Ans. For preparing an efficient budget, there
is an urgent need of well-versed system for preparing the budget. This process
is required an efficient system of implementation within the organisation. The
main essentials of establishment of system of budgeting are:
1)
Budget Centres
2)
Budget Committee
3)
Budget Officer
4)
Budget Manual
5)
Budget Period
6)
Budget Key Factor or Determining Principal Budget Factor
7)
Forecasting
8)
Determining Level of Activity
9)
Preparation of Budget Let us study each one of the above in detail.
Let us study
each one of the above in detail.
1)
Budget Centres : Budget centre
are defined as different sections of an undertaking or an organisation, where
budgetary control measures are to be applied and for the purpose, separate
budgets are to be prepared with the help of head of these centres so that these
may be implemented more efficiently.
2)
Budget Committee : The budget
committee is a group of representatives of various functions in an organisation,
e.g. Sales Manager, Production Manager, R&D Manager, Materials Manager,
etc. As all functions are interrelated and any change in one’s target will have
its impact on that of the others. Therefore, it is necessary to discuss the
targets so that a mutually agreed programme can be determined. This is really
the co-ordination in budget making. It is powerful force in knitting together
the various activities of the business and enforcing real control over
operations. The principle functions of a Budget Committee are:
a)
To provide departmental managers past data regarding performance, costs etc.
thus, helping them to prepare their respective budgets.
b)
To co-ordinate, receive, review the functional budgets in the light of general
policies and objective of the organisation.
c)
To approve the functional budgets after making necessary changes.
d)
To prepare and present the Master Budget on the basis of functional budgets, so
developed and approved for final considerations and approval of the Board of
Directors.
e)
To recommend action to be taken on the basis of variance analysis.
3)
Budget Officer :
To link up or co-ordinate the various functions, to bring them together and to
co-ordinate their efforts in the matter of preparation of target figures, there
should be a person called Budget Officer or Budget Controller. He is enable to
provide ready data relating to all the functions. He is more or less the
Secretary to the Budget Committee. His duties will comprise mainly:
a)
Helping in preparation of the various budgets and their co-ordinations and
compilation into the master budget.
b)
Compiling information about actual performance on a continuous basis, comparing
it against the budget figures, ascertaining causes of deviation and preparing
reports based thereon and sending them to the appropriate executives.
c)
Bringing to the notice of the management the need for revision of budgets and
assisting them in the task, and
d)
Compiling information of all types for the purpose of efficient preparation of
budgets and proper reporting.
4)
Budget Manual :
Budget manual is defined as a document which sets outstanding instructions, the
responsibility of the persons engaged in, and the procedures, forms and records
relating to the preparation and use of budgets. Thus budget manual is a booklet
of budget policies which lays down the details of the organisational set up
with duties and responsibilities of executives including the budget committee
and budget officer and procedures to be followed for developing budget in
respect of various activities. The following are some of the important matters
dealt with in the budget manual:
a)
The dates by which preliminary forecasts and plans are to be submitted.
b)
The forms in which these are to be submitted and the person to whom these are
to be forwarded.
c)
The important factors that must be considered for each forecast or plan
d)
The categorisation of expenses, e.g., variable and fixed, and the manner in
which each category is to be estimated and dealt with.
e)
The manner of scrutiny and the personnel to carry it out.
f)
The matter which must be settled only with the consent of the managing
director, departmental manager, etc.
g)
The finalisation of the functional budgets and their compilation into the
Master Budget.
h)
The form in which the various reports are to be made out, their periodicity and
dates, the persons to whom these and their copies are to be sent.
i)
The reporting of the remedial actions.
j)
The manner in which budgets, after acceptance and issuance, are to be revised
or amended, and
k)
The matters to be included in budgets, on which action may be taken only with
the approval of top management.
5)
Budget Period : This
is the period for which forecasts can reasonably be made and budgets can be
formulated. Budget periods vary between short-term and long-term and no
specific period can be laid down for all budgets. Normally, a detailed budget
for each responsibility centre is prepared for one year. In fact, the length of
the budget period depends on the type of the business, the length of the
manufacturing cycle from raw material to finished products, the ease or
difficulty of forecasting future market conditions and other factors. It should
be kept in mind that the budget period should be long enough to allow for the
financing of production well in advance of actual needs and also coincide with
the financial accounting period to compare actual results with budgeted
estimates.
6)
Budget Key Factor or Determining Principal Budget Factor : The key factor
is also known as limiting factor, governing factor, etc. and may be defined as
the factor which at a particular time or over a period will limit the
activities of an undertaking. The limiting factor is, usually, the level of
demand for the products or services of the undertaking, but it could be a
shortage of one of the productive resources, e.g. skilled labour, raw material,
or machine capacity etc.. In order to ensure that the functional budgets are
reasonably capable of fulfillment, the extent of the influence of this factor
must be assessed.
The
key factor is normally temporary in nature and is a constraint at a particular
point of time. In the long run, they can be overcome by proper planning and
management action
The
principal budget factor which will influence the targets may be : (i) customer
demand, (ii) plant capacity, (iii) availability of raw materials, (iv)
availability of skilled labour, (v) availability of adequate capital, (vi)
storage capacity of raw material and finished goods, (vii) space for plant
installation, and (viii) governmental restrictions etc.
7)
Forecasting : Forecasting is
the statement of events likely to occur. It connotes a degree of looseness, so
that it is usually the practice to judge the accuracy of forecasts on the basis
of actual performance, taking the latter to be correct. The forecast of a
function need not necessarily be well coordinated. The desired coordination
could be obtained before the budget is finalised. A forecast forms the basis
for the budget. A budget indicates a target and it is a statement of planned
events, generally evolved from the forecast.
8)
Determining Level of Activity :
The
level of activities are determined on the basis of information and estimates
provided regarding / about future conditions and activities of market and position
of product in the market by departmental heads or concerned managers. For this
purpose, detailed discussions, analysis, preparation of reports are to be done
and then written report to be formed and submitted to budget committee for
their decision making.
9)
Preparation of Budget : After discussing all the factors, which may affect
the process of budgeting, the budget should be prepared. The manager who is
responsible for meeting the budgeted performance should prepare the budget for
those areas for which they are responsible. The preparation of the budget
should be a bottom-up process. This means, the budget should originate at the
lowest levels of management and be refined and co-ordinated at higher levels.
This will enable managers to participate in the preparation of their budgets
and increases the probability that they will accept the budget and strive to
achieve the budgeted targets.
When
all the budgets prepared by respective managers, then, they should be
coordinated with each other and corrected in respect of organisational goal and
then, summarized into a Master Budget consisting of a Budgeted Profit and Loss
Account, a Balance Sheet and a Cash Flow Statement. After the Master Budget has
been approved, the budgets are to be passed down through the organisation to
the appropriate responsibility centre. The approval of the master budget gives
the authority for the manager of each responsibility centre to carry out the
plans contained in each budget.
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