Accounting and Finance on Computers

CS54 Project - January 2001

Que.What is Budget and Budgetary Control? Collect data from a University and a Computer Company and develop their budgets under various categories (as per your block) for the year 2001-2002. Describe the budgetary control procedures followed by these companies. Develop a flow-chart for creation of such budgets from the available data.

BUDGET

A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material resources.

In a business organization, a budget represents an estimate of future costs and revenues. Budgets may be divided into two basic classes: Capital Budgets and Operating Budgets.

Capital budgets are directed towards proposed expenditures for new projects and often require special financing. The operating budgets are directed towards achieving short-term operational goals of the organization, for instance, production or profit goals in a business firm. Operating budgets may be sub-divided into various departmental of functional budgets.

The main characteristics of a budget are:

1. It is prepared in advance and is derived from the long-term strategy of the organization.

2. It relates to future period for which objectives or goals have already been laid down.

It is expressed in quantitative form, physical or monetary units, or both.

Different types of budgets are prepared for different purposed e.g. Sales Budget, Production Budget, Administrative Expense Budget, Raw-material Budget etc. All these sectional budgets are afterwards integrated into a master budget, which represents an overall plan of the organization.

ADVANTAGES OF BUDGETS

A budget helps us in the following ways:

1. It brings about efficiency and improvement in the working of the organization.

2. It is a way of communicating the plans to various units of the organization. By establishing the divisional, departmental, sectional budgets, exact responsibilities are assigned. It thus minimizes the possibilities of buck passing if the budget figures are not met.

3. It is a way or motivating managers to achieve the goals set for the units.

4. It serves as a benchmark for controlling on-going operations.

5. It helps in developing a team spirit where participation in budgeting is encouraged.

6. It helps in reducing wastage and losses by revealing them in time for corrective action.

7. It serves as a basis for evaluating the performance of managers.

8. It serves as a means of educating the managers.

BUDGETARY CONTROL

No system of planning can be successful without having an effective and efficient system of control. Budgeting is closely connected with control. The exercise of control in the organization with the help of budgets is known as budgetary control. The process of budgetary control includes:

1. Preparation of various budgets.
2. Continuous comparison of actual performance with budgetary performance.
3. Revision of budgets in the light of changed circumstances.

A system of budgetary control should not become rigid. There should be enough scope of flexibility to provide for individual initiative and drive. Budgetary control is an important device for making the organization. More efficient on all fronts. It is an important tool for controlling costs and achieving the overall objectives.

INSTALLING A BUDGETARY CONTROL SYSTEM

Having understood the meaning and significance of budgetary control in an organization, it will be useful for you to know how a budgetary control system can be installed in the organization. This requires, first of all, finding answers to the following questions in the context of an organization:

· What is likely to happen?
· What can the objectives to be achieved?
· What are the constraints and to what extent their effects can be minimized?
Having found answers to the above questions, the following steps may be taken for installing an effective system of budgetary control in an organization.

Organization for Budgeting:
The setting up of a definite plan of organization is the first step towards installing budgetary control system in an organization a budget manual should be prepared giving details of the powers, duties, responsibilities and areas of operation of each executive in the organization.

1. Budget Manual: "A document which setout, inter alias, the responsibilities of the persons engaged in, the routine of, and the forms and records required for, budgetary control."

2. Web for obtaining the necessary approval of budgets, the authority of granting approval should be stated in explicit terms. Whether one, two or more signatures are to be required on each document should also be clearly stated.

3. Timetable for all stages of budgeting.

4. Reports, statements, forms and other records to be maintained.

5. The accounts classification to be employed. It is necessary that the framework within which the costs, revenues and other financial amount are classified must be identical both in accounts and the budget department.

There are many advantages attached to the use of budget manual. It is a formal record defining the functions and responsibilities of each executive.

The methods and procedures of budgetary control are standardized. There is synchronization of the efforts of all which result in maximization of the profits of the organization.

The responsibility for preparation and implementation of the budgets may be fixed as under:

Budget Controller

Although the chief executive is finally responsible for the budget programme, it is better if a large part of the supervisory responsibility is delegated to an official designated as Budget Controller or Budget Director. Such a person should have knowledge of the technical details of the business and should report directly to the president or the Chief Executive of the organization.

Fixation of the budget period

Budget period mean the period for which a budget is prepared and employed. The budget period depends upon the nature of the business and the control techniques. For example, a seasonal industry will budget for each season while an industry requiring long periods to complete work will budget for four, five or even larger number of year. However, it is necessary of control purposes to prepare budgets both for long as well as short periods.

Budget Procedures

Having established the budget organization and fixed the budget period, the actual work or budgetary control can be taken upon the following pattern:

STEPS IN BUDGETARY CONTROL

1. Organization for budgeting
2. Budget manual + Theory

"A document which sets out, inter alias, the responsibilities of the persons engaged in, the routine of and forms and records required for budgetary control."

The budget manual is a written document or booklet that specifies the objectives of budgeting organization and procedures. Following are some of the important matters covered in a budget manual:

1. A statement regarding the objectives of the organization and how they can be achieved through budgetary control.
2. A statement regarding the functions and responsibilities of each Executive by designation both regarding preparation and execution of budgets.
3. Procedures to be followed for obtaining the necessary approval of budgets.
4. The authority of granting approval should be stated in explicit terms.
5. Whether one, two or more signatures are to be required on each document
6. Should also be clearly stated.
7. Timetable for all stages of budgeting.
8. Reports, statements, forms and other records to be maintained.
9. The accounts classification to be employed. It is necessary that the framework within which the
costs, revenues and other financial amount are classified must be identical both in accounts and the budget departments.

There are many advantages attached to the use of budget manual. It is a formal record defining the functions and responsibilities of each executive.
The methods and procedures of budgetary control are standardized.
There is synchronization of the efforts of all which result in maximization of the profits of the organization.

Making a forecast

Consideration of alternative combination of forecasts:
Alternative combinations of forecasts are considered with a view to contain the most efficient overall plan so as to maximize profits. When the optimum -profit combination of forecasts is selected, the forecasts should be regarded as being finalized.

Sales budget

Past sales figures and trend. The record of previous experience forms the most reliable guide as to future sales as the past performance is related to actual business conditions. However the other factors such as seasonal fluctuations, growth of market, trade cycles etc., should not be lost sight of salesmen's estimates. Salesmen are in a position to estimate the potential demand of the customers more accurately because they come in direct contact with the customers. However, proper discount should be made for over-optimistic or too conservative estimates of the salesmen depending upon their temperament.

Plant Capacity. It should be the endeavor of the business to ensure proper utilization of plant facilities and that the sale budget provides an economic and balanced production on the factory.

General trade prospects. The general trade prospects considerable affect the sales. Valuable information can be gathered in this connection from trade papers and magazines.

Orders on hand. In case of industries where production is quite a lengthy process, orders on hand also have a considerable influence in the amount of sales.

Proposed expansion of discontinuance of products. It is affects sales and therefore, it should also be considered.

Seasonal fluctuations. Past experience will be the best guide in this respect. However, efforts should be made to minimize the effects of seasonal fluctuations by giving special concessions or off-season discounts thus increasing the volume of sales.

Potential market. Market research should be carried out for ascertaining the potential market, for the company's products. Such an estimate on the basis of expected population growth, purchasing power of consumers and buying habits of the people.

Availability of material and supply. Adequate supply of raw materials and other supplies must be ensured before drafting the sales programme.

Financial aspect. Expansion of sales usually require increase in capital outlay also, therefore, sales budget must be kept within the bounds of financial capacity.

Other factors:

a. The nature and degree of competition within the industry;
b. Cost of distributing goods;
c. Governments controls, rules and regulations related to the industry;
d. Political situation - national and international as it may have an influence upon the market.

The sales manager, after taking into consideration all these factors, will prepare the sales budget in terms if quantities and money, distinguishing between products, periods and areas of sale.

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