Unit 1

Introduction to Management Accounting

WHAT IS MANAGEMENT ACCOUNTING?

Managerial accounting, also called management accounting, is a method of
accounting that creates statements, reports, and documents that help
management in making better decisions related to their business'
performance. Managerial accounting is primarily used for internal purposes.

DEFINITION OF MANAGEMENT ACCOUNTING

According to R.N. Anthony - “Management accounting is concerned with
accounting information that is useful to the management.”
The Institute of Cost and Management Accountants, London, has
defined Management Accounting as: “The application of professional
knowledge and skill in the preparation of accounting information in such a
way as to assist management in the formulation of policies and in the
planning and control of the operation of the undertakings.“
______________________________________________________________________________
____________________________
NATURE (CHARACTERISTICS) OF MANAGEMENT ACCOUNTING
1. It Focuses More on the Future
It is concerned with the nature of management accounting regarding the
future. The management can foresee and plan their future course of action
with its assistance.
2. Methods of Selective Nature
It is a method with a selective focus. It considers only data from the profit
and loss account and balance sheet, which is relevant and valuable to the
management.
3. It demonstrates the causality of events (cause and effect
analysis)
On the profitability of the company, the impact of numerous decisions,
including pricing, advertising a new product, sales mix, cost control, etc., is
studied. As it shows that the nature of management accounting establishes
the cause and effect relationship.
4. It Provides information and not Decisions
The management accountant never takes any decisions but only provides
data based on which the management takes decisions. The nature of
management accounting shows that it only provides information to the
administration.
5. Use of Special Methods and Concepts

1
Some techniques included ration analysis, budgetary control, cash flow
statement, etc. The methods used will depend upon the nature of the
problem and the prevailing circumstances.
6. No set formats
It does not provide information in a prescribed proforma like that of financial
accounting. It includes information that may be more suitable for the
management in making various decisions. There are no set formats for
providing information on the nature of management accounting.
7. No Specific Rules Followed
No specific rules are followed, like management accounting. Though
management accounting tools are the same, their use differs from one form
to another.
8. Purely Optional
It is purely a voluntary technique, and there is no statutory obligation. Its
adoption by a firm depends upon its utility and desirability.
9. Providing Accounting Information
Management Accounting is a service function. it collects data from financial
accounting and cost accounting, analysis it and hence provide it to different
levels of management.
______________________________________________________________________________
____________________________
SCOPE OF MANAGEMENT ACCOUNTING

Management accounting covers a wide range of areas, such as financial

accounting, cost accounting, budgeting, and taxes. The primary goal is to
assist management in performing its planning, directing, and managing
tasks.

1. Cost Accounting
Cost accounting is a crucial accounting technique because it provides cost
analysis tools for a business, such as marginal cost, operational cost,
inventory costing, budget control, etc. These are required by business
management to draft and outline the business needs.
Cost accounting assists in determining the total budget for any firm and
gives several methods for estimating and calculating the entire cost of
providing a service to the consumer.
2. Financial Accounting
Financial accounting and cost-accounting are not the same things. As
mentioned earlier, cost accounting involves calculating and analyzing the
overall cost of a business process. Conversely, financial accounting
calculates and analyses business transactions, including expenses,
inventories, assets, and reporting.

As financial accounting deals with the historical data, management can

better forecast, and operate successfully based on this data.

2
3. Budgeting and Forecasting
Forecasting and budgetary controls controls the activities of the business
through the operations of budget by comparing the actuals with the
budgeted figures, and hence finding out the deviations, and analysing the
deviations in order to take suitable remedial action.
4. Financial Administration
The purpose of considering financial management as managerial accounting
in terms of scale is to optimize a company's profits through the efficient use
of cash.
5. Management Reporting/Reporting
Reporting is essential for each business manager. Obtaining reports on time
is critical for managing corporate growth and resources. The timely report
assists management in making successful decisions and keeps management
informed of ongoing operations. Data and reports are presented to
management in simple graphs, charts, and presentations.
6. Data Interpretation
Data interpretation is described as converting business data into facts and
statistics that business management can easily understand. Interpreting
your work is just as crucial to your business as financial reporting because it
helps you avoid drawing erroneous conclusions from your business data.
7. Inventory Control
Inventory control refers to exercising control over the utilization of raw
materials, processing of work in progress and disposal of finished goods for a
specific period.
8. Taxation
It includes the computation of corporate income tax in accordance with the
tax laws, filing of returns and making tax payments.
9. Internal Audit
Internal audit is conducted by the business organization with the help of a
paid employee who has thorough accounting knowledge. All the relevant
records are maintained under the management accounting system so that
the internal audit is conducted in an effective manner.
______________________________________________________________________________
_____________________________
OBJECTIVES (or ROLE) OF MANAGEMENT ACCOUNTING

The fundamental objective of management accounting provides information

to the managers for use in planning, controlling operations, and decision
making.

Main purpose and objectives of management accounting may be

summarized as under:

3
1. Assistance in planning and formulation of future Policies:

Planning is deciding in advance what is to be done. It helps the management

for effective planning. It provides costing and statistical data to be utilized in
setting goals and formulating future policies.

2. helps in Decision Making

All management work is accomplished by decision making.

Decision making is defined as the selection of a course of action from among

alternatives. It helps the management in decision-making. It uses accounting
data to solve various management problems.

3. helps in Motivating the employees

By setting goals, planning the best and economic courses of action, and also
by measuring the performances of the employees, it tries to increase their
efficiency and, ultimately, motivate the organization as a whole.

4. helps in Controlling performance

Management accounting helps management in controlling the performance

of the organization. Actual performance is compared with operating plans,
standards, and budgets, and deviations are reported to the management so
that corrective measures may be taken.

5. helps in coordinating operations

Management accounting helps the management in co-ordinating the
activities of the concern by getting prepared functional budgets in the first
instance and then co-ordinating the whole activities of the concern by
integrating all functional budgets into one master budget.

6. Helps in timely Reporting of financial information

One of the primary objectives of management accounting is to keep the

management fully informed about the latest positions of the concern. The
facilitates management to take proper and timely decisions.

7. Assisting with the Understanding of Financial Data

Management accounting focuses on analysing and interpreting data,
which has opened up new avenues. It is concerned with keeping records of
past accomplishments, maintaining values, establishing duties, and
providing a foundation for helping future development.

4
 8. Helpful in Resolving Strategic Problems
Decision-making is largely a management activity. Accounting assists
managers in making effective business decisions. These decisions may
pertain to business expansion, contraction, diversification, or
establishing a new line of business. All of these issues are addressed by
management accounting.

Management accounting uses accessible accounting statistics to solve a

variety of management difficulties. Its purpose is to offer vital facts, not to
make decisions. It simply informed management and delegated decision-
making authority to them.
__________________________________________________________

FUNCTIONS OF MANAGEMENT ACCOUNTING

[1] Planning
Proper planning can help to achieve the underlying objectives of an
organisation. Management accounting is entwined in planning and
forecasting so closely by providing reports and information for decision
making.
These reports and information provided by management accounting help
business leaders estimate the effects of alternative actions to achieve the
desired goals.
[2] Decision Making
Selecting among competitive alternatives in a business is Decision
making.To make the best decision for an organisation, statistical data and
accounting information needs to be well furnished.
Management accounting applies analytical information regarding various
alternatives to make it easy for management to make decisions. For
example, variance analysis, comparing costs vs budget, computing burn
rate, cashflow forecasts and projections, scenario building, what if analysis
and list goes on.
[3] Organising
In order to achieve business goals, it is important to have a proper
organisational framework. With the help of reports and information provided
by management accounting, an organisation can regulate or adjust its
operations and activities in the light of changing condition.
[4] Controlling
The control and performance reports provided by management accounting
can highlight actual and expected performances of a business. These reports
can be key components in making necessary corrective action to control
operations.
If there comes out differences between budgeted and actual results, a
manager will investigate to know what is going wrong and possibly.
[5] Financial Statement Analysis
Financial statement analysis is the process of evaluating financial data such

5
as balance sheet, cash flow statement, income statement etc. This helps in
understanding the financial position and operating performance of an
organisation.
It also helps in forecasting the future condition and performance of the
organisation.
[6] Communication
Management accounting is a crucial medium of communication. Different
levels of management need different types of information.
The top management requires information at long intervals, middle
management requires it regularly, while lower management requires
knowledge at short intervals but a detailed one. Management accounting act
as a communicating body within the organisation and with the outside world
provides the needy information on time.
[7] Coordinating
Management accounting provides various coordination tools such as
budgeting, financial analysis, interpretation, financial reporting etc. to
maximise profit and increase efficiency.
It helps the management by reconciling the cost and financial accounts,
preparing budgets and setting the standard costs and analysing variances in
costs to facilitate management by exception.

____________________________________________________________________________

IMPORTANCE (ADVANTAGES) OF MANAGERIAL ACCOUNTING

The main objective of managerial accounting is to assist the management of
a company in efficiently performing its functions: planning, organizing,
directing, and controlling. Management accounting helps with these
functions in the following ways:

1. Provides data: It serves as a vital source of data for planning. The

historical data captured by managerial accounting shows the growth of the
business, which is useful in forecasting.

2. Analyzes data: The accounting data is presented in a meaningful way by

calculating ratios and projecting trends. This information is then analysed for
planning and decision-making. For example, you can categorise purchase of
different items period-wise, supplier-wise and territory wise.

3. Aids meaningful discussions: Management accounting can be used as

a means of communicating a course of action throughout the organization. In
the initial stages, it depicts the organisational feasibility and consistency of
various segments of a plan. Later, it tells about the progress of the plans and
the roles of different parties to implement it.

6
4. Helps in achieving goals: It helps convert organizational strategies and
objectives into feasible business goals. These goals can be achieved by
imposing budget control and standard costing, which are integral parts of
management accounting.

5. Uses qualitative information: Management accounting does not restrict

itself to quantitative information for decision-making. It takes into account
qualitative information which cannot be measured in terms of money.
Industry cycles, strength of research and development are some of the
examples qualitative information that a business can collect using special
surveys.

6. Identify early signs of problems: If a product is not performing well the

management can identify it early on as the accounts are presented at
regular intervals. This will aid in overcoming the constraints early on and
avoiding future losses.

7. It helps in planning and preparing Budgets: various functional

budgets are prepared and accounting information are rearranged in
department wise, product wise, section wise and the like for proper planning.

8. Improvement of Efficiency: The management accounting system may

eliminate various types of wastage, production, defectives and other work
thereby the workers efficiency may be improved.

9. Reliability: The tools used in management accounting system are

reliable. This procedure usually makes the data supplied to
management accurate and reliable.
______________________________________________________________________________
_

WHAT IS A MANAGEMENT ACCOUNTANT?

Management accountants provide a wide range of essential financial analysis

services to organisations. They prepare, develop and analyse financial
information so that leadership teams have reliable figures on which to base
their critical strategic decisions.
_______________________________________________________
FUNCTIONS (or ROLE) OF MANAGEMENT ACCOUNTANTS

The functions of management accountants are dictated by their job

positions, agreement with the organization, knowledge, and capabilities. On
this basis, the tasks of a management accountant are briefly explained
below:

7
1) Planning and Accounting

Management accountants prepare an accounting system covering costs,

sales forecasts, profit planning, production planning, and allocation of
resources. It should also include capital budgeting, short-term and long-term
financial planning. They also prepare the procedures necessary to implement
the plan effectively.

2) Controlling

Management accountants assist in the control of an organization's

performance through the use of standard costing, accounting ratios, budget
control, revenue and funds flow statements, cost-cutting initiatives, and
assessing capital expenditure proposals and returns on investment.

3) Reporting

Management accountants assist the top management in finding out the root
cause of an unfavorable operation or event by identifying the real reasons
for the adverse events and as well as the responsible parties and
comprehensively reporting them.

4) Coordinating

Management accountants improve an organization's efficiency and profits by

providing various coordination tools such as budgeting, financial reporting,
financial analysis and interpretation, and so on. These tools aid management
by comparing cost and financial records, preparing financial budgets and
establishing standard costs, and analyzing cost deviations to enable
management by exception.

5) Communication

Management accountants create a wide range of reports to communicate

results to superiors, inspire staff, retain effective control over their
operations, and help management to make smart decisions. Through
published financial statements and returns, they also inform the outside
world about their company's success.

8
6) Financial evaluation and Interpretation

Management accountants analyze the data and present it to the

management in a non-technical approach, together with their comments and
ideas, so that the shareholders and senior management employees can
understand it and make informed decisions.

7) Tax Administration

Management accountants are in charge of tax policies and processes. They

make the reports that are required by various authorities available. Further,
they establish enough tax provisions, ensuring that quarterly tax payments
are made in advance, as required by the Income Tax Act, to prevent the
payment of penal interest on late tax payments.

8) Evaluation of External Effects

There may be changes in government policy and even existing laws. These
amendments and policy changes can affect business goals; Management
accountants assess the extent of any impact of these external factors on the
business and report it to the stakeholder to take necessary precautionary
measures

9) Economic appraisal

When the government makes regular announcements about the country's

economic situation, management accountants do an economic study and
determine the influence of current economic conditions on the company's
operations. They compile a report containing their observations and present
it to high management.

10) Asset Protection

Management accountants separate fixed asset registers for each type and
provide internal checks and controls to protect the company’s assets. They
also create the rules and regulations for each type of fixed asset and get
insurance coverage for all types of fixed assets.

-
______________________________________________________________________________

9
RELATIONSHIP BETWEEN MANAGEMENT ACCOUNTING AND
FINANCIAL ACCOUNTING

Financial accounting is concerned with the recording of day-to-day

transactions of the business. while management accounting is concerned
with using financial accounts for forecasting and decision making.

How Is Management Accounting Different From Financial

Accounting?

Financial accounting and management accounting have some inherent

differences. They are

Basis for Management Financial accounting

Comparison accounting

Purpose It is used for internal It is used for external

purpose reporting primarily,
although the management
also reviews it

Regulation It is not regulated by any It has to be presented as

law per standards

10
Users Its users are the Its users are shareholders,
management of an investors and regulators
organization

Objective It aids in internal decision preparing periodical

making reports

Mandatory Preparation and Preparation and

presentation of financial presentation is
statements is not mandatory.
mandatory

Audit It is not subject to audit Financial statements must

be audited

Frequency There is no defined Financial statements must

frequency for preparation be prepared for the
and presentation of the financial year and
statements presented

11
Contents Management accounts Financial accounts include
include both monetary only monetary information
and non-monetary
information

Orientation future historical

Format of the
Financial
Statements not specified specified

Segment
reporting
Pertains to individual
departments in Pertains to the entire
addition to the entire organization. Certain
organization. figures may be broken out
for materially significant
business units.

Difference Between Cost Accounting and Management Accounting

BASIS OF MANAGEMENT
COST ACCOUNTING
COMPARISON ACCOUNTING

12
Meaning The recording, The accounting in which the
classifying and both financial and non-
summarising of cost financial information are
data of an organisation provided to managers is
is known as cost known as Management
accounting. Accounting.

Information Type Quantitative. Quantitative and Qualitative.

Objective Ascertainment of cost of Providing information to

production. managers to set goals and
forecast strategies.

Scope Concerned with Impart and effect aspect of

ascertainment, costs.
allocation, distribution
and accounting aspects
of cost.

Specific Yes No
Procedure

Recording Records past and It gives more stress on the

present data analysis of future projections.

Planning Short range planning Short range and long range

planning

Interdependency Can be installed without Cannot be installed without

management cost accounting.

13
 accounting.

______________________________________________________________________________
__________________________

TECHNIQUES IN MANAGERIAL ACCOUNTING

In order to achieve business goals, managerial accounting uses a number of
different techniques.

 Marginal analysis: This assesses profits against various types of

costs. It primarily deals with the benefits of increased production. It
involves calculating the break-even point, which requires knowing the
contribution margin on the company’s sales mix. Here, sales mix is the
proportion of a product that a business has sold when compared to the
total sales of that business. This is used to determine the unit volume
for which the business’ gross sales are equal to total expenditures. This
value is used by managerial accountants to determine the price points
for various products.

 Constraint analysis: Managerial accounting monitors the constraints

on profits and cash flow with respect to a product. It analyzes the
principal bottlenecks and the problems they cause, and calculates their
impact on revenue, profit, and cash flow.

 Capital budgeting: This is an analysis of information in order to make

decisions related to capital expenditures. In this analysis, the
managerial accountants calculate the net present value and internal
rate of return to help managers with capital budgeting decisions like
calculating payback period or calculating accounting rate of return.

 Inventory valuation and product costing: This deals with

determining the actual cost of goods and services. The process
generally involves computing the overhead charges and assessment of
direct costs associated with cost of goods sold.

 Trend analysis and forecasting: This primarily deals with variations

in product costs. The resulting data is helpful in identifying unusual
patterns and finding efficient ways to identify and resolve the
underlying issues.

14
 Analysis of Financial Statements:
The analysis is an attempt to determine the significance and meaning
of the financial statement data so that a forecast may be made of the
prospects for future earnings, ability to pay interest and debt
maturities and profitability of a sound dividend policy.:
The techniques of such analysis are comparative financial statements,
trend analysis, cash funds flow statements and ratio analysis. This
analysis results in the presentation of information which will help the
business executives, investors and creditors.

 Standard Costing:
Standard costing is the establishment of standard costs under most
efficient operating conditions, comparison of actual with the standard,
calculation and analysis of variance, in order to know the reasons and
to pinpoint the responsibility and to take remedial action so that
adverse things may not happen again. This aspect is necessary to have
cost control.

 Budgetary Control:
The management accountant uses the tool of budgetary control for
planning and control of the various activities of the business.
Budgetary control is an important technique of directing business
operations in a desired direction, i.e., achieves a satisfactory return on
investment.

 Funds Flow Statement:

The management accountant uses the technique of funds flow
statement in order to analyse the changes in the financial position of a
business enterprise between two dates. It tells wherefrom the funds
are coming in the business and how these are being used in the
business. It helps a lot in financial analysis and control, future guidance
and comparative studies.

 Cash Flow Statement:

A funds flow statement based on increase or decrease in working
capital is very useful in long-range financial planning. It is quite
possible that there may be sufficient working capital as revealed by
the funds flow statement and still the company may be unable to meet
its current liabilities as and when they fall due. It may be due to an
accumulation of inventories and an increase in trade debtors.

15
 In such a situation, a cash flow statement is more useful because it
gives detailed information of cash inflows and outflows. Cash flow
statement is an important tool of cash control because it summarises
sources of cash inflows and uses of cash outflows of a firm during a
particular period of time, say a month or a year. It is very useful tool
for liquidity analysis of the enterprise.

______________________________________________________________________________

LIMITATIONS OF MANAGERIAL ACCOUNTING

1. Dependency on Financial and Cost Records
Both financial and cost accounting information are used in the management
accounting system. The accuracy and validity of management account is
largely based on the accuracy if financial and cost records maintained. These
records determine the Strength and weakness of management accounting.
2. Personal Bias
The analysis and interpretation of financial statements are fully depending
upon the capability of the analyst and interpreter. Hence, personal
prejudices and bias of an individual can affect the objectivity and
effectiveness of the conclusions and recommendations.
3. Lack of Knowledge and Understanding of the Related Subjects
Financial accounting, cost accounting, statistics, economics, psychology and
sociology are the related subjects of management accounting. The
organization can derive more benefits of management accounting if the
management accountant has thorough knowledge over related subjects. If
not so, the success of management accounting system is questionable.
4. Provides only Data
Under management accounting system, many alternatives are developed to
solve a problem and submitted before the management. Out of the many
alternatives available, the management can select any one of alternatives or
even discard all of them. Hence, management accounting can only provide
data and not prescribe any course of action.
5. Management Accounting is only a Tool
Management accounting is only a tool; it cannot replace management. Its
usefulness depends on the extent to which the available data are used by
management to make decisions.
6. Continuity and Participation
The decisions are taken by the management. Their implementation is vested
in the hands of management accountant. The continuous efforts of
management accountant and full participation of all levels of management
are necessary for successful operation of management accounting system.
7. Costly Installation

16
The cost of installation of management accounting system is very high.
Hence, a small business organization can not bear the cost of such
installation. Moreover, the utility of this system is restricted only to big and
complex organizations.
8. Evolutionary State
Management accounting is a recent development discipline. The utility of
management accounting is depend upon the intelligent interpretation of the
data available for managerial use. Hence, it is presumed that the
management accounting stands in evolutionary stage.
10. Limited Scope (serves only internal purpose)
Management accounting is limited to the internal needs of the organization
and does not consider external factors. External factors could include the
market situation, economic factors, and labor-related issues.
11. Lack of Standardization
Management accounting does not have the same standards as financial
accounting, which makes it difficult to compare performance from one
organization to another. This makes it difficult to measure a business’s
impact on the market as a whole.

12. Bias or internal resistance:

Traditional methods of accounting have been used for a long time. This
can lead to changes or new approaches meeting with resistance from
the majority.

Accounting staff will likely be hesitant to new working approaches.

Unit – 4
MARGINAL COSTING

Definition of Marginal Cost:

According to the Terminology of Cost Accountancy of the institute of cost and management
Accountants, London, Marginal Cost represents – “the amount at any given volume of
output by which aggregate costs are changed if the volume of output is increased by one
unit.”

In practice it is measured by the total variable costs attributable to one unit.

17
According to Blocker and Weltmore – “Marginal cost is the increase or decrease in the
total cost which results from producing or selling additional or fewer units of a product or
from a change in the method of production or distribution such as the use of improved
machinery, addition or exclusion of a product or territory, or selection of an additional
sales channel.”

Example -1

it may cost $10 to make 10 cups of Coffee. To make another would cost $0.80. Therefore,
that is the marginal cost – the additional cost to produce one extra unit of output.

Example-2, let us suppose:

18
Hence, The term marginal cost implies the additional cost involved in producing an extra
unit of output.

Where, Marginal Cost = Direct Material + Direct Labor + Direct Expenses + Variable
Overheads

Therefore, Marginal cost is the “Aggregate of variable costs” (or) “prime cost + variable
OH’s.”

19
Meaning of Marginal Costing:

Marginal Costing is a costing technique wherein the marginal cost, i.e. variable cost is
charged to units of cost, while the fixed cost for the period is completely written off against
the contribution.

Marginal cost is the change in the total cost when the quantity produced is incremented by
one. That is, it is the cost of producing one more unit of a good.

20
21
 Need for Marginal Costing
 Variable cost per unit remains constant; any increase or decrease in production changes
the total cost of output.
 Total fixed cost remains unchanged up to a certain level of production and does not vary
with increase or decrease in production. It means the fixed cost remains constant in terms
of total cost.

CHARACTERISTICS (Features) OF MARGINAL COSTING:

1.Marginal costing is used to know the impact of variable cost on the volume of production
or output.
2. Break-even analysis is an integral and important part of marginal costing.
3. Contribution of each product or department is a foundation to know the profitability of
the product or department.
4. Fixed cost is recovered from contribution and variable cost is charged to production.

5. Classification into Fixed and Variable Cost: Costs are bifurcated, on the basis of
variability into fixed cost and variable costs.
6. Fixed and variable costs are kept separate at every stage. Semi – Variable costs are also
separated into fixed and variable.
7. Valuation of Stock: While valuing the finished goods and work in progress, only variable
cost are taken into account.
8. Determination of Price: The Prices are determined on the basis of marginal cost and
marginal contribution.
9. Marginal income or marginal contribution is known as the income or profit.
10. Fixed costs remains constant irrespective of the level of activity.
11. Sales price and variable cost per unit remains the same.

________________________________________________________________________________________________________
__

Revenue / income (money earned by selling goods / services —-- it includes even the cost)

Profit = total revenue - total cost

Contribution = sales - variable cost

20,000 Rs sales
V.C = 10,000 Rs

Contribution = 20,000 - 10,000 = 10,000 Rs

if fixed cost is 2000 Rs

22
then profit = contribution - Fc
10,000 - 2000 = 8,000 Rs

Contribution = Profit +fixed cost

therefore, profit = Contribution - FC

MEANING OF CVP ANALYSIS:

Cost-Volume-Profit analysis is a technique for studying the relationship between cost,

volume and profit.

Profit of an undertaking depends upon a large number of factors. But the most important of
these factors are the cost of manufacture, volume of sales and the selling process of the
products.

Hence, the 3 factors of CVP analysis: cost, volume and profit are interconnected and
dependent on one another.

The cost-volume-profit analysis, also commonly known as breakeven analysis, looks to

determine the breakeven point for different sales volumes and cost structures, which can
be useful for managers making short-term business decisions.

KEY TAKEAWAYS

 Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and
fixed costs affect a firm's profit.
 Companies can use CVP to see how many units they need to sell to break even
(cover all costs) or reach a certain minimum profit margin.
 CVP analysis makes several assumptions, including that the sales price, fixed, and
variable costs per unit are constant.
_________________________________________________________________________________________________________
_____
TECHNIQUES (OR) ELEMENTS OF CVP ANALYSIS:
1. Contibution Margin concept
2. Marginal Cost Equation
3. P/V Ratio
4. Break even Analysis
5. Margin of Safety
6. Profit – Volume Graph
_________________________________________________________________________________________________________

23
___

1. CONTRIBUTION MARGIN: (or) GROSS MARGIN:

The contribution margin represents the incremental money generated for each
product/unit sold after deducting the variable portion of the firm's costs.

i.e., Contribution = Sales - Variable Cost

The contribution is computed as the selling price per unit - variable cost per unit. Also
known as contribution margin (or) Gross Margin”, the measure indicates how a particular
product contributes to the overall profit of the company.
Ex: if S.P of a product = 20 Rs per unit
V.C of a product = 15 Rs per unit
Hence, Contribution (S.P – V.C) = 20 – 15 =Rs. 5 is the Contribution.

What is a good contribution margin?

The closer a contribution margin percent, or ratio, is to 100%, the better. The higher the
ratio, the more money is available to cover the business's overhead expenses, or fixed
costs.
PROFIT VOLUME RATIO (P/V RATIO)
Meaning:
P/V Ratio is also known as “Contribution ratio” or “Marginal ratio”.
Profit-volume ratio indicates the relationship between contribution and sales and is usually
expressed in percentage. The ratio measures the rate of change of profit due to change in
the volume of sales.
It is influenced by sales and variable or marginal cost.
The formula to calculate P/V ratio is:

P/V Ratio = Fixed Cost+ProfitSales

Sales = Fixed Cost+ProfitPV ratio

[OR]

Interpretation of P/V ratio:

A high P/V ratio indicates high profitability so that a slight increase in volume, without
increase in fixed cost, would result in high profits. A low P/V ratio, on the other hand, is a
sign of low profitability so that efforts should be made to improve P/V ratio. Thus every
management aims at increasing the P/V ratio.
How to increase the P/V ratio:

24
a. If the sale price increases without a corresponding increase in marginal cost, the
contribution increases—and the profit-volume ratio improves.
b. Similarly, if the marginal cost is reduced with sale price remaining same— profit-
volume ratio improves.
c. Changing the sales mixture and selling more profitable products for which the P/V
ratio is higher.

Uses of P/V Ratio:

(i) It helps in the determination of Break-even-point [BEP = Fixed cost ÷ P/V ratio]
(ii) It helps in the determination of profit contribution made at different volumes of sales
[Sales x P/V ratio = Contribution, Profit = Contribution – Fixed Cost]
(iii) It helps in the determination of sales to earn a desired amount of profit.

25
26
(vi) It helps in determining margin of safety [Margin of safety = Profit ÷ P/V ratio]

BREAK-EVEN ANALYSIS:
The break-even analysis was developed by Karl Bücher and Johann Friedrich
Schär.
A break-even analysis is a financial calculation used to determine a company’s break-even
point (BEP).

A break-even analysis is an economic tool that is used to determine the cost structure of a
company or the number of units that need to be sold to cover the cost. Break-even is a
circumstance where a company neither makes a profit nor loss but recovers all the money
spent.
In other words, it reveals the point at which you will have sold enough units to cover
all of your costs. At that point, you will have neither lost money nor made a profit.

It helps in calculating and examining the Margin of Safety based on the revenues earned
and cost incurred. In other words, BEA shows how many sales it takes a co., to make to
cover the cost of doing business. BEA tells that co., at some point TR= TC.

The main purpose of break-even analysis is to determine the minimum output that must
be exceeded for a business to profit.
Example of break-even analysis
Company X sells a pen. The company first determined the fixed costs, which include a lease,
property tax, and salaries. They sum up to ₹1,00,000. The variable cost linked with
manufacturing one pen is ₹2 per unit. So, the pen is sold at a premium price of ₹10.
Therefore, to determine the break-even point of Company X, the premium pen will be:
Break-even point = Fixed cost/Price per pen – Variable cost
= ₹1,00,000/(₹12 – ₹2)
= 1,oo,000/10
= Rs 10,000
Therefore, given the variable costs, fixed costs, and selling price of the pen, company X
would need to sell 10,000 units of pens to break-even.
Assumptions of BEA:
(i) The total costs may be classified into fixed and variable costs. It ignores semi-variable
cost.
(ii) The cost and revenue functions remain linear.
(iii) The selling price per unit remains unchanged and is assumed to be constant at all
levels of output.
(iv) The fixed costs remain constant over the volume under consideration.
(v) variable cost remains constant per unit of output irrespective of the level of output and
thus fluctuates directly in proportion to changes in the volume of output.
(vi) volume of production is the only factor that influences cost.
(vii) It assumes constant rate of increase in variable cost.

27
 (viii) It assumes constant technology and no improvement in labour efficiency.
(ix) there is a synchronisation between production and sales.
HENCE,
Break-even analysis is the relationship between cost, volume and profits at various levels
of activity, with an emphasis placed on the break-even point. This point is where the
business receives neither a profit nor a loss, when total money received from sales is equal
to total money spent to produce the items for sale.
ADVANTAGES AND USES OF BEA:
Break-even analysis enables a business organization to:

1. Measure profit and losses at different levels of production and sales.

2. Predict the effect of changes in sales prices.
3. Analyze the relationship between fixed and variable costs.
4. Predict the effect of cost and efficiency changes on profitability.

Disadvantages OF BEA:
Even with its advantages and uses, there are also several demerits of break-even analysis.
1. Assumes that sales prices are constant at all levels of output.
2. Assumes production and sales are the same.
3. Break even charts may be time consuming to prepare.
4. It can only apply to a single product or single mix of products.

_________________________________________________________________________________________________________
__
BREAK-EVEN POINT: [BEP]

Definition: The break-even point is the point at which total cost and total revenue are
equal, meaning there is no loss or gain for your small business. In other words, you've
reached the level of production at which the costs of production equals the revenues for a
product.
BEP is the point at which total cost and total revenue are equal, i.e. "even". There is no net
loss or gain, and one has "broken evenly" between cost incurred and revenue earned.
Hence the name.
Hence, A business is said to BEP when its TR=TC. It is a point of “NO profit – No loss”
situation. This point of BEP is often called as “Critical Point” or “Equilibrium Point” or
“Balancing Point”. If production / sales is increased beyond this level, there shall be profit
to the co., and if it is decreased from this level, there shall be loss to the company.

28
 Computation of the BEP
BEP can be performed in the following 2 qq1methods:

(i) the algebraic formula method or

(ii) Graphic or Chart method.
Formulas
There are two ways to calculate the break-even point, in units and in sales revenue.

1. The first way is to divide the fixed cost by the contribution per unit. This gives the result in
units.
2. Divide the fixed cost by the contribution-to-sales ratio. This gives the sales revenue. The
contribution-to-sales ratio is given by dividing the contribution per unit by the selling price
per unit.

BREAK EVEN CHART

29
 A break-even chart is a graphical representation of the break-even point, profits, losses and
margin of safety. It shows the relation between cost and revenue at a given time.
A breakeven chart is a chart that shows the sales volume level at which total costs
equal sales. Losses will be incurred below this point, and profits will be earned above this
point.

It is a graphic tool to determine break-even point and profit potential under the varying
condition of output and costs.
Break even chart shows-

 fixed cost
 total revenue line
 margin of safety
 loss region
 total cost line
 break-even point
 profit region

Advantages of break-even charts:

 Managers can look at the graph to find out the profit or loss at each level of output
 Managers can change the costs and revenues and redraw the graph to see how that would
affect profit and loss, for example, if the selling price is increased or variable cost is
reduced.
 The break-even chart can also help calculate the safety margin- the amount by which sales
exceed break-even point.
Margin of Safety (units) = Units being produced and sold – Break-even output

Limitations of break-even charts:

 They are constructed assuming that all units being produced are sold. In practice, there
are always inventory of finished goods. Not everything produced is sold off.
 Fixed costs may not always be fixed if the scale of production changes. If more output is
to be produced, an additional factory or machinery may be needed that increases fixed
costs.
 Break-even charts assume that costs can always be drawn using straight lines. Costs
may increase or decrease due to various reasons. If more output is produced, workers may
be given an overtime wage that increases the variable cost per unit and cause the variable
cost line to steep upwards.

_________________________________________________________________________________________________________
___
PROBLEMS ON BREAK EVEN CHART

30
 Example 1:
Fictional Company

Unit selling price: $36

Unit variable expenses: $28

Total fixed expenses: $50,000

Actual sales: 7,000 units

Solution:

1. Work out the total revenue by multiplying the unit selling price by the actual sales: 36 ×
7,000 = 252,000

2. Work out the total cost by multiplying the unit variable expenses by the number of
units sold and adding that to the fixed expenses: 28 × 7,000 = 196,000 + 50,000 =
246,000

3. Now set up your chart. Note that when plotting, the first number in brackets is the x
(horizontal) axis value and the second digit after the comma is the y (vertical) axis
value.

For this chart, you will show total unit sales (or) sales volume(i.e., no. of units
produced) along the x axis in thousands. Along the y axis you will show total cost
and total sales revenue in tens of thousands of dollars

NORMALLY, there are 3 lines representing Break even Chart.

line (a) – Fixed Cost - Fixed Cost line drawn horizontal to x-axis always. Because, the
FC is same for any production volume. And FC doesn’t changes with the rise in
output.

FC are incurred even when the output is 0 and will remain the same in the short run.
In the long-run they may change. Also known as overhead costs.
E.g.: rent, even if production has not started, the firm still has to pay the rent.

line (b) – Total Cost – it is increasing linear. It is a monotonic function which

increases with the increase in volume of output. TC = FC+VC.

31
 line (c) – Total revenue / Sales revenue – shows income earned at varying levels of
output

4. Now draw the fixed cost line. Make a dotted line from (0, 50,000) to (7,000,
50,000).

5. Next you will make the Total Revenue line. Plot a point at (7,000, 252,000) and
draw a line from zero to that point. Label the line.

Total revenue function, always starts with (0,0) initially. As we know that if we sell ‘0’ units,
the total revenue at 0 (zero)units will be 0 (zero) itself.

Hence, the total revenue line is satisfied by (0,0) and will pass through the break even
point.

6. To create the Total Cost line, plot the point (7,000, 246,000) and draw a line from
(0, 50,000) to that point. Label the line.

As we understood, variable costs have direct relationship with volume of output and
fixed costs remains constant irrespective of volume of production.

Hence, For total Cost, when 0 units is purchases then, Total cost = Fixed cost (variable costs
is not added here bcoz at 0 units of production the VC will be 0 itself….. but the fixed cost
remains constant. -------Hence at 0 level of production TC= FC)

This is why the reason, the TC line will initially start at FC and pass through the BEP

7. Where the two lines meet is called the Break-Even Point and should to be labelled
as such. The region below the break-even point should be labelled the Loss Region.
The region above the break-even point should be labelled the Profit Region.

Break even point – is a situation with “No Profits – No Loss” for a given volume of
production.
This is because, before breaking even, the TC is higher than TR, so the region constitutes
“Losses” (it is the area between total cost line and total sales revenue towards the left hand
side of the BEP)

And After before breaking even, the TR is greater than TC, so the region constitutes
“Profits” (it is the area between total cost line and total sales revenue towards the right

32
hand side of the BEP)

Note: Profit increases as output rises.

8. Now draw the Angle of Incidence.

It is the angle at which the sales revenue line cuts the total cost line. A large angle
indicates profit is making at a higher rate. This angle is formed from the starting of a
break-even point. The angle of incidence shows the rate at which a company is
making profits.

9. Draw a dotted line from the break-even point to meet the x axis. From where it
touches the x axis, to the actual sales, is the Margin of Safety in Units.

Margin of Safety – presented on the Break even chart is the distance between
break even points and the production output.

A large distance of Margin of Safety indicates that profit will be there even if there is
a serious drop in production.

If the distance is relatively small, it indicates the profits will be reduced

considerably with a sign of a small drop in productive capacity or sales.

In the below BEC/ graph, the business decided to sell 7000 units, but the co., has its
break even point at 5,000 units. Hence their margin of safety would be [7,000 –
6,250 units =750 units]. In sales terms, the margin of safety would be (2,52,000 –
2,25,000 Rs = 27,000 RS). They are 27,000 Rs safe from making a loss.

10. To illustrate the margin of safety in dollars, draw a dotted line from the break-even
point to the y axis. From where the line touches the y axis, to the total revenue line,
is the Margin of Safety in Dollars.

MARGIN OF SAFETY (MOS):

Margin of safety, also known as MOS, is the difference between your breakeven point and
actual sales that have been made.
i.e., The margin of safety is the difference between actual sales and break-even sales.

Any revenue that takes your business above break even can be considered the margin of
safety.

33
The actual sales made over the break-even point, which generates profit is considered as
the margin of safety.

It’s called the safety margin because it’s kind of like a buffer. This is the amount of
sales that the company or department can lose before it starts losing money. As long as
there’s a buffer, by definition the operations are profitable. If the safety margin falls to zero,
the operations break even for the period and no profit is realized. If the margin becomes
negative, the operations lose money.
The size of the margin of safety is a measure of the stability of the profits.
The higher the proportion of variable costs (to fixed costs), the greater the margin of safety,
while the higher the proportion of fixed costs the narrower the margin of safety. However,
The bigger the margin is, the lower the risk of insolvency.

Generally speaking, the higher your margin of safety, the better. The value represented by
your margin of safety is your buffer against becoming unprofitable, which will vary
depending on your business.

A minimal margin of safety might trigger action to reduce expenses. The opposite situation
may also arise, where the margin of safety is so large that a business is well-protected from
sales variations.

The formula for the margin of safety is depicted below:

Example for MOS:

Let’s look at Bob’s machine shop for example. Bob produces boat propellers and is
currently debating whether or not he should invest in new equipment to make more boat
34
parts. Bob’s current sales are $100,000 and his breakeven point is $75,000. Thus, Bob
would compute his margin of safety like this.

As you can see, Bob achieves a $25,000 safety buffer. This means that his sales could fall
$25,000 and he will still have enough revenues to pay for all his expenses and won’t incur a
loss for the period.

Problems with the Margin of Safety: The margin of safety concept does not work well
when sales are strongly seasonal, since some months will yield catastrophically low
results.
-------------------------------------------------------------------------------------------------------------------
---
MARGIN OF SAFETY RATIO
The percentage representation of the margin of safety is called a margin of safety ratio.
Its formula is as follows:

it indicates the profitability and strength of a business. It also helps to find out whether the
company is financially sound and can keep up even after a slight fall in sales.

ANGLE OF INCIDENCE:
It is the angle at which the sales revenue line cuts the total cost line. A large angle indicates
profit is making at a higher rate. This angle is formed from the starting of a break-even
point. The angle of incidence shows the rate at which a company is making profits.

Low break-even point, A high margin of safety and a large angle of incidence in the break
even chart indicate that fixed costs are low and margin of safety is high. It is a sign of
financial stability. And it is an indication of favourable business position.

The Angle of Incidence in accounting occurs when the entire sales line crosses the cost line
from below in the break-even chart. Or, it is an angle that gets created due to the sale and
cost line. Usually, this angle starts forming at the break-even point, indicating how
efficiently the company is making a profit. Further, the angle suggests that the rate at which
the company is making profits.

Rule of Thumb:
A general rule of thumb is the higher the angle, the more the profit and vice versa. A large
angle of incidence means the company is making profits at a higher rate. Similarly, a small
angle suggests the profit is being earned at a lower rate.

35
Additionally, it gives one more significant information. If the angle of incidence is small, it
means the company is incurring more variable costs. Thus, for a business, a desirable
situation is a large angle of incidence with a high margin of safety. It could further indicate
that the business might have a monopoly status in its industry.

UNIT - 5
BUDGETARY CONTROL
Dr. Mahasweta Bhattacharya

INTRODUCTION:

A budget is an accounting plan. It is a formal plan of action

expressed in monetary terms. It could be seen as a statement of
expected income and expenses under certain anticipated
operating conditions. It is a quantified plan for future activities –
quantitative blue print for action.

A budget is an estimation of revenue and expenses over a specified

future period of time and is usually compiled and re-evaluated on a
periodic basis.

Every organization achieves its purposes by coordinating different

activities. For the execution of goals efficient planning of these

36
 activities is very important and that is why the management has
a crucial role to play in drawing out the plans for its business.
Various activities within a company should be synchronized by
the preparation of plans of actions for future periods.

These comprehensive plans are usually referred to as budgets.

Budgeting is a management device used for short‐term planning
and control. It is not just accounting exercise.

MEANING AND DEFINITION:

BUDGET:

According to CIMA (Chartered Institute of Management

Accountants) UK, a budget 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,
expenditure to be incurred during the period and the capital to be
employed to attain a given objective.”

In a view of Keller & Ferrara, “a budget is a plan of action to

achieve stated objectives based on predetermined series of
related assumptions.”
G.A.Welsh states, “A budget is a written plan covering projected
activities of a firm for a definite time period.”

One can elicit the explicit characteristics of budget after

observing the above definitions. They are…
 It is mainly a forecasting and controlling device.

 It is prepared in advance before the actual operation of the

company or project.
 It is in connection with definite future period.
 Before implementation, it is to be approved by the
management.
 It also shows capital to be employed during the period.

BUDGETARY CONTROL:

BUDGETARY CONTROL - Meaning

37
Budgetary Control is a method of managing costs through preparation of
budgets. Budgeting is thus only a part of the budgetary control.
Budgetary Control is a method of managing costs through preparation
of budgets. Budgeting is thus only a part of the budgetary control.

According to CIMA, “Budgetary control is the establishment of budgets

relating to the responsibilities of executives of a policy and the
continuous comparison of the actual with the budgeted results, either
to secure by individual action, the objective of the policy or to provide a
basis for its revision.”

The main features of budgetary control are:

1. Establishment of budgets for each purpose of the business.

2. Revision of budget in view of changes in conditions.
3. Comparison of actual performances with the budget on a continuous
basis.
4. Taking suitable remedial action, wherever necessary.
5. Analysis of variations of actual performance from that of the
budgeted performance to know the reasons thereof.

OBJECTIVES OF BUDGETARY CONTROL:

Budgeting is a forward planning. It serves basically as a tool for

management control; it is rather a pivot of any effective scheme of
control.
The objectives of budgeting may be summarized as follows:

1. Planning: Planning has been defined as the design of a desired

future position for an entity and it rests on the belief that the
future position can be attained by uninterrupted management
action. Detailed plans relating to production, sales, raw‐material
requirements, labour needs, capital additions, etc. are drawn out.
By planning many problems estimated long before they arise and
solution can be thought of through careful study. In short,
budgeting forces the management to think ahead, to foresee and
prepare for the anticipated conditions. Planning is a constant
process since it requires constant revision with changing
conditions.

38
 2. Co‐ordination: Budgeting plays a significant role in establishing
and maintaining coordination. Budgeting assists managers in
coordinating their efforts so that problems of the business are
solved in harmony with the objectives of its divisions. Efficient
planning and business contribute a lot in achieving the targets.
Lack of co‐ordination in an organization is observed when a
department head is permitted to enlarge the department on the
specific needs of that department only, although such
development may negatively affect other departments and alter
their performances. Thus, co‐ordination is required at all vertical
as well as horizontal levels.

3. Measurement of Success: Budgets present a useful means of

informing managers 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 their
accomplished low budget targets or promotion of a manager is
linked to his budget success record. Success is determined by
comparing the past performance with previous period's
performance.

4. Motivation: Budget is always considered a useful tool for

encouraging managers to complete things in line with the business
objectives. If individuals have intensely participated in the
preparation of budgets, it acts as a strong motivating force to
achieve the goals.

5. Communication: A budget serves as a means of communicating

information within

firm. The standard budget copies are distributed to all management

people provide not only sufficient understanding and knowledge of the
programmes and guidelines to be followed but also give knowledge
about the restrictions to be adhered to.

6. Control: Control is essential to make sure that plans and

objectives laid down in the budget are being achieved. Control,
when applied to budgeting, as a systematized effort is to keep the
management informed of whether planned performance is being
achieved or not.

39
 ADVANTAGES OF BUDGETARY CONTROL:

In the light of above discussion one can see that, coordination and
control help the planning. These are the advantages of budgetary
control. But this tool offer many other advantages as follows:

1. This system provides basic policies for initiatives.

2. It enables the management to perform business in the most professional
manner because budgets are prepared to get the optimum use of
resources and the objectives framed.
3. It ensures team work and thus encourages the spirit of support and
mutual understanding among the staff.
4. It increases production efficiency, eliminates waste and controls the costs.
5. It shows to the management where action is needed to remedy a position.
6. Budgeting also aids in obtaining bank credit.
7. It reviews the present situation and pinpoints the changes which are
necessary.
8. With its help, tasks such as like planning, coordination and control
happen effectively and efficiently.
9. It involves an advance planning which is looked upon with support by
many credit agencies as a marker of sound management.

LIMITATIONS OF BUDGETARY CONTROL:

1. It tends to bring about rigidity in operation, which is harmful. As

budget estimates are quantitative expression of all relevant data,
there is a tendency to attach some sort of rigidity or finality to them.
2. It being expensive is beyond the capacity of small undertakings. The
mechanism of budgeting system is a detailed process involving too
much time and costs.
3. Budgeting cannot take the position of management but it is only an
instrument of management. ‘The budget should be considered not as
a master, but as a servant.’ It is totally misconception to think that
the introduction of budgeting alone is enough to ensure success and
to security of future profits.
4. It sometimes leads to produce conflicts among the managers as each
of them tries to take credit to achieve the budget targets.
5. Simple preparation of budget will not ensure its proper
implementation. If it is not implemented properly, it may lower
morale.

40
 6. The installation and function of a budgetary control system is a costly
affair as it requires employing the specialized staff and involves other
expenditure which small companies may find difficult to incur.

ESSENTIALS OF EFFECTIVE BUDGETING:

1. Support of top management: If the budget structure is to be made

successful, the consideration by every member of the management not
only is fully supported but also the impulsion and direction should also
come from the top management. No control system can be effective
unless the organization is convinced that the management considers the
system to be important.
2. Team Work: This is an essential requirement, if the budgets are ready
from “the bottom up” in a grass root manner. The top management
must understand and give enthusiastic support to the system. In fact, it
requires education and participation at all levels. The benefits of
budgeting need to be sold to all.
3. Realistic Objectives: The budget figures should be realistic and
represent logically attainable goals. The responsible executives should
agree that the budget goals are reasonable and attainable.
4. Excellent Reporting System: Reports comparing budget and actual
results should be promptly prepared and special attention focused on
significant exceptions i.e. figures that are significantly different from
expected. An effective budgeting system also requires the presence of a
proper feed‐back system.
5. Structure of Budget team: This team receives the forecasts and
targets of each department as well as periodic reports and confirms the
final acceptable targets in form of Master Budget. The team also
approves the departmental budgets.
6. Well defined Business Policies: All budgets reveal that the business
policies formulated by the higher level management. In other words,
budgets should always be after taking into account the policies set for
particular department or function. But for this purpose, policies should
be precise and clearly defined as well as free from any ambiguity.
7. Integration with Standard Costing System: Where standard costing
system is also used, it should be completely integrated with the budget
programme, in respect of both budget preparation and variance
analysis.
8. Inspirational Approach: All the employees or staff other than
executives should be strongly and properly inspired towards budgeting
system. Human beings by nature do not like any pressure and they
dislike or even rebel against anything forced upon them.

41
ESSENTIALS OF BUDGETARY CONTROL:
There are certain steps which are necessary for the successful
implementation budgetary control system. These are as follows:
1. Organisation for Budgetary Control
2. Budget Centres
3. Budget Mammal
4. Budget Officer
5. Budget Committee
6. Budget Period
7. Determination of Key Factor.
1. Organization for Budgetary Control:
The proper organization is essential for the successful preparation,
maintenance and administration of budgets. A Budgetary Committee is
formed, which comprises the departmental heads of various departments. All
the functional heads are entrusted with the responsibility of ensuring proper
implementation of their respective departmental budgets.
The Chief Executive is the overall in-charge of budgetary system. He
constitutes a budget committee for preparing realistic budgets A budget
officer is the convener of the budget committee who co-ordinates the
budgets of different departments. The managers of different departments
are made responsible for their departmental budgets.
2. Budget Centres:
A budget centre is that part of the organization for which the budget is
prepared. A budget centre may be a department, section of a department or
any other part of the department. The establishment of budget centres is
essential for covering all parts of the organization. The budget centres are
also necessary for cost control purposes. The appraisal performance of
different parts of the organization becomes easy when different centres are
established.
3. Budget Manual:
A budget manual is a document which spells out the duties and also the
responsibilities of various executives concerned with the budgets. It specifies
the relations amongst various functionaries.
4. Budget Officer:
The Chief Executive, who is at the top of the organization, appoints some
person as Budget Officer. The budget officer is empowered to scrutinize the
budgets prepared by different functional heads and to make changes in
them, if the situations so demand. The actual performance of different

42
departments is communicated to the Budget Officer. He determines the
deviations in the budgets and the actual performance and takes necessary
steps to rectify the deficiencies, if any.
He works as a coordinator among different departments and monitors the
relevant information. He also informs the top management about the
performance of different departments. The budget officer will be able to
carry out his work fully well only if he is conversant with the working of all
the departments.

5. Budget Committee:
In small-scale concerns the accountant is made responsible for preparation
and implementation of budgets. In large-scale concerns a committee known
as Budget Committee is formed. The heads of all the important departments
are made members of this committee. The Committee is responsible for
preparation and execution of budgets. The members of this committee put
up the case of their respective departments and help the committee to take
collective decisions if necessary. The Budget Officer acts as convener of this
committee.
6. Budget Period:
A budget period is the length of time for which a budget is prepared and
employed. The budget period depends upon a number of factors. It may be
different for different industries or even it may be different in the same
industry or business.
The budget period depends upon the following considerations:

43
 (a) The type of budget i.e., sales budget, production budget, raw materials
purchase budget, capital expenditure budget. A capital expenditure budget
may be for a longer period i.e. 3 to 5 years purchase, sale budgets may be
for one year.
(b) The nature of demand for the products.
(c) The timings for the availability of the finances.
(d) The economic situation of the country.
(e) The length of trade cycles.
All the above-mentioned factors are taken into account while fixing period of
budgets
7. Determination of Key Factor:
The budgets are prepared for all functional areas. These budgets are
interdependent and inter-related. A proper co-ordination among different
budgets is necessary for making the budgetary control a success. The
constraints on some budgets may have an effect on other budgets too. A
factor which influences all other budgets is known as Key Factor or Principal
Factor.
There may be a limitation on the quantity of goods a concern may sell. In
this case, sales will be a key factor and all other budgets will be prepared by
keeping in view the amount of goods the concern will be able to sell.
The raw material supply may be limited, so production, sales and cash
budgets will be decided according to raw materials budget. Similarly, plant
capacity may be a key factor if the supply of other factors is easily available.
The key factor may not necessarily remain the same. The raw materials
supply may be limited at one time but it may be easily available at another
time. The sales may be increased by adding more sales staff, etc. Similarly,
other factors may also improve at different times.
The key factor also highlights the limitations of the enterprise. This will
enable the management to improve the working of those departments where
scope for improvement exists.
______________________________________________________________________________
_________________

CLASSIFICATION OF BUDGET:

The extent of budgeting activity varies from firm to firm. In a smaller firm
there may be a sales forecast, a production budget, or a cash budget.
Larger firms generally prepare a master budget. Budgets can be classified

44
into different ways from different points of view. The following are the
important basis for classification:

Functional Classification:

SALES BUDGET:

The sales budget is an estimate of total sales which may be

articulated in financial or quantitative terms. It is normally forms
the fundamental basis on which all other budgets are
constructed. In practice, quantitative budget is prepared first then
it is translated into economic terms.
While preparing the Sales Budget, the Quantitative Budget is
generally the starting point in the operation of budgetary control
because sales become, more often than not, the principal budget
factor. The factor to be consider in forecasting sales are as
follows:

 Study of past sales to determine trends in the market.

 Estimates made by salesman various markets of company
products.
 Changes of business policy and method.
 Government policy, controls, rules and Guidelines etc.
 Potential market and availability of material and supply.

PRODUCTION BUDGET:
The production budget is prepared on the basis of estimated production
for budget period. Usually, the production budget is based on the sales
budget. At the time of preparing the budget, the production manager
will consider the physical facilities like plant, power, factory space,
materials and labour, available for the period.
Production budget envisages the production program for achieving the
sales target. The budget may be expressed in terms of quantities or
money or both. Production may be computed as follows: Units to be
produced = Desired closing stock of finished goods + Budgeted sales –
Beginning stock of finished goods.
PRODUCTION COST BUDGET:
This budget shows the estimated cost of production. The production
budget demonstrates the capacity of production. These capacities of

45
production are expressed in terms of cost in production cost budget. The
cost of production is shown in detail in respect of material cost, labour
cost and factory overhead. Thus production cost budget is based upon
Production Budget, Material Cost Budget, Labour Cost Budget and
Factory overhead.

RAW‐MATERIAL BUDGET:
Direct Materials budget is prepared with an intention to determine
standard material cost per unit and consequently it involves quantities
to be used and the rate per unit. This budget shows the estimated
quantity of all the raw materials and components needed for production
demanded by the production budget. Raw material serves the following
purposes:
 It supports the purchasing departmentin
scheduling the purchases.
 Requirement of raw‐materials is decided
on the basis of production budget.
 It provides data for raw material control.

Helps in deciding terms and conditions of purchase like


credit purchase, cash purchase, payment period etc.
It should be noted that raw material budget generally deals with only
the direct materials whereas indirect materials and supplies are
included in the overhead cost budget.

PURCHASE BUDGET:
Strategic planning of purchases offers one of the most important areas
of reduction cost in many concerns. This will consist of direct and
indirect material and services. The purchasing budget may be expressed
in terms of quantity or money.
The main purposes of this budget are:
 It designates cash requirement in respect of purchase to be
made during budget period; and
 It is facilitates the purchasing department to plan its
operations in time in respect of purchases so that long term
forward contract may be organized.

LABOUR BUDGET:
Human resources are highly expensive item in the operation of an
enterprise. Hence, like other factors of production, the management
should find out in advance personnel requirements for various jobs in

46
 the enterprise. This budget may be classified into labour requirement
budget and labour recruitment budget.
The labour necessities in the various job categories such as unskilled,
semi‐skilled and supervisory are determined with the help of all the
head of the departments. The labour employment is made keeping in
view the requirement of the job and its qualifications, the degree of skill
and experience required and the rate of pay.
PRODUCTION OVERHEAD BUDGET:
The manufacturing overhead budget includes direct material, direct
labour and indirect expenses. The production overhead budget
represents the estimate of all the production overhead i.e. fixed,
variable, semi‐variable to be incurred during the budget period.
The reality that overheads include many different types of expenses
creates considerable problems in:
1. Fixed overheads i.e., that which is to remain stable irrespective of vary
in the volume of output,
2. Apportion of manufacturing overheads to products manufactured, semi
variable cost i.e., those which are partly variable and partly fixed.
3. Control of production overheads.
4. Variable overheads i.e., that which is likely to vary with the output.

The production overhead budget engages the preparation of overheads

budget for each division of the factory as it is desirable to have
estimates of manufacturing overheads prepared by those overheads to
have the responsibility for incurring them. Service departments cost are
projected and allocated to the production departments in the proportion
of the services received by each department.

SELLING AND DISTRIBUTION COST BUDGET:

The Selling and Distribution Cost budget is estimating of the cost of
selling, advertising, delivery of goods to customers etc. throughout the
budget period. This budget is closely associated to sales budget in the
logic that sales forecasts significantly influence the forecasts of these
expenses. Nevertheless, all other linked information should also be
taken into consideration in the preparation of selling and distribution
budget.
The sales manager is responsible for selling and distribution cost
budget. Naturally, he prepares this budget with the help of managers of
sub‐divisions of the sales department. The preparation of this budget
would be based on the analysis of the market condition by the
47
management, advertising policies, research programs and many other
factors. Some companies prepare a separate advertising budget,
particularly when spending on advertisements are quite high.

ADMINISTRATION COST BUDGET:

This budget includes the administrative costs for non‐manufacturing
business activities like director’s fees, managing directors’ salaries,
office lightings, heating and air condition etc. Most of these expenses
are fixed so they should not be too difficult to forecast. There are semi‐
variable expenses which get affected by the expected rise or fall in cost
which should be taken into account. Generally, this budget is prepared
in the form of fixed budget.

CAPITAL‐ EXPENDITURE BUDGET:

This budget stands for the expenditure on all fixed assets for the
duration of the budget period. This budget is normally prepared for a
longer period than the other functional budgets. It includes such items
as new buildings, land, machinery and intangible items like patents,
etc.
This budget is designed under the observation of the accountant which
is supported by the plant engineer and other functional managers. At
the time of preparation of the budget some important information
should be observed:
 Overfilling on the production facilities of certain
departments as revealed by the plant utilization budget.
 Long‐term business policy with regard to technical
developments.
 Potential demand for certain products.

CASH BUDGET:
The cash budget is a sketch of the business estimated cash inflows and
outflows over a specific period of time. Cash budget is one of the most
important and one of the last to be prepared. It is a detailed projection
of cash receipts from all sources and cash payments for all purposes and
the resultants cash balance during the budget. It is a mechanism for
controlling and coordinating the fiscal side of business to ensure
solvency and provides the basis for forecasting and financing required to
cover up any deficiency in cash. Cash budget thus plays a vital role in
the financing management of a business undertaken.

48
Cash budget assists the management in determining the future liquidity
requirements of the firm, forecasting for business of those needs,
exercising control over cash. So, cash budget thus plays a vital role in
the financial management of a business enterprise.

Function of Cash Budget:

 It makes sure that enough cash is available when it is required.
 It designates cash excesses and shortages so that steps
may be taken in time to invest any excess cash or to borrow
funds to meet any shortages.
 It shows whether capital expenditure could be financed
internally.
 It provides funds for standard growth.
 It provides a sound basis to manage cash position.

Advantages of Cash Budget:

1. Usage of Cash: Management can plan out the use of cash in
accord with the changes of receipt and payment. Payments can be
planned when sufficient cash is available and continue the
business activity with the minimum amount of working capital.
2. Allocation for Capital Investment: It is dual benefits such as
capital expenditure projects can be financed internally and can get
an idea for cash availability of capital investment.
3. Provision of Excess Funds: It reveals the availability of excess
cash. In this regard management can decide to invest excess funds
for short term or long term according to the requirements in the
business.
4. Pay‐out Policy: This budgetary system may help the
management for future pay‐out policy in the form of dividend. In
case the cash budget liquid position is not favourable, the
management may reduce the rate of dividend or maintain dividend
amount or skip dividend for the year.
5. Provision for acquiring Funds: It gives the top level
management ideas for acquiring funds for particular time duration
and sources to be explored.
6. Profitable Use of Cash: Business person can take decision for
the best use of liquidity to make more profitable transaction. It can
be used at the time of bulk purchase payments and one get the
benefit of discount.

Limitation of Cash Budget:

1. Complex Assumption: Business is full of uncertainties, so
it is very difficult to have near perfect estimates of cash

49
 receipts and payments, especially for a longer duration. It
can be predicted for short duration such as of three to four
months.
2. Inflexibility: If the finance manager fails to show flexibility
in implementing the cash budget, it will incur adverse
effects. If the manager follows strictly adheres to the
estimates of cash inflow it may negatively result in losing
customers. Likewise, loyalty in payments may lead to
deterioration of liquid position.
3. Costly: Application of this technique necessitates collecting
of statistical information from various sources and expert
personnel in operation research would be the costliest deal.
It becomes expensive which may not be affordable to small
business houses. In addition, finding out experts is not
always possible. In this situation the long term predictions
do not prove correct.

Methods:
1. Receipt and payment: It is most popular and is universally used
for preparing cash budget. The assumption of statistical data is
arrived at calculated on the basis of requirements like monthly,
weekly or fortnightly. On account of elasticity, this method is
used in forecasting cash at different time periods and thus it
helps in controlling cash distributions.

a. Cash receipts from customers are based on sales forecast. The

term of sale, lag in payment etc., are generally taken into
consideration.
b. Cash receipts from other sources, such as dividends and interest
on trade investment, rent received, issue of capital, sale of
investment and fixed assets.
c. Cash requirements for purchase of materials, labour and salary
cost and overhead expenses based on purchasing, personnel and
overhead budgets.
d. Cash requirements for capital expenditure as per the capital
expenditure budget.
e. Cash requirements for other purposes such as payment of
dividends, income‐tax liability, fines and penalties.
i. Estimating Cash Receipts: Generally main sources of cash
receipts are sales, interest and dividend, sales of assets and
investments, capital borrowings etc. The Company estimates
time‐lag on the basis of past experience of cash receipts on
credit sales while cash sales can be easily determined.

50
 ii. Estimating Cash Payments: It can be decided on the basis of
various operating budgets prepared for the payment of credit
purchase, payment of labour cost, interest and dividend,
overhead charges, capital investment etc.

2. Adjusted Profit and Loss Account: This method is based on

cash and non‐cash transactions. This method estimates closing
cash balance by converting profit into cash. The hypothesis of this
method is that the earning of profit brings equal amount of cash
into the business.

The net profit shown by profit and loss account does not signify
the actual cash flow into the business. This also leads to another
assumption, that is the business will remain static, i.e. there will
be no wearing out or increase of assets and changes of working
capital so that the total cash on hand for the business would be
equal to the profit earned.

3. Budgeted Balance Sheet Method: This method looks like the

Adjusted Profit and Loss Account method only, except that in this
method a Balance Sheet is projected and in that method Profit
and Loss Account is adjusted. In this method Balance Sheet is
prepared with the projected amount of all assets and liabilities
except cash at the end of budget period. The cash balance will
find out balancing amount. If assets side is higher than liability
side it would be the bank overdraft while liability side is higher
than assets side it gives bank balance. This method is used by
the stable business houses.

4. Working Capital Differential Method: It is based on the

estimate of working capital. It begins with the opening working
capital and is added to or deducted from any changes made in the
current assets except cash and current liabilities. At the end of the
budget period balance shows the real cash balance. This method
is quite similar to the Balance Sheet method.

MODEL OF CASH BUDGET

Particular Januar Februar Marc

s y y h
Opening Balance ‐ ‐ ‐
Add: Receipts:

51
 Cash Sales ‐ ‐ ‐
Receipts from Debtors ‐ ‐ ‐
Interest and Dividend ‐ ‐ ‐
Sale of fixed assets ‐ ‐ ‐
Sale of Investments ‐ ‐ ‐
Bank Loan ‐ ‐ ‐
Issue Shares & Debenture ‐ ‐ ‐
Others ‐ ‐ ‐
Total Receipts (A) ‐ ‐ ‐
Less: Payments
Cash Purchases ‐ ‐ ‐
Payment to creditors ‐ ‐ ‐
Salaries & wages ‐ ‐ ‐
Administrative expenses ‐ ‐ ‐
Selling expenses ‐ ‐ ‐
Dividend payable ‐ ‐ ‐
Purchase of Fixed Assets ‐ ‐ ‐
Repayment of Loan ‐ ‐ ‐
Payment of taxes ‐ ‐ ‐
Total Payments (B) ‐ ‐ ‐
Closing Balance (A ‐ B) ‐ ‐ ‐

FIXED AND FLEXIBLE BUDGET:

1. FIXED BUDGET:
A fixed budget is prepared for one level of output and one set of
condition. This is a budget in which targets are tightly fixed. It is
known as a static budget. It is firm and prepared with the
assumption that there will be no change in the budgeted level of
motion. Thus, it does not provide room for any modification in
expenditure due to the change in the projected conditions and
activity. Fixed budgets are prepared well in advance.

This budget is not useful because:

 The conditions go on the changing and cannot be expected to be

firm.

52
  The management will not be in a position to assess, the
performance of different heads on the basis of budgets
prepared by them because to the budgeted level of activity.
 It is hardly of any use as a mechanism of budgetary control
because it does not make any difference between fixed, semi‐
variable and variable costs
 It does not provide any space for alteration in the budgeted
figures as a result of change in cost due to change in the level
of activity.

2. FLEXIBLE BUDGET:
This is a dynamic budget. In comparison with a fixed budget, a
flexible budget is one “which is designed to change in relation to the
level of activity attained.” An equally accurate use of the flexible
budgets is for the purposes of control.

Flexible budgeting has been developed with the objective of

changing the budget figures so that they may correspond with the
actual output achieved. It is more sensible and practical, because
changes expected at different levels of activity are given due
consideration. Thus a budget might be prepared for various levels of
activity in accord with capacity utilization.

Flexible budget may prove more useful in the following conditions:

 Where the level of activity varies from period to period.

 Where the business is new and as such it is difficult to forecast the
demand.
 Where the organization is suffering from the shortage of any
factor of production. For example, material, labour, etc. as the
level of activity depends upon the availability of such a factor.
 Where the nature of business is such that sales go on changing.
 Where the changes in fashion or trend affects the production and
sales.
 Where the organization introduces the new products or
changes the patterns and designs of its products frequently.
 Where a large part of output is intended for the export.

Uses of Flexible Budget:

53
 In flexible budgets numbers are adjustable to any given set of operating
conditions. It is, therefore, more sensible than a fixed budget which is
true only in one set of operating environment.

Flexible budgets are also useful from the view point of control. Actual
performance of an executive should be compared with what he should
have achieved in the actual circumstances and not with what he should
have achieved under quite different circumstances. At last, flexible
budgets are more realistic, practical and useful. Fixed budgets, on the
other hand, have a limited application and are suited only for items like
fixed costs.

Preparation of a Flexible Budget

The preparation of a flexible budget requires the analysis of total costs
into fixed and variable components. This analysis of course is, not
unusual to the flexible budgeting, is more important in flexible
budgeting then in fixed budgeting. This is so because in flexible
budgeting, varying levels of output are considered and each class of
overhead will be different for each level.
Thus the flexible budget has the following main distinguishing features:
 It is prepared for a range of activity instead of a single level.
 It provides a dynamic basis for comparison because it is
automatically related to changes in volume.

The formulation of a flexible budget begins with analyzing the overhead

into fixed and variable cost and determining the extent to which the
variable cost will vary within the normal range of activity.

There are two methods of preparing such a budget:

i. Formula Method / Ratio Method: This is also known as the Budget
Cost Allowance Method. In this method the budget should be
prepared as follows:
a. Before the period begins:
 Budget for a normal level of activity,
 Segregate into fixed and variable costs,
 Compute the variable cost per unit of activity

b. At the end of the period:

 Ascertain the actual activity

54
  Compute the variable cost allowed for this level, add the fixed cost to
give the budget cost allowance.
The whole process is expressed in the formula:
Allowed cost = Fixed cost + (Actual units of activity for the period) (Variable
cost per unit of activity)
ii. Multi‐Activity Method: This method involves computing a budget for
every major level of activity. When the actual level of activity is known,
the allowed cost is found “interpolating” between the budgets of activity
levels on either side.

 Different levels of activity are expressed in terms of either production

units or sales values. The levels of activity are generally expressed in
production units or in terms of sales values.
 The fixation of the budget cost gives allowance for the budget centres.
According to CIMA London, the budget cost allowance means, "the cost
which a budget centre is expected to incur during a given period of
time in relation to the level of activity attained by the budget centre."
 The determination of the different levels of activity for which the
flexible budget is to be prepared.

(3) Graphic Method: In this method, estimates of budget are

presented graphically. In this costs are divided into three classes, viz.,
fixed, variable and semi‐variable cost. Values of costs are obtained for
different levels of production. These values are signified in the form of a
graph.

Model of Flexible Budget

Capacity Utilization
Particular 60 80 100
s % % %
1. Prime Cost:
‐ Direct Material ‐ ‐ ‐
‐ Direct Labour ‐ ‐ ‐
‐ Direct expenses (if any) ‐ ‐ ‐
Total (A) ‐ ‐ ‐
2. Variable overheads:
‐ Maintenance & repairs ‐ ‐ ‐
‐ Indirect Labour ‐ ‐ ‐
‐ Indirect Material ‐ ‐ ‐
‐ Factory overheads ‐ ‐ ‐
‐ Administrative Overheads ‐ ‐ ‐

55
‐ Selling & distribution O/H ‐ ‐ ‐
Total (B) ‐ ‐ ‐
3. Marginal Cost (A + B) ‐ ‐ ‐
4. Sales ‐ ‐ ‐
5. Contribution ( Sales ‐ MC) ‐ ‐ ‐
6. Fixed cost
‐ Factory overheads ‐ ‐ ‐
‐ Administrative ‐ ‐ ‐
Overheads
‐ Selling & distribution O/H ‐ ‐ ‐
Total (C) ‐ ‐ ‐
7. Profit or Loss (C‐ FC) ‐ ‐ ‐

ZERO BASE BUDGETING [ZBB]:

The ‘Zero‐Base’ refers to a ‘nil‐budget’ as the starting point. It starts

with a presumption that the budget for the next period is ‘zero’ until
the demand for a function, process, or project is not justified for
single penny. The assumption is that without such justification, no
expenditure will be allowed. In effect, each manager or functional
head is required to carry out cost‐benefit analysis of each of the
activities, etc. under his control and for which he is responsible.

The method of ZBB suggests that the business should not only
make decision about the proposed new programmes but it should
also, regularly, review the suitability of the existing programmes.
This approach of preparing a budget is called incremental budgeting
since the budget process is concerned mainly with the increases or
changes in operations that are likely to occur during the budget
period.

This method for the first time was used by the Department of
Agriculture, U.S.A. in the 19 century. Other State Governments of
th

the U.S.A. found this method helpful and so almost all the states took
deep interest in the ZBB method. A number of states of America use
this technique even today. The ICAI has brought out a research in the
form of a monograph showing the application of the ZBB method that
worries in tandem with the concerns for national environment and its
requirements. In India, however, the ZBB approach has not been fully
accepted and actualized.

56
 "ZBB is a management tool, which provides a systematic
method for evaluating all operations and programmes, current or
new, allows for budget reductions and expansions in a rational
manner and allows re‐allocation of sources from low to high priority
programmes."

‐ David Lieninger

ZBB is a planning, resource allocation and control tool. It, however,

presupposes that
a. There is an efficient budgeting system within the enterprise.
b. Managers can develop quantitative measures for use in performance
evaluation.
c. Among the new suggestions and programmes, along with old
ones are put to a strict scrutiny.
d. Funds are diverted from low‐priority suggestions to high priority
suggestions.

PROCEDURE OF ZERO‐BASE BUDGETING:

1. Determination of the objective: This is an initial step for determining

the objective to introduce ZBB. It may result into the decreased cost
in personnel overheads or debunk the projects which do not fit in the
business structure or which are not likely to help accomplish the
business objectives.
2. Degree at the ZBB is to be introduced: It is not possible every
time to evaluate every activity of the whole business. After studying
the business structure, the management can decide whether ZBB is
to be introduced in all areas of business activities or only in a few
selected areas on the trial basis.
3. Growth of Decision units: Decision units submit their data as to
which cost benefit analysis should be done in order to arrive at a
decision that helps them decide to continue or abandon. It could be
a functional department, a programme, a product‐line or a sub‐line.
Here the decision unit sexist independent of all the other units so
that when the cost analysis turns unfavourable that particular unit
could be closed down.
4. Growth of Decision packages: Decision units are to be identified for
preparing data relating to the proposals to be included in the
budget, concerned manager analyzes the activities of his or her own
decision units. His job is to consider possible different ways to fulfill
objectives. The size of the business unit and the volume of goods it
deals with determine the number of decision units and packages.
The decision package has to contain all the information which helps
57
 the management in deciding whether the information is necessary
for the business, what would be the estimated costs and benefits
expected from it.
5. Assessment and Grading of decision packages: These
packages invented and formulated are submitted to the next level of
responsibility within the organization for ranking purposes. Ranking
basically decides as to whether or not to include the proposals in the
budget. The management ranks the different decision packages in
the order from decreasing benefit or importance to the organization.
Preliminary ranking is done by the unit manager himself and for the
further review it is sent to the superior officers who consider overall
objectives of the organization.
6. Allotment of money through Budgets: It is the last step
engaged in the ZBB process. According to the cost benefit analysis
and availability of the funds management has ranks and thereby a
cut‐off point is established. Keeping in view reasonable standards,
the approved designed packages are accepted and others are
rejected. The funds are then allotted to different decision units and
budgets relating to each unit are prepared.

Advantages:
 ZBB rejects the attitude of accepting the current position in
support of an attitude of inquiring and testing each item of
budget.
 It helps improve financial planning and management information
system through various techniques.
 It is an educational process and can promote a management team
of talented and skillful people who tend to promptly respond to
changes in the business environment.
 It facilities recognition of inefficient and unnecessary activities and
avoid wasteful expenditure.
 Cost behavior patterns are more closely examined.
 Management has better elasticity in reallocating funds for
optimum utilization of the funds.

Disadvantages:
 It is an expensive method as ZBB incurs a huge cost every in its
preparation.
 It also requires high volume of paper work; hence sometimes it becomes
a tedious job.
 In ZBB there is a danger of emphasizing short‐term benefits at the
expenses of long term ones.

58
 This is not a new method for evaluating various alternatives, and cost‐
benefit analysis.
 The psychological effects can also not be ignored. It holds out high
hopes as a modern technique, claiming to raise the profitability and
efficiency of the business.

59