Dibrugarh University B.COM 5TH SEMESTER MANAGEMENT ACCOUNTING NOTES UNIT-4


Budget and Budgetary control

UNIT – IV


Q1. What is Budget and Budgetary control?

Ans: Budget: A budget is the monetary or/and quantitative expression of business plans and policies to be pursued in the future period of time. The term budgeting is used for preparing budgets and other procedures for planning, co-ordination and control of business enterprise. According to ICMA, “A budget is a financial and/or quantitative statement prepared prior to defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective.” In the words of Crown and Howard, “A budget is a pre-determined statement of management policy during a given period which provides a standard for comparison with the results actually achieved.”

 Budgetary control: Budgetary control is the process of determining various budgeted figures for the enterprises for the future period and then comparing the budgeted figures with the actual performance for calculating variances, if any. First of all budgets are prepared and then actual results are recorded. The comparison of budgeted and actual figures will enable the management to find out discrepancies and take remedial measures at a proper time. The Budgetary control is a continuous process which helps in planning and co-ordination. A budget is a means and budgetary control is the end-result.

According to Brown and Howard, “Budgetary control is a system of controlling costs which includes the preparation of budgets, co-coordinating the department and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.” Wheldon characterizes budgetary control as ‘planning in advance of the various functions of a business so that the business as a whole is controlled.’

Q2. What are the objectives of budgetary control?

 Ans: Budgetary control is essential for policy planning and control. It also acts as an instrument of coordination. The main objectives of budgetary control are as follows:

1. To ensure planning for future by setting up various budgets. The requirements and expected performance of the enterprise are anticipated.

2. To co-ordinate the activities of different departments.

3. To operate various cost centers and departments with efficiency and economy.

4. Elimination of wastes and increase in profitability.

5. To anticipate capital expenditures for future.

6. To centralize the control system.

7. Correction of deviations from the established standards.

8. Fixation of responsibility of various individuals in the organization.

Q3. What are the advantages and disadvantages of Budgetary control?

Ans: Advantages of Budgetary control

The budgetary control system helps in fixing the goals for the organization as a whole and concerted efforts are made for its achievements. Some of the advantages of budgetary control are:

1. Maximization of profit: The budgetary control aims at maximization of profits of the enterprise. To achieve this aim, a proper planning and co-ordination of different function is undertaken. There is a proper control over various capital and revenue expenditures. The resources are put to the best possible use.

2. Co-ordination: The working of different departments and sectors is properly co-ordinated. The budgets of different departments have a bearing on one another. The co-ordination of various executives and subordinates is necessary for achieving budgeted targets.

3. Specific aims: The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving some specific aims.

4. Tool for measuring performance: By providing targets to various departments’ budgetary control provides a tool for measuring managerial performance. The budgeted targets are compared to actual results and deviations are determined. The performance of each department is reported to the top management.

5. Determining weakness: The deviations in budgeted and actual performance will enable the determination of weak sports. Efforts are concentrated on those aspects where performance is less than the stipulated.



6. Corrective action: The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest.

7. Consciousness: It creates budget Consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.

8. Introduction of incentive scheme: Budgetary control system also enables the introduction of incentive schemes of remuneration. The comparison of budgeted and actual performance will enable the use of such schemes.


Following are the disadvantages of budgetary control:

1. Uncertain Future: The budgets are prepared for the future period. Despites best estimates made for the future, the predictions may not always come true. The future is always uncertain and the situation which is presumed to prevail in future may change.

2. Budgetary revisions required: Budgets are prepared on the assumptions that certain conditions will prevail. Because of future uncertainties, assumed conditions may not prevail necessitating the revision of budgetary targets. The frequent revision of targets will reduce the value of budgets and revisions involve huge expenditures too.

3. Correlation and co-ordination of various budgets is expensive: Maintaining correlation and co-ordination among the various budgets is an expensive matter which may not be possible to afford by small firms. Hence, the system may not be employed by small firms.

4. Conflict among different departments: Budgetary control may lead to conflicts among functional departments. Every departmental head worries for his department goals without thinking of business goal. Every department tries to get maximum allocations of funds and this raises a conflict among different departments.

5. Depends upon support of top management: Budgetary control system depends upon the support of top management. The management should be enthusiastic for the success of this system and should give full support for it. If at any time there is a lack of support from top management then this system will collapse.



Q4. Write short notes on:

1. Performance budgeting: The performance budget is a budget based on functions, activities and projects which focus attention on the accomplishment, the general and relative importance of the work to be done and the service to be rendered rather than upon the means of accomplishments such as personnel, service, supplies, equipment etc. Under this system, the functions of various organizational units would be split into programmes of activities, sub-programmes and component schemes, etc. and estimates would be presented for each.

Performance budgeting involves:

a. Development of performance criteria for various programmes;

b. Assessment of performance of each programme and by each responsibility unit;

c. Comparison of the actual performance with the budget;

d. Undertaking periodic review of the programme with a view to make modifications as required.

2. Production Budget: A production budget is a forecast of the total output of an organization. Production budget is prepared for the number of units to be produced and also for the cost to be incurred on materials, labor and factory overheads. Two important considerations are involved in the preparation of production budget:

    What is to be produced?

     When is it to be prepared?


The preparation of production budget involves the following stages:

a. Production planning: A proper production planning schedule is essential for preparing production budget. The number of physical units to be produced is determined. Production planning will ensure a smooth production schedule.

b. Consideration of plant capacity: The number of units of different products to be produced should be determined and the capacity which the plant will be able to work throughout the budgeted period should be decided.

c. Stock quantity to be held: The quantity of finished goods to be carried forward should be decided. This quantity will depend upon a number of factors like sales potential, storage facilities available and cost of the stock.

d. Considering sales budget: The production budget is fixed with reference to sales budget. The sales budget will provide a guideline for production planning. If both budgets are not co-ordinated then there may arise problems of either selling the whole stock or of producing it. In case the sales are not undertaken as per schedule then production should be reduced or vice-versa.


3. Zero-base budgeting: Zero base budgeting is the latest technique of budgeting and it has an increased use as a managerial tool. In zero base budgeting every year is taken as a new year and previous year is not taken as a base. The budget for this year will have to be justified according to present situation. Zero is taken as a base and likely future activities are decided according to the present situations.

Process or steps involved in zero base budgeting:

a. The objective of budgeting should be determined. When the objective is clear, than efforts will be made to achieve that objective.

b. The extent to which zero base budgeting is to be applied should be decided. Whether it should be used for all operational areas or it should be applied in some areas only should be decided beforehand.

c. The next step in zero base budgeting is developing of decision packages. A decision package is a document that identifies a specific activity in such a manner that management can evaluate and rank it against other activities competing for limited resources, and decide whether to approve or disapprove it.

d. Cost and benefits analysis should be undertaken. We should consider the cost involved and the likely benefits to accrue.

e. The final step involved in zero base budgeting is concerned with selecting, approving decision packages and finalizing the budgets.

4. Cash budget: A cash budget is an estimate of cash receipts and disbursements during a future period of time. It proceeds various other budgets like materials budgets and research and development budget. “The cash budget is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlet”.

The cash receipts from various sources are anticipated. The estimated cash collections for sales, debts, bills receivables, interests, dividends and other incomes and sale of investments and other assets will be taken into account. The amounts to be spent on purchase of materials, payment to creditors and meeting various other revenue and capital expenditure needs should be considered. Cash forecasts will include all possible sources from which cash will be received and the channels in which payments are to be made so that a consolidated cash position is determined.

 

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