Budget & Budgetary Control

C BATCH, GROUP 5
ANJU MATHEWS
IZZUDEEN
PRANAVE V N
GOKUL RAVI
NOWA K N
NANDANA VIJAY
ANAMYA KALESH
KANEV RAJ
BUDGET-MEANING

A budget is a written plan covering projected activities of a firm for a definite period of time. It is a financial and /or
quantitative expression of business plans and policies to be pursued in the future period of time. A budget is prepared to have
effective utilization of funds and for the realization of objectives as efficiently as possible. Budgeting is used for preparing
budgets and other procedure for planning, co-ordination, and control of business enterprise. It is a quantified expression of
the intensions of the management.

BUDGET-DEFINITION

The institute of cost and management accountant (ICMA) London defines budget as “A financial and/or
quantitative statement, prepared and approved prior to a defined period of time, of the policy to be
pursued during that period for attaining a given objective”
Functions of Budget

 Budgeting has two primary functions: planning and control.

 The planning process expresses all the ideas and plans in quantifiable terms.
 Careful planning in the initial stages creates the framework for control, which a company
initiates when it includes each department in the budgeting process, standardizes
procedures, defines lines of responsibility, establishes performance criteria, and sets up
timetables.
 The careful planning and control of a budget benefit a company in many ways, including:
 ENHANCING MANAGERIAL PERSPECTIVE
 FLAGGING POTENTIAL PROBLEMS
 COORDINATING ACTIVITIES
 EVALUATING PERFORMANCE
 REFINING THE HISTORICAL VIEW
Functions of Budget

 Budgeting has two primary functions: planning and control.

 The planning process expresses all the ideas and plans in quantifiable terms.
 Careful planning in the initial stages creates the framework for control, which a company
initiates when it includes each department in the budgeting process, standardizes
procedures, defines lines of responsibility, establishes performance criteria, and sets up
timetables.
 The careful planning and control of a budget benefit a company in many ways, including:
 ENHANCING MANAGERIAL PERSPECTIVE
 FLAGGING POTENTIAL PROBLEMS
 COORDINATING ACTIVITIES
 EVALUATING PERFORMANCE
 REFINING THE HISTORICAL VIEW
 ENHANCING MANAGERIAL PERSPECTIVE : In recent years the pace and
complexity of business have outpaced the ability to manage by "the seat of one's pants."
On a day-to-day basis, most managers focus their attention on routine problems. However,
in preparing the budget, managers are compelled to consider all aspects of a company's
internal activities. The act of making estimates about future economic conditions, and
about the company's ability to respond to them, forces managers to synthesize the external
economic environment with their internal goals and objectives.

 FLAGGING POTENTIAL PROBLEMS: Because the budget is a blueprint and road

map, it alerts managers to variations from expectations which are a cause for concern.
When a flag is raised, managers can revise their immediate plans to change a product mix,
revamp an advertising campaign, or borrow money to cover cash shortfalls

 COORDINATING ACTIVITIES: Preparation of a budget assumes the inclusion and

coordination of the activities of the various segments within a business. The budgeting
process demonstrates to managers the inter-connectedness of their activities.
 EVALUATING PERFORMANCE: Budgets provide management with established
criteria for quick and easy performance evaluations. Managers may increase activities in
one area where results are well beyond exceptions. In other instances, managers may need
to reorganize activities whose outcomes demonstrate a consistent pattern of inefficiency.

 REFINING THE HISTORICAL VIEW: The importance of clear and detailed historical
data cannot be overstated. Yet the budgeting process cannot allow the historical
perspective to become crystallized. Managers need to distill the lessons of the most
current results and filter them through their historical perspective. The need for a flexible
and relevant historical perspective warrants its vigilant revision and expansion as
conditions and experience warrant.
 Types of Budget
Long-term budgets

Classification on the basis of Time Short-term Budgets

Current Budgets

Functional or Subsidiary Budgets

Classification according to function
Master Budget

Fixed Budgets
Budgets Classification on the basis of Capacity
Flexible Budgets
Classification on the Basis of Time
Long-term budgets
• Long-term budgets are prepared for a longer period varies between five to ten years.
• It is usually developed by the top level management.
• These budgets summarise the general plan of operations and its expected consequences.
• Long-Term Budgets are prepared for important activities like :
• Composition of its capital expenditure
• New product development and research
• Long-term finance

Short-Term Budgets
• These budgets are usually prepared for a period of one year.
• Sometimes they may be prepared for shorter period as for quarterly or half yearly.
• The scope of budgeting activity may vary considerably among different organization.
Current Budget
• Current budgets are prepared for the current operations of the business.
• Current budget is a budget which is established for use over a short period of time and related to current
conditions
Classification on the Basis of Function

1. Functional Budget
• The functional budget is one which relates to any of the functions of an organization.
• The number of functional budgets depend upon the size and nature of business.
• The following are the commonly used:
• Sales Budget
• Production budget
• Cost of Production budget
• Purchase budget
• Personnel budget
• R & D budget
• Capital Expenditure Budget
• Cash budget.
Classification on the Basis of Function

2. Master Budge
• The Master Budget is a summary budget.
• This budget encompasses all the functional activities into one
harmonious unit.
• It is the summary budget incorporating its functional budgets,
which is finally approved, adopted and employed
Functional Budget
1. SALES BUDGET:
Sales budget is the most important budget based on which all the other
budgets are built up. This budget is a forecast of quantities and values of
sales to be achieved in a budget period.

2. PRODUCTION BUDGET:
Production budget involves planning the level of production which in turn
involves the answer to the following questions:
• What is to be produced?
• When is it to be produced?
• How is it to be produced?
• Where is it to be produced?
Functional Budget
3.  COST OF PRODUCTION BUDGET:
This budget is an estimate of cost of output planned for a budget
period and may be classified into –
• Material Cost Budget
• Labour Cost Budget
• Overhead Cost Budget

4. PURCHASE BUDGET:
This budget provides information about the materials to be
acquired from the market during the budget period.
Functional Budget
5. PERSONNEL BUDGET:
This budget gives an estimate of the requirements of direct labour essential
to meet the production target.
This budget may be classified into –
a. Labour requirement budget
b. Labour recruitment budget

6. RESEARCH AND DEVELOPMENT BUDGET:

This budget provides an estimate of expenditure to be incurred on R & D
during the budget period. An R&D budget is prepared taking into consideration
the research projects in hand and new R & D projects to be taken up.
Functional Budget
7. CAPITAL EXPENDITURE BUDGET:
This is an important budget providing for acquisition of assets necessitated by
the following factors:
a. Replacement of existing assets.
b. Purchase of additional assets to meet increased production
c. Installation of improved type of machinery to reduce
costs.

8. CASH BUDGET:
This budget gives an estimate of the anticipated receipts and payments of cash
during the budget period. Cash budget makes the provision for minimum cash
balance to be maintained at all times
Classification on the Basis of Capacity

Fixed Budget
• A fixed budget is designed to remain unchanged irrespective of the level
of activity actually attained.

Flexible Budge
• A flexible budget is a budget which is designed to change in accordance
with the various level of activity actually attained.
• The flexible budget also called as Variable Budget or Sliding Scale Budget
• It takes both fixed, variable and semi fixed manufacturing costs into
account.
Cash Budget
Cash Budget
A cash budget is an estimation of the cash flows for
a business over a specific period of time.
This budget is used to assess whether the entity has
sufficient cash to operate

The following are three methods of preparing cash budget:

(i) Receipt and Payment Method
(ii) Adjusted Project and Loss Method
(iii) Balance Sheet Method

Gokul Ravi
(a) Receipt
Cash and Payment Method
Budget
Here cash is received from cash sales, receipt from debtors,
sale of fixed assets and investments, issue of shares and
debentures. Both capital and revenue receipts are forecasted.

>Both capital and revenue receipts are forecasted

>The cash is applied for capital and revenue expenditure
>outstanding payments and accrued incomes are not recorded
here

Gokul Ravi
Format
(b) Adjusted
Cash BudgetProfit and Loss Method

Under this method Net profit given is adjusted by adding items of non-
fund expenses and deducting non-fund incomes. This method is used
for forecasting long term cash requirement. Here cash forecast is
made like fund flow statement. Profit is added by non-fund expenses
and non-fund incomes are deducted
Additions : Depreciation, Goodwill written off, Preliminary
expenses written off, Loss on sale of fixed Assets

Deductions : Dividend received, interest on debentures, income

from house property
Gokul Ravi
Format
 (c) Balance
Cash BudgetSheet Method
Under this method at the end of Budget period forecast Balance
Sheet is prepared in which assets and liabilities are also shown, the
difference in both sides of Balance Sheet represents Overdraft or
cash balance as the case may be. When assets are less than
liabilities then the difference will be Cash Balance. On the other
hand when assets are more than liabilities the difference will be
Bank Overdraft.

Gokul Ravi
Format
PRODUCTION
BUDGET
By,
NOWA K.N
MEANING:
 A production budget is a financial plan that lists the number of units to be
manufactured during a period. In other words, this is a report that estimates the
number of units that a plant will produce from period to period.
OBJECTIVES
 To consider all the relevant factors affecting the sales and other operational activities of the
organization.
 To make provision for raw materials at right time and place.
 To plan the sequence of operations necessary for economical production.
 To co-ordinate the various aspects of factory production operations in order to maximize the
profits of the firm.
CALCULATION USING
FORMULA
 The production budget will project the number of units to be produced in a period using the
formula:
 Production Budget = Budgeted Sales Units – Opening Stock of Finished
Goods + Closing Stock of Finished Goods
 This can be justified because:

a) The opening stock of finished goods has already been produced, and can
b) Therefore be deducted from our calculation of what needs to be made, and
c) The closing stock has yet to be made so needs to be added into our total of goods to
be produced.
 SALES BUDGET
 A sales budget is management’s estimate of sales for a future financial period .
 A sales budget consists of expected volume of sales and selling expenses.
 The sales volume part of the sales budget is based on the sales forecast and sales
budgets are generally set lower than sales forecast to avoid excessive risk
 A business uses sales budgets to set department goals, estimate earnings and
forecast production requirements.
 A company must know how many products it will sell and how much revenue will
be generated before it can determine purchasing budgets , manufacturing budgets
and capital expenditure budgets.
 The sales budget is called as the starting point of master budget as all other budgets
are based on the sales budget.
 PLANNING OF SALES BUDGET

 Sales budgets are often divided into first, second, third and fourth quarter estimates.
 The critical components of a sale budget are estimated unit sales, price per unit and the
allowance for discounts and returns.
 Estimated unit sales multiplied by the price per unit equals budgeted gross sales.
 Budgeted gross sales less estimated sales discounts and returns is the budgeted net sales
for the period .

The formula to calculate sales for each period is :

Total Sales = Expected unit sales * Unit selling price
 SALES BUDGET PROCESS
 Situation Review
- Past Performance, Current Situation
 Central Communication

- Formats , Guidelines, Ttimelines

 Subordinate Budgets

- Consolidates to national budget

 Approval of sales budget
 Communiction of budget to all
 NEED OF SALES BUDGET
 Planning

predicting profits
Assigning targets to team
planning production / allocation of resources
 Coordination

keeping all departments and teams on same page

levelling expectations
clarifying requirements
 Control

monitoring actual Vs targets

corrective actions
DIFFERENCE BETWEEN FINANCIAL,
COST AND MANAGEMENT ACCOUNTING
BASIS OF COMPARISON FINANCIAL ACCOUNTING COST ACCOUNTING
MEANING Financial accounting is an Cost accounting is an
accounting system that accounting system,
captures the records of through which an
financial information organisation keeps the
about the business to
show the correct financial track of various costs
position of the company incurred in the business in
at a particular date. production activities.
MANAGEMENT
ACCOUNTING
Management accounting
is the presentation of
accounting information in
order to formulate the
policies to be adopted by
the management and
assist its day- to day
activities.

INFORMATION TYPE Records the information Records the information Quantitative and
which are in monetary related to material, labour qualitative information
terms. and overhead which are
used in the production
process.

OBJECTIVE To accurately prepare an Ascertainment of cost of Providing information to

organisation’s financial production. managers to set goals and
accounts for a specific forecast strategies.
period.
USERS Users of information Information provided by Internal psarties(managers
provided by financial cost accounting is used of business, employees,
accounting are internal and only by the internal directors, CEO, Promoters
external parties like management of the etc. )
creditors, shareholders, organisation like
customers etc. employees, directors,
managers, supervisors, etc

RECORDING It classifies, records and
analyses the transaction in
a subjective manner i.e.
according to the nature of
expenses.
It records the expenditure
in ana objective manner
that is according to the
purposes for which the
cost are incurred.
It gives more stress on the
analysis of future
projections.

PERIODICITY OF It reports operating results It gives information As frequently as needed.

REPORTING and financial position through cost reports to
usually at the end of the management as and when
year. desired.
NATURE Concerned with historical Concerned with both past Deals with projection of
data. and presently recorded data for the future
data (historical in nature) (futuristic in nature)
PRINCIPLE FOLLOWED Governed by GAAP. This Certain principles followed There is no standard basis
GAAP is different for for recording costs. for preparing management
different countries with accounting statements.
more or less same Hence, they are prepared
features. based on the requirement
of the management team.
PLANNING Short range and long range Short range planning Short range and long range
planning planning.
REPORTS Summarized reports about it gives special purpose Complete and detailed
the financial position of statement and reports like reports regarding various
the organization. report on loss of materials, information.
variance report, idle time
etc.
PUBLISHING AND Required to be published Certain classes of Neither published nor
AUDITING and audited by statutory companies are required to audited by statutory
auditors. get their cost accounts auditors.
audited.
Case Study – MNC Engineering Firm Budget Planning

Global Provider of Integrated Power Systems

Publicly listed firm with GBP 11 Billion Turnover and 40,000 Employees
4 principal business segments with Global operations across North America, Asia,
BACKGROUND Europe and mainland Europe
Zero based Budgeting approach

Many products in service for up to 25 years so need for long term

planning horizon.
Need to anticipate customer activity and when there will be a need to
BUDGETING perform regular maintenance and overhaul of products
CHALLENGE Short time frame for budget production so that data to prepare budgets
is fresh and up to date

Forecasting the activity of the customer - when will they operate the equipment
Forecasting the reliability of the parts
When will the customer require an overhaul shop visit
FEATURES OF
Which parts will require replacement and at what cost.
PLANNING SYSTEM

Kanev Raj
Batch C
 Case Study – MNC Engineering Firm Budget Planning
Well established but continues to evolve
Consistent across all business segments and aligned with long term objectives
Process begins at Sept end. Draft budgets filed by Oct end-15 month forecasts
BUDGET PROCESS 4 Weekly budget reviews in November with continuous feedback
Budget approval in Dec 1st week at Board Meeting along with a 10 year plan.

Profit
Cash Conversion – Proportion of profit converted to cash within the year
Capital Expenditure targets
TARGET AREAS Working capital targets in terms of ratios such as stock turn, debtor days, creditor
days etc

A Summary calendarised Income Statement

Projected calendarised Balance Sheets
Projected calendarised cash flow statements
BUDGET OUTPUTS Manpower budgets
Capital Expenditure Budgets
Departmental resource and operating cost budgets

Consolidated version of above aoutputs for board submission

Budgets produced for each of the 200 Legal entities with sufficient geography
specific detail to enable tax, treasury , FX planning etc.
BUDGET FLEXING
Regular updated forecasts over the year to take into account events that were
not anticipated at the start of the year.
Kanev Raj
Batch C
Case Study – MNC Engineering Firm Budget Planning
Review processes in November followed by Board approval in December
Budget Guidance to Financial Markets covering turnover, profit & cash flows
alongside the preliminary results at half year and at Interim Management
GOVERNANCE Statements dates
Internal circulation of budget summary at high level.
Each Business sector responsible for disseminating and managing own budgets
Supply Chain Units(SCU) and Customer Facing Business Units(CFBU)
CFBUs’ sales plans converted by SCUs into a load for internal factories and external
suppliers
INTER ENTITY Shared service costs(IT, HR, Facilities etc) determined annually and internally charged
BUSINESS to each business units on a monthly basis
Budget consolidation checks to ensure Inter BU transactions are broadly balanced.

Regular and ongoing monitoring of performance against budget

Monthly outcomes examined in detail by each Business segment to explain
BUDGET variances in actual performance from budget
MONITORING Updates of forecasts on a Quarterly basis to take into account any trends in
variances between the budget and actual figures that are identified.

Performance Bonus system based on corporate profit and cash targets primarily
driven off corporate objectives of YoY improvements and market expectations
Group performance creates the bonus pool for reallocation across sectors.
BUDGET
Measurement against circumstances encountered over the course of business
PERFORMANCE year rather than prepared budget.
Kanev Raj
Batch C
Thank You