Fixed Budgeting
According to C.I.M.A., London, “a fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained.”Thus, a budget prepared on the basis of a standard or fixed level of activity is known as a fixed budget. It does not change with the change in the level of activity. Therefore, it becomes an unrealistic yardstick in case the level of activity actually attained does not conform to the one assumed for budgeting purposes. The management will not be in a position to assess the performance of different heads on the basis of budgets prepared by them because they can serve as yardsticks only when the actual level of activity corresponds to the budgeted level of activity.
Fixed budget is useful when there is no significant variation between the budgeted output and the actual output. It does not consider variances due to changes in the volume. In the industries where the pattern of demand is stable, a fixed budget may be adequate, especially where the budget period is comparatively short. In such concerns, it is possible to forecast sales with a considerable degree of accuracy.
Flexible Budgeting
Flexible budget, also known as variable or sliding sale budget, is a budget that is designed to furnish budgeted costs for any level of activity actually attained.Flexible budgeting technique may be employed to adjust other budgets according to current conditions arising out of seasonal variations or changes in the length of the working period.
According to C.I.M.A., London, “a flexible budget is a budget designed to change in accordance with the level of activity actually attained.” Thus, a budget prepared in a manner so as to give the budgeted cost for any level of activity is known as a flexible budget. Such a budget is prepared after considering the fixed and variable elements of cost and the changes that may be expected for each item at various levels of operations.Under this method, a series of budgets would be prepared at different levels of activity. Variable items are shown in the budget as per the level of output.Fixed costs are shown at the same amount irrespective of level of output.Sales value is computed and entered into the flexible budget. The position of profit or loss will be revealed at the various levels of activity. Management will take a decision to operate at a particular level of activity where the profit is maximum taking into account all other factors.
Therefore, a flexible budget is more realistic, useful and practical. The likely changes in the actual circumstances are taken into account while preparing a flexible budget. The technique is highly useful for control purposes. Actualperformance of an executive may be compared with what he should have achieved in the actual circumstances and not with what he should have
achieved under quite different circumstances.
Appropriation Budgeting
Generally, budgets are prepared for the regular business activities and they cover the operational activities of an organisation. However, it is not true that budgets are only useful for operational activities, these may also prepare for any particular purpose, like for constructing any particular building,development activities, where revenue is not concerned, only expenditures are there. When budgets are prepared only for a particular activity/work, which is called Appropriation Budget. These budgets are related to only one activity/work and on completion of that particular activity the purpose of this budget ends. Hence, this type of budget are always relate/cover different activities in an organisation.
Performance Budgeting
Performance budgets are framed in such a manner that items of expenditure and receipts for a budget period related to a specific responsibility centre are linked with the physical performance of that centre. The main issue involved in the preparation of performance budgets is the development of work programmes and performance expectation by assignment of responsibility. It is essential for the attainment of the objectives.In this approach, there is not only a financial plan but also a work plan in terms of work done or products produced. Thus, it gives a broader view to the budget as a plan and programme of action rather than only as an instrument for obtaining funds. In fact, it makes the integration of inputs with the outputs of a development programme.
According to National Institute of Bank Management, performance budgeting technique is, “the process of analysing, identifying, simplifying and crystallising specific performance objectives of a job to be achieved over a period, in the framework of the organisational objectives, the purpose and objectives of the job. The technique is characterised by its specific direction towards the business objectives of the organisation.”
The main objectives of performance budgeting are :
(i) to coordinate the physical and financial aspects;
(ii) to improve the budget formulation, review and decision making at all levels of management;
(iii) to facilitate better appreciation and review by controlling authorities as the presentation is more purposeful and intelligible;
(iv) to make more effective performance audit possible; and
(v) to measure progress towards long-term objectives which are envisaged in a development plan?
Performance 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 firm’s organisational structure. The responsibility for preparing the performance budget of each department lies on the respective department head. Periodic reports from various sections of a department will be required by the departmental head who will submit a summary report about his department to the budget committee. The report will be in the form of comparison of budgeted and actual figures both periodic and cumulative. The purpose of preparing these reports is to promptly 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.
Thus, performance budgeting lays immediate stress on the achievement of specific goals over a period of time. However, in the long run it aims at continuous growth of the organisation so that it continues to meet the dynamic needs of its growing clientele. It enables the organisation to be sensitive and adaptive, preventing it from developing rigidities that may retard the process of growth.
A comparison of the master budget with the flexible budget and with actual results forms the basis for analyzing difference between plans and actual performance. The difference between operating profits in the master budget and operating profits in the flexible budget is called an activity variance. When the change from the master budget to the flexible budget is due to changes in sales volume, the activity variance is known as the sales volume variance.The variance may be favourable or unfavourable variance.
According to C.I.M.A., London, “a fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained.”Thus, a budget prepared on the basis of a standard or fixed level of activity is known as a fixed budget. It does not change with the change in the level of activity. Therefore, it becomes an unrealistic yardstick in case the level of activity actually attained does not conform to the one assumed for budgeting purposes. The management will not be in a position to assess the performance of different heads on the basis of budgets prepared by them because they can serve as yardsticks only when the actual level of activity corresponds to the budgeted level of activity.
Fixed budget is useful when there is no significant variation between the budgeted output and the actual output. It does not consider variances due to changes in the volume. In the industries where the pattern of demand is stable, a fixed budget may be adequate, especially where the budget period is comparatively short. In such concerns, it is possible to forecast sales with a considerable degree of accuracy.
Flexible Budgeting
Flexible budget, also known as variable or sliding sale budget, is a budget that is designed to furnish budgeted costs for any level of activity actually attained.Flexible budgeting technique may be employed to adjust other budgets according to current conditions arising out of seasonal variations or changes in the length of the working period.
According to C.I.M.A., London, “a flexible budget is a budget designed to change in accordance with the level of activity actually attained.” Thus, a budget prepared in a manner so as to give the budgeted cost for any level of activity is known as a flexible budget. Such a budget is prepared after considering the fixed and variable elements of cost and the changes that may be expected for each item at various levels of operations.Under this method, a series of budgets would be prepared at different levels of activity. Variable items are shown in the budget as per the level of output.Fixed costs are shown at the same amount irrespective of level of output.Sales value is computed and entered into the flexible budget. The position of profit or loss will be revealed at the various levels of activity. Management will take a decision to operate at a particular level of activity where the profit is maximum taking into account all other factors.
Therefore, a flexible budget is more realistic, useful and practical. The likely changes in the actual circumstances are taken into account while preparing a flexible budget. The technique is highly useful for control purposes. Actualperformance of an executive may be compared with what he should have achieved in the actual circumstances and not with what he should have
achieved under quite different circumstances.
Appropriation Budgeting
Generally, budgets are prepared for the regular business activities and they cover the operational activities of an organisation. However, it is not true that budgets are only useful for operational activities, these may also prepare for any particular purpose, like for constructing any particular building,development activities, where revenue is not concerned, only expenditures are there. When budgets are prepared only for a particular activity/work, which is called Appropriation Budget. These budgets are related to only one activity/work and on completion of that particular activity the purpose of this budget ends. Hence, this type of budget are always relate/cover different activities in an organisation.
Performance Budgeting
Performance budgets are framed in such a manner that items of expenditure and receipts for a budget period related to a specific responsibility centre are linked with the physical performance of that centre. The main issue involved in the preparation of performance budgets is the development of work programmes and performance expectation by assignment of responsibility. It is essential for the attainment of the objectives.In this approach, there is not only a financial plan but also a work plan in terms of work done or products produced. Thus, it gives a broader view to the budget as a plan and programme of action rather than only as an instrument for obtaining funds. In fact, it makes the integration of inputs with the outputs of a development programme.
According to National Institute of Bank Management, performance budgeting technique is, “the process of analysing, identifying, simplifying and crystallising specific performance objectives of a job to be achieved over a period, in the framework of the organisational objectives, the purpose and objectives of the job. The technique is characterised by its specific direction towards the business objectives of the organisation.”
The main objectives of performance budgeting are :
(i) to coordinate the physical and financial aspects;
(ii) to improve the budget formulation, review and decision making at all levels of management;
(iii) to facilitate better appreciation and review by controlling authorities as the presentation is more purposeful and intelligible;
(iv) to make more effective performance audit possible; and
(v) to measure progress towards long-term objectives which are envisaged in a development plan?
Performance 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 firm’s organisational structure. The responsibility for preparing the performance budget of each department lies on the respective department head. Periodic reports from various sections of a department will be required by the departmental head who will submit a summary report about his department to the budget committee. The report will be in the form of comparison of budgeted and actual figures both periodic and cumulative. The purpose of preparing these reports is to promptly 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.
Thus, performance budgeting lays immediate stress on the achievement of specific goals over a period of time. However, in the long run it aims at continuous growth of the organisation so that it continues to meet the dynamic needs of its growing clientele. It enables the organisation to be sensitive and adaptive, preventing it from developing rigidities that may retard the process of growth.
A comparison of the master budget with the flexible budget and with actual results forms the basis for analyzing difference between plans and actual performance. The difference between operating profits in the master budget and operating profits in the flexible budget is called an activity variance. When the change from the master budget to the flexible budget is due to changes in sales volume, the activity variance is known as the sales volume variance.The variance may be favourable or unfavourable variance.
No comments:
Post a Comment