If, however, the cost was identified as a fixed cost, no changes are made in the budgeted amount when the flexible budget is prepared. Standard cost data would be compiled that include details of the activity cost drivers required to produce a product or number of products. Budgeting helps in optimum utilization of resources by allocating them according to the requirements of different departments. The budget was based on a cane tonnage cut of 16,000 tonnes in the 3rd quarter and a cumulative tonnage of 25,000. Next is to coordinate: Budgeting helps managers in coordinating their efforts so that objectives of the organization are synchronized with the objectives of its constituents. Our tutors have many years of industry experience and have had years of experience providing Advantages, Limitations of Budgetary Control Homework Help.
In Zero Based budgeting no reference is made to previous level expenditure. This system enables the introduction of management by exception. Efficiency and Economy: Effective budgetary control results in cost control and cost reduction. It is difficult o forecast accurately the results in it. The management should be enthusiastic for the success of this system and should give full support for it. These targets guide the business operations and help in overcoming problems and analyzing the future.
It also makes the various operations of the enterprises economical. Emphasis on co-ordination and cooperation helps in achieving the predetermined targets and goals. Oatley in 2001 notes that nowadays most business enterprises use the assumption that budgetary system has become the more integrative control method. While any plan need not be a budget, a budget has to be necessarily a plan. If there is no definite aim then the efforts will be wasted in pursuing different aims.
State the various methods of preparing sales budget. If the budgets are arbitrarily imposed top down, employees will not understand the reason for budgeted expenditures, and will not be committed to them. Similarly, other factors may also improve at different times. Economy: The planning of expenditure will be systematic and there will be economy in spending. The committee is responsible for preparation and execution of budgets. It forecasts what the company can reasonably expect to sell to its customers during the budget period. This makes it possible for a person without any accounting training to build a budget.
Indeed ideally it sets out detailed plans for achieving the targets for each department, and so managers anticipate and give the business purpose and direction. In technical view, a budget is a statement that includes a conjecture of revenues and expenditures for a period of time, generally a year. The length of period chosen is important in that the shorter it is, the greater the control that can be exercised by the budget but the greater the expense in preparation of the budget and reporting of any variances. The expenses involved in production as per budget are grouped as fixed, variable and semi variable. Overheads may be further subdivided in to fixed, variable and semi-fixed overheads. Periodically, accountants compare the budget with actual expenditures, and take note of any discrepancies.
Ask the managers responsible for those areas to explain the variances. It shows yearly cash position with proper breakups by quarters and months. Budget also serves as a reference for organizing your bills, receipts, and financial statements. · Clearly defines areas of responsibility. The standard direct labor hours of each grade of labor required for each unit of output and standard wage rate for each grade of labor are ascertained. Expenses associated with capital expenditure for example repairs, maintenance and depreciation, and so on. Control in budgeting may be combined effort aimed at keeping management informed of what pre-determined plans will achieve.
If, however the manager is the Chief Executive Officer, the entire income statement should be used in evaluating performance. Select and explain appropriate budgetary systems for an organisation, including topdown, bottom-up, rolling, zero-base, activity base, incremental and feed-forward control. However it has certain limitations while operating it as a technique. Management controls, in the broadest sense, include the plan of organization, methods and procedures adopted by management to ensure that its goals are met. There should be coordination in the budgets of various departments. The raw material supply may be limited; so production, sales and cash budgets will be decided according to raw materials budget.
Budgets broaden individual thinking by helping to remove unconscious biases on the part of engineers, sales and production officers. This control is important because spending excesses have an unfavorable impact on corporate profits. This will make the departmental heads to be selfish to get maximum funds and think in terms of achieving their own set targets, thereby raising conflict among different departments. The whole exercise is done to check inefficiencies, wastages and losses, thereby improving the overall performance of the organization. Advantages of Budgetary Control There are numerous advantages of budgeting control: It offers an efficient plan based on facts. The difficulties in the preparation of this budget arise because it is not easy to estimate consumer demand, particularly when a new produce is introduced. The production budget is prepared by the chief executives of the production department.
Balance sheet at the end of the year. For example, if rolling budgets are prepared quarterly there will always be a budget extending for the next 9 to 12 months. A cash budget is often a rolling budget because of the need to keep tight control of this area of financial management. It is actually a detailed estimate of money receipts from all sources and cash payments for many purposes and the resultant cash balance throughout the budget period. According to the principles that guide the preparation of the flexible budget a series of fixed budgets are drawn for different levels of activity. Some of the limitations are discussed as follows: 1. Coasts are classified according to the nature of their variability.
Machine Hour Rate Overhead Distribution 2. Marginal Costing Formula Formations : 3. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs. If the budgeted and actual activity levels vary, the correct ascertainment os coasts and fixation of prices becomes difficult. Having identified cost centres, the next step will be to make a quantitative calculation of the resources to be used, and to further break this down to shorter periods, say, one month or three months. A budgetary committee is formed which comprises the departmental heads of various departments. It generally culminates in a cash budget, a budgeted income statement and a budgeted balance sheet.