BUDGETING

FEATURES
Act as tool for planning & control. It is formal process of financial planing using estimated financial & actual data. Budgeting is a process of preparing budget and further control aspects in its procedure. Budgeting is a forecasting a particular event Budget preparation is a line function while organisation of budgeting is staff function. A budget is future profit plan.
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Advantage of budget
Budget compels & motivates organisation to make an early & timely investigate its problem that compel the management to force for planning for future. Provides valuable means of control the income and expenditure of business Budget provides managerial polices & goals are periodically evaluated , test & establish guidelines for entire organisation Budget helps in directing capital & other resources into the most possible channels Budget coordinates & correlates all business activities Enables the management to decentralize responsibilities without loosing control of business Simulative the effective use of resources & create an environment of profit mindless through out the organisation Provides norms , basic yard stick for measuring performance of dept Budget provides a systematic & disciplined approach to the solution of problem to organisation Budget provides an effective communication in respect of objectives, goals, 2 plans, authority, procedure to implement.

Limitations
Budget Planning is not exact science, use appropriate judgment may not be accurate Success of budget depends on cooperation, coordination & participate of all members A budget is only a tool & does not eliminate nor takes over the place of management Time consuming in preparing budget Excessive emphasis on budget may result in attempt to buck the system by lower level management.
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Types of budget

Operating budget provide details about the firm operation like production sales , purchase etc. : releated to planning of all activities of the enterprise Financial budget Include profit & loss statement , balance sheet and cash budget Capital budget provide details about investment , projects the amount of capital expenditure planned by the firm
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Budgeting process
Obtain estimates of sales ,production levels, exported costs & availability of resources. Coordinating the estimates Communicating the budget to responsible managers & concerned department Implementing budget plan Reporting interm progress towards budget objectives

ELEMENT OF A SUCCESSFUL BUDGETING PLAN

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Accurate forecasting of business activities Coordinating business activities Communicating the budget Acceptance and co-operation Reasonable flexibility Providing a framework for evaluation

ESSENTIAL OF EFFECTIVE BUDGETING

Sound organisational structure (authority & responsibility in clearly defined) Research analysis- provides realistic goals that contribute to growth & profit of company Acceptance at all levels of management Budgeting & human behaviour

BUDGETING & HUMAN BEHAVIOUR

Significant impact in human performance If not prepared adequately , lead to pull down morale of managers Participative management with bottom to top approach in preferred in budget planning or business planning Budget fails when managers intestinally under estimate budget. Requires careful reviewers & checks

MASTER BUDGET
1. Operating budget
Individual budget prepared by sales production to establish the goals of individual division

2. Financial budget
Capital budget Cash budget Budget balance sheet

Operating budget 1. Sales budget

Planned sales units & the expected reverse Derived from sales forecast Represents management best estimate of sales revenue for budget period Sales budget based on analysis forecast & market conditions, business capital

MASTER BUDGET
2. Production budget
Shows the units to be produced to meet the anticipated sales Produce requirement Required product = budget sales units + (derived ending finished goods Beginning finish goods (units)

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Example

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Fixed budgeting
Used when budgeted part is close enough to actual output Fixed budget remain unchanged irrespective of the level of activity and is based on single level of activity Fixed budget don't change when production level changes Rarely used since actual output is significantly differ from budget output & cannot be used for cost control(Eg. Actual production 10,000 units budget 12,000 units cost increased cannot be complied in the budget which lead to distortion of activity.
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Flexible budgeting
Budget that is prepared for a range for more than one level of activity Set of alternative budget to different expected level of activity Called by different variable budget, dynamic budget, sliding scale budget Principle of flexible budget is that business is dynamic ever changing or static Provides a reliable basis for comparison because it is automatically geared to change in production activity Relevant range 800-10,000 units Budget cost 9 00 units- automatically to changes in production activity
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Features
It covers a range of activity More flexible easy to change or adjust with variation in production levels Facilities performance measurement & evaluation in these budgeting

Steps/stage
Decide the range of activity to which budget in to be prepared Determine the cost behaviour pattern (fixed, variable , semi variable) for e ach element of cost to be included Selecting the activity levels to prepare budget at there levels Prepare the budget at each activity level selected by associating the activity level with corresponding cost
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Advantages of Flexible budgeting

Accurate budgeting since all cost dont behave in the same manner Accurate performance measurement more meaningful comparison & evaluation between actual & budgeted data are compared Coordination flexible budgeting results in coordination between all activities . Facilities are provided to budgetary goals Control tool- flexible budgeting in an effective managerial units
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Participative budgeting
A process in which personnel at all level of an organisation activity engage in on taking decision about budgeting More activities like production, sales, employee training take place at lower level information is necessary for budgeting Without input at all levels of operations , the budget will be unrealistic & impossible to attain. Joint participation creates better motivation & committed to budget
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Static/ fixed budget

Prepared once in a year & do not change during budget period

Continuous budget
For hard rolling budget that summarizes budget for next 12 months . Each month manages change the budget for next year, causing continuous reviewing & revising

Zero- base budget

FEATURES
1. It requires every item be justified not just changes . 2. Each year budget in built from scratch 3. Method of budgeting where by all activities re-evaluated each time the budget is formulated where the expenditure are fully justified 4. ZBB involves starting the budgeting activities from scratch or zero 5. Traditional budgets permits increases and the incremental addition in automatically allocated while under zero based budgeting concept each departmental functions are received completely & all expenditure are justified before sanction

Methodology of ZBB
Each activity of the organisation is identified & is called decision package Describe specific activity in such a manner that management can evaluate it & rank it against other activities (b) decide whether to approve or disapprove Decision package must be justified enquires about whether a decision package promotes the goal of enterprise If justified , cost minimum efforts needed for the decision package is determined Alternative decision package are considered to select better & cheaper option Incremental decision package are justified & costed as above method Manager rank their decision packages in the order of priority for resources allocation 19 Resources are allocated to the package

Advantages of ZBB
Allocation of resources need & benefits resulting efficient collection of resources Identifies & eliminates wastage & obsolete operation Ensures best possible method of performing the jobs are used leading to next ideas creation Creates questioning attitudes rather than one which accepts the current practices represent value money ZBB Leads increased staff involvement which may lead to improved motivation & greater interest in job Improves communication & coordination with in the organisation Manager become more aware of cost inputs that help identifying priorities Documentation of decision package provides management with a deep ,coordinated knowledge of all level of organisational activities More useful to service department where sometimes difficult to identify the output
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Limitations of ZBB
Cost involving in preparing a vast number of decision package is high Time consuming & large documentation & paper work Develop a fear of threatening by ZBB& therefore the associates may oppose new ideas & changes Ranking of decision package & allocation of resources is subjective to certain degree which may result in dept conflict Administrative & communication of ZBB process may cause critical problem.
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Budgetary control
Budgetary control

It is a means of control in which the actual stage of affairs is compared with the budget so that appropriate action may be taken with regard to any deviations. Budgetary control relates expenditure to a section or department who incomes the expenditure in compared with budget one thus providing convent method of control

Features
1. 2. 3. 4. 5. 6. Make use of budget for planning & controlling all aspects of product & selling products / services Attempts to show the plan in financial term Planning in advance of various function of business so that business can be controlled Includes forecast of income & expenditure on equipment , machinery , material, necessary for efficient production & distribution of estimated sales volume Attempts to bring actual performance at part with predicated performance by enforcing strict supervising control on actual performance Control factors the planning & coordinating the variance in analysis & action taken quickly at right time & correction taken quickly.

Objectives of Budgetary control 1.To provide an organised procedure for planning 2.To coordinate all activities of various dept. of a business of a firm in such a manner that maximum profit will be achieved for the minimum use of resources 3.To provide means of determining the responsibility for all deviation