Cost and Management

Accounting
Unit I
BUDGETARY CONTROL
 DEFINITION
• According to the Chartered Institute of
Management Accountants (CIMA) London,
Budget has been defined 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
attaining a given objective”.
 DEFINITION
• According to Brown and Howard,” A budget is
a predetermined statement of management
policy during a given period which provides a
standard for comparison with the results
actually achieved”
 CHARACTERISTICS - BUDGET
• Planning device
• Prepared either in money terms or
quantitative terms or both
• Prepared for a definite future period
• Purpose of budget is to implement the policies
formulated by management for attaining the
given objectives
• Basis for Performance evaluation and control
 BUDGETING
• The act of preparing budgets is called
budgeting
• According to J Batty, “ the entire process of
preparing the budgets is known as budgeting”
 BUDGETARY CONTROL
• According to CIMA, London, “ Budgetary
control is the establishment of budgets
relating to the responsibilities of executives of
a policy and the continuous comparison of the
actual with the budgeted results, either to
secure by individual action the objective of the
policy or to provide a basis for its revision”
CHARACTERISTICS – BUDGETARY CONTROL

• Establishment of budgets – each

function/department
• Comparison of actual performance with
budgets
• Analysis of variations of actual performance
• Taking suitable Remedial action
• Revision of budgets
 OBJECTIVES– BUDGETARY CONTROL
• Planning
– Provides a detailed plan of action for a business
over a definite period of time
– Helps in anticipating many problems and their
solutions
• Co-ordination
– Aids managers in coordinating their efforts to
achieve organisation objectives
– There should be co-ordination in the budgets of
various departments.
 OBJECTIVES– BUDGETARY CONTROL
• Communication
– Provides adequate understanding and knowledge of
the programmes and policies to be followed
• Motivation
– Motivating managers to perform in line with the
company objectives
• Control
– Systematized effort to check whether planned
performance is being achieved.
• Performance Evaluation
– Performing in meeting targets
– Rewarding the employees
ADVANTAGES– BUDGETARY CONTROL
• Clear-Cut Goals and Targets
• Effective Coordination
• Maximisation of Profits
• Evaluation of Executive Performance
• Economy in Operations
• Revelation of Ineffectiveness
• Correction of Performance Continuously
• Introduction of Incentive Schemes of
Remuneration
DISADVANTAGES– BUDGETARY CONTROL
• Budget plan is based on estimates
• Prediction of Uncertain Future
• Budgeting is only a tool of management
• Opposition from staff
• Expensive technique
• Difficulty in Coordination
• Conflict among Different Departments
 Essentials of effective budgeting
• Support of top management
• Participation by responsible executives
• Reasonable goals
• Clearly defined organisation
• Continuous budget education
• Adequate accounting system
• Constant vigilance
• Maximum profits
• Cost of the system
• Integration with the standard costs
Preliminaries in the installation of budget system

• Creation of budget centres

– A budget centre is a centre or department or a
segment of an organisation for which separate
budgets can be prepared and control can also be
exercised
• Introduction of adequate accounting records
– A chart of accounts should be maintained which
corresponds with the budget centres’.
• Preparation of an organisation chart
– An organisation chart defines the functional
responsibilities of each member of the management
• Establishment of budget committee
– in large concerns a budget committee is established to
formulate a general programme for preparing budgets
and exercising overall control
Functions of budget committee
– provide historical data, issue instructions
– Define general policies of management
– Receiving the budgets estimates from various
departments
– Deciding on the policies to be followed;
– Evaluating & Suggesting revision of functional budgets,
where necessary;
– Approving the finally revised budgets;
– Recommending action
• Preparation of budget manual
– Budget manual is “a document which sets out the
responsibilities of the persons engaged in the routine of, and
the forms and records required for budgetary control.” 
• Contents
– Description of the system and its objectives;
– Procedure to be followed in operating the system;
– Definition of responsibilities and duties of different
functional heads, budget committee, and budget director
– Methods of accounting and control
– Scope of the budgets
– Budget Calender – (Reports and statements required
and Submission date)
– Routine forms to be used and records to be prepared etc.
 Preliminaries in the installation of budget
system cont..
• Budget period
– A budget period is the period of time for which a
budget is prepared and employed
• Determination of the key factor
– It is defined as the factor in the activities of an
undertaking which—at a particular point of time
or over a period—will limit the volume of output.
 KEY FACTOR
• (a) Materials:
– (i) Availability,
– (ii) Restrictions imposed by licences, quotas etc.
• (b) Labour:
– (i) General shortage,
– (ii) Shortage of certain grades of labour for automatic
machines.
• (c) Plant:
– (i) Insufficient capacity due to lack of capital,
– (ii) Lack of space,
– Lack of markets,
– Bottlenecks in certain key processes, operations or
departments.
 KEY FACTOR

• (d) Sales:
– (i) Low market demand,
– (ii) Shortage of experienced salesmen,
– (iii) Insufficient advertising due to lack of money.
• (e) Management:
– (i) Lack of capital, restricting policy,
– (ii) Lack of knowhow,
– (iii) Inefficient executives,
– (iv) Insufficient research into product design and
methods.
 Preliminaries in the installation of budget
system cont..
• Determination of level of activity
– It is important to determine the normal level of
activity that is the level the concern can
reasonably be expected to achieve. This level is
important in forecasting.
 Classification of Budget
• I On the basis of flexibility
– Fixed Budget
– Flexible Budget
• II On the basis of function and scope
– Functional Budget
– Master Budget
 Fixed Budget
• According to ICWA London ‘Fixed budget is a
budget which is designed to remain
unchanged irrespective of the level of activity
actually attained’
 Flexible Budget
• According to CIMA, London, a Flexible Budget
is, „a budget designed to change in
accordance with level of activity attained‟. It is
prepared by taking into account the fixed and
variable elements of cost.
Fixed Budget
• Costs are not classified
according to their variability,
i.e., fixed, variable and semi-
variable.
• 2. Fixed budget is inflexible
and remains the same
irrespective of the volume of
business activity.
• 3. Fixed budget assumes that
conditions would remain
static.
• 4. Accurate forecasting of
results is difficult.
Flexible Budget
• 1. Costs are classified
according to the nature of
their variability.
• 2. Flexible budget can be
suitably re-casted quickly to
suit changed conditions.
• 3. Flexible budget is designed
to change according to a
change in the level of activity.
• 4. Flexible budget clearly
shows the impact of various
expenses on the operational
aspect of the business.
Fixed Budget
• 5. Actual and budgeted
performances cannot be
correctly compared if the
volume of output differs.
• 6. This budget has a limited
application and is ineffective
as a tool for cost control.
• 7. All conditions will remain
unaltered is an unrealistic
expectation on the part of the
management.
• 8. Costs cannot be
ascertained if there is a
change in the circumstances.
Flexible Budget
• 5. Comparisons are realistic
since the changed plan figures
are placed against actual ones.
• 6. This budget has more
applications and can be used as
a tool for effective cost control.
• 7. Under flexible budgeting,
series of fixed budgets are
prepared for different levels of
activity.
• 8. Cost can be easily
ascertained at different levels
of activity. The task of fixing
prices becomes easy.
 FUNCTIONAL BUDGET

• Sales Budget
• Production Budget
• Purchase Budget
• Cash Budget
• Selling and Distribution Cost budget
• Plant Utilization Budget
• Capital Expenditure Budget
 Sales Budget

• The budget which estimates total sales in

terms of items, quantity, value, periods, areas,
etc is called Sales Budget.
• Sales estimate is the commencement of
budgeting may be made in quantitative terms.
• Sales budget is primarily concerned with
forecasting of what products will be sold in
what quantities and at what prices during the
budget period.
 Production Budget
• It estimates quantity of production in terms of
items, periods, areas, etc.
• It is prepared on the basis of Sales Budget.
• The production budget determines the level of
activity of the produce business and facilities
planning of production so as to maximum
efficiency
• Finished units to be produced = expected
sales in units + desired ending inventory of
finished units – beginning inventory of
finished units
 Cost of Production Budget
• Production cost budgets show the cost of the
production determined in the production
budget.
• Cost of production budget is grouped in to
material cost budget, labour cost budget and
overhead cost budget.
• Overheads may be further subdivided in to fixed,
variable and semi-fixed overheads.
• Separate budgets required for each item.
 Purchase Budget
• This budget forecasts the quantity and value
of purchase required for production. It gives
quantity wise, money wise and period wise
particulars about the materials to be
purchased.
 Cash Budget
• This budget is a forecast of the cash position
by time period for a specific duration of time.
• It states the estimated amount of cash
receipts and estimation of cash payments and
the likely balance of cash in hand at the end of
different periods.
 CAPITAL EXPENDITURE BUDGET
• The budget provides a guidance regarding the
amount of capital that may be required for
procurement of capital assets during the
budget period.
• It also deals with the items not directly related
to profit & loss account.
SELLING AND DISTRIBUTION COST BUDGET

• Sales budget and selling & distribution cost

budget are prepared simultaneously
• Forecasts of all costs incurred in selling and
distributing the company’s products during
the budget period.
 PLANT UTILISATION BUDGET
• This budget indicates plant and machinery
facility required to meet the budgeted
production during the budget period.
• Plant capacities/facilities will be expressed in
the budget in terms of convenient units such
as working hours or weight or the number of
products etc.
 MASTER BUDGET
• The master budget is a summary budget.
• This budget encompasses all the functional
activities into one harmonious unit.
• The ICMA England defines a Master Budget as
“the summary budget incorporating its
functional budgets, which is finally approved,
adopted and employed”.
 Zero Base Budgeting
• : The budget for the next period is zero; unless the
demand for a function, process, project or activity
is justified for each rupee.
– A method of budgeting where all activities are revalued
from scratch(Zero)
– Manager of responsibility center has to justify that the
activity is essential and amount asked is reasonable
– Technique is first used by US Dept. of Agriculture in
1962
– In conventional budgeting
• Current years budget = Past figures + some percentage
• There was no relationship between the expenditures made
and the result obtained
• There is no control over the inputs to the system and the
outputs obtained.
 Procedure for ZBB
• 1) Identification of Responsible centre.
• 2) Analysis of Responsible centre in terms of decisions package .
A decisions package is a document or form which contains the
following.
a)A description of the function or activity.
b)The goals or objectives of function or activity.
c)Specific measures of performance. (To Set standards)
d)Benefits to be derived from financing the activity.
e)The projected costs of the package.
f) Alternative ways of performing the same activity.
• 3) Evaluation & ranking of the decision packages
• 4) Preparation of detailed operating budgets which reflects
decision packages approved in budget preparation
 Advantages of ZBB
• Enables to allocate resources According to
priority
• Ensures every activity is as per requirements
• It links budget with organizational goals
• Drives managers for innovation
• It seeks cost effective & economical
alternatives
• Helps into identification of wasteful areas
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