Budgetary control-A technique of performance evaluation
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Transcript of Budgetary control-A technique of performance evaluation
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Budgetary control-A technique of performance evaluation.
Submitted By:
Soumil Popat-Roll no 3
Vaibhav Karia-Roll no 19
Sandeep Mishra-Roll no 25
Pushkar Pande-Roll no 27
Anamta Shaikh- Roll no 47
Sneha Tyagi-Roll no 50
Ajinkya Totla-Roll no 56
A Report Submitted to The METs Institute Of Management in partial
fulfilment of the requirement for the award of PGDM for 2014-2016.
Under the Guidance of:
Prof. L.N. Chopde.
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CERTIFICATE
This is to certify that this project titled Budgetary Control-A technique of
performance evaluation. Is Based on the original study conducted by:
Soumil Popat-Roll no 3 Vaibhav Karia-Roll no 19 Sandeep Mishra-Roll no 25 Pushkar Pande-Roll no 27 Anamta Shaikh- Roll no 47 Sneha Tyagi-Roll no 50 Ajinkya Totla-Roll no 56
of METs Institute of computer science, PGDM (E-Business) under my guidance
and this had not formed a basis for the award of any other degree of this
institute/university.
Place: METs INSTITUTE COMPUTER SCIENCE.
Date: 06/04/2015
Prof. L.N. Chopde.
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PREFACE
This report is the practical part of the most vital practice of our MBA-two year
program. The sole objective of this project is to familiarize the students with
understanding the procurement function of a business organization. This report has
been written to analyze and understand the Budgetary Control - A technique
of performance evaluation in industry.
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ACKNOWLEDGEMENT
We take this opportunity to express our profound gratitude and deep regards to
our guide Prof. L. N. Chopde for his exemplary guidance, monitoring and
constant encouragement throughout the course for this project. The knowledge,
help and guidance given by him from time to time helped us understand the
topic precisely.
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EXECUTIVE SUMMARY
Objective: To Study the Budgetary control.
Flow of the Project: The Project starts with a brief introduction on meaning of Budget, its need, types of budget and budgetary control. The project continues with the case introduction and the information provided by the company such as the details of the various estimated budgets and the comparison between the two.
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CONTENTS
Sr.
No
Contents
Page No.
1. Introduction-Budget 7
2. Need for budget 8
3. Types of budget 9
4. Company 1: Silver Touch Smelting Industries 11
5. Company 2: MX-MDR Technologies Limited
13
6. Comparison between the Company 14
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Introduction
BUDGET
Budget is derived from a French word Bougetts which means the purse in which funds are
collected for meeting the anticipated expenses. It is a financial plan serving as an estimate of
and control over future operations. It is any estimate of future costs. It is any systematic plan
for the utilization of manpower, material or other resources. .It is a financial and/or quantitative
statement prepared prior to a defined period of time, of the policy to be pursued during that
period for the purpose of attaining a given objective. It is an estimate of future needs arranged
according to an orderly basis, covering some or all of the activities of an enterprise for a definite
period of time. Budgets are made up of statistical data which establish measurements of
reasonable operating expectations. It is a cost plan for a period of time.
Kohler, in his Dictionary for Accountants defines budget as:
a) Any financial plan serving as an estimate of and a control over future operations.
b) Hence, any estimate of future costs.
c) Any systematic plan for the utilization of manpower, material, or any other resources.
The objective of budgeting is to:
Budgets communicate managements plans throughout the organization.
Budgeting forces managers to give planning top priority.
Budgets provide a means of allocating resources to their most effective uses.
Budgeting uncovers potential bottlenecks.
Budgeting coordinates the activities of the entire organization.
Budgeting provides goals that serve as benchmarks for evaluating subsequent
performance.
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NEED FOR BUDGET
Budget provides a means of communication. It facilitates centralized control. It defines the
objectives / targets for executives at all levels of the management. It serves as a declaration of
policies. Budget helps to aid the planning of actual operations by forcing managers to
consider how the conditions might change and what steps should be taken now and by
encouraging managers to consider problems before they arise. It also helps co-ordinate the
activities of the organization by compelling managers to examine relationships between their
own operation and those of other departments. Other essentials of budget include
controlling activities. -To communicate plans to various responsibility center managers. -To
motivate managers to strive to achieve budget goals. -To evaluate the performance of
managers.
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TYPES OF BUDGET
1. Materials and Utilities Budget:
This budget also known as operations budget includes budgeting for raw material required
for production, spare parts for maintenance, labour time, machine time, energy
consumption etc. The labour time and machine time is usually related to what a unit of time
is budgeted to
yield. It is the output per unit of time.
2. Control of Liquidity:
This involves cash flow and is very important in controlling cash and meeting current
financial obligations. This budget forecasts cash receipts and outlays on a set time basis
and is necessary to control the income and expenses, so that
there is no shortage of cash to pay bills and also there is no excessive unused cash which
may be unproductive.
3. Revenue and Expense Budgets:
The revenue budgets should show anticipated sales by product or by geographical territory
or department etc. The expense budgets should cover all necessary and relevant areas such
as rent, utilities, supplies, security etc.
4. Cash flow/cash budget:
A prediction of future cash receipts and expenditures for a particular time period is a cash
budget. It usually covers a period in the short term future. The cash flow budget helps the
business determine when income will be sufficient to cover expenses and when the
company will need to seek outside financing.
4. Capital Expenditure Budgets:
These budgets plan for long-term investments and include expenditure for new plant and
equipment, major installations replacement of existing equipment, building etc. Capital
budgeting is a part of long-range planning and must be broken into well-defined phases of
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the programme, known as milestones, each phase being budgeted for cost, time and success
in a self-contained way.
5. Balance-sheet Budget:
It is a composite budget and reflects anticipated assets, liabilities and owner's equity or net
worth at the end of a given period in the future. It provides forecast of the anticipated
financial status of the company at a future date.
6. Flexible Budget:
Flexible or variable budget reflects and combats the changes in expenditure as a result of
changes in volume of production and revenues. These expenditures are primarily variable
costs since the fixed costs are not generally affected by changes in revenues. The basic idea
of flexible budget is to establish a relationship of changes in variable cost as affected by
changes in revenues due to changes in sales.
7. Project budget:
A prediction of the costs associated with a particular company project. These costs include
labour, materials, and other related expenses. The project budget is often broken down into
specific tasks, with task budgets assigned to each. A cost estimate is used to establish a
project budget.
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Company 1: Silver touch smelting industries:
Silver touch smelting industries is a private firm that assembles soldering irons by acquiring different raw
materials required for it.
The company produces 2 types of product based on its capacity and standards
Expected sales, Selling price and Invetory
Product Sales unit Selling price Inventory(Begining) inventory(Ending)
Product SRN25 30000 100 3000 2500
Product SRN35 35000 120 2500 2500
Material usage
Raw Materials Product SRN25 Product SRN35
Iron Rod 1 1
Heater coil 1 1
Plastic Cap 1 1
Metal Ring 1 1
Extension wire 1 1
Insulator 1 2
Anticipated raw material price and Inventories
Raw Materials
Unit
Price (In Rs.)
Inventory(Begining) inventory(Ending)
Desired
Iron Rod Each 10 2000 2500
Heater coil Each 30 2500 2500
Plastic Cap Each 3 2300 2500
Metal Ring Each 0.25 2000 2500
Extension wire metres 2 1600 2500
Insulator Each 5 4500 5000
Sales Budget
Products
Sales unit
Selling price per unit
Total (In Rs. )
Product SRN25 30000 100 3000000
Product SRN35 35000 120 4200000 Total 7200000
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Raw Materials
Iron Rod
Heater coil
Plastic Cap
Metal Ring
Extension wire
Insulator
Material Requirement 65000 65000 65000 65000 65000 100500
Desired closing stock 2500 2500 2500 2500 2500 5000
Total Requirement 67500 67500 67500 67500 67500 105500
Opening Stock 2000 2500 2300 2000 1600 4500 Budgeted Purchases(Units)
65500
65000
65200
65500
65900
101000
Price per unit (In Rs.) 10 30 3 0.25 2 5 Budgeted Purchases (In Rs.)
655000
1950000
195600
16375
131800
505000
Total (In Rs.) 3453775
Production budget
Product SRN25 Product SRN35
Budgeted Sales 30000 35000
Add:
Desired Closing 2500
2500
Total Requirement 32500 37500
Less:
Opening Stock of F.G.
3000
2500
Budgeted production 29500 35000
Raw Material Purchase Budget in Rs.
Add:
Less:
Product SRN25 (29500
Units)
Product SRN35 (35500
Units)
Total Material
Required
Raw
Materials
unit
Total
unit
Total
Iron Rod 1 29500 1 35500 65000
Heater coil 1 29500 1 35500 65000
Plastic Cap 1 29500 1 35500 65000
Metal Ring 1 29500 1 35500 65000
Extension wire
1
29500
1
35500
65000
Insulator 1 29500 2 71000 100500
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Performance Budget
Budgeted Plan
Actual Position
Sales Revenue 7200000 7150000 Sales Variance 50000 Adverse Raw material Req.
3453775
3500000
Raw material Variance
46225
Adverse
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Company 2: MX-MDR Technologies Limited:
MX-MDR Technologies ltd is a private firm that assembles copper by acquiring different raw materials required for it.
SALES BUDGET
Product A Product B Product C Product D
Budgeted sales (units) ............... 20,000 50,000 30,000 100,000
Selling price per unit ................. 10 10 10 10
Total sales.................................. 200,000 500,000 300,000 1,000,000
=20, 00,000
PRODUCTION BUDGET
Additional data:
The company desires to have inventory on hand at the end of each month equal to 20% of the following months budgeted unit sales.
On March 31, 4,000 units were on hand.
Product A Product B Product C Product D
Budgeted sales [TM 9-4]........................ 20,000 50,000 30,000 25,000
Add desired ending inventory ................ 10,000 6,000 5,000 3,000*
Total needs ............................................. 30,000 56,000 35,000 28,000
Less beginning inventory ....................... 4,000 10,000 6,000 5,000
Required production ............................... 26,000 46,000 29,000 23,000
* Budgeted sales of product D = 15,000 units.
Desired ending inventory of Product D = 15,000 units 20% = 3,000 units.
DIRECT MATERIALS BUDGET
Additional data:
Rs. 5 of material are required per unit of product.
Management desires to have materials on hand at the end of each month equal to 10% of the following months production needs.
The beginning materials inventory was 13,000 Rs.
The material costs 0.40 per rupee.
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Required production in units
[TM 9-6] ................................................
Raw materials per unit (Rs) ......................
Production needs (Rs) ...............................
Add desired ending inventory (Rs)* .........
Total needs (Rs) ........................................
Less beginning inventory (Rs) ..................
Raw materials to be purchased (Rs)..........
Cost of raw materials to be purchased at
0.40 per rupee ........................................
Product A
26,000
5
130,000
23,000
153,000
13,000
140,000
56,000
Product B
46,000
5
230,000
14,500
244,500
23,000
221,500
88,600
Product C
29,000
5
145,000
11,500
156,500
14,500
142,000
56,800
Product D
101,000
5
505,000
11,500
516,500
13,000
503,500
201,400
* For June: 23,000 units produced in July [TM 9-6] 5 rupees per unit = 115,000 rupees;
115,000 Rupees 10% = 11,500 Rupees
COMPARISON of Silver touch smelting industries and MX-MDR Technologies ltd:
From the above Companies we can analyses the below:
The Silver touch smelting industries has a sales of Rs 72, 00,000out of 2 products while the
MX-MDR Company is only making Rs 20, 00,000 out of 4 products. The Silver touch
smelting industries expected raw material cost is around 40% whereas the MX-MDR
Companys raw material cost is around 48% which is higher as compared to Silver touch.
Silver touch inventory is also 10% of the total cost whereas the inventory of the MX-MDR
Company is 20%. Also Company Silver touch will sell 35000 units whereas the MX-MDR
Company sales will be around 200,000 units. We can also conclude from the above that the
profit margin of Silver touch company is greater than that of MX-MDR Company.
Hence if we compare both the companies we feel that Silver touch Company will be the
best company to choose from both the Companies.