COST AND MANAGEMENT ACCOUNT

ASSIGNMENT
1. Budget and Budgeting, ideas, definition, objective, types and budget process
2. How does budget behave?
3. Problem of budget
4. Budgetary Control
5. Basic Control
6. Objective and budget control

Budget and Budgeting

What is a Budget?
A budget is an approximation of revenue and expenses over a defined future time
frame; it is organised and re-conceptualised on a periodic basis. Budgets can be
outlined for a person, a family, a group of people, an entity, a country, a
multinational organisation, a government, or just anything else that makes and
spends money. At institutions and organisations, budget is an internal mechanism
inculcated by the management and is often not required for reporting by external
parties.

Budget is classified into the following three parts:

 Balanced budget
 Surplus budget
 Deficit budget

Budgeting is the tactical implementation of a business plan. To achieve the goals in

a business’s strategic plan, we need a detailed descriptive roadmap of the business
plan that sets measures and indicators of performance. We can then make changes
along the way to ensure that we arrive at the desired goals.

Goals of the Budgeting Process

Budgeting is a critical process for any business in several ways.
1. Aids in the planning of actual operations
The process gets managers to consider how conditions may change and what steps
they need to take, while also allowing managers to understand how to address
problems when they arise.
2. Coordinates the activities of the organization
Budgeting encourages managers to build relationships with the other parts of the
operation and understand how the various departments and teams interact with
each other and how they all support the overall organization.

3. Communicating plans to various managers

Communicating plans to managers is an important social aspect of the process,
which ensures that everyone gets a clear understanding of how they support the
organization. It encourages communication of individual goals, plans, and
initiatives, which all roll up together to support the growth of the business. It also
ensures appropriate individuals are made accountable for implementing the budget.

4. Motivates managers to strive to achieve the budget goals

Budgeting gets managers to focus on participation in the budget process. It
provides a challenge or target for individuals and managers by linking their
compensation and performance relative to the budget.

5. Control activities
Managers can compare actual spending with the budget to control financial
activities.

6. Evaluate the performance of managers

Budgeting provides a means of informing managers of how well they are
performing in meeting targets they have set.

Types of Budgets
A robust budget framework is built around a master budget consisting of operating
budgets, capital expenditure budgets, and cash budgets. The combined budgets
generate a budgeted income statement, balance sheet, and cash flow statement.

1. Operating budget
Revenues and associated expenses in day-to-day operations are budgeted in detail
and are divided into major categories such as revenues, salaries, benefits, and non-
salary expenses.

2. Capital budget
Capital budgets are typically requests for purchases of large assets such as
property, equipment, or IT systems that create major demands on an organization’s
cash flow. The purposes of capital budgets are to allocate funds, control risks in
decision-making, and set priorities.
3. Cash budget
Cash budgets tie the other two budgets together and take into account the timing of
payments and the timing of receipt of cash from revenues. Cash budgets help
management track and manage the company’s cash flow effectively by assessing
whether additional capital is required, whether the company needs to raise money,
or if there is excess capital.

The Process
The budgeting process for most large companies usually begins four to six months
before the start of the financial year, while some may take an entire fiscal year to
complete. Most organizations set budgets and undertake variance analysis on a
monthly basis.

Starting from the initial planning stage, the company goes through a series of
stages to finally implement the budget. Common processes include communication
within executive management, establishing objectives and targets, developing a
detailed budget, compilation and revision of budget model, budget committee
review, and approval.

HOW DOES BUDGET BEHAVE?

Budgeting behavior refers to the actions and decisions individuals or organizations
make regarding their financial planning and allocation of resources [1] [2]. It
involves creating a budget, which is a plan that outlines income, expenses, and
savings goals [3]. Budgeting behavior can vary depending on factors such as income
level and financial knowledge [4]. Research suggests that budgeting behavior is an
important aspect of consumer finance and is considered a desirable financial
behavior [5]. It is also influenced by behavioral aspects such as attitudes,
motivation, and participation in the budgeting process. Understanding budgeting
behavior is crucial for effective financial management and can contribute to the
success of budgeting processes in organizations. Additionally, budgeting behavior
can be influenced by psychological factors such as awareness, conflicts, and ego.
Overall, budgeting behavior plays a significant role in financial decision-making
and resource allocation.

PROBLEM OF BUDGET
1. Unpredictable Income
Dealing with irregular paychecks or salaries makes it tough to create a steady
financial plan. This is why coping with the uncertainty of earnings requires flexible
strategies to handle the ups and downs of budgeting.

2. Impulse Spending
Balancing the desire for immediate satisfaction with the need for disciplined
financial management is a constant struggle that many people face today. Many
cannot delay gratification for greater benefits in the future, hence, even when they
create a budget, they don’t run with it.

3. Lack of Financial Knowledge

Many people struggle because they don’t have a good understanding of basic
financial concepts. Not knowing the basics of sustaining wealth makes it hard to
create and stick to a budget aligned with their financial goals.

4. Dealing with Unexpected Expenses

Life’s surprises, like sudden medical bills or home repairs, are also a challenge to
budgeting. Being prepared for and managing these unexpected costs is crucial for a
resilient budget.

5. Lack of consistent
Tracking a budget needs regular attention. Ignoring consistent tracking and review
of spending patterns can result in an outdated budget that doesn’t adapt to changing
financial circumstances. This may expose people to potential financial pitfalls. Or
discourage them from future budgeting.

6. Unrealistic Goal-Setting
While having financial goals is good, setting unrealistic expectations can be a
problem. Many have not learnt how to balance ambition with feasibility. This is to
prevent budgeting from becoming a source of frustration rather than a motivator
for financial growth.

Budgetary control.
Budgetary control methods
a) Budget:
 A formal statement of the financial resources set aside for carrying out
specific activities in a given period of time.
 It helps to co-ordinate the activities of the organisation.
 An example would be an advertising budget or sales force budget.

b) Budgetary control:
 A control technique whereby actual results are compared with budgets.
 Any differences (variances) are made the responsibility of key individuals
who can either exercise control action or revise the original budgets.

Budgetary control and responsibility centres;

These enable managers to monitor organisational functions.
A responsibility centre can be defined as any functional unit headed by a manager
who is responsible for the activities of that unit.
There are four types of responsibility centres:
a) Revenue centres
Organisational units in which outputs are measured in monetary terms but are not
directly compared to input costs.

b) Expense centres
Units where inputs are measured in monetary terms but outputs are not.

c) Profit centres
Where performance is measured by the difference between revenues (outputs) and
expenditure (inputs). Inter-departmental sales are often made using "transfer
prices".

d) Investment centres
Where outputs are compared with the assets employed in producing them, i.e. ROI.

Advantages of budgeting and budgetary control

There are a number of advantages to budgeting and budgetary control:
 Compels management to think about the future, which is probably the most
important feature of a budgetary planning and control system. Forces
management to look ahead, to set out detailed plans for achieving the targets
for each department, operation and (ideally) each manager, to anticipate and
give the organisation purpose and direction.
 Promotes coordination and communication.
  Clearly defines areas of responsibility. Requires managers of budget centres
to be made responsible for the achievement of budget targets for the
operations under their personal control.
 Provides a basis for performance appraisal (variance analysis). A budget is
basically a yardstick against which actual performance is measured and
assessed. Control is provided by comparisons of actual results against
budget plan. Departures from budget can then be investigated and the
reasons for the differences can be divided into controllable and non-
controllable factors.
 Enables remedial action to be taken as variances emerge.
 Motivates employees by participating in the setting of budgets.
 Improves the allocation of scarce resources.
 Economises management time by using the management by exception
principle.

BASIC CONTROL
A basic control system is a set of interconnected components designed to manage
or regulate the behavior of a system. In general terms, a control system consists of
three main components: input, process, and output.

1. Input: The input represents the signal or information that initiates the
control action. It could be a command or a sensor reading that provides
information about the current state of the system.

2. Process: The process component represents the system being controlled. It

could be a physical system (like a temperature control system, a robotic
arm, or an aircraft) or a more abstract system (like a software application).

3. Output: The output represents the result of the control action. It could be
a change in the system's behavior, a movement, a change in temperature,
or any other measurable outcome.

Control systems are categorized into two main types: open-loop and closed-loop
(feedback) control systems.
 Open-Loop Control System: In an open-loop control system, the output
is not used to influence the control action. The control action is
predetermined and does not depend on the system's output. It's a one-way
process from input to output. Example: An automatic washing machine
with a timer.
  Closed-Loop (Feedback) Control System: In a closed-loop control
system, the output is used to make adjustments to the control action. This
creates a feedback loop, allowing the system to respond to changes and
maintain a desired output. Example: A thermostat controlling the
temperature in a room. The thermostat measures the current temperature
(feedback), compares it to the desired temperature (reference input), and
adjusts the heating or cooling accordingly.

OBJECTIVE OF BUDGET CONTROL

The main objectives of budgetary control are to:
 Plan for the Future: Budgetary control helps organizations plan for the future
by forecasting future income and expenditures. This allows organizations to
recognize potential problems and develop strategies to address them.

 Coordinate Activities: Budgetary control helps to coordinate the activities of

different departments and units within an organization. As a result, everyone
works towards the same goals and resources are not duplicated.

 Control Costs: It helps organizations control costs by setting targets for

spending and tracking actual performance against those targets. This allows
organizations to identify areas where costs are overspending and take corrective
action.

 Improve Efficiency: It helps organizations improve efficiency by identifying

areas where resources are ineffective. This can lead to changes in processes and
procedures that can save the organization money.

 Increase Profitability: Budgetary control can help organizations increase

profitability by using their resources efficiently and effectively. This can lead to
higher revenues and lower costs, which in turn can boost profits.