This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
According to CIMA London, budget is defined as a financial statement prepared and approved prior to a defined period of time of the policy to be perused during that period for the purpose of attaining a given objective. It may include income, expenditure and the employment of capital.
The entire process of preparing the budgets is known as budgeting therefore it is an act that refers to preparing of budgets it is managerial action of formulating budgets.
TYPES OF BUDGETS
The sales budget is usually the keystone in planning and control of operation of a business. Sales forecast serves as a base for the sales budget. The sales budget is prepared in quantitative terms of units expected to be sold and the value expected to be realized. The Sales Manager should be made directly responsible for the preparation and execution of sales budget. This is prepared according to the requirements of the business while preparing sales budget. The useful classification may be-products, territories, customers, salesmen, etc. More than one classification may be employed
The Production Budget is a forecast of the production for the budget period. It provides an estimate of the total volume of production product-wise with the scheduling of operations by days, weeks and month and also a forecast of the closing finished product inventory. It is based on sales budget. The Factory Manager is the person generally made responsible for its preparation, administration and execution. This budget can also be prepared department-wise. This budget is prepared in quantity terms only. The main factors, which are useful in preparing production budgets, are:
(a) Inventory Policies (b) Sales Requirements (c) Uniformity of Production (d) Plant Capacity (e) Availability of inputs (f) Duration of Production.
Materials are either direct or indirect. The Material budget generally deals only with the direct materials. Indirect materials are generally included in overhead budget. The material requirements are estimated on the basis of quantity of each class of products to be produced by multiplying the exact material requirement for each class of product by the number of units of that class. Material budget can be prepared on the basis of standards or, historical data regarding percentage of raw materials to total cost, adjusted for current price and normal wastage of material.
Purchase Budget gives the details of material purchases to be made in the budget period.Â It correlates with sales forecast and production planning.Â It deals with purchases that are required for planned production. Purchases would include both direct and indirect materials and goods.Â While placing the purchase orders material manager has to see the orders on hand and unfulfilled orders at the beginning of the budget period and adjust the purchases accordingly.Â Purchase budget enables the budget officer to provide funds in the cash budget according to delivery schedules, terms of payment and credit period.Â Â While preparing purchase budget the factors like the opening and closing stock to be maintained, maximum and minimum stock quantities to be maintained, economic order quantity level, the resources available, the policy of management etc., should also be taken into account.
Budgetary Control is defined as "the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide a base for its revision.
To know about concepts of management accounting.
To know about budgets and budgetary control.
To learn how budgets are being made in real.
SOLUTION AND FINDINGS
A1 Furniture Ltd. Should use the sequence mentioned below:
Firstly, Sales budget should be prepared
Finished stock budget
Production budget and lastly
Materials usage budget
1. PRINCIPAL BUDGET FACTOR
The principal budget factor is the factor that limits the activities of an organization because such a limit/constraint will have a pervasive effect on all plans and budgets. The limiting factor must be identified during the budget preparation process.
Examples of principal budget factors are:-
Shortage of labor material
Shortage of production capacity.
Shortage of finance or working capital
Shortage of demand for goods or services.
Principal budget factor is such an important factor that it would affect all the functional budgets to a large extent. The extent of its influence must be assessed first in order to ensure that functional budgets are reasonably capable of fulfillment.
This is the factor in the activities of an undertaking which at a particular point in time or overÂ a period will limit the volume of output. It is the governing factor which is a majorÂ constraint on all the operational activities of the organization, so this factor is taken into consideration to determine whether the budgets are capable of attainment.
It is essential to locate the limiting factor may be any one of the following: Is there sufficient demand for the product? (Customer demand) Will a required quality and quantity of materials be available? (Availability of raw material)Is the plant capacity sufficient to cope up with the expected sales? (Plant capacity)Is the required type of labor available?( available of labor)Is cash position sufficient to finance the expected volume of sales?(cash position)Are there any Government restrictions?( Government restrictions).
2. Budgeting is not considered by participants as a neutral, objective, purely technical process which is a view adopted by many accountants. The human subjective aspects cannot be overemphasized and these are dealt with below under the following headings: goal congruence, participation, motivation, goal definition and communication.
Behavioral problems associated with budgetary control are:
Managers may complain that budgeting takes too much of their time;
"Slacks" may be built into expenditure estimates and thus managers may lobby for a higher budget expenditure allowance.
Co-operation and communication between managers might be minimal.
3. Benefits of budgetary control and planning to an organization:
It clearly defines the areas of responsibilities of all concerned executives who are engaged in various business activities.
It provides yardsticks for evaluation of actual performance from planned.
It coordinates various activities of different sections, division or departments of the organizations.
It helps the management in the process of its planning in respect of various business activities.
Budget is a financial statement prepared and approved prior to a defined period of time of the policy to be perused during that period for the purpose of attaining a given objective.
"The establishment of budgets, relating the responsibilities of executives to the requirements of a policy" is budgetary control.
TYPES OF BUDGETS
â€¢ Sales Budget
â€¢ Production Budget
â€¢ .Materials Budget
â€¢ Purchase Budget
In solution and findings principal budget factor is explained which is key factor in preparing of budgets. Human behavioral problems associated with budgeting is explained and finally merits of budgetary control which are it points out the efficiency of various business activities etc.