Module V- (Cost control techniques)

Budget
A financial plan expressed in terms of money for a period is called
budget.
Budgeting
A process of preparation, implementation and operation of budget is
called budgeting.
Budgetary control
Budgetary control is a system of using budget for planning and
controlling cost.
Objectives of budgets/ budgetary control
 To control activities.
 To evaluate performance of managers.
 To motivate managers.
 To eliminate wastes.
 To aid the planning of annual operation.
 To coordinate activities of the organisation.
 To communicate plans with responsibility centre managers.
Steps involved in budgeting and budgetary control
 Setting up of organisational goals.
 Formulating plans for achieving goals.
 Translating plans into budget.
 Relating responsibility of executives to requirements of a policy.
 Recording and reporting actual performance.
 Continuous comparison of actual with budget.
 Find out deviations.
 Focusing attention on significant deviations.
 Find out the reasons for deviations.
 Presentation of information to the management.
 Taking corrective action.
 Revision of budgets.
Essentials of budgetary control system
 Support by top management
 Formal organisation
 Clear cut objectives
 Minimum cost of operation
 Budget committee
 Adequate accounting system
 Periodic reporting
 Flexibility
 Effective communication
Steps in the installation of budgetary control system
1. Establishment of budget centres
2. Introduction of adequate accounting records
3. Budget training and education
4. Preparation of an organization chart
5. Establishment of budget committee
6. Preparation of budget manual
7. Fixation of budget period
8. Determination of key factor
9. Determination of the level of activity
Need/ importance/ Advantages of budget and budgetary control
 Tool of planning
 Promotes profitability
 Evaluate managerial performance
 Optimum utilization of resources
 Coordination
 Tool of control
 Motivates executives
 Facilitate delegation
 Improves communication
 Management by exception
Disadvantages of budgetary control
 Based on estimates
 Based on forecasts
 Rigidity
 Expensive
 Time consuming
 Only a tool of management
 Employee’s resistance
 Success depends upon support
Budget Manual
It is a written document which guides the executives in preparing
various budgets.
Budget period
A period for which a budget is prepared and employed is called
budget period.
Classification of budget
 Classification according to time
 Long term budget
A budget for a period of five to ten years is called long term budget.
 Short term budget
A budget for a period of one to two years is called short term budget.
 Current budget
A budget covers a period of one month is called current budget.
 Classification according to flexibility
 Flexible budget
It is a dynamic budget. It gives different budgeted cost for different
level of activity.
 Fixed budget
It is a budget does not change with changes in the level of activity.
 Classification according to function
 Functional budget
Functional budgets are those which are prepared by heads of
functional departments for their respective departments. It is also
called operating budgets or financial budgets.
 Master budget
It is the summary of all budgets. It summarises sales, production,
purchases, fiancé, labour etc.
Types of functional budgets
1. Sales budgets
It forecast the total sales expressed in quantities and money. It is
prepared by the sales manager.
2. Production budget
It is the forecast of the quantity of production for the budget period.
3. Material budget
It shows the estimated quantity of raw material required for the
production for a budget period.
4. Purchase budget
It shows the quantity of different types of materials to be purchased
during the budget period.
5. Cash budget
It is a statement showing cash inflows and cash outflows over the
budgeted period.
Zero based budgeting (ZBB)
It is a recent trend in budgeting and it starts from zero base. It is
particular used of service departments and government.
Advantages of ZBB
 It starts from zero.
 It is useful for service department and government.
 It ensure active participation of managers.
 It helpful to management in making optimum allotment of scarce
resources.
 It promote high level of motivation at the level of unit managers.
Difference between traditional budgeting and ZBB
Traditional budgeting ZBB
Begins with previous year Begins with zero, a base.
budget.
Focus on money. Focus on goals and objectives.
Prepare annually. Prepare once in every five years.
Produces a single level of Produces alternative level of
expenditure for an activity. expenditure.
Resources are allotted not on Resources are allotted on basis
the basis of cost benefit analysis. of cost benefit analysis.
Difference between fixed and flexible budget
Fixed budget Flexible budget
Based on the assumption that Based on the assumption that
business condition do not business conditions change.
change.
Comparison between actual and Comparison between actual and
budgeted cost is not possible. budgeted cost is possible.
Costs are not classified Costs are classified according to
according to variability. variability.
Prepared for a single level Prepared for a range of
activity. activities.
Not useful for control price Useful for cost control pricing
fixation. decision etc.
Standard cost
Standard cost is a predetermined cost for evaluating the actual
performance. It is the expected cost of producing one unit.
Standard Costing
Standard costing is a technique which uses which uses cost and
revenue for the purpose of control through variance analysis.
Difference between standard costing and budgetary control
Budgetary control Standard costing
It is based on past performance. It is based on technical estimate.
It fix minimum limits. It fix targets.
It does not required It requires standardisation of
standardisation of product. product.
Budget are expressed in total. Standard are expressed per unit
of production.
It is applicable to all types of It is applicable to manufacturing
organisations. organisation.
Budget consider both income It considers only expenditure.
and expenditure.
It is a projection of financial It is a projection of cost
accounts. accounts.
Objectives of standard costing
 Performance measurement.
 Cost control.
 Stock valuation
 Establishing selling prices.
 Profit planning.
 Decision making.
Advantages of standard costing
 Cost control
 Aid to management
 Quick reporting
 Management by exception
 Utilization of resources
 Delegation of authority
 Inventory valuation
 Coordination
 Economy
Limitations/ Disadvantages of standard costing
 Difficult to establish accurate cost standard.
 It is costly for small industries.
 Revision of standard is costly.
 It is not suitable to job order industries.
 It is not suitable to non-standard products.
 It would be a failure, if management doesn’t have interest in it.
Steps in standard costing
 Establishment of cost centres.
 Classification and codification of accounts.
 Establishment of standards.
 Ascertainment of actual costs.
 Comparison of standard and actual costs.
 Analysis of variance.
 Reporting of variance.
Analysis of variance (Variance)
It is the difference between standard cost and comparable actual
cost incurred during a period.
Managerial uses/ Benefits variance analysis
 It facilitates management by exception.
 It helps in compare performance of different departments.
 It helps in future planning.
 It helps in formulating policies.
 It helps in developing team spirit among managerial personnel.
 It identify the cause for variance.
Material cost variance
Material variance are popularly known as material cost variance. It is
the difference between standard cost and actual cost of material
used.
Labour cost variance
It is also called wage variance. It is the difference between standard
cost of labour and actual cost of labour.
Overhead variance
It is the difference between standard overhead cost and actual
overhead incurred.
Types of standards
 Basic standard
It is a standard which is established for some base year and remain in
use for a long period of time.
 Current standard
It is a standard which is established for use over a short period of
time related to current conditions.
 Expected standard
This is the standard which is anticipated during a future specified
budget period. This is also called ideal standard.
 Normal standard
It is the average standard which is anticipated can be attained over a
future period of time, preferably long enough to cover one trade
cycle.
Attainable standard
An attainable standard is a performance target or goal that can be
realistically achieved given the available resources, skills, and
circumstances.
Budget key factor
It is a factor in the activities of an undertaking which at a particular
point in time or over a period limit the volume of output. It is also
called limiting factor.
Angle of incidence
It is the angle formed between sales line and total cost line after
breakeven point in the break even chart.
Difference between forecast and budget
Budget Forecast
It is prepared by management Estimate future trend based on
for future period. historical data.
Usually done for short term. Usually done for long term.
It is a static statement. It is flexible.

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