Budgetary Control Meaning and Need for Budget Everyone Is familiar with the Idea of a budget because It Is essential In every walk of our life – national, domestic and business. A budget is prepared to have effective utilization of funds and for the realization of objectives as efficiently as possible. Budgeting is a powerful tool to the management for performing its functions (I. E. , formulating plans, coordinating activities and controlling operations etc. ) efficiently.
COMA London defines budget as, “A plan quantified In monetary terms prepared and approved prior to a defined period of time usually showing planned Income to be enervated and or expenditure to be incurred during that period and the capital to be employed to attain a given objective. ” Budgetary Control Budgetary control is applied to a system of management and accounting control by which all operations and output are forecasted as far ahead as possible and actual results when known are compared with budget estimates.
COMA, London defines budgetary control as – The establishment of the budgets relating to the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted result either to secure by individual action the objectives of that policy or to provide a firm basis for its revision. Budget, Budgeting and Budgetary Control Rowland and William in their book entitled Budgeting for Management Control has given the deference between budget, budgeting and budgetary control as follows: “Budgets are the individual objectives of department, etc. Whereas budgeting may be said to be the act of bulldog budgets. Budgetary Control embraces all these and In addition includes the science of planning the budgets themselves and the utilization of such budgets to effect an overall management tool for the business planning and control. Thus, a budget is a financial plan and budgetary control results from the administration of the financial plan. Functional Budgets A functional budget Is a budget which relates to any of the functions of an undertaking, e. G. , sales, production, research and development, cash etc. He following functional budgets are generally prepared : Budget: Prepared by: I) Sales Budget including Selling and Distribution Cost Budget ii) Production Budget “I) Materials Budget Sales Manager Production Manager Purchase Manager ;v) Labor and Personnel Budget Personnel Manager v) Manufacturing Overhead Budget Production Manager VI) Administration Cost Budget v”) Plant Utilization Budget Finance Manager ix) Research and Development x) Cash Budget Sales Budget R & D Manager Sales being the principal budget factor, sales budget is the most important budget and forms the basis 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. Every effort should be made to ensure that its fugues are as accurate as possible because this is usually the starting budget. The Sales Manager should be made directly responsible for the preparation and execution of the budget. The sales budget may be prepared according to products, sales territories, types of customers, salesmen etc. In the preparation of the Sales budget, the sales manager should take into consideration the following factors: 1.
Past Sales Figures and Trends 2. Salesman’s Estimates 3. Plant Capacity 4. Availability of Raw Materials and Supplies 5. General Trade Prospects 6. Orders in Hand 7. Seasonal Fluctuations 8. Financial Aspects 9. Adequate Return on Capital Employed 10. Competition Production Budget Production Budget is a forecast of the total output of the whole organization broken own into estimates of outputs of each type of product with a scheduling of operations to be performed and a forecast of the closing finishing stock.
This budget may be expressed in quantitative or financial units or both. This budget is prepared after taking into consideration the estimated opening stock, the estimated sales and the desired closing finishing stock of each product. Suppose if the estimated opening stock of product X is 2,000 units, and the estimated sales is 15,000 units and the closing stock of the product is 2,500 units, the estimated production will be 15,000 + ,500 – 2,000 ( Sales + Closing stock – Opening stock) = 1 5,500 units.
The Works manager is responsible for the total production budget and the departmental managers are responsible for the departmental production budgets. Cash Budget One of the methods of forecasting and controlling the cash requirements of any a business undertaking where liquid position is not very comfortable. Cash budgets are prepared annually, quarterly, monthly, fortnightly and when cash and bank balances are not adequate, it may be done even weekly. This budget gives an estimate of the anticipated receipts and payments of cash during the budget period.
Hence, this budget is divided into two parts, one showing the estimated cash receipts on account of cash sales, credit collections and miscellaneous receipts and the other showing the disbursement on account of cash purchases, amount payable to creditors, wages payable to workers, indirect expenses payable, income tax payable, dividend payable, budgeted capital expenditure etc. ILLUSTRATION – 3 Prepare a cash budget for the three months ended 30th Swept, 2006 based on the following information.
Cash at bank on 1st July, 2006 salaries and wages (estimated) August, 2006 25,000 Monthly 10,000 Interest payable in Estimated 80,000 240,000 21,000 June July 5,000 August September credit sales RSI. 1 purchases Other Expenses 18,000 20,000 Cash Sales 22,000 Credit Sales are collected 50% in the month of sale and 50% in the month following. Collections from credit sales are subject to 10% discount if received in the month of sale and to 5% if received in the month following. 10% of the purchases are in cash and balance is paid in next month.
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