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BUDGET
A budget is a spending plan that you decide upon. It is based on how much you make in income and what your monthly expenses are. By understanding your monthly income and expenses, you will be better able to manage your cash flow and determine how much debt, if any, you can assume. A budget is a plan expressed in amounts that acts as a road map to carry out an organizations objectives, strategies and assumptions. A company might have a master budget or profit plan for the upcoming year. The master budget will include a projected income statement and balance sheet. Within the master budget will be operating budgets such as a sales budget, production budget, marketing budget, administrative budget, and budgets for departments. In addition there will be a cash budget and a capital expenditures budget. It is common that the budgets prepared for the next accounting year will be detailed by quarter and/or by month. It is also typical that the annual budget will not be changed once the actual year begins. Good managers realize that a budget is a guide and that it cannot be so rigid that it prevents timely action when needed. In rare circumstances the annual budget might be revised, but only when the business environment has radically changed.

OBJECTIVES An indication and explanation of the importance of budgetary control in marketing as a key marketing control technique 1) An overview of the advantages and disadvantages of budgeting 2) An introduction to the methods for preparing budgets 3) An appreciation of the uses of budgets.

Of all business activities, budgeting is one of the most important and, therefore, requires detailed attention. The chapter looks at the concept of responsibility centers, and the advantages and disadvantages of budgetary control. It then goes on to look at the detail of budget construction and the use to which budgets can be put. Like all management tools, the chapter highlights the need for detailed information, if the technique is to be used to its fullest advantage.

BUDGETARY CONTROL METHODOLOGY BUDGET: A formal statement of the financial resources set aside for carrying out specific activities in a given period of time. It helps to co-ordinate the activities of the organization. An example would be an advertising budget or sales force budget.

BUDGETARY CONTROL:

A control technique whereby actual results are compared with budgets. Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.

BUDGETARY CONTROL &RESPONSIBILITY CENTERS:

These enable managers to monitor organizational functions. A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit. There are four types of responsibility centers: 1) Revenue centers: Organizational units in which outputs are measured in monetary terms but are not directly compared to input costs. 2) Expense centers: Units where inputs are measured in monetary terms but outputs are not.

3) Profit centers: Where performance is measured by the difference between revenues (outputs) and expenditure (inputs) . Inter-departmental sales are often made using "transfer prices". 4) Investment centers: Where outputs are compared with the assets employed in producing them, i.e. ROI.

ADVANTAGES OF BUDGETING & BUDGETARY CONTROL

There are a number of advantages to budgeting and budgetary control:

Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organization purpose and direction.

Promotes coordination and communication. Clearly defines areas of responsibility. Requires managers of budget centers to be made responsible for the achievement of budget targets for the operations under their personal control.

Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be

investigated and the reasons for the differences can be divided into controllable and noncontrollable factors. Enables remedial action to be taken as variances emerge. Motivates employees by participating in the setting of budgets.

Improves the allocation of scarce resources. Economies management time by using the management by exception principle.

PROBLEMS IN BUDGETING
Whilst budgets may be an essential part of any marketing activity they do have a number of disadvantages, particularly in perception terms.

Budgets can be seen as pressure devices imposed by management, thus resulting in: Bad labor relations Inaccurate record-keeping.

Departmental conflict arises due to: Disputes over resource allocation 6

 Departments blaming each other if targets are not attained. It is difficult to reconcile personal/individual and corporate goals. Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is often coupled with "empire building" in order to enhance the prestige of a department. Responsibility versus controlling, i.e. some costs are under the influence of more than one person, e.g. power costs. Managers may overestimate costs so that they will not be blamed in the future should they overspend.

BUDGET PREPARATION:
Firstly, determine the principal budget factor. This is also known as the key budget factor or limiting budget factor and is the factor which will limit the activities of an undertaking. This limits output, e.g. sales, material or labour.

SALES BUDGET

This involves a realistic sales forecast. This is prepared in units of each product and also in sales value. Methods of sales forecasting include: Sales force opinions Market research 7

 Statistical methods (correlation analysis and examination of trends) Mathematical models.

In using these techniques consider: Company's pricing policy General economic and political conditions Changes in the population Competition Consumers' income and tastes Advertising and other sales promotion techniques After sales service.

PRODUCTION BUDGET: expressed in quantitative terms only and is geared to the sales budget. The production manager's duties include:

Analysis of plant utilization Work-in-progress budgets.

If requirements exceed capacity he may: Subcontract Plan for overtime Introduce shift work Hire or buy additional machinery

 The materials purchases budget's both quantitative and financial.

RAW MATERIAL &PURCHASING BUDGET:

The materials usage budget is in quantities. The materials purchases budget is both quantitative and financial.

Factors influencing above include: Production requirements Planning stock levels Storage space Trends of material prices.

LABOUR BUDGET:

Labour budget is both quantitative and financial.

This is influenced by: Production requirements. Man-hours available Grades of labour required Wage rates (union agreements) The need for incentives.

CASH BUDGET
Steps in preparing a cash budget

Step 1: Set out a pro forma cash budget month by month. Below is a suggested layout.

Month 1 Month 2 Month 3 RS RS RS Cash receipts Receipts from debtors Sales of capital items Loans received Proceeds from share issues Any other cash receipts Cash payments Payments to creditors Wages and salaries Loan repayments Capital expenditure Taxation Dividends Any other cash expenditure Receipts less payments Opening cash balance b/f W Closing cash balance c/f X Step 2: sort out cash receipts from debtors Step 3: other income Step 4: sort out cash payments to suppliers Step 5: establish other cash payments in the month

X Y

Y Z

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CASH BUDGET
A cash plan for a defined period of time. It summaries monthly receipts and payments. Hence, it highlights monthly surpluses and deficits of actual cash. Its main uses are: To maintain control over a firm's cash requirements, e.g. stock and debtors To enable a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises To show the feasibility of management's plans in cash terms To illustrate the financial impact of changes in management policy, e.g. change of credit terms offered to customers.

Receipts of cash may come from one of the following: Cash sales Payments by debtors The sale of fixed assets The issue of new shares The receipt of interest and dividends from investments.

Payments of cash may be for one or more of the following:

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 Purchase of stocks Payments of wages or other expenses Purchase of capital items Payment of interest, dividends or taxation.

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MASTER BUDGET
Composition of a master budget:

OPERATING BUDGET FINANCIAL BUDGET

Budgeted P/L account Production budget Materials budget Labor budget Admin. Budget Stocks budget

Cash budget Balance sheet Funds statement

THE MASTER BUDGET INTERRELATIONSHIP Sales Budget Ending Inventory Production Budget Budget Direct Materials Direct Overhead Budget Labor Budget Budget Cash Budget Budgeted Balance Sheet Selling and Admn.Budget

Budgeted Income Statement

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Composition:

The master budget is the aggregation of all lower-level budgets produced by a company's various functional areas, and also includes budgeted financial statements, cash forecast, and a financing plan. The master budget is typically presented in either a monthly or quarterly format, or usually covers a company's entire fiscal year. An explanatory text may be included with the master budget, which explains the company's strategic direction, how the master budget will assist in accomplishing specific goals, and the management actions needed to achieve the budget. A master budget is the central planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centers. It is customary for the senior management team to review a number of iterations of the master budget and incorporate modifications until it arrives at a budget that allocates funds to achieve the desired results. Hopefully, a company uses participative budgeting to arrive at this final budget, but it may also be imposed on the organization by senior management, with little input from other employees.

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The budgets that roll up into the master budget include: 1)Direct labor budget 2)Direct materials budget 3)Ending finished goods budget 4)Manufacturing overhead budget 5)Production budget 6)Sales budget 7)Selling and administrative expense budget

The selling and administrative expense budget may be further subdivided into budgets for individual departments, such as the accounting, engineering, facilities, and marketing departments. Once the master budget has been finalized, the accounting staff may enter it into the company's accounting software, so that the software can issue reports comparing budgeted and actual results. Smaller organizations usually construct their master budgets using electronic spreadsheets. However, spreadsheets may contain formula errors, and also have a difficult time constructing a budgeted balance sheet. Larger organizations use budget-specific software, which does not have these two problems.

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ZERO BASE BUDGETING (ZBB)

After a budgeting system has been in operation for some time, there is a tendency for next year's budget to be justified by reference to the actual levels being achieved at present. In fact this is part of the financial analysis discussed so far, but the proper analysis process takes into account all the changes which should affect the future activities of the company. Even using such an analytical base, some businesses find that historical comparisons, and particularly the current level of constraints on resources, can inhibit really innovative changes in budgets. This can cause a severe handicap for the business because the budget should be the first year of the long range plan. Thus, if changes are not started in the budget period, it will be difficult for the business to make the progress necessary to achieve longer term objectives.

One way of breaking out of this cyclical budgeting problem is to go back to basics and develop the budget from an assumption of no existing resources (that is, a zero base). This means all resources will have to be justified and the chosen way of achieving any specified objectives will have to be compared with the alternatives. For example, in the sales area, the current existing field sales force will be ignored, and the optimum way of achieving the sales objectives in that particular market for the particular goods or services should be developed. This might not include any field sales force, or a different-sized team, and the company then has to plan how to implement this new strategy.

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The obvious problem of this zero-base budgeting process is the massive amount of managerial time needed to carry out the exercise. Hence, some companies carry out the full process every five years, but in that year the business can almost grind to a halt. Thus, an alternative way is to look in depth at one area of the business each year on a rolling basis, so that each sector does a zero base budget every five years or so.A method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a zero base and every function within an organization are analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.

ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations.

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Advantages of ZBB
Forces budget setters to examine every item. Allocation of resources linked to results and needs. Develops a questioning attitude. Wastage and budget slack should be eliminated. Prevents creeping budgets based on previous years figures with an added on percentage. Encourages managers to look for alternatives.

Disadvantages of ZBB
It a complex time consuming process Short term benefits may be emphasised to the detriment of long term planning Affected by internal politics - can result in annual conflicts over budget allocation

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ZERO BASED BUDGETING

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FIXED BUDGET
A fixed budget is a financial plan that does not change through the budget period, irrespective of any changes from the plan in actual activity levels experienced. Since most companies experience substantial variations from their expected activity levels over the period encompassed by a budget, the amounts in the budget are likely to diverge from actual results. The only situations in which a fixed budget is likely to track close to actual results are when:

Costs are largely fixed, so that expenses do not change as revenues fluctuate. The industry is not subject to much change, so that revenues are reasonably predictable. The company is in a monopoly situation, where customers must accept its pricing. Most companies use a fixed budget, which means that they routinely deal with large variations between actual and budgeted results. This also tends to cause a lack of reliance by employees on the budget, and in the variances derived from it.

A good way to mitigate the disadvantages of a fixed budget are to combine it with continuous budgeting, where you add a new budget period onto the end of the budget as soon as the most recent budget period has been concluded. By doing so, you gradually incorporate the actual results of the most recent period into the budget.Another way to mitigate the effects of a fixed budget are to shorten the period covered by it. For example, the budget may only encompass a three-month period, after which management formulates another budget that lasts for an additional three months.

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The fixed budget is not effective for evaluating the performance of cost centers. For example, a cost center manager may be given a large fixed budget, and will make expenditures below the budget and be rewarded for doing so, even though a much larger overall decline in company revenues should have mandated a much larger expense reduction. The same problem arises if revenues are much higher than expected - the managers of cost centers have to spend more than the amounts indicated in the baseline fixed budget, and so appear to have unfavorable variances, even though they are simply doing what is needed to keep up with customer demand.

The reverse of a fixed budget is a flexible budget, where the budget is designed to change in response to variations in activity levels. There tend to be much smaller variances from the budget when a flexible budget is used, since the model tracks much closer to actual results.

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FLEXIBLE BUDGET
A flexible budget, or flex budget, itemizes different expense levels depending upon changes in the amount of actual revenue. This approach varies from the more common static budget, which contains nothing but fixed amounts that do not vary with actual revenue levels.

In its simplest form, the flex budget will use percentages of revenue for certain expenses, rather than the usual fixed numbers. This allows for an infinite series of changes in budgeted expenses that are directly tied to revenue volume.

However, this approach ignores changes to other costs that do not change in accordance with small revenue variations. Consequently, a more sophisticated format will also incorporate changes to many additional expenses when certain larger revenue changes occur, thereby accounting for step costs.

By making these changes to the budget, a company will have a tool for comparing actual to budgeted performance at many levels of activity.

Advantages of Flexible Budgeting

Since the flexible budget restructures itself based on activity levels, it is a good tool for evaluating the performance of managers - the budget should closely align to expectations at any number of activity levels. It is also a useul planning tool for managers, who can use it to model the likely financial results at a variety of different activity levels.

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Disadvantages of Flexible Budgeting

Though the flex budget is a good tool, it can be difficult to formulate and administer. One problem with its formulation is that many costs are not fully variable, instead having a fixed cost component that must be included in the flex budget formula. Another issue is that a great deal of time can be spent developing step costs, which is more time than the typical accounting staff has available, especially when in the midst of creating the standard budget. Consequently, the flex budget tends to include only a small number of step costs, as well as variable costs whose fixed cost components are not fully recognized.

Example of a Flexible Budget

ABC Company has a budget of Rs10 million in revenues and a Rs4 million cost of goods sold. Of the Rs4 million in budgeted cost of goods sold, Rs1 million is fixed, and Rs3 million varies directly with revenue. Thus, the variable portion of the cost of goods sold is 30% of revenues. Once the budget period has been completed, ABC finds that sales were actually Rs9 million. If it used a flexible budget, the fixed portion of the cost of goods sold would still be Rs1 million, but the variable portion would drop to Rs2.7 million, since it is always 30% of revenues. The result is that a flexible budget yields a budgeted cost of goods sold of Rs3.7 million at a Rs9 million revenue level, rather than the Rs4 million that would be listed in a static budget.

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CAPITAL EXPENDITURE BUDGET

The capital expenditures budget identifies the amount of cash a company will invest in projects and long-term assets. Although funds for expenditures may be identified and approved in total during the budget process, most companies have a separate process for approving funds for the specific items included in a capital expenditures budget. The process includes a financial evaluation to determine whether the company's return on investment targets are met and, once the targets are known to be met, a qualitative review by a top management team.

Many companies include long-term assets, such as joint ventures, purchases of other companies, and purchases or leases of fixed assets, as well as new products, new markets, research and development, significant marketing programs, and information technology items in their capital expenditures budgets.

Capital Expenditures is referred as amount of money needed to spend on capital items or fixed assets such as land, buildings, roads, equipment, etc. that are projected to generate income in the future. Capital expenditures to be budgeted include replacement, acquisition, or construction of plants and major equipment.

Capital Expenditure Budget is plan prepared for individual capital expenditure projects. Capital expenditures are payments made over a period of more than one year. They are used to acquire assets or improve the useful life of existing assets; an example of a capital expenditure is the funding to construct a factory.

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Making a capital budget must account for the potential profitability of the plans involved. Calculating the net present value or the internal are two methods for determining a capital budget

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FUNCTIONAL BUDGET
Functional budget is related to a major function of the business. The usual functional budgets are: Sales Budget: The sales in terms of quantity & value which are analyzed by the product, by region, by month, by salesman & by distribution channels are shown by this budget. Selling Expenses Budget: The salaries & commission of salesmens, expenses & other related costs is included in this budget. Distribution Expenses Budget: Charges for transportation, charges for freight, warehousing, stock control, wages, expenses & related administrative costs is included in this budget. Marketing Budget: Marketing budget, apart from details regarding advertising, activities related to promotion, market research, customers service, public relations & so forth; also includes a summery relating to sales, selling expenses & marketing expenses budgets. Research & Development Budget: Materials, salaries, expenses, equipment & supplies & other costs which are related with design, development & technical research projects are included in research & development budget.

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 Production Budget: Production budget aims to supply specified quality of finished goods so that the marketing demands can be met. Levels of finished goods stock is specified by the distribution budget & for providing detailed production requirements this can be related with the sales budget. Following from this, consideration of a series of subsidiary budgets becomes necessary: Raw Materials Budget: Appropriate attention to the desired levels of stock is paid by this budget. Labor Budget: This budget ensures that at the right time the required number of employees with suitable skills & of suitable grade will be made available by the plan. Manufacturing Overheads budget: Items such as consumable materials & waste disposal is covered by this budget. Purchasing Budget: While preparing this budget along with the answers to the questions regarding when, where & at what price to buy & how often to buy, consideration has to given to raw materials, consumable items, office supplies & equipments & the whole range of requirements of an organization. Administration Expenses Budget: Such expenses as salaries & upkeep of office, salaries of management, stationery, telephones, depreciation, postage etc. are dealt with by this budget. Manpower Budget: An overall view of the need of the organization regarding manpower for all the areas of activity for a period of years-like manufacturing,

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administrative, sales, executive activities & so on, must be taken by the manpower budget.

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Management action and cost control

Producing information in management accounting form is expensive in terms of the time and effort involved. It will be very wasteful if the information once produced is not put into effective use.

There are five parts to an effective cost control system. These are: Preparation of budgets Communicating and agreeing budgets with all concerned Having an accounting system that will record all actual cost. Preparing statements that will compare actual costs with budgets, showing any variances and disclosing the reasons for them, and Taking any appropriate action based on the analysis of the variances as above. Action(s) that can be taken when a significant variance has been revealed will depend on the nature of the variance itself. Some variances can be identified to a specific department and it is within that department's control to take corrective action. Other variances might prove to be much more difficult, and sometimes impossible, to control.

Variances revealed are historic. They show what happened last month or last quarter and no amount of analysis and discussion can alter that. However, they can be used to influence managerial action in future periods. 31

Conclusion
Budget allotted under various Heads to an organization is being utilized for the purpose for which it is meant. The expenditure incurred is being monitored for proper and timely utilization of the funds to avoid surrender/over expenditure. The amount expended during a financial year is also used as a yardstick for estimating future requirements of the organization.

Bibliography
www.nmmu.ac.za

www.fao.org

www.mu.ac.in

www.subboard.com

www.wikipedia.com

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