Budgeting by kuldeep ghanghas

8/8/2019 Budgeting by kuldeep ghanghas

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` Planning` Directing and Motivating` Controlling


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` Th e objectives of Budgeting are

` To encourage self study in all aspects of aCompany's operations.

` To promote t h e planning process and provide asense of direction to every member of t h eorganization.

` To force a definition and crystallization of Companypolicies and aims.

` To increase t h e effectiveness wit h wh ich people andcapital are employed.


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` To disclose areas of potential improvement in t h eCompanys operations.

` To stimulate study of relations h ip of t h e Company to its

external economic environment for improving th

eeffectiveness of its direction.

` To direct and coordinate business activities and units toac h ieve stated targets of performance.

` To facilitate t h e control process, by comparing actualresults wit h plan, and provide feedback to t h eemployees about t h eir performance.


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` Budgetary Control is defined as "t h eestablis h ment of budgets, relating t h eresponsibilities of executives to t h e

requirements of a policy, and t h econtinuous comparison of actual wit hbudgeted results eit h er to secure byindividual action t h e objective of t h at

policy or to provide a base for itsrevision.


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Th e use of budgets to controloperations.Compare actual results wit h

planned objectives.


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Illustration 7-1


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A projection of budget data atone level of activity.

Budgeted Production in units (steel ingots) 10,000Budgeted Costs

Indirect materials $ 250,000Indirect labor 260,000Utilities 190,000Depreciation 280,000Property taxes 70,000Supervision 50,000

$1,100,000

Budgeted Production in units (steel ingots) 10,000Budgeted Costs

Indirect materials $ 250,000Indirect labor 260,000Utilities 190,000Depreciation 280,000Property taxes 70,000Supervision 50,000

$1,100,000

Barton Steel (Forging Department)Manufacturing Overhead Budget (Static)

For the Year Ended December 31, 2002

Illustration 7-6


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A projectionof budget

data for variouslevels of

activity.


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Illustration 7-13

Fox Manufacturing Company (Finishing Department)Flexible Monthly Manufacturing Overhead Budget

For the Month Ended January 31, 2002

Activity levelDirect labor hours 8,000 9,000 10,000 11,000 12,000

Variable costs

Indirect materials ($1.50) $12,000 $13,500 $15,000 $16,500 $18,000Indirect labor ($2.00) 16,000 18,000 20,000 22,000 24,000Utilities ($.50) 4,000 4,500 5,000 5,500 6,000

Total variable 32,000 36,000 40,000 44,000 48,000Fixed costs

Depreciation 15,000 15,000 15,000 15,000 15,000Supervision 10,000 10,000 10,000 10,000 10,000

Property taxes 5,000 5,000 5,000 5,000 5,000Total fixed 30,000 30,000 30,000 30,000 30,000Total costs $62,000 $66,000 $70,000 $74,000 $78,000

Activity levelDirect labor hours 8,000 9,000 10,000 11,000 12,000

Variable costs

Indirect materials ($1.50) $12,000 $13,500 $15,000 $16,500 $18,000Indirect labor ($2.00) 16,000 18,000 20,000 22,000 24,000Utilities ($.50) 4,000 4,500 5,000 5,500 6,000

Total variable 32,000 36,000 40,000 44,000 48,000Fixed costs

Depreciation 15,000 15,000 15,000 15,000 15,000Supervision 10,000 10,000 10,000 10,000 10,000

Property taxes 5,000 5,000 5,000 5,000 5,000Total fixed 30,000 30,000 30,000 30,000 30,000Total costs $62,000 $66,000 $70,000 $74,000 $78,000


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Th e preparation of reportsfor eac h level of responsibility in t h e

companys organizationch art.

Illustration 7-17


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Costs t h at a manager h asth e aut h ority to incur wit h ina given period of time.


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Illustration 7-17


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Costs t h at relate specificallyto a responsibility center and are incurred for t h esole benefit of t h e center.


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Costs t h at are incurred for th e benefit of more t h anone profit center.


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A responsibility center t h atincurs costs but does notdirectly generate revenues.

Warranty Dept


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A responsibility center t h atincurs costs but alsogenerates revenue.


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Illustration 7-18


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` E stimates: Budgets may or may not be true, as t h ey arebased on estimates. Th e assumptions about futureevents may or may not actually h appen.

` 2. Rigidity: Budgets are considered as rigid document.Too muc h emp h asis on budgets may affect day to dayoperations and ignores t h e dynamic state of organizational functioning.


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` 3 . False Sense of Security: Mere budgeting cannot leadto profitability. Budgets cannot be executedautomatically. It may create a false sense of security t h ateveryt h ing h as been taken care of in t h e budgets.

` 4. Lack of coordination: Staff cooperation is usually notavailable during Budgetary Control exercise.

` 5. T ime and Cost: Th e introduction and implementationof th e system may be expensive.

Budgeting by kuldeep ghanghas

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