A SUMMER TRAINING REPORT

ON
BUDGETING PROCESS IN ONGC
IN PARTIAL FULFILLMENT FOR THE REQUIREMENT
OF THE DEGREE OF
BACHELOR OF BUSINESS ADMINISTRATION

BATCH (2008-2010)
SUBMITTED TO:- SUBMITTED BY:-
DR. ASHU BANSAL SHALINI SHARMA

FACULTY – DEPTT. OF MANAGEMENT BBA- V SEM.

G.E.I.T., DEHRADUN GEIT, DEHRADUN

GRAPHIC ERA INSTITUTE OF

TECHNOLOGY, DEHRADUN

1
 A REPORT
ON

BUDGETING PROCESS IN ONGC

2
 PREFACE
Summer training is an essential part of a two-year’s M.B.A. course
.The motive behind the study is to gain practical knowledge regarding the
operation and activities of an organisation. An organisation can be defined
as a group of working together in coordination with other for attainment of
specific organisation objectives. A major concern of every organisation
should be to contribute positively towards the achievement of
organisation objectives. Organisation effectiveness is often equated with
man agent efficiently.

India has 0.50% of the total natural reserves out of which 0.30% is
owned by ONGC. India contributes to 1.10% of the total natural gas
production, where the contribution of ONGC is 1.00%. India has 15% of
the world’s population and 0.50% of the world’s oil and gas reserves but it
has to spend a lot every year to meet its oil and gas requirements.

Today’s finance is deeply concerned with proper utilisation of the

organisation budget and other resources for achieving its objectives. But
to achieve any target in the changing environment is not an easy job, it
requires a planned effort to review the organisational target, improved
technology, planning and decision making processes and for achieving
this target budget plays a significant role, as blood plays in a human body.

In an organisation like ONGC, where operation are enormous, nature

of business is complex and expenditure involved large huge, the budget
analysis assumes a very special significance. My goals in undertaking the
present project, in this way was to study and understands the budget of
ONGC (Oil and Natural Gas Corporation Limited) and convert the
theoretical practices into the practical working life. I also tried to evaluate
the effectiveness of Budget.

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 ACKNOWLEDGEMENT

It is a pleasant duty to acknowledge the valuable help I received

from different quarters in the completion of my project work. At the very
outset, I express my reverential regards and profound gratitude to Mrs.
Asha Talwar, Manager (F&A), IDT, ONGC Ltd. for her constant guidance,
advice and encouragement.

I would also like to sincerely thank Mrs. Indu Chopra (Manager, F&A),
Mr. C. Eswardass (Chief Manager, F&A), Mr. Daud Jamal (Sr. F&A,IDT).

A report of this kind cannot be written without the support of the

concerned organisation. I wish to draw my special thanks to the other
executives of ONGC for giving their precious time in providing me with
valuable information.

Last but not the least, I would like to thanks my parents and my
friends who instilled confidence and gave moral support at various stages
during the course of this training.

SONAM KHAN

BBA-FINANCE

GEIT, DEHRADUN

4
 DECLARATION

Title of the project : Budget Report of ONGC

Trainee : SONAM KHAN

BBA, Finance

GEIT, DEHRADUN

Coordinator : Mrs. Asha Talwar

Manager (F&A)

IDT, ONGC LTD

Centre of Study : Finance and Accounts Wing

IDT, ONGC

Dehradun

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 RESEARCH METHODOLOGY
In order to complete project report on budget on ONGC Ltd, methodology
has been adopted.

The very first step I have taken is that I have collected all the accounts
which are required for analysis, after that I have extracted the things out
of accounts, which are needed for Budget Analysis. (e.g. current asset,
etc.)

There are two main types of data collection i.e,

 Primary Data
 Secondary Data

PRIMARY DATA:

It means collection of information for the first time. In order to collect such
type of information questioner ie, to be constructed and information is
collected from the respondent. In my project report budget analysis in
ONGC Ltd, the primary data collection is not used since it is based on
secondary data already available.

SECONDARY DATA:

Secondary data are information, which has already been collected by

others. In order to carry out my project successfully I have relied on the
secondary data already available.

Source of secondary Data:

 Annual report of ONGC Ltd.

 Monthly publication of ONGC ie. Corporation finance.
 ONGC Ltd website: www.ongcindia.com
 Library of ONGC at IDT.

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 MEANING OF PROJECT
The word project has great importance in the development of new things,
idea, and technique. Each single alphabet of this word represents different
management terms:

P- It implies ‘planning’. Planning gives the framework of the future. It is a

predetermined procedure about the future work.

R- It implies ‘resources’ or the available means, which we will go ahead.

Resources have their own role in the development of any organisation.

O- It implies ‘operation’ or the existing or adopted sequential procedure.

J- It implies ‘joint efforts’ which directly indicates towards coordination

or teamwork.

E- It implies ‘effectiveness’. Every aspect of the project should be

effective.

C- It implies ‘collect’, that is to bring together all the relevant things,

which are necessary to make any project effectiveness.

T- It implies ‘techniques’, without a new or developed technique, an

organisation cannot complete in this highly changing environment.

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 CONTENTS
Acknowledgement

Certificate

Preface

Executive Summary

Certificate of Declaration

Company profile

 Introduction
 Historical background
 Mission and vision of ONGC
 Organisational chart
 Board of directors
 Institutes of ONGC
 Why IDT is chosen

Profile of IDT

 Why IDT is chosen as sample unit

 Introduction

 Mission and vision of IDT

Budgeting Overview

 Introduction of budgeting
 Why budgeting

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  Objectives of budgeting
 Benefits of budgeting
 Classification of budgets

O.N.G.C Budget

 Budget preparation in ONGC

 Types of budgets in ONGC
 Budget process in ONGC
 Budget exercise in ONGC
 Budget monitoring mechanism in ONGC
 Salient features of the proposed budget

Standard costing

 Introduction of standard costing

 Difference b/w budgetary control &
standard costing
 Variance analysis
 Classification of variances

Estimated Calculations

Annexures

Conclusion

Problem Areas

Suggestion

Abbreviations

Bibliography

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10
INTRODUCTION
GLOBAL RANKING

 ONGC ranks as the Numero Uno Oil & Gas Exploration & Production
(E&P) Company in Asia, as per Platts 250 Global Energy Companies
List for the year 2007.
 ONGC ranks 23rd Leading Global Energy Major amongst the “Top 250
Energy Majors of the World in the Platt’s List” based on outstanding
performance in respect of Assets, Revenues, Profits and Return on
Invested Capital (RIOC) for the year 2007.
 ONGC is the only Company from India in the Fortune Magazine’s list
of the World’s most admired Companies 2007. ONGC is 9th position
in the industry of Mining, Crude Oil Production.
 ONGC ranks 239th position in the prestigious Forbes Global 2000 and
Numero Uno ranking amongst Indian Companies.
 ONGC ranks 369th position in Fortune Global 500 list for the year
2006 based on Revenues.
 ONGC retains Numero Uno position from India in terms of Profits
with overall global ranking of 121st.
 ONGC ranks 21st among the top 50 publicly traded Companies in Oil
& Gas Industry, based on the year-end (2007) market Capitalisation
by PFC Energy.

INDIA’S MOST VALUABLE COMPANY

 “Biggest Wealth Creator Awarded” for the period 2000-2006
instituted by M/s Motilal Oswal Securities Ltd., third time in a row.
 Ranked as the most respected Company in PSU Category in
the 2006 Business World Survey, with 13 th position in the league of
the most respected Indian Corporate.
 Tops the Business India Super 100 list (among 284 Indian
Companies having Sales in excess of Rs. 500 Crore), based on Sales,
Profit After Tax (PAT), Net Fixed Assets and Market Capitalization
(Dec 2006).

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  Topped the visibility metrics in Indian Oil and Gas Sector and
the only PSU in the top 10 list of Indian Corporate newsmakers.
 Investor Services awarded the highest-ever Credit Rating for
an Indian Corporate – Baa1 (indicative Foreign Currency debt
rating).
 CRISIL and ICRA also reaffirmed ONGC the highest credit rating of AAA and
LAAA respectively.

PIONEERING EFFORTS
ONGC is the only fully-integrated petroleum company in India, operating
along the entire hydrocarbon value chain:

 Holds largest share of hydrocarbon acreages in India.

 Contributes over 78 per cent of Indian’s oil and gas production.

 About one tenth of Indian refining capacity.

 Created a record of sorts by turning Mangalore Refinery and

Petrochemicals Limited around from being a stretcher case for
referral to BIFR to the BSE Top 30, within a year.

 Interests in LNG and product transportation business.

COMPETITIVE STRENGTH

 All crudes are sweet and most (76%) are

light, with sulphur percentage ranging from 0.02-0.10, API gravity
range 26°-46° and hence attract a premium in the market.
 Strong intellectual property base, information, knowledge, skills and
experience
 Maximum number of Exploration Licenses, including competitive
NELP rounds.
 ONGC owns and operates more than 15000 kilometers of pipelines
in India, including nearly 3800 kilometers of sub-sea pipelines. No
other company in India, operates even 50 per cent of this route
length.

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STRREGIC VISION: 2001-2020

To focus on core business of E&P, ONGC has set strategic objectives of:

 Doubling reserves (i.e. accreting 6 billion tonnes of O+OEG).

 Improving average recovery from 28 per cent to 40 per cent.
 Tie-up 20 MMTPA of equity Hydrocarbon from abroad.

The focus of management will be to monetise the assets as well as to

assetise the money.

SOURCING EQUITY OIL ABROAD

ONGC’s overseas arm ONGC Videsh Limited (OVL), has laid strong foothold
in a number of lucrative acreages, some of them against stiff competition
from international oil majors.

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OVL’s projects are spread out in Vietnam, Russia, Sudan, Iraq, Iran, Libya,
Myanmar, Syria, Qatar, Egypt, Cuba, Nigeria Sao Tome Principle, Brazil,
Nigeria and Columbia. It is further pursuing Oil and gas exploration blocks
in various oil and gas rich countries.

 During 2006-07, OVL has acquired stakes in 9 projects in 6

Countries, out of which 6 projects were acquired through
participation in bidding rounds and 3 from the existing concession
holders.
 Sakhlalin-1 project in Russia commenced export of crude oil from
September 2006 and peak production of 250,000 bpd was achieved
in March 2007.
 Crude Oil production from block 5A in Sudan commenced in May
2006.
 Consortium of blocks A-1 and A-3 in Myanmar made gas discoveries.
 Consortium of North Ramadan block in Egypt made Oil discovery.
 OVL currently has participation in 29 E&P projects in 15 countries.
Out of the existing 29 projects, OVL is operator in 14 projects and
joint operator in 2 projects in 9 countries.
 OVL’s share in production of oil and oil-equivalent gas (O+OEG),
together with its wholly owned subsidiaries ONGC Nile Ganga BV
and ONGC Amazon Alaknanda Ltd, is 7.952 MMT.
 ONGC’s strategic objective of sourcing 20 million tonnes of equity oil
abroad per year is likely to be fulfilled well before 2020.

BEST IN CLASS INFRASTRUCTURE AND FACILITIES

ONGC’s success rate is at par with the global norm and is elevating its
operations to the best in class level, with the modernization of its fleet of
drilling rigs and related equipment.

ONGC has adopted Best-in-class business practices for modernization,

expansion and integration of all Info-com systems.

Onshore

 Production installations:-
240
 Pipeline network (km):- 15,800
 Drilling rigs:- 70
 Work over rigs:- 74
 Seismic units:- 29
 Logging units:- 32
 Engineering workshops:- 2
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  Virtual reality centre:- 5
 Regional computer centre:- 5

Offshore

 Well platforms:- 147

 Well-cum-process:- 32
 Process platforms:- 13
 Drilling rigs:- 29
 Pipeline network (km):- 4,500
 Offshore supply vessels:- 55
 Special application vessels:- 4
 Seismic vessels:- 1

FINANCIALS (2006-07)

 ONGC posted a net profit of Rs. 156.429 billion, the Highest by any
Indian Company.
 Net worth Rs. 614 billion.
 Practically Zero Debt Corporate.
 Contributed over Rs. 286 billion to the exchequer.

THE ROAD AHEAD

ONGC looks forward to become an integrated energy provider, with:

 New Discoveries and fast track development.

 Equity Oil from Abroad.
 Downstream Value Additions & Forward Integration.
 Leveraging state-of-the art technology and global best practices.
 New Sources of Energy.
 Production from small and marginal fields.

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HISTORICAL BACKGROUND

1947 – 1960

During the pre-independence period, the Assam Oil Company in the

northeastern and Attock Oil company in northwestern part of the
undivided India were the only oil companies producing oil in the country,
with minimal exploration input. The major part of Indian sedimentary
basins was deemed to be unfit for development of oil and gas resources.

After independence, the national Government realized the importance oil

and gas for rapid industrial development and its strategic role in defense.
Consequently, while framing the Industrial Policy Statement of 1948, the
development of petroleum industry in the country was considered to be of
utmost necessity.

Until 1955, private oil companies mainly carried out exploration of

hydrocarbon resources of India. In Assam, the Assam Oil Company was
producing oil at Digboi (discovered in 1889) and the Oil India Ltd. (a 50%
joint venture between Government of India and Burmah Oil Company) was
engaged in developing two newly discovered large fields Naharkatiya and
Moran in Assam. In West Bengal, the Indo-Stanvac Petroleum project (a
joint venture between Government of India and Standard Vacuum Oil
Company of USA) was engaged in exploration work. The vast sedimentary
tract in other parts of India and adjoining offshore remained largely
unexplored.

In 1955, Government of India decided to develop the oil and natural gas
16
resources in the various regions of the country as part of the Public Sector
development. With this objective, an Oil and Natural Gas Directorate was
set up towards the end of 1955, as a subordinate office under the then
Ministry of Natural Resources and Scientific Research. The department
was constituted with a nucleus of geoscientists from the Geological survey
of India.

A delegation under the leadership of Mr. K D Malviya, the then Minister of

Natural Resources, visited several European countries to study the status
of oil industry in those countries and to facilitate the training of Indian
professionals for exploring potential oil and gas reserves. Foreign experts
from USA, West Germany, Romania and erstwhile U.S.S.R visited India and
helped the government with their expertise. Finally, the visiting Soviet
experts drew up a detailed plan for geological and geophysical surveys
and drilling operations to be carried out in the 2nd Five Year Plan (1956-57
to 1960-61).

In April 1956, the Government of India adopted the Industrial Policy

Resolution, which placed mineral oil industry among the schedule 'A'
industries, the future development of which was to be the sole and
exclusive responsibility of the state.

Soon, after the formation of the Oil and Natural Gas Directorate, it became
apparent that it would not be possible for the Directorate with its limited
financial and administrative powers as subordinate office of the
Government, to function efficiently. So in August, 1956, the Directorate
was raised to the status of a commission with enhanced powers, although
it continued to be under the government. In October 1959, the
Commission was converted into a statutory body by an act of the Indian
Parliament, which enhanced powers of the commission further. The main
functions of the Oil and Natural Gas Commission subject to the provisions
of the Act, were "to plan, promote, organize and implement programmes
for development of Petroleum Resources and the production and sale of
petroleum and petroleum products produced by it, and to perform such
other functions as the Central Government may, from time to time, assign
to it ". The act further outlined the activities and steps to be taken by
ONGC in fulfilling its mandate.

1961 – 1990

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Since its inception, ONGC has been instrumental in transforming the
country's limited upstream sector into a large viable playing field, with its
activities spread throughout India and significantly in overseas territories.
In the inland areas, ONGC not only found new resources in Assam but also
established new oil province in Cambay basin (Gujarat), while adding new
petroliferous areas in the Assam-Arakan Fold Belt and East coast basins
(both inland and offshore).
ONGC went offshore in early 70's and discovered a giant oil field in the
form of Bombay High, now known as Mumbai High. This discovery, along
with subsequent discoveries of huge oil and gas fields in Western offshore
changed the oil scenario of the country. Subsequently, over 5 billion
tonnes of hydrocarbons, which were present in the country, were
discovered. The most important contribution of ONGC, however, is its self-
reliance and development of core competence in E&P activities at a
globally competitive level.

AFTER 1990

The liberalized economic policy, adopted by the Government of India in

July 1991, sought to deregulate and de-license the core sectors (including
petroleum sector) with partial disinvestments of government equity in
Public Sector Undertakings and other measures. As a consequence
thereof, ONGC was re-organized as a limited Company under the
Company's Act, 1956 in February 1994.

After the conversion of business of the erstwhile Oil & Natural Gas
Commission to that of Oil & Natural Gas Corporation Limited in 1993, the
Government disinvested 2 per cent of its shares through competitive
bidding. Subsequently, ONGC expanded its equity by another 2 per cent
by offering shares to its employees.

During March 1999, ONGC, Indian Oil Corporation (IOC) - a downstream

giant and Gas Authority of India Limited (GAIL) - the only gas marketing
company, agreed to have cross holding in each other's stock. This paved
the way for long-term strategic alliances both for the domestic and
overseas business opportunities in the energy value chain, amongst
themselves. Consequent to this the Government sold off 10 per cent of its
share holding in ONGC to IOC and 2.5 per cent to GAIL. With this, the
Government holding in ONGC came down to 84.11 per cent.

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In the year 2002-03, after taking over MRPL from the A V Birla Group,
ONGC diversified into the downstream sector. ONGC will soon be entering
into the retailing business. ONGC has also entered the global field through
its subsidiary, ONGC Videsh Ltd. (OVL). ONGC has made major
investments in Vietnam, Sakhalin and Sudan and earned its first
hydrocarbon revenue from its investment in Vietnam.

VISION AND MISSION

To be a world-class Oil and Gas Company integrated in energy
business with dominant Indian leadership and global presence.

WORLD CLASS

 Dedicated to excellence by leveraging competitive advantages in

R&D and technology with involved people.
 Imbibe high standards of business ethics and organizational values.
 Abiding commitment to safety, health and environment to enrich
quality of community life.
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  Foster a culture of trust, openness and mutual concern to make
working a stimulating and challenging experience for our people.
 Strive for customer delight through quality products and services.

INTEGRATED IN ENERGY BUSINESS

 Focus on domestic and international oil and gas exploration and

production business opportunities.
 Provide value linkages in other sectors of energy business.
 Create growth opportunities and maximize shareholder value.

DOMINANT INDIAN LEADERSHIP

 Retain dominant position in Indian petroleum sector and enhance

India's energy availability.

ORGANISATIONAL CHART
ONGC is aboard managed company with Chairman cum Managing Director
(C&MD) at the top and functional directors, nominated independent
directors & government nominated directors below him. The present
organisational structure of ONGC is shown in the chart below.

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BOARD OF DIRECTORS

FUNCTIONAL DIRECTORS

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 Mr. R S Sharma
Chairman & Managing Director

Dr. A K Balyan Mr. A K Hazarika

Director (HR) Director (Onshore)

Mr. N K Mitra Mr. D K Pande

Director (Offshore) Director (Exploration)

Mr. U N Bose Mr. D K Sarraf

Director (Finance)
NON-OFFICIAL PART TIME DIRECTORS

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 Mr. A M Uplenchwar Mr. P K Choudhury

Mr. V P Singh Mr. R K Pachauri

Mr. Bakul H Dholakia

INSTITUTES OF ONGC
ONGC has institutionalized research and development in the oil & gas, and
related sectors and established separate institutions to undertake specific
activities in key areas of exploration, drilling, reservoir management,
production technology, ocean engineering, safety and environment
protection in the form of 9 independently-managed R&D centers.
These institutes are also supported by regional laboratories.

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 LIST OF INSTITUTES

 GEOPIC: Geodata Processing and Interpretation Centre.

 KDMIPE: Keshav Deva Malaviya Institute of Petroleum Exploration.
 IDT: Institute of Drilling Technology.
 IEOT: Institute of Engineering and Ocean Technology.
 IMD: Institute of Management Development.
 INBIGS: Institute of Biotechnology & Geotectonics Studies.
 IOGPT: Institute of Oil & Gas Production Technology.
 IPSHEM: Institute of Petroleum Safety, Health & Environment
Management.
 IRS: Institute of Reservoir Studies.

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WHY IDT IS CHOSEN AS SAMPLE UNIT:
The place of my summer training is ONGC, Dehradun. There are only two
R&D Institutes in ONGC, Dehradun-IDT and KDMIPE.

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Out of these two R&D units, IDT is smaller unit as compared to KDMIPE
having less manpower. For the estimation of budgeting process projects,
the smaller unit IDT has been selected as a sample unit. The process
which has been adopted for the estimation of the cost of the Research and
Development projects in IDT may be adopted for the same purpose in
other big R&D units also.

INTRODUCTION
The Institute of Drilling Technology (IDT) was set up in 1978 at Dehradun.
Located in the picturesque valley of Doon between the green Shivaliks and
26
the lower Himalayas, it is engaged in relentless effort in R&D and has
rendered excellent services in the area of oil and gas well drilling
technology. Over the years, the Institute has emerged as a premier R&D
centre in South East Asia, capable of providing advance technical
knowledge through training and offering plausible solution to field
problems.

The Institute with highly qualified and experienced scientists and

engineers, carries out applied research in all facets of drilling related
activities to achieve technical excellence in R&D efforts and assimilation
of emerging technologies.

The integrated HRD division imparts training to participants from both

national and international oil companies in various aspects of oil well
drilling technologies. The renowned Well Control School at IDT has been
accredited by International Well Control Forum, The Netherlands,
International Alliance for Well Control, the Netherlands, and also from
International Association of Drilling Contractors, USA.

The infrastructure for applied R&D has been developed with the state-of-
the-art equipment and machines to achieve qualitative experimental
results. Focus of R&D is directed towards drilling technology, drilling fluid
engineering and cementation and cementing materials to meet challenges
of drilling industry. The technologists and scientists provide solutions to
the down hole drilling problems, improving design of the systems and
thereby contributing towards the development of excellent, efficient and
cost effective operations.

MISSION AND VISION OF IDT

MISSION

To provide services in an environmentally harmonious manner through

continuous knowledge assimilation, adaptation, upgradation and
development of technologies.

VISION

To become a global leading institute providing services for the E&P related
drilling activities.

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28
INTRODUCTION OF BUDGETING

BUDGET

The word budget is very familiar and is often used in every walk of
life. This is because of its wide practical usage- personal budget, business
budget and national budget. A budget is a quantitative expression of a
plan of action relating to the forthcoming budget period. It represents a
written operational plan of management for the budget period. It is always
expressed in terms of money and quantity. It is the policy to be followed
during the budget period for attainment of specified organisational
objectives.

In the ICMA (presently CIMA) terminology, a budget is defined as

follows:

“A financial and/or quantitative statement, prepared and approved

prior to a defined period to time, of the policy to be persued during that
period for the purpose of attaining a given objective.”

An analysis of this definition reveals the following essensials of a

budget:

 It is a financial or monetary and/or quantitative statement.

 It is prepared for a specific period.
 It is prepared prior to a definite period of time.
 It is a plan of the policy to be pursued during the budget
period.
 It is prepared to attain the given objectives.

Although the definition of ICMA is the most authentic but two more
definitions of budget are given below:

“A budget is a predetermined statement of management policy

during a given period which provides a standard for comparision
with the results actually achieved.”

-brown and Howard

“A budget is a written plan covering projected activities of a firm for a

definite time period.”

-G.A.Welsh
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BUDGETING

Budgeting is a process of preparing budgets and further control aspects

are involved in its procedure. Main definitions of budgeting are as follows:

“Budgeting is a kind of future tense accounting in which the problems of

future are met on paper before the transactions actually occur.”

-William J. Betty

“Budgeting is the preparation of comprehensive operating and financial

plans for specific intervals of time.”

-Shilinglow

BUDGETARY CONTROL

Budgetary control is a system which uses budgets as a means planning

and controlling all aspects of producing and selling commodities or
services.

As per the definition , the essential features of budgetary control are as

follows:

 Establish a budget or target of performance for each department or

function of the organisation.
 Compare actual performance with the budget.
 Ascertain the reasons for the difference between actual and
budgeted performance.
 To fix the responsibility of executives for not achieving budgeted figure.
 Take suitable remedial action so that budgeted performance may be
achieved.
 Revise budgets if necessary.

WHY BUDGETING

30
 Budgeting is an essential management tool for every organisation.
The future of an organisation depends on how effectively it implements its
plans and consequently the budgets.

This applies even more to ONGC. As ONGC is an industry where are

highly probabilistic and not deterministic special emphasis should be
given to budget preparation and utilisation as it is only through proper and
determined utilisation, which translates into physical activity that success
can be achieved in this industry.

OBJECTIVES OF BUDGETING
The major objective that budget serves in an organisation are:

 To provide an organised procedure for planning. It provides a

detailed plan of action for a business over a definite period of time.
 To coordinate all the activities of various departments of a business
firm in such a manner that the maximum profit will be achieved for
the minimum use of resources.
 To provide a means of determining the responsibility for all
deviations from the plan (budget), and to supply information on the
basis of which necessary corrective action may be taken.

Thus, budgeting has the objective of controlling cost.

BENEFITS OF BUDGETING
Budgeting provides the following benefits:

 Planning & Co-ordination

 Budgeting forces planning.
 Budgeting provides an opportunity for everybody in the
organisation to contribute to the overall plan.
 Clarification of authority & responsibility
 The budgeting process clarifies responsibilities within the
organisation.

31
 Budgets enable responsibility to be assigned for management
by exception.
 Communication
 The budgeting process should involve all levels of
management.
 There should be both vertical and functional communication.
 Control
 Budget sets up a framework for control.
 Management can act on deviations from the budgeted plan.
 Motivation
 Budgeting can provide very good motivational influences on
the staff.
 The establishment of targets enables management to have
specific goals which should help positive motivation.

CLASSIFICATIONS OF BUDGETS
 Classification according to Time:
 Long term budgets
 Short term budgets
 Current budgets

 Classification according to Function:

 Functional or subsidiary budgets
 Master budgets

 Classification according to Flexibility:

 Fixed budgets
 Flexible budgets

1. Classification according to Time:-

Based on time factor, budgets can be classified into three types, such as
Long term budgets and Current budgets.

a) Long term Budgets: These budgets are related to planning the

operations of the organisation for a period of 5 to 10 years.
Infact, these budgets are concerned with planning of the
operations of a firm over a considerable long period of time.
These are generally prepared in terms of physical quantities.

32
 b) Short term Budgets: These budgets are designed for a period
of one or two years. These are usually prepared in physical as
well as in monetary units.
c) Current budgets: These budgets are designed for a very short
period, say, a month or a quarter. These are essentially short-term
budgets adjusted to current conditions or prevailing situations.

2. Classification according to Function:-

When budgets are classified on the basis of functions they are called
functional budgets. The number of functional budgets depends on the size
and nature of the business concern.

At the time of preparing functional budgets, the first job is to

identify the principal budget factor or key factor and prepares a budget for
the same. Thereafter, all other budgets will be prepared on the basis of
that budget. For example, if the principal budget factor is sales, first of all
sales budget will be prepared. On the basis of the sales budget, the
production and the other budgets will be prepared.

The functional budgets which are commonly used in a business

concern are as follows:

1) Sales Budget:-

The sales budget is the most important functional budget. The

forecasted quantities of sales and value of sales are presented in
this budget. The difficulty in relation to this budget lies in making a
correct assessment of sales, more particularly when the products
happens to be new to the market. If the estimates of the budget go
wrong, all other functional budgets based on this budget, including
the master budget, go wrong. Therefore the sales budget is the
starting points in preparing other functional budgets.

Sales budget can be prepared showing sales under any one or

combination of the following headings:

a) Product-wise
b) Territory-wise
c) Customer-wise
d) According to sales
e) Period-wise

2) Production Budget:-

33
 After preparing the sales budget, the production budget is prepared.
Production budget is prepared in two parts, one showing the estimates in
volume or quantities, and the other showing production costs. It is first
drawn up in quantities of each product and when the remaining budgets
have been compiled and cost of production is calculated, then the
quantities of production are translated into money terms, to get a
production cost budget.

It is an important budget and forms basis for preparation of material,

labour and factory overheads budgets. This budget helps in best
utilisation of business resources available for production, reduction in
production costs by eliminating wastage, maintenance of optimum
inventory, and production of goods.

3) Materials Budget:-

It is based upon production budget and mainly concerned with material

needed for budgeted output. This budget shows the estimated quantities
of materials and components needed for the output demanded by the
production budget. Materials Budget are of following two types:

a)Material requirement budget:

It is a detailed statement of the forecast of the quantity of raw materials

required for budgeted output. It is necessary to know unit material
utilisation rate for preparing material requirement budget.

This budget helps in preparing purchase budget and in planning

purchases. It also enables fixation of stock levels of material for inventory
control.

b) Material purchase budget:

Careful planning of purchases offers one of the most significant areas of

cost saving in many concerns. Purchase budget is concerned with
purchases for the budget period. It indicates:

i. The quantities of each type of raw material and other items to be

purchased
ii. The timings of purchases
iii. The estimated cost of material purchases

34
The preparation of the purchase budget is the direct responsibility of
purchase manager. He should have sound knowledge of different markets
for different products.

4) Direct Labour Budget:-

Labour cost is classified into direct and indirect. The direct labour
budget will ensure that the plan will make the required number of
employees of relevant grades suitable skills available at the right times. It
specifies the direct labour requirement of various products as envisaged in
the production budget. The direct labour budget will be developed for both
direct labour hours and direct labour cost.

5) Selling and Distribution Overhead Budget:-

This budget shows all the forecasted expenses to be incurred on

selling and distribution of finished goods during the budget period. Thus,
preparation of this budget is based primarily on sales budget, because the
selling and Distribution budget shows the cost of selling and distribution of
quantities shown in the sales budget.

The sales manager is held responsible for selling and distribution

overhead budget.

A lot of review and discussions takes place to incorporate

anticipated changes. All these estimates are then consolidated.

After consolidation, a final selling and distribution cost budget is

presented to budget committee for approval.

6) Factory Overhead Budget:-

Factory overhead or manufacturing overhead budget shows the

estimated manufacturing expenses to be incurred during the budget
period. Factory overhead, as we know, comprises indirect materials,
indirect labour, and indirect factory expenses.

This budget is prepared by the production department managers.

The budget is very useful for computing the pre-determined recovery
rates.

7) Research and Development Budget:-

35
 Research has now become a continuous activity in many industries.
Research and development programmes should be identified and their
corresponding cost should be budgeted. The research and development
budget is the most important tool for planning and controlling research
and development costs. The preparation of research and development
budgets should be based on reasonably accurate estimates and should be
flexible.

8) Administration Overhead budget:-

This budget represents the estimated expenditure of administration.

Administrative expenses in an organisation will be incurred for the
following activities:

a. Formulation of policies
b. Directing the organisation
c. Controlling the operations of an organisation etc.

Since most of the expenses on administration are fixed in nature, this

budget is easy to prepare in comparison to other functional budgets. It
can be prepared with the help of data taken from past budgets and each
budget centre is responsible for the preparation of its own budget which is
ultimately incorporated in the Administration Cost Budget.

9) Cash Budget:-

The cash budget is developed only after all the other functional
budgets are prepared and, in fact, this is the most important of all the
functional budget. This budget is also called the “Financial Budget”. It is a
forecast of expected cash intake and outtake. This budget gives a detailed
estimated of cash inflow from all sources and cash disbursements for all
purposes and the resultant cash balances during the budget period.

3. Classification according to Flexibility:-

On the basis of flexibility, the budget can be classified into

i. Fixed budget
ii. Flexible budget

Fixed budget:-

The fixed budget is a project for a given level of activity of capacity.

It is defined as one “which is designed to remain unchanged irrespective

36
of the level of activity attained”. The basic assumption of this budget is
that there will not be any change in the budgeted level of activity.

This budget can be used only when budgeted and actual activity
levels are the same. In fact, a fixed budget has a limited utility in practice
because the given level of activity and set conditions will never remain
constant. Some internal and external factors will influence and as a result,
the level of activity and set conditions will change.

Flexible budget:-

A budget which depicts different budgeted costs for different levels

of activity is term as a flexible budget. The budget of this type takes into
consideration the unexpected changes in the set conditions of the activity.
It is defined as one,” which is designed to change in relation to the level of
activity attained.”

A flexible budget is thus known as a variable or sliding scale budget

as against the fixed budget which is static in nature. Thus, it can be said
that with flexible budget it is possible to establish budgeted cost for any
range of activity and this budget is more use full for the purpose of
budgetary control.

37
BUDGET PREPARATION IN ONGC
It is a statutory requirement for ONGC Ltd to prepare budget
estimated for the next year and submit them in the form of annual plan to

38
the ministry after the budget is approved by the board. ONGC also
prepares, along with the estimates for the next year, the revised
estimates for the current year. These are primarily the corrections made
to the plan drawn in advance.

TYPES OF BUDGET IN ONGC

1. General budget
2. Performance budget

 GENERAL BUDGET

General budget includes:

 Income budget:- Income budget primarily generated based on the

sale of crude oil, natural gas, LPG, NGL, ARN, etc. these budgets are
projected based on the production program planned at each asset.
 Expenditure budget:- This is the budget which is planned in the
natural heads i.e. man power, other charges, capital, stores, spares
and contractual at each department under plan and non planned.
Natural head budget also converted into activity wise financial
outlays for services.

ONGC’s expenditure budget is grouped under to broad heads:

 Plan expenditure budget

 Non plan expenditure budget

a. Plan expenditure budget:-

The plan expenditure is that expenditure which is incurred with the
objective of creating asset, which will help in increasing the revenue
earning capacity of the organisation.

This is made up of following:-

 Survey
 Exploratory & Development drilling
 Institute of Research & Development Expenditure
 Capital
Thus the plan expenditure is that part if the expenditure which is
incurred with the objective of increasing long term revenue earning
capacity of the organisation.

b. Non plan expenditure budget:-

39
 Expenditure, which is incurred for earning the revenue for the
current financial year and maintaining the same, is non plan
expenditure. Expenditure not coming within the preview of plan is
treated as non plan expenditure.

This is made up of following:-

 Production expenditure
 Statutory levies
 Foreign exchange loss

 PERFORMANCE BUDGET

Traditional budget are being prepared for different element of cost

like man power, material, etc. this cannot help us to determine the
efficiency of various activities, so this cannot be as performance
indication. To overcome this and make budget more objective and
purposeful, budget are being prepared for different activities, e.g. Survey,
Drilling, etc. this budget is compared with actual performance taking into
account the actual physical achievement with planned level of activity and
the financial implication. In this way performance and productivity can be
measured.

ONGC’s performance budget contains the following:-

 Review of actual performance of proceeding year reason for

variation.
 Budget estimates and revised estimates of physical activity for
current year reason for variation.
 Budget estimates of physical activity for next year.

Above physical figures are supported by financial figures. Besides that

information like internal resources, financial efficiency indicators, physical
efficiency indicators, etc.

Budget is prepared for the elements, which are requires for executing
the plans of action, grouped primarily under the following heads:

 Capital
 Manpower
 Stores
 Contractual payments
 Other charges

40
Capital:

Primarily the estimates for capital are done by the technical officers in
consultation with the stores and purchases officer, keeping in mind the
plan and norms.

Manpower:

The forecasts for manpower has to be made keeping in view the actual
manpower for the preceding period and the likely changes in the level of
activity, likely pay revision, if any, annual promotion, price index changes,
VRS, etc. and any factor which is having direct bearing on the likely
manpower cost.

Stores and Spares:

For stores and spares budget, both the concept of consumption and
purchases, has to be kept in mind. This is because, although budget is
essentially on cash basis and consequently related to purchases of stores
and spares, the purchase is fixed only after the consumption is firmed up.
There is no standard guideline for making estimation. This method will
depend upon the nature of the particular item.

Thus the consumption budget for stores and spares is firmed upon the
basis of past consumption levels, likely increase/decrease in the level of
activity and in case of well material directly on the basis of chasing policy
and well depth planned.

Contractual payments:

In this case each and every contract has to be analysed to see:

a) Whether the introduction or continuance of the same is having proper

executive authority, and

b) Justification from the concerned execution of the contract.

Then the actual expenditure to be incurred on the services availed/utilized

is worked out considering the likely date of mobilization of the services
and the rates as per the contract. As the budget is now on the accrual
basis, no adjustment for opening and closing liabilities is made.

Other Charges:
41
This is also to be forecasted on the basis of actual expenditure during the
preceding period and likely level of activities. Further, expected rise in the
price and any other special event which is likely to affect the future other
charges have to affect the future other charges have to be considered
while making forecast.

Statutory charges:

This is computed directly on the basis of quality of various products and

the likely rate of charges. Proper care has to be taken before applying the
rate, which must be the current rate. However, if any likely change is
anticipated that incorporated after getting approval from the appropriate
authority. For statutory charges the detailed basis of calculation showing
clearly the assumptions, etc, made should be given. Further special care
has to be taken for these items, which are reimbursable to see the
reimbursement has been taken properly under income.

Budget drivers:

Prime factors responsible for preparation of budget are:

 Cost
 Inventory
 Profitability

Cost:

The unit cost of activities is to be taken as the guiding factor for working
out budgetary outlays for each assets/basins, services, regional office.
Bench mark/standard unit of cost of activities such as drilling, survey,
production, work-over, etc., for each location are to be considered. The
methodology for working out the cost of activities for budgetary purpose
will be same as per accounting cost cycle allocations in view of
synchronisation of budgets and accounts.

Inventory:

The inventory management is essential to optimise the inventory holding

carrying cost. Inventory built up leads to increase in our non-performing
assets (NPA), which has direct impact on bottom line of the corporation.
While preparing/approving item-wise budgets for stores and spares, the
available items in stock must be kept in view. Inventory variation
statements are to be invariably prepared and made available by each

42
location to the virtual corporate the items proposed by user groups. The
guiding principle will not be built up further inventory.

Profitability:

ONGC has enjoyed the privilege of being number one profit making
company in the country. This position would come under challenge unless
conscious efforts are made to improve the profitability. While framing the
budget estimates, it must be kept in view that not only the physical
targets set in the MOU are to be achieved but the financial parameters of
gross margin, net profit/capital employed and net profit/net worth
indicated there in are also to be achieved. It may be made clear that the
financial parameters carry more weight (60%) as compared to physical
targets (14%) in the MOU. Hence, profitability of the assets/basins gains
importance than cash outflow. The asset/basins are therefore, expected to
prepare budget profit margin and contribution of each location and lay
emphasis on the achievement of overall efficiency/productivity and cost
effectiveness.

43
 BUDGET PROCESS IN ONGC
The budget process is an extremely significant tool of financial
control in the hands of the management of a commercial entity. This
financial control mechanism becomes more prominent for a flagship
Navratna PSU like, ONGC, with manual outlay on plan and non-plan
activities, including statutory levies, aggregating in excess of Rs. 38,000
crores. Since the plan budget of ONGC becomes a component of the
annual plan document of the administrative ministry. While the budget
estimates relate to the next financial year, as a mid course correction, the
budget outlay for the ongoing year also gets reviewed as revised budget
estimates. The budget complication incorporates as a first stage the
physical programme of activities and after the concerned functional
directors approve such physical activities, the financial outlays are framed
keeping in view reasonability of the cost of activities and economy in
expenditure.

According to as per rule 21 of ONGC Act,1959, it is a statutory

requirement for ONGC to prepare estimates for the next year and submit
to the ministry duly approved by the commission by 15 Oct for approval.
However, as per the existing policies ONGC submits along with the
estimates for next year the revised estimates for the current year to the
ministry after the corporate duly approved the same.

The process of budgeting lies in three folds with the consideration of

two years, viz;

B.E of 2007-2008

R.E of 2007-2008
44
 B.E of 2008-2009

Thus the two financial years are 2007-08 & 2008-09

In ONGC the budgeting process starts in Feb/March with the preparation of

plan action for the next year and budgeted estimates for the next year.

The budget preparation of the organisation is based on three levels that

are-Project, Regional and Corporate.

It is a statutory requirement of ONGC to prepare budget estimates

of the next year and to submit to the ministry duly approved by the
commission by 15 Oct, for approval. As per the existing policies ONGC
Limited submits along with the budget estimates for the next year, the
revised estimates of the current year to the ministry after the ONGC board
duly approves the same.

The existing practice of budget preparation for the two years was
not able to address the requirement of long lead procurements and
contracts spread beyond a period of two years the concept of
commitment budget has therefore been introduced to facilitate the cases,
which needs to be processed with a financial sanction in the current
period, whereas actual receipt of material/services occur only in the future
years. ONGC has adopted a new assets bases CRC structure. Now the
budgetary exercise is being done in Assets, Basin Services, Regional
offices, Institutes and Corporate functions as per the CRC structure.

The budgetary process of the organisation has undergone changes

in the last couple of years to provide greater flexibility to the operating
managers in their operation and at the same time making them
accountable for the costs of operation at the corporate level. Budget
allocations to the asset/basin/services institutes and corporate functions
are made on the basis of overall resource generation and physical
programme of work. The asset/basin institute & services chiefs have
operational flexibility to provide for the budget items.

Budgetary process

1. Estimates are made for 2 years on rolling basis.

2. Budgetary process starts in may
3. Current year budget (BE) is revised to Revised estimates (RE)
4. Next year’s budget is estimated BE (budgetary estimates)

Time schedule

45
  Budget Circular issued by Director(F)- First week of April
 Detailed proposals with proper justifications along with quantitative
basis are to be prepared by respective Fund Centre Heads and the
same to be submitted to finance by finance by respective Budget
Coordinators to be finalised both for RE and BE
– April to May
 Budget Coordinators are required to submit final proposals after
obtaining due approval/concurrence from Competent Authority to
be submitted to F&A duely reviewed by Heads -15th June
 Finalised Budgets as received from Budget Coordinators within the
cut off date, are Consolidated/Compiled formatted by Finance in the
budget software and submitted to Corporate Budget – 15th July
 Corporate Budget Consolidates the budgetary figures received for all
work centres of ONGC – August-September
 Budget Agenda is put up to the Board & PAC for approval –
September
 The Budget is approved by the Board with a moderation in Plan &
Non-Plan figures – October
 It is then communicated by Corporate Budget to all work centres
including HQF – October-November
 HQ finance after aligning the approved figures, communicates it to
the fund centre heads/Budget Coordinators for factoring in the
moderation on their priority needs – November
 After receiving the response, the Budgetary Data is loaded in the system
and then the Approved figures is communicated to the Fund Centre
Heads/Budget Coordinators– November-December

Budget is prepared at each location under the three levels:-

 Procurement budget
 Consumption budget
 Cash budget

1. Procurement budget:-

Procurement budget is the budget foe procurement of capital, stores &

spares and contractual payments. Procurement budget is derived from
consumption budget as under.

Procurement budget= consumption + planned closing stock – opening

stock

The department primarily prepares that budget for expenditure on capital

acquisition, stores & spares, contractual where as manpower and other
charges are planned as deferred revenue.

46
2. Consumption budget:-

The budget is primarily defined as operational budget. This budget is

planned at lowest level where the expenditure is likely to be incurred in
manpower, other charges, consumption of stores & spares and
contractual. Consumption of stores & spares are planned on the basis of
per unit rate of consumption.

3. Cash budget:-

This budget indicates the actual outgo of financial resources during the
period and is to plan funds availability and approved physical work
programme.

BUDGETING EXERCISE IN ONGC

 ONGC is one of the few E&P companies, which has in-house fleet of
rigs & equipments for drilling & support activities.

 Due to in-house fleet of rigs & equipments, budget for service also
need to be prepared which gets subsequently allocated to final
activities of survey, exploratory & development drilling and
production.

 With the implementation of CRC structure, assets/basin/services

structure has been implemented.

 Service function under the control of the asset manager except for
Mumbai offshore where they are under control of director offshore
as they simultaneously provide support to three assets & one basin.

47
  Based on the above characteristics, budgeting exercise has been
moulded to meet the specific requirements of ONGC.

 Budget is prepared by each of the virtual corporate line wise under

natural heads for each of the cost centre.

BUDGET MONITORING MECHANISM IN ONGC

No planning system is complete without proper monitoring and control. In
ONGC also budget utilisation is monitored on periodic basis.

I. MONITORING AT PROJECT LEVEL- Budget utilization is monitored on

monthly basis and based on received corrective actions for revision
of budget are taken for re-appropriation on budget from surplus
heads to deficit heads.

II. MONITORING AT CORPORATE LEVEL- At corporate level budget is

monitored on monthly & quarterly basis.

a. Monthly review on cash basis for natural head budget:-

Budget expenditure reports under natural heads of budget are
collected from the work centres on monthly basis and budget
utilization is reviewed.

b. Quarterly review of activity wise performance:-

Working out of activity wise budget requires cost allocation of
common services to final activities. As liabilities are provided and
cost cycles are executed on quarterly basis, activity wise
expenditure is worked out on quarterly basis from quarterly

48
 accounts and budget performance vis a vis achievement of
physical targets are reviewed.

c. Half yearly review by the board:-

In ONGC monitoring is given due importance & utilization is
reviewed on half yearly basis in the board meetings. For this
board agenda is submitted by corporate budgeted section
detailing Asset/Basin wise budget utilisation.

SALIENT FEATURES OF THE PROPOSED

BUDGET

DECENTRALISATION:-

To ensure better operational performance, productivity and greater

coordination amongst the various functional groups and attributes
accountability for overall performance undefined areas, asset/basin
managers have been granted considered flexibility. It is therefore
expected that their physical targets and financial outlays are framed as
per the potential of the field/area/project and work centres. Each
asset/basin is like a profit/cost centre land shall prepare beside annual
cash budget, profit & loss account, statement of generation of resources
and exploration. P&L account in order to assess the economics/cost
benefit analysis of exploration efforts. The ultimate objective is to make
each region as self reliant in terms of resources generation for its planned
activities.

49
COST CONTROL AND REDUCTION:-

ONGC has been adjusted as number one Corporation in India in terms of

profitability, net worth and market capitalization. However, in the area f
cost consciousness, credit worthiness and wealth creation ONGC has been
rated miserably low. This necessitates more focuses approach on cost
control and cost reduction, which in turn would require meaningful
analysis of the past and proposed outlays and prioritization of planned
activities. Developing benchmark cost control and cost reduction which in
turn would require meaningful analysis of planned activities i.e. Survey,
Drilling, and Production taking into account the internal & external
environmental factors. Actual costs for the past three years and the trend
therefore is one of the ways to control costs. It is expected that the region
shall be established sound benchmarks costs and measure their
performance as against. Cost reduction measures adopted by the region
and its financial implication should be separately indicate in the budget.

CAPITAL BUDGET:-

For each and every capital items or group of capital items whether new or
replacement, a detail cost benefit analysis brings out the Pay Back Period,
NPV, and IRR, etc. should be carried out. No provision shall be made for
capital items unless financial analysis is carried out and these are
economically viable. However, all capital items should be prioritized in
order of their operational necessity so that if non-priority capital items can
be deferred in cash of budget/fund constraints.

TAX PLANNING:-

For the purpose of taking maximum benefits under the income tax, it must
be ensured that the facilities and assets procured/erected are put to use
without any time loss. As delay on commissioning of the same may not
only deprive us of the desired benefits from the assets/operations but may
also result in the loss of appropriate tax benefits, thereby further reducing
internal resources.

CONTRACTUAL PAYMENTS:-

All proposals for making provision for contractual payments need to be

scrutinized thoroughly. In case of contracts for hiring of manpower/labours
50
approval need to be obtained. For contracts of hiring of
machinery/equipment etc. detailed cost benefits analysis as in case of
capital items may also be carried out besides carrying out cost benefits
analysis of Hiring vs. Owning. All these efforts are made to reduce the
outflow on contractual payments.

51
STANDARD COSTING
STANDARD

It is a pre-determined measurable quantity set in defined conditions.

Therefore, a standard figure is one against which one can measure an
actual figure to see by how much actual differs from the standard.

52
STANDARD COST

Standard cost is a scientifically pre-determined cost, which arrived at

assuming a particular level of efficiency in utilisation of material, labour
and indirect services. In other words, standard cost is a pre-determined
cost that should be attained under a given set of operating conditions. The
main object of standard cost is to look forward and assess what the cost
‘should be’ as distinct from what the cost has been in the past.

Standard cost is a pre-determined cost which determines what each

product or service should cost under given circumstances.

-Browan and Howard

Standard costs and Estimated costs

Both standard costs and estimated costs are pre-determined costs

computed in advance of production. But their objectives are normally
different. Thus, the term ‘standard costs’ should not be confused with
‘estimated costs’. The important distinctions between the two are as
follows:

i. Nature: Standard costs point out what costs ought to be. Estimated
costs show what costs will be.
ii. Determination: standard costs are determined on a scientific basis
while estimated costs are not scientifically determined. They are
determined by adjusting past figures to possible future changes.
iii. Purpose: standard costs serve the purpose of cost control. Estimated
costs do not serve such purpose. Such costs serve other purposes,
like quoting selling price of new products, decision to buy or
manufacture, etc.
iv. Applicability: standard costs can be used by a firm which has
standard costing system. Estimated costs may be used in any
concern operating on a historical costs system.

DEFINITION OF STANDARD COSTING

Standard costing is simply the name given to a technique whereby

standard costs are computed and subsequently compared with the actual

53
costs, to determine the efficiency of the operation, so that any remedial
action may be taken immediately.

“Standard costing is a method of ascertaining the costs whereby statistics

are prepared to show: (a) the standard costs; (b) the actual costs; (c) the
difference between these costs, which is termed as variance.”
-H.J.Wheldon

The above definitions of standard costing indicate that any system of

standard costing involves the following steps:

i. A careful determination of standards.

ii. Ascertaining actual performance
iii. A comparison of actual performance with standards by preparing
appropriate reports showing difference between actual and standard
performance.
iv. Identifying the reasons for the difference between actual
performance and standards through variance analysis. Variance may
be controllable and non-controllable.
v. Taking appropriate action on the basis of the nature of variance i.e.,
controllable and non-controllable.
vi. If the variance is controllable, take corrective action to prevent its
recurrence: if non-controllable, revise future standards.

DIFFERENCE BETWEEN BUDGETARY CONTROL &

STANDARD COSTING
54
 Budgetary control and standard costing are two different terms.
Standard costing is introduced primarily to ascertain efficiency and
effectiveness of cost performance. Budgetary control is introduced to
state in figures an approved plan of action relating to a particular period.
Thus, although each has a distinctive object of its own, and one can be
worked without the other, but they function much better in conjunction
with each other than in isolation. But yet, their inter-relationship does not
mean that they are inter-dependent. It is precisely for this that it becomes
necessary to know the points of similarity and of difference between
budgetary control and standard costing.

Points of Similarity

 Both have common object of improving managerial control.

 Both assume that costs are controllable along fixed lines of
supervision and responsibility.
 Actuals are compared with the standards set in the case of both.
 In both the techniques results of comparison are analysed and
reported to management.
 Both aim at corrective action to be taken in the case of deviated
performance.

Points of difference

 Budgeted costs, based on past experience, are expected costs.

However, standard costs are planned costs, indicating the level of
costs that should be attained.
 Budget is a plan of action for a definite period, whereas standard
costs are criteria for operative efficiency.
 Budget preparation considers both income and expenditure,
whereas use of standard costing is mainly confined to expenditure
only.
 Budgets are laid down for all functions of an organisation like
production, purchase, selling and distribution, and research and
development. Standard costing relates primarily to one function,
i.e., production. It mainly deals with manufacturing cost only.
 Budgeting may either be comprehensive or partial. But, there
cannot be a partial application of standard costing.
 While budgeting is concerned with the origin of expenditure at
functional levels, standard costing is concerned with the
requirement of each element of cost for each cost unit.
55
 Budget lay down the level of costs which should not be exceeded.
Standards, on the other hand, emphasis the levels to which costs
should be reduced.
 Budget figures are not for accounting, whereas standard costs are
for accounting and, therefore, entered in cost ledger.
 Budgeting system may be operated without standard costing,
whereas standard costing presupposes existence of budgeting in
operation.
 Budget is a projection of financial accounts, whereas standard cost
is a projection of cost accounts.

56
VARIANCE ANALYSIS
‘Variance analysis’ is the crux of standard costing system. The
variance is the difference between the standard performance and the
actual performance while the ‘variance analysis’ is the process of
analysing variances by sub-dividing the total variance in such a way that
management can assign responsibility for off-standard performance. In
other words, we can say that variance analysis is an exercise, which
involves efforts to isolate the causes of variance in order to reports to
management those situations which can be corrected and controlled by
timely action. In short, variance analysis involves:

 Computation of individual variances

 Determination of the causes of each variance
 Disposition of variances

CLASSIFICATION OF VARIANCES

The main variances can be classified as under:

Classification on Functional Basis: On functional basis, there can be

following type of variances:

a. Cost variance: ‘cost variance’ represents the difference between

the costs actually incurred for production and the costs specified for
the same. Variances can be found out with respect to all elements of
cost i.e., Direct material, Direct labour and Overheads.
b. Sales variance: A sales variance is the difference between the budgeted
value of sale and the actual sales achieved during the budget period.
Various factors such as selling price, sales volume, sales mix may cause
variation between actual sales value and budgeted sales value.

Classification on Result Basis:

On the basis of result, there can be two types of variance-

favourable and unfavourable. Whether a variance is favourable or
unfavourable, is ultimately determined with reference to its impact on
profit. Any variance that has a favourable effect on profit is favourable
variance and any variance which has an adverse or unfavourable effect on
profit is unfavourable or adverse. If the actual costs is less than the
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standard cost, the variance is favourable, and if the actual cost is less
than the standard cost, the variance is favourable, and if the actual cost is
more than the standard cost, the variance known as unfavourable or an
adverse variance. A favourable variance indicates efficiency while an
unfavourable variance denotes inefficiency. The favourable and
unfavourable variances are also known as credit and debit variances
respectively.

Many students experience difficulty in ascertaining whether a

variance is favourable or adverse. In the formulae given in the book,
positive (+ve) variance will indicate favourable variance and negative (-
ve) variance will indicate adverse variances. A favourable variance is
denoted as (F) and an adverse variance is denoted as (A).

Classification on Controllability Basis:

On the basis of controllability, there may be two types of variances-

controllable and uncontrollable. If a variance is due to inefficiency of a
cost centre.(i.e., individual or department ), it is said to be controllable
variance. Such a variance can be corrected by taking a suitable action. For
example, if actual quantity of material used is more than the standard
quantity, the concerned foreman would be responsible for it. On the other
hand, uncontrollable variances do not relate to an individual or
department but it arises due to external reasons like increase in prices of
materials etc. This type of variance is not controllable and no particular
individual or department can be held responsible for it.

The division of variances into controllable and uncontrollable is extremely

important because the attention of the management is drawn particularly
towards controllable variance.

Classification on Measurement Basis:

Variances may be expressed either in an amount or as a

percentage. The former is known as ‘absolute’, while the later, ‘relative’.
In short, the difference between the standard cost and the actual cost, in
terms of money, is an absolute variance. However, if the variance is
expressed as a percentage of the standard cost, it becomes relative.

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EXPENDITURE OVERHEAD VARIANCE

Total planned overhead variance

Revised Estimates – Actual Expenditure = (+Favourable/-Adverse)

Year R.E A.E R.E-A.E +Fav/-Adv % of target

achieved
w.r.t. R.E
2005-06 10624.71 6851.94 3772.77 FAV 100.4%
2006-07 10849.89 10681.29 168.6 FAV 100.02%
2007-08 12735.31 10487.07 2248.24 FAV 100.18%

Calculation of % of target achieved=R.E-A.E ÷ R.E

ANALYSIS:

The past three years have been showing a favourable variance in plan
expenditure. The budgeted expenditure is more than the actual
expenditure.

Total non-planned overhead variance

Year R.E A.E R.E-A.E +Fav/-Adv % of target

achieved

2005-06 11612 12385 -773 ADV 99.93%

2006-07 13385 15648 -2263 ADV 99.83%
2007-08 17993 19912 -1919 ADV 99.89%

ANALYSIS:

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The non-planned expenditure is showing an adverse trend i.e., ONGC is
spending more than it is budgeting. Its actual outflow of non planned
expenditure is around 1105 of estimated expenditure. This increase in
non-planned expenditure is due to increased operating expenditure;
increase in dividend paid or due to increase in tax liability.

PHYSICAL PERFORMANCE VARIANCE

Production variances

Revised Estimates-Actual= (+Adv/-Fav)

CRUDE OIL

Years R.E A.E R.E-A.E +Adv/-Fav % of target

achieved
2005-06 26.446 27.546 -1.1 FAV 99.96%
2006-07 26.814 26.18 0.634 ADV 100.02%
2007-08 26.645 26.627 0.018 ADV 100%

GAS SUPPLY

Years R.E A.E R.E-A.E +Adv/-Fav % of target

achieved
2005-06 19.518 19.386 0.132 ADV 100%
2006-07 19.548 20.062 -0.514 FAV 99.97%
2007-08 19.467 20.625 -1.158 FAV 99.94%

ANALYSIS:

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This calculation shows that there is very little difference in the actual or
budgeted production. In case of crude oil production there is an adverse
trend i.e. actual production is less than targeted, which means that the
company has estimated above its capacity. While in case of gas supply,
shows that the company has estimated below its capacity. It also shows
the better utilization of resources.

URVEY VARIANCES

Revised Estimates – Actual expenditure = +Adv/-Fav

TOTAL 2D SURVEY

Year R.E A.E R.E-A.E +Adv/-Fav % of target

achieved
2005-06 5399 6908 -1509 FAV 99.72%
2006-07 4259 5164 -905 FAV 99.79%
2007-08 15145 16894 -1749 FAV 99.88%

TOTAL 3D SURVEY

Year R.E A.E R.E-A.E +Adv/-Fav % of target

achieved
2005-06 107340 107731 -391 FAV 99.99%
2006-07 108773 144819 -36046 FAV 99.67%
2007-08 96665 117335 -20670 FAV 99.79%

ANALYSIS:

The analysis of survey shows that we are budgeting less than the actual.
There is a huge margin between the budgeted and the actual especially in
3D survey the margin is large. Though it shows the best utilisation of
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resources but it also shows that the company is estimating below its
capacity.

DRILLING VARIANCES

Revised Estimates – Actual expenditure = +Adv/-Fav

EXPLORATORY DRILLING

Year R.E A.E R.E-A.E +Adv/-Fav % of target

achieved
2005-06 333179 287919 45260 ADV 100.14%
2006-07 433530 384592 48938 ADV 100.11%
2007-08 395526 359597 35929 ADV 100.09%

DEVELOPMENT DRILLING

Year R.E A.E R.E-A.E +Adv/-Fav % of target

achieved
2005-06 332841 299506 33335 ADV 100.10%
2006-07 276398 283680 -7282 FAV 99.97%
2007-08 314963 296854 18109 ADV 100.06%

ANALYSIS:

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The above calculations show that the company has estimated less than
the required in the year 2005-06 and 2007-08. While for rest of the years
it has budgeted more than the actual drilled.

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 CONCLUSION

Preparation of budget is a collective effort, especially for an

organisation of the size of ONGC. Obviously, all the persons involved in
the process of exercise of budget cannot be expected to have a uniform
way to understand and interpret. It is therefore required that the
objectives and guidelines from the top management should be very clear
and the middle management should monitor properly before forwarding
the budget proposals.

The observation regarding underutilization is much attributed to the

inherent problem with the procedure of working in ONGC. The major
proposals ( having considerable impact on the budget utilization) involving
huge outlays are normally long term programs, the execution of which has
to undergo lots of clearances and procedures, which cannot be predicted
with certainty, hence the period overrun in utilization.

The conclusion of the analysis of the past 3 years planned

expenditure reveals that the ONGC is budgeting more than the required
expenditure. Although the company tried to reduce its allocations but still
its revised estimates are in excess. The planned expenditure for R&D has
been estimated much more in these three years, the budgeted estimate
margin was high in the year 2006-07.

The production of crude oil and gas supplies shows that ONGC is
budgeting almost equal to the actual production. The variance is
negligible.

It can be seen that the company was having an adverse situation

i.e. it was budgeting more than required where as in the year 2005-06 and
2007-08 the company was having a favourable variance. Thus, it is
showing that company estimates are not accurate for drilling.

The company is exceeding its target for survey which is a sign of

efficiency but it also proves that the company is estimating far below than
its capacity. Actual capacity of the company is much than planned. On the
other hand if we see the figures of expenditure on survey it can be seen
that company is planning more than actually required i.e. the survey can
be done with lesser expenses than planned. It can be concluded that the
company is doing the faulty estimates of cost and physical parameters.

The company’s budgeted estimates are favourable in drilling. There

is not much difference between the estimated and the actual in case of
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development drilling i.e. the variance is negligible. The estimate for
exploratory drilling is slightly more than the required but the company is
having a favourable variance in case of drilling.

After the following study it can be concluded that the company is

not having very accurate budgeting policy. With some exception, usually it
is budgeting too much or too less than the actual requirement. The reason
for this can be the faulty estimates or the delays in budgeting.

PROBLEM AREAS

1. Lack of awareness of Budgetary process and importance of Budget

as an important monitoring tool for Cost Control and achieving
corporate goals and objectives.
2. Non submission of Budgetary Data to finance during Budget making
leading to shortage of funds later.

3. Non Budgeting of items. Eg Golden Jubilee Celebrations

4. Absence of periodical review of approved Budget and utilisation

thereof by the budget coordinators and fund centre heads.

5. Capitalisation of Projects and proper routing and control of

expenditures through WBS elements e.g Museum Project.

6. No control at Budget coordinator level of how many PR has been

made and outstanding PR’s which will not be converted to PO’s
thereby blocking of funds.

7. Resorting to re-appropriations as a practice instead of exceptions for

items which should have been Budgeted but has not been
Budgeted, leading to audit observations and defeating the very
purpose of Budgeting.

8. Files not being routed through Budget Coordinators.

9. Limits as given in BDP for approving authorities needs to be

monitored by Budget coordinators and fund centre heads at the
time of initiation of the proposal itself.

10. Utilization reports cost centre wise is not available in ICE.

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 SUGGESTIONS

Based upon the understanding and observations of the existing

system of budgeting in ONGC, it is felt that there is a need to make the
budgeting system more efficient and effective. Some of the suggestions
are mentioned below:

The focus of budgeting procedure should be on the budget

estimates of the next year and not on the revision of the estimates for the
ongoing year. The result is that the schemes of the next financial year are
given less importance than the modification in the budget process, thus
loses its significance as a planning tool-the prime and basic concept of
budgeting. As a result the figures of the next year are not accurate and
require a lot of modifications when they are to be reviewed next year.
Hence the problem of inaccuracy arises. Therefore, the importance should
be shifted on budgeting of BE.

If budgeting has to be emphasized from the management point of

view, somebody has to be entrusted with the responsibility of ensuring the
accuracy. Hence, some sort of incentive/recognition scheme could be
implemented for motivating the budget coordinators.

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 The analysis of plan and non-plan expenditure shows that we are
budgeting more for the plan and less for the non-plan which affects the
working capital; hence company should allocate resources more for the
non-planned expenditure and less for the planned as required.

The technical and finance personnel having proper exposure and

knowledge in both the fields should interact in a reiterative process before
preparing a realistic budget.

As ONGC is a large concern its budgetary process is complex.

Hence, it takes considerable time; therefore there is a need for an
integrated information system so that there is a faster exchange of
information and help in reducing the time.

ABBREVIATIONS

EOR Enhanced Oil Recovery

SKD Semi Knocked Down
NELP New Exploration Licensing Policy
LPG Liquefied Petroleum Gas
E&P CO. Exploration & Production Company
MRPL Mangalore Refinery and Petrochemicals Limited
OVL ONGC Videsh Limited
MMTPA Million Metric Tones Per Annum
CRC Corporate Rejuvenation Campaign
SLA Service Legal Agreement
BOE Barrels of Oil Equivalent
O+OEG Oil & Oil Equivalent Gas
QHSE Quality, Health, Safety and Environment Management
CDM Clean Development Mechanism
BCM Billion Cubic Meters
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MOST Motilal Oswal Securities & Trading Awards
EPS Earning Per Share
PSU Public Sector Undertaking
CBM Coal Bed Methane
UCG Underground Coal Gasification
SCG Surface Coal Gasification
NGHP National Gas Hydrate Program
MMT Million Metric Tonnes
BSE Bombay Stock Exchange
EVA Economic Value Added
MVA Market Value Added
PAT Profit After Tax
PSE’s Public Sector Enterprises
MOU Memorandum of Understanding
SAPMAIL System Application & Products Mail
IRS Institute of Reservoir Studies
ICE Integrated Composite Efficiency

BIBLIOGRAPHY
BOOKS:

“Management accounting” - Dr. A. K. Garg

Dr. D. R. Yadav

Dr. Sanjeev Gupta

“Accounting for Management” – N. P. Srinivasan

M. Sakthivel Murugan

Accounting for Managerial Decisions – Dr. K. G. Gupta

WEBSITE:

www.ongcindia.com

www.ongcreports.com
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MISCELLANEOUS:

Budgets outlay of ONGC

Budgets circular

Budget agenda

ONGC Report, monthly publication of ONGC

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