Principles and practices of budgetary control
There are two Principle and practices are followed in the budgetary control that is mention below:-
- Double-Entry Bookkeeping: – The basic principle of double entry bookkeeping is that there is two entry for the every single transaction and these two entries have equal effects on the company financial statements (Ijiri, 2014). For instances, if the company assets are increasing in the debit side because company purchases some assets for generating profits. On the credit side, the decrease in assets represents that cash goes out with the reason to purchase the assets. Thus, this example reflects that both the entry have equal effects on the company as the company make an investment in particular assets for generating more cash flows. So in that case, company till now is neither bear any loss and nor earning any high profits. The basic principle or rule of double entry accounting is that both the amount that is entered into the debit and credit side of double-entry bookkeeping should be equal to the right side of another account.
- Accrual accounting: Accrual accounting is considered as an accounting method that helps in measuring the performances and position of the company through matching revenue and expenses (Jones and Lüder, 2011). The principal of accrual accounting is that the company is required to mention their accounting transaction in the period in which the transaction occurs rather than in the period in which the cash flows occurs. For example, there is need to record sales when a company charges from the customer, rather than when the customer pays the cash. Similarly, in the case of expense, there is need to record an expense when it is incurred rather than when the company pays it. Thus, by recoding, every transaction helps the company to analysis their current position in the market.
There are four process and procedures that company follows for recording and storing their financial data that are mention below:-
- Book keeping system: – The first process that company performs that is keeping the book by highlighting the records of financial transactions of the business. It is the process of recording the financial transactions in business (Jagalla, et al., 2011). Transactions can be purchase, sales, receipt, and payments related, and on that basis, the accounting will be done.
- Accounting: -In the second step of the accounting process, it includes two processes, i.e., classifying and summarising, etc.
- Classifying: -In this step of recording and storing of financial data, the companies after recording the transaction then classified the data on the basis of persons, enterprises, assets, and income-expenses (Curdia and Woodford, 2011). Then, these data are recorded in the ledger accounts such as debtors and creditors accounts, land & buildings; the commission received accounts and rent accounts, etc.
- Summarising: -After recording the data into the ledger account then afterwards all the financial transactions are summarized in this step of accounting recording process. In this, the company prepares the trail balances by mentioning that which transaction comes into the credit or debit side. The main aim to prepare the trail balances is to help the company to prepare the final accounts that are profit & loss and balances sheet.
Thus, by preparing the summary of all the transaction will give the reflection of the company financial position. At the same time, these processes also allow the companies to properly store the financial data and helps in taking the appropriate decision.
These both terminologies are the interconnected with each other as costing system allows to establishing the cost standards of activities. While variances analysis helps to determine the reasons for any variances of it occur in any period. Thus, both possess the common objective that is to control the maximum cost by identifying the reasons (Stoner, 2011). The comparison of standards is costing and actual costing is referred as variances analysis. Thus, it indicates that the variances analysis is integral part of the standards costing. Because of calculating the standards cost only this help the company to find the variances by making the comparison between the standards and actual costing. Moreover, variances analysis is identified by the company through estimating the direct material cost, direct labour cost, and overhead costs, etc. The analysis of variances is only possible with the standards costing as if the standards costing is not calculated then to find the variances is quite difficult. Thus this gives the sign that both standards are costing and variances analysis are interrelated to each other. In addition to this, the standards costing help in setting standards cost on the basis of past historical data records. While variances analysis provide the reasons of the differing in the standards and actual cost. So that the management could make improvements in the operations and able to take corrective actions by utilisation of resources and reduce the extra expenses (Adejare, 2014). Hence, it is proved that standards are costing and variances analysis both are plays a significant role in the management in terms to controlling the cost.
There are various principles and practices that the company follows while the preparation of budgets:-
- Be conservative not the optimistic:-The budget should be future-oriented that guide the high expectations of the company (Ansar, et al., 2014). So this reflects that the budget should be prepared in an optimistic manner rather than the conservative.
- Team work and consultations: -The most important principle in the budget preparation is the requirement of the team work and consultation. In this, process, the planner should need to involve each in the budget preparation by understanding each expense that could occur with departments (Heene, et al., 2011).
- The requirement of large amount: – Budget preparation considers as time consuming activity. The principal of budget preparation states that the good budget will be prepared in several weeks. So, it is necessary for the companies to prepare the budget by considering all the changing technologies so that each aspect will be cover in the budget.
- Excellences in documentations: – It is quite necessary that the budget planner should have excellences in the preparation of budget so that reader could easily understand the budgets (Guo and Neshkova, 2013). In the preparation of budgets, it should be assumed that budgeting workings will include the different departments in order to calculate the correct and relevant budget requirements. Thus, the excellences in the preparation of the documents are the current requirements of the company in order to estimate the correct budget.
- Proper training facilities: – The last principle of the budget planning process that there is the requirement that the company needs to include the employees. It is because, with the involvement of eevery employee, the budget will prepare as per the strategic and operational plans (Weir, 2010). In that case, there is need to conduct the proper training facilities so that employees perform their role appropriately.
Thus, these are the principle, and practices need to involve in the budgeting preparation process.
In the business organisations, managers need information to take a decision. Managers make a decision on the various daily activities that are essential to do business. The management needs to operation information, tactical information and strategic information to handle the business activities effectively. In this, operational information indicates to the day to day operational activities. Operation information is required to make control on those activities that are repetitive in nature. However, the need of the operational information is to low level managers in the management system. Along with this, the operational information relates to those activities which can be easily measured by the specific standard. Furthermore, in the business environment, tactical information is required for the middle level manager in the management system. Tactical information enables the managers to allocate the organisational resources and develop the control on the implemented policies by the top managers (Adejare, 2014). Typically, the tactical information is related to the predictive and concerning on the short term trends.
At the same time, it is also found that strategic information is also essential for the management. By the help of the strategic information, the management can be found that how the current business system improved. The strategic information allows the management to prepare a strategy to achieve the competitive advantage. It is also important to determine the business goals, aims, and objectives. The strategic information allows the management prepare the long plan on the investment decision and dividend decision.
The organisational policy and procedure are set of the organisational principles, rules, and guidelines formulated by the management of the organisation. But, in the words of Curdia and Woodford (2011), organisation policy is a set of the action or guideline that is followed by the each person that is associated with the firm. Organisational policies, procedures, processes, and system implement some strict laws and regulations at the workplace. It is the written guideline for the employees that have to follow by the employees and management to conduct the business smoothly. The set of the organisational policy or procedures is adopted or formulated by the organisation to achieve the business goal and objectives.
In this, the organisational policy is established course of action that is developed to give a guideline on the accepted firm’s objectives and strategies. It is important to develop the relationship between the organisational objectives and its day to day business operation. Organisational policies analyse the key issues in the business and workplace and provide the strategy to resolve them effectively. It helps the management to achieve the organisational goals and objectives. In the context of the organisation procedures, it is found that it is a procedure of applying the policies effectively (Ijiri, 2014). A well determined procedure is effective to minimise the common issue by assessing job responsibilities of the employees. A good procedure is helpful for the organisational is to manage and control the organisational procedure.
In the accounting management, cost behaviour indicates to a different kind of the product cost change when the change occurs at the level of the production. Cost behaviour is related to understating of change in the cost of the production according to change in the production level. Typically, there are three kinds of the cost behaviour patterns that are fixed cost, variable cost, and mixed cost. In this, fixed cost is a kind of cost that does not change with the change in the level of the production. It happens even if there is no production in the plant. The fixed cost may in the terms of rent, straight line depreciation expenses, etc. At the same time, variable cost behaviour patterns state that when change in the cost happens due to change level in the production, then it is known as the variable cost change. It means that when in the plant, more unities are produced then the total cost of variable increases. Beside of this, when fewer units are produced then total variable cost reduces (Stoner, 2011). Mixed cost behaviour pattern is also known as the semi variable cost behaviour. It is a combination of the both fixed and variable cost and there is a mixed of the semi variable cost, and semi fixed cost. A telephone expense is a kind of mixed cost expense.
Conversion cost refers to a cost that to convert raw materials into complete products. In order to calculate to conversion cost, below formula can be used
Conversion cost = Direct labour + Manufacturing overhead
Direct labour = $80000
Manufacturing overhead = fixed Manufacturing overhead + variable Manufacturing overhead
= 60000 + 30000
Conversion cost = $80000 + $90000
In the accounting, product cost indicates to that cost that is used to produce product. Product cost contains the direct labour, variable cost and fixed cost. To calculate the product cost the below formula can be used
Total direct labor + Total fixed cost + total variable cost + variable selling cost ) ÷ Total number of units
Total direct labor = $80000
Total fixed cost = 60000+ 110000 = 170000
Total fixed cost = 30000 + 250000 = 280000
Variable selling cost = 70000
Total units of 50000
Product cost = (80000 + 170000 + 280000 +70000) / 50000
= 12 per unit
The accounting term prime cost means direct cost of the product of a product. It can be calculated through the following formula:
Prime Cost = Raw Materials + Direct Labor
Raw material = fixed manufacturing overhead + variable manufacturing overhead + variable manufacturing
= 60000 + 30000 + 250000
Direct labor = $80000
Prime cost = $80000 + 340000
In the accounting, period cost does not include the product cost. In the other words, a product cost that does not include the prime cost is known as the period cost. Following is formula of the period cost
Period cost = total product cost – prime cost
Product cost = $600000
Prime cost = $420000
= 600000 – 420000
In order to calculate overhead cost for 60000 units below formula is used
Expected manufacturing overhead cost = (total overhead cost / total production) * expected production units
Total overhead cost = Fixed overhead cost + variable overhead cost
= 60000 + 30000
Total production = 50000
Expected production unities = 60000
Expected manufacturing overhead cost = (90000 / 50000) * 60000
Adejare, A. T. (2014) The analysis of the impact of accounting records keeping on the performance of the small scale enterprises. International Journal of Academic Research in Business and Social Sciences, 4(1), pp. 1.
Ansar, A., Flyvbjerg, B., Budzier, A., and Lunn, D. (2014) Should we build more large dams? The actual costs of hydropower megaproject development. Energy Policy, 69, pp. 43-56.
Curdia, V., and Woodford, M. (2011) The central-bank balance sheet as an instrument of monetarypolicy. Journal of Monetary Economics, 58(1), pp. 54-79.
Guo, H., and Neshkova, M. I. (2013) Citizen input in the budget process: When does it matter most?. The American Review of Public Administration, 43(3), pp. 331-346.
Heene, M., Hilbert, S., Draxler, C., Ziegler, M., and Bühner, M. (2011) Masking misfit in confirmatory factor analysis by increasing unique variances: a cautionary note on the usefulness of cutoff values of fit indices. Psychological methods, 16(3), pp. 319.
Ijiri, Y. (2014) The beauty of double-entry bookkeeping and its impact on the nature of accounting information. Economie Notes by Monte dei Paschi di Siena, 22 2-1993, pp. 265-285.
Jagalla, T., Becker, S. D., and Weber, J. (2011) A taxonomy of the perceived benefits of accrual accounting and budgeting: evidence from German states. Financial Accountability & Management, 27(2), pp. 134-165.
Jones, R., and Lüder, K. (2011) The Federal Government of Germany’s circumspection concerning accrual budgeting and accounting. Public Money & Management, 31(4), pp. 265-270.
Stoner, G. (2011) The perseverance of Pacioli’s goods inventory accounting system. Accounting History, 16(3), pp. 313-329.
Weir, R. O. (2010) Trimming the library materials budget: communication and preparation as key elements. Serials Review, 36(3), pp. 147-151.
Academic Research Writing Arm of Global Research Services.