UNIVERSITY OF MUMBAI PROJECT REPORT ON ADVANCED COST ACCOUNTING

BUDGETARY CONTROL

BY

Mr. OJAS NITIN NARSALE

M.COM (Part-I) (SEM-I) (Roll No.40)

ACADEMIC YEAR 2015-2016

PROJECT GUIDE PROF. SUNITA MADHAV

PARLE TILAK VIDYALAYA ASSOCIATION’S

M.L. DAHANUKAR COLLEGE OF COMMERCE

DIXIT ROAD, VILE PARLE ( E)

MUMBAI- 400057

DECLERATION

I, Mr. OJAS NITIN NARSALE of PARLE TILAK VIDYALAYA ASSOCIATION’S M.L. DAHANUKAR COLLEGE OF COMMERCE of M.COM(Part-I) (SEM-I) (Roll No.40) hereby declare that I have completed this project on Budgetary Control in the ACADEMIC YEAR 2015-2016. This information submitted is true and original to the best of my knowledge.

(Signature of Student)

ACKNOWLEDGEMENT

To list who all helped me is difficult because they are so numerous and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion of this project.

I would firstly thank the University of Mumbai for giving me chance to do this project.

I would like to thank my Principal, Dr. Madhavi Pethe for providing the necessary facilities required for completion of this project.

I even will like to thank our co-ordinator, for the moral support that I received.

I would like to thank our College Library, for providing various books and magazines related to my project.

Finally I proudly thank my Parents and Friends for their support throughout the Project.

INDEX

No Topic Pages

1 Definition 1

2 Purpose 1

3 Types of Budget 2

4 Zero Base Budgeting 6

5 Performance-based budgeting 13

6 Fixed Budget 19

7 Flexible Budget 20

8 Benefits Of Budgeting 22

9 Essentials of a budgetary control 23

10 Budgetary Control 24

11 Budgeted Balancesheet 27

11 Limitation and Conclusion 30

12 Illustration 33

13 References 35

Definition:-

A budget (derived from old French word bougette, purse) is a quantified financial plan for a

forthcoming accounting period

A budget is an important concept in microeconomics, which uses a budget line to illustrate the

trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in

monetary terms.

The Chartered Institute of Management Accountants, England, defines a budget as:

“A plan quantified in monetary terms prepared and approved prior to a defined period of time

usually showing planned income to be generated and/or expenditure to be incurred during that

period and the capital to be employed to attain a give objective.”

Simply put, a budget is an itemized summary of likely income and expenses for a given period.

It’s an invaluable tool to help you prioritize your spending and manage your money—no matter

how much or how little you have. 

Planning and monitoring your budget will help you identify wasteful expenditures, adapt quickly

as your financial situation changes, and achieve your financial goals.

Purpose

Budget helps to aid the planning of actual operations by forcing managers to consider how the

conditions might change and what steps should be taken now and by encouraging managers to

consider problems before they arise. It also helps co-ordinate the activities of the organization by

compelling managers to examine relationships between their own operation and those of other

departments. Other essentials of budget include:

To control resources

To communicate plans to various responsibility center managers.

To motivate managers to strive to achieve budget goals.

To evaluate the performance of managers

To provide visibility into the company's performance

For accountability

In summary, the purpose of budgeting tools:

1. Tools provide a forecast of revenues and expenditures, that is, construct a model of how a

business might perform financially if certain strategies, events and plans are carried out.

2. Tools enable the actual financial operation of the business to be measured against the

forecast.

3. Lastly, tools establish the cost constraint for a project, program, or operation.

Budgets help businesses track and manage their resources. Businesses use a variety of budgets to

measure their spending and develop effective strategies for maximizing their assets and

revenues. The following types of budgets are commonly used by businesses:

Master Budget

A master budget is an aggregate of a company's individual budgets designed to present a

complete picture of its financial activity and health. The master budget combines factors like

sales, operating expenses, assets, and income streams to allow companies to establish goals and

evaluate their overall performance, as well as that of individual cost centers within the

organization. Master budgets are often used in larger companies to keep all individual managers

aligned.

Operating Budget

An operating budget is a forecast and analysis of projected income and expenses over the course

of a specified time period. To create an accurate picture, operating budgets must account for

factors such as sales, production, labor costs, materials costs, overhead, manufacturing costs, and

administrative expenses. Operating budgets are generally created on a weekly, monthly, or

yearly basis. A manager might compare these reports month after month to see if a company is

overspending on supplies.

Cash Flow Budget

A cash flow budget is a means of projecting how and when cash comes in and flows out of a

business within a specified time period. It can be useful in helping a company determine whether

it's managing its cash wisely. Cash flow budgets consider factors such as accounts payable and

accounts receivable to assess whether a company has ample cash on hand to continue operating,

the extent to which it is using its cash productively, and its likelihood of generating cash in the

near future. A construction company, for example, might use its cash flow budget to determine

whether it can start a new building project before getting paid for the work it has in progress.

Financial Budget

A financial budget presents a company's strategy for managing its assets, cash flow, income, and

expenses. A financial budget is used to establish a picture of a company's financial health and

present a comprehensive overview of its spending relative to revenues from core operations. A

software company, for instance, might use its financial budget to determine its value in the

context of a public stock offering or merger.

Static Budget

A static budget is a fixed budget that remains unaltered regardless of changes in factors such as

sales volume or revenue. A plumbing supply company, for example, might have a static budget

in place each year for warehousing and storage, regardless of how much inventory it moves in

and out due to increased or decreased sales.

The following list summarizes the key aspects and disadvantages of each type of budgeting

model:

Static budgeting. This is the classic form of budgeting, where a business creates a model

of its expected results and financial position for the next year, and then attempts to force

actual results during that period to align with the budget model as closely as possible.

This budget format is typically based on a single expected outcome, which can be

extremely difficult to achieve. It also tends to introduce a great deal of rigidity into an

organization, rather than allowing it to react quickly to ongoing changes in its

environment.

Zero-base budgeting. A zero-base budget involves determining what outcomes

management wants, and developing a package of expenditures that will support each

outcome. By combining the various outcome-expenditure packages, a budget is derived

that should result in a specific set of outcomes for the entire business. This approach is

most useful in service-level entities, such as governments, where the provision of services

is paramount. However, it also takes a considerable amount of time to develop, in

comparison to the static budget.

Flexible budgeting. A flexible budget model allows you to enter different sales levels in

the model, whch will then adjust planned expense levels to match the sales levels that

have been entered. This approach is useful when sales levels are difficult to estimate, and

a significant proportion of expenses vary with sales. This type of model is more difficult

to prepare than a static budget model, but tends to yield a budget that is reasonably

comparable to actual results.

Incremental budgeting. Incremental budgeting is an easy way to update a budget model,

since it assumes that what has happened in the past can be rolled forward into the future.

Though this approach results in simplified budget updates, it does not provoke a detailed

examination of company efficiencies and expenditures, and so does not assist in the

creation of a lean and efficient enterprise.

The rolling budget. A rolling budget requires that a new budget period be added as soon

as the most recent period has been completed. By doing so, the budget always extends a

uniform distance into the future. However, it also requires a considerable amount of

budgeting work in every accounting period to formulate the next incremental update.

Thus, it is the least efficient budgeting alternative, though it does focus ongoing attention

on the budget.

The rolling forecast. A rolling forecast is not really a budget, but rather a regular update

to the sales forecast, frequently on a monthly basis. The organization then models its

short-term spending on the expected revenue level. This approach has the advantages of

being very easy to update, and requiring no budgeting infrastructure.

Of the budgeting models shown here, the static model is by far the most common, despite being

unwieldy and rarely attained. A considerably different alternative is to use a rolling forecast, and

allow managers to adjust their expenditures "on the fly" to match short-term revenue

expectations. Organizations may find that the rolling forecast is a more productive form of

budget model, given its high degree of flexibility.

Zero-based budgeting

is an approach to planning and decision-making that reverses the working process of traditional

budgeting. In traditional incremental budgeting departmental managers justify only variances

versus past years based on the assumption that the "baseline" is automatically approved. By

contrast, in zero-based budgeting, every line item of the budget must be approved, rather than

only changes. Zero-based budgeting requires that the budget request be re-evaluated thoroughly,

starting from the zero-base; this involves preparation of a fresh budget every year without

reference to the past. This process is independent of whether the total budget or specific line

items are increasing or decreasing.

The term is sometimes confused with "zero-sum budgeting", a personal finance technique of

budgeting every unit of income received, and then adjusting some part of that budget downward

for every other part that needs to be adjusted upward.

Zero based budgeting also refers to the identification of a task or tasks and then funding

resources to complete the task independent of current resourcing.

Advantages

1. Efficient allocation of resources, as it is based on needs and benefits rather than history.

2. Drives managers to find cost effective ways to improve operations.

3. Detects inflated budgets.

4. Increases staff motivation by providing greater initiative and responsibility in decision-

making.

5. Increases communication and coordination within the organization.

6. Identifies and eliminates wasteful and obsolete operations.

7. Identifies opportunities for outsourcing.

8. Forces cost centers to identify their mission and their relationship to overall goals.

9. Facilitates more effective delegation of authority

Zero-based budgeting helps in identifying areas of wasteful expenditure, and if desired, can also

be used for suggesting alternative courses of action.

Disadvantages

1. More time-consuming than incremental budgeting.

2. Justifying every line item can be problematic for departments with intangible outputs.

3. Requires specific training, due to increased complexity vs. incremental budgeting.

4. In a large organization, the amount of information backing up the budgeting process may

be overwhelming.

Background

Zero Base Budgeting (ZBB) in the public sector and the private sector are very different

processes, and this must be understood when implementing a ZBB process in the public sector.

“The use of ZBB in the private sector has been limited primarily to administrative overhead

activities (i.e. administrative expenses needed to maintain the organization…)”.For example,

Peter Pyhrr used ZBB successfully at Texas Instruments in the 1960s and authored an influential

1970 article in Harvard Business Review. In 1973, President Jimmy Carter, while governor of

Georgia, contracted with Pyhrr to implement a ZBB system for the State of Georgia executive

budget process.

President Carter later required the adoption of ZBB by the federal government during the late

1970s. “Zero-Base Budgeting (ZBB) was an executive branch budget formulation process

introduced into the federal government in 1977. Its main focus was on optimizing

accomplishments available at alternative budgetary levels. Under ZBB agencies were expected to

set priorities based on the program results that could be achieved at alternative spending levels,

one of which was to be below current funding.”

According to Peter Sarant, the former director of management analysis training for the US Civil

Service Commission during the Carter ZBB implementation effort, “ZBB means “different

things to different people.” Some definitions are implying that zero-base budgeting is the act of

starting budgets from scratch or requiring each program or activity to be justified from the

ground up. This is not true; the acronym ZBB, is a misnomer. ZBB is a misnomer because in

many large agencies a complete zero-base review of all program elements during one budget

period is not feasible; it would result in excessive paperwork and be an almost impossible task if

implemented.” In many respects the “common misunderstanding” of ZBB noted above resemble

a “sunset review” process more than a traditional public sector ZBB process.

Definition

According to Sarant, ZBB is a technique which complements and links to existing planning,

budgeting and review processes. It identifies alternative and efficient methods of utilizing limited

resources . It is a flexible management approach which provides a credible rationale for

reallocating resources by focusing on a systematic review and justification of the funding and

performance levels of current programs.”

A method of budgeting in which all expenses must be justified for each new period. Zero-based

budgeting starts from a "zero base" and every function within an organization is analyzed for its

needs and costs. Budgets are then built around what is needed for the upcoming period,

regardless of whether the budget is higher or lower than the previous one.

ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them

to specific functional areas of the organization, where costs can be first grouped, then measured

against previous results and current expectations.

Components of a public sector ZBB analysis

In general there are three components that make up public sector ZBB:

1. Identify three alternate funding levels for each decision unit (Traditionally, this has been

a zero-base level, a current funding level and an enhanced service level.);

2. Determine the impact of these funding levels on program (decision unit) operations using

program performance metrics; and

3. Rank the program “decision packages” for the three funding levels.

The process was also specifically intended to involve both program staff and budget staff in the

process. In many cases, program staffers were asked to look for alternative service delivery

models that could deliver services more efficiently at lower funding level.

The US General Accounting Office (GAO) reviewed past performance budgeting initiatives in

1997 and found that ZBBs “main focus was on optimizing accomplishments available at

alternative budgetary levels. Under ZBB agencies were expected to:

Set priorities based on the program results that could be achieved at alternative spending levels,

one of which was to be below current funding.

1. In developing budget proposals, these alternatives were to be ranked against each other

sequentially from the lowest level organizations up through the department and without

reference to a past budgetary base.

2. In concept, ZBB sought a clear and precise link between budgetary resources and

program results.”

Further, “ZBB illustrated the usefulness of:

1. Defining and presenting alternative funding levels; and

2. Expanded participation of program managers in the budget process.”

The federal ZBB budgeting system had the following components: “Budget requests for each

decision unit were to be prepared by their managers, who would (1) identify alternative

approaches to achieving the unit’s objectives, (2) identify several alternative funding levels,

including a “minimum” level normally below current funding, (3) prepare “decision packages”

according to a prescribed format for each unit, including budget and performance information,

and (4) rank the decision packages against each other.”

ZBB was officially eliminated in federal budgeting on August 7, 1981. “Some participants in the

budget process as well as other observers attributed certain program efficiencies, arising from the

consideration of alternatives, to ZBB. Interestingly, ZBB established within federal budgeting a

requirement to:

1. Present alternative levels of funding; and

2. Link (them) to alternative results.”

This element of the ZBB budgeting process remained in effect through the Reagan, Bush and

early Clinton administrations before being eliminated in 1994.

Defining the government program zero-base

As noted earlier, there is often considerable confusion over the meaning of zero-base budgeting.

There is no evidence that public sector ZBB has ever included “building budgets from the

bottom up” and “reviewing every invoice” as part of the analysis. In discussions of ZBB, there is

often confusion between a ZBB process and a sunset review process. In a sunset review the

entire function is eliminated unless evidence is provided of program effectiveness. This

confusion ultimately leads to the question: what is a zero-base?

Sarant’s definition of the zero-base based on the federal training experience is: “A minimum

level is actually the grass roots funding level necessary to keep a program alive. Therefore, the

minimal level is the “program or funding level below which it is not feasible to continue a

program… because no constructive contribution can be made toward fulfilling its objective.”

dentifying this level of program funding has been subjective and problematic.

Consequently, “some states have selected arbitrary percentages to insure that an amount smaller

than last year’s request in considered. They do this by stipulating that one alternative must be 50

or 80 or 90 percent of last year’s request.” This equates to analyzing the impact on program

operations of a 10, 20 or 50 percent reduction in funding as the “zero base” funding level.

Importance of performance measures

Performance measures are a key component of the ZBB process. At the core, ZBB requires

quality measures that can be used to analyze the impact of alternative funding scenarios on

program operations and outcomes. Without quality measures ZBB simply will not work because

decision packages cannot be ranked. To perform a ZBB analysis “alternative decision packages

are prepared and ranked, thus allowing marginal utility and comparative analysis.”

Traditionally, a ZBB analysis focused on three types of measures. “They (federal agency

program staff) were to identify the key indicators to be used in measuring performance and

results. These should be “measures of:

1. effectiveness,

2. efficiency, and

3. workload for each decision unit.

Indirect or proxy indicators could be used if these systems did not exist or were under

development.”

Impact of ZBB on Government Operations

According to the GAO:

“Agencies believed that inadequate time had been allowed to implement the new initiative. The

requirement to compress planning and budgeting functions within the timeframes of the budget

cycle had proven especially difficult, affecting program managers’ ability to identify alternative

approaches to accomplishing agency objectives. Some agency officials also believed that the

performance information needed for ZBB analysis was lacking.”

According to the National Conference of State Legislatures:

“In its original sense, ZBB meant that no past decisions are taken for granted. Every previous

budget decision is up for review. Existing and proposed programs are on an equal footing, and

the traditional state practice of altering almost all existing budget lines by small amounts every

year or two would be swept away. No state government has ever found this feasible. Even

Georgia, where Governor Jimmy Carter introduced ZBB to state budgeting in 1971, employed a

much modified form.

State programs are not, in practice, amenable to such a radical annual re-examination. Statutes,

obligations to local governments, requirements of the federal government, and other past

decisions have many times created state funding commitments that are almost impossible to

change very much in the short run. Education funding levels are determined in many states partly

by state and federal judicial decisions and state constitutional provisions, as well as by statutes.

Federal mandates require that state Medicaid funding meet a specific minimum level if Medicaid

is to exist at all in a state. Federal law affects environmental program spending, and both state

and federal courts help determine state spending on prisons. Much state spending, therefore,

cannot usefully be subjected to the kind of fundamental re-examination that ZBB in its original

form envisions.

To the extent that ZBB has encouraged governors and legislators to take a hard look at the

impact of incremental changes in state spending, it produced a significant improvement in state

budgeting. But in its classic form--begin all budget evaluations from zero--ZBB is as unworkable

as it ever was.”

Performance-based budgeting

Performance-based budgeting is the practice of developing budgets based on the relationship

between program funding levels and expected results from that program. The performance-based

budgeting process is a tool that program administrators can use to manage more cost-efficient

and effective budge

Introduction

Today, when the management of money is more important than ever for public and private

entities, budgeting plays an enormous role in controlling operations efficiently and effectively.

Budgeting in itself is a familiar process to even the smallest economic unit – the household - but

it needs to be divided into two different classes: budgeting for public entities and private entities.

This differentiation is important because public bodies need to go through many processes before

moving into the budget execution phase and post-execution analyses; furthermore, the entire

process involves the collaboration of different bodies throughout the government. This

collaboration is not only for budget preparation, negotiation and approval processes, but also for

the spending approval after the whole budget allocation is finalized. Compared to private sector,

it is cumbersome.

Another factor is the increasing awareness of the policies of the World Bank in pursuit of

restructuring the budgeting and spending processes of developing nations via the World Bank

Treasury Reference Model. This new model has led the public sector to understand, digest and

adopt a new style.

According to this new budgeting methodology, traditional methods of analyzing and utilizing

budget figures are insufficient. In traditional terms, organizations start building up their long-

term plans and break those plans into annual budgets that are formed as forecasts. At the end of

the year, budget figures are compared with actual results and a simple actual-budget variance

comparison is calculated. Since the analysis is simple, this analysis lacks any sophistication in

terms of adjusting similar budget items for forthcoming periods by increasing or decreasing the

expenditure estimates. Basically, variance results are generally used for revising monetary

amounts for the next planning and budgeting cycle, and also for very simple departmental

performance tracking.

This new approach to budget analysis and utilization is many steps ahead of traditional methods.

As an example, a governmental project to enhance the social welfare of children in a remote area

can help explain the performance-oriented approach. For such projects, which are generally

composed of long-term plans, governments decide on objectives and the activities that are

required to be accomplished to achieve them. Practical ways of enhancing social welfare of

children in a rural area might include increasing the job skills of parents in the area.

In order to achieve such an objective, the government may plan to establish schooling

infrastructures in various locations, complete with the necessary equipment, and further plan to

assign trainers to those schools for implementing the educational programs. All these activities

have a cost aspect and, at this point, long-term plans are broken down into annual budgets that

incorporate the monetary figures. Once the long-term plans are accomplished, the traditional way

to gauge the effectiveness of this whole project would be to assess the gap between the budget

and the actual money spent. However, with the new budgeting approach, the questions to answer

are tougher:

Did we really succeed in enhancing the social welfare of children?

Did this project cost what we expected?

Have we done what we should have done in enhancing the social welfare of

children?

Peter van der Knaap from the Ministry of Finance in the Netherlands suggests: “The general

purpose of the proposals is to make budget documents and, hence, the budgetary process more

policy-oriented by presenting information on (intended and achieved) policy objectives, policy

measures or instruments, and their costs.” Furthermore, van der Knaap explains that this type of

budgeting has the following major performance indicators:

(the quantity, quality, and costs of) products and services (output) produced by

government or government services in order to achieve certain effects, and;

the intended effects of those measures (outcome).

Within this kind of a planning and budgeting setup, the lack of reliable information on the effects

of policies emerges as a serious issue. Therefore, it is important to approach the planning and

budgeting cycle in a holistic and integrated way, with collaboration across the areas of policy

design, performance measures definition and policy evaluation.

From a conceptual point of view, performance-based budgeting systems are a sub-set of what are

known as 'outcomes systems'. Outcomes systems are any systems designed to identify, prioritize,

measure, attribute and/or hold parties to account for outcomes. The technical principles for

developing and implementing sound performance-based budgeting systems as a type of

outcomes system are described in outcomes theory.

Performance-based budgeting (PBB)

This whole framework points us to a newer way of budgeting, the performance-based budgeting.

As explained by Carter (as quoted in ) “Performance budgets use statements of missions, goals

and objectives to explain why the money is being spent. It is a way to allocate resources to

achieve specific objectives based on program goals and measured results.” The key to

understanding performance-based budgeting lies beneath the word “result”. In this method, the

entire planning and budgeting framework is result oriented. There are objectives and activities to

achieve these objectives and these form the foundation of the overall evaluation.

According to the more comprehensive definition of Segal and Summers, performance budgeting

comprises three elements:

the result (final income)

the strategy (different ways to achieve the final outcome)

activity/outputs (what is actually done to achieve the final outcome)

Segal and Summers point out that within this framework, a connection exists between the

rationales for specific activities and the end results and the result is not excluded, while

individual activities or outputs are. With this information, it is possible to understand which

activities are cost-effective in terms of achieving the desired result.

As can be seen from some of the definitions used here, Performance-Based Budgeting is a way

to allocate resources for achieving certain objectives,

Harrison elaborates: “PBB sets a goal, or a set of goals, to which monies are “connected” (i.e.

allocated). From these goals, specific objectives are delineated and funds are then subdivided

among them.”

Achieving PBB

Adopting public sector’s performance-based budgeting to the private sector using the

Corporate Performance Management (CPM) framework. In performance-based budgeting first

the goals and objectives of organization or department are identified, then measurement tools are

developed and the last step is reporting.

For this type of advanced budgeting, which requires the definition of Key Performance

Indicators (KPIs) at the outset, linking these performance indicators to resources becomes the

vital part of the entire setup. This is similar to the CPM framework, which is “where strategy and

planning meet execution and measurement”, according to John Hagerty from AMR Research.

This is a sort of a Balanced Scorecard approach in which KPIs are defined and linkages are built

between causes and effects in a tree-model on top of a budgeting system which should be

integrated with the transactional system, in which financial, procurement, sales and similar types

of transactions are tracked. Moreover, linking resources with results provides information on

how much it costs to provide a given level of outcome. Many public bodies fail to figure out how

much it costs to deliver an output, primarily due to problems with indirect cost allocation. This

puts the Activity-Based Costing framework into the picture.

Both the concepts of scorecards, as first introduced by Kaplan and Norton, and activity-based

costing are today well-known concepts in the private sector, but much less so for the public-

sector bodies…until the advent of Performance-Based Budgeting! Another conceptual

framework that has gained ground is the relatively recently introduced CPM, again more popular

in the private sector. The point is that the CPM framework has not much touched on the topic of

Performance-Based Budgeting, although the similarities in policies offered by these frameworks

are worth a deeper look. The technical foundation that the CPM framework puts on the table may

well be a perfect means to rationalize the somewhat tougher budgeting approach, not only for the

public sector but also for commercial companies.

The way to CPM and PBB

Leading companies are integrating various business intelligence applications and processes in

order to achieve corporate performance management. The first step is for senior management to

formulate the organization’s strategy and to articulate specific strategic objectives supported by

key financial and non-financial metrics.

These metrics and targets feed the next step in the process, Planning and Budgeting, and are

eventually communicated to the front-line employees that will carry out the day-to-day activities.

Targets and thresholds are loaded from the planning systems into a Business Activity Monitoring

engine that will automatically notify responsible persons of potential problems in real time. The

status of the business is reviewed regularly and re-forecast and, if necessary, budget changes are

made. If the business performance is significantly off plan, executives may need to re-evaluate

the strategy as some of the original assumptions may have changed. Optionally, activity-based

costing efforts can enhance the strategic planning process – deciding to outsource key activities,

for example. ABC can also facilitate improved budgeting and controls through Activity-Based

Budgeting which helps coordinate operational and financial planning.

The ability to establish CPM to enhance control on budget depends first upon achieving a better

understanding of the business through unified, consistent data to provide the basis for a 360-

degree view of the organization. The unified data model allows you to establish a single

repository of information where users can quickly access consistent information related to both

financial and management reporting, easily move between reporting the past and projecting the

future, and drill to detailed information.

By then, you are ready to plug in - on the unified data - the applications that support

consolidations, reporting, analysis, budgeting, planning, forecasting, activity-based costing, and

profitability measurement. The applications are then integrated with the single repository of

information and are delivered with a set of tools that allow users to follow the assessment path

from strategy, to plans and budgets and to the supporting transactional data.

CPM and the adoption of more public-sector oriented PBB are not easy to tackle, but in the ever-

changing business and political climate they are definitely worth a closer look.

PBB in Higher Education

The application of Performance Based Budgeting in U.S. Institutions of Higher Education

provides incentives for colleges to enroll students and thus provide access to postsecondary

education. Performance-based budgeting is an approach in which funding for an institution

“depends on performing in certain ways and meeting certain expectations”. “Historically, many

colleges have received state funding based on how many full-time equivalent students are

enrolled at the beginning of the semester”. Thirty states have a funding formula in place that

allocates some amount of funding based on performance indicators such as course completion,

time to degree, transfer rates, the number of degrees awarded, or the number of low-income and

minority graduates”.

The strengths of PBB for Higher Education

Provides incentives for enrolling students and opening access to higher education

Focuses on results and accomplishments

A simple approach once expectations and measurements are defined

“Promotes equitable allocation of resources to those institutions that meet performance

criteria"

The weaknesses of PBB for Higher Education

"Does not necessarily provide incentives for institutions to help students successfully complete

degree programs”

Performance criteria and measures can be difficult to define

The time between and accomplishment and its measurement and the allocation of funds

might be great and Measuring long-term outcomes is difficult

Fixed Budget:

A fixed budget is a budget that does not change or flex when sales or some other activity

increases or decreases. A fixed budget is also referred to as a static budget.

1. It is inflexible and does not change with the actual volume of output achieved.

2. It assumes that conditions would remain static.

3. Costs are not classified according to their variability i.e. fixed, variable and semi-variable.

4. Comparison of actual and budgeted performance cannot be done correctly if the volume of

output differs.

5. It is difficult to forecast accurately the results in it.

6. Only one budget at a fixed level of activity is prepared due to an unrealistic expectation on the

part of the management i.e., all conditions will remain unaltered.

7. Its is not possible to ascertain costs correctly if there is a change in circumstances

8. It has a limited application and is ineffective as a tool for cost control.

9. If the budgeted and actual activity levels vary, the correct ascertainment of costs and fixation

of prices becomes difficult.

Flexible Budget:

A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The

flexible budget is more sophisticated and useful than a static budget, which remains at one

amount regardless of the volume of activity.

1. It is flexible and can be suitably recasted quickly according to the level of activity attained.

2. It is designed to change according to changed conditions.

3. Costs are classified according to the nature of their variability.

4. Comparisons are realistic as the changed plan figures are placed against actual ones.

5. It clearly shows the impact of various expenses on the operational aspect of the business.

6. Under it, series of budgets are prepared at different levels of activity.

7. Costs can be easily ascertained at different levels of activity under this type of budget.

8. It has more applications and can be used as a tool for effective cost control.

9. It helps in fixation of price and submission of tenders due to correct ascertainment of costs.

For example, a budget can be prepared for capacity utilization levels of 50%, 60%, 70%, 80%,

90% and 100%. The basic principle of flexible budget is that if budget is prepared for showing

the results at say, 15, 000 units and actual production is only 12, 000 units, the comparison

between the expenditures, budgeted and actual will not be fair as the budget was prepared for 15,

000 units.

Therefore it is developed for a relevant range of production from 12, 000 units to 15, 000 units.

Thus even if the actual production is 12, 000 units, the results will be comparable with the

budgeted performance of 12, 000 units.

Even if the production slips to 8,000 units, the manager has a tool that can be used to determine

budgeted cost at 8,000 units of output. The flexible budget thus, provides a reliable basis for

comparison because it is automatically geared to change in production activity. Thus a flexible

budget covers a range of activity, it is flexible i.e. easy with variation in production levels and it

facilitates performance measurement and evaluation.

iii. While preparing flexible budget, it is necessary to study the behavior of cost and divide them

in fixed, variable and semi variable. After doing this, the costs can be estimated for a given level

of activity. iv. It is also necessary to plan the range of activity. A firm may decide to develop

flexible budget for activity level starting to plan the range of activity level from 50% to 100%

with an interval of 10% in between.

BENEFITS OF BUDGETING

Gives you control over your money – A budget is a way of being intentional about the

way you spend and save your money.    It is said that with budgeting, you control your

money and not your money controls you.  Budgeting saves you the stress of suddenly

having to adjust to lack of funds because you did not initially plan how to spend them.  It

also helps you decide if you want to sacrifice short term spending like buying coffee

everyday in exchange for a long term benefit like a cruise vacation or a new HDTV.

Keeps you focused on your money goals –  You avoid spending unnecessarily on items

and services that do not contribute to attaining your financial goals.  If you are working

with limited resources, budgeting makes it easier to make ends meet.

Makes you aware what is going on with your money – With budgeting, you are clear

on what money is coming in, how fast it goes out, and where it is going to. Budgeting

saves you from wondering every end of the month where your money went.  A budget

enables you to know what you can afford, take advantage of buying and investing

opportunities, and plan how to lower your debt. It also tells you what is important to you

based on how you allocate your funds, how your money is working for you, and how far

you are towards reaching your financial goals.

Helps you organize your spending and savings – By dividing your money into

categories of expenditures and savings, a budget makes you aware which category of

expenditure takes which portion of your money.  That way, it is easy for you to make

adjustments.  Budget also serves as a reference for organizing your bills, receipts, and

financial statements.  When all of your financial transactions are organized for tax time or

creditor questions, you save time and effort.

Enables you to communicate with your significant others about money – If you share

your money with your spouse, family, or anyone, a budget can communicate how you use

money as a group.  This promotes teamwork on working for common financial goals and

prevents conflict on how money is used.  Creating a budget in tandem with your spouse

will avoid conflicts and resolve personal differences on how your money is spent.  

Budgeting teaches family members spending responsibility and accountability

Budgetary Control

Budgetary control is actually a means of control in which the actual results are compared with

the budgeted results so that appropriate action may be taken with regard to any deviations

between the two. Budgetary control has the following stages.

A. Developing Budgets: The first stage in budgetary control is developing various budgets. It

will be necessary to identify the budget centers in the organization and budgets will have to

develop for each one of them. Thus budgets are developed for functions like purchase, sale,

production, manpower planning as well as for cash, capital expenditure, machine hours, labor

hours and so on. Utmost care should be taken while developing the budgets. The factors

affecting the planning should be studied carefully and budgets should be developed after a

thorough study of the same.

B. Recording Actual Performance: There should be a proper system of recording the actual

performance achieved. This will facilitate the comparison between the budget and the actual. An

efficient accounting and cost accounting system will help to record the actual performance

effectively

C. Comparison of Budgeted and Actual Performance: One of the most important aspects of

budgetary control is the comparison between the budgeted and the actual performance. The

objective of such comparison is to find out the deviation between the two and provide the base

for taking corrective action.

D. Corrective Action: Taking appropriate corrective action on the basis of the comparison

between the budgeted and actual results is the essence of budgeting. A budget is always prepared

for future and hence there may be a variation between the budgeted results and actual results.

There is a need for investigation of the same and take appropriate action so that the deviations

will not repeat in the future.

Responsibilities can be fixed on proper persons so that they can be held responsible for any such

deviations.

Essentials of a budgetary control

Establishment of budgets for each function and section of the organization. 

Continuous comparison of the actual performance with that of the budget so as to know

the variations from budget and placing the responsibility of executives for failure to

achieve the desires results as given in the budget.

Taking suitable remedial action to achieve the desires objective if there is a variation of

the actual of the actual performance from the budgeted performance.

Revision of budgets in the light of changed circumstances.

Objectives of Budgetary Control

• Planning: A budget provides a detailed plan of action for a business over a definite

period of time. Detailed plans relating to production, sales, raw material requirements,

labor needs, advertising and sales promotion performance, research and development

activities, capital additions etc. are drawn up. By planning many problems are anticipated

long before they arise and solutions can be sought through careful study. Thus most

business emergencies can be avoided by planning. In brief, budgeting forces the

management to think ahead, to anticipate and prepare for the anticipated conditions.

• Coordination: Budgeting aids managers in co-coordinating their efforts so that

objectives of the organization as a whole harmonize with the objectives of its divisions.

Effective planning and organization contributes a lot in achieving coordination. There

should be co-ordination in the budgets of various departments. For example, the budget

of sales should be in coordination with the budget of production. Similarly, production

budget should be prepared in co-ordination with the purchase budget, and so on.

• Communication: A budget is actually a communication device. The accepted budget

copies are distributed to every management personnel which gives not only adequate

understanding and knowledge of the policies and programmes to be followed however

also gives understanding about the restrictions to be followed to. It is not the budget by

itself that facilitates communication; however the vital information will be communicated

in the work of preparing budgets and participation of most responsible men and women

in this act.

• Motivation: A budget is a helpful device for encouraging managers to carry out in line

with the organization objectives. If men and women have actively participated in the

planning of budgets, it acts like a strong motivating force in order to achieve the targets.

• Control: Control is necessary to ensure that plans and objectives as laid down in the

budgets are being achieved. Control, as applied to budgeting, is a, systematized effort to

keep the management informed of whether planned performance is being achieved or not.

For this purpose, a comparison is made between plans and actual performance. The

difference between the two is reported to the rr1anagement for taking corrective action.

• Performance evaluation: A budget offers a useful means of telling managers how nicely

they are performing in conference targets they have formerly helped to set. In numerous

companies there is an exercise of rewarding workers on the basis of their reaching the

budget targets or promotion of a manager might be linked to his budget accomplishment

record.

Advantages Of Budgetary Control

• The major problem occurs when budgets are applied mechanically and rigidly.

• Budgets can demotivate employees because of lack of participation. If the budgets are

arbitrarily imposed top down, employees will not understand the reason for budgeted

expenditures, and will not be committed to them.

• Budgets can cause perceptions of unfairness.

• Budgets can create competition for resources and politics.

• A rigid budget structure reduces initiative and innovation at lower levels, making it

impossible to obtain money for new ideas.

Budgeted Balance Sheet Definition

A budgeted balance sheet shows estimated financial position of a company.

By seeing budgeted balance sheet, we can expect same at the end of the financial year. But this is not real balance sheet. When it is not real, then what is the need of preparing it and why I am here to explain it? Reason behind this is very clear. It is useful tool for management for decision making. We know management makes almost all type of budget. We should see all these budget's effect on our future financial position. Future is in our hand. We have made cash budget, material budget, production budget, sales budget, purchase budget and master budget and other departments' budgets. After this, we should make budgeted balance sheet to check whether all budget's effect is positive on on our estimated financial position or not. Now, I am explaining the steps to make it.

1. Take the Beginning Real Balance Sheet For making budgeted balance sheet, we take all the data of real balance sheet of beginning of financial year.

2. Collect the Data of All Budget For making budgeted balance sheet, you need to collect the data of various budget like cash budget, purchase budget, finished goods budget, raw material budges, projected sales or purchase deal of fixed assets on credit.

3. Adjustment of Beginning Real Balance Sheet with Data of Different Budgets If your hand is good on ms excel, within just few minutes, you can make budgeted balance sheet.

Following are the main adjustments which you should do.

Balance Sheet Items Adjustment Basis of Budget

a) Cash in Hand and at bank

Take the figure of closing cash in hand balance from

cash budgetCash Budget

b) Sundry DebtorsOpening Debtors + New

Credit Sale - Cash  Received

Sales Budget and Cash Budget

c) Sundry CreditorsOpening Creditors+ New Credit Purchase  - New

Payment

Purchase budget and Cash Budget

d) Finished StockOpening Finished Stock + New Production  - New

total Sales (Cash+ Credit)

Production, Sales and Cash Budgets

e) Raw Material StockOpening Raw Material  Stock + New Purchase ( Cash+Credit) - New

Consumption

Material, production and Cash Budget

f) Fixed AssetsOpening Balance+ New Purchase - New Sale

( Cost Value)

Cash Budget and Projected Plan Report andPlant Utilization

budget

g) Loan LiabilitiesOpening Balance of Loan Liabilities + New Loan Taken - Repayments

Cash Budget

h) Accumulated Depreciation

Opening Balance Accumulated

Depreciation + New Depreciation

Overhead Budget

i) Paid in CapitalOpening Balance of Paid in Capital + Additional Paid

in CapitalCash Budget

j) Retained Earning

Opening Retained Earning + Estimated Net

Profit - (Estimated Dividend declared + Estimated Dividend

Paid )

Cash Budget and Budgeted Income

Statement

k) General ReserveOpening Balance of

General Reserve + New General Reserve on

Specific Rate as per law

l) TaxationOpening Payable Tax +

New Payable Tax - (Advance+ TDS)

Tax Returns, New Income Tax Law reports, finance

budget of Govt. of India and Cash

Budget

Limitations And Problems

There are several limitations and problems associated with the master budget that need to

be considered by management. These problems involve uncertainty, behavioral bias and

costs.

Uncertainty:

Budgeting includes a considerable amount of forecasting and this activity involves a

considerable amount of uncertainty. Uncertainty affects both sides of the financial

performance dichotomy,but uncertainty on the revenue side presents a more serious

limitation for planning. The sales budget is frequently based on a forecast supported by a

variety of assumptions about the economy, the actions of the federal reserve board and

congress in implementing monetary and fiscal policy, and the actions of competitors,

suppliers, and customers. The uncertainty associated with sales forecasting creates a

greater problem than uncertainty on the cost side because the other parts of the budget are

derived from the sales forecast. This forces management to constantly monitor and

analyze changes in the economic environment. From the planning perspective, the

inability to accurately forecast the future reduces the usefulness of the original budget

estimates for materials requirements planning (MRP) and planning for other resource

needs. Uncertainty on the cost side tends to be less of a problem because management has

more influence over the quantities of resources consumed than over the quantities of their

own products purchased by customers. From a performance evaluation and control

perspective, uncertainty on both sides of the financial performance dichotomy is not as

much of a problem because flexible budgets are used to fine tune the original budget to

reflect expectations at the current level of activity.

Behavioral Bias

A second problem involves a variety of behavioral conflicts that are created when the

budget is used as a control device. To be effective, the budget must be used by the

managers it is designed to help. Thus, it must be acceptable to all levels of management.

The behavioral literature on budgeting supports the view that the budget should reflect

what is most likely to occur under efficient operating conditions. If a budget is to be used

as an effective planning and monitoring device, it should encourage a high level of

performance and efficiency, but at the same time, it should be fair and obtainable. If the

budget is viewed by managers as unfair, (too optimistic) it may intimidate rather than

motivate. One way to gain acceptance is referred to as participative (rather than imposed)

budgeting. The idea is to include all levels of management in the budget preparation

process. Of course this process must be coordinated by a budget director to ensure that a

fair budget is obtained that will help achieve the goals of the total organization.

Another way to reduce the behavioral bias against budgeting is to recognize the concepts

of variation and interdependence when using the budget to evaluate performance. Recall

from our discussion of the statistical control concept in Chapter 3 that there is variation in

all performance and most of this variation is caused by the system , (i.e., common causes)

not the people working in the system. The concept of interdependence refers to the fact

that the various segments of a company are part of a system. Inevitably, these segments,

or subsystems influence each other. Failure to adequately recognize the

interdependencies within an organization tends to cause behavioral conflicts and motivate

participants to optimize the performance of the various segments (subsystems) rather than

to optimize the performance of the overall system.

Finally, the behavioral conflicts associated with budgeting are reduced by using flexible

budgets when evaluating performance.

Costs

A third problem or limitation is that budgeting requires a considerable amount of time

and effort. Many companies maintain a twelve month budget on a continuous basis by

adding a future month as the current month expires.4 While this does not create a major

expenditure for large or medium sized organizations, smaller companies may find it

difficult to justify the costs involved. Many small, potentially profitable firms, do not

plan effectively and eventually fail as a result. Cash flow problems are common, e.g., not

having enough cash available (or accessible through a line of credit with a bank) to pay

for merchandise or raw materials or to meet the payroll. Many of these problems can be

avoided by preparing a cash budget on a regular basis.

The Assumptions Of The Master Budget

Typically, the following simplifying assumptions are made when preparing a master

budget:

1.) sales prices are constant during the budget period

2.) variable costs per unit of output are constant during the budget period

3.) fixed costs are constant in total

4.) sales mix is constant when the company sells more than one product.

These assumptions facilitate the planning process by removing many of the economic

complexities. Instead of planning on the basis of the more complicated non-linear model

on the left, the master budget is very similar to the more easily understood linear model

on the right. In addition, a practical approach for analyzing the differences between

budgeted and actual sales prices, unit cost, sales mix and sales volume.

Conclusion:

A budget is a detailed quantitative plan for acquiring and using financial and other

resources over a specified forthcoming time period.

1. The act of preparing a budget is called The act of preparing a budget is called

budgeting.

2. The use of budgets to control an organization’s activity is known as

budgetary control.

Navratri Event Budget

Provided below is an in list of items that could potentially cause expenses in Navratri Event Budget.

Murti Cost: Rs. 6,501

Pundit Dakshina: Rs. 5,001

Murti Decoration Cost: Rs. 2,000

Daily Prasad Cost : Rs. 1000

Location Costs:Site rental fee Rs.50,000Additional labor Rs.15,000Subtotal Rs.65,000

Rental Needs:Electricity Rs.25,000 Furniture Rs.4,000 Carpeting Rs. 5,000Labor Rs. 4,000Subtotal Rs. 38,000

Food and Beverage Costs:Food/catering Rs.65,000Labor/staff Rs.7,000 Misc. charges Rs.10,000 Subtotal Rs.82,000

Audio-Visual/Entertainment Costs:Recorders Rs.12,000Sound system Rs.26,000 Technical staff Rs.15,000Other Rs.20,000Subtotal Rs.73,000

Lighting Costs:Special lighting (pictures/videos) Rs.12,500Generator/extension cords Rs.7,000 Labor Rs.3,000 Subtotal Rs.22,500

Decorations and Supplies

Stage decor Rs.2,000Stage backdrop Rs.5,00Flowers/plants Rs.1,000Specialty linens Rs.3,000 Misc. charges Rs.1,000Subtotal Rs.7,500

Other Event and Incidental Expense : Rs. 30,000

Income:-

Donation from the People:- Rs. 2,50,000

Danpeti Receipt:- Rs. 50,000

References:

http://www.myaccountingcourse.com/accounting-dictionary/master-budget

http://www.accountingtools.com/master-budget

http://www.businessdictionary.com/definition/master-budget.html

http://accountingexplained.com/managerial/master-budget/

http://www.ehow.com/info_7806988_master-budget.html

http://docs.oracle.com/cd/A60725_05/html/comnls/us/gl/budmet06.htm

http://maaw.info/Chapter9.htm