Project on Budgetary Control Essay
Project on Budgetary Control
1. A budget is concerned for a definite future period. 2. A budget is a written document. 3. A budget is a detailed plan of all the economic activities of a business. 4. All the departments of a business unit co-operate for the preparation of a business budget. 5. Budget is a mean to achieve business and it is not an end in itself. 6. Budget needs to be updated, corrected and controlled every time when circumstances changes. Therefore it is a continuous process. 7. Budget helps in planning, coordination and control. 8. Different types of budgets are prepared by industries according to business requirements. 9. A budget acts a business barometer. 10. Budget is usually prepared in the light of Past Experience. 11. Budget is a constant endeavor of the Management.
PREPARATION OF BUDGETS 1. Definition of objectives: A budget being a plan for the achievement of certain operational objectives, it is desirable that the same are defined precisely. The objectives should be written out; the areas of control demarcated; and items of revenue and expenditure to be covered by the budget stated. This will give a clear understanding of the plan and its scope to all those who must cooperate to make it a success. 2. Location of the key (or budget) factor: There is usually one factor (sometimes there may be more than one) which sets a limit to the total activity. For instance, in India today sometimes non-availability of power does not allow production to increase inspite of heavy demand. Similarly, lack of demand may limit production. Such a factor is known as key factor. For proper budgeting, it must be located and estimated properly. 3. Appointment of controller: Formulation of a budget usually requires whole
time services of a senior executive; he must be assisted in this work by a Budget Committee, consisting of all the heads of department along with the Managing Director as the Chairman. The Controller is responsible for co-ordinating and development of budget programmes and preparing the manual of instruction, known as Budget manual. The Budget manual is a schedule, document or booklet which shows, in written forms the budgeting organisation and procedures. The manual should be well written and indexed so that a copy thereof may be given to each departmental head for guidance. 3
4. Budget period: The period covered by a budget is known as budget period. There is no general rule governing the selection of the budget period. In practice the Budget Committee determines the length of the budget period suitable for the business. Normally, a calendar year or a period coterminous with the financial year is adopted. The budget period is then sub-divided into shorter periods—it may be months or quarters or such periods as coincide with period of trading activity. 5. Standard of activity or output: For preparing budgets for the future, past statistics cannot be completely relied upon, for the past usually represents a combination of good and bad factors. Therefore, though results of the past should be studied but these should only be applied when there is a likelihood of similar conditions repeating in the future. Also, while setting the targets for the future, it must be remembered that in a progressive business, the achievement of a year must exceed those of earlier years. Therefore what was good in the past is only fair for the current year. In budgeting, fixing the budget of sales and of capital expenditure are most important since these budgets determine the extent of development activity. For budgeting sales, one must consider the trend of economic activity of the country, reactions of salesmen, customers and employees, effect of price changes on sales, the provision for advertisement campaign plan capacity etc.
Meaning of Budgetary Control: The Chartered Institute of Management Accountants of England and Wales has defined the terms ‘budgetary control’ as “Budgetary control is the establishment of budgets relating to the
responsibilities of executives of a policy and the continuous comparison of the actual with the budgeted results, either to secure by individual action the objective of the policy or to provide a basis for its revision.” It is the system of management control and accounting in which all the operations are forecasted and planned in advance to the extent possible and the actual results compared with the forecasted and planned ones. Budgetary Control Involves: 1. Establishment of budgets 2. Continuous comparison of actuals with budgets for achievement of targets 3. Revision of budgets after considering changed circumstances 4. Placing the responsibility for failure to achieve the budget targets. The salient features of Budgetary Control System are as follows: 1. Determining the objectives to be achieved, over the budget period, and the policy or policies that might be adopted for the achievement of these ends. 2. Determining the variety of activities that should be undertaken for the achievement of the objectives. 3. Drawing up a plan or a scheme of operation in respect of each class of activity, in physical as well as monetary terms for the full budget period and its parts.
4. Laying out a system of comparison of actual performance by each person, section or department with the relevant budget and determination of causes for the discrepancies, if any. 5. Ensuring that corrective action will be taken where the plan is not being achieved and, if that be not possible, for the revision of the plan. In brief, it is a system to assist management in the allocation of responsibility and authority, to provide it with aid for making, estimating and planning for the future and to facilitate the analysis of the variation between estimated and actual performance. In order that budgetary control may function effectively, it is necessary that the concern should develop proper basis of measurement or standards with which to evaluate the efficiency of operations, i.e., it should have in operation a system of standard costing. Besides this, the organization of the concern should be so integrated that all lines of authority and responsibility are laid, allocated and defined. This is essential since the system of budgetary control postulates separation of functions and division of responsibilities and thus requires that the organization shall be planned in such a manner
that everyone, from the Managing Director down to the Shop Foreman, will have his duties properly defined. Objectives of Budgetary Control System: 1. Portraying with precision the overall aims of the business and determining targets of performance for each section or department of the business. 2. Laying down the responsibilities of each of the executives and other personnel so that everyone knows what is expected of him and how he will be judged. Budgetary control is 6
one of the few ways in which an objective assessment of executives or department is possible. 3. Providing a basis for the comparison of actual performance with the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures. This naturally helps in adopting corrective measures. 4. Ensuring the best use of all available resources to maximize profit or production, subject to the limiting factors. Since budgets cannot be properly drawn up without considering all aspects usually there is good co-ordination when a system of budgetary control operates. 5. Co-coordinating the various activities of the business, and centralizing control and yet enabling management to decentralize responsibility and delegate authority in the overall interest of the business. 6. Engendering a spirit of careful forethought, assessment of what is possible and an attempt at it. It leads to dynamism without recklessness. Of course, much depends on the objectives of the firm and the vigour of its management. 7. Providing a basis for revision of current and future policies. 8. Drawing up long range plans with a fair measure of accuracy. 9. Providing a yardstick against which actual results can be compared. Working of a budgetary control system: The responsibility for successfully introducing and implementing a Budgetary Control System rests with the Budget Committee acting through the Budget Officer. The Budget Committee would be composed of all functional heads and a member from the Board to 7
preside over and guide the deliberations. The main responsibilities of the Budget Officer are: 1. To assist in the preparation of the various budgets by coordinating the work of the accounts department which is normally responsible to compile the budgets—with the relevant functional departments
like Sales, Production, Plant maintenance etc.; 2. To forward the budget to the individuals who are responsible to adhere to them, and to guide them in overcoming any practical difficulties in its working; 3. To prepare the periodical budget reports for circulation to the individuals concerned; 4. To follow-up action to be taken on the budget reports; 5. To prepare an overall budget working report for discussion at the Budget Committee meetings and to ensure follow-up on the lines of action suggested by the Committee; 6. To prepare periodical reports for the Board meeting. Comparing the budgeted Profit and Loss Account and the Balance Sheet with the actual results attained. It is necessary that every budget should be thoroughly discussed with the functional head before it is finalized. It is the duty of the Budget Officer to see that the periodical budget reports are supplied to the recipients at frequent intervals as far as possible. The efficiency of the Budget Officer, and through him of the Budget Committee, will be judged more by the smooth working of the system and the agreement between the actual figures and the budgeted figures. Budgets are primarily an incentive and a challenge for better performance; it is up to the
Budget Officer to see that attention of the different functional heads is drawn to it to face the challenge in a successful manner.
Advantages of Budgetary Control System: 1. The use of budgetary control system enables the management of a business concern to conduct its business activities in the efficient manner. 2. It is a powerful instrument used by business houses for the control of their expenditure. It in fact provides a yardstick for measuring and evaluating the performance of individuals and their departments. 3. It reveals the deviations to management, from the budgeted figures after making a comparison with actual figures. 4. Effective utilization of various resources like—men, material, machinery and money is made possible, as the production is planned after taking them into account. 5. It helps in the review of current trends and framing of future policies. 6. It creates suitable conditions for the implementation of standard costing system in a business organization. 7. It inculcates the feeling of cost
consciousness among workers. 8. It helps the principal of management by exception to apply. 9. Management which has developed a well ordered budget plans and which operate accordingly, receive greater favour from credit agencies.
Limitations of Budgetary Control System: 1. Based on Estimates: Budgets may or may not be true, as they are based on estimates. 2. Time factor: Budgets cannot be executed automatically. Accuracy in budgeting comes through experience. Management must not expect too much during the development period. 3. Cooperation Required: Staff co-operation is usually not available during budgetary control exercise. The success of the budgetary control depends upon willing co-operation and teamwork, 4. Expensive: Its implementation is quite expensive. No budgetary programme can be successful unless adequate arrangements are made for supervision and administration. 5. Not a substitute for management: Budget is only a managerial tool. It cannot substitute management. 6. Rigid document: Budgets are considered as rigid document. But in reality, firm’s affairs continuously change under inflationary pressure and changing government policies.
ZERO BASE BUDGETS The technique of zero base budgeting suggests that an organisation should not only make decisions about the proposed new programmes, but should also review the appropriateness of the existing programmes from time to time. Such a review should particularly be done of such responsibility centres where there is relatively high proportion of discretionary costs. Costs of this type depend on the discretion or policies of the responsibility centre or top managers. These costs have no direct relation to volume of activity. Hence, management discretion typically determines the amount budgeted. Some examples are: expenditure on research and development, personnel administration, legal advisory services. Zero base budgeting, as the term suggests, examines or reviews a programme or function or responsibility from ‘scratch’. The reviewer proceeds on the
assumption that nothing is to be allowed. The manager proposing the activity has, therefore, to justify that the activity is essential and the various amounts asked for are reasonable taking into account the outputs or results or volume of activity envisaged. No activity or expense is allowed simply because it was being allowed or done in the past. Thus according to this technique each programme, whether new or existing, must be justified in its entirety each time a new budget is formulated. It involves: 1. Dealing with particularly all elements of mangers’ budget requests 2. Critical examination of ongoing activities along with the newly proposed activities 3. Providing each manger a range of choice in setting priorities in respect of different activities and in allocating resources.
Process of Zero Base Budgeting: The following steps are involved in Zero base budgeting: Determining the objectives of budgeting: The objective may be ‘to effect cost reduction in staff overheads or it may be to drop, after careful analysis, projects which do not fit into achievement of the organizations objectives etc. Deciding on scope of application: The extent to which zero base budgeting is to be introduced has to be decided, i.e. whether it will be introduced in all areas of the organisation’s activities or only in a few selected areas on trial basis. Developing decision units Decision units for which cost-benefit analysis is proposed have to be developed so as to arrive at decisions whether they should be allowed to continue or to be dropped. Each decision unit, as far as possible should be independent of other units so that it can be dropped if the cost analysis proves to be unfavourable for it. Developing decision packages : A decision package for each unit should be developed. While developing a decision package, answers to the following questions would be desirable: • Is it necessary to perform a particular activity at all? If the answer is in the negative, there is no need to proceed further. • How much has been the actual cost of the activity and what has been the actual benefit both in tangible as well as intangible forms? • What should be the estimated cost of the level of activity and the estimated benefit from 12
such activity? • Should the activity be performed in the way in which it is being performed, and what should be the cost? • If the project or activity is dropped, can the unit be replaced by an outside agency? After completing decision packages for each unit, the units are ranked according to the findings of cost benefit analysis. Essential projects are identified and given the highest ranks. The last stage is that of implementing the decision taken in the light of the study made. It involves the selection and acceptance of those projects which have a positive cost-benefit analysis or which are capable of meeting the objectives of the organization. The above analysis shows that zero base budgeting is in a way an extension of the method of cost benefit analysis to the area of the corporate budgeting. Advantages of Zero Base Budgeting: • It provides the organization with systematic way to evaluate different operations and programmes undertaken. It enables management to allocate resources according to priority of the programmes. • It ensures that each and every programme undertaken by managers is really essential for the organization, and is being performed in the best possible way. • It enables the management to approve departmental budgets on the basis of cost-benefit analysis. No arbitrary cuts or increase in budget estimates are made. • It links budgets with the corporate objectives. Nothing will be allowed simply because it was being done in the past. An activity may be shelved if it does not help in achieving the goals of the enterprises. 13
• It helps in identifying areas of wasteful expenditure and, if desired, it can also be used for suggesting alternative courses of action. • It facilitates the introduction and implementation of the system of `management by objectives’. Thus it can be used not only for fulfillment of the objectives of traditional budgeting, but also for a variety of other purposes. It is contended that zero base budgeting is time consuming. Of course, it is true, but it happens only in the initial stages when decision units have to be identified and decision packages have to be developed or completed. Once this is done, and the methodology is clear, zero base budgeting is likely to take less time than the traditional budgeting. In any case, till such time the organization is properly acclimatized to the technique of zero base budgeting, it may be done in a way that all
responsibility centre’s are covered at least once in three or four years. Zero base budgeting as a concept has become quite popular these days. The technique was first used by the U.S. Department of Agriculture in 1962. Texas Instruments, a multinational company, pioneered its use in the private sector. Today, a number of major companies such as Zerox, BASF, International Harvester and Easter Airlines in the United State are using the system. Some departments of the Government of India have recently introduced zero base budgeting with a view to making the system of budgetary control more effective.
PERFORMANCE BUDGETS Performance budgeting (or programme budgeting) has been designed to correct the shortcomings of traditional budgeting by emphasizing management’s considerations/ approaches. Both the financial and physical aspects are incorporated into the budget. A performance budget presents the operations of an organisation in terms of functions, programmes, activities, and projects. In performance budgeting, precise detainment of job to be performed or services to be rendered is done. Secondly, the budget is prepared in terms of functional categories and their sub-division into programmes, activities, and projects. Thirdly, the budget becomes a comprehensive document. Since the financial and physical results are interwoven, it facilitates management control. The Main objectives of Performance Budgeting are: (i) to coordinate the physical and financial aspects; (ii) to improve the budget formulation, review and decision-making at all levels of management (iii) to facilitate better appreciation and review by controlling authorities (legislature, Board of Trustees or Governors, etc) as the presentation is more purposeful and intelligible; (iv) to make more effective performance audit possible; and (v) to measure progress towards long-term objectives which are envisaged in a development plan. Performance budgeting involves evaluation of the performance of the organisation in the context of both specific, as well as, overall objectives of the organisation. It presupposes a crystal clear perception of organisational objectives in general, and short-term business objectives as stipulated in the budget, in particular by each employee of the
organisation, irrespective of his level. It thus, provides a definite direction to each employee and also a control mechanism to higher management. 15
Performance budgeting requires preparation of periodic performance reports. Such reports compare budget and actual data, and show variances. Their preparation is greatly facilitated if the authority and responsibility for the incurrence of each cost element is clearly defined within the firm’s organisational structure. In addition, the accounting system should be sufficiently detailed and coordinated to provide necessary data for reports designed for the particular use of the individuals or cost centres having primary responsibility for specific cost. The responsibility for preparing the performance budget of each department lies on the respective Department Head. Each Department Head will be supplied with a copy of the section of the master budget appropriate to his sphere. For example, the chief buyer will be supplied with the copy of the materials purchase budget so that he may arrange for purchase of necessary materials. Periodic reports from various sections of a department will be received by the departmental head that will submit a summary report about his department to the budget committee. The report may be daily, weekly or monthly, depending upon the size of business and the budget period. These reports will be in the form of comparison of budgeted and actual figures, both periodic and cumulative. The purpose of preparing these reports is to promptly inform about the deviations in actual and budgeted activity to the person who has the necessary authority and responsibility to take necessary action to correct the deviations from the budget.
FUNCTIONAL BUDGET A functional budget is one which is related to function of the business as for example, production budget relating to the manufacturing function. Functional budgets are prepared for each function and they are subsidiary to the master budget of the business. The various types of functional budgets to be prepared will vary according to the size and nature of the business. The various commonly used functional budgets are: • • • • •
• • • • • • • • •
Sales budget Production budget Plant utilisation budget Direct-material usage budget Direct-material purchase budget Direct-labour (personnel) budget Factory overhead budget Production cost budget Ending-inventory budget Cost-of-goods-sold budget Selling and distribution cost budget Administration expenses budget Research and development cost budget (xiv) Capital expenditure budget Cash budget
Illustration: Sales Budget: Sales forecast is the commencement of budgeting and hence sales budget assumes primary importance. The quantity which can be sold may be the principal budget factor in many business undertakings. In any case in order to chalk out a realistic budget programme, there must be an accurate sales forecast. The sales budget indicates for each product: 1. The quantity of estimated sales and 2. The expected unit selling price. These data are often reported by regions or by sales
representatives. In estimating the quantity of sales for each product, past sales volumes are often used as a starting point. These amounts are revised for factors that are expected to affect future sales, such as the factors listed below. 1. Backlog of unfilled sales orders 2. Planned advertising and promotion 3. Expected industry and general economic conditions 4. Productive capacity 5. Projected pricing 6. Findings of market research studies 7. Relative product profitability. 8. Competition. 18
Once an estimate of the sales volume is obtained, the expected sales revenue can be determined by multiplying the volume by the expected unit sales price, the sales budget represents the total sales in physical quantities and values for a future budget period.
Sales managers are constantly faced with problem like anticipation of customer requirements, new product needs, competitor strategies and various changes in distribution methods or promotional techniques. The purposes of
sales budget is not to attempt to estimate or guess what the actual sales will be, but rather to develop a plan with clearly defined objectives towards which the operational effort is directed in order to attain or exceed the objective. Hence, sales budget is not merely a sales forecast. A budget is a planning and control document which shows what the management intends to accomplish. Thus, the sales budget is active rather than passive. A sales forecast, however, is a projection or estimate of the available customer demand. A forecast reflects the environmental or competitive situation facing the company whereas the sales budget shows how the management intends to react to this environmental and competitive situation. A good budget hinges on aggressive management control rather than on passive acceptance of what the market appears to offer. If the company fails to make this distinction, the budget will remain more a figure-work exercise than a working tool of dynamic management control.
The sales budget may be prepared under the following classification or combination of classifications: 1. Products or groups of products. 2. Areas, towns, salesmen and agents. 3. Types of customers as for example: (i) Government, (ii) Export, (iii) Home sales, (iv) Retail depots. 4. Period—months, weeks, etc Example of Sales Budget: XYZ Ltd. Sales Budget for the Year Ended 31 March XXXX Particulars Units Selling Price (P.U) Total Sales Value (Rs.) Product A Product B Total 5000 10000 75 80 375000 800000 1175000
LEADING TO THE PREPARATION OF THE MASTER BUDGET When all the necessary functional budgets have been prepared, the budget officer will prepare the master budget which may consist of budgeted profit and loss account and budgeted balance sheet. These are in fact the budget summaries. When the master budget is approved by the board of directors, it represents a standard for the achievement of which all the departments will work. On the basis of the various budgets (schedules) prepared earlier in this study, we
prepare below budgeted income statement and budgeted balance sheet. Illustration: Floatglass Manufacturing Company requires you to present the Master budget for the 31 March 2012 from the following information: Sales: Toughened Glass Bent Glass Direct Material Cost Direct Wages Factory Overheads: Indirect Labour Works Manager Foreman Rs. 500 per month Rs. 400 per month 2.5% on Sales Rs. 600000 Rs. 200000 60% of Sales 20 workers @ Rs. 150 per month
Stores and Spares Depreciation on Machinery Repairs and Maintenance Other Sundries Administration, selling and Distribution Expenses
Rs. 12600 Rs. 3000 Rs. 8000 10% on Direct Wages Rs. 36000 per year
Solution: Master Budget for the Year Ending 31 March 2012 Particulars Amount (Rs.) Sales: Toughened Glass Bent Glass Total Sales Less: Cost of Production: Direct Material Direct Wages Prime Cost (A) Fixed Factory Overhead: 480000 36000 516000 600000 200000 800000 Amount (Rs.)
Works Manager’s Salary Foreman’s Salary Depreciation Light and Power Total Fixed Factory Overhead (B) Variable Factory Overhead: Stores and Spares Repairs and Maintenance Sundry Expenses Total Variable Factory Overhead (C) Works Cost (A+B+C) Gross Profit (Sales- Works Cost) Less: Administration, Selling and Distribution Expenses Net Profit
6000 4800 12600 3000 26400
20000 8000 3600 31600 574000 226000 36000 190000
CAPITAL EXPENDITURE BUDGET: The capital expenditure budget represents the
planned outlay on fixed assets like land, building, plant and machinery, etc. during the budget period. This budget is subject to strict management control because it entails large amount of expenditure. The budget is prepared to cover a long period of years and it projects the capital costs over the period in which the expenditure is to be incurred and the expected earnings. The preparation of this budget is based on the following considerations: 1. Overhead on production facilities of certain departments as indicated by the plant utilization budget. 2. Future development plans to increase output by expansion of plant facilities. 3. Replacement requests from the concerned departments 4. Factors like sales potential to absorb the increased output, possibility of price reductions, increased costs of advertising and sales promotion to absorb increased output, etc. Merits/Advantages: 1. It outlines the capital development programme and estimated capital expenditure during the budget period. 2. It enables the company to establish a system of priorities. When there is a shortage of funds, capital rationing becomes necessary. 3. It serves as a tool for controlling expenditure. 4. It provides the amount of expenditure to be incorporated in the future budget
summaries for calculation of estimated return on capital employed. 5. This enables the cash budget to be completed. With other cash commitments capital expenditure commitment should also be considered for the completion of the budget. 6. It facilitates cost reduction programme, particularly when modernization and renovation is covered by this budget.
FIXED AND FLEXIBLE BUDGETS Fixed Budget: According to Chartered Institute of Management Accountants of England, “a fixed budget is a budget designed to remain unchanged irrespective of the level of activity actually attained”. A fixed budget shows the expected results of a responsibility center for only one activity level. Once the budget has been determined, it is not changed, even if the activity changes. Fixed budgeting is used by many service
companies and for some administrative functions of manufacturing companies, such as purchasing, engineering, and accounting. Fixed Budget is used as an effective tool of cost control. In case, the level of activity attained is different from the level of activity for budgeting purposes, the fixed budget becomes ineffective. Such a budget is quite suitable for fixed expenses. It is also known as a static budget. Essential conditions: 1. When the nature of business is not seasonal. 2. There is no impact of external factors on the business activities 3. The demand of the product is certain and stable. 4. Supply orders are issued regularly. 5. The market of the product should be domestic rather than foreign. 6. There is no need of special labour or material in the production of the products. 7. Supply of production inputs is regular. 8. There is a trend of price stability. Generally, all above conditions are not found in practice. Hence fixed budget is not important 26
in business concerns. Merits/advantages: 1. Very simple to understand 2. Less time consuming Demerits/Disadvantages: 1. It is misleading. A poor performance may remain undetected and a good performance may go unrealized. 2. It is not suitable for long period. 3. It is also found unsuitable particularly when the business conditions are changing constantly. 4. Accurate estimates are not possible. Flexible Budget According to Chartered Institute of Management Accountants of England,”a flexible budget is defined as a budget which, by recognizing the difference between fixed, semi-variable and variable costs is designed to change in relation to the level of activity attained.” Unlike static (fixed) budgets, flexible budgets show the expected results of a responsibility center for several activity levels. You can think of a flexible budget as a series of static budgets for different levels of activity. Such budgets are especially useful in estimating and controlling factory costs and operating expenses. It is more realistic and practicable because it gives due consideration 27
to cost behaviour at different levels of activity. While preparing a flexible budget the expenses are classified into three categories viz. 1. Fixed, 2. Variable, and 3. Semi-variable. Semi-variable expenses are further segregated into fixed and variable expenses. Flexible budgeting may be
resorted to under following situations: 1. In the case of new business venture due to its typical nature it may be difficult to forecast the demand of a product accurately. 2. Where the business is dependent upon the mercy of nature e.g., a person dealing in wool trade may have enough market if temperature goes below the freezing point. 3. In the case of labour intensive industry where the production of the concern is dependent upon the availability of labour. Merits/ Advantages: 1. With the help of flexible budget, the sales, costs and profit may be calculated easily by the business at various levels of production capacity. 2. In flexible budget, adjustment is very simple according to change in business conditions. 3. It also helps in determination of production level as it shows budgeted costs with classification at various levels of activity along with sales. Hence the management can easily select the level of production which shows the profit predetermined by the owners of the business. 4. It also shows the quantity of product to be produced to earn determined profit. 28
Demerits/Disadvantages: 1. The formulation of flexible budget is possible only when there is proper accounting system maintained, perfect knowledge about the factors of production and various business circumstances is available. 2. Flexible Budget also requires the system of standard costing in business. 3. It is very expensive and labour oriented. Need for flexible budget: 1. Seasonal fluctuations in sales and/or production, for example in soft drinks industry; 2. A company which keeps on introducing new products or makes changes in the design of its products frequently; 3. Industries engaged in make-to-order business like ship building; 4. An industry which is influenced by changes in fashion; and 5. General changes in sales.
Illustration: A factory which expects to operate 7,000 hours, i.e., at 70% level of activity, furnishes details of expenses as under: Particulars Variable Expenses Amount (Rs.) 1260
Semi- Variable Expenses 1200 Fixed Expenses 1800
The semi-variable expenses go up by 10% between 85% and 95% activity and by 20% above 95% activity. Construct a flexible budget for 80, 90 and 100 per cent activities. Solution: Particulars Budgeted Hours Variable Expenses Semi-Variable Expenses Fixed Expenses Total Expenses Recovery Rate Per Hour 70% 7000 1260 1200 1800 4260 0.61 80% 8000 1440 1200 1800 4440 0.55 90% 9000 1620 1320 1800 4740 0.53 100% 10000 1800 1440 1800 5040 0.50
Difference between Fixed and Flexible Budget: Fixed Budget Flexible Budget
It does not change with actual volume of It can be recasted on the basis of activity activity achieved. Thus it is known as rigid level to be achieved. Thus it is not rigid. or inflexible budget. It operates on one level of activity and under It consists of various budgets for one set of conditions. It assumes that there different levels of activity. will be no change in the prevailing conditions, which is unrealistic. Here as all costs like – fixed, variable and Here analysis of variance provides useful semi-variable are related to only one level information as each cost is analyzed of activity so variance analysis does give useful information. If the budgeted and actual activity levels differ Flexible budgeting at different levels of significantly, then the aspects like cost activity facilitates the ascertainment of ascertainment and price fixation do not give a cost, fixation of selling price and tendering correct picture. of quotations. a meaningful basis of not according to its behaviour.
Comparison of actual performance with It provides budgeted targets will be
meaningless comparison of the actual performance with
specially when there is a difference the budgeted targets. between the two activity levels.
BIBLIOGRAPHY 1 ICAI Module on Cost Accounting 2 Newsletters and opinions published by ICAI 3 http://en.wikipedia.org/wiki/Budget 4 www.icai.org