Economics and Innovative Technologies. Vol. 2020, No. 1, January-February
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00045)
METHODOLOGY OF CALCULATING BUDGETING AT
INDUSTRIAL ENTERPRISES
Abdusalomova Nodira Bakhodirovna
Doctor of Economics (DSc)
Associate Profeccor of “Accounting”
Department Tashkent State Economic University
E-mail:
Abstract:
This article is devoted to the consideration of the issues related to budgeting
at industrial enterprises. Based on the research results, the author has developed relevant
proposals. In addition, the scheme of the budgeting for the enterprises of the ferrous
metallurgical industry has been proposed.
Key words:
Industrial enterprise, budgeting, financial budget, operating budget.
Introduction
Rapid changes in the external and internal environment of the enterprise oblige the
management of industrial enterprises to search for efficient ways of making decisions to
achieve their strategic goals. One of the financial instruments for achieving the goals is
budgeting which combines management and accounting and which enables to adequately
utilize the company
’
s resources.
The functions of enterprise management include planning of its activities in the
form of budgeting with subsequent analysis of the budgets executed. The success of
industrial enterprises is based not only on cost and income accounting, but also in
adequate management. Planning promotes achieving the economic goals set forth for the
company. Under conditions of the global economy, when competition plays a huge role, it
is impossible to achieve an increase in profits without taking into account consumer-based
approach. With the aim of using money of the company as efficiently as possible, it is
required to use simple management accounting mechanisms. Budgeting is considered to
be one of such mechanisms.
Literature review
Before launching the budgeting process, an industrial enterprise sets forth itself a
specific mission. In order to fulfill this mission, the enterprise develops its strategic plans
which constitute the strategy for achieving the company
’
s goals (Karu, 2008).
The main business processes can include supply, production, sales, i.e. the creation
and sale of services or products. These processes are provided through the available
resources, employees of the company and financial opportunities.
In our opinion, budgeting is a process of coordinated planning and management the
company’s performance
using the indicators that help to determine the contribution of
each subdivision and each manager in achieving goals. As our research has demonstrated,
more than half of the companies are not able to develop budgets that comply with the
company’
s strategy. Accordingly, the achieved result on the basis of the adopted budget
does not coincide with the goal determined for the company. The basis of budgeting is cost
minimization, and not the search for how to increase the value of the company.
Economics and Innovative Technologies. Vol. 2020, No. 1, January-February
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From the point of view of the author, budgeting can be determined as a continuous
process of the efficient
use of the company’
s resources to minimize costs for a certain
period. The budgeting process is carried out through planned budgets determining the
centers of responsibility for execution, accounting of the received data and analysis of
their deviations in order to avoid the repetition of mistakes in the future.
Analysis and discussion
The main aim of the budgeting is to coordinate all aspects of the company. The
objectives which must be solved by the budgeting can be formulated as follows (Shiborsh,
2003):
- budgeting is required for understanding where, when, how and for whom you are
going to produce and sell products;
- budgeting is required for a certain volume and amount of resources needed to
achieve the goals;
- budgeting is required for the efficient use of attracted resources.
In the opinion of the author, the main objectives and relevance of budgeting is
associated with the elaboration of strategies and modernization of management
development and planning processes, resource allocation, optimization and analysis. The
role of budgeting also includes the delegation of tasks, transfer and development of
information and rather significant for the staff motivation.
The main functions of compiling the budget are the following:
•
developing and selecting the strategy;
•
providing the information to be selected;
•
making accountants and managers to plan;
•
creating prerequisites for measuring, analyzing and evaluating performance;
•
promoting coordination of actions, delegating powers and transferring the
information from one subdivision to another one;
•
developing and motivating employees.
The budget management cycle is a continuous process and a particular attention
should be paid to each stage, and the continuity of the cycle can be demonstrated in Figure
1. This picture illustrates how the budgeting process should ideally happen, but often in
practice not everything is so perfect as it seems.
As it is obvious from the Figure, budgeting is a constant cyclical process and each of
its stages is a structural unit of the whole system.
At the planning stage, the number of available or borrowed resources is determined
to achieve certain results in future. Theoretical knowledge, scientific findings, economic
condition of the company in this market help to efficiently schedule the achievement of
planning results. An assessment of the planning efficiency is provided by comparing
planned and actual results.
Another significant objective of budgeting is coordination. The interconnection of
individual units can be observed at this stage. Moreover, the whole budget system is
consolidated into a single system of the company, which in turn, facilitates coordination of
operational activities.
Further the determination of responsibility centers in structural divisions is
identified. Furthermore, interrelations between different divisions are established, and the
hierarchy in management is determined. Execution and control represent one more
Economics and Innovative Technologies. Vol. 2020, No. 1, January-February
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significant objective. Execution is analyzed on the basis of the comparison of planned and
actual while control ensures the smooth implementation of the planned budget.
Figure 1. Budgeting cycle at industrial enterprises
1
The basis of budgeting is constituted by a common (master) budget which is
represented by a working schedule for the company as a whole, coordinated across all
departments or functions. It consists of operational and financial budgets. Budgets are
developed both for structural units and for the company as a whole. Budgets of the
structural units are consolidated a single budget of the company called the master budget.
1.
Operational budget
includes: sales budget; industrial budget; budget of
inventory; procurement budget (use of materials or direct material costs); budget of
overhead costs; labor cost budget; budget of commercial expenses; budget of total and
administrative expenses.
2.
Financial budget
includes: pro forma income statement (profit and loss account);
cash flow budget (cash budget); forecast balance; capital expenditure budget (investment
budget).
In the structure of the master budget
the investment budget
has recently been
separated from the financial budget to the third component of the master budget.
The operational budget
illustrates planned operations for the upcoming year for a
segment or a separate function of the company. In the process of its preparation, the
projected volumes of sales and production are transformed into quantitative estimates of
income and expenses for each of the operating subdivisions of the company.
A financial budget
is a budget that reflects expected sources of funds and the
possible areas for their use in a future period.
1
Developed by the author on the basis of the research results.
Strategic planning
Budget
Annual
reports
Actual data
Reports (plan,
fact, deviations
)
Results of
the analysis
Current
plan
Setting aims
and objectives
Execution and
accounting
Control
Preparing
annual
reports
Analysis
ANNUAL CYCLE
Clarifying
plans
Analysis
Execution and
accounting
MONTHLY CYCLE
Economics and Innovative Technologies. Vol. 2020, No. 1, January-February
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The budget for the purchase of raw materials and consumables represents a plan
for the equipment and material procurement unit. This plan for the equipment and
material procurement unit is developed with the account of the following factors:
• production program;
• standards of reserves of material resources;
• rates of consumption of raw materials
and consumables, semi-finished products,
fuel, spare parts;
• plans for capital con
struction, reconstruction, pre-production of new goods, repair
and maintenance of equipment, buildings, structures, household objects, etc.;
• balances of material resources at the beginning and end of the planned period;
• established and newly
opened relationships with suppliers;
• prices for all types of material and technical resources.
The basic stage of budget planning is to determine the need for materials for the
core business. This term refers to the part of the compa
ny’
s variable costs, related to the
costs of tangible floating assets (raw materials, consumables, spare parts, etc.).
In terms of the stages of the financial cycle direct materials are divided into:
•
related to the production stage;
•
related to the sales stage.
The need for materials for the core business activities at industrial enterprises
(
)
is determined by the formula:
(1)
2
where
Qi
–
production
volume
on
each
item
(units);
ni
–
material consumption rate for one product with the into account process losses
(physical units);
m
–
number of product names.
Total need for certain materials (
Gm)
is determined by the formula:
2)
3
where
necessity for materials for the core business production,
Zn.m
–
norm for materials inventory;
Za.m
–
actual availability of materials at the enterprise;
Gm.n.e
–
necessary amount of materials to modify uncompleted production;
G.m.r.m
–
necessity in materials for repairing and maintenance activities.
Necessity for material resources is determined by:
•
core business production, including production of components and spare parts;
• production of
machinery and tools;
• production of non
-standard equipment and equipment modernization;
• reconstruction of
production workshops and sites;
• repair
ing and maintenance needs;
•
major construction;
•
activities of social, cultural and household spheres;
•
stockpiling.
2
Developed by the author on the basis of the research results.
3
Developed by the author on the basis of the research results.
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The development stage of the budgeting system is the most complicated and time
consuming. Before starting to create this system, it is necessary to determine how the
org
anization will plan its activities: targeted planning (or “top
-
down” planning) and
“bottom
-
up” planning (Savchuk, 2005).
When the budget is d
eveloped in “bottom
-
up” way
based on the activity plans of
certain subdivision which are further submitted upward to determine the indicators for the
entire company. A particular plan aimed at achieving certain economic indicators is
complied on the basis of economic indicators. This kind of approach is carried out
in “top
-
down” way.
This process can be long, since the movement of information
“bottom
-
up” and
“top
-
down”
occurs several times to clarify and select the strategy and other aspects that
are important in budgeting.
The considered budgets are static or fixed as they are calculated at one specific level
of expected sales or production. A total budget that includes all periodic budgets is usually
developed for a fixed, projected or regulatory level of output. Prior to analyzing deviations
from the budget data, with the aim control, the whole set of the budget data should be
adjusted for the corresponding actual release. A flexible budget is used for these purposes.
It should be noted that a flexible budget provides forecast data for different levels of
output within the usual levels of activity. With a flexible budget, the link between a static
budget and actual results is clearly indicated.
A flexible budget (or variable budget) is designed to take into consideration
alterations at the level of activity, for example, production volume. Within the period over
which the budget is compiled, items of fixed costs such as rent, for example, are not
modified with changes in the production volume. Other costs will vary in proportion to the
level of the output or sales.
With a flexible budget, the production cost per each item of production is
determined by reconsidering budget indicators in terms of the actually achieved level of
production. With the aim of cost management it is possible to analytically compare actual
costs and the amount of funds allocated by the budget, since planned and actual costs are
calculated for the same production level.
The use of a flexible budget in practice represents the process of preparing a
number of budgets that determine profits and costs for different levels of activity, for
example, for production. As an alternative option to several budgets it is possible simply to
reconsider the budget figures at the end of the budget oversight period when the
production level becomes available.
The table below considers the use of a flexible budget for analysis and oversight by
case-
study of “
ABC Metkombinat
” industrial enterprise. Thus
Table 1 presents the actual
and budget data for
“
ABC Metkombinat
” over a
year.
As the Table illustrates, the actual costs exceeded the targeted costs by 14 300 or
7,2%. Thus it is possible to calculate that this excess is very significant and unfavorable.
However, it should be noted that the actual output (19100 tons) was higher than the
planned one (17500 tons), and thus comparing the results of the performance with the
static budget data is not adequate for assessing implementation of the cost budget.
Economics and Innovative Technologies. Vol. 2020, No. 1, January-February
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Table 1
Comparison of actual and budget data
4
(thousand UZS)
Items of expenditures
Budget
Actual
Deviation
Direct materials
42,000
46,000
(4,000)
Direct labor costs
68,250
75,000
(6,750)
General production expenses
Variable
Indirect materials
10,500
11,500
(1,000)
Indirect labor costs
14,000
15,250
(1,250)
Utility costs
7,000
7,600
(600)
Others
8,750
9,750
(1,000)
Fixed
Salary of inspector
19,000
18,500
500
Amortization
15,000
15,000
-
Utility costs
4,500
4,500
-
Others
10,900
11,100
(200)
TOTAL
199,900
214,200
14,300
Budget output constituted 17500 tons.
Actual costs on the actual production volume constituted 19100 tons.
To achieve accuracy and legitimacy of the analysis we must adjust the budget data
for the actual output of 19100 tons. Unlike a static budget, a flexible budget provides
forecast data automatically adjusted to changes in the output level. The budget
consolidates the account data by the selected direction or business object. The budget is
planned on the basis of the norms adopted in this direction or the object with the account
of their previous functioning.
The budget is a management tool based on the analysis of the reasons of deviations
of the actual indicators from the planned ones (Figure 2).
Figure 2. Management scheme on the basis of the analysis of reasons of deviations of
actual budget indicators from the planned indicators
5
4
Developed by the author on the basis of the research results.
5
Developed by the author on the basis of the research results.
Indicators (digital)
Items (To group the indicators)
Analytical objects (directions of analysis)
Norms
PLAN
TIME
deviation
Responsibility
centres
FACT
CURRENCY
Economics and Innovative Technologies. Vol. 2020, No. 1, January-February
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The budget has a hierarchical structure of the items where the most complicated
item has one or more numerical indicators. The system of indicators is created within the
framework of the concept of BIS (Balanced Indicators System). We must determine the
basic leading indicators to evaluate the analyzed business processes and business objects,
as well as to group these indicators into appropriate items articles and then into budgets
(Figure3).
Figure 3. Budgeting process at industrial enterprises
6
The main aims of improving the budgeting system include the relationship of unity
of plans and strategic management in the efficient management of the enterprise. As it has
been previously noted, reporting should be available and understandable to the person
whom this information is addressed. In addition, promptness and reliability of the
necessary information are also very important. Maintaining a unified system of accounting
and management accounting will promote rapid processing of the required information.
The selection of responsibility centers will assist in finding a person responsible
for the implementation of the plan and for analyzing deviations of performance at any
time. Coordination of responsibility of the structural units for the budget execution
facilitates making timely adjustments to the budget. Data for the future period should be
analyzed and appropriate adjustments should be made to avoid previous mistakes and
omissions.
It will be inefficient to develop a completely new budgeting system, as the
company has already developed a certain system. It is necessary to comprehensively
6
Developed by the author on the basis of the research results.
Business Strategy of
Company
Total
Economic efficiency
Norms
ы
Balanced Indicators System
Creating the Budgeting model
Planning on the budget basis
Collection of actual data
Budget execution analysis
Feasible management decision
Adjustment of production
program and business processes
Plan adjustment
Budgeting model adjustment
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analyze all stages of the budgeting process, as well as evaluate each process and find a
more efficient solution.
It should be noted that when preparing the expenditure budget, the company
naturally aspires to reduce costs which can also affect the product quality. Prime-cost
reduction and, as a consequence, a decline in the sale price cannot be a guarantee that the
goods will be in demand by the consumer. The consumer is willing to pay for quality, so it
is required to use a careful and reasonable approach to the preparation of the expenditure
part of the master budget having selected choosing the most appropriate option between
reducing production costs or choosing suppliers or competitiveness.
On the basis of the studied theory and analysis of the state of the budgeting system,
the author has developed relevant recommendations to be implemented at the industrial
enterprises.
Conclusion
An efficient budgeting system will promote elimination of problems even before
they occur taking into consideration ongoing monitoring and analysis of deviations.
Furthermore, it will enable to visually observe the connection between different structural
subdivisions by identifying responsibility centers in budgeting and motivating staff to
achieve a single goal for an industrial enterprise.
The problem of budgeting is basically challenged by an accountant when it is
necessary to compile an annual report and provide data on budget execution and future
plans. Often budgets are transferred from the head office which can be located abroad as
it happens at the enterprise selected as a case-study. The received budget remains as just
a plan on paper without bringing any benefit. To achieve benefits provided by the
compiled budget it is necessary to implement a number of measures. In this regard each
employee of the company must be familiarized with the aim and objectives of the
company for future.
Each of the process participants should be interested in achieving the aims set forth.
Aims and objectives should be clear to everyone, they should be neither easy nor difficult
to achieve otherwise the employees disappear.
In connection with the rapidly changing economic conditions, budgets compiled
for a year and split by months with the aim of making necessary adjustments are
recommended to be reconsidered at least a quarter. New technologies and competition
are forcing company executives to rapidly respond the changes in the external
environment and wherein budgeting will help with a constant analysis of the fact and the
plan.
Reference
1.
Shiborsh K.V. (2003). Budget planning of the performance of the industrial
enterprises / K
.В.
Shiborsh// Auditor
№ 3.
2.
Savchuk V.(2005). Budgeting for a month: objectives and technologies// Financial
Ditector.
3.
Karu S. (2008). Efficiency of the cost management. Or, in other words, how to
transfer expenditures into revenues. Journal “Accounting news” №
6 (109).
