Budgeting costing

It is a plan quantified in monetary terms prepared andapproved prior to a defined period of time usually showing planned income to be generated and expenditure to be incurred during that period and the capital to be employed to attains a given objective.

Budgeting
It is process of preparation implementation and theopertion of budget is referred to as budgeting.

Budgetary control
Budgetary control is the establishment of budget relating the responsbilities of executives to the requirements of a policy and the continous comparison of actual with budget result either to secure by individual action the objectives of that policy, or to provides a basis.

OBJECTIVES CONTROL
Basic purpose

OF

BUDGETARY

Co-operative spirit Maximum profitability Centralized control Optimum use of resources Co-ordination Execution Remedial measures Revision.

ADVANTAGES
Planning Control Co-ordination Delegation of authority

 Criteria for evaluation Communication Motivation Review Fore runners of standard costs

LIMITATION
Based on estimates Conflicts of goals Changing economy Ambitious traget Rigidity Time factor costly

Pre-requisites for the adoption of budgetary control

organizational structure

 budget centres clear goal budget committee key factor (budget factor) budget manual. Budget period Level of activity Accounting system Communication

Classification of Budget
Based on Scope\coverage: Functional Budget: Functional Budget is a budget which relate to the individual functions in an organisation, are known as functional budgets. Examples:

Purchase Budget, Sales Budget, Production Budget, Plant-Utilization Budget, Cash Budget. Master Budget: It is a consolidated summary of various functional budgets. It serves as the basis upon which budgeted profit and loss account and forecasted Balance sheet are built up. Based on time period: Long-term budget: The budgets which are prepared for periods longer than a year are called long-term budgets. Such budget are helpful in Business forecasting and forward planning.Capital expenditure budgets and resarch and development budgets are examples of long term budgets Short-term budget:

Budgets which are prepared for periods less than a year are known as short term budgets. Such budgets are prepared in cases where a specific action has to be immediately taken to bring any variation under control. Cash budget is an example of short term budget. Based on conditions: Basic Budget: A budget, which remains unaltered over a long period of time is called basic budget. Current Budget: A budget which is established for use over a short period of time and is related to the current conditions, is called current budget. Based on capacity : Fixed budgeting: It is a budget designed to remain unchanged irrespective of the level of activity actually attained. It is based on a single level of

activity. Fixed budgets do not change when production level changes. e.g. If actual production is 12000 units in place of the budget 10000 units the cost incurred can not be compared with the budget which relates to different levels of activity. 2. Flexible Budgeting: It is a budget which by recognizing the difference between fixed, semi-variable and variable costs is designed to change in relation to the level of activity attatined. This budget is prepared for more than one level of activity. It is set of alternative budgets to different expected level if activity.

Budgetary control system:

As defined by the terminology of CIMA: Budgetary contol is the establishment of budgets relating the responsbilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results either to secure by individual

action the objective of that policy, or to provide a basis for its revision. It is essence a system which uses budgets as a means of planning and controlling all aspects of production and sale of all goods or services.

Pre requisites:
Top management support Proper organisational structure Realistic nature of goals Flexibility Participative process Conducive environment

Objectives:
Definition of goals Defining responsbilities

 Basis for performance evaluation Optimum use of resources Co-ordination Planned action Basis for policy

Advantages:
Efficiency Cost control Performance evaluation Standard costing\variance costing Policy formulation.

Limitations:
Estimates Rigidity False sense of security Lack of coordination

 Time and cost

Zero- Base budgeting:

Zero-based budgeting is an analytical approach to budgeting. It is a method of budgeting in which all activities are reevaluated each time a budget is formulated. Each functional budget starts with the assumption that the function does not exist and is at zero cost.Previous years actual results are not given any due consideration. Steps in zero budgeting: Determination of objectives. Consideration of alternative ways of doing each activity. Evaluation of all alternative ways in terms of costs and benefits at different levels. Fixing criteria for evaluation of work load and the performance. Ranking of all the activities in order of preference.

PROCESS:
Definitions of decision units. Preparation of set of decision packages for each decision units. Ranking of decision packages. Forwarding of decision packages. Decision making. Resources to be appropriated.