BUDGETS AND BUDGETING
Profit-planning or
budgeting is a systematic approach for attaining effective management
performance.
A budget is a
comprehensive and coordinated plan expressed in financial terms, for the
operations and resources of an enterprise, for some specific period in future.
PURPOSE OF BUDGETING
ü To attain the management’s objectives.
ü To communicate expectations to all concerned.
ü To help in making detailed plans.
ü To provide a basis for measuring and controlling
activities.
STEPS IN PREPARING A BUDGET
1.
Establish budget
centers and form a committee.
2.
Prepare budget
manual (budget manual is procedures to be followed and forms to be used).
3.
Form budget
committee.
4.
Determine the
limiting or the key factor.
5.
Select the budget
period.
6.
Select the
objectives to be achieved at the end of the budget period.
7.
Prepare forecasts.
8.
From forecast
prepare provisional budget
9.
Review and prepare
final budget.
ADVANTAGES OF BUDGETING
1.
Compels management
to plan for future.
2.
Coordinates
integrates and balances the effort of various department.
3.
Forms a basis of
evaluation and control.
4.
Forms a basis of
communication.
5.
Helps in optimum
utilization of resources.
LIMITATIONS OF
BUDGET
1.
Restricts
creativity
2.
Must be
continuously adapted.
3.
Everybody must be
involved as otherwise execution is difficult.
4.
Estimates are
basis for budgets which might not match results.
BUDGETARY CONTROL
Budgetary control involves
the use of budgets and budgetary reports though out the period of budget to
co-ordinate evaluate and control day to day operations in accordance with the
goals specified by the budget.
OBJECTIVES OF BUDGETARY CONTROL
The objectives of budgetary
control are:
1.
To compel
planning. This
is the most important feature of budgetary control, because management is
forced to look ahead, set targets, anticipate problems and give the
organization purpose and direction,
2.
To communicate
Ideas and Plans. To everyone affected by them. It
is necessary to have a formal system to make sure that each person is aware of
what he is supposed to be doing.
3.
To co-ordinate the
activities.
Of different department or sub-units of the organization, this concept of
co-ordination implies, for example, that the purchasing department should base
its budget on production requirements, and that the production budget should in
turn be based on sales expectations.
4.
To establish a
system of control by having a plan against which actual results can be progressively
compared.
5.
To motivate
Employees to
improve their performance.
Key Factor
In each organization there
is always some factor which governs the scale of its activity. Such a factor is
known as the ‘limiting factor,’ ‘principal budget factor’ or ‘key factor’. Some
examples of limiting factor are:
(a)
Production capacity:
(b)
Shortage of space :
(c)
Shortage of skilled labour:
(d)
Shortage of material:
(e)
Low market demand:
(f)
Lack of capital:
DIFFERENT TYPESOF BUDGETS
Budgets may be classified
into number of categories. This classification is based on some features,
connected with the operational activities of a business. The classification
along with the features that have led to the said classifications, are
discussed hereunder:
1.
Budget based on
coverage: Budgets
are often drawn encompassing the different areas of activities of a business
undertaking. That is to say, a budget is often drawn covering different
functions of business unit. On the basis of the coverage, the budget is
classified into two
(a)
Functional budget;
(b)
Master budget.
2.
Budgets based on capacity:
The
operation of a business unit is characterized by level of activity. This level
of activity is known as the capacity at which the business functions. This
capacity depends on the extent of the demand of the product of the business
entity. The budgets which are drawn considering the operational capacity of a
business concern may be classified into
two:
(a)
Fixed budget;
(b)
Flexible budget.
3.
Budgets based on
the length of the period: Some budgets are drawn for a long period of time. This period may cover
5 years or so. Some budgets are to run for a short period of time, say for a
day, a weal or a month as the case may be. The budget that covers a long period
of time is known as a Long range budget or long term budget. When
the budgets are drawn covering a short period of time, as stated above, are
called short term budget or short range budget.
4.
Budgets drawn
based on conditions: It is sometimes found that budgets are based on some conditions required
to be taken into account for efficient management. The budgets bases on
conditions may be classified in to the following:
(a)
Basic budget ;
(b) Current budget.
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