Budgets & Budgetory Control Unit VI
Budget • Budgets are blueprints of the desired plan of action • They are means of communications, indicate business policies, declaration of policies, means of coordination, instruments of managerial control, controlling tools, yardsticks of comparison, set definite goals, fix responsibilities and direct to profitable direction
Objectives • It directs the attention of all concerned to the attainment of a common goal. • It leads to the disclosure of organisational weakness. The budgets are compared with actual performance & variances if any are investigated to take corrective & remedial measure. • It aims at careful control over the performance and cost of every function. • It contributes to co-ordinated efforts of all departments in order to achieve an integrated goal. Budgets grow from bottom and are controlled from top level.
Budgeting • Budgets is a statement of intention of mgmt. Budgeting refers to the mgmt action of formulating budgets. • The entire process of preparing the budgets is known as budgeting • Budgeting may be said to be act of building budgets.
Objectives • To obtain more economical use of capital • To prevent waste and reduce expenses • To facilitate various departments to operate efficiently & economically • To plan & control income and expenditure of the firm • To create a good business practice by planning for future • To fix responsibilities on different departments.
Objectives • To co-ordinate activities of various departments. • To ensure the availability of working capital • To smooth out seasonal variations by developing new products. • To ensure the matching of sales with productions.
Budgetory Control • It means the establishment of budgets relating to the responsibilities of executives to the requirement of policy and continuous comparison of actuals with budgeted results either to secure by individual action the objective of that policy for its revision. • Budgetory control includes budgets & budgeting and includes the science of planning the budgets themselves and utilisation of such budgets to effect an overall management for business planning & control.
Characteristics • Establishment: Budgets are prepared for each dept. And then the plans and objectives are presented before the mgmt. • Co-ordination: The budgetory control co-ordinates the plans of various departments and the master budget is prepared. • Continuous comparision: To conduct comparision of actual performance with budgeted figures, revealing the variations. • Revision: Budgets are revised, if necessary according to changed conditions.
Advantages • Budgets fix goals, targets w/o which operation lacks direction. • Reduction in cost & elimination of inefficiency is achieved automatically. • Enables the mgmt to decentralise responsibility w/o control of business. • It ensures that capital employed at particular level is kept at min level • Aim at max of profit through cost control and proper utilisation of resources. • Brings to light inefficiencies and weaknesses on comparing actual performance with budgeted to take remedial measure.
Limitations • The success depends upon degree of accuracy of estimates. • It is time consuming, during preparation conditions may change and estimates go wrong. • Successful operation & execution of budgets depends upon efficiency of executive personnel.
Classification of Budgets • On basis of time: • Long term, short term, Current • On basis of flexibility: • Fixed, Flexible • On basis of functions: • Sales, production, Materials, Labour, Overheads, Plant Utilisation, Cash, Capital expenditure
Cost Accounting Introduction
Cost • Cost: An amountthat has to be paid or given up in order to get something. • In business , cost is usually a monetary valuation of • (1) effort, (2) material (3) resources, (4) time and utilities consumed, (5) risks incurred , and (6) opportunity forgone in production and delivery of a good or service. • All expenses are costs, but not all costs (such as those incurred in acquisition of an income-generating asset ) are expenses.
Costing • System of computing cost of production or of running a business, by allocating expenditure to various stages of production or to different operations of a firm.
Cost accounting • A method of accounting in which all costs incurred in carrying out an activity or accomplishing a purpose are collected, classified, and recorded. This data is then summarized and analyzed to arrive at a selling price, or to determine where savings are possible. • In contrast to financial accounting (which considers money as the measure of economic performance ) cost accounting considers money as the economic factor of production
Features • The important features of Cost Accounting are stated below: • a) It is a process of accounting to determine costs. • b) It records incomes and expenditures, incurred for manufacturing and rendering services. • c) It provides statistical data for preparing estimates and submitting quotations. • d) It is the basis to ascertain and control costs. • e) It evaluates efficiency by comparing actual performance with the standard performance fixed for the purpose. • f) It involves recording, analysis, comparison and reporting of co, information for day-to-day managerial decision.
Scope • The scope of cost accounting is very wide. There are lots of techniques, tools, procedures, processes, programs are used in cost accounting for calculating cost and its control. But basically, we divide its scope within three major parts.
Scope • 1. Cost AscertainmentIn this region of cost accounting, cost accounting collects product's material, labor and overhead cost and try to calculate total and per unit cost of product. This total cost calculation will be based on historical or standard or estimated basis. After this, cost accountant will use any method of costing like specific order costing, operation costing, and direct costing technique. These techniques and methods may be used for calculating different nature products in same organization.
Functions • Ascertainment of cost of product: Cost Accounting ascertains cost of production of each job, process, or work order by applying different methods of cost accounting, such as job costing, process operation costing, contract costing etc. according to the suitability and needs of the organization. • Fixation of selling prices: Cost accounting helps to find out cost of production and fixation of selling prices of the product or process job or operation. It also helps in preparing necessary tenders or quotations. • Measurement of efficiency: Cost accounting measures the efficiency of each product, process or departments by applying standard cost method. • Cost control procedure: Cost accounting controls cost by setting standards and compared with the actual. The deviation between them are identified and if required necessary controlling measures may be taken. • Reporting to the Management: Cost accounting reports to the management periodically which may be monthly, quarterly or half yearly. According to the reports of the cost accounting, the management takes necessary decisions.
SCOPE • 2. Cost RecordsIn this part of cost accounting, cost accountant maintains cost books, vouchers, ledgers, reports and other cost related documents for future comparison and reference. It will also be under the scope of cost accounting. 3. Cost ControlThis is the end boundary of cost accounting scope. In this division, cost accountant used different techniques and methods for controlling the cost. Save One Rupees in the cost of product means we have earned one rupees in the production of goods. So, Cost accountant uses budgetary control, standard costing, break even point analysis and many other techniques for controlling the cost.
Advantages • Identify unprofitable activities, losses/inefficiency • Finding new & improved methods for reducing costs • Provide information to the management • Useful for price fixation • Helps in cost control
Limitations • It provides base but not outright solutions to the problem • It lacks uniform procedure • It is difficult to derive correct costs due to flexible factors • Heavy establishment cost afforded by medium size concerns
Cost Classification • According to Nature or element: Material, Labour & Expenses • According to Functions of Companies: Production cost, administration cost, Selling & Distribution cost. • According to Variability: Fixed cost, variable cost, semi variable cost • According to Controllability: Controllable & Uncontrollable
Cost Classification • Classification into Direct & Indirect cost • According to capital & Revenue: Ex: Cost of plant, machinery. Revenue cost are incurred to maintain the earning ca • According to Normality costs
Elements of Cost • Prime Cost = Direct materials + Direct labour + direct expenses • Works cost = Prime cost + Factory overhead • Cost of production = Factory Cost + Administration overhead • Total cost (Cost of Sales ) = Cost of production + Selling & Distribution O/H
Elements of Cost • Direct materials: Raw materials, Packing material • Direct labour: Labour engaged in production, operation i.e., supervision, foreman & Inspectors. • Direct Expenses: Hire, design, layout, Excise duty, Royalty
Elements of Cost • Indirect Materials: Lubricant, loose tools • Indirect Labour: salary & wages of foreman, store keepers, clerical staff • Indirect expenses : Rent, rates, insurance, depreciation, cost of training new employees
Elements of Cost • Overheads: All expenses other than direct material, wages, expenses are known as O/H. Sub divided into • A) Production O/H: Indirect material, wages, expenses like rent, rates, insurance • B) Administrative O/H: Office expenses, salaries of staff, accountant, dep. • C) Selling O/H: Advt, publicity, show room exp • D) Distribution O/H: Cost of packing, diesel, lubricant for selling vans.
Cost Sheet • All expenses relating to product are extracted from financial a/cs & analysed under expense heads in the form of statement called cost sheet.
Management Accounting • It is a system of accounting which is concerned with internal reporting of information to management for planning & controlling operations, decision taking on special matters & formulating long range plans. • It involves collecting, analysing, interpreting & presenting all accounting information which is useful to management.
Importance • Planning • Controlling • Coordinating • Organising • Motivating • Communicating
Scope • Financial accounting • Cost accounting • Budgeting & forecasting • Statistical methods • Inventory control • Interpretation of data • Reporting • Internal audit • Tax accounting
Tools & Techniques • Financial planning • Analysis of Financial statements • Historical cost accounting • Standard costing • Budgetory control • Marginal costing • Decision accounting • Ratio accounting
Role of Accounting information in planning & control • Control of material cost • Control of labour cost • Control of O/H • Measuring efficiency • Budgeting • Price determination • Expansion • Arriving at decision
Demand & Supply Functions Unit II
Demand & Utility • Demand constitutes willingness to pay, desire to pay & ability to pay. • Demand is the desire or want backed up by money • Demand is always related to price & time • Demand may be viewed ex-ante ( intended demand) or ex-post (already purchased) • Utility means want satisfying power of commodity.
Individual & Market demand • Consumer demand for a product viewed at 2 level • i) Individual demand • ii) Market demand
Demand function • Q=f(Px,I,Pr,T,A) • Px = Own price of commodity • I= Income of individual • Pr= Price of related commodities • T= Tastes & preferences of individual consumer • A= advertising expenditure mde by producers • Q= f(Px)
Law of Demand • According to law of demand other things being equal if price of commodity falls the quantity demanded of it will rise & vice-versa. • Reasons for Law of Demand: Why does Demand Curve slope downward? • i) Income Effect ii) Substitution Effect
Exceptions to Law of Demand • Goods having prestige value • Giffen goods • Some other Exceptions like Speculation, Illusion
Price Elasticity of Demand • It is defined as the ratio of the % change in quantity demanded to a % change in price. • = % change in quantity demanded/% change in price =∆q/∆p x p/q • Elastic change a given change in price cause large change in quantity demanded. • In elastic change a given change in price brings about small change in quantity demanded.
Determinants of price elasticity of demand • Availability of substitutes • Proportion of consumer’s income spent • Number of uses of commodity • Complementarity between goods • Time & elasticity
Cross elasticity of demand • The degree of responsiveness of demand for one good in response to the change in price of another good represents the cross elasticity of demand. • = % change in quantity demanded of X/% change in price of good Y = ∆qx /qy x py/∆px • Substitute & Complementary goods: Cross EOD +ve for substitute & - ve for complementary.
Income elasticity of demand • Defined as % change in purchase of a good to a % change in income. • = % change in purchase of good/% change in income = ∆q/∆y x y/q • Goods having –ve income elasticity is inferior goods & having +ve income is superior goods. • Good having income elasticity >1 & bulks larger in consumer’s budget as becomes richer is luxury & income elas<1 & declining proportion of consumers income as he becomes richer is necessity.
Demand Estimation • It is first step to demand forecasting • Knowledge about market demand is vital for business in creating price, sales & output strategies against dynamic changes in determinants of demand. • Several business decisions in this regard can be aided by information & empirical measures regarding consumer demand behaviour such as demand function & elasticity of demand.
Steps in Demand Estimation • Specification of demand function • Adopting the form of demand function • Choice of statistical technique • Data collection • Empirical process • Result reporting • Interpretation • Evaluation
Techniques • Consumer survey • Consumer Clinic • Market Experiment • Statistical Technique of regression analysis • i) Identify the variables • Qd=f(P,I,Px,A,T) • ii) Collection of data • iii) Choice of functional form of demand equation that describes the relationship between dependent & independent variables
Contd... • iv) Estimating the parameters of demand equation • v) Interpretation of results & make predictions • Linear Demand Model: Qd= ∞+B1p+B2I+B3Px+B4a+e ∞,B1,B2,B3,B4, are parameters E is standard error