Accounting for Managers

Budget is a plan quantified in monetary terms prepared and approved prior to a definite period of time
usually showing planned income to be generated and/or expenditure to be incurred during that period and
the capital to be employed to attain a given objective.

Budgetary control is the establishment of budgets relating to the responsibilities of executives to the
requirements of a policy and the continuous comparison of actual with budgeted result either to secure by
individual action the objectives of that policy or to provide a firm basis for its revision.

There are four common types of budgets that companies use: (1) incremental, (2) activity-based, (3) value
proposition, and (4) zero-based.
Scope of Budgetary Control

The scope of a budgetary control broadly covers the following:

To define the business objectives precisely and establish the performance targets.
To delineate the responsibilities of each department as well as each personnel.
To create a standard benchmark for measuring performance.
To identify the reasons for variation, if any, and take necessary corrective actions.
To ensure optimal utilization of available resources to improve productivity as well as profitability.
To monitor and revise the budgetary plans in case there is any such requirement due to changing environment.
To articulate long-term policies with maximum accuracy.
Importance of Budgetary Control
The importance of budgetary control is reflected from the fact that it helps the management to efficiently track
the company’s performance. Such monitoring ensures that the deviation of the company’s actual performance
from the budgeted one is always under the scanner and can be rectified before it is too late.
In this way, the unfavorable impact of the deviations on the corporate profit is mitigated to a large extent.

Advantages
1) It facilitates a centralized control on various decentralized activities.
2) It encourages more co-ordination among the different departments.
3) It helps in eliminating wasteful expenses to improve profitability.
Cash Budgeting or short- term forecasting is the principal tool of cash management. Cash budgets are
helpful in – a) estimating cash requirements b) planning short-term financing c) scheduling payments in
connection with capital expenditures d) planning purchase of materials e) developing credit policies
and f) checking the accuracy of long-term forecasts.

The budget periods are as per requirement of the companies which may vary from weekly to yearly.
Even firms which are facing liquidity crunches may make it daily.

The principal method of short-term forecasting is Receipts & Payments method. The cash budgets prepared
under this method shows timing and magnitude of cash receipts and payments for the forecasted period.
It includes all receipts and payments irrespective of their classification in accounting.
The estimated sales of ABC Co. from January, 2020 to March,2020- Rs.100000 per month. From
April to June 2020 it is Rs.120000 per month. Sales for previous year November & December were
Rs.100000 per month. Cash and credit sales were 20:80 ratio. Credit sales are collected @ 50% of
receivables on 1 month from date of sale and the balance on 2 months from date of sale. Other
anticipated receipts are- i) Rs.5000 from sale of machine in March and ii) Rs.2000 interest on securities in June.

It purchased materials of Rs.40000 in January and February and Rs.48000 each month from March to June.
The payments are made 1 month after the date of purchase. Previous year December, purchases were
Rs.40000. Other payments each month from January to June are- Cash purchase- Rs.2000, Selling expense-
Rs.30000, Wages- Rs.15000. Dividend and Tax payment of Rs.20000 each is in June. A machine costing
Rs.50000 is to be purchased in March.
Opening cash balance on January 1, 2020 is Rs.22000 and the minimum cash balance required is rs.20000 p.m.
Prepare the cash budget from January to June,2020.
Particulars January February March April May June

Collection of 80000 80000 80000 80000 88000 96000

Sales
Cash Sales 20000 20000 20000 24000 24000 24000
Sale of 5000
equipment
Interest 2000

TOTAL 100000 100000 105000 104000 112000 122000

Particulars January February March April May June

Payment of 40000 40000 40000 48000 48000 48000

purchases
Cash Purchase 2000 2000 2000 2000 2000 2000

Wages 15000 15000 15000 15000 15000 15000

Selling expenses 30000 30000 30000 30000 30000 30000

Dividend 20000

Tax 20000

Capital 50000
Expenditure
TOTAL 87000 87000 137000 95000 95000 135000
Particulars January February March April May June

Opening Balance 22000

Receipts 100000 100000 105000 104000 112000 122000

Payments 87000 87000 137000 95000 95000 135000

Net Cash Flow 13000 13000 (32000) 9000 17000 (13000)

Cumulative Cash 13000 26000 (6000) 3000 20000 7000

Flow

Closing Balance 35000 48000 16000 25000 42000 29000

Surplus/Deficit 15000 28000 (4000) 5000 22000 9000

Sales Budget-
As sales is the principal budget factor, sales budget is the most important budget and. Forms the basis on
which all the other budgets are built up. It is the forecast of quantities and values of sales to be achieved in
a budget period. In preparation of sales budget following factors are to be considered-
a) Past sales figures and trends
b) Salesman’s estimates
c) Plant capacity
d) Availability of raw materials and other supplies
e) General trade prospects
f) Orders in hand
g) Seasonal fluctuations
h) Financial aspect
i) Adequate return on Capital employed
j) Competition
Flexible Budgeting- It is that budget which recognises the difference in behaviour between fixed and
variable costs in relation to fluctuations in output, turnover or other variable factors such as number
of employees, and is designed to change approximately with such fluctuations.

The expenses budgeted for production of 10000 units in a factory are as follows-
Particulars Per Unit (In Rs) Prepare a
Materials 70 Flexible budget
labour 25 For production
Variable factory overheads 20 Of 6000 units
Fixed factory overheads (Rs100000) 10 And 8000 units.
Variable expenses (Direct) 5
Selling expenses (10% fixed) 13
Distribution expenses (20% fixed) 7
Administrative expenses( Fixed 50000) 5 Cost of Sales –Rs. 155
----
Particulars8000 units Output 6000 units Amount Output 8000 units Amount
Per unit (rs) Per unit (Rs)

Variable or Production
expenses
Material 70.00 420000 70.00 560000
Labour 25.00 150000 25.00 200000
Direct Variable expenses 5.00 30000 5.00 40000
Prime Cost 100.00 600000 100.00 800000
Factory Overheads 20.00 120000 20.00 160000
Variable Overheads 16.67 100000 12.50 100000

Works cost 136.67 820000 132.50 1060000

Fixed administrative cost 8.33 50000 6.25 50000

Cost of Production 145.00 870000 138.75 1110000

Selling expenses 2.17 13000 1.63 13000

Fixed 10% of 13

Variable 90% of 13 11.70 70200 11.70 93600

Distribution expenses
Fixed – 20% of Rs.7 2.33 14000 1.75 14000
Variable- 80% of Rs.7 5.60 33600 5.60 44800
Total cost of sales 166.80 1000800 159.43 1275400
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