a job to be achieved over a period in the framework of the organizational objectives, the purpose and objectives of the job. The technique is characterized by its specific direction towards the business objectives of the organization.

Thus, performance budgeting lays immediate stress on the achievement of specific goals over a period of time. However, in the long-run it aims at continuous growth of the organization so that it continues to meet the dynamic needs of its growing clientele. It enables the organization to be sensitive and adaptive, preventing it from developing rigidities which may slow down the process of growth.
The main features of performance budgeting are as follows: i. Classification into functions, programs or activities ii. Specification of objectives for each program iii. Establishing suitable methods for measurement of work as far as possible iv. Fixation of work targets for each program.

CASH BUDGET 1. From the following information prepare a monthly Cash- Budget for the four months ending 31st December 2011.

Expected Sales: September October November December

Expected Purchase: September October November December

50,000 60,000 45,000 80,000

32,000 60,000 70,000 45,000

Other relevant information is: Wages to be paid to workers Rs. 6,000 each month. Dividend from investment amounting to Rs. 1,000 is expected on 31st December 11. Income tax to be paid in advance in December Rs. 2,000. Preference share dividend of Rs. 5,000 is to be paid on 30th November. Balance at Bank on 1st September is expected to Rs. 6,000.

2. From the following particulars make out a Cash-Budget of Luxury Ltd. for October to December Month July August September October November Sales 3,00,000 3,50,000 4,00,000 Budgeted 6,00,000 4,50,000 3,00,000 2,50,000 80,000 72,000 Purchase 1,00,000 1,50,000 2,00,000 Wages 60,000 70,000 64,000 Actual Figures

December 5,00,000 2,00,000 60,000 Other information: Credit allowed to customer is 2 months and credit allowed by creditor is 1 month. Time lag in payment of wages and expenses is of a month. Advance tax is to be paid in November Rs. 25,000. Insurance Rs. 5,000 payable every month which is not included in the above wages and expenses. Machinery purchased in December amounted to Rs. 1,50,000. 10% of sales and purchase are made for cash. Selling commission is payable @ 5% on sales, payable in the month following the month of collection. The bank balance on 1st October is 1,00,000.

3. Prepare a Cash-Budget for the three months ending 30th June, 2011 from the information given below: (a) Month Sales Materials Wages Overheads
February March April May June 14,000 15,000 16,000 17,000 18,000 9,600 9,000 9,200 10,000 10,400 3,000 3,000 3,200 3,600 4,000 1,700 1,900 2,000 2,200 2,300

(b) Credit terms are: Sales & Debtors- 10% sales are on cash, 50% of the credit sales are collected next month and the balance in the following month. Creditors- Materials 2 months Wages months Overhead month ( c) Cash and bank balance on 1st April 2011 is expected to be Rs. 6,000. (d) Other relevant informations are: Plant & machinery will be installed in February 2011 at a cost of Rs. 96,000. The monthly installment of Rs. 2,000 is payable from April onwards. Dividend @ 5% on preference share capital of Rs. 2,00,000 will be paid on 1st June. Dividend from investment amounting to Rs. 1,000 is expected to be received in June. Advance income tax to be paid in June is Rs. 2,000.

4. From the following information supplied by Bright Ltd. Prepare a cash budget for the Period From 1st September 2011 to 31st December 2011:

Months July August September October November

Credit Purchase 85,000 92,000 1,00,000 1,20,000 90,000

Credit Selling Wages Overheads Sales Expenses 1,60,000 32,000 8,000 10,000 1,85,000 37,000 9,500 11,500 2,10,000 42,000 10,500 13,000 2,45,000 49,000 12,500 14,500 1,82,000 36,000 9,000 11,000

Additional Information: Expected cash balance on 1st September is Rs. 10,500. Period of credit allowed to debtors is 2 months. Period of credit allowed by creditors is 1 month. Time lag in payment of wages, selling expenses and overhead is 1 month. Selling commission @ 2% on sales is payable 1 month after sales. Expenditure on machinery worth Rs. 50,000 is payable in October. Expected cash sales per month Rs. 15,000. No commission is payable on cash sales.

5. Following information is available from the record of Jay Ltd. for the year end 31 st Dec 2011.
Rs. (Lakhs) Fixed Expenses Wages & Salaries Rent, Rates and Taxes Depreciation Sundry expenses Semi-Variable expenses (50% capacity) Maintenance & Repairs Indirect Labour Sales department salaries Sundry expenses Variable Expenses (50% capacity) Material Labour other Expenses Total 9.5 6.6 7.4 6.5 3.5 7.9 3.8 2.8 21.7 20.4 7.9 98.0

Assuming that fixed expenses remain constant for all levels of production, Semi variable expenses remain constant between 45% and 65% of capacity, increasing by 10% if capacity exceeds 65%but does not exceed 85% of capacity and by 20% if capacity exceeds 85%.Sales at various levels are:
50% capacity 60% capacity 75% capacity 90% capacity 100% capacity 100 Lakhs 120 Lakhs 150 Lakhs 180 Lakhs 200 Lakhs

Prepare a flexible budget for the year and forecast the profit at 60%, 75%, 90%, 100% of capacity.

6. Prepare flexible budget for the production at 80% and 100% activity on the basis of the following information: Production at 50% capacity:- 5,000 units of raw material @ Rs. 80 per units, Direct Labour @ Rs. 50 per unit, Direct expenses Rs. 15 per unit, Factory expenses Rs. 50,000 (50% variable), Administrative expenses Rs. 60,000 (40% fixed).

MATERIAL PURCHASE / PROCUREMENT BUDGET 7. The Sales Manager of Delhi Mills Company expected to sale 25,000 units of a particular product next year. The Production Manager consulted the storekeeper who gave the necessary detail as follows: Two kinds of raw material, P and Q required for manufacturing the product. Each unit of the product requires 2 unit of P and 3 unit of Q. The estimated opening balances at the commencement of the next year are: Units Finished Product 5,000 Raw Material P 6,000 Raw Material Q 7,500 The desirable closing balances at the end of the next year are: Units Finished Product 7,000 Raw Material P 6,500 Raw Material Q 8,000 Let us prepare a statement showing material purchase budget for the next year.

8. The sales and production budgets for a glass manufacturing company are given below. It is now the end of January, during which actual sales were 44,000 units. The sales manager expects the sales for each of the remaining months of the year to be 25% higher than originally budgeted. He wishes to increases production to take advantage of the higher demand. The firm has a policy of keeping inventory equal to budgeted sales for the following two months. Actual production in January was 56,000 units and the beginning inventory was 88,000 units. The budgeted data based on previous estimates is given below:
Particulars Budgeted Sales January February March 40,000 48,000 April May June

56,000 60,000 56,000 52,000

Budgeted Production

56,000

60,000

56,000 52,000 48,000

nil

Prepare modified sales budgets and production budget.

9.

A glass manufacturing company requires you to calculate and present the budgeted Income-Statement for the year from the following information:

Sales Toughened glass Bent toughened glass Direct material cost Direct Wages Factory Overheads Work manager salary Foreman Stores & spares Depreciation on machinery Light and Power Repairs & Maintenance Other sundries Administration, selling & distribution expenses

Rs. 3,00,000 Rs. 5,00,000 60% of sales 20 workers @ 150/month Rs. 500/month Rs. 400/month 2.5% on sales Rs.12,600 Rs. 5,000 Rs. 8,000 10% 0n direct wages 14,000 per year

10. Z Ltd. provides you the following information: Balance-sheet (31-3-2011) Liabilities Amount Assets Amount

Share Capital
Retained Earnings Creditors Bills payable Provision for taxation

4,00,000 Plant & Machinery

32,000 Original Cost 10,000 Less: Depreciation 6,000 Stock of Raw Material 20,000 Stock of Finished goods Debtors Bills Receivable Cash 4,68,000 4,00,000 1,00,000 3,00,000 38,000 80,000 20,000 10,000 20,000 4,68,000 40,000 46,000 11,000 4,40,000 1,40,000 52,000 66,900 70,000 95,000 60,300

1 2 3 4 5 6 7 8 9 10 11 12

13

14 15

Purchase of machinery during 2011-12 Outstanding Debtors Outstanding Creditors Credit Sales Credit Purchase Closing stock of raw material Closing stock of finished goods Direct labour consumed and paid Factory overheads (Including depreciation for Rs 20,000) Administrative, Selling & distribution overheads Income tax is levied @ 50% and paid in the following year Re bills receivable: (i) To be drawn (ii) To be endorsed to trade creditors (iii) To be collected Re bills payables (i) To be accepted (ii) To be discharged Budgeted profit fo 2011-12 Income tax to be provided @ 50%

4,000 1,000 10,000 5,000 7,000 75,600

Required: Prepare Cash Budget and Budgeted Balance-Sheet.