budgetary control2
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BUDGETARY CONTROLAS A CONTROL TOOL
Presented byTonmoy Haldar
MBA-2nd year
MAGNETS
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Topics to be covered
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INTRODUCTION:
For effective running of a business, management mustknow:
where it intends to go i.e. organizationalobjectives
how it intends to accomplish its objective i.e. plans
whether individual plans fit in the overallorganizational objective. i.e. coordination
whether operations conform to the plan of operations relating to that period i.e. control
Budgetarycontrol is the device that a company
uses for all these purposes.
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WHAT ISA 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 beemployed. 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 likeplanning, coordination and control.
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Classification of Budgets
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TIME
Long term
Short term
Current
Rolling
FUNCTION
Sales
Production
Cost of production
Purchase
Personnel
R&D
Capital Expenditure
Cash
Master
FLEXIBILITY
Fixed
Flexible
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1. SALES BUDGET:
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.
2. PRODUCTION BUDGET:
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?
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3. COST OF PRODUCTION BUDGET:
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
4. PURCHASE BUDGET:
This budget provides information about the materials tobe acquired from the market during the budgetperiod.
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5. PERSONNEL BUDGET:
This budget gives an estimate of the requirements of
direct labour essential to meet the production target.This budget may be classified into
a. Labour requirement budget
b. Labour recruitment budget6. RESEARCHAND DEVELOPMENT BUDGET:
This budget provides an estimate of expenditure to be
incurred on R & D during the budget period.A R&D budget is prepared taking into consideration the
research projects in hand and new R & D projects to betaken up.
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7. CAPITAL EXPENDITURE BUDGET:
This is an important budget providing for acquisition ofassets necessitated by the following factors:
a. Replacement of existing assets.
b. Purchase of additional assets to meet increased production
c. Installation of improved type of machinery to reduce
costs.
8. CASH BUDGET:
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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9. MASTER BUDGET:
CIMA defines this budget as The summary budgetincorporating its component functional budget and which isfinally approved, adopted and employed.
Thus master budget is a summary of all functional budgets incapsule form available in one report.
10. FIXED BUDGET:
This is defined as a budget which is designed to remainunchanged irrespective of the volume of output or turnover
attained.This budget will, therefore, be useful only when the actual levelof activity corresponds to the budgeted level of activity.
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11. FLEXIBLE BUDGET:
CIMA defines this budget as one which, by recognising thedifference in behaviour between fixed and variable costs inrelation to fluctuations in output, turnover or other variablefactors such as number of employees, is designed to changeappropriately with such fluctuations.
12. PERFORMANCE BUDGETING:
These days budgets are established in such a way so that eachitem of expenditure is related to specific responsibility centreand is closely linked with the performance of that standard.
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13. ZERO BASE BUDGETING:
The zero base budgeting is not based on the incremental
approach and previous figures are not adopted as the base.
Zero is taken as the base and a budget is developed on thebasis of likely activities for the future period.
A unique feature of ZBB is that it tries to helpmanagement answer the question, Suppose we are tostart our business from scratch, on what activities would
we spent out money and to what activities would we givethe highest priority?
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Costs involved in a business
A classification
Fixed
Committed
Discretionary
Variable
Discretionary
Engineered
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The cost which varies directly in proportion with every increase ordecrease in the volume of output or production is known asvariable cost. Some of its examples are as follows:
Wages of labourers Cost of direct material
Power
The cost which does not vary but remains constant within a givenperiod of time and a range of activity in spite of thefluctuations in production is known as fixed cost. Some of its
examples are as follows: Rent or rates
Insurance charges
Management salary
The cost which does not vary proportionately but simultaneouslydoes not remain stationary at all times is known as semi-variable cost. It can also be named as semi-fixed cost. Some ofits examples are as follows:
Depreciation
Repairs
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Committed fixed costs consist largely of thosefixed costs that arise from the possession ofplant, equipment and a basic organization
structure. For e.g
once a building is erected and a plant is installed,nothing much can be done to reduce the costs
such as depreciation, property taxes, insuranceand salaries of the key personnel etc. withoutimpairing an organizations competence to meetthe long-term goals.
Fixed Costs::Committed Costs
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Fixed Costs::Discretionary
Costs Discretionary fixed costs are those which are
set at fixed amount for specific time periodsby the management in budgeting process.These costs directly reflect the top
management policies and have no particularrelationship with volume of output. Thesecosts can, therefore, be reduced or entirelyeliminated as demanded by the
circumstances For e.g.
R&D costs, Mgmt Costs, ADV & promo
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Variable Costs::Engineered
Costs
Engineered variable costs are those variable
costs which are directly related to the
production or sales level. These costs exist inthose circumstances where specific
relationship exists between input and output.
For e.g.
in an automobile industry
Relation between parts & final car
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Variable
Costs::Discretion
ary costs
Discretionary costs is generally linked with
the class of fixed cost. However, in the
circumstances where management haspredetermined that the organization would
spend a certain percentage of its sales for the
items like research, donations, sales
promotion etc., discretionary costs will be ofa variable character.
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Thus, an increase in discretionary variable
costs is due to the authorization of
management whereas an increase inengineered variable costs is due to the
volume of output or sales.
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QUESTIONS
???
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Thank
You!!!!
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