Budgetary control

Strives to improve profitability through production and marketing goals at min cost Effective tool to control, co-ordinate and plan various business activities Yardstick to evaluate actual performance Concept of Budget: it is record of plan of action ICSI defines it as statement of expected results expressed numerically ICWA England defines it as a quantities statement prepared prior to the period of time, policy to be pursued for attaining given objective It is like a road map to the executives to plan their route

Concept of Budgetary control (BC )

Objective of firm is to maximize profits and sales at min cost BC produces frame work within which the firm reach objective ICMA defines: as the establishment of budgets relating to the responsibilities of executives and continuous comparison of actual with budgets and provide for revision if necessary Thus BC consists of : a. prepare budgets for activities b. compare actual with budgets c. compute deviation if any d. revise budget if reqd If principles of BC are carried out properly firm can reach assured results and also favorable result in long run

Objectives of BC
Success based on accurate & reliable targets and formulation of policies Controls cost separate budgets for each depts find causes of wastages & cure Understand cost behavior & cost structure Plan operations for a period with min waste Provide measure for performance Execute plans & correct unsatisfactory task Revise budget when required

Organization for BC
Proper organization of BC leads to proper coordination of operations. Requirements: 1.Budget committee: constitute members from all depts chaired by CEO 2. Budget Period: Time span week, month, year etc.,- cap investment long term 3. Budget manual: set out responsibility of executives reporting system guidelines 4. Budget centre : segment of the organisation- under control of an executive - accountable 5. Limiting factor: material labour Finance Market, - capacity demand etc.,

Classification of budgets
1. 2. 3. 4. Activity level: a. fixed b. flexible nature of transactions:1operating,2. capital Period : long term 2. short term functional :1. Master budget 2. subsidiary

1. fixed budget: for expn management predetermined cost at particular activity level. ICWA says budget remain unchanged irrespective of activity level also called as static budget In practice mgt change this budget based on economic conditions by constant review

Flexible Budget
Recognize tendency of Fixed overhead to change with substantial change in production A series of fixed budgets at varying levels ICWA London Definition: budget recognizes difference between fixed, variable, semi variable cost which are designed to change at different level of activity Twko ways to compute: Step method : Budgets are developed for different levels of operation Variable method : prepare budgets based on variable cost basis Executives prefer FB as it can be easily understood as it is realistic

Operating budget
Plan of expected revenues & expn for one year P & L items like sales, production, expn Capital Budget: plan of inv in fixed assets long term long time impact Plans for expansion, modernization Short term budgets: prd : One year or less Items like cash, sales overheads etc Dept heads are responsible for preparation Long term budget: beyond one year by top management depends on the long term plan Master Budget: summery of budget schedules in capsule form complete blue print of planned operations summery consisting of separate budgets Prepare sales, production, cost, cash, p/L and projected B/s

Zero base budgeting

New approch receiving attn First put forward in 1924 Used successfully by Jimmy carter 1962 as governor of Gregoria for controlling expn Executives start at zero budget level and justify all costs each time past fig. to be evaluated It has to review and defend all programmes Every period is treated as a new period and previous period is not taken as base GOI has directed all PSUs to introduce this Govts of Maharastra and Karnataka has introduced Rajastan and Gujarat have also planned to start

Steps involved in ZB B
Lay down objectives Identify areas where it has to be applied Divide the organization into small parts In charge executive should prepare alternative plans Difft packages evaluated based on cost-benefit analysis

Advantages of Zero base budgeting

1. 2. 3. 4. 5. 6. 7. Improves efficiency of decisions Scientific and systematic approach considers alternative programmes Ensures efficient use of limited resources Review programmes no programme beyond its life Corporate objectives successfully met Proper eco study leads to reduction of risk Submission of packages by budget units to top mgt assists appraisal Fixing decision units makes evaluation more effective Helps mgt to to design & develop cost effective technique for improving operations