Meaning Of Budgetary Control, Cost Management Video Lecture | Cost Management - B Com

you
hello students welcome to the lecture on
budget concept and types and after this
lecture we will be able to learn the
following objectives
let's start with budget concept and
types a budget is a financial plan for
the future
concerning the revenues and costs of a
business budgets for income or revenue
and expenditure are prepared in advance
and then compared with actual
performance to establish any variances
budgetary control is the process by
which financial control is exercised
within an organization managers are
responsible for controllable costs
within their budgets and are required to
take remedial action if the adverse
variances arise and they are considered
excessive definition an estimate often
itemized of expected income and expense
for a given period in the future in
modern terms a budget is a plan to spend
less than you make each month so let's
build a sample and see what a budget
looks like we'll create two columns
let's start by entering the median u.s.
income from last year which was roughly
$50,000 per year equating to four
thousand one hundred and sixty seven
dollars per month next we'll enter some
common expenses if we add these up we
have a total $4,400 4160 seven dollars
per month and spend four thousand four
hundred dollars per month mean we're
spending two hundred thirty-three
dollars more than we make this is crazy
we're broke there's two ways to fix this
problem either increase your income or
decrease your expenses let's take a look
at our expenses first the first few are
pretty solid and not easy to change but
we then arrived at entertainment and
Recreation than clothing those two
categories total seven hundred and fifty
dollars per month so we can definitely
trim some spending there here's where
your life changes for the better take a
look get why your entertainment and
recreation costs are so high
are you going to the movies every week
do you have a gym membership partying
too much
and don't forget clothing are you
spending too much money on shoes and
purses each month if so it's time to cut
it out just reduce those two categories
by 35% and you'll have a balanced budget
each month and even a few extra dollars
for something else it's not that hard to
have a healthy budget you just need to
live within your means
concept of budget a budget is a
financial plan for future activities it
is a plan for saving borrowing and
spending the budgets used in business
often include a sales or revenues budget
detailed by products or services
production budgets budgets for each
department in the company cash budget
capital expenditures budget and others
the combination of all the budgets is
referred to as the company's master
budget or profit plan budgets help
management decide which activities it
will undertake and how the company's
resources will be used budgets can also
assist in controlling the actual cost
because managers realize that the costs
of their activities will be compared to
the budget the main characteristics of a
budget are it is prepared in advance and
is derived from the long term strategy
of the organization it relates to future
period for which objectives or goals
have already been laid down advantages
of budgets why is budgeting money
important when you budget money you're
giving yourself more room for error in
life when you budget the amount of money
you spend you're always in a much better
position financially overall another
great reason why you should budget your
money is based on the space
there are variety of tools and
techniques that you can use if you want
to start budgeting your funds but first
one of the best first step you can take
if when you are budgeting money you are
capable of finding the areas of life
where you're spending money on
unnecessary expenses budgeting business
budgeting is one of the most powerful
financial tools available to any small
business owner the most effective
financial budget includes both a short
range month-to-month plan for at least
one calendar year and a long range
quarter-to-quarter plan we use for
financial statement reporting the long
range plan should cover a period of at
least three years some go up to five
years on a quarterly basis or even an
annual basis how to set a budget and
stick to it nowadays I know it is not
easy keeping your hard-earned cash in
your wallet even when you're trying to
be responsible right I mean we've all
got a variety of need to have expenses
like like a mortgage car repairs and
college tuition to pay for I mean never
mind the like to have expenses you know
that you want to treat yourself to once
in a while you know like I like I do a
pair of cool high tops are those fancy
designer jeans so I'm sure your question
is how do you keep all those things from
chipping away at your bank account well
no matter who you are or what you're
spending your money on you could
probably use a budget especially when
the average household spends 80 percent
of its annual income on a range of
necessary expenditures you know which
includes almost 60% on housing food gas
and insurance alone now that's a lot to
pay for right I mean so then how can you
ensure your being is smart with your
money as you can be well by creating a
budget it's the tool you need to help
you stretch your paycheck as far as
it'll go and now all it takes just a
little bit of discipline planning and
most importantly prioritization while
creating a budget may seem overwhelming
at first I know believe me
the time you spent putting it together
that's going to certainly be worth it
when the process of paying your monthly
bills becomes a little less stressful so
where do you start well setting a goal
is always a good place to begin you know
it gives you something to shoot for and
then of course making a plan that's
going to set you in motion so here's how
to do that in six easy steps step one
know your income seem simple enough
right but knowing how much you can spend
each month starts with knowing how much
you take home that means you can't build
your budget based on your salary it
should be based on your net income so
get out some pay stubs and see what
you're clearing after taxes insurance
401k contributions and other stuff like
that step two determine your basic
expenses figure out what your fixed
expenses are every month you know now
these are the things that don't
fluctuate or change dramatically through
the year like um you know like rent or
mortgage payments a good old car
payments and insurance uh student loans
this is also a good time to make sure
you have some kind of safety net to help
pay for these expenses in case of an
emergency like let's say you need a new
water heater or your car needs a new
transmission there you go so if you have
a safety net established great if not
there happens to be a video on this site
called easy ways to save on everyday
expenses and that can help you find some
extra money to put towards that savings
step 3 determine expenses that vary each
month these are the things that change
based on usage like your your phone and
other utilities as well as your grocery
bill that could change you could also
add up all those flexible expenses like
clothes you know those jeans restaurant
meals entertainment costs these are the
costs that you have control over step 4
determine what's really important when
it comes to creating a budget that works
they have to take a really hard look at
what you feel is truly necessary as much
as you'd like to think you can't live
without the latest gadget this type of
expense should go into the like to have
category so if so if you want to find
the fluff in your budget start digging
into your variable expenses and rank
what's most important to you I mean do
you really need unlimited texting on
your cell phone if not get rid of it are
you watching all 437 channels of cable
no downgrade to basic for more simple
tips that you know can help you save
check out that video I mentioned easy
ways to save on everyday expenses
because if you follow some of the tips
there you could save hundreds of dollars
each year yes
hundreds step 5 follow your spending and
review monthly you want to give your
budget a fighting chance right so just
keep an eye on your wallet and
especially those credit cards to make
sure you're spending within limits
throughout the month it's easy to forget
right and even easier for the small
things to start adding up so keep on it
step 6
keep track find a way that works for you
to keep track of your expenses you know
that can mean the old pen and paper a
spreadsheet or one of those new fancy
fun budgeting apps a lot of banks have
these as part of their online banking
they're easy to find and use so be sure
to look for them then you just balance
your budget
keep your income information current and
track your actual expenses monthly after
a few months you're going to start to
see patterns and figure out where you
can streamline and make adjustments now
if you don't want to go it alone feel
like a little company but there are some
sites all over the internet to help you
analyze what you have coming in and what
you're spending and if you're the pen
and paper type like myself or even the
computer spreadsheet type check the
links at the end of the video in the
what to do now section where you can
access a handy budget worksheet it's
great all in all making a budget is a
process that will take some time and
effort but put these steps into place
and what you'll get a return is well
worth it trust me
you might relieve some anxiety over your
bills and feel better about yourself and
where your income is going not so bad
right put them into everyday practice
and before long you could have more
money for the things you want like
high-tops in addition to the things you
need
budgeting control the exercise of
control in the organization with the
help of budgets is known as budgetary
control system of creating budgets
monitoring progress and taking
appropriate action to achieve budgeted
performance a budget should provide the
information necessary to enable approval
authorization and policymaking bodies to
assess a project proposal and reach a
rational decision the process of
budgetary control includes preparation
of various budgets continuous comparison
of actual performance with budgetary
performance and revision of budgets in
the light of change circumstances
organization for budgeting the setting
up of a definite plan of organization is
the first step towards installing
budgetary control system in an
organization responsibility for
budgeting the responsibility for
preparation and implementation of the
budgets may be fixed as under budget
controller although the chief executive
is finally responsible for the budget
program it is better if a large part of
the Supervisory responsibility is
delegated to an official designated as
budget controller or budget director
Budget Committee the budget controller
is assisted in his work by the Budget
Committee the committee may consist of
heads of various departments with
production sales finance personnel
purchase etc with the budget controller
as its chairman it is generally the
responsibility of the budget committee
to submit discuss and finally approve
the budget figures fixation of the
budget period budget period means the
period for which a budget is prepared
and employed the budget period depends
upon
nature of the business and the control
techniques budget procedures budgeting
process is a systemic activity that
develops a plan for the expenditure of a
usually fixed resource such as money or
time during a given period to achieve a
desired result key factor it is also
termed as limiting factor the extent of
influence of this factor must first be
assessed in order to ensure that the
budget targets are met making a forecast
a forecast is an estimate of the future
financial conditions or operating
results an estimate differs from a
budget in that the latter embodies an
operating plan of an organization a
forecast may be prepared in financial or
physical terms for sales production cost
or other resources required for business
preparing budgets after the four cards
have been finalized the preparation of
budgets follow the budget activity
starts with the preparation of the sales
budget then production budget is
prepared on the basis of sales budget
and the production capacity available
financial budget that is cash or working
capital budget will be prepared on the
basis of sales forecast and production
budget all these budgets are combined
and coordinated into a master budget
advantages of budgetary control the
budgetary control system helps in fixing
the goals for the organization as a
whole and concerted efforts made for its
achievements some of the advantages of
budgetary control are maximization of
profit the budgetary control aims at the
maximization of profits of the
enterprise to achieve this aim a proper
planning and coordination of different
functions is undertaken coordination the
coordination of various executives and
subordinates is necessary for achieving
budgeted targets specific aims the
efforts are directed towards achieving
some specific aims if there is no
definite aim then the efforts will be
wasted in pursuing different aims
economy the planning of expenditure will
be systematic and there will be economy
in spending determining weakness the
deviations in budgeting and actual
performance will enable the
determination of weakspots
corrective action the management will be
able to take corrective measures
whenever there is a discrepancy in
performance types of budgets different
types of budgets are described as
follows master budget master budget is a
combination of all other budgets
prepared for a specific period it shows
the overall budget plan all the budgets
are coordinated into one harmonious unit
it is prepared by the budget officer and
it requires the approval of the budget
committee before it is put into
operation sales budget the sales budget
is usually the keystone in planning and
control of operation of a business sales
forecast serves as a base for the sales
budget the sales manager should be made
directly responsible for the preparation
and execution of sales budget production
budget the production budget is a
forecast of the production for the
budget period it provides an estimate of
the total volume of production product
wise with the scheduling of operations
by days weeks and month and also a
forecast of the closing finished product
inventory the factory manager is the
person generally made respond
for its preparation administration and
execution materials budget material
budget can be prepared on the basis of
standards or historical data regarding
percentage of raw materials to total
cost adjusted for current price and
normal wastage of material but change
budget per J's budget gives the details
of material purchases to be made in the
budget period but J's budget enables the
budget officer to provide funds in the
cash budget according to delivery
schedules terms of payment and credit
period direct labor budget the direct
labor budget tells about the estimates
of direct labor requirements essential
for carrying out the budgeted output the
purpose of this budget is to ensure
optimum utilization of labor force cash
budget a cash budget is a summary
statement of the firm's expected cash
inflows and outflows over a projected
time period the overall objective of a
cash budget is to enable the firm to
meet all its commitments in time and at
the same time prevent accumulations of
unnecessary large balanced with it fixed
budget a fixed budget is a budget which
is designed to remain unchanged
irrespective of the level of activity
actually attained fixed budget is useful
when there is no significant variation
between the budgeted output and the
actual output flexible budget flexible
budget also known as variable or sliding
sale budget is a budget which is
designed to furnish budgeted course for
any level of activity actually attained
a flexible budget is a budget designed
to change in accordance with the level
of activity actually attained a flexible
budget is more realistic
useful and practical the lightly changes
in the actual circumstances are taken
into account while preparing a flexible
budget now for some but it can seem
complex and intimidating so let's
simplify a budget is a plan for how you
spend your money
now many plan their spending by looking
at their account balances but this can
be misleading we'd like to show you
envelope budgeting a better way to plan
your spending but let's take a look at
account balances first the problems
arise when people view their available
balance as money they have left to spend
but this isn't true and can get you into
a lot of trouble let me give you an
example meet Joe let's say on the 20th
Joe checks his account balance it's
positive so he decides to take his
family out for a nice dinner and decides
to reward himself with a little gift and
even after all this he's still well in
the black so what's the problem
well Joe forgets things like that on the
25th of each month his mortgage company
automatically deduct his payment from
his account and his credit card bill is
due at the end of the month this is not
good in adding insult to injury
Joe's Bank then hits him was an
overdraft fee yeah oops
you see for Joe basing his spending on
his account balances got him into
trouble fortunately there is a better
way envelope budgeting so that Seba will
talk about her a little later but anyway
onto envelope budgeting the first thing
you should know that this is not just a
way to track your spending but a way to
plan your spending let me show you each
envelope represents a budget category
like groceries mortgage eating out and
transport and each starts out empty
the next thing you need to do is set
them up so at the beginning of each
month or whatever budget period you
choose you fill each envelope with that
month's allotment so from your paycheck
let's say you set aside $300 for
groceries or $1500 for mortgage etc etc
so once your envelopes are set just
simply use money straight from the
envelope so for example when Debbie buys
groceries
l.joe buys ice cream or Joe eats out
those get deducted directly from the
envelopes if you do this your envelopes
will always show you how much money you
have left to spend so let's see how
envelopes could have helped Joe it's
it's xx again and he wants to take his
family out for dinner this time though
he's going to ignore his checkbook
balance and instead take a look at his
envelopes and just by looking at him he
knows that he only has 30 dollars left
so going out is probably not an option
but pizza is it may not be steak but it
is pizza and Joe is not in trouble or is
he after getting that sinking feeling
whenever he forgets something important
Joe remembers that his mortgage is due
on the 25th but Joe don't worry the
money for the mortgage payment is safely
tucked away in the mortgage envelope
envelopes keep things straight even when
Joe forgets
so relax Joe and get back to your pizza
so let's recap although budgeting is the
better way to plan your spending
envelopes keep your money separate so
that you can allocate it to specific
expenses envelopes help you control your
spending by giving you immediate
feedback on how much money is left as
you spend and all this helps you spend
only what you have
advantages of the master budget the
master budget allows managers to
reevaluate their plans either starting
with their current activities or start
from zero zero based budgeting
justifying all activities that do not
start at zero the master budget can also
be used as a form of benchmarking
disadvantages of the master budget it
includes the lack of participating from
subordinates misleading information and
difficulty of acquiring accurate and
reliable information zero based
budgeting zero based budgeting zbb is an
alternative approach that is sometimes
used particularly in government and
not-for-profit sectors of the economy
zero based budgeting now what is zero
based budgeting compared to more
traditional budgeting well in
traditional budgeting if you remember
we're looking at creating a forecast for
what we're anticipating will happen in
the future
and we're looking at exactly what we've
done in the past what changes we're
going to make in the future well in zero
based budgeting we take a very different
approach because in zero based budgeting
what we're focused on is not so much
what we've done in the past but what we
need to use for the future so all costs
have to be justified on a line item by
line item basis any cost that cannot be
justified are automatically taken down
to zero this changes everything it
really requires us to think and look
back at the best utilization of our
resources one of the big problems in
traditional budgeting is the tendency to
look at what we've used before and just
add a certain margin for the growth
without ever looking at whether or not
we need to spend what we spent before so
this forces us to be more efficient and
more effective in the use of our
resources in fact in many cases with
zero based budgeting we can actually
produce more in the next period than we
did
the last period spending the same or
even less because what we're really
effectively doing is eliminating waste
advantages of Z VB alternatives analysis
the Z BB requires that managers identify
alternative ways to perform each
activity such as keeping it in-house or
outsourcing it as well as the effects of
different levels of spending budget
inflation since managers must die
expenditures to activities it becomes
less likely that they can artificially
inflate their budgets the change is too
easy to spot communication the Z BB
should spark a significant debate among
the management team about the corporate
mission and how it is to be achieved
mission focus since the Z BB concept
requires managers to link expenditures
to activities they are forced to define
the various missions of their
departments which might otherwise be
poorly defined required review using ZB
B on a regular basis makes it more
likely that all aspects of a company
will be examined periodically resource
allocation if the process is conducted
with the overall corporate mission and
objectives in mind an organization
should end up with strong targeting of
funds in those areas where they are most
needed disadvantages or limitations of
ZB be difficult to define decision units
and decision packages as it is
time-consuming and exhaustive forced to
justify every detail related to
expenditure the research and development
R&D department is threatened whereas the
production department benefits the ZB B
must be clearly understood by managers
at various levels to be successful
implemented in a large organization the
volume of forms may be so large that no
one person could read it all honesty of
the managers must be reliable and
uniform
summary
you