Term Paper on Budget | Business | Accounting

Here is a term paper on ‘Budget’ for class 11 and 12. Find paragraphs, long and short term papers on ‘Budget’ especially written for school and college students.

Term Paper # 1. Meaning and Definition of Budget:

Modern business world is full of competition, uncertainty and exposed to different types of risks. This complexity of managerial problems has led to the development of various managerial tools, techniques and procedures useful for the management in managing the business successfully. Budgeting is the most common, useful and widely used standard device of planning and control.

The budgetary control has now become an essential tool of the management for controlling costs and maximising profit. Costs can be reduced, wastage can be prevented and proper relationship between costs and incomes can be established only when the various factors of production are combined in profitable way. The resources of a business can be effectively utilised by efficient conduct of its operations. This requires careful working out of proper plans in advance, co-ordination and control of activities on the part of management.

A proper planning and control are essential for an efficient management. A good number of tools and devices are available. Of all these, the most important device used is budget. Cost accounting aims not only at cost ascertainment, but also greatly at cost control and cost reduction. This the management aims at the proper and maximum utilization of resources available. It is possible when there is a Pre-planning.

Modern management aims that all types of operations should be predetermined in advance, so that the cost can be controlled at every step. The more important point is that the actual programme is compared with the pre-planned programme and the variances are analysed and investigated. All are familiar with the idea of budget, at every walk of life-state, firm, business etc.

A budget is the monetary and/or quantitative expression of business plans and policies to be pursued in the future period of time. Budgeting is preparing budgets and other procedures for planning, coordination and control or business enterprises.

l.C.M.A. defines a budget as “A financial and/or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective”.

Term Paper # 2. Classification of Budgets:

Budgets are classified according to their nature.

The following are the different classifications of budgets:

A. Classification on the Basis of Time:

(1) Long-Term Budgets:

Long-term budgets are prepared to reflect long-term planning of the business. Generally, the long-term period varies between five to ten years. They are prepared by the top level management. Long-term budgets are prepared for specialised activities like capital expenditure, research and development, long-term finances, etc.

(2) Short-Term Budgets:

These budgets are generally for duration of one year and are expressed in monetary terms.

(3) Current Budgets:

The duration of current budgets is generally in months and weeks. These budgets are prepared for the current operations of the business. As per I.C.M.A. London, ‘current budget is a budget which is established for use over a short period of time and is related to current conditions”.

B. Classification on the Basis of Functions:

(1) Functional Budgets:

These budgets relate to various functions of the concern.

Following are the commonly prepared functional budgets:

(a) Purchase budget

(b) Cash budget

(c) Production budget

(d) Sales budget

(e) Materials budget.

(2) Master Budget:

This budget is a summary of various functional budgets. It encompasses the activities of the whole organisation. According to I.C.M.A., London “The master budget is the summary budget incorporating its functional budgets”. Master budget is prepared to coordinate the activities of various functional departments.

C. Classification on the Basis of Flexibility:

1. Fixed Budget:

It is prepared for a given level of activity and remains same irrespective of change of activity.

2. Flexible Budget:

It is a budget prepared for various levels of activity by classification of expenditure under fixed, variable and semi fixed categories.

Term Paper # 3. Purpose of Budgets:

Every modern organisation is supposed to have a budget for each of its functional areas or major activities. Most organisations developed make are of that different kinds of budget: financial, operating and non-monetary. There are summarised in tables.

We have already drawn a distinction between operating budgets and capital (finance) budgets. It may be recalled that operating budgets are for forecasting sales and allocating financial resources and supplies. Capital budgets are for purchasing equipment and facilities.

Two other budgets are: production budgets (for producing the organisation’s basic products or services) and personnel budgets (for securing and developing human resources). Non- monetary budgets are expressed in terms that are not financial.

Although these budgets are treated as separate and distinct units, they are in fact part of a comprehensive system. The sales budget holds the key position in the system, since it shows the main function of the organisation. The production budget is based on the sales budget; others are derived from and related to these two.

Term Paper # 4. Some Important Budgets:

(1) Sales Budget:

In the budgeting process, sales are a starting point, as sales are the key factor in many cases. W.W.Bigg Writes, “This is probably most important budget, as it is usually the most difficult of forecast to attain”.

(2) Production Budget:

This budget is based on sales budget, unless production itself is the key-factor. It shows the budgeted quantity of output to be produced during a specific period. It has two parts, one showing the output for the period and the other showing production costs. The following key elements are considered while preparing the production budget.

(3) Materials Budget:

This budget is prepared in coordination with production budget. Preparation of materials budget is useful and helpful in achieving continuous, uninterrupted production as the non-availability of materials at the right time can affect the production. Material budget consists of two parts, one is the consumption budget and another is materials purchase budget.

(4) Labour Budget:

Labour budget is also a part of production budget. Labour budget is prepared by the personnel department.

This budget consists of the following details:

(a) Number of different grades of workers required

(b) Rates of wages of workers

(c) Labour hours needed for production.

(d) Labour cost for the period, etc.

(5) Overhead Budget:

This budget helps in the preparation of Production Budget. All the indirect expenses pertaining to production, office and administration, selling and distribution are shown separately under the budget, and their information’s are collected from their concerning departments.

(a) Production Overhead Budget:

It is a budget of indirect costs in the form of indirect wages, indirect material and indirect expenses to be incurred in the factory. It is prepared with the help of production, and labour budgets. It is prepared on the basis of past year’s figures and future changes expected.

(b) Administration Overhead Budget:

This budget is prepared to estimate the expenditure to be incurred for planning, organising, and direction control functions of the management. The budget is based on the past year’s expenditure incurred with expected future changes.

(c) Selling and Distribution Overhead Budget:

This budget is prepared to estimate expenditure to be incurred to sell the product and is distribution. It is based on sales budget. It is generally prepared in consultation with sales managers of each territory.

(6) Research and Development Budget:

This budget is prepared to estimate the research and development expenditure to be incurred during specific period. The budget is prepared in two parts, one is for revenue expenditure and another is to estimate the capital expenditure to be incurred.

(7) Capital Expenditure Budget:

This budget is prepared to estimate the capital expenditure on fixed assets-Buildings, machinery, plant, furniture, etc. It is generally a long-term budget. It is prepared for replacement of assets, expansion of production facilities, adoption of new technologies, diversification, etc.

(8) Cash Budget:

Cash budget is an important budget. It estimates the amount of cash receipts and payments and the balance of cash during a specific budget period. The cash budget is based on forecasts of cash or estimates of cash showing what funds would be available at what times and whether the funds available would meet requirements. The objective of cash budget is to provide for all cash requirements in time and avoid accumulation of excess cash.

Methods of Preparing Cash Budget:

(a) Receipts and payments method.

(b) Balance sheet method

(c) Adjusted Profit and Loss Account method.

(9) Master Budget:

A comprehensive master budget is prepared for the entire organisation, by integrating all the functional budgets of a period. The master budget is an overall plan for the guidance of the management. I.C.M.A., England, defines it as “summary budget incorporating its component functional budges which is finally approved, adopted and employed”.

(a) Flexible Master Budget:

I.C.M.A., London defines a flexible budget as “a budget which, by recognising the difference between fixed, semi-variable and variable costs is designed to change in relation to the level of activity attained”. Flexible budget is prepared to know the costs at different levels of activity. It is also termed as ‘variable budget’ or ‘sliding scale budget’.

(b) Steps Involved in Preparing the Flexible Budgets:

After completing the above mentioned preliminary steps, the following are the steps in preparing a flexible master budget:

i. Classification of Cost:

The cost is classified according to variability as variable, cost, fixed and semi variable cost.

ii. Estimation of Variable Cost:

Variable cost comprises of all those costs which vary in direct proportion to the level of activity. Usually, all the direct costs and variable portions of the indirect costs are combined called ‘variable cost’.

iii. Estimation of Fixed Costs:

All those expenses which remain constant irrespective of the level of activity are fixed costs. They usually include all the fixed portion of the overheads. The total of such expenses has to be estimated.

iv. Estimation of Semi-Variable Cost:

It remains fixed upto a particular level of capacity and there after it increases if the activity level goes up further. The semi variable cost should be estimated for the chosen activity levels.

(c) Presentation of Flexible Budget:

The flexible budget can be presented in the following forms:

i. In Tabular Form:

This is the most commonly used method. Under this method costs are classified under fixed variable and semi variable. These costs are estimated for different levels of activity.

ii. In Graph Form:

Here also expenses are classified as under tabular from and presented on a graph sheet.

iii. In the Form of Rations:

This method is used by concerns with standard lines of business and the expenses are uniform. The expenses are expressed in terms of ratios or percentages of production. The ratios are generally expressed in terms of percentages for any level with a variation of 10% say 70%, 80%, 90% and 100% etc.