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Cost Accounting- Budgeting And Budgetary Control

Budgeting And Budgetary Control
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The planning process involves specifications of objectives organization set and fundamental value that will guide an organization to pursue those goals. In operation terms, planning process comprising four objectives

  • Aims and Objectives
  • Goals
  • Strategies 
  • Plans and Budget

The timing of introducing new products involves laying down strategies and preparing budgets/profits plans. The first ingredients of preparing budget are plan. In reference to a comprehensive and coordination, the term plan suggesting budgeting having special connotations. 

Budgeting helps in predicting the firm’s future operations wholly external and beyond its control. It is also affecting the internal operational activities of firms. In others, word budgeting not only exposed what will happen even describe what makes things to happen.

In brief, budgeting tends to express what management is expecting to happen and what management intends to have happened. The purpose of this article is to generalize the budgeting view as an instrument of planning and illustrating various types of budgets.

Budget- Purpose And Definition

In accordance with Lambe, Lawal and Okoli (2015), Budgeting refers as key instruments for management which are practised in government and public firms. As suggested by assignment help experts, many accountants see budget as a qualitative and financial statement for some specific period. 

Therefore the philosophy lies under budgeting is expressed the revenues and costs linked to daily operational activities of a business. 

A budget comprises of essential elements defined as- Plan, Resource and Operations, Specified future projects, Comprehensiveness, Financial terms and Coordination(Christensen, 2013)

Operation and Resources reflect revenues and expenses. That means, Budget quantifies revenues and briefed expenses occurred due to product and service formation.  

Budgets can be expressed in financial terms for instance various operational activities are described in units in terms of weight, man-hour, sales advertisements. Under this, A modus of Operandi referred to as that budget which is prepared for each operating segment within a business.

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Purpose Of Budget

As instrumental accounting tools, budget is used to conduct business operations thus evaluating actual results. The main purpose of budgets are-

  • Expressing the expectation of firms in comprehensive and financial terms so that most of the underlying assumption could be identified
  • Communicating others about the goals and objectives of the company since budgeting deals with fundamental policies
  • Coordinating operations to all the departments of the company such that there is no bottleneck and imbalance established among operation
  • Finally, the budget provides a framework for judging employee performance and the extent to which employee has been succeeding in terms of achieving goals

Concepts And Characteristics Of Budget

Egubinke et.al, 2017 considered budget as specific control and plan of an organization expressed in monetary terms and subjected to constraints imposed also how strategies should be made to whatever objectives the company has formed. The budget recognizes fully control and dominant managers’ roles, continuous feedback and accounting responsibility. Therefore a good budget displays the following characteristics-

  • It constantly monitors budgets and performances
  • It embraces the whole organization
  • It allows cost and revenue analysis on basis of cost centres and product lines
  • It follows standard performance protocols

According to frow et.al, 2020 a budget is also defined as predetermined statements entails how much outcomes company has received and what has been expected. 

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The Concept Of Budgetary Control

Budgetary control can be viewed as controlling costing, embracing preparation of a budget, establishing responsibility and coordinating actual performance to achieve maximum profitability. 

In an organization, the expenses and revenues are observed accordingly personal areas of responsibility holding permitting financial values. Essay Deutsch deduced budgetary control gives a response to actual outcomes reports variations in the report. 

The basic stages of budgetary control include a set of predetermined settings, measuring actual performance against pre-determined standards so a company can bring out expected outcomes in timings.

The five basic steps needed to follow to make effective budgetary controls are-

  • Clearly defining the manager’s responsibility
  • Ensuring effective protocols and record keep and performances
  • Ensuring commitment of top management for budgeting control at its place
  • Training managers for interpreting and using budgets
  • Revisions of budgets to assure any amendments company has made out

 Source- Microsoft 2020

The above graph provides an outline of budget gives summary of expenses and revenues of the company and how this template can be used by some other companies to allow comparison between revenues and incomes.

Types Of Budgets

A master budget typically consists of three types of budgets- Operating budgets, Financial budgets, and Special decisions budgets

Operating Budgets

As per online assignment help experts, operating budgets are related to physicals and operation of firms such as sales, production, debators and creditors. Herein we have listed the following components of operating budget are-

  • Sales budget
  • Production budget
  • Direct labour budget
  • Manufacturing budget
  • Expenses budget
  • Administration and Selling budgets
Operating Cash Flow Items
Cash ReceiptsCash Outflows
Sales CashPayable Payments
Account receivable cashPurchasing raw materials
Fixed assetsSalary and Wages
 Expenses (Factory or administration)
 Purchasing Fixed Assts

Financial Budgets

A financial budget is expected to cash receipts/disbursements and operation results. It contains a few components which have been discussed in a given section

  • Income statement
  • Cash Budget
  • Retained Earnings
  • Balance Sheet
Financial Cash Flow Items
Cash InflowsCash Outflows
BorrowingsIncome tax
Security salesLoan Redemption
Interest gainedRe purchasing sales
DividendsDividends
Rent 
Tax Refunds 

Cash Budgets

The principle aim of a cash budget is covered by planning horizon in the light of circumstance. Cash budgeting depends on its nature and degree of accuracy and differs from firms to firms.

Zero Base Budgeting

Peter A. Pyhrr.At Texas Instruments Inc, first introduced the term zero-base budgeting implies that the budget of each department and each activity of the next year would be zero. It means no amounts would be relocated to the department unless a proper justification has been made. Along with this, a department may be required to provide detail of different alternatives through proposing the way activity has to be executed.

ZBB holds different definition and roles that is-

  • It aims in providing systematic consideration of all the operations and program,s
  • Justifies each program
  • It is considered a budgeting process and provides alternative actions
  • It is used to compare other activities
ZBB Features-
  • Provides justification for each activity of an organization
  • It ensures the best courses of actions 
  • Most alternatives are considered
  • It assures participative decision making (Savenko & Zinkevych, 2018).
  • It is based on cost-benefit analysis

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Conclusion

In this blog, we have tried to conclude each aspect of budget and budgeting control where we have deduced most appropriate definition of a budget that is a budget helps in predicting firm’s future operations wholly external and beyond its control. Then after we have described purpose of the budget that shows budget helps in coordinating operations to all the departments of the company such that there is no bottleneck and imbalance established among operation. In additional to this, we have defined different types of budget follows as Operating budgets, Financial budgets, and Special decisions budgets. A financial budget is expected to cash receipts/disbursements and operation results, also operating budgets are related to physicals and operation of firms such as sales, production, debtors and creditors. At last cash, budget is covered by planning horizon in the light of circumstance. In the next section, we have enumerated Zero base budgeting implies that budget of each department and each activity of the next year would be zero that shows no amounts would be relocated to the department unless a proper justification has been made.

References

Christensen, M. D. (2013, July). The president’s budget: overview of structure and timing of submission to congress. LIBRARY OF CONGRESS WASHINGTON DC CONGRESSIONAL RESEARCH SERVICE.

Egbunike, Amaechi & Nkiru, Unamma. (2017). BUDGETING, BUDGETARY CONTROL AND PERFORMANCE EVALUATION: Evidence from Hospitality Firms in Nigeria. STUDIES AND SCIENTIFIC RESEARCHES. ECONOMICS EDITION. 10.29358/sceco.v0i26.398.

Frow, N., Marginson, D., & Ogden, S. (2010). “Continuous” budgeting: Reconciling budget flexibility with budgetary control. Accounting, Organizations and Society, 35(4), 444-461.

Lambe, I., Lawal, M., & Okoli, T. ( 2015). A systematic review of budgeting and budgetary control in government owned organizations. Research Journal of Finance and Accounting, 6(6), 1-10.

Microsoft(2020). Monthly company budget. Available at-

https://templates.office.com/en-us/monthly-company-budget-tm03458075, [Data Accessed from 15 January 2021]

Pyhrr, P. A. (2012). Zero‐Based Budgeting. Handbook of Budgeting, 677-696.

Savenko, H., & Zinkevych, T. (2018). Alternative methods of budgeting: aspects of their implementation in Ukraine.

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