PPT: - Budgeting & Cost Control

BUDGETING & COST CONTROL
What is budgeting?
Basically, it's making sure that you're spending less than you're bringing in and planning for both the short- and longterm. Provide a forecast of revenues and expenditures, that is, construct a model of how a business might perform financially if certain strategies, events and plans are carried out. Enable the actual financial operation of the business to be measured against the forecast. Establish the cost constraint for a project, program, or operation.
WHAT IS A BUDGET?
A budget is one of the most basic and probably most useful things you can do to get in control of your finances. It is simply a snapshot of your financial situation at a particular point in time, which can help you keep track of what you're earning, what you're spending, and what happens to the leftovers (if there are any). You can then use your budget to set some guidelines for yourself when it comes to how you spend what you earn. A budget is the most fundamental and most effective financial management tool available to anyone. It is extremely important to know how much money you have to spend and where you are spending it. Some of your "spending" might be for investments, but there is an important distinction between creating a personal budget and deciding where to invest your extra income. A budget is the first and most important step towards maximizing the power of your money.
WHAT IS BUDGETARY CONTROL?

Budgetary control is the use of the comprehensive system of budgeting to aid management in carrying out its functions like planning, coordination and control. This system involves: Division of organization on functional basis into different sections known as a budget centre. Preparation of separate budgets for each budget centre. Consolidation of all functional budgets to present overall organizational objectives during the forthcoming budget period. Comparison of actual level of performance against budgets. Reporting the variances with proper analysis to provide basis for future course of action.
According to Function
SALES BUDGET: Sales budget is the most important budget based on which all the other budgets are built up. This budget is a forecast of quantities and values of sales to be achieved in a budget period. PRODUCTION BUDGET: Production budget involves planning the level of production which in turn involves the answer to the following questions: What is to be produced? When is it to be produced? How is it to be produced? Where is it to be produced? COST OF PRODUCTION BUDGET: This budget is an estimate of cost of output planned for a budget period and may be classified into Material Cost Budget, Labor Cost Budget, Overhead Cost Budget. PURCHASE BUDGET: This budget provides information about the materials to be acquired from the market during the budget period. PERSONNEL BUDGET: This budget gives an estimate of the requirements of direct labor essential to meet the production target. This budget may be classified into a. Labor requirement budget b. Labor recruitment budget RESEARCH AND DEVELOPMENT BUDGET: This budget provides an estimate of expenditure to be incurred on R & D during the budget period. R&D budget is prepared taking into consideration the research projects in hand and new R & D projects to be taken up.
CAPITAL EXPENDITURE BUDGET: This is an important budget providing for acquisition of assets necessitated by the following factors: a. Replacement of existing assets. b. Purchase of additional assets to meet increased production c. Installation of improved type of machinery to reduce costs. CASH BUDGET: This budget gives an estimate of the anticipated receipts and payments of cash during the budget period. Cash budget makes the provision for minimum cash balance to be maintained at all times. MASTER BUDGET: CIMA defines this budget as The summary budget incorporating its component functional budget and which is finally approved, adopted and employed. Thus master budget is a summary of all functional budgets in capsule form available in one report.
According to FLEXIBILITY
FIXED BUDGET: This is defined as a budget which is designed to
remain unchanged irrespective of the volume of output or turnover attained. This budget will, therefore, be useful only when the actual level of activity corresponds to the budgeted level of activity.
FLEXIBLE BUDGET: CIMA defines this budget as one which, by

recognizing the difference in behavior between fixed and variable costs in relation to fluctuations in output, turnover or other variable factors such as number of employees, is designed to change appropriately with such fluctuations.
Preparation of budgets is the first step in the budgetary control system. Implementation of budgets is the second phase. But preparation and implementation of budgets alone will not achieve much unless a comparison is made regularly between the actual performance and the budgeted performance. Continuous and proper reporting makes this possible. To ensure the success of budgetary control system, proper follow up action has to be taken immediately for the reports submitted.
CAPITAL BUDGETING
Capital budgeting is a decision situation where large funds are committed (invested) in the initial stages of the project and the returns are expected over a long period of time. These decisions are related to allocation of investible funds to different longterm assets. Capital budgeting is a continuous process and it is carried out by different functional areas of management such as production, marketing, engineering, financial management etc.
BASIC FEATURES OF CAPITAL BUDGETING: a. Capital budgeting decisions have long-term implications. b. These decisions involve substantial commitment of funds. c. These decisions are irreversible and require analysis of minute details. d. These decisions determine and affect the future growth of the firm.
CAPITAL BUDGETING DECISION INVOLVES THREE STEPS i. Estimation of costs and benefits of a proposal or of each alternative. ii. Estimation of the required rate of return, i.e., the cost of capital iii. Selection and applying the decision criterion.
The costs and benefits for a capital budgeting decision situation are measured in terms of cash flows. An important point is that all cash flows are considered on after tax basis. The rule is that all financial decisions are subservient to tax laws. The cash flow from the project is compared with the cost of acquiring the project.
Cost Control
The process or activity on controlling costs associated with an activity, process, or company. Cost control typically includes (1) investigative procedures to detect variance of actual cost from budgeted cost, (2) diagnostic procedures to ascertain the cause(s) of variance, and (3) corrective procedures to effect realignment between actual and budgeted costs.
Four Requirements for Effective Cost Control

Many businesses use cost control strategies to keep expenses down and increase profits. Cost control is used to curb costs associated with many areas of business, including processes and projects. Cost control is an important goal, but if the necessary aspects are not implemented correctly, a business may lose money instead. Expectations and Frequent Review
Before a project is started, all involved must have a clear and specific definition of the project's needs, goals and requirements. These needs, goals and requirements must be reviewed frequently to make sure the project is going in the right direction. Failure to get all the necessary information about a project can seriously impact cost control efforts.
Budgeting
Creating a realistic, thorough budget helps keep costs down. With a budget in place once the project's details are set, everyone involved in the project can make decisions about items that add to the cost, such as materials and labor.
Variable Evaluation and Action

Any unexpected variables in a budget where actual cost is exceeding the estimated cost by a significant percentage must be addressed immediately for cost control. Those working on the project must work together to come up with a solution that will stop the expense from spiraling out of control. Other variables from the project itself, such as an unexpected design flaw, must be handled the same way. If all those involved collaborate to find creative solutions to unexpected problems, they can keep costs down.
Proper Information Use and Communication

Those involved in a project must use all the information available, including the project details and project budget, and coordinate efforts to keep costs down. Use of other cost-control strategies, such as budgeting, won't work well without information sharing and open communication among all those involved on the project. For example, if a business and project manager decide to eliminate part of a new building design to save money, the architect must adjust for the change and give the new plans to the construction crew. Otherwise, the crew will proceed with the original, more costly design.
Conclusion
Without proper planning of cost management, deliverables may happen, but chances of over shooting the budget always remain. It is very critical that we nee to keep a strict vigil on various process involved in estimation, budgeting and control in a project so as to ensure its completion within the allotted time frames and budget.

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What is budgeting and what are its main purposes?

What are the different types of budgets?

BUDGETING & COST CONTROL

WHAT IS BUDGETARY CONTROL?

FLEXIBLE BUDGET: CIMA defines this budget as one which, by

Four Requirements for Effective Cost Control

Variable Evaluation and Action

Proper Information Use and Communication

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