Accounting and Finance on Computers

Production budget

Inventory policies. Inventory standards should be predetermined as that neither there is a shortage nor over-stocking of goods.

Sales requirements. The quantity of goods to be sold would decide to a great extent how much is to be produced. Therefore, this budget depends upon the sales budget.

Production stability. For reduction of costs, stability in employment and better utilization of plant facilities, the production should be evenly distributed throughout the year. In case of seasonal industries, since it is not possible to have stable levels of production or inventory, an effort should be made to have the optimum balance between the two.

Plant capacity. How much can be produced depends upon the available plant capacity. There must be sufficent capacity to procede the annual requirements and also to meet seasonal high demands.

5. Availability of material and labour. Adequate and timely supply of raw material and labour should have an important effect on the planning of production.
6. Time taken in production process. The production should commence

well in time deeping in view how much time it would take in the factory to translate the raw materials into finished goods.

Capital Expenditure Budget

The budget provides a guidance as to the amount of capital that may be

Needed for procurement of capital assets during the budget period. The budget is prepared after taking into account the available productive capacitates, probable reallocation of existing assets and possible improvement in production techniques. If necessary separte budgets may be prepared for edach item o assets, such a building budget, a plnat and equipment budget etc.

Cash budget

The cash budget can be prepared by any of the following methods;
1. Receipts and payments method
2. The adjusted profit and loss method
3. The balance sheet method.

1. Receipts and payments method : In case of this method the cash receipts from various sources and the cash payments to various agencies are estimated. In the opening balance of cash , estimated cash receipts are added and From the total, the total of estimated cash payments are deduted to find out the closing balance.

2. The adjusted profit and loss method : In case of this method the cash budget is prepared on the basis of opening cash and bank balances, projected profit and loss account and the balances of the various assests and liabilities.

3. The balance sheet methos : With the helop of budget balances at the

end except cash and bank balances, a budgeted balance sheet can be prepared and the balancing figure would be the estimated closing cash/ bank balance.

Thus under this method, closing balances other than cash/bank will have to be found out first to be put in the budgeted balance sheet. This can be done by adjusting the anticipated.

Research and Development Budget

Research and development costs are to be incurred so that the products or the methods of the concern do not become out of date. The research and development budget is a forecast of all such expenses.

CLASSIFICATION OF BUDGETS

Budgets can be classified into different categories on the basis of time, function or flexibility. The different budgets covered under each category are shown

Chart : Classification of Budgets

Time Function Flexibility
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Long-Term 1. Sales 1. Fixed
Short-Term 2. Production 2. Flexible
Current 3. Cost of Production
Rolling 4. Purchase
5. Personnel
6. Research
7. Capital Expenditure
8.Cash
9. Master

Some of the budgets covered in the above classification.

Rolling Budget

Some organizations follow the practice of preparing a rolling or

Progressive budget. In such organizations, a budget for a year in advance will always be there. Immediately after a month, or a quarter, passes, as the case may be, a new budget is prepared for a twelve months. The figures for the month/quarter which has rolled down are dropped and the figures for the next month/quarter are added. For example, if a budget has been prepared for the year 19*7, after the expire of the first quarter ending 31st march 19*7, a new budget for the full year ending 31st march, 19*8 will be prepared by dropping

the figures for the quarter which has rolled past and adding the

figures for the new quarter ending 31st march 19*8. The figures for the remaining three quarters ending 31st December 19*7 may also be revised, if necessary. This process will continue whenever a quarter ends and a new quarter begins. It is also termed as limiting factor. The extent of influence of this factor must first be assessed in order to ensure that the budget targets are met. It would be desirable to prepare first the budget relating to this particular factor, and then prepare the other budgets. We are giving below an illustrative list of key factors in certain industries. Industry Motor car Aluminum Petroleum refinery Electro-optics Hydel power generation

Key factor

Sales demand Power Supply of crude oil Skilled technicians Monsoon The key factors should be correctly identified and examined. The key Factors need not be of a permanent nature. In the long run, the management may overcome the key factors by introducing new products, by changing material mix or by working overtime or extra shifts etc.

Making a forecast

A forecast is an estimated of the future financial conditions or Operating results. Any estimation is based on consideration of probabilites. An estimate differs from a budget in that the latter embodies an operating plan of an organization.

A budget envisages a commitment to certain objectives or targets which The management seeks to attain on the basis of the forecasts prepared. A forecast on the other hand is an estimate based on probabilities of an event. A forecast may be prepared in financial or physical terms for sales,roduction cost, or other resources required for business. Instead of just one forecast a number of alternative forecasts may be considered with a view to obtaining the most realistic overall plan.

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.

Preparing budgets

After the forecasts have been finalised the prepareation of budgets follows. The budget activity starts with the preparation of the sales budget. Then production budget is prepared on the basis of sales budget and the production capacity available. Financial budget (i.e., cash or working capital budget) will be prepared on the basis of sales forecasts and the production budget. All tehse budgets are combined and coordinated into a master budget. The budget may be revised in the course of the financial period if it Becomes necessary to do so in view of the unexpected developments which have already taken place or are likely to take place.

Choice between fixed and flexible budgets

A budget may be fixed or flexible. A fixed budget is base on a fixed Volume of activity. It may lose it s effectiveness in planning and controlling if the actual capacity utilisation is different from what was planned for any particular unit of time e.g., a month or a quarter. The flexible budget is more useful for changing levels of activity as it considers fixed and vaiable costs separately fixed costs as you are aware, remain unchanged over a certain range of output. Such costs change when there is a change in capacity level.

The vaiable costs change in direct proportion to output. If flexible budgeting approach is adopted, the budget controller can analyses the variance between actual costs and budgeted costs depending upon the actual level of activity attained during a period of time. This will be explained in detail a little later.

Choice between fixed and flexible budgets

A budget may be fixed flexible. A fixed budget is base on a fixed

volume of activity. It may lose its effectiveness in planning and controlling if the actual capacity utilisation is different from what was planned for any particular unit of time e.g., a month or a quarter. The lfexible budget is more useful for changing levels of activity as it considers fixed and vaiable costs separatley fixed costs as you are aware, remain unchanged over a certain range of output. Such costs change when there is a change in capacity leve.

The variable costs change in direct proportion to output. If flexible budgeting approach is adopted, the budget controllet can analyses the variance between actual costs and budgeted costs depending upon theactual level of activity attained during a period fo time. This will be explained in detail a little later.

Sale Budget :

Sales budget generally forms the fundamental basis on which all other Budgets are built. The budget is based on projected sales to be achieved in a budget period. The sales manager is directly responsible for the preparation and execution of this budget. Usually takes into consideration the following organizational and environmental factors while preparing the sales budget :

Organizational Factors
Past sales (figure and trends)
Salesmen's estimates
Plant capacity
Order on hand
Proposed expansion or discontinuation of products
Availability of material of supplies
Financial aspect
Cost of distribution of goods
Environmental factors
General trade prospects
Seasonal fluctuations
Potential market
Degree of competition
Government controls, rules and regulations relating to the industry
Political situation and its impact on market

It is desirable to break up the entire sales budget on the basis of Different products, time periods and sales areas or territories.

Description

1. Past sales figures and trend. The record of previous experience forms the most reliable guide as to future sales as the past performances 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.

2. 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 make for over-optimistic or to conservative estimates of the salesmen depending upon their temperament.

3. Plant capacity. It should be the endeavor of the business to ensure proper utilization of the plant facilitates and that the seal budget provides an economic and balanced production on the factory.

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

5. 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.

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

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

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

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

10. 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.

Production Budget

This budget provides an estimate of the total volume of production Distributed product-wise with scheduling of operations by days, weeks and months, and a forecast of the inventory of finished products. Generally, the production budget is based on the sales budget. The responsibility for the overall production budget ties with works manager and that of with departmental works managers.

Production budget may be expressed in physical or financial terms or both in relation to production. The production budgets attempt to answer questions like :-

(I) What is to be produced?
(II) When it is to be produced ?
(III) How is to be produced?
(IV) Where it is to be produced? The production budget envisages the production programme for achieving the sales target. It serves as a basis for preparation of related cost budgets, e.g., materials cost budget, labour cost budget, etc. it also facilities the preparation of a cash budget. The production budget is prepared after taking into consideration several factors like - Inventory policies, sales requirements, production stability, plant capacity, availability of materials and labour, time taken in production process etc.

1. Inventory policies. Inventory standards should be predetermined as that neither there is a shortage nor over-stocking of goods.
2. Sales requirements. The quantity of goods to be sold would be decide to a great extent how much is to be produced. Therefore, this budget depends upon the sales budget.
3. Production stability. For reduction of costs, stability in employment and better utilization of plant facilities, the production should be evenly distributed throughout the year. In case of seasonal industries, since it is not possible to have stable levels of production or inventory, an effort should be made to have the optimum balance between the two.
4. Plant capacity. How much can be produced depends upon the available plant capacity. There must be sufficient capacity to proceed the annual requirements and also to meet seasonal high demands.
5. Availability of materials and labour. Adequate and timely supply of raw materials and labour force should have an imporant effect on the plannning of production.
6. Time taken in production process. The production should commence well in time keeping in view how much time it would take in the factor to translate the raw materials into finished goods.

Production costs budgets

Basically, there are three elements of costs, namely direct material, Direct labour and overheads. Separate budgets for each of there elements have to be prepared. The direct materials budget has tow components, (I) Materials Requirement budget , (ii) Materials procurement or purchase budget. The former deals with the total quantity of materials required during the budget period, while the latter deals with the materials to be acquired from the market during the budget period. Materials to be acquired are estimated after taking into account the closing and the opening inventories and the materials from which orders have already been place.

Overhead budget :

The overheads may relate to factory, general administration, selling and distribution function. Separate budgets may, therefore, be prepared for factory overheads, administrative overheads and selling and distribution overheads.

Manufacturing overheads budget :

Factory or manufacturing overheads includes the cost of indirect material, indirect labour and indirect expenses. Manufacturing overheads may be classified into

i. Fixed overheads i.e., which tend to remain constant irrespective of change in the volume of output,

j. Variable overheads i.e., which tend to vary with the output,

k. Semi-variable overheads, i.e., which are partly variable and partly fixed. The manufacturing overhead budget will provide an estimate of these Overheads to be incurred during the budget period.

Fixed manufacturing overhead can be estimated on the basis of past Information and knowledge of any changes which may occur during the ensuring budget period. Variable overheads are estimated after considering the scheduled production and operating conditions in the budget period.

Administrative overheads budget

This budget covers the administrative expenses including the salaries Of administrative expenses including the salaries of administrative the managerial staff. A careful analysis of the needs of all administrative departments of the enterprise is necessary. The minimum requirement for the efficient operation of each administrative department of the budget period. The budget of all administrative departments.

Selling and distributing overhead budget :
This budget includes all the expenses relating to selling, advertising, delivery of goods to customers etc. It is better if such costs are analyzed according to products, types of customers, territories and the sales departments. The responsibility of the preparation of this budget rests with the executives of the sales expected and an effort should be made to control the costs of distribution. The preparation of the budget would depend on analysis of the market situation by the management, advertising policies, research programmes, and the fixed and variable elements.

Cash budget

The cash budget is a summary of the firm's expected cash inflows and Outflows over a particular period of time. In other words, cash budget involves a projection of future cash receipts and cash disbursements over various time intervals.

A cash budget helps the management in : Determining the future cash needs of the firm. Planning for financing of those needs. Exercising control over cash and liquidity of the firm. The overall cash budget can be prepared by any of the following methods :

1. Receipts and payments method
2. The adjusted profit and loss method
3. The balance sheet method

Receipts and payments method : In case of this method the cash receipts From various sources and the cash payments to various agencies are estimated. In the opening balance of cash estimated cash receipts are added and from the total, the total of estimated cash payments are deducted to find out the closing balance.

The adjusted profit and loss method : In case of this method the cash Budget is prepared on the basis of opening cash and bank balances, projected profit and loss account and the balances of the various assets and liabilities.

The balance sheet method : With the help of budgeted balances at the End except cash and bank balances, a budgeted balance sheet can be prepared and the balancing figure would be the estimated closing cash/bank balance.

Thus, under this method, closing balances other than cash/bank will have to be found out first to be put in the budgeted balance sheet. This can be done by adjusting the anticipated transactions of the year in the opening balances.