Góc học tập
15/04/2016 07:28:21 AM

Cost Accounting - Budgeting Analysis

We are all well-familiar with the term budget. Budgeting is a powerful tool that helps the management in performing its functions such as planning, coordinating, and controlling the operations efficiently. The definition of budget is,

 

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

---CIMA, England

Budget, Budgeting, and Budgetary Control

Let us go through the terms sequentially.

Budget

Budget represents the objectives of any organization that is based on the implication of forecast and related to planned activities.

Budget is neither an estimate nor a forecast because an estimation is a predetermination of future events, may be based on simple guess or any scientific principles.

Similarly, a forecast may be an anticipation of events during a specified period of time. A forecast may be for a specific activity of the company. We normally forecast likely events such as sales, production, or any other activity of the organization.

On the other hand, budget relates to planned policy and program of the organization under planed conditions. It represents the action according to a situation which may or may not take place.

Budgeting

Budgeting represents the formation of the budget with the help and coordination of all or the various departments of the firm.

Budgetary Control

Budgetary control is a tool for the management to allocate responsibility and authority in planning for future and to develop a basis of measurement to evaluate the efficiency of operations.

A budget is a plan of the policy to be pursued during a defined time period. All the actions are based on planning of budget because budget is prepared after studying all the related activities of the company. Budget gives a communication ground to the top management with the staff of the firm who are implementing the policies of the top management.

Budgetary control helps in coordinating the economic trends, financial position, policies, plans, and actions of an organization.

Budgetary control also helps the management to ensure and control the plan and activities of the organization. Budgetary control makes it possible by continuous comparison of actual performance with that of the budgets.

Budgets are the individual objectives of a department whereas budgeting may be said to be the act of building budgets. Budgetary Control embraces all this and in addition, includes the science of planning the budgets themselves and utilization of such budget to effect an overall management tool f or the business planning and control.

...Rowland and William

Types of Budgets

Budgets can be categorized in various ways. Let us go through the types of budgets in detail.

Functional Budgets

It relates to any function of the firm such as sales, production, cash, etc. Following budgets are prepared in functional budgets:

  • Sales Budget
  • Production Budget
  • Material Budget
  • Manufacturing Budget
  • Administrative Cost Budget
  • Plant Utilization Budget
  • Capital Expenditure Budget
  • Research and Development Cost Budget
  • Cash Budget

Master Budget or Summarized Budget or Finalized Profit plan

This budget is very useful for the top management of the company because it covers all the information in a summarized manner.

Fixed Budget

It is a rigid budget and is drawn on the assumption that there will be no change in the budget level.

Flexible Budget

It is also called a sliding scale budget. It is useful in:

  • the new organizations where it is difficult to foresee,
  • the firms where activity level changes due to seasonal nature or change in demand,
  • the industries based on change of fashion,
  • the units which keep on introducing new products, and
  • the firms which are engaged in ship-building business.

Zero Base Budgeting

Zero base budgeting is not based on the incremental approach; previous year figures are not adopted as base.

CIMA has defined it as:

As a method of budgeting, where all activities are revaluated each time a budget is set, discrete levels of each activity are valued and combination is chosen to match the funds available.

Control Ratios

Following ratios are used to evaluate the deviations of the actual performance from the budgeted performance. If the ratio is 100% or more, it represents favorable results and vice-a-versa.

Capacity Ratio

= 

Actual hours workedBudgeted hours

Activity Ratio

= 

Standard hours for actual productionBudgeted hours

 × 100

Efficiency Ratio

= 

Standard hours for actual productionActual hours worked

 × 100

Calendar Ratio

=   

Number of actual working days in a periodNumber of working days in the budgeted period

 × 100

Flexible Budget Vs. Fixed Budget

Points

Flexible Budget

Fixed Budget

Flexibility

Due to its nature of flexibility, it may be quickly re-organized according to the level of production.

After the commencement of a period, fixed budget cannot change according to actual production.

Condition

Flexible budget may change according to change in conditions.

Fixed budget is based on the assumption that conditions will remain unchanged.

Cost Classification

Classification of costs is done according to the nature of their variability.

It is suitable for fixed costs only; no classification is done in fixed budget.

Comparison

Comparisons of actual figures with revised standard figures are done according to change in the production level of a concern.

If there is change in production level, then it is not possible to do a correct comparison.

Ascertainment of cost

It is easy to ascertain costs even at different levels of activity.

If there is change in the production level or circumstances, it is not possible to ascertain costs correctly.

Cost Control

It is used as an effective tool to control costs.

Due to its limitations, it is not used as cost control tool.

Flexible Budget

Flexible budget provides logical comparison. The actual cost at the actual activity is compared with the budgeted cost at the time of preparing a flexible budget. Flexibility recognizes the concept of variability.

Flexible budget helps in assessing the performance of departments in relation to the activity level achieved. Cost ascertainment is possible at different levels of activities. It is also useful in fixation of price and preparation of quotations.

Example

With the help of the following given expenses, prepare a budget for production of 10,000 units. Prepare flexible budgets for 5,000 and 8,000 units.

Costs

Price per Unit(Rs.)

Material

75

Labor

20

Variable Factory Overheads

15

Fixed Factory Overheads (Rs 50,000)

5

Variable Expenses (Direct)

6

Selling Expenses (20% Fixed)

20

Distribution Expenses (10% fixed)

10

Administrative Expenses ( Rs 70,000)

7

Total cost of Sale per unit

158

Solution

Particulars

Output 5000 units

Output 5000 units

Rate(Rs)

Amount

Rate(Rs)

Amount

Variable or Product Expenses:

        

Material

75.00

3,75,000

75.00

6,00,000

Labour

20.00

1,00,000

20.00

1,60,000

Direct Variable Overheads

6.00

30,000

6.00

48,000

Prime Cost

101.00

5,05,000

101.00

8,08,000

Factory Overheads

        

Variable Overheads

15.00

75,000

15.00

1,20,000

Fixed Overheads

10.00

50,000

6.25

50,000

Work Cost

126.00

6,30,000

122.25

9,78,000

Fixed Administrative Expenses

14.00

70,000

8.75

70,000

Cost of Production

140.00

7,00,000

131.00

10,48,000

Selling Expenses

        

Fixed 20% of Rs.20/-

8.00

40,000

5.00

40,000

Variable Cost 80% of Rs.20/-

16.00

80,000

16.00

1,28,000

Distributed Expenses

        

Fixed 10% of Rs.10/-

2.00

10,000

1.25

10,000

Variable 90% of Rs.10/-

9.00

10,000

1.25

10,000

Total Cost of Sale

175.00

8,75,000

165.25

12,98,000

Cash Budget

Cash budget comes under the category of financial budget. It is prepared to calculate budgeted cash flows (inflows and outflows) during a specific period of time. Cash budget is useful in determining the optimum level of cash to avoid excessive cash or shortage of cash, which may arise in future.

With the help of cash budget, we can arrange cash through borrowing funds in case of shortage, and we may invest cash if it is present in excess.

It is necessary for every business to keep a safe level of cash. Being a part of master budget, the following tasks are included in a cash budget:

  • Collection of Cash
  • Cash Payments
  • Selling Expenses and administrative expensive budget

Format

If a firm wants to maintain cash balance of Rs 50,000 and in case of shortage the firm borrows funds from Bank, following cash budget is prepared:

Particulars

Q-1

Q-2

Q-3

Q-4

Total
         

(Yearly)

Opening Cash Balance

40,000

50,000

50,000

50,500

40,000

Add; Cash receipts

80,000

1,00,000

90,000

1,25,000

3,95,000

Total available Cash (A)

1,20,000

1,50,000

1,40,000

1,75,500

4,35,000
           

Less: Cash Payments:

          

Direct Material

30,000

40,000

38,000

42,000

1,50,000

Direct Labour

12,000

15,000

14,000

16,000

57,000

Factory Overheads

18,000

19,000

17,000

20,000

74,000

Administrative Expenses

16,000

16,000

16,000

16,000

64,000

Selling & Distribution Exp.

9,000

10,000

11,000

12,000

42,000

Purchase of Fixed Assets

-

-

40,000

-

40,000

Total Cash Payments (B)

85,000

1,00,000

1,36,000

1,06,000

4,27,000
           

Cash in hand C (A-B)

35,000

50,000

4,000

69,500

8,000
           

Financing Activities:

15,000

-

50,000

-

65,000

Borrowings

  

-

-3,000

-18,000

-21,000

Repayments of Borrowings

  

-

-500

-1,500

-2,000

Interest paid

          

Net Cash Flows from financing

23,000

0

46,500

-19,500

50,000

Activities ( D)

          

Closing Cash Balance E (C+D)