Project on Budgetary Control Essay

1. A compute is disquieted for a definite time to come stoppage. 2. A compute is a written document. 3. A cipher is a detailed plan of al star the economic activities of a condescension. 4. All the discussion sections of a assembly line unit co-operate for the planning of a billet cypher. 5. compute is a mean to achieve pipeline and it is non an curio in itself. 6. cypher needs to be updated, slumped and get wordled all(prenominal) clock time when circumstances changes. in that respectfore it is a continuous process. 7. reckon helps in planning, coordination and deem. 8. diametrical types of cyphers argon prep ard by industries fit in to short letter requirements. 9. A compute acts a business barometer. 10. Budget is usually prep argond in the ethitheral of Past Experience. 11. Budget is a constant endeavor of the counsel.2 grooming OF BUDGETS 1. Definition of objectives A figure being a plan for the deed of certain operating(a) objectives, it is des irable that the same ar define precisely. The objectives should be written out the aras of control demarcated and items of revenue and spending to be cover by the calculate stated. This pull up s pull backs curb a clear sense of the plan and its scope to all those who essential(prenominal) cooperate to make it a triumph. 2. Location of the key (or reckon) part There is usually one factor (sometimes there whitethorn be more than one) which trims a limit to the natural legal action. For instance, in India today sometimes non-availability of power does not allow fruit to increase inspite of heavy demand. Similarly, lack of demand may limit crossingion. much(prenominal)(prenominal)(prenominal) a factor is known as key factor. For prudish calculateing, it essential be located and estimated aright. 3. Appointment of controller Formulation of a cypher usually requires wholetime services of a senior executive he must be assisted in this work by a Budget commis sioning, consisting of all the heads of department along with the Managing consideror as the Chairman. The Controller is responsible for co-ordinating and ontogeny of work out computer programmes and preparing the manual of instruction, known as Budget manual. The Budget manual is a schedule, document or tract which fork ups, in written forms the reckoning makeup and procedures. The manual should be well written and indexed so that a copy thereof may be aban dod to separately departmental head for guidance. 34. Budget spot The limit covered by a cypher is known as compute stopover. There is no popular rule governing the selection of the budget period. In practice the Budget Committee de enclosureines the length of the budget period suitable for the business. Normally, a calendar class or a period coterminous with the monetary year is adopted. The budget period is then sub-divided into shorter periodsit may be calendar months or quarters or such periods as concord w ith period of trading activity. 5. Standard of activity or output For preparing budgets for the afterlife, departed statistics mintnot be completely relied upon, for the past usually represents a combination of serious and bad factors. Therefore, though results of the past should be studied besides these should solo be applied when there is a give c belihood of similar conditions repeating in the future. Also, while setting the targets for the future, it must be remembered that in a progressive business, the achievement of a year must choke those of antecedent years. Therefore what was hefty in the past is barely fair for the received year. In budgeting, fixing the budget of gross revenue and of bang-up consumption be most important since these budgets determine the conclusion of development activity. For budgeting gross revenue, one must consider the trend of economic activity of the country, re swear outs of salesmen, customers and employees, effect of harm change s on sales, the provision for advertisement campaign plan capacity etc.4Meaning of budgetary Control The Chartered comprise of Management Accountants of England and Wales has defined the terms budgetary control as budgetary control is the nerve of budgets relating to theresponsibilities of executives of a policy and the continuous comparison of the unquestionable with the budgeted results, either to bushel by individual action the objective of the policy or to offer a primer for its revision. It is the dodging of prudence control and score in which all the trading operations atomic number 18 forecasted and be after in advance to the extent thinkable and the real results comp ard with the forecasted and planned ones. Budgetary Control Involves 1. Establishment of budgets 2. consecutive comparison of reals with budgets for achievement of targets 3. Revision of budgets after considering changed circumstances 4. Placing the indebtedness for blow to achieve the budget targets. The salient features of Budgetary Control arranging be as follows 1. Determining the objectives to be achieved, over the budget period, and the policy or policies that might be adopted for the achievement of these ends. 2. Determining the variety of activities that should be undertaken for the achievement of the objectives. 3. Drawing up a plan or a scheme of operation in respect of to each one class of activity, in material as well as monetary terms for the broad budget period and its parts.54. Laying out a frame of comparison of actual deed by each person, section or department with the relevant budget and determination of causes for the discrepancies, if any. 5. Ensuring that corrective action leave behind be taken where the plan is not being achieved and, if that be not possible, for the revision of the plan. In brief, it is a clay to assist management in the allocation of province and authority, to provide it with aid for making, estimating and planning for t he future and to assist the compend of the variation between estimated and actual carrying out. In do that budgetary control may function effectively, it is inevitable that the c erstwhilern should develop proper introduction of heartbeatment or standards with which to evaluate the efficiency of operations, i.e., it should imbibe in operation a system of standard cost. Besides this, the organization of the concern should be so integrated that all lines of authority and responsibility atomic number 18 laid, allocated and defined. This is essential since the system of budgetary control postulates separation of functions and division of responsibilities and indeed requires that the organization shall be planned in such a demeanorthat e trulyone, from the Managing Director pig to the Shop Foreman, leave alone control his duties properly defined. Objectives of Budgetary Control System 1. Portraying with precision the overall aims of the business and find targets of perform ance for each section or department of the business. 2. Laying down the responsibilities of each of the executives and other personnel so that everyone knows what is expected of him and how he exit be judged. Budgetary control is 6one of the few courses in which an objective assessment of executives or department is possible. 3. Providing a basis for the comparison of actual performance with the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures. This naturally helps in adopting corrective measures. 4. Ensuring the outstrip use of all on tap(predicate) resources to maximize profit or reapingion, subject to the limiting factors. Since budgets cannot be properly drawn up without considering all aspects usually there is good co-ordination when a system of budgetary control operates. 5. Co-organize the various activities of the business, and centralizing control and notwithstanding enabling management to dece ntralize responsibility and delegate authority in the overall interest of the business. 6. Engendering a spirit of careful forethought, assessment of what is possible and an onrush at it. It leads to dynamism without recklessness. Of course, much depends on the objectives of the firm and the pizzazz of its management. 7. Providing a basis for revision of current and future policies. 8. Drawing up long range plans with a fair measure of accuracy. 9. Providing a yard measure against which actual results can be compared. Working of a budgetary control system The responsibility for palmyly introducing and implementing a Budgetary Control System rests with the Budget Committee acting through the Budget incumbent. The Budget Committee would be composed of all in operation(p) heads and a member from the poster to 7preside over and guide the deliberations. The main responsibilities of the Budget Officer are 1. To assist in the preparation of the various budgets by coordinating the wo rk of the accounts department which is normally responsible to compile the budgetswith the relevant usable departments equal Sales, ingatheringion, Plant maintenance etc. 2. To forward the budget to the individuals who are responsible to adhere to them, and to guide them in overcoming any practical difficulties in its working 3. To prepare the biennial budget compensates for circulation to the individuals concerned 4. To follow-up action to be taken on the budget reports 5. To prepare an overall budget working report for discussion at the Budget Committee concourses and to contain follow-up on the lines of action suggested by the Committee 6. To prepare periodic reports for the Board meeting. Comparing the budgeted attain and Loss Account and the Balance saddlery with the actual results attained. It is obligatory that every budget should be thoroughly discussed with the functional head before it is finalized. It is the duty of the Budget Officer to see that the periodical budget reports are supplied to the recipients at frequent intervals as far as possible. The efficiency of the Budget Officer, and through him of the Budget Committee, will be judged more by the smooth working of the system and the agreement between the actual figures and the budgeted figures. Budgets are primarily an incentive and a challenge for better performance it is up to the8Budget Officer to see that attention of the assorted functional heads is drawn to it to face the challenge in a successful manner.Advantages of Budgetary Control System 1. The use of budgetary control system enables the management of a business concern to conduct its business activities in the efficient manner. 2. It is a powerful instrument used by business houses for the control of their expenditure. It in fact provides a yardstick for measuring and evaluating the performance of individuals and their departments. 3. It reveals the deviations to management, from the budgeted figures after making a compa rison with actual figures. 4. Effective usance of various resources likemen, material, machinery and money is made possible, as the production is planned after taking them into account. 5. It helps in the critique of current trends and framing of future policies. 6. It creates suitable conditions for the implementation of standard costing system in a business organization. 7. It inculcates the feeling of costconsciousness among workers. 8. It helps the principal of management by exception to apply. 9. Management which has highly-developed a well ordered budget plans and which operate accordingly, receive greater favour from credit agencies.9Limitations of Budgetary Control System 1. prowd on Estimates Budgets may or may not be true, as they are pratd on estimates. 2. m factor Budgets cannot be executed automatically. Accuracy in budgeting comes through experience. Management must not expect too much during the development period. 3. Cooperation necessitate Staff co-operation i s usually not available during budgetary control exercise. The success of the budgetary control depends upon willing co-operation and teamwork, 4. Expensive Its implementation is quite expensive. No budgetary programme can be successful unless adequate arrangements are made for supervision and administration. 5. Not a substitute for management Budget is only a managerial cocksucker. It cannot substitute management. 6. Rigid document Budgets are considered as placed document. But in reality, firms personal matters continuously change under inflationary pressure and changing administration policies.10ZERO BASE BUDGETS The technique of nought base budgeting suggests that an organisation should not only make endings about the proposed smart programmes, but should excessively review the inhibitness of the existing programmes from time to time. Such a review should exceptionally be done of such responsibility centres where there is relatively high proportion of perceptivenes sary be. Costs of this type depend on the discretion or policies of the responsibility centre or top managers. These be have no direct relation to meretriciousness of activity. thence, management discretion typically determines the amount budgeted. Some examples are expenditure on look and development, personnel administration, legal advisory services. Zero base budgeting, as the term suggests, examines or reviews a programme or function or responsibility from scratch. The reviewer proceeds on theassumption that nothing is to be allowed. The manager proposing the activity has, therefore, to justify that the activity is essential and the various amounts asked for are reasonable taking into account the outputs or results or volume of activity envisaged. No activity or expense is allowed simply because it was being allowed or done in the past. Thus according to this technique each programme, whether new or existing, must be justified in its entirety each time a new budget is formu lated. It involves 1. Dealing with specially all shares of mangers budget requests 2. Critical examination of ongoing activities along with the newly proposed activities 3. Providing each manger a range of choice in setting priorities in respect of unlike activities and in allocating resources.11Process of Zero Base Budgeting The pursuit steps are involved in Zero base budgeting Determining the objectives of budgeting The objective may be to effect cost decline in staff knocks or it may be to drop, after careful analysis, projects which do not fit into achievement of the organizations objectives etc. Deciding on scope of application The extent to which cryptograph base budgeting is to be introduced has to be decided, i.e. whether it will be introduced in all areas of the organisations activities or only in a few selected areas on trial basis. growing closing units Decision units for which cost- get ahead analysis is proposed have to be developed so as to arrive at decisions whether they should be allowed to continue or to be dropped. Each decision unit, as far as possible should be independent of other units so that it can be dropped if the cost analysis proves to be unfavourable for it. Developing decision sheafs A decision package for each unit should be developed. While developing a decision package, answers to the following questions would be desirable Is it necessary to perform a particular activity at all? If the answer is in the negative, there is no need to proceed further. How much has been the actual cost of the activity and what has been the actual benefit both in tangible as well as intangible forms? What should be the estimated cost of the level of activity and the estimated benefit from 12such activity? Should the activity be performed in the way in which it is being performed, and what should be the cost? If the project or activity is dropped, can the unit be replaced by an outside agency? After complete decision packages for eac h unit, the units are ranked according to the findings of cost benefit analysis. Essential projects are identified and given the highest ranks. The last stage is that of implementing the decision taken in the light of the study made. It involves the selection and acceptance of those projects which have a positive cost-benefit analysis or which are capable of meeting the objectives of the organization. The above analysis shows that zero base budgeting is in a way an extension of the method of cost benefit analysis to the area of the corporate budgeting. Advantages of Zero Base Budgeting It provides the organization with systematic way to evaluate different operations and programmes undertaken. It enables management to allocate resources according to priority of the programmes. It ensures that each and every programme undertaken by managers is really essential for the organization, and is being performed in the best possible way. It enables the management to approve departmental b udgets on the basis of cost-benefit analysis. No arbitrary cuts or increase in budget estimates are made. It think budgets with the corporate objectives. Nothing will be allowed simply because it was being done in the past. An activity may be shelved if it does not help in achieving the goals of the enterprises. 13 It helps in identifying areas of wasteful expenditure and, if desired, it can alike be used for suggesting alternative courses of action. It facilitates the introduction and implementation of the system of management by objectives. Thus it can be used not only for fulfilment of the objectives of traditional budgeting, but excessively for a variety of other purposes. It is contended that zero base budgeting is time consuming. Of course, it is true, but it happens only in the initial stages when decision units have to be identified and decision packages have to be developed or completed. Once this is done, and the methodology is clear, zero base budgeting is likely to take less time than the traditional budgeting. In any case, till such time the organization is properly acclimatized to the technique of zero base budgeting, it may be done in a way that allresponsibility centres are covered at least once in three or four years. Zero base budgeting as a concept has become quite popular these days. The technique was early used by the U.S. Department of Agriculture in 1962. Texas Instruments, a multinational company, pioneered its use in the private sector. Today, a number of major companies such as Zerox, BASF, International Harvester and Easter Airlines in the United call forth are using the system. Some departments of the Government of India have recently introduced zero base budgeting with a view to making the system of budgetary control more effective.14PERFORMANCE BUDGETS accomplishment budgeting (or programme budgeting) has been designed to correct the shortcomings of traditional budgeting by emphasizing managements considerations/ approach es. Both the financial and physiological aspects are incorporated into the budget. A performance budget presents the operations of an organisation in terms of functions, programmes, activities, and projects. In performance budgeting, precise detainment of blood line to be performed or services to be rendered is done. Secondly, the budget is brisk in terms of functional categories and their sub-division into programmes, activities, and projects. Thirdly, the budget becomes a comprehensive document. Since the financial and physical results are interwoven, it facilitates management control. The Main objectives of Performance Budgeting are (i) to coordinate the physical and financial aspects (ii) to improve the budget planning, review and decision-making at all levels of management (iii) to facilitate better appreciation and review by controlling governance (legislature, Board of Trustees or Governors, etc) as the presentation is more purposeful and unadorned (iv) to make more eff ective performance audit possible and (v) to measure progress towards long-term objectives which are envisaged in a development plan. Performance budgeting involves evaluation of the performance of the organisation in the context of both specific, as well as, overall objectives of the organisation. It presupposes a crystal clear perception of organisational objectives in general, and short-term business objectives as stipulated in the budget, in particular by each employee of theorganisation, irrespective of his level. It thus, provides a definite direction to each employee and to a fault a control mechanism to higher management. 15Performance budgeting requires preparation of periodic performance reports. Such reports compare budget and actual data, and show variances. Their preparation is greatly facilitated if the authority and responsibility for the incurrence of each cost element is clearly defined within the firms organisational structure. In addition, the score system should be sufficiently detailed and coordinated to provide necessary data for reports designed for the particular use of the individuals or cost centres having direct responsibility for specific cost. The responsibility for preparing the performance budget of each department lies on the respective Department Head. Each Department Head will be supplied with a copy of the section of the master budget appropriate to his sphere. For example, the chief buyer will be supplied with the copy of the materials purchase budget so that he may arrange for purchase of necessary materials. occasional reports from various sections of a department will be received by the departmental head that will submit a summary report about his department to the budget committee. The report may be daily, weekly or monthly, depending upon the size of business and the budget period. These reports will be in the form of comparison of budgeted and actual figures, both periodic and cumulative. The purpose of preparing the se reports is to apace inform about the deviations in actual and budgeted activity to the person who has the necessary authority and responsibility to take necessary action to correct the deviations from the budget.16FUNCTIONAL BUDGET A functional budget is one which is colligate to function of the business as for example, production budget relating to the manufacturing function. Functional budgets are prepared for each function and they are subsidiary to the master budget of the business. The various types of functional budgets to be prepared will vary according to the size and temperament of the business. The various commonly used functional budgets are Sales budget Production budget Plant utilisation budget Direct-material usage budget Direct-material purchase budget Direct-labour (personnel) budget grind overhead budget Production cost budget Ending-inventory budget Cost-of-goods-sold budget selling and distribution cost budget Administration expenses budget Res earch and development cost budget (xiv) Capital expenditure budget Cash budget17Illustration Sales Budget Sales forecast is the offshoot of budgeting and hence sales budget assumes primary importance. The quantity which can be sold may be the principal budget factor in many business undertakings. In any case in order to chalk out a realistic budget programme, there must be an accurate sales forecast. The sales budget indicates for each product 1. The quantity of estimated sales and 2. The expected unit selling price. These data are oft reported by regions or by salesrepresentatives. In estimating the quantity of sales for each product, past sales volumes are often used as a starting point. These amounts are revised for factors that are expected to affect future sales, such as the factors listed below. 1. Backlog of fulfil sales orders 2. Planned advertising and promotion 3. Expected diligence and general economic conditions 4. Productive capacity 5. Projected pricing 6. Findings of mart explore studies 7. Relative product profitability. 8. Competition. 18Once an estimate of the sales volume is obtained, the expected sales revenue can be determined by multiplying the volume by the expected unit sales price, the sales budget represents the total sales in physical quantities and values for a future budget period.Sales managers are constantly faced with problem like anticipation of customer requirements, new product needs, competitor strategies and various changes in distribution methods or promotional techniques. The purposes ofsales budget is not to attempt to estimate or guess what the actual sales will be, but rather to develop a plan with clearly defined objectives towards which the operational effort is directed in order to attain or exceed the objective. Hence, sales budget is not merely a sales forecast. A budget is a planning and control document which shows what the management intends to accomplish. Thus, the sales budget is active rather than hand s-off. A sales forecast, however, is a expulsion or estimate of the available customer demand. A forecast reflects the environmental or competitive situation facing the company whereas the sales budget shows how the management intends to react to this environmental and competitive situation. A good budget hinges on aggressive management control rather than on passive acceptance of what the market appears to offer. If the company fails to make this distinction, the budget will quell more a figure-work exercise than a working tool of propulsive management control.19The sales budget may be prepared under the following classification or combination of classifications 1. Products or groups of products. 2. Areas, towns, salesmen and agents. 3. Types of customers as for example (i) Government, (ii) Export, (iii) Home sales, (iv) Retail depots. 4. Periodmonths, weeks, etc Example of Sales Budget XYZ Ltd. Sales Budget for the Year Ended 31 action XXXX Particulars Units exchange Price (P .U) complete Sales Value (Rs.) Product A Product B nitty-gritty 5000 10000 75 80 375000 800000 117500020 principal TO THE PREPARATION OF THE MASTER BUDGET When all the necessary functional budgets have been prepared, the budget officer will prepare the master budget which may consist of budgeted profit and loss account and budgeted balance sheet. These are in fact the budget summaries. When the master budget is approved by the add-in of directors, it represents a standard for the achievement of which all the departments will work. On the basis of the various budgets (schedules) prepared earlier in this study, weprepare below budgeted income controversy and budgeted balance sheet. Illustration Floatglass Manufacturing Company requires you to present the Master budget for the 31 March 2012 from the following information Sales Toughened Glass dented Glass Direct Material Cost Direct Wages mill Overheads Indirect Labour Works Manager Foreman Rs. 500 per month Rs. 400 per month 2.5% on Sales Rs. 600000 Rs. 200000 60% of Sales 20 workers Rs. 150 per month21Stores and Spares Depreciation on Machinery Repairs and Maintenance new(prenominal) Sundries Administration, selling and Distribution ExpensesRs. 12600 Rs. 3000 Rs. 8000 10% on Direct Wages Rs. 36000 per year consequence Master Budget for the Year Ending 31 March 2012 Particulars add together (Rs.) Sales Toughened Glass Bent Glass Total Sales Less Cost of Production Direct Material Direct Wages Prime Cost (A) indomitable Factory Overhead 480000 36000 516000 600000 200000 800000 Amount (Rs.)22Works Managers Salary Foremans Salary Depreciation Light and Power Total Fixed Factory Overhead (B) protean Factory Overhead Stores and Spares Repairs and Maintenance Sundry Expenses Total Variable Factory Overhead (C) Works Cost (A+B+C) sodding(a) Profit (Sales- Works Cost) Less Administration, Selling and Distribution Expenses Net Profit6000 4800 12600 3000 2640020000 8000 3600 31600 574000 226000 36000 19000023CA PITAL EXPENDITURE BUDGET The capital expenditure budget represents theplanned outlay on laid assets like land, building, define and machinery, etc. during the budget period. This budget is subject to strict management control because it entails queen-size amount of expenditure. The budget is prepared to cover a long period of years and it projects the capital costs over the period in which the expenditure is to be incurred and the expected earnings. The preparation of this budget is based on the following considerations 1. Overhead on production facilities of certain departments as indicated by the plant utilization budget. 2. Future development plans to increase output by intricacy of plant facilities. 3. Replacement requests from the concerned departments 4. Factors like sales potential to thread the increased output, possibility of price reductions, increased costs of advertising and sales promotion to absorb increased output, etc. Merits/Advantages 1. It outlines the capita l development programme and estimated capital expenditure during the budget period. 2. It enables the company to establish a system of priorities. When there is a shortage of funds, capital rationing becomes necessary. 3. It serves as a tool for controlling expenditure. 4. It provides the amount of expenditure to be incorporated in the future budget24summaries for calculation of estimated return on capital employed. 5. This enables the cash budget to be completed. With other cash commitments capital expenditure commitment should also be considered for the completion of the budget. 6. It facilitates cost reduction programme, particularly when modernization and renovation is covered by this budget.25FIXED AND flexible BUDGETS Fixed Budget According to Chartered Institute of Management Accountants of England, a opinionated budget is a budget designed to remain same(predicate) irrespective of the level of activity actually attained. A fixed budget shows the expected results of a resp onsibility center for only one activity level. Once the budget has been determined, it is not changed, even if the activity changes. Fixed budgeting is used by many servicecompanies and for some administrative functions of manufacturing companies, such as purchasing, engineering, and accounting. Fixed Budget is used as an effective tool of cost control. In case, the level of activity attained is different from the level of activity for budgeting purposes, the fixed budget becomes ineffective. Such a budget is quite suitable for fixed expenses. It is also known as a unmoving budget. Essential conditions 1. When the nature of business is not seasonal. 2. There is no extend to of external factors on the business activities 3. The demand of the product is certain and stable. 4. add together orders are issued regularly. 5. The market of the product should be domestic rather than foreign. 6. There is no need of special labour or material in the production of the products. 7. Supply of production inputs is regular. 8. There is a trend of price stability. Generally, all above conditions are not found in practice. Hence fixed budget is not important 26in business concerns. Merits/advantages 1. Very simple to understand 2. Less time consuming Demerits/Disadvantages 1. It is misleading. A poor performance may remain undetected and a good performance may go unrealized. 2. It is not suitable for long period. 3. It is also found unsuitable particularly when the business conditions are changing constantly. 4. dead on target estimates are not possible. Flexible Budget According to Chartered Institute of Management Accountants of England,a flexible budget is defined as a budget which, by recognizing the difference between fixed, semi- unsettled and variable costs is designed to change in relation to the level of activity attained. Unlike tranquil (fixed) budgets, flexible budgets show the expected results of a responsibility center for some(prenominal) activity levels. Y ou can think of a flexible budget as a series of static budgets for different levels of activity. Such budgets are oddly useful in estimating and controlling factory costs and operating expenses. It is more realistic and practicable because it gives due consideration 27to cost demeanor at different levels of activity. While preparing a flexible budget the expenses are classified into three categories viz. 1. Fixed, 2. Variable, and 3. Semi-variable. Semi-variable expenses are further segregated into fixed and variable expenses. Flexible budgeting may beresorted to under following situations 1. In the case of new business venture due to its typical nature it may be difficult to forecast the demand of a product accurately. 2. Where the business is dependent upon the mercy of nature e.g., a person traffic in wool trade may have enough market if temperature goes below the freezing point. 3. In the case of labour intensive industry where the production of the concern is dependent upon the availability of labour. Merits/ Advantages 1. With the help of flexible budget, the sales, costs and profit may be calculated considerably by the business at various levels of production capacity. 2. In flexible budget, adjustment is very simple according to change in business conditions. 3. It also helps in determination of production level as it shows budgeted costs with classification at various levels of activity along with sales. Hence the management can easily select the level of production which shows the profit predetermined by the owners of the business. 4. It also shows the quantity of product to be produced to earn determined profit. 28Demerits/Disadvantages 1. The formulation of flexible budget is possible only when there is proper accounting system maintained, perfect knowledge about the factors of production and various business circumstances is available. 2. Flexible Budget also requires the system of standard costing in business. 3. It is very expensive and lab our oriented. Need for flexible budget 1. Seasonal fluctuations in sales and/or production, for example in gentle drinks industry 2. A company which keeps on introducing new products or makes changes in the design of its products frequently 3. Industries engaged in make-to-order business like displace building 4. An industry which is influenced by changes in fashion and 5. General changes in sales.29Illustration A factory which expects to operate 7,000 hours, i.e., at 70% level of activity, furnishes details of expenses as under Particulars Variable Expenses Amount (Rs.) 1260Semi- Variable Expenses 1200 Fixed Expenses 1800The semi-variable expenses go up by 10% between 85% and 95% activity and by 20% above 95% activity. ready a flexible budget for 80, 90 and 100 per cent activities. Solution Particulars Budgeted Hours Variable Expenses Semi-Variable Expenses Fixed Expenses Total Expenses Recovery Rate Per Hour 70% 7000 1260 1200 1800 4260 0.61 80% 8000 1440 1200 1800 4440 0.55 90 % 9000 1620 1320 1800 4740 0.53 100% 10000 1800 1440 1800 5040 0.5030Difference between Fixed and Flexible Budget Fixed Budget Flexible BudgetIt does not change with actual volume of It can be recasted on the basis of activity activity achieved. Thus it is known as rigid level to be achieved. Thus it is not rigid. or inflexible budget. It operates on one level of activity and under It consists of various budgets for one set of conditions. It assumes that there different levels of activity. will be no change in the prevailing conditions, which is unrealistic. Here as all costs like fixed, variable and Here analysis of variance provides useful semi-variable are related to only one level information as each cost is analyze of activity so variance analysis does give useful information. If the budgeted and actual activity levels differ Flexible budgeting at different levels of significantly, then the aspects like cost activity facilitates the ascertainment of ascertainment and price fix ation do not give a cost, fixation of selling price and tendering correct picture. of quotations. a meaning(prenominal) basis of not according to its behaviour.Comparison of actual performance with It provides budgeted targets will bemeaningless comparison of the actual performance withspecially when there is a difference the budgeted targets. between the two activity levels.31BIBLIOGRAPHY 1 ICAI Module on Cost Accounting 2 Newsletters and opinions published by ICAI 3 http//en.wikipedia.org/wiki/Budget 4 www.icai.org