Tuesday, September 15, 2009



BUDGET AND BUDGETARY CONTROL

01. Budget:
v A plan of future activities normally expressed in financial terms.

v Not a mere 'forecast', a ‘prediction’ or a ‘guesstimate’ or 'estimate.
v But a well-conceived plan which shows the desired level of profitability of the company as a whole.

v "A financial and/or quantitative statement prepared and approved prior to a defined period of time of the policy to be pursued during that period for the purpose of attaining a given objective" - by Institute of Cost and Works Accountants (UK).

v Briefly - "a predetermined statement of management policy during a given period which provides a standard for comparison with the results actually achieved".

02. Budgetary Control:
Definition -
"the establishment of departmental budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actuals with budgeted results either to secure by individual action or through executive direction, the objective of that policy or to provide a basis for its revision." - by The Institute of Cost and Works Accountants (UK).

The Budgetary control system involves -
v Establishment of targets.
v Comparison of actuals with the targets and
v Acting upon results to achieve maximum profitability.

Functions
v Making budget for future activities.
v Using budget to control activities.
v Briefly - it concerns with planning, organising and controlling all the financial and operating activities of the firm in the forthcoming period.
v De Paula illustrates Budgetary Control through an analogy with the navigation of a ship across the seas.
v Log book of Navigating officer - factors that caused misadventure - report by him to captain for correct course of ship.

03. Objectives:
v To plan the allocation of business resources, so as to achieve maximum profitability.
v To communicate plans and targets to executives responsible for their execution.
v To bring about co-ordination between the activities of technique business.
v To motivate executives to achieve targets.
v To provide a yard stick for comparison with targets.
v To show managements where action is needed to remedy a situation.
v To centralise control.
v To decentralise responsibility on to each executive involved.
v To combine the ideas and aspirations of all levels of management.
v To act as a guide and director during unforeseen contingencies.

04. Advantageous:
v Instrument of planning.
v Tool of co-ordination.
v Delegation of authority and responsibility
v Checking tool.
v Control of costs.
v Accounting records
v Controlling the Income and Expenditure

05. Limitations:
v Future is uncertain.
v Inflexible nature
v A costly system.
v Not a substitute for management - only a tool.
v Lot of paper work.
v Lack of co-ordination among departments - negative effect.
v Responsibilities may overlap.
v Resistance to change.

06. Reasons for failure:
v Too much of expectation.
v Poor organisation.
v Inadequate accounting system.
v Failure to obtain co-operation.
v Failure to analyse and ascertain causes of variances.
v Failure to revise the estimates i.e., lack of flexibility.

07. Organisation for budgetary control:
v Creation of budget centres:
v With a budget centre there may be smaller areas to which costs are attributable - called 'a cost centre'.
v 'Cost Centre' - " A location, person, or items of equipment or a group of these, in or connected with an undertaking in relation to which costs may be easily and conveniently ascertained and used for purposes of cost control"

v Good accounting system.
v Better knowledge about the system.
v Organisation chart.
v Establishment of a Budget Committee.
v Preparation of Budget manual
v Budget period.
v Determination of the 'key factor' or limitation factor.
v Laying down 'level of activity'.

08. Budget procedure:
THE BUDGET PROCEDURE
ESTABLISH OBJECTIVES
BUDGET AND PLANS PREPARED BY BUDGET CENTRES
CORDINATED BY BUDGET COMMIITTEE
ACTUAL PERFORMANCE RECORDED
FINAL BUDGETS AGREED
COMPARISONS MADE
FEED BACK FOR FUTURE CONTROL
VARIANCES INVESTIGATED
REMEDIAL ACTION WHERE POSSIBLE

09. Classification of Budget:
v Fixed Budget and flexible budget.
v Fixed budget - “a budget which is designed to remain unchanged irrespective of the level of activity actually attained".
v Flexible budget - “is a budget which is designed to amend the budget figures as the level of output changes".

10. Various Railway Budgets:
v Railway Budget.
v Zero-based budgeting
v Performance budgeting.
v Earnings budget.
v Integrated budget.
v Fuel budget.
v Stores Budget
v Budget of manufacture operations.
v Works, Machinery and Rolling Stock Budget.
v Cash budget.

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