Question

Planning and Control- Budgeting

Management and cost accounting requires the accumulation of costs for a number of different purposes, i.e. stock valuation and profit measurement, decision making and planning and control.

The budgeting process has been traditionally used to plan an organisations’ activities into the future. A budget can be described as an approved financial plan, reflecting expectations for a defined, future period of time. Budgets also serve an as important framework for performance evaluation and control by holding individuals and managers accountable for prescribed targets.

The preparation of budgets is a lengthy process which requires great care if the ultimate master budget is to be useful for the purposes of management control within an organisation. If this is done properly however it can be hugely beneficial.

question - Explain the reasons for an organization to produce budgets, the steps the need to be followed in the planning and budgetary process and the benefits that can accrue from successful budget implementation.

Answer 1

Reasons for organisation to produce budget-

1. Forecast of Income and expenditure-

The purpose of budgeting is basically to provide a model of how the business might perform, financially speaking, if certain strategies, events, plans are carried out.

2. A tool for decision making-

The purpose of budgeting is to provide a financial framework for the decision making process i.e. is the proposed course action something we have planned for or not.

3. Monitoring business performance-

The purpose of budgeting is to enable the actual business performance to be measured against the forecast business performance i.e. is the business living up to our expectations. Variance is the difference between budgeted expenditure and actual expenditure.

A proper budget will identify available capital, estimates expenditures, and anticipates revenues. Business owners must continually refer to their budget as a way of measuring performance against expectations.

Steps to be followed in planning and budgetary process-

1. Planning- This is the most important aspect of any budget. Planning include a way forward idea of expense,sales etc. It is the basic step which guide all other steps.

2. Organizing- It includes identification of various alternate sources and select best alternate out of them. It also includes organise all the available resources at one place.

3. Implementing- When all things are done. It is the stage where budget is implemented and users are guide accordingly.

4.Controlling- Once budget is implemented we have identify Variance with actual and budgeted figures.

5. Correcting- Once Variance find out we have to take steps to correct those variances.

Benefits that an Organisation accrue through Budgeting-

1. Planning Orientation- Everyone is clear about goals and objectives of Organisation and they work accordingly in that direction.

2.Profitability Review- Budgeting helps to control over expense and check profitability.

3.Performance Evaluations- Budgeting helps to identify whether organisation are achieving desired goals or not.

4. Funding Planning- Budgets helps us to identify resources for procurement of Funds and there utilisation.

5 Cash Allocation- Liquidity is the most important aspect of any Organisation. Budgets helps to keep tight control over fund utilisation. This maintains liquidity.

There are various types of Budget like Sales, Cash, Production, Expense, Raw Material etc.