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ASSIGNMENT
TOPIC: “what is budget and budgetary control what
do you mean by depreciable budget and how to
calculate budget with example”

SUBMITTED TO: Mr. TAHIR ISHFAQ

SUBMITTED BY: HAMMAD MAJEED


ROLL#: 64
8TH SEMESTER CHEMICAL ENGINEERING
NFC IE&FR FAISALABAD
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INDEX
BUDGET ……………………………………………………………………… 2
• Who needs a budget ………………………………………………. 2
• Why do I need a budget ………………………………………….. 2
• How do I create a budget ……………………………………….. 2
• Main characteristics of budget ………………………………… 3

ZERO BASE BUDGETING …………………………………………….. 3

MASTER BUDGET ……………………………………………………….. 4

ORGANIZATION FOR BUSGETING ……………………………… 4

STEPS IN BUDGETRY CONTROL …………………………………. 5


• Benefits ……………………………………………………………… 6

LIMITATIONS OF BUDGET AND BUDGETRY CONTROL .. 7

BUDGETRY PLANNING ……………………………………………… 8

CASH BUDGET ………………………………………………………… 8

EXAMPLE/PROBLEM HOW TO CALCULATE THE BUDJET


• Statement ………………………………………………………… 10
• Solution …………………………………………………………… 11

REFRENCES …………………………………………………………….. 11

BUDGET
Businesses need to plan for the future. In large businesses such planning is very formal while, for
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Smaller businesses, it will be less formal. Planning for the future falls into three time scales:

• Long-term: from about three years up to, sometimes, as far as twenty years ahead
• Medium-term: one to three years ahead
• Short-term: for the next year

Clearly, planning for these different time scales needs different approaches: the further on in
time, the less detailed are the plans. In the medium and longer term, a business will establish
broad business objectives. Such objectives do not have to be formally written down, although in
a large business they are likely to be. In smaller businesses, objectives will certainly be
considered and discussed by the owners or managers. Planning takes note of these broader
business objectives and sets out how these are to be achieved in the form of detailed plans known
as budgets.

A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of
time, usually one year. In other words a budget is a systematic plan for the utilization of
manpower and material resources.

In a business organization, a budget represents an estimate of future costs and revenues. Budgets
may be divided into two basic classes: Capital Budgets and Operating Budgets.

Capital budgets are directed towards proposed expenditures for new projects and often require
special financing. The operating budgets are directed towards achieving short-term operational
goals of the organization, for instance, production or profit goals in a business firm. Operating
budgets may be sub-divided into various departmental of functional budgets.

Budget is simply a tool that is used to plan spending and savings. You can think of it as a
roadmap to navigating your finances. You wouldn’t even think of driving cross-country without
first knowing which highways to take, so why do people think that they can just ‘wing’ their
spending and expect to end at their desired destination

Who needs a budget?


Budgets are often viewed as necessary for those who are financially burdened or for the poor.
However, budgets can and should be used by everyone, regardless of age or financial status.

Why do I need a budget?


Most people are ignorant of their spending habits—they simply know that the money is gone at
the end of the month but rarely have an idea of where it went. A planned, well thought-out
budget can not only help you identify potentially problem areas, but also help you plan for
unexpected emergencies.

How do I create a budget?


A successful budget needs to have categories for all major expenses such as: Housing,
Automotive, Debts, Clothing, Food, etc. Each of these categories should then be broken into sub-
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categories. For example, Housing can be divided to include Rent/Mortgage, Maintenance,


Electricity, Gas, etc. These are then added to show the total Housing requirements.

Categories should also be set up for miscellaneous expenses that you typically don’t think about:
The morning coffee and donut, daily newspaper, or that bottle cap collection that always has you
looking for that elusive rarity. All of these need to be taken into account and planned for.

When you are planning your budget it is helpful to be aware of your spending history for each
category, such as, knowing what your utilities typically run for in an average month. Knowing
what you have to spend each month is half the battle; the other half is knowing what you can
spend on the other items

The main characteristics of a budget are:


1. It is prepared in advance and is derived from the long-term strategy of the organization.
2. It relates to future period for which objectives or goals have already been laid down.

It is expressed in quantitative form, physical or monetary units, or both.

Different types of budgets are prepared for different purposed e.g. Sales Budget, Production
Budget, Administrative Expense Budget, Raw-material Budget etc. All these sectional budgets
are afterwards integrated into a master budget, which represents an overall plan of the
organization.

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.

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
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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.

MASTER BUDGET
The master budget is a summary of company's plans that sets specific targets for sales,
production, distribution and financing activities. It generally culminates in a cash budget, a
budgeted income statement, and a budgeted balance sheet. In short, this budget represents
management’s plans for future and how these plans are to be accomplished. A master budget is
usually classified into two individual budgets: the Operational budget and the financial budget. It
usually consists of a number of separate but interdependent budgets. One budget may be
necessary before the other can be initiated. The figures of one budget are usually used in the
preparation of other budget. Therefore these budgets are

ORGANIZATION FOR BUDGETING


The setting up of a definite plan of organization is the first step towards installing budgetary
control system in an organization a budget manual should be prepared giving details of the
powers, duties, responsibilities and areas of operation of each executive in the organization.

1. Budget Manual: "A document which setout, inter alias, the responsibilities of the
persons engaged in, the routine of, and the forms and records required for, budgetary
control."
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2. Web for obtaining the necessary approval of budgets, the authority of granting approval
should be stated in explicit terms. Whether one, two or more signatures are to be required
on each document should also be clearly stated.
3. Timetable for all stages of budgeting.
4. Reports, statements, forms and other records to be maintained.
5. The accounts classification to be employed. It is necessary that the framework within
which the costs, revenues and other financial amount are classified must be identical both
in accounts and the budget department.

There are many advantages attached to the use of budget manual. It is a formal record defining
the functions and responsibilities of each executive.

The methods and procedures of budgetary control are standardized. There is synchronization of
the efforts of all which result in maximization of the profits of the organization.

The responsibility for preparation and implementation of the budgets may be fixed as under:

STEPS IN BUDGETARY CONTROL

1. Organization for budgeting


2. Budget manual + Theory

"A document which sets out, inter alias, the responsibilities of the persons engaged in, the
routine of and forms and records required for budgetary control."

The budget manual is a written document or booklet that specifies the objectives of budgeting
organization and procedures. Following are some of the important matters covered in a budget
manual:

1. A statement regarding the objectives of the organization and how they can be achieved
through budgetary control.
2. A statement regarding the functions and responsibilities of each Executive by designation
both regarding preparation and execution of budgets.
3. Procedures to be followed for obtaining the necessary approval of budgets.
4. The authority of granting approval should be stated in explicit terms.
5. Whether one, two or more signatures are to be required on each document
6. Should also be clearly stated.
7. Timetable for all stages of budgeting.
8. Reports, statements, forms and other records to be maintained.
9. The accounts classification to be employed. It is necessary that the framework within
which the costs, revenues and other financial amount are classified must be identical both
in accounts and the budget departments.

There are many advantages attached to the use of budget manual. It is a formal record defining
the functions and responsibilities of each executive.
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BENEFITS OF BUDGETS AND BUDGETARY CONTROL

Budgets provide benefits both for the business, and also for its managers and other staff: the
budget assists planning by formalizing objectives through a budget; a business can ensure that its
plans are achievable. It will be able to decide what is needed to produce the output of goods and
services, and to make sure that everything will be available at the right time. The budget
communicates and co-ordinates because a budget is agreed by the business, all the relevant
managers and staff will be working towards the same end. When the budget is being set, any
anticipated problems should be resolved and any areas of potential confusion clarified. All
departments should be in a position to play their part in achieving the overall goals. The budget
helps with decision-making by planning ahead through budgets, a business can make decisions
on how much output – in the form of goods or services – can be achieved. At the same time, the
cost of the output can be planned and changes can be made where appropriate.

Budget can be used to monitor and control:


An important reason for producing a budget is that management is able to use budgetary control
to monitor and compare the actual results (see diagram below). This is so that action can be taken
to modify the operation of the business as time passes, or possibly to change the budget if it
becomes unachievable. The budget can be used to motivate A budget can be part of the
techniques for motivating managers and other staff to achieve the objectives of the business. The
extent to which this happens will depend on how the budget is agreed and set, and whether it is
thought to be fair and achievable. The budget may also be linked to rewards (for example,
bonuses) where targets are met or exceeded.

Budget can be used to motivate:


A budget can be part of the techniques for motivating managers and other staff to achieve the
objectives of the business. The extent to which this happens will depend on how the budget is
agreed and set, and whether it is thought to be fair and achievable. The budget may also be
linked to rewards (for example, bonuses) where targets are met or exceeded.
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LIMITATIONS OF BUDGET AND


BUDGETARY CONTROL
Whilst most businesses will benefit from the use of budgets, there are a number of limitations of
budgets to be aware of:

Benefit of the budget must exceed the cost:


Budgeting is a fairly complex process and some businesses – particularly small ones – may find
that the task is too much of a burden in terms of time and other resources, with only limited
benefits. Nevertheless, many lenders – such as banks – often require the production of budgets as
part of the business plan. As a general rule, the benefit of producing the budget must exceed its
cost.

Budget information may not be accurate:


It is essential that the information going into budgets should be as accurate as possible. Anybody
can produce a budget, but the more inaccurate it is the less use it is to the business as a planning
and control mechanism. Great care needs to be taken with estimates of sales – often the starting
point of the budgeting process – and costs. Budgetary control is used to compare the budget
against what actually happened – the budget may need to be changed if it becomes unachievable.

Budget may demotivate:


Employees who have had no part in agreeing and setting a budget which is imposed upon them
will feel that they do not own it. As a consequence, the staff may be demotivated. Another
limitation is that employees may see budgets as either a ‘carrot’ or a ‘stick’, i.e. as a form of
encouragement to achieve the targets set, or as a form of punishment if targets are missed.

Budgets may lead to disfunctional management:


A limitation that can occur is that employees in one department of the business may over-achieve
against their budget and create problems elsewhere. For example, a production department might
achieve extra output that the sales department finds difficult to sell. To avoid such dysfunctional
management, budgets need to be set at realistic levels and linked and co-ordinate across all
departments within the business.

Budgets may be set at too low a level:


Where the budget is too easy to achieve it will be of no benefit to the business and may, in fact,
lead to lower levels of output and higher costs than before the budget was established. Budgets
should be set at realistic levels, which make the best use of the resources available.
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BUDGETARY PLANNING
Many large businesses take a highly formal view of planning the budget and make use of:

•A budget manual, which provides a set of guidelines as to who is involved with the
budgetary planning and control process, and how the process is to be conducted

•A budget committee, which organises the process of budgetary planning and control; this
committee brings together representatives from the main functions of the business – egg
production, sales, administration – and is headed by a budget co-ordinator whose job is to
administer and oversee the activities of the committee

In smaller businesses, the process of planning the budget may be rather more informal, with
the owner or manager overseeing and budgeting for all the business functions. Whatever the
size of the business it is important, though, that the planning process begins well before the
start of the budget period; this then gives time for budgets to be prepared, reviewed,
redrafted, and reviewed again before being finally agreed and submitted to the directors or
owners for approval. For example, the planning process for a budget which is to start on 1
January might commence in the previous June, as follows:

• June Budget committee meets to plan next year’s budgets

• July First draft of budgets prepared

• August Review of draft budgets

• September Draft budgets amended in light of review

• October Further review and redrafting to final version

• November Budgets submitted to directors or owners for approval

• December Budgets for next year circulated to managers

• January Budget period commences

CASH BUDGET
A cash budget sets out the expected cash/bank receipts and payments, usually on a month-
by-month basis, for the next three, six or twelve months, in order to show the estimated bank
balance at the end of each month throughout the period. From the cash budget, the managers
of a business can decide what action to take when a surplus of cash is shown to be available
or, as is more likely, when a bank overdraft needs to be arranged.
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Layout of a cash budget:


A suitable format for a cash budget, with sample figures, is set out as.

Sections of a cash budget:


A cash budget consists of three main sections:

• Receipts for the month

• Payments for the month

• Summary of bank account

Receipts are analyzed to show the amount of money that is expected to be received from cash
sales, debtors, sale of fixed assets, capital introduced/issue of shares, loans received etc.
Payments show how much money is expected to be paid in respect of cash purchases,
creditors, expenses (often described in cash budgets as operating expenses), purchases of
fixed assets, repayment of capital/shares and loans. Note that non-cash expenses (such as
depreciation and doubtful debts) are not shown in the cash budget. The summary of the bank
account at the bottom of the cash budget shows net cash flow (total receipts less total
payments) added to the bank balance at the beginning of the month, and resulting in the
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estimated closing bank balance at the end of the month. An overdrawn bank balance is shown
in brackets.

BUDGET CALCULATION TECNIQUES/HOW TO


CALCULATE BUDGET
PROBLEM:

SOLUTION IS ON THE NEXT PAGE IN BLOCK


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Reminder: No depreciation – a non-cash expense – is shown in the cash budget.

Notes:
• Purchases are two-thirds of the sales values (because selling price is cost price plus 50 per cent)
• Customers pay two months after sale, i.e. debtors from January settle in March
• Suppliers are paid one month after purchase, i.e. creditors from January are paid in February
The cash budget shows that there is a need, in the first six months at least, for a bank overdraft.
An early approach to the bank needs to be made. The total net cash outflow for the six month
period is £7,100 (i.e. from a nil opening balance to £7,100
Overdraft at 30 June).

REFRENCES

 Budget and budgetary control methods by “marks d loves”.


 Accounting and Finance on Computers by lay net works.
 http://www.Palnabuget.com
 FAO corporate document repository.

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