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BUDGETRY CONTROL
The budgets are usually classified according to their nature . The following
are the types of budgets which are commonly used .
1. Long-term budgets.
2. Short-term Budgets
3. Current budgets.
1. Operating Budgets
2. Financial budgets
3. Master budgets
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(C)Classification on the basis Flexibility.
1. Fixed Budgets
2. Flexible Budgets.
1. Sales Budget
2. Production Budget
4. Purchase Budget
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6. Labor Budget
1. Cash Budget
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semi-fixed and variable cost is designed to change in relation to the level
of activity.
Master Budget
The budget is prepared by the budget officer and requires the approval of
the budget committee before it is put into operation. This budget is used to
co-ordinate the activities of various functional departments and also to serve
as a control device.
2. Production budget
4. Cash budget
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6. The balance Sheet ,etc.
The overall concepts of planning and control are illustrated and summarized
in the exhibit below. After the organization's objectives, goals and strategy
has been identified, the master budget is developed to express the plans in
monetary terms. The master budget serves as a tool for communication and
coordination recognizing the interrelationships within the organization. The
control elements of the cycle involve calculating differences (variances)
between the actual results and the budget estimates to help monitor
performance.
There are two main parts, or sub-budgets within the master budget including
the operating budget and the financial budget.
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The operating budget involves forecasting the demands for various types of
resources including the variable or flexible resources and the intermediate
term and long term capacity related resources. The operating budget begins
with the sales budget and ends with the budgeted income statement.
The financial budget includes the capital budget along with the cash budget
and budgeted balance sheet.
Collections and payments tie the operating and financial budgets together
along with all the budgeted changes in balance sheet accounts. An overall
view of the master budget appears in Exhibit below.
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Integrates and Coordinates
The master budget is the major planning device for an organization. Thus, it
is used to integrate and coordinate the activities of the various functional
areas within the organization. For example, a comprehensive plan helps
ensure that all the needed inputs (equipment, materials, labor, supplies, etc.)
will be at the right place at the right time when needed, just-in-time if
possible. It also helps insure that manufacturing is planning to produce the
same mix of products that marketing is planning to sell. The idea is that the
products should be pulled through the system on the basis of the sales
budget, rather than produced speculatively and pushed on the sales force.
Excess inventory and other resources hide problems and add unnecessary
costs. The integrative nature of the budget provides a way to implement the
lean enterprise concepts of just-in-time and the theory of constraints where
the emphasis is placed on the performance of the total system (organization)
rather than the various subsystems or functional areas.
Guides Performance
The master budget also provides a guide for accomplishing the objectives
included in the plan. The budget becomes the basis for the acquisition and
utilization of the various resources needed to implement the plan. Perfection
of the guidance aspect of budgeting can significantly reduce the amount of
uncertainty and variability in the company’s operations. In a JIT environment,
the budget can also serve as a guide to vendors. For example, suppliers to
General Motors Saturn plant in Tennessee have access to Saturn’s
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production schedule through an on-line database. This information allows
Saturn’s vendors to deliver the required parts in the order needed to precise
locations just-in-time without a purchase order or delivery schedule.
There are several limitations and problems associated with the master
budget that need to be considered by management. These problems involve
uncertainty, behavioral bias and costs.
Uncertainty
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Behavioral Bias
Costs
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e.g., not having enough cash available (or accessible through a line of credit
with a bank) to pay for merchandise or raw materials or to meet the payroll.
Many of these problems can be avoided by preparing a cash budget on a
regular basis.
2.) Variable costs per unit of output are constant during the budget period,
4.) Sales mix is constant when the company sells more than one product.
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