Budget and Budgetary Control A budget is a plan of expected achievement based on the most efficient standards against which

actual accomplishment is regularly compared. The major purpose of budgeting are. 1. To state the firms goals in clear, formal terms to avoid confusion and to facilitate their attainability. 2. To communicate expectations to all concerned with the management 3. To provide a detailed plan of action for reducing uncertainty and for the proper direction of individual and group efforts 4. To coordinate the activities and efforts

ESSENTIALS OF BUDGETING

Top management support. Clear and realistic goals. Assignment of authority and responsibility. Creation of responsibility centers. Adaptation of the accounting system Full participation. Effective communication. Budget education. Flexibility.

Procedure in preparing Budget It need be emphasized that the Budget preparation is line function, while the administration of budgeting is a staff function. The line executives have the responsibility of deciding what the Budgets would be. The primary responsibility of staff organization is to assist line executives in preparing budgets Budget committee The administration of budgeting is delegated to a budget committee. The members of the committee consists of executive of each department. Budget director is the overall in-charge of the budget committee.

The major functions of the budget committee are : To provide general guidelines for preparing budgets. To offer Technical advice. To receive and review individual budgets. To suggest changes. To reconcile divergent views. To coordinate budgetary activities. To approve budgets To scrutinize budget reports later on.

Budget Director Overall responsibility for the functions of the budget committee lies on the Budget Director. He is responsible for the preparation of budget and making necessary adjustments to consolidate individual budget into master budget. The other functions of the budget director include : 1. Designing necessary procedures and forms. 2.Selling the idea of budgeting to all levels of management. 3. Educating line executives in the mechanics of budgeting. 4. Collecting, analyzing and coordinating data. 5. Evaluating and reporting actual performance.

Budgetary control is a system of planning & controlling costs. This may be done daily, weekly, monthly or quarterly basis. It involves, establishment of Budget. Measurement of actual performance. Comparison of actual with budgeted performance. Gap analysis Analysis of the causes of variations.

OBJECTIVES OF BUDGETING
Combining the ideas of all levels of management Coordinating all the activities of the concern. Helping to centralize control & decentralize responsibilities. Planning & controlling income & expenditure Providing a yard stick for comparing it with actual.

FUNCTIONAL BUDGET

A functional budget is a budget which relates to any of the functions of an undertaking, e.g., Production, Sales Administration etc. On the basis of the functional budgets, a master budget for the firm is prepared. Sales Budget The Sales budget is a forecast of total sales which may be expressed in monetary and/or quantitative terms. Sales & distribution cost budget It is a forecast of the cost of selling and distributing of goods during the budget period. Production Budget It is a forecast of the production for the budget period. It may be expressed in Units or Standard Hours.

 Personnel budget The budget shows in financial terms, the number of working hours the direct or indirect labour necessary to meet the programmes set out in the budget. Purchase budget This budget relates to purchase to be made during the budget period. This budget is generally based upon the budget of various departments. Repair & Maintenance Cost Budget This may be set in four parts viz., for preventive maintenance, for emergency maintenance, for major maintenance and for other costs relating to the maintenance department. Capital Expenditure Budget This is the planned outlay on Fixed assets such as Plant & Machinery, Land & Building etc.

 Administration Cost Budget This budget will show the total estimated cost of formulating the policy, directing the organization, controlling the operations of an undertaking Research & Development Cost Budget Research costs include the costs incurred for Pure research, creation of new products, improvement of existing product, improvement in layout etc. Development cost are costs incurred for the commercial application of knowledge of knowledge gained through research.

ZERO BASED BUDGETING

The zero-base refers to a nil-budget as the starting point. It starts with the assumption that the budget for the next period is zero. Each manager heading the department will have to justify why the money should be spent at all & to indicate what will happen if the proposed activity is not carried out & no money is spent.

 In the traditional budgeting current years budgets are generally arrived at based on past figures. So there is lack of objectivity in this process. ZBB overcomes these limitations by starting with zero & then objectively determining the budget figures. ZBB is experienced by every firm once in its life time. This may happen when a firm is starting its business or when a re-organization of the firm calls a budget revision.

STEPS IN ZBB

Identify decision units & develop decision alternatives Evaluate & rank all decision alternatives in order of importance through cost/benefit analysis. Allocate resources accordingly. Eg: ZBB was adopted by the Indian Government in their union budget from April 1 1987.

Effectiveness of ZBB It Improves Planning & Control activities in the organization by relating costs with benefits. It ensures active participation from all concerned. Allocation of resources are made according to needs & benefits derived. It develops skills & interpersonal relationships for managers at all levels.

Advantages In the course of ZBB process, inefficient & obsolete operations are identified & removed. It monitors cost behavior patterns to decide the best course of action. Management uses it for identifying wasteful & obsolete items of expenditure. Documentation required enables a coordinated in depth knowledge of the organization to be available to all management.

 The scarce resources are allocated more efficiently to activities & departments of the organization according to priority. It requires participation of all managers in preparation of budget. Disadvantages : It leads to increase in paper work thereby leading to loss of time in maintaining it. ZBB is more in use for short term benefit rather than for long term.

 Where objectives are difficult to quantify, ZBB does not offer any significant control advantage. For successful introduction of ZBB, it will require a lot of training for managers. The other problem of ZBB relates to ranking process : Large no. packages are to be ranked. Conceptual difficulty in ranking packages It is difficult to rank activities which have qualitative benefits.

CASH BUDGET

It is a forecast of cash position for a period. The principal aim of the cash budget, as a tool of planning, is to ascertain whether, at any time, there is likely to be an excess or shortage of cash. 1. Selection of time period of budget. 2. Factors that have a bearing on cash flows. Factors are divided into two categories operating i.e., cash flows generated by the operations of the firms & financial which represents financial factors affecting cash.

Advantages : It indicates the probable cash position It indicates whether cash is available in excess or there is shortage of cash. Preparing cash budget helps to know if cash needs to be arranged through short term borrowings or availability of idle cash for investment. It establishes a sound basis for obtaining credit. It helps in optimum utilization of cash.

 There are two methods Receipt & payment method & Fund flow method. Receipt & payment method This is scheduling receipts & payments by month, & carrying forward the cumulative balance from month to month, it is possible to see whether the concern will have sufficient cash throughout the year. Hence plans can be made to raise any additional funds required, or to invest any temporary surplus. Receipts & payment method includes following items.

1. Sales revenue as per the sales budget. 2. Production cost as per the production cost budget.
3. Administration, selling & distribution costs.

 4. Capital expenditure as per the Capital expenditure budget. 5. Receipt of rent, interest & dividend. 6. Payments of Tax. 7. Expected Dividend payments & progress payments on long term contracts. 8. Cash to be received by issue of shares, debentures etc. or to be paid on its redemption. Fund flow method of cash budgeting will substitute Sl. No. 1 to 3 as funds from operations. Items 4 to 8 will appear the same as in receipts & payments method. Funds from operation is determined by taking net profit as the basis & making adjustments for Depreciation, non operating incomes & expenses & increase or decrease in current account items.

MASTER BUDGET

The master budget is the total budget package for an organization. It is the end product of the budget preparation process. It is the summary budget which incorporates its component functional budgets and which is approved, adopted & employed. A master budget commonly takes the form of a budgeted Profit & Loss account & budgeted Balance sheet. The budget committee will prepare the Master budget on the basis of coordinated functional budgets. When it is approved by the committee, it becomes the target for the firm during the budget period.

Fixed budget This is a rigid & inflexible plan. That is, there is one set of conditions & one level of activity & management expect them without any variation. Flexible budget This is a budget which is designed to change in accordance with the level of activity attained. The principle of flexible budget lies in making a series of fixed budgets for different levels of activity.

Performance budgeting provides a meaningful relationship between estimated inputs & expected outputs as an integral part of the budgeting system. Performance budgeting is a technique of presenting budgets for costs & revenues in terms of functions, programmes, & activities & correlating the physical & financial aspects of the individual items comprising the budget.

1. Establishment of goals, objectives & policies. 2. Formulation of programmes for the achievement of the goals & objectives. 3. Execution of the budget in terms of responsibility & achievement of targets. 4. A systematic process of evaluation & appraisal for control as well as updating the budget. Performance budgeting is extremely useful in planning & controlling limited resources. Accordingly, it has been put to use by Pvt., Public sector firms & Government departments.