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Basics Of Accounting

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  • Soumendra R

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    BUDGETING AND BUDGETARY CONTROL QI. Define the terms (a) Budget, (b) Budgeting and (c) Budgetary Control. Ans: Budget: Budget is a financial and/or quantitative statement, prepared and approved prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective. It is a plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective. It is a plan of future activities for an organization. It is expressed mainly in financial terms, but also usually incorporates many nonfinancial quantitative measures as well. Budgeting: Budgeting is the whole process of designing, implementing and operating budgets. The main emphasis in this is short — term budgeting process involving the provision of resources to support plans which are being implemented. Budgetary Control: Budgetary control means the establishment of budgets relating to the responsibilities of executives to the requirements of a policy and continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide basis for its revisions Q2. Explain in brief the importance of budgeting. Ans: Budgeting is a management tool used for short — term planning and control. Traditionally budgets have been employed as devices to limit expenditure, but a much more useful and constructive view is to treat the budgeting process as a means for obtaining the most effective and profitable use of the company's resources via planning and control. Short — term planning is formalized in the budgetary process. A budget is merely a collection of plans and forecasts, expresses largely but not exclusively in financial terms. Even though many organizations do not plan formally for more than a year ahead, the annual budget must be set in the context of longer — term plans, which are likely to exist even if they have been made explicit. Budgets should be a management tool rather than merely an accounting exercise. Advantages of Budgeting: l. a. b. c. d. e. f. g. h. i. Budgetary control establishes a basis for internal audit by regularly evaluating departmental results. Only reporting information which has not gone according to plan, it economizes on managerial time and maximizes efficiency. This is called 'management by exception' reporting. Scarce resources should be allocated in an optimal way, thus controlling expenditure. It forces management to plan ahead so that long — term goals are achieved. Communication is increased throughout the firm and coordination should be improved. An effective budgetary control system will allow people to participate in the setting of budgets, and thereby have a motivational impact on the work force. Individual and corporate goals are aligned. Areas of efficiency and inefficiency are identified. Variance analysis will prompt remedial action where necessary. The budget provides a yardstick against which the performance of the firm can be evaluated. It is better to compare actual with budget rather than with the past, since the latter may no longer be suitable for current and expected conditions. People are made responsible for items of cost and revenue, i.e., areas of responsibility is clearly delineated. Q3. Distinguish between 'Forecast' and "Budget'? Ans: Forecast 1. Forecast is merely an estimate of what is likely to ha en. It is a statement of robable events which Bud et Budget shows the policy and programme to be followed in a eriod under lanned conditions.
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    2. 3. 4. are likely to happen under anticipated conditions durin a s ecified eriod of time. Forecasts, being statements of future events, do not connote any sense of control. Forecasting is a preliminary step for budgeting. It ends with the forecast of likel events. Forecasts are wider in scope and it can be made in those spheres, also where budgets cannot interfere. 2. 3. 4. A budget is a tool of control since it represents actions which can be shaped according to will so that it can be suited to the conditions which may or ma not ha en. It begins when forecasting ends. Forecasts are converted into bud ets. Budgets have limited scope. It can be made of phenomenon capable of being expressed uantitativel . Q4. Write short notes on 'Major elements of a Completed Financial Plan'. Ans: The sales and revenue budget is the starting point of most master budgets. In manufacturing organizations sales budgeting begin with the forecasting of the sales of individual products. These forecasts may be by geographical area, by class of customer or by some other segment. In case of manufacturing companies, the budgeting will begin with the revenue budget of the organization. Forecasting sales is a difficult task as many assumptions need to be made about consumer demand, environmental conditions, likely customer demand at different prices, the probable prices for similar products sold by competitors, the number of economic activity in the regions where the product is sold, the number of sales personnel required to service the estimated demand, the appropriate level of advertising and promotional expenditures, the impact of anticipated changes in exchange rates and changes in the taxes such as the value added tax or customs and excise duties. Once the sales budget has been determined it would be possible to construct the following other budgets. a. b. c. d. e. f. g. h. Production Budget: It is an estimate of the quantity of goods that must be produced during the budget period. Plant Utilization Period: It is prepared for the estimation of plant capacity to meet the budgeted production during the period considered under the budget. Direct Materials Budget: It specifies the budgeted quantities of each raw material required for the budgeted production. Direct Labour Budget: It will ensure that the plan will make the required number of employees of relevant grades, and suitable skills. It will be developed for both direct labour hours and direct labour cost. Manufacturing Expenses Budget: It refers to the aggregate of factory indirect material, indirect labour and indirect expenses. Administrative Expenses Budget: It includes the administrative expenses incurred for the activities like formulation of policies, directing the organization and controlling the operations of an organization etc. Selling and Distribution Expense Budget: Selling expenses refers to expenses incurred relating to the activities like: (a) Creation and simulation of demand of company's product, and (b) Secure orders. Selling expenses include salesmen's salaries, commissions, expenses and related administrative cost, etc. distribution expenses refers to expenses incurred relating to the activities like: (a) Maintaining and creating demand of product, and (b) Making the goods available in the hands of the customer. Distribution expenses include transportation, freight charges, stock control, warehousing, etc. Preparation of selling and distribution expense budget is based on the sales budget. The selling and distribution expenditure can be estimated with the help of flexible budgeting technique. Master Budget: Master Budget is a budget which is prepared from, and summarizes the functional budgets. It is a summary budget that incorporates the key figures and totals of all other budgets. Q5. Write short notes on: (a) Budget Centre, (b) Budget Period. Ans: Budget Centre: Budget centre is a section of an organization for which separate budgets can be prepared and control exercised. CIMA official terminology
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    The entire organization is divided into different segments, which are clearly defined for the purpose of budgetary control according to responsibilities of departmental heads. These segments of an organization defined for the purpose of budgetary control are technically referred to as budget centres. Budget Period: Budget period is a period for which the budget is prepared. A budget can be a long — term budget or short — term budget. A short — term budget is generally prepared for one year or lesser period. Quarterly, monthly or even weekly budget can be prepared for certain operations of the company. The short — term budget will generally not exceed the full accounting year. The long — term budget which extend to five or even more years. This long term budget will agree with the long — term forecast of sales, organizational schemes for expansion, modernization, diversification etc. The long — term budgets are used for planning whereas short — term budget is used for implementation of long range plans, activities, objectives and also for control purposes. Capital expenditure budget and Research and development expenditure budget are examples of long — term budgets. Annual sales budget, Income and expenditure budget are the examples of short — term budgets. Q6. What is the role of Budget Committee? Ans: In small organizations, the person incharge of finance and accounting functions will involve in preparation of budgets. The setting up of a budget committee in case of large and complex organizations. As the budget involves the various functional activities, the closest association of functional managers is essential for satisfactory formulation and implementation of the budget. The budget committee will be composed of major functional heads. It can be an effective medium for coordination and review of the budget program. The main functions of budget committee are as follows: a. b. c. d. e. f. g. h. To review the functional budget estimates. To recommend the functional budget estimates. To review and advise on the general policies affecting more than one function. To review, approval, and adoption of revised budgets. To receive and analyze the periodic performance reports from budget centres. To examine the budget reports showing actuals compared with budget. To locate the responsibility for discrepancies between actuals and budgets, and recommends the corrective action. To participate in decision making in strategic issues like, expansion, modernization, diversification and revision of organizational activities, which have direct relationship to the company's budgets. Q7. Who is a Budget Controller? Explain his/her functions and responsibilities. Ans: Proper budget administration is facilitated by the budget controller who is made responsible for the preparation of the budget and coordinating activities of the individual departments. His functions and responsibilities will include the following: a. b. Generation and dissemination of information needed for decision making and planning to each person in the organization having such responsibilities. The information may include, but is not limited to, forecasts of economic and social conditions, governmental influences, organizational goals and standards for decision making, economic and financial guidelines, performance data, performance standards and the prerequisite plans of others in the enterprise. Establishing and maintaining a planning system which: i. ii. lii. iv. Channels of information to each of persons responsible for planning. Schedules the formulation of plans. Structures the plans of subsections of the enterprise into composites at which points tests are made for significant deviations from economic and financial guidelines and from goal achievement and repeats the process for larger segments to and including the enterprise as a whole, and Disseminates advice of approval, disapproval or revision of plans to affected individuals in accordance with established lines of authority and organizational responsibilities.
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    c. d. Constructing and using models of the enterprise both in total and by subsections, to test the effect of internal and external variables upon the achievement of organizational goals. Ensuring the accumulation of performance data related to responsibility centres within the organization, measured against the plans, whether period or project, for each centre, transmitted to each centre and the analysis of deviations of actual from planned performance. The budget controller is responsible for the final preparation, presentation and interpretation of the financial plan of the company. He is responsible for development of budget procedures. He will act as a staff manager coordinating all budget functions. Q8. What do you understand by Budget Manual? Ans: Budget manual is the documentation of policies and procedures involved in implementation of budgetary control system. A budget manual will normally set out the following: a. b. c. d. e. f. g. h. i. Responsibility and authority of different levels of management. Establishment of organizational hierarchy. Definition and clarification of various terms used in budgets. Definition of organizational and functional objectives. Fixation of responsibility for preparation and implementation of budgets and budgetary system. Specification and timing of statements and reports. Procedures in management information system in the organization. Procedures in feedback and feed forward control systems. Exhaustive program of budget preparation. The budget manual contains the standardized form which becomes information generation for preparation of budgets. It contains a complete program of activities involved in budget preparation. The budget manual should provide detailed procedure for preparation and development and control of each budget like sales budget, production budget, direct material budget, direct labour budget, overhead budget, capital expenditure budget, R & D expenses budget etc. Q9. "Principal Budget Factor is of vital importance to management in profit planning." Comment. Ans: The performance of every organization will be particularly influenced by certain critical success factors. Key factor will influence the activities of an undertaking and it will limit the volume of outputs and will have direct impact on the profitability of the organization. The critical success factor is also called as 'principal budget factor'. Critical success factors may consist of a specified raw material, a specific type of labour skill, a tool, a service facility, floor space, cash resources etc. The limitation or shortage of such critical factors may result in restricting capacity utilization. The limiting factors may shift from time to time due to external and internal circumstances. In organizations which are already operating at maximum capacity, the most critical success factor is likely to be productive capacity. In majority of organizations the critical factor is likely to be consumer demand or the expected level of revenues or funds. Because of this, the sales or funds budget is usually the first budget to be prepared. It will determine the content of other related budgets. QIO. What are the requirements of a sound Budgeting System? Ans: The following are the essential requirements of a sound budgeting system: a. b. c. d. Clear lines of authority and responsibility have to be established throughout the organization and the authority and responsibility of different levels of management and departmental executives are clearly defined. The organizational goals should be quantified and clearly stated. These goals should be within the framework of organizations' strategic and long range plans. The budget system should be established on the highest possible level of motivation. All levels of management should participate in setting budgets. The budget control system should provide for a degree of flexibility designed to change in relation to the level of activity attained and the impact of changes in sales and production levels on revenue, expenses are known.
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    e. f. g. h. Proper communication systems should be established for management reporting and information service so that information relating to actual performance is presented to the manager responsible for it promptly to enable the manager to know the nature of variations so that remedial action is taken whenever necessary. Educating the budget process and creation of cost awareness atmosphere will lead to effective implementation of budgets. The top management's involvement in budget process is essential for successful implementation of the budgets. A sound system for generating accurate and reliable and prompt accounting information is basic for successful implementation of budget system in an organization. QII. Define 'Flexible budget' and explain its importance as a budgeting technique and tool of control. Ans: Flexible budget is a budget which, by recognizing the difference in behaviour between fixed and variable costs in relation to fluctuations in output, turnover, or other variable factors, etc. It is designed to change in relation to the level of activity actually attained. A flexible budget is one that takes account of a range of possible volumes. It is sometimes referred to as a multi — volume budget. The range of possible outputs may be known as the relevant range. "Flexing' a budget takes place when the original budget is deliberately amended to take account of change in activity levels. The flexible budget is based on the fundamental difference in behaviour of fixed costs, variable costs and semi variable costs. Since fixed costs do not vary with short — run fluctuations in activity, it can be seen that the flexible budget will really consist of two parts: The first is a fixed budget begin with made up of fixed costs and the fixed component of semi — variable costs. The second part is a truly flexible budget that consists solely of variable costs. Steps in Preparation The steps involved in preparation of flexible budget are as follows: a. Specify the time period that is used. b. Classify all costs into fixed, variable and semi — variable categories. c. Determine the types of standards that are to be used. d. Analyze cost behaviour patterns in response to past levels of activity. e. Build up the appropriate flexible budget for specified levels of activity. Importance Flexible budgets are important aids to decision making which help the management in the following ways: i. Flexible budget enable an organization to predict its performance and income levels at a given range of sales levels and activity levels. It can be seen the impact of changes in sales and production levels on revenue, expenses and ultimately income. ii. Flexible budgets enable more accurate assessment of managerial and organizational performance. Disadvantages The procedure for drawing up a flexible budget is quite straight forward. The flexible budget is only accurate, if costs behave in a predicted manner. All too often assumptions are made about cost behaviour which are too simplistic and hence do not reflect what actually happens. a. b. c. d. Flexed budgets assume linearity of costs and therefore take no account of, for example discounts for bulk purchases of materials. Labour costs are unlikely to behave in a linear fashion unless a piecework scheme is in operation. Such budgets also rely on the assumption of continuity when costs may actually behave in a stepped or discontinuous manner. The method of determining the fixed and variable elements of costs is often arbitrary and hence the fixed cost bears little relation to the correct budgeted cost for the flexed level of activity. Although flexed budgets tend to maintain fixed costs at the same level whatever the level of output/sales, very often fixed costs are actually fixed only over a relevant output range.
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    Q12. Differentiate between: i) Fixed and Flexible Budget; ii) Traditional and Zero Base Budgeting. Ans: Fixed and Flexible Budget: Fixed Budget: The fixed budgets are normally prepared keeping in view a certain level of activity as the goal. All the functional budgets are prepared basing on the planned level of activity. It is usual that actual performance of the concern may be higher or lower than the budgeted level of activity. This would cause serious problems in making comparison of actual data with the budgeted figures. In such cases the budgeted data is quite meaningless since these refer to two different levels of activity and therefore, the budget figures should be adjusted or revised in accordance with the actual level of activity. Flexible Budget: A flexible budget takes account of a range of possible volumes. Flexible budget enable an organization to predict its performance and income levels at a given range of sales levels and activity levels. In preparation of flexible budgets, costs are to be classified into fixed, variable and semi-variable costs. Since fixed costs do not vary with short-run fluctuations, fixed cost is estimated to be uniform for all levels of activity, but the variable costs are estimated volume dependant. The preparation of flexible budgets, require the semi-variable costs to be segregated into fixed and variable components. The distinction between fixed bud et and flexible bud et is summarized as follows: Fixed Bud et i.Costs are not classified according to their variability, i.e. fixed, variable and semi-variable. ii.lt is inflexible and remains the same irrespective of the volume of business activity. iii.lt assumes that conditions would remain static. iv.Accurate forecasting of results is difficult. v.Actual and budgeted performances cannot be correctly compared if the volume of output differs. vi.This budget has a limited application and is ineffective as a tool for cost control. vii.All conditions will remain unaltered is an unrealistic expectation on the part of the management. viii.Costs cannot be ascertained if there is a change in the circumstances. Flexible Bud et i.Costs are classified according to the nature of their variability. ii.lt can be suitably recasted quickly to suit changed conditions. iii.lt is designed to change according to a change in the level of activity. iv.Flexible budget clearly shows the impact of various expenses on the operational aspect of the business. v.Comparisons are realistic since the changed plan figures are placed against actual ones. vi.This budget has more applications and can be used as a tool for effective cost control. vii.Under flexible budgeting, series of fixed budgets are prepared for different levels of activity. viii.Costs can be easily ascertained at different levels of activit . The tasks of fixin rices become eas Traditional and Zero Base Budgeting: Traditional Budgeting: Traditional Budgeting starts with previous year expenditure level as a base and then discussion is focused to determine the 'cuts' and 'additions' to be made in previous year spending. Zero Base Budgeting: In ZBB no reference is made to previous level of expenditure. A convincing case is made for each decision unit to justify the budget allotment of resources for that activity during the period under consideration and the available resources are allocated to different activities in order of its importance to optimize results. The oints of difference between traditional bud etin and ZBB are as follows: Traditional Bud etin i.Traditional budgeting is accounting oriented. Main stress happens to be on previous level of expenditure. ii.First reference is made to past level of spending and then demand is made for inflation and new program. iii.Some managers deliberately inflate their budget request so that after the cuts they still get what they want. Zero Base Bud etin i.ZBB makes a decision oriented approach. ii.A decision unit is broken into understandable decision packages which are ranked according to importance to enable top management to focus attention, only on decision packages which enjoy priority to others. iii.A rational analysis of budget proposals is attempted. iv.lt is clear and res onsive.
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    iv.lt is not as clear and responsive as ZBB v.lt is for top management to decide why particular amount should be spent on particular decision unit. vi.lt makes a routing approach. v. Their responsibility is shifted from top management to the manager of decision unit. vi.lt makes a very straightforward approach and immediately spotlights the decision packages enjoying priority over others. Q13. What is meant by Zero Based Budgeting? Explain clearly the steps involved for introduction of ZBB in an organization. Mention also the advantages and drawbacks of ZBB. Ans: ZBB is a method of budgeting whereby all activities are reevaluated each time a budget is formulated. It is an approach to budget review and evaluation that requires a manager to justify the resources requested for all activities and projects, including on — going activities and projects, in rank order. Each functional budget starts with the assumption that the function does not exist and it is at zero cost. Increments of costs are compared with increments of benefit, culminating in the planned maximum benefit for a given budgeted cost. Under this system a number of alternatives Q. What is Budgetary Control? Discuss various advantages and essentials for the success of budgetary control? Ans: Budgetary Control: "Budgetary control means the establishment of budgets relating to the responsibilities of executives to the requirements of a policy and continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide basis for its revisions". Budgetary Control is a system of controlling costs which includes the preparation of budgets, coordinating the departments & establishing responsibilities, comparing actual performance with the budgeted & action upon results to achieve maximum profitability. Plan Budget/target > Compare Actual with budgets >Variance Action Meaning of Budgetary Control: Budgetary Control is a technique of managerial control through budgets. It involves control over the procedure adopted to achieve standards determined under the budgets. According to W.W. Bigg, "The term 'budgetary control' applies to a system of management and accounting control by which all operations and output are forecast as far as ahead as possible and the actual results, when known, are compared with the budget estimates. ' Thus, the term 'budgetary control' is designed to evaluate the performance in terms of goals budgeted through budget reports. Here are some other important definitions of 'budgetary control . According to J. Batty, "Budgetary Control is a system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities or services. " According to Wheldon, "Budgetary control is the planning in advance of the various functions of a business as a whole can be controlled. According to Brown and Howard, "Budgetary Control is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with the budgeted and acting upon the results to achieve maximum profitability.' According to Glan A. Welsok, "Budgetary Control involves the use of budgets and budgetary reports throughout the period to coordinate evaluate and control day-to-day operations in accordance with the goals specified by the budget. Advantages of Budgetary Control: Budgetary Control is an important technique of directing business activities (and operations) in a desired direction. According to Blocker and Wletmer, "budgetary Control is planned to assist management in the allocation of responsibility and authority, to aid in making estimates and plans for the future, to assist in the analysis of the variations between estimated and actual results and to develop bases of measurement of standards with which to evaluate the efficiency of operations." It serves as a valuable aid to management through planning, co-ordination and control. The principal advantages of a budgetary control system are enumerated below: a. Improvement in Planning:
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    i. ii. iii. iv. v. vi. vii. viii. b. i. ii. iii. c. i. ii. iii. d. i. ii. iii. Profit Maximization: Budgetary Control aims at maximization of profits through effective planning and control of income and expenditure — directing capital resources to the best and most profitable channel. Intelligent consideration of future events: It directs every activity of the enterprise towards the common goal set-up by the top management; hence they consider future events intelligently. It is through budgets that action conforms to the policies and plans. Stability in Business Operations: Budgets are properly phased and targets are set for each control period. This phasing leads to control production in each phase of activity and so eliminates the impact on the financial position of the concern arising as a result of seasonal variations in sale. Budgeting, thus, brings stability in business operations. Delegation of Authority and Responsibility: A budgetary control system creates budget centers and therefore, assists in delegation of authority and is a powerful tool of responsibility. Clarity of Objectives: It provides a clear definition of the objectives and policies of the concern and a tool for subjecting these policies to periodic examination. Each employee remains clear about his work responsibility and authority limits. Best Utilization of Resources: Since each level of management is aware of its task and is fully conscious as to the best way by which it is to be performed, maximum effective utilization of men, materials and resources can be attained. Specificity in Planning: Budgeting system brings specificity in planning. It assists the management to take prompt action and profitable decisions under the circumstances given, by furnishing adequate accounting statistics. Enhances the Collateral Value of the Enterprise: Budgeting is supposed to be an indicator of sound planning and efficient management. It enhances the collateral value of the enterprise. The banks are willing to lend credit more or less on easy terms to concerns having a budgetary programme. Aid in Co-ordination: Promotes Balanced Activities: Budgeting generates harmony in the netire organization and promotes good morale. The executive actions are all interlinked and so there becomes a mutual proper understanding. Thus, the task of managerial co-ordination is facilitated through budgetary control. Promotes Co-operation and Team Spirit: In the task of preparation of budgets, there is a participation of management personnel placed at all levels of organization. It brings co-operation and fosters team-spirit among them. Co-ordination: Budgetary control can bring full coordination in business policies, plans and operations. Helpful in Control: Assists in Standard Costing: Installation of budgetary Control system assists in introducing standard costing. Budgets are the forerunners of standard costs in the sense that they create necessary conditions to suit setting up of standard costs. Measurement of Performance: It is a good toll for measuring managerial performance. The budget targets are compared with the actual ones, variations are stroked out and responsibility fixed. Suitable reports are placed before the management on the basis of which corrective action is taken. It is, therefore, an instrument of effective management control. Cost Control: It promotes overall cost consciousness in the entire organization, hence, the wastes likely to occur in different elements of cost may be avoided. Other Advantages: The budgets have a special role to play in the present day competitive economy. Every entrepreneur strives to lower the costs through budgeting. In fact, budgets act as a schedule for the most profitable combination of factors of production, which if achieved will not only lower the costs but will pass the efficiency to the customers in the form of cheap price. The method of evaluating performance against budgets provides a suitable basis for establishing incentive systems of remuneration by results (or payment by results). It ensures efficiency of working capital in the business. Essentials for the success of Budgetary Control: A sound budgetary control system should be based on the following principles: 1. Support of Top Management: The budgetary control system should have full support of top management. The impetus and direction must come from the top. It must have the whole-hearted support of every member of management. The management and executives should be well aware of the uses and limitations of budgets.
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    2. 3. 4. 5. 6. 7. 8. 9. Sound and Efficient Organization with definite lines of responsibility: In order to make budgetary control system a success, there must be a well-planned organization set-up in the concern. There must be clear division of authority and responsibility in the organization. Proper communication lines should be kept and there should be proper delegation of authority also. Delegation of authority and budgetary control both are interrelated. According to Weston, "The use of budgets makes possible the successful delegation authority to subordinates without loss of control. Well-defined Objectives and Policies: A budget programme is always based on certain fundamentals, the collection of which is called the 'policy' of the business. The budgeting system should be based on well-defined objectives, policies and programmes. They should lay down the targets which are realistic and attainable. The budget policies should be incorporated in the budget manual. Accurate Accounting System: For effective budgeting accurate accounting system is essential and it should be tailored as per the requirements of budgetary control. Budget Education: An essential condition for the success of budgeting is budget education, more particularly to those who are responsible for implementation of budgets. Budget education should be concerned with preparation, implementation and supervision aspect of budgeting. Participation by Responsible Executives: The management should seek co-operation of all executives in preparation and implementation of budgets, determination of responsibilities and performance appraisal. The system should not give the impression to the subordinates that budgeting is being imposed on them in an authoritarian way. Wide participation by the subordinates in framing the budgets is essential so that they may become more effective. However, there should be clear-cut division of the responsibility for preparation, operation and supervision of budget. Logical Sequence in the Budget Preparation: It is essential that proper system is developed for the preparation, submission, examination and review of budget. For this purpose, it is proper that a budget committee should be formed to carry out these activities in logical sequence. Reasonably Attainable Goals: The budget targets should be realistic and capable of being achieved with reasonable level of efficiency and diligence. Cost of the System: The budget system should not cost more to operate than its worth. However, exact measurement of worth is not possible. Hence, it only implies a caution against expensive refinements without regard for size of the concern. 10. Flexibility: The budgets should be flexible enough to permit the adjustments in the light of changed operational circumstances. It is always desirable to provide for the possible and unforeseen circumstances. Flexibility strengthens as well as smooth's the control. 11. Constant Vigilance: Constant vigilance is the price of success. An effective system of budgetary control requires for continued action and reviews it at frequent intervals. As soon as unfavorable trends are detected, immediate action should be taken to remedy them. 12. Emphasis on Co-ordination: Budgets should actually aim as a co-coordinating device rather than control device. It should work as communicator of basic policies of enterprise at all levels and delegate of authority at lower levels of organizational hierarchy. A well developed scheme of incentive plans for the execution of departmental budgets should be introduced. 13. Proper Feedback: A sound system of budgetary control calls for prompt reporting of exceptions, the causes, the responsibility and the possible corrections. In order to make reporting effective and fruitful, variations located, responsibility assigned, explanations demanded and possibility of future occurrence prevented.

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