ACKNOWLEDGEMENT

Analysis of Budgeting Controlling Procedure at KRIBHCO

A

PROJECT REPORT

ON

AT

KRISHAK BHARTI CO-OPERATIVE LTD., HAZIRA 2006-2007

AS THE PARTIAL FULFILMENT OF

MASTER OF BUSINESS ADMINISTRATION,

BHAVNAGAR UNIVERSITYTANK SANJAYKUMAR

M.B.A. (FINANCE)

Preface

This project report is prepared during the vocational training undertaken at KRIBHCO SURAT, on partial fulfillment of the degree in Management of Business Administration.

Theory of any subject is important but without its practical knowledge it becomes useless particularly for the Management students. As a student of the Business Administration, we have studied many theories in the classroom, but only after taking up this project work we have experienced & understood these Management theories & practices in its fullest sense, which plays a very vital role in business field today. The knowledge of Management is incomplete without knowing the practical applications of the theories studied. This training provides golden opportunity for all students, especially when the Management student does not have perfect understanding of the working of a unit.

Hence, this report is designed with the objective to gain practical knowledge & is undertaken on ANALYSIS OF BUDGETING CONTROL PROCEDURE AT KRIBHCO

ACKNOWLEDGEMENTI am glad to express my profound sentiments of gratitude to all who rendered their valuable help for the successful completion of this project report titled, Analysis of budgeting controlLING procedure at KRIBHCO And to know the functions of finance and accounts DEPARTMENT.I record my deep sense of gratitude to Mr. D.K.RAVAL (Mgr.-Account) who had given me a chance to do a project under this roof of KRIBHCO and given opportunity to know the functions of Finance and Accounts department.

Im also thankful and would like to show my special gratitude to Mr.R.K.Aggrawal (F & A), Mr. S.Gajjar (F & A), Mr. N.K.Shahoo (P& A), Mr. S.Goswami (Estate Dept.), Mr. Mukesh Jani (Estate Dept.), Mr. Rajesh Sampat (Stores Dept.), Mr. M. N. Patel Sr. Pvt. Secy. (HRD),who supervised my entire project. I would like to thank sincerely from the deep of my heart as they were the persons who constantly guided me and gave me the practical knowledge of the subject.

As books were the source of our knowledge and data I would also like to thank Mr. P.T. Solanki Asst. Mgr. (Library head) and Mr. Thomas TS, Pvt. Secretary, who helped me whenever required.

My genuine sense of gratitude goes to the respective universities that gave me a chance to brighten my academic qualification that provided me this opportunity to have a practical knowledge of relevant fields.

INDEXSr. NoParticulars

1Fertilizer industry in the service of farmers

2Objective of the Project

3Company Overview

4Research Methodology

5Introduction of budgeting

Meaning

Definition

Source of Budget

Essential of Budgeting

Purpose of Budgeting

Factors Considered

Statement of Expectation

Budget Administration

Types of Budget

Classification of Budget

Budget Formulation Process

Advanced Budgeting Technique - Zero Based Budgeting Advantages of Budgeting Problems and Limitations Of Budgeting

6Budgeting in KRIBHCO

7Budget Process in KRIBHCO

8Conclusion

9Bibliography

Fertilizer industry in the service of farmers

immediately after the Second World War necessitated increasing food grains production and consequently fertilizers consumption. The introduction of fertilizer responsive HYV (High Yielding varieties) of wheat and rice in the mid-sixties proved to be a turning point in Indian agriculture. The expansion in area under irrigation and increasing coverage of HYVs led to a remarkable growth in fertilizer use and crop production. India became self sufficient in food grain production and has emerged as the third largest producer and user of chemical fertilizer in the world. Adoption of an imaginative and innovative approach by the Government of India and the fertilizer

In the initial years, the farmers were reluctant to use fertilizers. The fertilizers industry had to put in considerable efforts to convince farmers regarding the benefits of fertilizer use in crop production. The fertilizer industry also improved the availability of fertilizers at the farmers door by strengthening its dealer network. Conscious of the fact that making fertilizer available alone would not be enough to increase fertilizer consumption and keeping in view that Seeing is Believing and Doing is Learning, the industry conducted a large number of demonstrations at the farmers fields. Even today thousands of fertilizer demonstrations are conducted every year. Group communication method like field days, crop seminars, kisan melas, etc., are undertaken by the industry to increase the level of awareness among farmers.

Soil testing is a vital tool to assess the fertility status of the soil and ensure balance and efficient use of fertilizers. Accordingly, to enable farmers to use fertilizers in balanced proportions, the industry has set up 40 soil testing laboratories (28 static and 12 mobile) and more than 4 lakhs soil samples are tested annually. Intensive efforts are being made by the industry to make the farmers understand the need and importance of soil laid on conservation of natural resources through watershed development; farm level water management; soil conservation and soil reclamation/ amendment.

THE FERTILIZER INDUSTRY introduced the concept of village adoption for overall socio-economic development of the village way back in 1968 in Patrenahalli village in the state of Karnataka. Since then village adoption has become a very effective mode of socio-economic development and now hundreds of villages are being adopted by the industry every year. Besides transfer of improved technology farmers are trained in scientific cultivation, fertigation and post-harvest technology. The fertilizer companies are encouraging farmers to go for crop diversification like horticulture, floriculture, and off season vegetable cultivation to make farming a profitable venture. Social services like empowerment of woman, distribution of school bags to primary school students, girl childs education, camps for medical and veterinary checkup, rural sports, debates, entertainment, agree-club, hand pump installation, etc. are also provided for the benefits of farmers and their families. INTRODUCTION TO FERTILIZER INDUSTRIES INDIAN FARMER FERTILIZER COOPERATIVE COMPANY (IFFCO)

IFFCO was registered as a multi-unit cooperative society on November 3.1967 with an initial membership of 57societies, which contributed sum of Rs 0.549 million to its share capital. In the last over three decades the cooperatives have contributed immensely to the growth of IFFCO and their membership has steadily increased to 37381 with a share capital of Rs. 4210.8 million.

NAGARJUNA FERTILISERS AND CHEMICALS LIMITED (NFCL)

Society has an equity participation of Rs.10.00 Crores in M/s. NFCL, which is involved in manufacturing a wide range of plant nutrients and low toxicity plant protection products.

KRIBHCO SHYAM FERTILIZERS LIMITED (KSFL)

KRIBHCO along with M/s Shyam Basic Infrastructure Projects Pvt. Ltd. Joint Venture company to acquire ammonia - urea fertilizer complex of Oswal Chemicals and Fertilizers at Shahjahanpur, with annual urea capacity of 8.64 lakhs MT.

KRIBHCO Shyam Fertilizers Limited (KSFL) thus formed has been registered on December 8, 2005. KRIBHCO has 60% equity in the Joint Venture Company and management control. Balance 40% equity is held by M/s Shyam Basic Infrastructure Projects Pvt. Ltd.

Total equity contribution of the society is Rs. 420 Crores. OMAN INDIA FERTILISER COMPANY SAOC (OMIFCO)

KRIBHCO along with IFFCO as Indian partner and M/S Oman Oil Company has set up a joint venture fertilizer plant known as OMIFCOof capacity5060 MTPD Urea and 3500 MTPDAmmonia in Oman. Total equity contribution of the Societyis US $ 80 Million. The Role Of The FERTILIZER In The National EconomyAGRICULTUREINDUSTRYSERVICESENVIRONMENT

As critical input in crop production Fertilizer use promotes. It promoters agriculture growth food security & ruralFertilizer industry promotes Use of gas, sulfur etc.

Foreign Exchange savingDistribution network promotes domestic world trade; credit Banking, services, and research, transport and storage services. The proper use of Fertilizers can help in

1-maintainance of soil structure

2-prevention of soil erosion and degradation.

3-control of deforestation

OBJECTIVE OF THE PROJECT

A. PRIMARY OBJECTIVE:

The primary objective of the present study is to understand the techniques of the budgeting control used in this concern, with a view to find out the extent to which the concepts of scientific budgeting control are being applied to them and introduce scientific and practical budgeting controlling.

COMPANY OVERVIEW BIRTH OF KRIBHCOKrishak Bharati Co-operative Limited KRIBHCO, a premier Co-operative Society for manufacture of fertilizer, registered under Multi-State Cooperative Societies Act 1985, was promoted by the Govt. of India, IFFCO, NCDC and other agricultural co-operative societies spread all over the country.Oil & Gas findings in Bombay High and South Basin triggered off the birth of eight new generations fertilizer plants to fulfill ever-growing food needs of the country. KRIBHCO was amongst the first two Projects in the first phase.KRIBHCO has setup a Fertilizer Complex to manufacture Urea, Ammonia & Bio-fertilizers at Hazira in the State of Gujarat, on the bank of river Tapi, near Kawas village, 15 Kms from Surat city and 20 Kms from Surat Railway Station on Surat Hazira State Highway.Late Smt. Indira Gandhi, former Prime Minister of India laid the Foundation Stone on February 5, 1982.The trial production of Urea commenced from November 26, 1985 and within a very short time of 3 months, the commercial production commenced from March 01, 1986. Since then, it has excelled in performance in all areas of its operations.The total Project cost was Rs. 890 crores as against the estimated cost of Rs. 957 crores. This shows a saving of Rs. 67 crores (approximately 7%) in Capital Cost of the Project, which is a rare feature in the history of a Public Sector Unit.In order to serve the farming community better, a Bio-fertilizer Plant of 100 MT per year capacity was commissioned at Hazira on August 15, 1995. An additional capacity of 150 MT was added to that Plant on December 1, 1998. Subsequently, two more Bio-fertilizer Plants, each of 100 MT capacity, were installed at Varanasi, UP and Lanja, Maharashtra onOct 15, 2003 and Oct 01, 2004 respectively. MISSION, VISION & OBJECTIVES

MISSION

To act as a catalyst to agricultural and rural development by selecting, financing and managing projects that are both socially desirable and commercially profitable.

VISIONKRIBHCO will become one of the leading fertilizer producers in the world, funding growth through Efficient production

Efficient diversification

Efficient distribution

Efficient utilization of resources

OBJECTIVES

Main To increase the Urea installed capacity, maintaining its market share. To ensure optimum utilization of existing plant and machinery through proper maintenance

To diversify into other core sectors like power, LNG terminal/port, Chemicals etc.

OtherS To enlarge product-mix through product development

To continue and intensify efforts towards rural development and co-operative movement.

To encourage the use of bio-fertilizers and increase its production capacity.

Registered Office Red Rose House, 49-50,Nehru Place,New Delhi 110 019.

CORPORATE OFFICE A: 8-10, Sector-1, NOIDA-201 301, District: Gautam Budh Nagar (UP). Phone : (0120) (253 46 13, 253 46 29-32, 253 45 64)Voice Mail : (0120) (254 91 12-14)Fax : (0120) (253 71 13, 252 70 04)Website : www.kribhco.net

HAZIRA PLANT SITE PO: KRIBHCONAGAR, SURAT 394 515.Phone : (0261) (286 2766-70)Fax : (0261) (286 0283)Website : www.kribhcosurat.com

CENTRAL MARKETING OFFICE A 8-10, Sector-1, NOIDA-201 301, District: Gautam Budh Nagar (UP). Phone : (0120) (253 46 13, 253 46 29-32, 253 45 64)Voice Mail : (0120) (254 91 12-14)Fax : (0120) (253 4861)

MAJOR MILESTONES FOR HAZIRA PLANT

PIB Clearance for the Project17.04.1980

Land acquisition07.07.1980

Project Zero Date31.03.1981

Foundation Stone laying by Late PM Smt. Indira Gandhi05.02.1982

Project Completed 31.05.1985

Plant Completed

26.11.1985

Mech. Completion of Plants:a. 1st Phase of Ammonia & two streams of Urea plantsb. 2nd Phase of Ammonia & two streams of Urea plants30.04.198431.08.1984

Receipt of gas for - Phase-1 - Phase-218.09.198506.11.1985

Commencement of Trial production - Ammonia - Urea14.11.198526.11.1985

Start of Commercial Production Ammonia & Urea01.03.1986

OTHER PROJECT HIGHLIGHTS:Total Plant Land 1,700 acres

Total Land for Township 100 acres

Cement 15,000 MT

Steel 28,000 MT

Piping 8,80,300inch-meter

Electrical Cabling 700 Kms

Excavation 32Lakhs cum

Concreting 3.0Lakhs cum

Reinforcement 30,000 MT

PLANT DETAIL1. AMMONIA

No of plant

: TwoCapacity of each

Plan

: 1350 MT per day.

Rate of production: 2700 MT/DAY.

Process used: KELLOGG High Pressure Reforming Technology

By product

: Carbon Dioxide (CO2).

Raw Material : Principle Raw Materials used for the production of ammonia are:

Nitrogen gas (N2) Hydrogen gas (H2)Source of Raw Materials:

H2: from Natural gas supplied by O.N.G.C.

N2: from air.

Annual Capacity : 8.91 lakhs MT originally, which has been reassessed and revised upwards to 10.032 lakhs MT wef 01.04.2002Consultants: M/s Kellogg, (at present Kellogg Brown & Root), USA supported by M/s Fact Engineering and Decision Organisation (FEDO), India.BRIEF PROCESS DESCRIPTION:The ammonia process involves steam reforming of natural gas. Natural gas is used as feed and fuel in the ammonia plants.The following are the basic steps in the ammonia manufacturing process: Desulphurisation of natural gas

Steam Reforming of natural gas

Shift Conversion

Carbon Dioxide removal

Methanation

Ammonia Synthesis

Refrigeration system

2. UREA

No of plant

: Four

Capacity of each

Plan

: 1100 MT per day.

Rate of production: 4400 MT/DAY.

Process used: SNAM PROGETTI ammonia stripping

Process.By product

: Carbon Dioxide (CO2).

Raw Material : Principle Raw Materials used for the production of ammonia are:

Ammonia (NH3)

Carbon Dioxide (CO2)

Source of Raw Materials:

NH3: from own Ammonia Plant.

CO2: from own Ammonia Plant

Annual Capacity : 14.52 lakhs MT originally, which has been reassessed and revised upwards to 17.292 lakhs MT wef 01.04.2002Consultants: M/s. Snamprogetti, Italy Supported by M/s. Project & Development Ltd. (PDIL), India. BRIEF PROCESS DESCRIPTION:

BRIEF PROCESS DESCRIPTIONThe production of urea by ammonia stripping process involves the following steps: Synthesis

Purification and Recirculation

Concentration and prilling

Steam and Power Generation:The steam generation plant supplied by FOSTER WHEEL POWER, UK consist of 3 boilers (2 running & 1 stand by) capable of producing 275 MT steam per boiler per hour at 105 at pressure and 510C to supply steam to the process plant and power generation. The boilers are of single drum Monowall Balanced draft type, complete with all accessories and mountings. The boilers can fired to 100% MCR with gas. All three boilers are connected to a single common header and from their distribution of steam to different use points.

In power plant with help of boiler, heater, deaerator and other instrument steam is generated. From this steam about 65% is used in production plant and about 35% is used for power generation. Power is generated with the help of two turbo generators.

The power plant consists of two extractions cum condensing type T.G. sets each of 15 MW capacities, supplied by BHEL. Out of this KRIBHCO require 25 MW power and remaining supplied to G.E.B.

CAPACITY OF PLANT

1. Presently the society has Gas based Ammonia and Urea Complex, which is one of the largest in the cooperative sector in the world, situated on the bank of the river Tapti near Surat in Gujarat. Two Phase of Ammonia Plant 1520 MTDP (Metric Ton Per Day) Capacity each and Two Phase of Urea Plant 2620MTDP Capacity each. Annual capacity of produces is 16.24 Lacs Tones of Urea.

2. The production capacity of captive power plant is 30 Mega watts.

3. The Production capacity of Bio-Fertilizer Plant is 250 MT per annum-Surat, 150 each MT per annum-Varanasi, Lanza Maharashtra.

4. Seed Processing -1.21 Quintals in 2003-2004, highest ever production so far.

FINANCIAL PERFORMANCESource of finance: The following is the graphical representation of Sources of Finance:

DISTRIBUTION OF FINANCE:The following is the graphical representation of Distribution of Finance:

kribhco NETWORKa) Head Office

: Fertilizer Plant, Noida Delhi.b) Plant

: Surat Gujarat.bio-fertilizer Plant: Surat (Gujarat), Varanasi (UP), Lanza (Maharastra)

Seed Processing Plant: Andhra Pradesh, Gujarat, Haryana, M.P., Punjabc) Zonal Office

: Bhopal, Banglore, Luckhnow, Chandhigarh.d) State Mktg.Office: Jaipur, Ahmedabad, Chennai,Mumbai,Bangalore, Patna, Luckhnow, Guwahati, Dehradun, Kolkatta.

MARKETING ACTIVITIES

As per its byelaws, the society has been marketing its product(s) only through Cooperative and Institutional Agencies. Besides providing its product(s) to Apex Level Cooperative Federation/ Institutions in most of the states, it has also been supplying its product(s) to grass-root level societies in the States of Uttar Pradesh, Andhra Pradesh, Rajasthan, Uttaranchal, Bihar and the focal points in Punjab, apart form Krishak Bharati Seva Kendras (KBSKs). The direct supplies to Primary Agricultural Cooperative Societies (PACSs) / Focal point not only helps in timely availability and increase in fertilizer consumption, but also provide maximum benefits to these societies for making the financially strong.

aWARDS

the Society has been honored with various prestigious awards for its excellent performance during the year some of which are mentioned below:

Ugadi Puraskar (Samaikya Bharat Gourav Satkar)-2005 bestowed on Shri V.N.Rai, Managing Director, KRIBHCO by Delhi Telugu Academy for outstanding contribution in fertilizer Industry & Cooperative Sector.

Award from the South Gujarat Chambers of Commerce & Industry for outstanding performance in Pollution Control and outstanding Achievement in Agriculture & Agro Industry.

Indira Gandhi Rajbhasha Award 2003-2004 (Second) was awarded by Sh.Shivraj Patil, Honble Home Minister, Government of India, for maximum use of Hindi.

Third prize of 6th All India Awards of Hyderabad Chapter of Public Relations Society of India for CD/Video Production.DEPARTMENTSKRIBHCO plant site Surat having 1379 employees including both officers and staff. KRIBHCO is having functional organisation structure. There are 15 departments and each having linking system related to work. Each department is having their individual required man power for performing their jobs.

For e.g. Production Department is doing an operation job of various machines like compressors, pumps, blowers, valves etc. The maintenance of above machines and equipments are done by Mechanical, Instrument, Electrical and Civil Departments based on job specified. The material required for above work are arranging by purchase and store department with requirement from various maintenance department after taking financial clearance from finance department and competent authority.

MAN POWERDepartmentNo of Employees

Finance and Accounting62

Personnel and Administration82

HRD9

Security101

Material55

Medical32

Mechanical210

Transportation29

Fire and safety45

Purchase and store56

Instrumentation90

Electrical/Civil101

MS System13

Laboratory54

Production(HEAO Plant) Phase-I and Phase-II440

Total1379

Contract Labours1600

Total ManPower 2979

ORGANISATION STRUCTUREKRIBHCO-Surat having their Site-in charge designated as operations director, who is responsible for operations, maintenance, administration, financial decisions, maintaining pollution norms, which is given by Gujarat Pollution Control Board and Central Pollution Control Board and Other welfare activities. Under him there are six General Manager working, who are heading the department like Personnel and Administration, Finance and Account, production, Maintenance, Commercial (stores and Purchase) and Technical.

The individual Departments General Managers are responsible for smooth and efficient operation of plant and other related matters. The Chief Managers, who are working under General Managers, are heading Sub Section of Main Department. Under him there are individual Plant Senior managers, who are responsible for plant production target, day-to-day activities related to plant or Machineries preventing and break down maintenance. Under senior manager, there are Managers/Deputy Managers/Senior Engineers working who are responsible for round the clock plant production, safety and machine maintenance. There are field engineers/Chief Operators/Unit operators, who are responsible for plant operations and maintenance round the clock. grade system in KRIBHcoplant site haziraAManaging Director

BDirector (Operations/Marketing/Finance)

B1Executive Director

CSenior General Manager/General Manager

DJoint General Manager/Chief Manager

ESenior Manager/CMO

FManager

F1Deputy Manager/Senior Manager M.O.

GSr. Assistant Manager/ Sr, Area Manager/Sr. Engineer/Foreman

G1Assistant manager/Engineer/Assistant Foreman

G2Assistant Engineer/Assistant Manager

HJoint Manager/P.S.

Future PlansA joint venture fertilizer project in Oman:

Society has invested US$ 80 million as equity in Oman India Fertilizer plant which has achieved commercial production on 14th July 2005. The Project has annual capacity of 16.52 lakhs MT Urea and 2.50 lakhs MT surplus ammonia and has been built at a cost of US$ 969 million. Marketing of Urea produced by this plant has since been commenced by the society.Hazira Phase-II

Society is in the process of setting up a state of the art mega size ammonia plant of capacity of 1850 MTDP and urea plant of capacity of 3250 MTDP at existing fertilizer complex at Hazira. Existing infrastructure facilities will be utilized resulting in saving of cost. Plant will be based on natural gas and we have energy consumption.

Gujarat state energy generation limited(GSEG)

Society has diversified to power sector and has invested Rs. 48.75 crores being 30% equity in Gujarat State Energy Generation Limited, a joint venture company promoted by government of Gujarat, GSEG is operating 156 MW Power Plant at Mora, District Surat.KRIBHCOs Hazira plant is also going to be expanded. The society is also exploring the possibilities to set up a 200 MW liquid fuel based power project at Jhunjhunu, Rajasthan. Society has deposited a development security of Rs.25 lakhs with Rajasthan State Electricity Board (RSEB). Minister of power has given No Objection Certificate (NOC).

RESEARCH METHODOLOGYObjective

To gain the familiarity with the phenomenon of budget or to achieve new insights into it.

To know how the budget is being prepared in KRIBHCO.

To have the practical knowledge and details about the budget.

To find new recommendations or suggestions for the budget, that is being prepared in KRIBHCO.

Problem to investigate We have very limited time period for the training and project report so we prepared it within the sort time.

All the data are realistic but I have to keep it confidential from the outsiders, so I cant disclose that data. I tried very hard to get the data from the officers due to MR RAMVILAS PASVAN came for visiting of KRIBHCO. All the employees were busy for the preparation of that function.

Research methodology Type of the data: For the survey we have to collect two types of data:

1. Primary Data: This project no need any primary data.

2. Secondary data.

Source of the data: All the data collected from the officers of the Finance and Account Department. The data is stored in krims LAN system that is the shared network used in KRIBHCO. Instrument of the data collection

a. Primary Data: There is no primary data has collected

b. Secondary Data: All the data are secondary, that I have collected form the Finance and account Department. INTRODUCTION OF BUDGETINGMEANING OF A BUDGETA budget is a comprehensive and coordinated plan, expressed in financial terms, for the operations and resources of an enterprise for some specific period

1) It is a comprehensive and coordinated plan.

2) It is expressed in financial terms.

3) It is a plan for the firms operation and resources.

4) It is a future plan for a specified period.

A budget is the plan of the firms expectations in the future. Planning involves the control and manipulation of relevant variables- controllable and non-controllable, and reduces the impact of uncertainty. It makes management active to influence the environment in the interest of the enterprise. A budget expresses the plan in formal terms and helps to realize the firms expectations. It is a comprehensive plan in the sense that all activities and operations are considered when it is prepared. It is a budget of the enterprise as a whole, Budgets are indeed prepared for various segments of the enterprise, but they are components of the total budget- the master budget. The budget for a segment or department will not have much significance unless it is a part of the master budget for the entire enterprise. The comprehensive, or the master, budget is prepared after coordinating budgets for various segments of the enterprise. If budgets for various segments of the enterprise are not prepared jointly and in harmony with each other, the master budget will lose much of its importance and may even prove to be harmful in realizing the firms expectations.

For operational purposes, a budget is always quantified in financial terms. Initially the budgets may be developed in terms of varieties of quantities, but finally they must be expressed in the money unit (rupees, dollars or pounds, etc). For example, purchase and production budgets will involves units of raw-material and finished products respectively, the labour budget will involve men and labour-hours, or the sales budget may involves territories and customers to be served. But a coordinated and comprehensive budget can be developed only when all these budgets are expressed in some common denominator: the money unit undoubtedly serves as the common denominator.

A budget is a mechanism to plan for firms all operations or activities. The two aspects of every operation are: revenues and expenses. The budget must plan for and quantify revenues and expenses related to a specific operation. Planning should not only be done for revenues and expenses, but the resources necessary to carry out operations should also be planned. The planning of resources will include planning for assets and sources of funds.

Time dimension must be added to a budget. A budget is meaningful only when it is related to a specified period of time, the budget estimates will be relevant only for some specific period. For example, a production target of 10 lacks units or a profit target of Rs. 50 lacks has no meaning unless it is stated that when these targets have to be met. As we have stated previously, a firm may have its long range, broad objectives, such as a long run survival, maximum sales, maximum long run profit, employee satisfaction, customer satisfaction, social responsibilities, etc., expressed in vague, qualitative terms. But to achieve these qualitative expectations of the firm, the short-term objectives or goals, expressed in quantitative terms, must be related to the time period within which they have to be achieved.

DEFINITION

Planning is selection of objectives, policies, procedures and programmers from among various alternatives for achievement of enterprises objectives. It is thus essentially a decision making process affecting futures course of action of an enterprise or department.

BUDGETING

A budget is essentially a plan, a statement of expected results expressed in numerical term i.e. term or quantity terms.

The institute of Cost and Management Accountants of U.K. has defined Budget as a financial or quantitative interpretation prior of to a defined period of time of a policy to be pursued for that period to attain a given objective

What is a Budget?

Simply stated, a budget is a quantified, planned course of action over a definitive time period. It is an attempt to estimate inputs and the costs of inputs along with associated outputs and revenues from outputs. Creating a budget is important because it:

Forces an organization to carefully consider the expected demand for its products and services and the resources required to meet that demand translates the organization's higher priorities into the appropriate resources required to achieve those priorities Highlights potential problems in sufficient time to take corrective actions Creates a baseline against which actual results can be compared.

The Primary Sources for a BudgetThere are three primary inputs to a typical budgeting process:

Plansan organizations plans and priorities should be an important driver to the budgeting process. Budgets should reflect management's planned change initiatives, related costs, and expected results.

Performancepast and current performance, as well as that of like organizations, should contribute to the budgeting process. Consideration needs to be given to uncontrollable external changes that could dramatically affect the operation and its results. Examples of such events include rising energy costs, economic slowdowns, foreign threats, shifts in technology, and changing global markets.

Peoplegood intra- and inter-organizational communications are essential to developing both good plans and good budgets. From customers to suppliers to internal personnel, the higher the quality of information, thought, and input into the process, the more likely a more realistic budget will result.

A remindera budget is simply a result. The quality and meaningfulness of a budget is only as good as the process that led to its development. The Difference between a Budget and a Forecast

One thing is virtually certain about a budgetit will be wrong. Thats because nobody can accurately predict the future, regardless of what process, information, tools, or models are used. That is why many organizations also develop forecasts throughout the budget execution period. The purpose of a forecast is to continually update the expected results for the period based upon the latest information available.

Many things can cause a budget to be wrong, such as changes in:

Customer demand

Suppliers processes and costs

Internal procedures and/or priorities

Government policy

Technology

The global economy

Global stability.

ESSENTIALS OF BUDGETINGA successful and sound budgeting system is based upon certain prerequisites. These prerequisites represent management attitude, organisation structure and managerial approaches necessary for the effective and efficient application of the budgeting system. The following are some of the important essentials or fundamentals of a successful budgeting:

1) Top management support.

2) Clear and realistic goals.

3) Assignment of authority and responsibility.

4) Creation of responsibility centres.

5) Adaptation of the accounting system (responsibility accounting).

6) Full participation.

7) Effective communication.

8) Budget education.

9) Flexibility.

Top Management Support:-

A budgeting system will be an utter failure if it is not initiated and supported by top management. Top management must realise that budgeting is not merely an accounting device, but it is an important management tool. Top management must:a) understand the nature and characteristics of budgeting;b) be convinced that this particular approach to managing is preferable for their situation;c) be willing to devote the effort required to make it operative;d) support the programme in all its ramification;e) view the result of the planning process as performance commitments.A company will be able to implement the budget plans proficiently and effectively if top management has a positive attitude towards budgeting and gives directions for budget implementations. It is, therefore, one of the most difficult problems of the financial manager or the budget director to sell the idea of budgeting to the managing director and other top officials.

The support of top management for the budgeting system implies that it is confident about its capability to plan the future course of action and run the enterprise successfully. Top management must be convinced that it can predict future with reasonable accuracy; and that realistic objectives and goals can be predetermined. Top managements confidence in the budgeting process makes the subordinates more confident and conscious. It has been shown by the behavioural research that subordinates of a manager will be approximately three times more cost-conscious than the subordinates of a manager who is not cost-conscious.

Top management should not only have a positive attitude towards budgeting but should also devote necessary time and resources to the preparation and implementation of budgets. Budget estimates are generally prepared by the line managers, but top management has the responsibility of coordinating budgets of different departments regarding resources allocation. Top management should also initiate a follow-up to see that there is effective implementation of budgets.

Clear and Realistic Goals:-

Budgeting is a means to achieve goals and objectives. All planning presupposes that objectives and goals have been clearly and unambiguously established. Budgeting will not succeed if the goals achieved are not clear; budget implementation will not be systematic. In the absence of goal clarity, employees will lack a proper direction; the efforts of management will be wasted. The financial manager or budget director, therefore, must ensure that objectives and goals have been properly laid down. As far as possible, objectives and goals should be written in formal terms. But too much formality should be avoided as it can make budgeting system inflexible.

The enterprise objectives and budget goals to be accomplished through budgeting should be reasonable and realistic they should be capable of attainment. Budget goals should not be set at too high or too low a level. Goals set at a very high level are impossible to attain and, as a result, have a depressing effect on the employees morale. Once the employees know that they are unrealistic and unattainable, they do not put any serious efforts to achieve them. Goals set at a very low level do not provide any challenge to employees. Their achievement does not require any special effort and, therefore, employees do not feel motivated. The enterprise objectives and budget goals must provide a real challenge and should be capable to motivating employees. What are the realistic objectives and goals for an enterprise depend upon a host of factors, such as size of the enterprise, managerial philosophy and quality, age of the enterprise, nature of activities and many psychological and other factors. Goals set realistically provide better motivation to employees in the long run.

Assignment of Authority and Responsibility:-

A sound organisational structure is essential for the success of the budgetory system. Authorities and responsibilities of each manager should be clearly identified and established. A sound organisational structure and a clear-cut assignment of authorities and responsibilities provide an effective means to achieve enterprise objectives and budget goals in a coordinated and efficient manner. The budgetory system should be established in terms of the assigned authorities and responsibilities; the performance of each manager should be evaluated in terms of the assigned authorities and responsibilities. If there is no synchronization between the budgeting system and the organisation structure of the enterprise, the planning and control system would not be effective. In the absence of the clear-cut assignment of authorities and responsibilities either manager cannot be held accountable, or they will be held accountable for those activities for those activities for which they have no responsibility.

The type of organisational structure for an enterprise will depend upon the leadership style of top management. An enterprise may have a formally defined organisational structure or an information organisational structure. Usually, firm have a combination of both formal and informal organisational structure. Whatever the organisational structure, the budgetory system should be tuned in accordance with such structure.

Creation of Responsibility Centers:-

A small firm can possible be managed by an individual or a small group or individuals. But the activities of a large firm cannot supervise by an individual or a few individuals. For effective control of all activities, a large firm is divided into meaningful segments, departments or divisions. Each sub-unit has certain activities to perform and its manager is assigned specific authority and responsibility to carry out those activities, and is held responsible for his decisions affecting those activities. The sub-units of an enterprise for the purpose of control are called responsibility centres or decision centres. A responsibility centre is a sub-unit of an organizational under the control of a manager who has the responsibility for the activities of the responsibility center. The responsibility center can be a big unit, such as a production department or a small unit, such as a case section of an accounting department or a machine in the production department. The important criteria for creating a responsibility center are that the unit of the organization should be separable and identifiable for operating purposes, and that the performance measurement should be possible.

For planning and control purposes, responsibility centers are usually classified into three classes:

a) Cost centres

b) Profit centres and

c) Investment centres.

Cost Centre:-A cost centre is a responsibility center where the manager is responsible only for cost or expanses incurred in the sub-unit. He is not responsible for profit or investment in the centre. Thus costs are the primary planning and control data in a cost centre. The performance of the managers is evaluated by comparing the actual expenses incurred with the budgeted expenses for the cost centers. For control purposes the manager attention is focus upon the variance between actual and budgeted expenses.

In a cost center the consequences of decisions are measured by cost alone the accomplishment of the cost center are not measured in financial terms. Thus the effectiveness and efficiency of the cost centre cannot be properly evaluated. A cost center spending the least is considered as the best. This kind of analysis, of course, ignores the contributions made by the center to the firms overall profitability.

Profit Centre:-A profit centre, also known as a contributions margin centre, is a responsibility center where the manager is responsible for the both costs and revenues and thus, for profit. A profit center provides more effective assessment of performance as both costs and revenues are measured in financial terms. A profit centre is more relevant for profit planning and control as it allows the measurement of both output and input units of the centre.

To ensure effective control through the profit centre control system, the controllable and non controllable activities should be identified. The manager of a profit center should be held responsible only for those costs and revenues which are controllable by him through his decisions. The indirect costs are usually non- controllable therefore, they may not be allocated to a profit centre. If the allocation of indirect cost avoided, one may think in terms of contribution margin centers, rather that profit centers, contribution margin is the difference between variable costs and revenues of the center.Investment Center:-An investment centre is a responsibility center where the manager is responsibility for costs and revenues as well as the investment in assets used by the centre. In an investment center, performance is assessed not only by profit, but by relating profit to the investment. Thus, return on investment is used as the performance evaluation criterion in an investment center. In a sense, investment centres are treated as separate firms where the manager is responsible for the overall activities affecting costs, revenues and investment.The creation o responsibility centres costs centres, profit centres and investment centre is essential for successfully implementing plans (budgets), attaining objectives and accomplishing control. A budgetary system should be tailored to the organisational sub units the responsibility centres.

Adaptation of the Accounting System:-The accounting system catering only to the needs of external users is not adequate for the purpose of profit planning and control and internal management. Budgeting is based on the data generated by the accounting system. Control of performance involves the comparison of actual performance or results with the plant performance. Therefore the accounting system should suitable adapted to facilitate the planning and control process it should be structured around the areas of responsibility. In fact a sound budgetary system needs the certain of a responsibility accounting system. A responsibility accounting system is primarily oriented towards the organisation responsibilities and is a means to achieve affective control. The accounts are classified and prepared by responsibilities centers. An accounting system tailored to the responsibility structured of this enterprise generates data that are relevant to the planning and controls system. A cost accounting system has two primary aims:

a) To measure the cost of production and

b) To furnish data for planning and control.

Historical cost accounting has paid more attention to the measurement of cost of production than planning and control functions. In responsibility accounting, the emphasis is on planning on control accounts are classified on responsibilities basis, not on a product cost basis. The cost accumulated for planning and control purposes can easily be recast for product costing purpose. But it is difficult to use cost data accumulated for product costing purposes for planning and control.Full Participation:-Full participation of managers and there subordinates at all levels should be shout in developing the budgeting system. The participation should be meaning full and real. If employees have effectively participated in developing budget goals and targets, they will make special efforts to see that the budgeting process succeeds. A meaning full participation creates a positive motivation. Participation tends to increase commitment, commitment tends to heighten motivation; motivation which is job oriented tends to make managers work harder and more productively and harder and more productive work by manager tends to enhance the companys prosperity therefore participation is good. A non serious efforts on the part of top management to seek the participation of managers and there subordinates will not motivate them, at this time, it procedure negative motivation and makes employees less productive.

To seek meaning full participation of all persons in the enterprise is a difficult task. Some persons do not at all react to any screen of participation while other reacts very favourably. All individual should be motivated to participate in the budgeting process. All the participation of all should be sought in budget preparation and implementation, the suggestion made by various persons should be carefully evaluated and analysed before they are accepted.

If should be understood well that the responsibility to prepare budgets lies on the line managers. The financial manager or the budget director is a staff manager, and his role is to coordinate and supervise in the preparation of budgets. The budgets develop by the line executive will be there own budgets they will have no reason to say the budgets can not be carried out. Thus it is essential that those line executive who must achieve the plans and goals must be deeply involved in providing the planning and decisional inputs for their respective departments. The procedure makes possible effective implementation of participation principle in management.

Effective Communication:-

Communication is the process of transmitting thought or information form one person to another. The basic purpose of communication is to bring mutual understanding between two or more persons. It is a device to bring people together in an enterprise. A sound budgeting system requires effective communication of enterprise objectives and budgets goals and means of implementing budgets through the organisation so that a unified effort may be directed to accomplish those objectives and goals.

Communication is fundamental and vital to all decision. It should not be taken for granted. For an adequate flow of information, it must be ensured that communication is effective. Effective communication implies transmission of information as well as understanding. The receiver may hear a sender but may not understand what he means. An information has been effectively communicated if the receiver has understood its intended implication. This does not mean that, for effective communication, the receiver must agree with the sender; communication has taken place if the receiver at least understands what the sender means to convey. A comprehensive system of budgeting is not only based on a sound communication system, but also helps to improve the effectiveness of communication within as enterprise. Budgeting is formal way of communicating plans, objectives and budget goals to various responsibility centres. It brings about the harmony of understanding between managers and their subordinates. Budget, developed through full participation and tailored around the organisational structure of authorities and responsibilities, provides for better understanding of goals and plans that is not otherwise possible.

Budget Education:-We have noted earlier that participation of all should be sought in preparing budgets and that the budgets are prepared by line executives, though the final approval is accorded by top management. Participation can be meaningful only when people at all levels of management are convinced of the usefulness of budgets, understand the nature and characteristics of budgets, and know the role which they have to play in profit planning and control. In fact, for the success of budgeting, every one in the enterprise should have confidence in the budgeting system and should be involved and committed to it. The line executives, who actually prepare the budgets, should not only be confident of their ability to plan for the future with reasonable precision, but also should understand the technicalities of budgeting. They should know now to readjust budgets when the circumstances in order to seek their meaningful participation and involvement. This requires a continuous budget education. The employees of an enterprise must be educated about the nature, characteristics value and method of budgeting. They should also be taught how to interpret the budget result and how the performance is evaluated through budgets.

Flexibility:-The budgeting system should be flexible enough to take advantage of all opportunities that arise from time to time and are not covered by the budget. Inflexibility impairs the initiative and freedom of managers and subordinates in making decisions. A rigidly administered budgeting programme dominates the business and imposes strait jacket in implementing the budgets. On the other hand, if the budgeting programme is administered in a flexible and sophisticated way, managers at all levels get greater freedom in applying the budgets. In fact budgeting is a device to bring all levels of management together into the decision-making process of the enterprise. Once the budgets have been developed with full participation of all and have been approved, top management can delegate more authority and responsibility to lower levels of management can exercise better control over them through budgets. In other words, budgeting allows more freedom to management at lower levels; within the broad framework of budgets they are free to make decisions. Top management would exercise a tight control over lower levels of management and would put restrictions on them to make decisions in the absence of a sophisticated budgeting system. A flexible and comprehensive budgeting permits management to readjust plans when situation arises.

The principal of flexibility is particularly significant in cost control. The expenses budgeted for an anticipated level of activity cannot be compared with the actual expenses incurred for an actual level of activities to find out the variance. For a rational answer, we should compare actual expenses with budgeted expenses for the actual level of activity. Expenses budgets should not be used rigidly, therefore. Variable or flexible expense, budgets are employed to make a meaningful comparison of the actual and budgeted expenses when the anticipated circumstance change. It is a financial r quantitative interpretation of policy;

It involves selection of policy from among various alternatives;

It is must be for a specified period say a year, half year or quarter during which the above policy is to be followed;

It is futuristic in character;

The above policy is to be followed to achieve to achieve the set objectives inmost economical and efficient manner.

PURPOSES OF BUDGETINGSimple stated the process of preparing and using budgets to achieve management objectives is called budgeting. More specifically, a comprehensive profit planning and controlling or budgeting is a systematic and formalized approach for stating and communicating the firms expectations and accomplishing the planning, coordination, and control responsibilities of management in such a way as to maximize the use of given resources. It is a management technique; in fact it is a way of managing. It is the only comprehensive approach to managing so far developed that, if utilized with sophistication and good judgments, fully recognizes the dominant role of the manager and provides a framework for implementing such fundamental aspects of scientific management as management by objectives, effective, participative management, dynamic control, continuous feedback, responsibility accounting, management by exception, and managerial flexibility.The major purposes of budgets or budgeting are:

1. To state the firms expectations / goals in clear; formal terms to avoid confusion and to facilitate their attainability.

2. To communicate expectations to all concerned with the management of the firm so that they are understood, supported and implemented.

3. To provide a detailed plant of action for reducing uncertainty and for the proper direction of individual and group efforts to achieve goals.

4. To coordinate the activities and efforts in such a way that the use of resources in maximized.

5. To provide a means of measuring and controlling the performance of individuals and units and to supply information on the basis of which the necessary corrective action can be taken.

IMPORTANT FACTORS TO BE CONSIDERED FOR FORMULATION AND IMPLEMENTATION OF BUDGET1. Determination of Key Factor

The most important factor in formulation and implementation of budget is the limiting factor or key factor i.e. who there is any limitation in respect of raw-material capacity utilization of the plant; sales, finance human resources etc. having considered the limiting factor, the production and sales targets are to be fixed and based on the functional budget: master budget is to be prepared.

Now, in KRIBHCO major factor gas availability is the production key factor. If in market gas is not available so definitely production should be less. Some time high price of gas and some another factors are consider so management purchase raw materials are less so should be less production. So this is a major factor in kribhco.2. Participation and Co-operation of the person responsible for preparation and Implementation of Budget

Next important point to be considered is the participation and cooperation of the person responsible for preparation and implementation of the budget. In fact, efficacy of the budget i.e. the controlling aspect entirely depends on the persons who are responsible for preparation and implementation of the budget. Unless a person is serious in preparation and implementation of the budget, the objective of cost minimization and wealth maximization will not be achieved.3. Control Technique

The budget may be so prepared and analyzed that it can be used as a technique for control.STATEMENT OF EXPECTATIONS As observed earlier, a firm establishes broad, longrange objectives. The long-run objectives are pursued in successive, shortrun steps in the future periods of time. A budget is a means of expressing goals to be achieved in short-run in formal terms. It establishes a harmony between the short-run goals and the long-run objective of the firm. The targets of expected performance are late down when a budget is prepared. These targets are directional and motivational in nature. They direct individual and group efforts and operations towards and common goal. They motivate individuals since expected targets are used to evaluated performance. A budget helps to clarify the assumption underlying future goal. For example, if a sales target for the next year is formulated, the budget gives details about the prices, quantities, sales efforts, territories to be served and so on. The assumption underlying the budgets or goals are based on a number of factors, such as economic conditions, political and social environment, supply and demand force, competition, consumers attitude, technological changes, etc. the short-term goals and policies should be modified whenever these factors change and should be incorporated in the budgeting system.

Communication:-A more explicit statement of goals and means to achieve them does not imply that goals will be accomplished. The people of an enterprise should know what the goals are; they should understand and support them. It is the function of too management to inform people at lower level of management about the performance expected of them. Top management uses budgeting as a vehicle to communicate goals or expectation of employees. A clear written communication of goals through budget will help employees to understand support and accomplish goals through a proper coordination or goals and means.Planning:- Planning is essential to accomplish goals. It reduces uncertainty and provides direction to the employees by determining the course of action in advance. Budgeting compels management to plan the comprehensive and coherent way. It is essentially a formalised planning of managements intended action and desired result. Formalised planning indicates the responsibility of management and provides on alternative to groping without direction. It should realised that budgeting is not merely for casting although forecasts from the basis of budgeting. Forecasting is the estimate of the future environment within which the company will operate. Budgeting or planning, on the other end, involves the determination of what should be done, how the goals may be reached, and what individuals or unites are to assume responsibility and be held accountable. Budgets provide and orderly way to proceed to attain goals and also provide a time schedule for future actions to produce measurable results.

Coordination:-

Coordination is a major function of budgeting. Coordination implies striking a proper balance labour, material, and other resource so that the goals are attained at a minimum cost. The activities of various departments must remain in harmony with each other. For example, there should be coordination between the activities of the production department and the sales department. It is undesirable to produce a product which cannot be profitably sold by the sales department. Likewise, the sales department should not create demands for the products which cannot be produced by the production department. Coordination between the purchase department and the production department is also required. The production department should not undertake to manufacture the product for the purchase department cannot procure materials, and the purchase department should not accumulate that material which will not be needed for production. The point to be emphasised is that the activities of all departments must mesh. It is through budgeting that the activities of various departments are coordinated, and unnecessary wastage of resources and efforts is stopped. Budgeting requires each manager to establish a proper rapport between the activities of his department and that of other departments. Any imbalance in the relationship between the department activities should be identified and corrected.

Control:-

Once a comprehensive and coordinated plan of action has been developed with the cooperation and participation of employees and has been communicated to them, each employee is required to implement plan and accomplish goals of the enterprise. As observed earlier, the budget indicates the performance expected of employees. A budget may, therefore, be used to serve as an index for measuring employees performance. It, thus, acts as a control device. The actual performance of employee is compared with the budgeted performance to provide a feedback-whether or not employees achieved the level of performance expected of them. The actual performance should be adjudged favorable or unfavorable in the light of budgets and changed conditions. The factors which underlie the preparation of budgets are subject to change. Therefore, this point should be taken care of while evaluating the performance of employees. Once the causes for the difference between the actual and budgeted performance have been identified, a corrective action should be initiated. It is noteworthy that may other criteria such as past performance or the other workers doing the same job, exits to measure employees performance; but budgets are frequently used for this purpose because of their objectivity and clarity of goals and the means of accomplishing goals. It should, however, be remembered that budget is just a method of control it is not a control system in itself.

BUDGET ADMINISTRATIONIt need be emphasised again that the budget preparation is a line function, while the organisation and administration of budgeting is a staff function. The line executives have the responsibility of deciding what the plans or budgets are to be. It is not the function of the staff organisation to decide what the plans are to be for areas of responsibility other then its own. The primary responsibility of the staff organisation is to assist line executives in preparing budgets by providing data and technical advice and coordinating the budgets of various departments to from a master budget.

Budget Committee:-

A joint effort of all managers is needed to prepared budgets. All should participate in setting goals, developing plans and formulating policies. Generally the administration of budgeting may be delegated to a budget committee. The members of budget committee consist of executive from each department. Frequently members from production, sales and finance are included in the budget committee. The budget director is the overall incharge of the budget committee. The budget director may be the controller or the chief accountant or an independent person. Sometimes the membership of the budget committee may be confined to the budget director, the financial manager, the managing director and the economist. Special budget committee may also be formed such as a production budget committee or a sales budget committee.

The major functions of the budget committee are:

a) To provide general guidelines for preparing budgets.

b) To offer technical advice.

c) To receive and review individual budgets.

d) To suggest changes.

e) To reconcile divergent activities.

f) To coordinate budgetory activities.

g) To approve budgets with or without revisions.

h) To scrutinize budget reports later on.The budget committee, in fact is a management committee. It brings to gether activities of all departments in a coordinated way and controls those activities in an effective manner. It should be remembered that the budget committee has an advisory role only; but its advice is very significant and is usually carried out by managers. As its first function, the committee decides on general policies for the enterprise and review and supplies economic information. It sees that all departments prepare budgets, provides them technical advice, whenever needed and reviews individual budget estimates. On reviewing budget estimates, it may suggest a modification. After necessary revision, the budgets will be finally approved by the budget committee. The committee also ensures that the budget goals of the departments are not in conflict with the enterprise objectives. It coordinates the budgetory activities of various departments and reconciles the divergent views of the line executives. The budget committee also enforces control by scrutinizing the budget reports and determining the responsibility for favorable and unfavorable results.

Budget Director:-The overall responsibility of the functions of the budget committee lies on the budget director or the budget officer. He is responsible for drawing up a detailed time-table for the preparation of budgets and making necessary adjustments and calculations to consolidated individual budgets into a master budget. The other functions of the budget director include:

a) Designing necessary procedures and forms.

b) Selling the idea of budgeting to all levels to management.

c) Educating the executives in the mechanics of budgeting.

d) Collecting, analysing and coordinating data.

e) Evaluating and reporting actual performance.

The budget director is usually the controller or the chief accountant. He should be unbiased and objective in his approach. He is a staff expert, who provides technical assistance to the line executives. He should keep good rapport with line managers and should not enforce his advice upon them.

Budget Manual:-

It is usually desirable to express objectives, goals, procedures, organisational structure and authority and responsibility in writing. These matters are explicitly set out in a budget manual. The budget manual is a written set of instructions and pertinent information that serves as a rule book and a reference for the implementation of a budget programme. It tells what to do, how to do it, when to do it and which form to do it on.TYPES OF BUDGETS

All enterprises make plans some in a systematic and formal way, while others in informal manner. However, they differ in their budgeting practices. Generally, the large and medium firms have a comprehensive system of budgeting they prepare budget for all of their important operations; but the small firms and some large and medium firms do not have a comprehensive system of budgeting they prepare budgets for of their operations. We have emphasised previously that a comprehensive budgeting involves the preparation of a master budget with a complete package of the component budgets. The three important components of the master budget are:

1) Operation budgets,

2) Financial budgets, and

Operation Budgets:-

Operation budgets relate to the planning of the activities or operations of the enterprise, such as production, sales and purchase. Operating budget is composed of two parts;

a) A programme or activity budget and

b) A responsibility budget.

These represent two different ways of looking at the operations of the enterprise; but arriving at the same results.

The programme or activity budget specifies the operations or functions to be performed during the next year. One logical way to prepare this kind of budget is to plan for each product the expected revenues and their associated cost. The programme budget exhibits the expected future in an impersonal manner and is helpful in ensuring balance among various operations or functions an enterprise.

The responsibility budget specifies plans in terms of individual responsibility. The basis purpose of this kind of budget is to achieve control by comparing the actual performance of a responsible only for the controllable activities. An individual should be involved to prepare those parts of the operating budget which related to his are of responsibility.

These two ways of depicting the operating budget are significant, because the programme budget is primarily a planning process while the responsibility budget is a control device. The programme budget needs to tailored to the organisation structure of the enterprise, but the responsibility budget must be. Therefore, the plan or programme budget must be converted into the control or responsibility budget before the actual implementation, and communicated to the persons involved in the execution of the plan so that they may precisely know what is expected of them.

There are two ways in which the operating budget may be prepared;

a) periodic budgeting and

b) continuous budgeting.

The method of periodic budgeting involves the preparation of the budget for the forthcoming year without providing for a comprehensive revision as the budget period passes. The budget period is generally dividing into months; that the annual budget consists of the monthly estimates.

Continuous budgeting provides for a system of revising the budget for the changing conditions continuously. The method involves the preparation of a tentative annual budget with the provision that the month or quarter just ended is dropped and a month or quarter in the future is added. Continuous budgeting forces management constantly to think in concrete terms about its short range planning.

In case of the stable firms, which can forecast with reasonable precision, periodic budgeting can be used. Continuous budgeting would, however be desirable in case of those firms which operate under uncertainties of consumer demands and are exposed to a greater degree of cyclical fluctuations.Financial Budgets:-

Financial budgets are concerned with the financial implications of the operating budgets the expected cash inflows and cash outflows, financial position and the operating results. The important components of financial budgets are: cash budget, pro forma balance sheet and income statement and statements of changes in financial position.

Cash budget is the most important component of the financial budgets. A good management would keep cash balance at optimum level; too little cash endangers the liquidity of a company, and too much cash tends to impair profitability. The major objective of the cash budget, therefore is to plan cash in such a way that the idle cash in the most profitable manner.

In addition to a cash budget, it is also useful to prepare a project, or pro forma, balance sheet and income statement. A cash budget reveals the expected cash position of an enterprise while pro forma financial statements give information as to the future assets, liabilities and income statement items. The pro forma statements are prepared to identify the anticipated results of the budgeted operations. The analysis of the present and past financial statements indicates the direction of change in the financial position and performance of the enterprise. The future can be planned to follow the past direction or to chance it. The preparation of the cash budget and pro forma statements compels management to look ahead and balance its policies and activities.

The cause of the change in the financial position of an enterprise is better revealed by the statement of change in financial position. The statements have become quite significant now-a-day and is being prepared as a third financial statement by the firms. The statement very clearly shows the sources and use of the firms financial resources. The projected statement of change in financial position can be prepared from the pro forma balance sheets and income statement to show the effect of the budgeted operations on the financial resources of the firm and, accordingly, the firm can plan its policies to pay dividends, refund debt, acquire fixed assets, borrow loans or issue share capital.

CLASSIFICATION OF BUDGETThe budget may be so broadly classified as Master Revenue Budget, Operation Budget and Capital Budget.

Master Revenue Budget is based on the following functional Budget:-

I. Cash budget

II. Selling budget

III. Production budget

IV. Procurement budget

V. Plant utilization budget

VI. Cost of production budget

Material budget

Purchase budget R & D cost budget

Labour cost budget Plant utilization budget Maintenance cost budget

Production overhead budgetVII. Selling and distribution cost budget

Capital Budget is based on the following elements

I. Source of finance

II. Capital cost estimates

III. Expenditure and phasing of expenditure

IV. Commitment and phasing of commitment

REVENUE BUDGETA letter duly signed by Chief Manager (F&A) is sent to all departments asking them to submit the likely requirements of the year, before specific date (mostly last day of November). They will also have to send the justification with adequate proof for the sum they demand. Concerned department while submitting their proposals will also submit the report containing details of expenditure done under the same head last year.

From all the information thus available, a preliminary budget formation takes place. Subsequently discussions are held at various levels to check the validity of the budget so formed and finally after passing through all checks it is presented before the Board of Directors for final approval.

The above written procedure is not as simple as it seems and takes 4-5 months. The concerned department also has to ensure that it neither asks for too much or too less amount for in first case it would be questionable for excess amount lying unutilized, whereas in later case they would not be given any additional amount to purchase in excess of budget.CAPITAL BUDGETThe other major budget is capital budget. The formation of capital budget is on the same pattern and follows same procedure as revenue budget.

It is important to understand distinction between capital and revenue expenditure. It benefits of an expenditure are expected to accrue for long time; the expenditure is of capital nature. Any expenditure whose benefit expires within the accounting year or expenditure that merely seeks to maintain the business or keep assets in good working condition is revenue expenditure.

On face of it, this distinction seems easy, but many of times it becomes quite complicated to differentiate between these two expenditures.

Capital budget involves the planning to acquire worth while projects, together with the timings of the estimated cost and cash flows of each project. Such projects require large some of funds and have long term implications for the firm. Capital budgets are difficult to prepare because estimate of the cash flows over a long period have to be made which involve a grater degree of uncertainty.

The capital budgets are generally prepared separately from the operating budgets. In many companies, there is a committee separate from the budget committee. To appropriate funds for capital investment projects. In the capital budgeting, the profitability of each project has to be carefully evaluated. Various techniques can be used to determine the profitableness biases and capable of clearly indicating whether the project should be accepted or not.BUDGET FORMULATION PROCESSCapital budgeting decisions are generally broken down into two levels-departmental levels and the organization vides level in any firm preparing a capital budget. There are instances whose break-down process follows other lines, like, e.g., geographically on the basis of a country or some world region in the case of multinationals or intermediate levels are added between the departmental and the organization level, however, two-level capital budgeting procedure is found to be in vogue in most business enterprises.

Every department head usually determines the various possible capital expenditures which are considered economically desirable for his department. This is bound to result in number of conflicting proposals being mooted. To illustrate, the production manager would like the space to be converted into a canteen; and so on. Every department head is required to submit sound arguments in support of his particular proposal and these may be so couched as to bring out their anticipated contribution to efficiency, employee moral, their welfare, etc.

It is quite observed that the three proposals cannot be effectively reconciled within the space available and, therefore, top management has to decide and select the alternative to be implemented. The important points to note is that the proposal happen to be mutually exclusive inasmuch as, if one is adopted, others are rejected. Such a difficult situation can be explained by the example of the manager of the department store deciding to discontinue the operations of its cafeteria and to allocate the space to childrens wear, whereupon the managers of higher priced as well as low priced were file their proposals for the space thus made available, but a decision either way on these requests would depend upon the basic policy of the store regarding the image it would like to have among its shoppers of children readymade garments the stress it would like to place either on low price with bargain or on high price with quality and the decision might get involved in a conflict between two possible images.

On the other hand, competing proposals are not mutually exclusive in the same manner as conflicting proposals are but they may not be equally desirable from the point of view of the larger interests of the enterprise. Therefore, it becomes necessary for the department head to rank the various competing proposal in some order of printing before submitting his proposal to top management.

For example, the factory manager may put in a proposal for the installation of sophisticated equipment; and the accounting department stakes its claim for a brand new computer to facilitate record-keeping operations. Taken in isolation, every proposal seems worth implementing to the extent that it would affect sizable savings in the present labour cost of the respective departments.

It is at this stage that the financial manager would enter into the picture with the object of bringing to bear a rational attitude on the consideration of the competing proposals. He examines not only the prospective profit but also the feasibility and desirability of making the proposed investments in terms of the cost of funds.

Since the budget is a blue print of the desired plan of action to be followed a given period care must be taken preparation of the budget. Normally, Chief Executive is the Chairman of the Budget Committee who is consultation with the Senior Executives takes an overall view of external and internal factors of the organization and sets production sales target for the budget period. Subsequently, the same is conveyed to respective department who will prepare the functional budget based on the overall target fixed by the chief executive or the Chairman of the Budget Committee. Once the functional is prepared, the same is sent to the budget committee / Finance Director who will review the same and put up to the Chief executive / Board of Directors for their approval. Once the budget is approved by the competent authority it is a Blue Print of desired plan of action according to which future action is to be made. Thus budget is a two-tier communication starting from top to bottom indication the basic target of production and sales for the organization and from bottom to top indicating the detailed action plan to achieve the target for the approval of the competent authority. BUDGETORY CONTROLBudget is an important instrument in controlling the course of action to be followed for the given future period for the purpose of maximization of the profit of an organization. But more preparation of budget will be show piece unless the same is followed and actual activities are measured in terms of budget to ensure that the actual is going on in correct directions. In fact, budget may be used for control purposes and utility of budget depends on the budgetory control process. The Institute of Cost of Management Accountants of U.K. has defined budgetory control as The establishment of Department Budgets relating to the responsibilities of the executives to the requirements of a policy and the continuous comparison of actual with Budgeted results either to secure by individual action the objectives of that policy or to provide a firm basis for its revision. Thus, a budgetory control system ensures continuous comparison of actual results with the budgeted results and brings out variances on a periodical basis say a month or a quarter. Deviations or variances are required to be further analyses to locate the areas where there is inefficiency or shortfall so that action may immediately be taken to avoid wasteful losses/wastage.

ADVANCED BUDGETING TECHNIQUE - ZERO BASED BUDGETING

Zero based budgeting is a most advance budgeting technique where the executives have to justify the funds require in the budget. They have also to justify the existing activities. The zero based budgeting techniques implies that the executive has to justify why he needs funds even for existing activities that is to say he must start from zero level. Funds are very scarce and various decision packages are to be kept in existing activities or other profitable channel. Therefore, zero based budgeting ensures the following steps:-

I. Preparation of decision package

II. Ranking and selection of decision package

Although, this advanced budgeting technique has been adopted in U.S.A. in sixties, it is still in its infant stage in India. Some of the private sectors have accepted this but none of the public sector has yet adopted this technique.

ADVANTAGES OF BUDGETINGTo reiterate budgeting is a management tool; it is a way of managing. Many benefits are derived from budgeting, although it is a means not an end in itself. Budgeting is a feed forward process; it makes an evaluation of the variables likely to affect future operations of the enterprise. It predicts future with reasonable precision and removes uncertainty to a greater extent. The following are some of the more significant advantages of budgeting:

1) Budgeting compels management to plan for future. The budgeting process forces management to look ahead and become more efficient in administering the business operations. It instills into managers the habit of evaluating carefully their problems and related variables before making any decisions.

2) Budgeting helps to coordinate, integrate and balance the efforts of various departments in the light of the overall objectives of the enterprise. This results in goal congruency and harmony among the departments.

3) Budgeting facilitates control by providing definite expectations in the planning phase that can be used as a frame of reference for judging the subsequent performance. Undoubtedly, budgeted performance is more relevant standard for comparison than past performance, since past performance is based on historical factors which are constantly changing.

4) Budgeting improves the quality of communication. The enterprise objectives, budget goals, plans, authority and responsibility and procedures to implement plans are clearly written and communicated through budgets to all individuals in the enterprise. This results in better understanding and harmonious relations among managers and subordinates.

5) Budgeting helps to optimise the use of the firms resources capital and human; it aids in directing the total efforts of the firm into the most profitable channels.

6) Budgeting increases the moral and thus, the productivity of the employees by seeking their meaningful participation in the formulation of plans and policies, bringing a harmony between individual goals and the enterprise objectives and by providing incentives to perform more effectively.

7) Budgeting permits to focus management attention on significant matters through budgetory reports; thus, it facilitates management by exception and thereby saves management time and energy considerably.

8) Budgeting measures efficiency, permits management self evaluation and indicates the progress in attaining the enterprise objectives.PROBLEMS AND LIMITATIONS OF BUDGETINGBudgeting is a systemic approach to the solution of problems. But it is not fool proof; it suffers from certain problems and limitations. The major problems in developing a budgeting system are:

a) Seeking the support and involvement of all levels of management.

b) Developing meaningful forecasts and plans, specially the sales plan.

c) Educating all individuals to be involved in the budgeting process and gaining their full participation.

d) Establishing realistic objectives, policies, procedures and standards of desired performance.

e) Applying the budgeting system in a flexible manner.

f) Maintaining effective follow-up procedures and adapting the budgeting system whenever the circumstances change.

Management must consider the following limitations in using the out getting system as a device to solve managerial problems:

1) Budgeting is not an exact science; its success hinges upon the precision of estimates. Estimates are based on facts and managerial judgment. Managerial judgment can suffer from subjectivism and personal biases. The adequacy of budgeting thus depends upon the adequacy of managerial judgment.

2) The installation of a perfect system of budgeting is not possible in a short period. Business conditions change rapidly; therefore budgeting programme should be continuously adapted. Budgeting has to be a continuous exercise; it is a dynamic process. Management should not loss patience; they should go on trying various techniques and procedures in developing and using the budgeting system. Ultimately they will achieve the success and reap the benefits of budgeting.

3) A skillfully prepared budgetary programme will not itself improve the management of an enterprise unless it is properly implemented. For the success of the budgetory programme, it is essential that it is understood by all and that the managers and subordinates put concerted efforts for accomplishing the budget goals. All persons in the enterprise must have full involvement in the preparation and execution of budgets, otherwise budgeting will not be effective.

4) Budgeting is a management tool a way of managing not the management. The presence of a budgetory system should not make management complacent. To get the best results of managing, management should use budgeting with intelligence and foresight, along with other managerial techniques. Budgeting assists management; it cannot replace management.

5) Budgeting will be ineffective and expensive if it is unnecessarily detailed and complicated. A budget should be precise in format and simple to understand; it should be flexible, not rigid in application.

6) The purpose of budgeting will be defeated if carelessly set budget goals conflict with enterprise objectives. This confuses means with the and results. Budget goals are the definite targets to achieve the overall enterprise objectives. They must be in harmony with enterprise aims.

7) Budgeting will hide inefficiencies instead of revealing them if a proper evaluation system lacks. There should be continuous evaluation of the actual performance. Standards also should be re-examined regularly.

8) Budgeting will lower morale and productivity if unrealistic targets are set and if it is used as a pressure tactic. To some extent budgeting may be used as a pressure device, but its extent must be carefully determined.

BUDGETING IN KRIBHCO

As per the Buy laws of KRIBHCO, the annual budget is required to be approved by the Board of Directors after the same is recommended by the Executive Committee of the Board.

The budget preparation is made much ahead of the commencement of the budget period based on the production and sales of the current year and expected production and sales for the next period for which budget is required to be made. High level committees under the Chairmanship of Managing Director consider the various factors and fixes production and sales target as well as and energy consumption factor for ammonia. Based on this, detailed circular is issued by Head Office Finance department to all the departments, Production, Personnel Sales etc. for preparation of detailed budget giving justification for each item. The three main annual budgets prepared are as under:-

I. Revenue Budget which is supported by Production Budget, Sales Budget, Procurement Budget and Advance Budget

II. Project Capital Budget

III. Capital Budget for normal additions

After scrutinizing the various budget provisions and their justification Head Office, Finance prepares the above budget and put up the same for recommendation of the Executive

Committee and approval of the Board after the same is duly approval by the Managing Director. Once the budget is approval by the Board, the is circulated to divisional head for further circulation to functional head so that the functional head must execute the work in terms of the budget. Budget gives the overall limit through which each section or department is to act and no additional expenditure can be made without further appropriation from the competent authority. Along with the budget for the next year, revised budget of the current year is also prepared and submitted to the Board for approval.

Head Office, Finance also prepares a report to the ministry as well as Board of Directors indicating the budgeted profit, actual profits and variances.

BUDGET PROCESS IN KRIBHCOREVENUE BUDGET PROCESS BUDGET SUBMITTED

ALL DEPERTMENT FINANCE & ASSETS DEPARTMENT

BOARD OF DIRECTORSGENERAL MANAGER F&A

MANAGING DIRECTOR

HEAD OFFICE

CAPITAL BUDGET PROCESS

BUDGET SUBMITTED ALL DEPERTMENT

MS DEPARTMENT

HEAD OFFICE

MANAGING DIRECTOR

BOARD OF DIRECTORSCONCLUSION

Planning and Bud