MBA management

Budgetary Control Topics:

DEFINATION OF BUDGETARY CONTROL


Budgetary Control is a technique of managerial control in which all operations are planned in advance in the form of budgets and actual results are compared with the budgetary standards.

This comparison reveals the necessary actions to be taken so that organizational objectives are accomplished. Budgeting focuses on specific and time bound targets and thus help in the attainment of organizational objectives.

Budgeting is a source of motivation to the employees who know the standard against which their performance will be evaluated and thus, enables them to perform better. Budgeting helps in optimum utilization of resources by allocating them according to the requirements of different departments.

Budgeting is also used for achieving coordination among different departments of an organization and highlights the interdependence between them. For instance, sales budget cannot be prepared without knowing production programmes and schedules. It facilitates management by exception by stressing on those operations which drive from budgeted standards in a significant way.

PREPARATION OF A CASH BUDGET


CASH BUDGET


An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has to fulfill regular operations and/or whether too much cash is being left in unproductive capacities.

“A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems”.

For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs.

For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems fairly unimpressive. However, upon setting a cash budget to account for regular annual cash expenditures, this seemingly small daily expenditure comes out to an annual total of $365, which may be better spent on other things.

If you frequently visit specialty coffee shops, your annual expenditure will be substantially more.

OUTLINE OF A CASH BUDGET


Cash Budget is prepared in the following manner:

Opening Cash Balance   --   ------------
Add Cash Sales   --   ------------
Cash Received yet to be        
Received from debtors   --   ------------
Less: Expenses made by Cash   --   ------------
Payments to made to Creditors   --   ------------
Administrative and Selling        
Expenses   --   ------------
Surplus or Deficit       ------------
        ------------

FLEXIBLE BUDGETS


Flexible budgets are one way companies deal with different levels of activity. A flexible budget provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a number of static budgets. For example, a restaurant may serve 100, 150 or 300 customers an evening. If a budget is prepared assuming 100 customers will be served, how will the managers be evaluated if 300 customers are served? Similar scenarios exit with merchandising and manufacturing companies. To effectively evaluate the restaurant’s performance in controlling costs, management must us a budget prepared for the actual level of activity. This does not mean management ignores difference in sales level, or customers eating in a restaurant, because those differences and the management actions that caused them need to be evaluated, too.

The flexible budget shows an even higher unfavorable variance than the static budget. This does not always happen but is why flexible budgets are important for giving management an indication of what question need to be asked. The important thing to remember in preparing a flexible budget is that if an amount, cost or revenue, was variable when the original budget was prepared, that amount is still variable and will need to be recalculated when preparing a flexible budget. If, however, the cost was identified as a fixed cost, no changes are made in the budgeted amount when the flexible budget is prepared. Differences may occur in fixed expenses, but they are not related to changes in activity within the relevant range. Budget reports can be a useful tool for evaluating a manager’s effectiveness only if they contain the appropriate information. When preparing budget reports, it is important to include in in the report items the manager can control. If a manager is only responsible for a department’s costs, to include all the manufacturing costs or net income for the company would not result in a fair evaluation of the manager’s performance .If, however the manager is the Chief Executive Officer, the entire income statement should be used in evaluating performance.

MASTER BUDGET


The master budget is a summary of company’s plans that sets specific targets for sales, production, distribution and functioning activities. It generally culminates in a cash budget, a budgeted income statement and a budgeted balance sheet. In short a master budget represents a comprehensive expression of management’s plans for future and how these plans are to be accomplished.

It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate affects other budget estimates because the figure of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets.
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Review Questions
  • 1. Define Budgetary control and state its advantages
  • 2. What do you mean by cost plus contracts?
  • 3. State the various methods of preparing sales budget.
  • 4. What is Capital Budgeting?
  • 5. What are the advantages of N.P.V.?
  • 6. What is a Master Budget?
  • 7. Distinguish between standard costing and budgetary control.
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