1 (c) Ghanendra Fago (M. Phil, MBA) Master Budgeting

(c) Ghanendra Fago (M. Phil, MBA)2 Budgeting/Profit Planning A comprehensive and coordinated plan for operations and resources of enterprises expressed in the financial terms for achieving organizational objectives.A comprehensive and coordinated plan for operations and resources of enterprises expressed in the financial terms for achieving organizational objectives. A mechanism to plan future activities to realize the expectations of the firm.A mechanism to plan future activities to realize the expectations of the firm. Refers the process of preparing and using budgets to attain the organizations expectations and objectives. Refers the process of preparing and using budgets to attain the organizations expectations and objectives. Also called profit planning or managerial budgeting, comprehensive budgeting, profit planning and control etc.Also called profit planning or managerial budgeting, comprehensive budgeting, profit planning and control etc. Traditionally, a budget was viewed as clerically derived set of quantitative schedules prepared by accountant, following reporting formats.Traditionally, a budget was viewed as clerically derived set of quantitative schedules prepared by accountant, following reporting formats.

(c) Ghanendra Fago (M. Phil, MBA)3 Nature and Characteristics of Budgeting It is a managerial process that includes planning, organizing, staffing, leading, and controlling. It is a process of achieving managerial commitment from all levels through participation for effective management. It clearly specifies assignment of authority and responsibility at all organizational level, which forms the organization structure. It is a continuous and consistent process for coordinating all management functions. It is a plan, which includes both long term, and short term profit plans. It is continuous process of feed foreward, feedback, and follow up and preplanning through upward and downward communication channels. It is a management control process though reporting.

(c) Ghanendra Fago (M. Phil, MBA)4 Objectives Of Budgeting To determine future expectations and goals in clear and formal terms for avoiding confusion and facilitating their attainability. To communicate expectations to all concerned so that they are understood, supported and implemented To provide detail plan of action for reducing uncertainty and for the proper direction of individual and group efforts to achieve goals. To coordinate the activities and efforts in such way that resources are used efficiently and effectively To provide a means of measuring and controlling performance of individual or unit and to supply information on the basis of which, necessary action can be taken

(c) Ghanendra Fago (M. Phil, MBA)5 Essentials for Successes of Budgeting Support of top management Clear and realistic goals and objectives Assignment of authority and responsibility Creation of responsibility center Adaptation of accounting system Full participation Effective communication Budget education Flexibility

(c) Ghanendra Fago (M. Phil, MBA)6 Advantages of Budgeting Forces management to look ahead and become more effective and efficient in administering the business operations. Inspires into managers the habit of evaluating carefully their problems and related variables before making any decisions. Helps to co-ordinate, integrate and balance the efforts of various departments in the light of the overall adjectives of the enterprise. Helps to optimize the use of the firm's resources like labor, material, capital etc. Increases efficiency and productivity of employees by participating in setting of goals and plans, budgeting Forces early consideration of basic policies and management to give adequate attention to the effect of general business condition. Measures efficiency and inefficiency in attaining enterprise objectives. Tends to remove uncertainty that exists in many organizations. Forces management to consider expected future trends and conditions with proper analysis of adequate and appropriate historical data

(c) Ghanendra Fago (M. Phil, MBA)7 Limitations/Disadvantages Of Budgeting Its sources depend upon precision of estimates. Estimates are based a managerial judgment which can be suffered from subjectivism and personal biases. Requires adequate time and continuous exercise to adapt it with changing business conditions. The objective of will not be achieved unless it is properly implemented. For the success, it is very essential to understand by all so that managers and subordinates put concerted effort for accomplishing goals. All persons in the enterprises must have full involvement in the preparation and execution of budgets. Otherwise, will not be effective. In the absence of continuous system evaluation of the actual performance, It will hide inefficiencies instead of revealing them. If unrealistic targets are set and if it is used as a pressure tactic, it will lower the employee's morale and productivity It will be ineffective and expensive, if it is rigid, unnecessarily complicated and detailed. There is chance of conflict between goals and enterprises objectives,if budget goals are set carelessly.

(c) Ghanendra Fago (M. Phil, MBA)8 Operating Budgets Operating budgets are concern with the process of preparing the budgets of each operations/activity like production, sales, purchase etc. of the organization. It includes: Manufacturing firmNon-manufacturing/Trading firm 1.Sales budget 2.Production budget 3.Materials budgets 4.Material consumption budget 5.Material purchase budget 6.Material Inventory budget 7.Labour cost budget 8.Manufacturing overhead budget 9.Cost of goods manufactured budget 10.finished goods inventory Budget 11.Cost of goods sold budget 12.Operating expenses budget 1.Sales budget 2.Merchandise budget 3.Merchandise Purchase budget 4.Merchandise Inventory budget 5.Cost of Sales/Cost of goods sold budget 6.Operating expense budget

(c) Ghanendra Fago (M. Phil, MBA)9 Financial Budgets Financial budget are the budgets that are concern with the financial implication of operating budgets i.e. cash inflows, cash outflows financial position and operating results. Cash budget Budgeted income statement Budgeted balance sheet