Budget & Budgetary Control Flashcards
Efficiency Ratio
Standard hrs/Actual hrs x 100
Activity Ratio
Standard hrs/Budgeted Hrs x 100
Calender Ratio
Available working days/Bud working days x 100
Standard Capacity Usage Ratio
Bud Hrs / Max possible Hrs in Bud period x 100
Actual Capacity usage ratio
Actual hrs worked/Max possible hrs in a period x 100
Actual usage of Budgeted capacity ratio
Actual working hrs/Budgeted working hrs x 100
Maximum capcity
max no of days in period x no or workers
or
max no of hrs x no or workers
or
max units that can be manufactured/produce in a perid
Practical capacity
Max capacity - sunday,holidays,normal maint/idle time
Normal capacity
Average of past 3 years Normal performance (exluding abnormal data)
Princinpal Budget Factor
Factors that limits the activities of The Functional Budgets of the Organization
What is Flexible budget and give an orgn example
- recognizes diff between fixed/semi vari/variable cost
- it is designed to change in relation to level of activity
- eg ; seasonal product - soft drink industry
make to order industry
industry always new products
Advantages / Limitations of ZBB
Advantage
- systematic approach to evaluate different activity and rank for resource allocation
- Ensure various functions critical to orgn are performed in best way
- Opportunity to mgt to allocate resoruces after doing proper cost benefit analysis
- Wasteful expenditure easily identified /eliminated
- dept budgets are linked to corp objectives
- can be used for implementing managemet by objective
Limitations of ABB
- many operation problem to implement this technique
- Top management support required
- It is time consuming and costly
- must have trained staff
Steps involved in ZBB/process of ZBB
- Determination of set of objects is pre-requisite and essential step
- Deciding application of ZBB whether all areas of orgn on specific areas
- Identify areas where decision are to be taken
- Develop decision package and rank In order of performance
- Preparation of budget that translates decision package into practicable units/items and allocate fin resoruces
ZBB is simply extension of cost benefit analysis to area of corporate planning and budgeting
Because single budget system is used to serve several purpose there is danger that they may conflict with each other …pls discuss
single budget system may be conflicting in
- planning and motivation
- planning and performance evaluation roles
planning and motivation
- demanding budgets appropriate for motivation but not for planning . must have easier targets
planning and performance evaluation
- for planning budget are set in advance of budget period based on anticipated circumstances
but performance evaluation should be based on active performance with adjusted budget to understand circumstance under which management operate
state with reason whether ZBB or Traditional budgeting will be suitable
- A company producing a certain product has done extensive ZBB exercise in year 1 . The activity level is expected to marginally increase in year 2
since extensive ZBB done in year 1, traditional may be used for year 2
state with reason whether ZBB or Traditional budgeting will be suitable
The sales manager of a company selling 3 products has intuitive feeling that in year 2 sales will increase for one product and decrease for other two. His expectation cannot be substantiated with figures
in Traditional budgeting system budgets are prepared on the basis of previous years budget figures with expected change in level of activity and corresponding adjustment to cost and prices
Zero based budgeting the estiamtions or projections are converted into figures. Since sales manager in unable to substantiate his expectations into figures so traditional budgeting will be preffered against zero based budgeting
state with reason whether ZBB or Traditional budgeting will be suitable
The top management would like to delegate responsibility to functional managers for their results during year 2
ZBB would be appropriate as ZBB allows top level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization. where costs can be first grouped, then measured against previous results and current expectations
Resources are heavily constrained and allocation for budget requirements are very strict
ZBB allocates resources based on order or priority upto the spending cut off level ( max level upto which spending can be made). In an organization where resources are constrained and budget is allocated on requirement basis , ZBB is more appropriate method
Difference between traditional budgeting and ZBB
- Traditional budgeting is ACCOUNTING oriented
- main stress on previous level of expenditure
Zero based budgeting is decision oriented approach
- rational in nature and requires all programs to compete for scare resoruces - TB - first reference to past level spending, then inflation/ new programs
in ZBB decision unit is broken into decision packages
which are ranked according to top mgt and focus only on decision packages with priority - TB - Deliberate inflation of budget so that after cut they still get what they want.
ZBB -rationale analysis of buget proposal
manager who inflate are exposed
approval only to carefully calculated amount - TB not as responsive as ZBB
- TB - top mgt decide whether particular amount to be spent on a decision unit
in ZBB responsibility shifted from top mgt to decision making unit - TB - is a routing approach
ZBB - straightforward approach - and identifies decision packages that enjoy priority over others
Performance based budgeting
PB
- Meaningful relationship between estimated inputs and expected output
- it presents the purpose and objectives for which funds are required
- it presents costs of the programmed proposed or achiving the objectives
- it presents quantities data measuring the accomplishment and work performed under each programme
- PB is a technique of presenting budgets for costs and revenues in terms of functions
- Programmes and activities are correlating the physical and financial aspect of individual items comprising the budget
