Chapter –II

PROFILE OF ORGANISATION

2.1 INTRODUCTION

India has a very long tradition of nearly 3000years of textiles production. The first composite
cotton textile mill came up in Kolkata in 1818, the second up in 1854 in Mumbai and the
third one at the Ahmedabad in 1861. The cities tradition of textile production dates back to
the Peshwa rule in Maharashtra in the late 18 th century, when Madhara Peshwa invited
telugu speaking hereditary weavers from the nearby Andhra to Solapur on promise of
providing the necessary facilities to establish a textile center at Solapur. In later century, as
to large composite textile mills were established and several textile ancillaries came up to
Solapur indeed became renowned textile center in Maharashtra.

As on 31st march there were around 10,000 functional small textile production [weaving
only] units in Solapur city. The universe of my study thus comprises these 10,000 units
functioning within the boundaries of Solapur city. These textile units in Solapur city have
adopted only such functional management practices that suit them to sustain the day-to-
day functioning, from one week planning time frames to the provision of are minimum
employee welfare facilities required under law. There is an utter lack of proactive, future-
oriented attitude in the owners of these units.

In the present model analysis an attempt is being made to study the “Working Capital
Management” of “M/S VISHWANATH CHATLA & SONS TEXTILES”, which has been selected
for my project report.

2.2 BRIEF HISTORY OF THE COMPANY:-

Solapur consists of medium and small scale industries. Solapur is also the leading Centre for
handlooms, power looms and cotton mills producing chadders (Solapur bed sheets), bath-
towels having great durability and novel designs.

M/S VISHWANATH CHATLA & SONS TEXTILES is a leading Indian manufacture of superior
quality jacquard chadders, bed sheets & terry towels to the global clientele since 1973. The
company has been adopting to new technologies of the time and the raw materials used are
of the highest quality. They further enhance the quality of the products. It is canonical
player in the area of home furnishings. The use of latest technology results in products that
are perfect and known for their finesse.

2.3 INFRASTURCTURE OF THE COMPANY:-

The company has state of the art infrastructure spread across 64000 sq. feet that is
equipped with modern machines for faster production to meet the immediate requirement
of their clients. The use of latest technology results in products that are perfect and known
for their finesse. All these efforts have helped them to increase the production to 54 metric
tonnes every month. The production unit is fitted with the following machines.
 Doubling Machines
 Boilers
 Warping Machines
 Double Needle Stitching Machines
 Reeling Machines
 Winding Machines
 Hydro extractors
 Pirn Winding Machines
 Power Looms with jacquard Attachment
 Strap Packing Machine
 Washing Machines

 Features of the company

1. The company proud to have one of the finest infrastructural ase in
the realm of home furnishing items.
2. It is equipped with all the materials needed for the trade.
3. It has an efficient team of technicians, designers and enginerrs who
ensure the quality of the outputs.
4. The main thrust of company is to establish long term business
relations with its end users.
5. The company follows stringent quality measures for maintaining the
quality of products as it is of prime concern to them.
6. It aspires to establish strong footholds in the industry delivering
perfect and innovative solution of terry bath towels.
7. The company has a well-structured quality control program that
keeps a close watch on the entire production process right from the
initial stages of procuring the raw fabric to final packaging and
delivery of the finished products.
8. The procedures which take place for quality testing include Raw
Materials, Yarn for count, Lea strength and fibred composition.
9. For purity and compatibility dyes and chemicals are tested.
OPERATIONAL PERFORMANCE

TEXTILE

Doubling Machines

Reeling Machines

Dying Section

Preparatory Section

Weaving Section

Checking & Cutting

Packing & Finishing Section

Product

Dispatching on Order

Sale
Chapter- III

Theoretical Framework:-

3.1 Budget

Meaning:-

A budgetary plan is relating to period of time of figure, expressed in qualitative or financial term the
institute of coast and work accountant. It is predetermined statement of management policy during a
given period which provide a standard for compaction with the result actually achieved. In short budget
is time of one year need to calculate for definite period. No specific period can be formulas the best
period, as depend upon the type of business. It is considered as the management instrument of
organizing, co-originating and control. A budget is a quantitative expression of a financial plan for a
defined period of time. It may include planned sales volumes and revenues, resource quantities, costs
and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units,
organizations, activities or events in measurable terms. A budget is the sum of money allocated for a
particular purpose and the summary of intended expenditures along with proposals for how to meet
them.

“As estimate of costs, revenues and resources over specified period, reflect of figure financial condition
and goal”.

“A budget is financial document used to project figure income and expenses to put it simply, a budget
plan figure saving and sending well as planed income and expenses”.

“A financial and qualities statement, prepare prior to defined period of time, of the policy to be
presumed during that period for the propose of attaining of a given objective blueprint of a project plan
of an action of business for a definite period of time”.

“As a plan quantified in monetary term papered and approved prior to defined period of time usually
showing planned income to be generated or expenditure to be incurred during that period and the
capital to be employed to attain a given objective”.

Budget helps to aid the planning of actual operations by forcing managers to consider how the
conditions might change and what steps should be taken now and y encouraging managers to consider
problems before they arise. It also helps to co-ordinate the activities of the organization y compelling
managers to examine relationships between their own operation and those of other departments. Other
essentials of budget include:

 To control resources.
 To communicate plans to various responsibility center mangers.
 To motivate managers to strive to achieve budget goals.
 To evaluate the performance of managers.
 To provide visibility into the company’s performance.
 For accountability.
In summary, the purpose of budgeting tools:

1. Tools provide a forecast of revenues and expenditures, that is construct a model of how a
business might perform financially if certain strategies, events and plans are carried out.
2. Tools enable the actual financial operation of the measured against the forecast.
3. Lastly, tools establish the cost constraint for a project, program or operation.

3.2 Different Types of Budget:

 Production Budget – An estimate of the number of units that must be manufactured to meet
the sales goals. The production budget also estimates the various costs involved with
manufacturing those units, including labor and material. Created by product oriented
companies.
 Capital Budget – Used to determine whether an organization’s long-term investments such as
new machinery, replacement machinery, new plants, new products, and research development
projects are worth pursuing.
 Marketing Budget – An estimate of the funds needed for promotion, advertising, and public
relations in order to market the product or service.
 Project Budget – A prediction of the costs associated with a particular company project. These
costs include labor, materials and other related expenses. The project budget is often broken
down into specific tasks, with task budgets assigned to each. A cost estimate is used to establish
a project budget.
 Revenue Budget – consists of receipts of government and the expenditure met from these
revenues. Tax revenues are made up of taxes and other duties that the government levies.
 Expenditure Budget – includes spending data items.
 Master Budget – A master budget is a comprehensive projection of how management expects
to conduct all aspects of business over the budget period, usually a fiscal year. The master
budget summarizes projected activity by way of a cash budget, budgeted income statement and
budgeted balance-sheet. Most master budgets include interrelated budgets from the various
departments. Managers typically use these subset budgets to plan and set performance
objectives. Master budgets are generally used in larger businesses to keep many mangers on
the same page.
 Operational Budget – The operational budget covers revenues and expenses surrounding the
day-to-day core business of a company. Revenues represent sales of products and services,
expenses define the costs of goods sold as well as overhead and administrative costs directly
related to producing goods and services. While budgeted annually, operating budgets are
usually broken down into smaller reporting periods, such as weekly or monthly. Managers
compare ongoing results to budget throughout the year, planning and adjusting for variations in
revenue.
 Cash Flow Budget – A cash flow budget examines the inflows and outflows of cash in a business
on a day-to-day basis. It predicts a company’s ability to take in more money than it pays out.
Mangers monitor cash flow budgets to pinpoint shortfalls between expenses and sales times,
when financing may be needed to cover overheads. Cash flow budgets also suggest production
 cycles and inventory levels. So that a company’s resources are available for activity, not sitting
idle on warehouse shelves.
 Financial Budget – A financial budget outlines how a business receives and spends money on a
corporate scale, including revenues from core business plus income and costs from capital
expenditures. Managing assets such as property, buildings, investments and major equipment
may have a significant effect on the financial health of a company, particularly through the
peaks and troughs of daily business. Executive managers use financial budgets to leverage
financing and value the company for mergers and public offerings of stock.
 Static Budget – A static budget contains elements where expenditures remain unchanged with
variations to sales levels. Overhead costs represent one type of static budget, but these budgets
aren’t confined to traditional overhead expenses. Some departments may have a fixed amount
of money set in budget to spend, and it is up to managers to make sure such amounts are spent
without going over-budget. This condition occurs routinely in public and non-profits sectors,
where organizations or departments are funded largely by grants.

3.3 Objective of Budget:

1. Planning:-
A budget provides detailed plan of action for a business over definite period of time. Detailed
plan relating to production, sales, raw materials requirement, labor needs, advertising and sales
promotion performance, research and development activities, capital additions etc. are drawn
up by planning many problems are anticipated long before they arise and solutions can be
sought through careful study. Thus most business emergencies can be avoided by planning.

2. Co-ordination:-
Budgeting aids managers in coordinating their effects, so that objectives of the organization as a
whole harmonies with the objectives of its division effective planning and organization
contributes a lot in achieving co-ordination. There should be co-ordination in the budget of
various departments for example, Budget of production. Similarly, production budget should be
prepared in co-ordination with the purchases budget and so on.

3. Communication:-
A budget is a communication device. The approved budget copies are distributed to all
management personal which provides not only adequate understanding and knowledge of the
programmers and policies to be followed but also gives knowledge about the restrictions to be
adhered to it is not a budget itself that facilitates communication, but the vital information in
the act of preparing budgets.

4. Motivation:-
A budget is a useful device for motivating managers to perform in line with the company
objectives. If individuals have actively participated in the preparation of budgets, it act a strong
motivating force to achieve the targets.
 5. Control:-
Control is necessary to ensure that plans and objectives as laid down in the budgets are eing
achieved, control as applied to budgeting. Is a systemized effort to keep the management
informed of whether planned performance is being achieved are not for this purpose
comparison is made between plans and actual performance.

6. Performance Evaluation:-
A budget provides a usefully means of informing mangers. How well they are performing in
meeting targets they have previously helped to set. In many companies, there is a practice of
rewarding employees on the basis of this achieving the budget targets or promotion of mangers
may be linked to his budget achievement record.

3.4 Characteristics:-

a) Budget is primarily a planning device but it also serves as a basis for performance evaluation and
control.
b) A budget is prepared either in money terms or the policies formulated by management for
attaining the given objective.
c) A budget is prepared for a definite future period.
d) Purpose of a budget is to implement in quantitative terms or in both.

3.5 Classification of Budget:-

Budget is the end of the budgeting process. The numbers and types of budgets in a business enterprise
depend on the size and nature of the business. However, in a manufacturing concern, the following
budgets are generally prepared.

Classification of Budgets

According to Time According to Flexibility According to Function

1) Long Term 1) Fixed 1) Sales

2) Short Term 2) Flexible 2) Production

3) Current 3) Cash

4) Capital
A. According to Time:-

1) Long Term Budget –

It is budget which is estimated for use over unaltered long period of time say 5 to 10 years. It is
normally concerned with the planning of activities of an enterprise over a pretty long period of
time and usually prepared in term of quality that is physical units, capital expenditure budget,
research and development budget etc. are some of the example.

2) Short Term Budget –

It is a budget is established for use over a short period of say 1 to 2 years, as related to current
condition. It is prepared for short term activities which cannot be expected over long period,
cash budget, materials cost budget, labour cost budget are the examples. This kind of budget is
usually used by lower management for cost control purpose.

3) Current Budget –
A very short period, such as month or quarter is covered. A period current budget it’s of and
weeks. The budgets are related to the current activity of the business. Current budget is a
budget which is established for use our short period of time and is related to current condition.

B. According to Flexibility:-

1) Fixed Budget –
This is a budget which is designed to remain unchanged irrespective of the level of activity
actually attained. This is prepared for definite production and capacity level. It is not adjusted
according to activity level attained. The fixed budget are not effective tools of cost control.
These types of budgets have limited use.
In practical life, conditions do not remain static. The main reason is that actual output is often
different from the budgeted output. In such a case the budget cannot be used for the purpose
of cost control. There may be internal or external factors which force the level of activity to
change.

2) Flexible Budget –
This is a dynamic budget. It is a budget which is designed to change in accordance with the level
of activity. Actual output may differ from the budgeted output and as such. It is necessary to
modify the budget on the basis of changed output. The budget is prepared in such a way as to
present the budgeted cost for different levels of activity. It is more realistic and practical,
because changes expected at different levels of activity are given due consideration.
The expenses are divided into three categories- fixed, variable and semi-variable. It is an
important tool of cost control, as it facilities comparison of actual result with the budgeted
figures.
  Preparation of flexible budget:
A budget prepared in a manner so as to given the budgeted cost for any level of activity
is known as flexible budget. A flexible budget is the opposite of static budget. It is
prepared for a range of activity instead of single level. Fixed costs are related mostly to
the period of time and are not concerned with the level of activity. At zero level activity,
the variable costs will not be in existence. The semi-variable costs occupy an in between
position between the fixed and variable costs. A part of these costs is variable and rest is
fixed. They are fixed to a certain level of activity and then rise with increase in the level
of activity but not in the same proportion as the activity increases.

C. According to Function:-

1) Sales Budget –
The most important budget, which all other budgets are contingent upon, is the sales budget.
All budgets, such as production budget, setting and distribution budget and other are all
affected upon the sales budget and are dependent upon the revenue derived from sales. It is
prepared by the sales manager. In the preparation, the sales manager should consider the
following points:-

a) Analysis of same product

b) Salesman assessment
c) General trade conditions
d) Availability of raw materials
e) Availability of funds

It is a basic foundation upon which another foundational budgets are build up. A sales budget is
a statement expressed in physical quantities or values of anticipated sales. During a specific
period of time sales forecasting is the basic steps in the preparation of budget. It is done by sales
department under the charge of sales manager in consultation and co-operation with the
budget controller. The forecasting of sales is not an easy job. It required lots of skill and
knowledge in technique of sales forecasting collection of relevant rates and figures and an
understanding of business environment. The technique of sales forecasting for new product are
different from those used for established product.

2) Production Budget –
This budget is prepare after the sales budget because the sales to be maid are estimated in the
sales budget, so that how much quantity should be produced can be known. Thus, a production
budget is one which is an estimate for the quantities of goods to be purchased during the
budget period it is expressed either in unit or standard hours.
3) Cash Budget –
A complete system of budgetary control makes the construction of cash budget easy. It is one of
the fictional budgets which are prepared along with other budgets. There are three recognized
method of preparing a cash budget.

a) The Receipt and Payments Method.

b) The Adjusted Profit and Loss Method.
c) The Balance-Sheet Method.

a) The Receipt and Payment:-

The method is all actual possible item of cash receipt and payments for the budgeted
period are considered. Sources of information are the various other budgets. For
examples, sales from sales budget, materials, labour, overheads expenditure and capital
expenditure etc. from the concerned budgets.

b) The Adjusted Profit and Loss Method:-

It is particularly useful for the long-term forecasts, say for a period of over three year. It
is called thus, because it transforms the profit and loss account into cash forecast the
basic assumption in this method is that any increase or decrease in cash balance is due
to profit or loss of the business. All non-cash items such as depreciation, write-offs or
write-ups etc. are mainly adjusted to the net profit source of information are the firm’s
profit and loss account and balance-sheet. Such a situation however will never exist in
practice in any business.

c) The Balance-Sheet Method:-

The same theoretical assumption of the adjusted profit and loss method holds good this
method also. Under this method a budgeted balance-sheet is prepared showing all
items of assets and liabilities except cash balance. The balancing figures is considered to
present cash balance. If there is excess of liabilities over assets, the balance is ordinary
cash balance if there is excess of assets over liabilities, the balance is assumed to be
bank overdraft these three method, the first method is mostly preferred because it is a
short-term forecast and is much more detailed than the other two methods which are
normally used as long-term forecasts.

4. Capital Budget –
Capital Budget is known as “Capital Expenditure Budget”. This budget shows the estimate
expenditure on fixed assets during the budget period. As the amount involved capital expenses
is sometimes high. This requires carefully attention of top management. This budget is based on
the requisition of capital expenditure from various department and after understanding there
profitability. Capital expenses is sanctioned and incorporated in the budget.
3.6 Budgeting:-

1. Meaning –
A budget is essentially a statement of the intention of management. Budgeting refers to the
management action of formulating budgets. Preparation of budgets involves study of business
situation and understanding of management objectives as also the capacity of the enterprise. It
includes the entire processing of making the budget plans. Preparation of budget or budgeting
is planning function, and their application or implementation is a control function.

One of the primary objectives of cost accounting is to provide information to business

managements for planning and control. Budgeting acts as tool of both planning and control.
Budgeting is a formal process of financial planning using estimated financial and accounting
data.

2. Definition of Budgeting –

“The entire process of preparing the budgets is known as budgeting”. Process of expressing
quantified resources requirement amount of capital, amount of material, number of people
into time-phased goals and milestones”.

“Establishing a planned level of expenditure, usually at a fairly detailed level of a company may
plan and maintain a budget on either an accrual or a cash basis”.

3. Objective of Budgeting –
The main objectives of budgeting are:-

a) To obtain more economical use of capital.

b) To prevent waste and reduce expenses.
c) To facilitate various departments to operate efficiently and economically.
d) To plan and control the income and expenditure of the firm.
e) To create a good business practice by planning for future.
f) To fix responsibility on different department or heads.
g) To co-ordination the activities of various departments.
h) To ensure the availability of working capital and the matching of sales with production.
i) To smooth out seasonal variations, by developing new products.
4. Advantages of Budgeting –
Budgeting plays an important role in effective use of resources and achieving overall
organizational goals. It has the following advantages:-
a) Budgeting compels and motivates management to make an early and timely study of its
problems. It generates a sense of caution and care, and adequate study among
managers before decisions are made by them.
Budgeting provides a valuable means of controlling income and expenditure of a
business as it is a “plan for spending”. Budgeting helps in directing capital and other
resources into the most profitable channels.
b) Budgeting coordinates and correlates all business activities. It enables management to
decentralize responsibility without losing control of the business. It reveals weaknesses,
inefficiencies, deviations in the organization very promptly which can be checked
immediately to achieve a desired goal.
c) The use of budgeting in an organization develops an attitude of “cost consciousness”
stimulates the effective use of resources, and creates an environment of profit-
mindedness throughout the organization.
It provides a norm, basis or yardstick for measuring performance of departments and
individuals working in organization.
d) Budgeting courage productive competition, provides incentive perform efficiently and
gives a sense of purpose to each individual in the organization.

5. Disadvantages of Budgeting –
While budgeting has many advantages that are vital to an organization. It has certain
disadvantages which require careful consideration. Planning, budgeting or forecasting is not an
exact science, it uses approximations and judgment which may not be cent percent accurate.
At best, a budget is an estimate no one know precisely what will happen in the future. The
success and utility of budgeting depending depends on the cooperation and participation of all
members of management. Many a time budgeting has filed because executive management has
paid only lip service to its execution.
a) A budget is only a tool and does not eliminate nor take over the place of management.
Executives generally feel “circled in” by a budget and its related figures. They fail to
understand that budget is meant to provide detailed information, goals and targets
which may help them in achieving the company objective.
b) The establishment from a budgeting process has taken time. Also, sometimes too much
is expected from a budget and in case expectations are not fulfilled, the blame is put
the budget.
c) Excessive emphasis on budgeting may result in attempts by lower level management
estimate of future costs and revenues.
d) As the end of budget period approaches and employees realize that actual expenses
have not been as great as allowed by the budget, there may be a temptation to spend
 excessive amounts in order to “use up” the budget allowance. Such activities result in
suboptimal profits for the company.

3.7 Budgetary Control:-

1. Meaning –
Budgetary control means control of affairs through the means of budget or predetermined
plans of action. Budgeting 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 result either to secure by individual action the objective of that policy or
to provide basis for its revision. Budgets are the individual objectives of a departments etc.,
whereas budgeting may be said to the act of building budgets. Budgetary control embraces all
this and in addition includes the science of planning the budgets themselves and the utilization
of such budgets to effects overall managements for the business planning and control.
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 result to achieve maximum profitability.

2. Definitions –
According to J Butte, “It is system which used budgets as means of planning and controlling all
aspects of producing and or selling commodities and services”.

The establishment of department budgets relating the responsibilities of executives to the

requirements of a policy and the continuous comparison of actual with budgeted results, either
to secure by individual actions the objectives of that policy or to provide a firm basis for
revision.

Thus a budget is predetermined statement of management policy during a given period.

Which provides a standard for comparison with the results actually achieved. Budgetary control
system is a system of controlling costs, which includes the preparation of budgets, coordinating
The departments and establishing responsibilities, comparing actual performance with that of
budgeted and acting upon results to achieve maximum profitability. Budgeting is essentially
concerned with planning and can be broadly illustrated by comparison with the route a ship’s
captain follows on each voyage.

The following steps are involved in a budgetary control system:

a) Establish a plan or target of performance, which coordinates all the activities of the
business.
b) Record the actual performance.
c) Compare the actual performance with the planned.
d) Calculate the differences or variances and the reasons for them.
3. Objectives of Budgetary control –

The main objectives of budgetary control are follows:

a) To combine the ideas of all levels of management in the preparation of the budgets.
b) To coordinate all the activities of the business.
c) To centralize control.
d) To decentralize responsibility to each manger involved.
e) To act as a guide for management decision-making when unforeseeable conditions
affect the business.
f) To plan and control income and expenditure so that maximum profitability is achieved.
g) To direct the capital expenditures into the most profitability areas or direction.
h) To ensure that sufficient working capital is available for the efficient operation of the
business.
i) To provide a yardstick against which actual results can be compared.
j) To show management where action is needed to remedy a situation.

4. Advantages of Budgetary Control –

The following are some of the most significant advantages of budgeting

a) Budgeting compels the management to plan for the future.
b) It forces management to look ahead and become more effective and efficient in
administering business operations.
c) It sets out plan of action and targets to be achieved, well in advance.
d) It helps in setting standards for the purpose of standard of costing.
e) Budgeting improves the quality of communication.
f) It plans the proper allocation of productive facilities and recourses, viz men, material,
machines and money for their best utilization.

5. Disadvantages of Budgetary Control –

Budgetary control is an effective tool for management control. However, it has certain
important Limitations which are identified below:
a) The budget plan is based on estimates and forecasting. Forecasting cannot be
considered to be an exact science. If the budget plans are made on the basis of
inaccurate forecasts then the budget programmed may not be accurate and ineffective.
b) For reasons of uncertainty about future, and changing circumstances which may
develop later on, budget may prove short or excess of actual requirements.
c) Effective implementation of budgetary control depends upon willingness, co-operation
and understanding among people reasonable for execution. Lack of co-operation leads
to in efficient performance.
d) The system does not substitute for management. It is mere like a management tool.
6. Organization of Budgetary Control –
The following are the essentials for a sound system of budgetary control. It is essential that
there should be an efficient organization if budgetary control is to be operated effectively.
Budgetary control is not only an accounting exercise, but also a tool of management at all
levels. In organizing a system, it is essential to obtain the full cooperation of each member of
the management team. A number of preliminaries will be necessary if the staffs are to have
confidence in this system.

a) Chart:-
There must be an organizational chart to show the authority and responsibility of each
executive of the firm. This will enable him to know his relationship with other
executives. The budget director derives power form the chief-executive, helps in co-
ordination and drawing up of all budgets and suggests changes, if necessary. The sales
manager, production manager, purchasing manager, personal manager and accountant
will prepare their budgets.

b) Budget Center:-
For the purpose of effective budgetary control, budget centers are defined. A budget
center may be a department or a section of the undertaking. Separate budgets are
prepared for each departments and departmental head is responsible for carrying out
budgets. Departmental heads should have effective control over the execution of the
budget, to prevent unfavorable variation.

c) Budget:-
In small firms, the chief accountant prepares the budgets and co-ordinates various
activities. In big concerns, a committee is appointed for this task. The committee
consists of various section heads, the chief executive and the budget controller. The
budgets are prepared by section heads and submitted to the committee for approval
changes are made, if necessary.

d) Budget Manual:-
It is a document which sets out the responsibilities of persons engaged in the routine
work. Budget manual lays down the objectives of the organization, responsibilities of all
executives and the procedure to be followed for budgetary control. Duties, authorities,
power of each official of the different departments are clearly defined, so as to avoid
conflicts among the personnel.

e) Budget Period:-
This is the period of time for which the budget is prepared and remains in operation.
The length of period depends on the nature of robustness, the production period, the
control aspects etc. There is no budget rule as regards the duration of a budget period.
For example manufactures of consumer goods may prepare budgets for a year,
whereas in industries like ship-building the period of the budget may be 5 to 10 years.
 f) Key–Factor:-
Key-factor is also known as ‘limiting factor’ or ‘governing factor’ which means this is the
factor, the extent of whose influence must first be assessed, in order to ensure that the
functional budget are reasonably capable of fulfillment. The key-factor may be, storage
of raw material and non-availability of labor, limited sales government restrictions etc.
The key-factor is a limitation on production or sales. First located the key-factor, before
preparing the budget, as it influences all other budgets.

For example strong a power supply leads to underutilization of plant capacity.

Therefore, the concern will have to first prepare a budget for plant utilization and later
the over budgets say sales will prepared.

g) Preparation of Budget:-
The top management should define the objective and policies in clear terms. The goals
set should be realistic and attainable. Then the budget estimates are prepared by the
executives in charge of different functions. The budget programmer should be
comprehensive, covering all activities of the undertaking. There are disused in budget
committee and with modifications, necessarily, budgets are drawn up. All budgets are
incorporated into a ‘Master Budget’ which will be approved by the top management
and put into action.

3.8 Zero-Base Budgeting (ZBB):-

Traditional budgeting starts with previous year expenditure level as a base and discussion is focused on
certain ‘addition’ and ‘cuts’ to be made in the previous year spending. The top management finally gives
its approval after hearing the arguments for and against the ‘additions’ and ‘cuts’. In ZBB reference is
not made to previous level of spending. A convincing case is made decision unit to justify the budget
allotment for that unit during that period.

1. Meaning of ZBB –
Zero-base budgeting is a new approach to budgeting. It is defined by Peter A. Python as an
“operating planning and budgeting process, which requires each manager to justify his entire
budget in details from scratch (hence zero-base) and shifts the burden of proof to each
manager to justify why he should spend any money at all”.

This approach requires that all activates should be identified in decision packages which should
be evaluated by systematic analysis and ranked in order of importance. Stephen Soskice define,
“zero base budgeting is a technique, which complements and likes the exiting planning,
budgeting and review processes. It identifies alternative efficient methods of utilizing limited
resources in effective attainment of selected benefits. It is a flexible management approach,
 which provides credible rationale for reallocating resources by focusing on the systematic
review and justification of the funding and performance levels of current programmers or
activities”.

Zero-base budgeting thus examines a programmers or activity from scratch (i.e. zero-base). The
manager proposing the activity should prove that the activity is essential and his budgeting
request for funds is reasonable. Nothing can be taken for granted, for it was being done or in
the past. Hence, ZBB is a technique whereby each programmers, whether new or existing must
be justified in its entirety each time a budget is formulated.

2. Features of zero-base Budgeting –

The essential features of ZBB are as follows:

a) The budget allotment to any Dion unit should be first justified by the manager of that
decision unit. He should justify his request without making any reference to previous
level of spending in his decision unit.
b) Activities are identified as decision packages and hen latte are ranked in order of
priority.
c) Decision packages are evaluated by systematic analysis linking them with clearly laid
down corporate objectives.
d) Available resources are directed towards alternatives in order of priority to ensure
optimum result.

3. Process of zero-base Budgeting –

The following steps are implied in zero-base budgeting. The managers at all levels have to
determine the objective of each programmed of activity that they supervise and prepare
alternative spending plans as ‘decision packages’. There should be at the minimum expenditure,
which will permit the programmed to continue meaningfully, another package indicating
resources in men, materials and money, which will be needed to continue the present levels of
performance and objectives, and a third package to indicate what more could be achieved if
additional funds were available to the extent of (say) 10% or more.

The executives at the next higher levels have then to consolidate these decision packages and
rank them in order of priorities, keeping in view the cost benefit analysis and available funds.

Zero-base budgeting differs from traditional budgeting on much point and following are a few
point differences between the two systems of budgeting.
4. Advantages of zero-base Budgeting –

a) Zero-base budgeting provides the organization with a systematic way to evaluate

operations and programmed of activity, and allows management to allocate resources
according to the priority of programmed.
b) It ensures through examination of every function. Managers are required to evaluate
the need for every programmed, and to consider different levels of efforts and
alternative ways of performing the operations.
c) It enables departmental budgets to be approved on the basis of cost benefit
comparison rather than be open to any arbitrary cuts or increases in budget estimates.
d) If decision packages are ranked in order of priority, subsequent budget year cycles do
not have to base on a complete recycling of budget input.
e) If available resources vary from the budgeted estimates during the budget year decision
packages can be reduced or expanded on the basis of priority ranking of packages.
f) Long-rang goals and plans can be linked with the annual budgets through the zero-base
budget. Not only does it facilitate quantification of costs and benefits of contemplated
decision, it also enables managers to communicate problems and opportunities to the
budget management.

5. Limitations of zero-base Budgeting –

The limitations of zero-base budgeting, which arise due to certain operational problems, are as
follows:
a) Implementation Problems:-
Successful implementation of zero0base budgeting may require wholehearted support
from the top management, which may not readily be available owing to fear and
problems in the minds of top management.

b) Formulation Problems:-
Considerable problems may arise while formulating decision packages. For example,
problems may arise in the fixation of minimum level of effort. Managers not like fix the
minimum level below the current levels. Similarly, problems may arise formulating
meaningful performance evaluation measures.

c) Ranking Problems:-
Problems may arise in ranking of decision packages. General Managers may like to
continue their favorable projects for the reasons best knows to them. Ranking may also
become difficult when there are a large number of decision packages, particularly in a
multi-product manufacturing firm.