Budget as an Instrument of Control

MAHANTESH HALAGATTI FACULTY IMER BELGAUM

BUDGETING

Budgets
Budgets are business plans that are stated in quantitative terms and are usually based on estimations. These plans aid an organization in the successful execution of strategies. Due to the uncertainties in the business environment and / or due to wrong estimation, there may be significant deviations between the a c t u a l s and the plans. Budgeting as a control tool, provides an action plan for the organization to ensure least deviations BUDGETING

learning experience
Managers should participate in the budgeting process to ensure consistency in the overall adherence to corporate goals. Budgeting helps mangers to enhance their learning experience. Learning takes place as they plan and later, compare a c t u a l s with plans. Investigating the reasons for deviations, further adds to their learning experience
BUDGETING

Importance of Budgets
Budgets are used to give an overview of the organization and its operations. They are useful in resource allocation whereby resources are allocated in such a way that the processes which are expected to give the highest returns are given priority. Budgets are also used as forecast tools and make the organization better prepared to adapt to changes in the environment
BUDGETING

Importance of Budgets
Budget preparation requires the participation of managers from different functions / departments. This helps in integrating the tactical and operational strategies of the departments with the corporate strategy of the organization. Budgets act as a means to verify the progress of the various activities undertaken to achieve the planned objectives. The verification is done by comparing the a c t u a l s against standards
BUDGETING

Importance of Budgets
They help in the delegation of authority and allocation of responsibility and accountability to more people in an organization. They thus promote division of labor, which , in turn, promotes the process of specialization. Functional specialization leads to the overall efficiency of the organization
BUDGETING

Steps in Budget Formulation

Creating a budget department or appointing a budget controller Developing guidelines for budget preparation Developing budget proposals at department/business unit level Developing the budget for the entire organization Determining the budget period and key budgets factors Benchmarking the budget Budget review and approval Monitoring progressBUDGETING and revising the budgets

Master Budget
The master budget is also known as the financial plan. Master budgets form the basis of the control systems in organizations. The master budget has two components: the operating budget and the financial budget. The operating budget includes the sales budget, cash collections from customers, purchases budget, disbursements for purchases, operating expense budgets.
BUDGETING

Master Budget
The master budget may take the form of a profit and loss account and a balance sheet at the end of the budget period. It shows the gross and the net profits and the important accounting ratios. Sometimes more than one master budget has to be prepared before the final one is agreed upon. It is the duty of the budget committee to approve the master budget
BUDGETING

Types of Budgets
Appropriation budget Flexible budget

Characteristi Examples cs
A ceiling is set for certain Training, advertising, discretionary expenditures sales promotion and Based on the management R&D decision A static amount is established for discretionary and committed fixed costs and a variable rate is determined per unit of activity for variable cost Decisions regarding potential investments are made using discounted cash flow techniques The static part: Salaries, depreciation, property taxes, and planned maintenance. The flexible part : direct material, direct labor, and variable overhead.sales commission

Capital budget Master budget

New plant and equipment

A comprehensive plan is All revenue and developed for all revenue expenditures for any BUDGETING and expenditure organization

Components of the Master Budget

Master budget Operating Budgets Financial Budgets Capital budgets Cash budgets Budgeted Balance sheet

sales

Direct material

Direct labor

Closing inventory

Cost of Goods sold

Income statement

production

Factory over head

BUDGETING

Selling and Administrative budgets

Zero-Based Budgeting
It was put into practice first time by Peter Phyrr at Texas Instruments , a world leader in digital signal processing and analog technologies based in the US, in 1969. A traditional budgeting process is a yearly process and uses the budget of the previous year as a starting point to devise the current years budget. However, this process results in discrepancies.
BUDGETING

Zero-Based Budgeting
For example, if there are inaccuracies in the previous years budget, they are carried forward to the next year, or, if the activities do not show a major impact on the budget, they are continued even if they are not contributing to the performance of the organization. On the other hand, in ZBB the base is taken as zero and the budget is devised as for a new venture.
BUDGETING

Zero-Based Budgeting
In ZBB , the responsibility centers are called decision units and the process and activities involved in each decision unit are called decision packages. The ZBB process involves the following steps: Decision unit identification Decision package development Evaluation and grading of decision packages Resource allocation
BUDGETING