ACCOUNTING FOR MANAGERSBY

CHITRAK KUMAR(6815)

PANKAJ KUMAR(6813)

RAHUL KUMAR(6821)

AKASH (6886)1

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INTRODUCTION WHAT IS BUDGET AND BUDGETARY

CONTROL CLASSIFICATION OF BUDGETS METHODS CONCLUSION

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INTRODUCTION:

For effective running of a business, management must know:

• where it intends to go i.e. organizational objectives

• how it intends to accomplish its objective i.e. plans

• whether individual plans fit in the overall organizational objective. i.e. coordination

• whether operations conform to the plan of operations relating to that period i.e. control

“Budgetary control is the device that a company uses for all these purposes.”

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WHAT IS A BUDGET?

“ A plan expressed in money.It is prepared and approved prior to the budget period and may show income, expenditure and the capital to be employed. May be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by Zero-based budgeting.”

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WHAT IS BUDGETARY CONTROL?Budgetary control is the use of the comprehensive system of budgeting to aid management in carrying out its functions like planning, coordination and control.

This system involves:

Division of organization on functional basis into different sections known as a budget centre.

Preparation of separate budgets for each “budget centre”.

Consolidation of all functional budgets to present overall organizational objectives during the forthcoming budget period.

Comparison of actual level of performance against budgets.

Reporting the variances with proper analysis to provide basis for future course of action.

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CLASSIFICATION OF BUDGETS

ACCORDING TO ACCORDING TO ACCORDING TO TIME FUNCTION FLEXIBILITY

1. Long term budget 1. Sales budget 1. Fixed budget2. Short term budget 2. Production budget 2. Flexible

budget3. Current budget 3. Cost of Production budget4. Rolling budget 4. Purchase budget 5. Personnel budget 6. R & D budget 7. Capital Expenditure budget 8. Cash budget 9. Master budget

CIMA(chartered institute of management accountants) defines this budget as one “ which, by recognizing the difference in behaviour between fixed and variable costs in relation to fluctuations in output, turnover or other variable factors such as number of employees, is designed to change appropriately with such fluctuations”.

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CIMA defines this budget as “ The summary budget incorporating its component functional budget and which is finally approved, adopted and employed”.

Thus master budget is a summary of all functional budgets in capsule form available in one report.

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This budget gives an estimate of the anticipated receipts and payments of cash during the budget period.

Cash budget makes the provision for minimum cash balance to be maintained at all times.

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Open bal. XXXX

Cash inflow

1) cash sales (+) XXXX

2) Collection from debtor XXXX

3) Sale of fixed assets XXXX

4) Issue of shares/debenture XXXX

5) Misc. income XXXX

Total inflows (A) XXXX

Cash outflows

1) cash purchase XXXX

2) Payment to creditor XXXX

3) Purchase of fixed assets XXXX

4) Repayment of loan/shares/deb. XXXX

5) Misc. exp. XXXX

6) Advance tax/tax XXXX

Total outflows (B) XXXX

CLOSING BAL. (A-B) XXXX

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SALES BUDGET PRODUCTION BUDGET COST OF PRODUCTION BUDGET PURCHASE BUDGET CASH BUDGET

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Sales budget is the most important budget based on which all the other budgets are built up. This budget is a forecast of quantities and values of sales to be achieved in a budget period

Format of sales budget:Open stock xxxProduction (+)xxxClosing stock (-)xxx xxx

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Production budget involves planning the level of production which in turn involves the answer to the following questions:

a. What is to be produced?

b. When is it to be produced?

c. How is it to be produced?

d. Where is it to be produced?

Format of Production budget:Closing stock xxxSales (+)xxxOpen stock (-)xxx xxx

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This budget is an estimate of cost of output planned for a budget period and may be classified into –

• Material Cost Budget

• Labour Cost Budget

• Overhead Cost Budget

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This budget provides information about the materials to be acquired from the market during the budget period.

Format of sales budget:Open stock xxxConsumption of raw material (+)xxxClosing stock (-)xxx xxx

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Q1) A factory which is expected to operate 7000hrs. i.e., at 70% level of activity, furnished details of expenses as under:

variable expense Rs. 1260 semi-variable expense Rs. 1200 Fixed expense Rs. 1800 the semi-variable expenses go up by 10% between 85% and 95% activity

and 20% above 95% activity. Construct a flexible budget for 80%, 90%, 100% activities.

Ans.. Budget (Rs.)

70% 80% 90% 100% Variable expense 1260 1440 1620 1800 Semi-variable 1200 1200 1320 1440 Fixed expense 1800 1800 1800 1800 Total cost 4260 4440 4740 5040

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months product X(units) product Y(unit) January 1000 2800 February 1200 2800 March 1600 2400 April 2000 2000 May 2400 1600Other information given below. Particulars product X(rs per unit) Product Y(rs per unit) Direct material 12.52 19.00 Direct labour 4.50 7.00 Factory o/h 3.00 4.00There will be no opening and closing WIP at the end of any month and finished

good equal to half of the budget sales of the next month should be in stock at the end of each month

You are required to prepareA. Production budget for january to aprilB. Summarised production cost budget

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january february march april

x y x y x y x y sales 1000 2800 1200 2800 1600 2400 2000 2000(+) closing 600 1400 800 1200 1000 1000 1200 800 stock(-) opening 500 1400 600 1400 800 1200 1000 1000 stock Production 1100 2800 1400 2600 1800 2200 2200 1800

total production of X = 6500 Y = 9400

(B) Production of cost budget (Rs)(B) Production of cost budget (Rs)

X Y

Direct material 81250 178600 Direct labour 29250 65800 Prime cost 110500 244400 Factory O/H 19500 37600 Cost of production 130000 282000

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CONCLUSION:

Ψ Preparation of budgets is the first step in the budgetary control system.

Ψ Implementation of budgets is the second phase.

Ψ But preparation and implementation of budgets alone will not achieve much unless a comparison is made regularly between the actual performance and the budgeted performance.

Ψ Continuous and proper reporting makes this possible.

Ψ To ensure the success of budgetary control system, proper follow up action has to be taken immediately for the reports submitted.

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