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Meaning of budget (unit 4)

Meaning of budget (unit 4)






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    Meaning of budget (unit 4) Meaning of budget (unit 4) Document Transcript

    • Meaning of BudgetA budget is a detailed plan of operations for some specific future period. It is anestimate prepared is advance of period to which it applies. It acts as a businessbarometer as it is complete programmed of activities of business for the periodcovered.According to CIMA, London, budget is defined as, “Financial and quantitativestatement, prepared prior to definite period of time, of policy to be pursued duringthat period, for the purpose of attaining a given objectives.” Or“Financial statement, prepared in advance & is based on future plan of actions forthe purpose of attaining a given objectives.”Thus the essentials of budgets are:- (A) It is prepared in advance & is based on future plan of actions. (B) It relates to a future period & is based on objectives to be attained. (C) It is a statement expressed in monetary & physical units prepared for implementation of policy formulated by management.Different types of budgets are prepared by an industrial concern for differentpurposes. A sales budget is prepared for purpose of forecasting sales for futureperiod. A master budget embodies forecasts - for sales & other incomes formanufacturing, marketing & other expenses besides forecasting the figures forprofit or loss. Purpose important of BudgetingThe major purpose important of budgets or budgeting are:- (1) Statement of expectations: A firm establishes long range objectives which are pursued in successive, short run steps in future period of time. A budget is a means to achieve these goals by maintaining relationship between short run goals & long run. Objectives of firm:-It helps to clarify assumptions underlying future goals.For example:- If sales target for next year’s formulated, budget gives detail aboutprices, quantities, sales effort etc. which are based on number of factors such asdemand and supply, technological changes, economic conditions etc.(2) Communication: The people of enterprises should know what goals are, theyshould understand and support them. Top management communicates budget tolower level so as to make them clear what is to be achieved.(3) Planning: It is essential to achieve goals. It reduces uncertainty and providesdirectors to employees by determining course of actions in advance. Budgetingcompiles management to plan in a comprehensive way. Planning involves whatshould be done how goals may responsibility and be held accountable.(4) Coordination: To implies proper balance b/w labour, material & otherresources so that goals are attained at min cost. The activities of various
    • departments must remain in harmony with each other. For example, there shouldbe coordinated b/w activities of production deptt and sales deptt. It is undesirable toproduce a product which cannot be profitable sold to sales deptt. Likewise, salesdeptt should not create demand for product which cannot be produced byproduction deptt.(5) Control: It consists of action necessary to ensure that performance of org.conforms to plans and objectives. Control of performance is possible with predetermined standard which are laid down in budget. Thus, budgeting makes controlpossible by continuous comparison of actual performance with that of budget so asto report variations from budget to mgmt of corrective actions. Essentials of Budgeting:-A successful and sound budgeting system is based upon certain pre requisites whicheffective and efficient application of budgeting system. The following are some impessentials or fundamental of a successful budgeting. (1) Top management support: A budgeting system will fail if it is not installed and supported by top mgmt because it is an important for management too. A company will be able to implement budget plans efficiently if top mgmt has positive attitude towards budgeting and gives directions for budget implementations. Budget estimates are generally proposed by line manager but top management has responsibility of coordinating budget of different departments and approving them finally and initiates follow-up procedure to see that there effective implementation of budgets. (2) Clear and realistic goals: Budgeting is a means to achieve goals and objectives and it cannot succeed if goals are not clear because there will be lack of proper direction, and effort of mgmt will be wasted. Therefore the financial manager must ensure that objectives and goal have been properly laid down, should be written in formal terms, reasonable and realistic. Budget goals should not be set at too high or too low level. Goals set a high level are impossible to attain and employees don’t put any serious efforts to achieve them. Goals set at a very low level don’t provide any challenge to employees and they are less motivated. Goals for an enterprise depend on many factors such as size, age of enterprise, nature of activities and other factors. (3) Assignment of Authority and Responsibility: A sound organizational structure is essential for success of budgetary system. Authorities and responsibilities of each manager should be clearly identified and established which provide an effective means to achieve enterprise objectives in efficient manner. If there is no relationship b/w budgeting system and org structure of enterprise planning and control would not be effective. In the absence of
    • clear – cut assignment of authorities and responsibilities either manager cannot be held accountable for those activities for which they have no responsibilities.(4) Creation of Responsibility center:  As the large firm cannot be surprised byan individual or few individuals so for effective control of all activities, each sub unithas certain activities to perform and its manager is assigned specific authority andresponsibilities to carry out those activities. The sub-unit of an enterprise forpurpose of control is called responsibility center or decision center. The imp criteriaof creating it is that unit of org should be separable and identifiable for operatingpurposes and perform once measurement should be possible.Advantages of BudgetingBudgeting is the important management tool; it is a way of managing. Manybenefits are derived from budgeting although it is a mean not an end itself. It is feedforward process that is it makes an evaluation of variables likely to affect the futureoperation of enterprises, it predict future with reasonable precision and removesuncertainty to great extent. The following are some of more signifies advantages ofbudgeting:1) Forced planning: - Budgeting compels the management to plan for future. Thebudgeting process the management looks ahead and become the more effective andefficient in administrating business operation it installs into the managers the habitof evaluating carefully their problems and related variable before making anydecision.2) Coordinated operation: - It helps to coordinate, integrate and balance efforts ofvarious departments in light of overall objectives of enterprises. This results in goodharmony among departments.3) Performance evaluation and control: - Budgeting facilitates control by fixingstandards and then compare the standard with actual to evaluate performance. Ifany deviation occurs measurable steps are taken.4) Effective communication: - It improves quality of communication the enterprisesobjectives budget goals, plans, authority and responsibility and procedures toimplement plans are clearly written and communicated through budgets to allindividuals in the enterprises. This results in the better understanding and a goodrelation among managers and subordinates.5) Optimum utilizations of resources: - It helps to make the optimum utilization ofthe resources that is capital and human by directing their effort in most profitablechannels.
    • 6) Productivity improvement: - It increases morale and thus the productivity ofemployees by seeking their participation in the formulation of plans and policiesbringing harmony between individual goal and the enterprises objective byproviding incentives to perform more effectively.7) Profit mindedness:- Budgeting develops the atmosphere of profit mindedness andthe cost consciousness .It helps in preventing waste, reducing expenses and attainingdesired return on investments.8) Management by exception: - Management gives the attention on importantmatters through budgeting reports and facilitates the management by exception andthereby saves time and energy9) Efficiency: - It measures efficiency, permits self evaluation and indicates progressin attaining enterprises objectives.Limitations in budgeting1) Budget plan is based on estimates: - Budgeting is not an exact science and it basedon facts and managerial judgments which suffer from personal biases. The successor failure of budget depends to a large extent upon accuracy of basic estimates orforecasts.2) Continuous adaptation:- Budgeting is the dynamic process the installation ofperfect system of budgeting is not possible in the short period .Business conditionschange rapidly therefore budgeting programmed should be continuously adapted.And should be continuous process .Management should not loose patience and go ontrying various technique and procedure in developing and using budgeting systemto achieve the success.3) Implementation: - Unless budget is properly implemented, budget programmedwill not work. For success of budgeting program it is essential that it is understoodby all and all persons in the enterprises must have full involvement in preparationand execution of budgets, otherwise budgeting will not be effective.4) Management complacency:- Budgeting is a management tool- a way of managingand not the management .To get the best result of managing; management shoulduse budgeting with intelligence and foresight along with the other managerialtechniques.5) Unnecessary details: - Budgeting will be ineffective and expensive if it isunnecessarily detailed and complicated a budget should be precise format andsimple to understand and should be flexible.
    • 6) Good conflict:- If budget set does not matches with the purpose of budgeting ofenterprises then there will be conflict and confuses so there must be harmony withenterprises aims.7) Evaluation: - Budgeting will hide inefficiencies instead of reveling them if aproper system evaluation lacks. There should be continuous evaluation of actualperformance and standards should be re- examined regularly.8) Unrealistic targets: Budget will lower morale and productivity if unrealistictargets are set and if it is used as pressure tactic