Budget Project - MBA - R.M

CHAPTER - I 1.1

INTRODUCTION ABOUT THE STUDY ON BUDGET AND BUDGETARY CONTROL

INTRODUCTION A budget is the pre-determined the future events. The word budget is derived from a French term “Bougetfe” which denoted a Leather pouch in which finds are appropriates for meeting anticipates Expanses. The same meaning applies to the business management. A budget is a numerical statement expressing the plans. Polices and goals of the enterprise for a definite period in the future. It is a plan laying down the target to be achieved with in specified period. It is a final and approved share of a forecast when forecasts are approved by the management as a tentative plan for the future they become budget. DEFINITION “Budget us an estimate of future needs arranged according to an orderly basis, covering, some or all of the activities of an enterprise for definite period of time” -

George R.Terry.

“A Budget is a comprehensive and Co-iodinated plan, Expressed in financial terms, for the Operations and resources of an enterprise for some specific period in the future” A Budget is a predetermined statement of management policy during a given period of which provides a standard for comparison with the results actually archived. -

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Brown and Howard

BASIC ELEMENTS OF A BUDGET  Budget is a comprehensive plan of what the enter pries endeavors to achieve.  It is a statement in terms or quantity or both.  It is a prepared for a definite future period.  It is prepared period to the defined period.  It Provides yardsticks and measures for the purpose of comparison  It is prepared in Advance and refers to the future course of action. PURPOSE OF A BUDGET  It directs the attention of all concerned to the afffainment of a common goal  It leads to the disclosure of organizational weakness. The budgets are Compare with actual performance, and variances. It any investigations this Step helps in taking corrective and remedial measures  It aims at careful control over the performance and cost of every function.  It co ordinates efforts of all department in order to achieve an integrated order to Achieve an integrated goal. Budget grows from bottom and are controlled from Top level CHARACTERISTICS ESTABLISHMENT Budget is prepared for each department and then the plans and objectives are presented before the management.

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CONTINUOUS COMPARISON The essential feature of budgetary control is conduct continuous comparison of Actual performance with budgeted figure, revealing the variations. Revision budgets are revised. It necessary according to changed conditions. ESSENTIALS OF A SUCCESSFUL BUDGETARY CONTROL  The budgetary control system should have full support of top management  There should be well – planned organizational set – up, with responsibility and Authority clearly demarked.  The accounting system should provide accurate and timely information.  Budgets have no meaning unless they lead to control action as a consequence of Feedback provided.  Staff should be strongly and properly motivated towards the system.  The budget should lay down the target, which are realistic and attainable.  Budget should actually aim as a co-coordinating device rather than control device. CLASSIFICATION OF BUDGETS BUDGET

On the Basis of time • Long term • Short term • Current

On the basis of flexibility * Fixed * Flexible

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On the basis of function * Sales * Production * Material * Labor * Overheads

* plant utilization * Cash * Capital * Expenditure 1.2

INDUSTRY PROFILE A mainstream cooperative comprises a legal entity owned and

democratically controlled by its members, with no passive shareholders, unless they hold non-voting shares. It thus combines the equal control characteristic of many partnerships with the legal personality conferred on corporations. In the United States most cooperatives are organized as limited liability companies (LLCs) but other legal entities may also be used. Co operative may or may not pay dividends. For Co-operatives failing in the latter category, any surplus may be returned to members by way of a rebate or bonus on their activity width the cooperative or a dividend on their shareholding in the cooperative. In the United Kingdom the traditional corporate form taken by cooperatives is the bonafide co-operative’ under the Industrial and Provident Societies Acts. Since the 1980’s,however, many have incorporated under the Companies acts, limited either by shares or ‘common ownership’ and have a zero or nominal share capital, along with a clause stipulating altruistic dissolution. This means that the cooperative cannot be wound up and its assets distributed for personal profit (see: asset stripping). The facility to legally lock a cooperative’s assets in this way was brought into force in 2004. In the European Union, the European Co-operative Statute provides a corporate form for cooperatives with individual or corporate members in at least two of the EU member’s states. In the European Union and in large regions of America, cooperatives, with associations, foundations and mutual funds, are considered parts of the Social economy or Third Sector. 4

A Co-operative (also cooperative or co-operative or co-op) has been defined in the international Co-operative Alliance (ICA) Statement on the Co-operative Identity as

“an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and

Democratically-controlled enterprise.” They “are based on the values of self-help, selfresponsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others. Such enterprises are the focus of study in the field of Co-operative. CO-OPERATIVE IDENTITY Main article: Statement on the Co-operative Identity Such legal entities have a range of unique social characteristics. Membership is open, meaning that anyone who satisfies certain non-discriminatory conditions may join, Unlike a union, in some jurisdictions a cooperative may assign different numbers of votes to different members. However most cooperatives are governed on a strict “one member, one vote”basis, to avoid the concentration of control in an elite. Economic benefits are distributed proportionally according to each member’s level of economic interest in the cooperative, for instance by a dividend on sales or purchases. Co-operative may be generally classified as either consumer or producer cooperatives, depending largely on the mutual interest (see mutual organizations) that there membership shares. POPULARITY AND PHILOSOPHY

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Worldwide, some 800 million people are members of cooperatives, and it is estimated that cooperatives employ some 100 million people.

Co-operatives have been presented as an ideal organizational form for proponents of a number of socio-political philosophies, including Co-operative Individualism and cooperative Federalism; such literature often cities the achievement of a Co-operative Commonwealth as an ultimate objective. The cooperative movement often has links and association with Green politics or Socialist Politics, with socially responsible investing, and with the social enterprise movement. Alternatively, the term may be used loosely to signify its members ‘ideology. HISTORY OF THE CO-OPERATIVE MOVEMENT Main article: History of the co-operative movement Robert Owen (1771-1858) fathered the cooperative movement. A Welshmen who made his fortune in the cotton trade, Owen believed in putting his workers in a good environment with access to education for themselves and their children. These ideas were put into effect successfully in the cotton mills of New Lanark, Scotland. It was here that the first co-operative store was opened. Spurred on by the success of this, he had the idea of forming “Villages of co-operation” where workers would drag themselves out of poverty by growing their own food, making their own clothes and ultimately becoming self-governing. He tried to form such communities in Orbiston in Scotland and in New Harmony, Indiana in the United States of America, but both communities failed. Although Owen inspired the co-operative movement, other-such as Dr William King (1786 – 1865) took his ideas and made them more workable and practical. Kint believed in starting small, and relized that the working classes would need to set up cooperatives for themselves, so he saw his role as one of instruction. He founded a monthly periodical called the cooperator, the first edition of which appeared on May 1,1828. This

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gave a mixture of co-operative principles. King advised people not to cut themselves off from society, but rather to form a society within a society, and to start which a shop because, “We must go to a shop every day to buy food and necessaries-why should we not go to our own shop?” He proposed sensible rules, such as having a weekly account

Audit, having 3 trustees, and not having meetings in pubs (to avoid the temptation of drinking profits). A few poor weavers joined together to form the Rockdale Equitable Pioneers Society at the end of 1834. The Rockdale pioneers, as they became known, set out the Rockdale Principles in 1844, which have highly influential through the cooperative movement. Co-operative communities are now widespred, with one of the largest and most successful examples being at Modaragon in the Basque country of Spain (See link technically not cooperatives, were also successful in Yugoslavia under Tito where worker’s councils gained a significant role in the management. In many European countries, cooperative institutions have a predominant market share in the retail banking and insurance businesses. An annual general of retail co-operative in England, 2005. In the UK, Co-operatives formed the Co-operative party in the early 20th century to represent members of co-ops in parliament who were elected at the 2005 General Election as Layout and Co-operative’ MPs. UK Co-operatives retain a significant market share in food retail, insurance, banking, funeral services, and the travel industry in many parts of the country. TYPES OF CO-OPERATIVES Housing Co-operative Main article: Housing Co-operative A housing Co-operative is a legal mechanism for ownership of housing where residents either own shares (share capital co-op) reflecting their equity in the cooperative’s real estate, or have membership and occupancy rights in a not-for-profit cooperative (non-share capital co-op), and they underwrite their housing through paying subscriptions or rent.

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Housing cooperatives come in three basic equity structures. In market- rate Housing co-ops, members can sell their in the co-op whenever they like for whatever price the market will bear, much like any ither residential property. Market-rate Co-ops

Is very common New York City limited equity co-ops. Which are often used by affordable housing developers, allow members to own some equity in their home, but limit the sale price of their membership share affordable to future members. In the third structure, called zero-equity or “Group Equity” by the North American Students of Cooperation (NASCO), one of the proponents of this model, individual members do not build up equity in the co-op the co-op is not owned by its members, but by itself. Housing cooperatives may occupy various types of physical structure. Co-ops can be structured as individual housing units grouped together, such as in an apartment building, or they can be groups of people living together in one housing unit, as an alternative to the traditional family structure. BUILDING CO- OPERATIVE Main article: Building Co-operative Members of a building cooperative in Britain known as a self-build housing co-operative pool resources to build housing, normally using a high a proportion of their homestead, and the co-operative may be dissolved. This collective effort was at the origin of many of Britain’s building societies, which persisted in some of their names (such as the former Leeds permanent). Nowadays such self-building may be financed using a step-by-step mortgage which is released in stages as the building is completed. The term also refers to worker’s co-operatives in the building trade. RETAILER CO-OPERATIVE Main article: Retailer’s Co-operative

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A retailer’s Co-operative (often known as a secondary or marketing co – operative in the UK) is an organization, which employs economics of scale on behalf of its members to get discounts from manufactures and to pool marketing. It is common for locally owned co-operative are businesses rather than individuals.

The well-known Best Western hotel chain is actually a giant co-operative, although it now prefers to call itself a nonprofit membership association” It gave up on the “Co-operative” label after the courts kept insisting on calling it a franchiser despite its nonprofit status. UTILITY CO-OPERATIVE Main article: Utility Co-operative A utility co-operative is a public utility that is owned by its customers. It is a type of customer co-operative, in the US many such co-operatives were formed to provide rural electrical and telephone service as part of the New Deal. See Rural Utilities Service. WORKER CO-OPERATIVE Main article: Worker Co-operative A worker Co-operative or producer co-operative is a cooperative that is wholly owned and democratically controlled by its “worker-owners”. There are no outside, or consumer owners, in a workers’ cooperative-only the workers own shares of the business. Membership is not compulsory for employees, and employees can become members. SOCIAL CO-OPERATIVE Main article: Social Co-operative A Particularly successful form of multi-stakeholder co-operative is the Italian “Social Co-operative”, of which some 7,000 exist. “Type A social cooperative bring together providers and beneficiaries of a social service as members. “Type B” social cooperatives bring together permanent workers and previously unemployed people who wish to integrate into the lab our market.

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SOCIAL CO-OPERATIVES ARE LEGALLY DEFINED AS FOLLOWS: o The objective is the general benefit of the community and the social integration of citizens. o Type A cooperatives provide health, social or educational services o Those of Type B integrate disadvantage people into the labor market. The categories of disadvantage they target may include physical and mental disability, drug and alcohol addiction, developmental disorders and problems with the law. They do not include other factors of disadvantage such as race, sexual orientation or abuse. o Various categories of stakeholder may become members, including paid employees, beneficiaries, Volunteers (up to 50% of members), financial investors and public institutions. In Type B Co-operative at least 30% of the members must be form the disadvantaged target groups. A good estimate of the current size of the social co-operative sector in Italy is given by updating the official ISATAT figures from the end of 2001 by an annual growth rate of 10%(assumed by the Direzione Generate per gli Ente Cooperative). This gives totals of 7,100 social co-operatives, with 267,000 members, 223,000 paid employees, 31,000 volunteers and 24,000 disadvantaged people undergoing integration. Combined turnover is around 5 billion euro. The co-operatives break into three types: 59% type A (social and health services), 33% type B (Work integration) and 8% Mixed. The average size is 30 workers.

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CONSUMER’S CO-OPERATIVE Main article: Consumer’s Co-operative The term co-operative also applies to business owned by their customers: a consumer’s co-operative. Employees can also generally become members. Members vote on major decisions, and elect the board of directors from amongst their own number. A well-known example in the US is the REI (Recreational Equipment Incorporated) Cooperative and in Canada: MEC (Mountain Equipment Co-op). The world’s largest consumer co-operative is the co-operative Group in the United Kingdom, which has a variety of retail and financial services. There are also a number of other, independent consumer co-operative societies in the UK, such as the East of England Co-operative society and Miscounted Co-operative. In fact the Co-operative Group is actually something of a hybried, having both corporate (other consumer cooperatives) and individual members. Japan has a very large and well developed consumer co-operative movement with over 14 million members; retail co-ops alone had a combined turnover of 2.519 trillion yen (21.184 billion US Dollars (market exchange rates as of 11/15/2005) in 2003/4.(Japanese Consumer’s Co-operative Union., 2003) As well as retail co-ops there are medical,housing,insurance co-ops alongside institutional(workplace based) co-ops for school teachers and university based co-ops. Around 1 in 5 of all Japanese households belong to a local retail co-op and 90% of all co-op members are women. (Takamura, 1995). Nearly 6 million households belong to one the 1,788,000 Han groups (Japanese Consumer’s cooperative Union., 2003).These consist of a group of five to ten members in a neighborhood who place a combined weekly order which is then delivered by truck the following week. A

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particular strength to Japanese’s consumer co-ops is recent years has been the growth of community supported agriculture where fresh produce is sent direct to consumers from producers without going through the market.

AGRICULTURAL CO-OPERATIVE Main article: Agricultural Co-operatives Agricultural Co-operatives are widespread in rural areas. In the United States, there are both marketing and supply co-operatives. Agricultural marketing co-operatives, some of which are government sponsored, promote and may actually distribute specific commodities. There are also agricultural; supply cooperatives, which provide inputs into the agricultural process. In Europe, there are strong agricultural/agribusiness co-operatives, and agricultural co-operative banks. Most emerging countries are developing agricultural cooperatives. Where it is legal, medical, marijuana is generally produced by co-operatives. CO-OPERATIVE BANKING (Credit unions and Co-operative Savings Banks) Main articles: Co-operative banking and credit union. The Co-operative Bank’s head office, I Ballon Street, Manchester. The statue in front is of Robert Owen, a pioneer in the Co-operative banking. In North America, the caisse popularize movement started by Alphonse Discarding in Quebec, Canada pioneered credit unions. Discarding wanted to bring desperately needed financial protection to working people. In 1990. From his home in levis, Quebec, he opened north America’s first credit union, marking the beginning of the movement Discarding. While they have not taken root so deeply as in Ireland or the USA, credit unions are also established in the UK. The largest are work – based, but many are now offering services in the wider community. The Association of British Credit unions Ltd

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(ABCUL) represents the majority of British Credit Unions. British Building Societies developed into general purpose savings & banking institutions with “one member. one vote” ownership and can be seen as a form of financial cooperative(although many’demutualised’ into conventionally-owned banks in the 1980’s & 1990). The UK CoOperative Group includes both an insurance provider CIS and the Co-operative Bank, both noted for promoting ethical investment. Other important European banking co-operative include the Credit Agricole in France, Migros and Coops bank in Swizerland and the Raiffeisen system in many Central and Eastern European countries. The Netherlands, Spain, Italy and various European countries also have strong cooperative banks. They play an important part in mortgage credit and professional (i.e. farming) credit. Co-operative banking networks, which were nationalized in Eastern Europe, work now as real cooperative institutions. A remarkable development has taken place in Poland, where the SKOK (Spoldzielcze Kasy Oszczednosciowo – Kredytowe) network has grown to serve over 1 million members via 13,000 branches, and is larger than the country’s largest conventional. Bank. In Scandinavia, there is a clear distinction between mutual savings banks(Spar bank) and true credit unions(Andelsbank). CAR SHARING Main article: Car sharing Car sharing is an arrangement by which individuals and groups share vehicles, which are stored in convenient common locations. It may be thought of as a very short term, locally based care hire, run on a member’s only basis. It is most prevalent in Swizerland (Where the Mobility Car Sharing cooperative has more than 50,000 clients), but is also common in Germany, Austria, and the Netherlands, and is fast growing in popularity in other European countries, Asia and North America. Car sharing

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operations may be for profit or non – profit organizations. Zipper and Flex car are examples. In Britain, where the term ‘car sharing’ has also been used for carpools or ride sharing, some people prefer the term ‘car clubs’. FEDERAL OF SECONDARY CO-OPERATIVES Main article: Co – operative Federation In some cases, Co-operative societies find it advantages to form Federal or Secondary Co-operatives in which all members are themselves Co-operatives. Historically, these have predominantly come in the form of Co-operative Wholesale Societies, and co-operative unions. Co-operative Federations are a means through which co-operative Societies can fulfill the sixth Rockdale principle, co-operation amongst cooperatives, with the ICA nothing that “Co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional and international structures. See Also: List of Co-operative Federations CO-OPERATIVE WHOLESALE SOCIETY Main article: Co-operative wholesale society According to Co-operative economist Charles Gide, the aim of a Co-operative wholesale society is to arrange “bulk purchases, and if possible, organize production.” The best historical examples of this were the English EWS and the Scottish CWS, which were the forerunners to the modern co-operative Group. CO-OPERATIVE UNION Main article: Co-operative Union

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A Second common form of Co-operative Federation is a Co-operative union, whose objective (according to Gide) is “to develop the spirit of solidarity among societies and in a word, to exercise the functions of a government whose authority, it is needless to say, is purely moral. “Co-operatives UK and the International Co-operative Alliance are examples of such arrangements.

CO-OPERATIVE PARTY Main article: Co-operative Party In some coutries with a strong Co-operative sector, such as the UK, Cooperatives may in some countries with a strong cooperative away find it advantages to form a parliamentary political party to represent their interests. The British Co-operative Party is a prime example of such an arrangement. 1.3 PROFILE OF THE COMPANY Arrival of the Tamil Nadu dairy development Corporation team. In the year of October 2nd 1974 and it is the starting of the first set of societies November 10th 1974. The Registration of Salem district Co-operative milk producer’s union ltd., on July 10th 1978 and it starts from October 7th 1978. The scope (or) the co-operative societies are covered only two districts. i.e. Salem at Namakal districts and it includes the societies 1101 of affiliated. The Salem district Co-operative milk producers union ltd., are start with authorized share capital of Rs.50 Laksh and paid-up Share capital of Rs.36, 41,100/-

VISION OF THE COMPANY o To give Quality milk to the customers o To give Quality of milk product like butter, Ghee

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o Remuneration prices to milk producers through out the years o Giving loans/ Dividend to members o Loan arrangement for purchase of cattle’s by members through banks Members o Can repay the loan by installments.

o Excess milk recited from the various places, stored and processed for skin Milk Powder. o Co-operative development programme started by National Dairy Development o Board to implement in unions to milk procurement. o Supply of quality cattle to members in the societal at reasonable price. o Manage the (or) maintain the standard price o To meet the competitions with private sections. o To Covered in all area customer.

QUALITY POLICTY(OBJECTIVE) 

To improve the quality of raw (Material) milk being received by union.



To ensure that all batches of packed milk, and milk product to be sent to the



Market, conforms to the stipulated under BIS, PEA Act and agmark



To maintain a high standard of house keeping and adopting GMP



To improve consumer satisfactions.

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ACTIVITIES i.

No of the functional societies 1015 for the year 2006-2007 upto December 2006.

ii.

Total No of the former member=3,21,652 (a) Women members – 408,672

(b) Scheduled Caste at trebles –48,532 (c) Pouring members –47,910 iii.

No of Milk collection Routes: 56

iv.

AV Quality of milk COW

BUFFALO

FAT %4.4

7.0

SNF%8.2

8.8

v.

Procurement Price Paid to producers Buffalo milk per kg price: 178.57-12.50

vi.

Milk payment schedule=every once in 10 days.

vii.

Daily Average procurement in liters in 3,71,877 litters

viii.

No of mobile veterinary unit –8

ix.

No of cases treated 47,020

x.

No of emergency veterinary unit 12.s

xi.

No of emergency cases treated 2,877.

xii.

Processing capacity in VPD (a) Salem Dairy (b) Chilling center

- 3,00,000 Attur

- 1,30,000

Namakkal

- 50,000

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P.Velur Xiii

- 50,000

Handling at present (a) Salem Dairy

- 1,70,000

(b) Chill ting center

Xiv

XV.

- Attur

- 1,30,000

Namakkal

- 50,000

P.Velur

- 50,000

Production Capacity per day AUTTER

- 9MT

GHEE

- 6MT

SMP

- 10 MT

Milk sent to Chennai in LPD: 2,14,279 per days.

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SALEM DISTRICT CO-OPERATIVE MILK PRODUCER’S UNION LTD

SL.NO

UNION CHAIRMAN

FROM

UPTO DATE

1

Thiru.P.Kannan, B.com, BL

07.10.78

30.04.80

2

Thiru.S.R.Karuppannan IAS

01.05.80

31.05.82

3

Thiru.p.Kannan, B.com, BL

01.06.82

06.10.84

4

Thiru.M.Periyasamy

07.10.84

31.10.85

5

Thiru.P.Palanisamy

01.04.85

15.05.85

6

Thiru.K.Kandasamy

16.05.86

09.06.82

7

Thiru.Velurajamani B.Sc., BL

10.06.87

22.02.88

8

Thiru.M.F.Parukthi IAS

26.10.88

09.07.89

9

Thiru.Surjith K.Sowthi IAS

10.07.89

16.07.91

10

Thiru.P.A.Ramaiya IAS

17.04.91

20.09.91

11

Thiru. P.A.Ramaiya IAS

21.10.92

24.10.93

12

Thiru.Prjkesosher prasanth IAS

05.11.93

04.11.93

13

Thiru.K.Palanisamy MLA

05.11.93

30.03.96

14

Thiru. Hansraj varma

12.04.96

31.05.96

15

Thiru.G. Muthusamy IAS

31.05.96

19.04.98

16

Thiru.MohamaduNasimuthin IAS

20.04.98

01.11.98

17

Thiru.M.Chinnathambi

02.11.98

25.05.01

18

Thiru.MohamaduNasimuthin IAS

26.05.01

06.06.01

19

Thiru.N.Dhajsazlyin IAS

07.06.01

25.07.01

20

Thiru.Dr.J.Radhakrishnan IAS

26.07.01

17.07.01

21

Thiru.Seduramachanderan IAS

18.07.03

05.06.03

22

Thiru.A.Sugumar IAS

06.06.04

06.05.03

23

Thiru.Therajkumar IAS

07.05.06

21.05.06

24

Thiru.N.Mathivanan IAS

22.05.06

Till Date

19

SALEM DISTRICT CO-OPERATIVE MILK PRODUCER UNION’S LTD SL.NO

MANAGING DIRECTOR &GM

FROM

UPTO DATE

1

Dr.R.Radhakrishnan M.Vsc., PG

27.07.73

03.06.84

2

Dr.T.Ramamurthy M.Vsc., IAICOA

07.05.88

15.09.88

3

Thiru.T.Jackap IAS

19.09.88

20.10.89

4

Dr.P.Periyasamy DEE PDR

21.10.89

02.11.89

5

Dr.M.Jasusavarinathan BE, DEE

03.11.89

07.04.91

6

Dr.Velusamy DE

04.04.91

18.04.91

7

Dr.A.Karpagavinayagam B.Vsc., PGDPM, MBA

19.04.91

24.07.94

8

Thiru.A.Manikkamvasagam M.A., M.Com, RD

25.07.94

21.10.94

9

Thiru.S.Elangovan B.Sc., MBA

22.10.94

13.12.94

10

Dr.M.K.Ramasamy B.Vsc.,

14.10.94

06.09.95

11

Thiru.Gothandaraman IDD

06.09.96

31.12.98

12

Dr.P.Suppaiya BE

01.01.99

13.06.99

13

Dr.P.Chadiramohan IAS

14.06.99

13.04.00

14

Dr.P.Suppaiya BE

14.04.00

17.09.00

20

CHAPTER – 2 2.1 OBJECTIVES OF STUDY  To analysis the income & expenditure Budgets  To Identify the budgeting methods for new projects & investment  To identify the unwanted expenses in Salem District Co-operative milk producer’s  Union ltd.  To ensure the availability of working capital 2.2 SCOPE OF THE STUDY The scope of the study is analysis only with Salem District Co-operative milk producer’s Union Ltd., budget and budgetary control from 01.04.2006 to 31.03.2007 2.3 LIMITATIONS OF STUDY Budgeting is time Consuming process during the preparation period, the business conditions may change and estimates may go working by that time. The successful operation and execution of budgets depends upon the efficiently of the executive personnel. Budgetary control is essentially a tool of decision-making and it helps the management in taking sound decisions. But it cannot replace the management. Budgeting necessitates the employment of specialized staff and this involves expenditure which small concerns may not afforded.

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The success of the budgetary control largely depends upon willing, co-operation or teamwork of all concerned. It there is no Co-operation, the whole systems Collapses.

CHAPTER – 3 REVIEW OF LETERATURE Modern business world is full of competition, uncertainty and exposed to different types of risks. This complexity of managerial problems has to the development of various managerial tools, techniques and procedures useful for the management in managing the business successfully. Budgeting is the most common. Useful and widely used standard device of planning and control. The budgetary control has now become an essential tool of the management for controlling costs and maximizing profit. Costs can be reduced, wastage can be prevented and proper relationship between costs and incomes can be established only when the various factors of production are combined in profitable way. The resources of a business can be effectively utilized by efficient conduct of its operations. This requires careful working out of proper plans in advance, Co-ordination and control of activities on the part of management. A Proper planning and control are essential for an efficient management. A good number of tools and devices are available. Of all these, the most important device used in budget. Cost accounting aims not only at cost ascertainment, but also greatly at cost control and cost reduction. Thus the management aims at the proper and maximum utilization of resources available. It is a possible when there is a pre-planning. Modern management aims that all types of operations should be predetermined in advance, so that the cost can be controlled at every step. The more important point is that the actual programme is compared with the pre-planned programme and the variances are analyzed and investigated. All are familiar with the idea of budget, at every walk of lifestate, firm, business etc., BUDGET MEANING

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Budget is an estimate of future needs arranged according to an orderly basis, covering some or all of the activities of an enterprise for definite period of time.

FORECAST AND BUDGET Forecast is mainly concerned with probable events; but budget is concerned with planned events. Forecast may be done for longer time; but budget is prepared for shorter periods. Forecast is only a tentative estimate and can be revised; but budget remains unchanged for the budget period. Forecast is a predication or an estimate of changes, if any, in characteristics, economic phenomena that may affect one’s business plans. It is a study into the future, when the forecasts are given a shape and approved by the management as a commitment, they become budgets. For example, sales forecast is an estimate for future sales, while a sales budget is a commitment with an objective to reach certain sales figures. Objectives of a Budget o It directs the attention of all concerned to the attainment of a common goal. o It leads to the disclosure of organizational weakness. The budgets are compared with actual performance; and variances, if any, are investigated. This step helps in talking corrective and remedial measure. o It aims at careful control over the performance and cost of every function. o It contributes to co-ordinate efforts of all departments in order to achieve an integrated goal. Budgets grow from bottom and are controlled from top-level. BUDGETARY CONTROL Budgetary control means the establishment of budgets relating to the responsibilities of executives to the requirements of a policy, and continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide basis for its revision.

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CHARACTERISTICS o Establishment budgets are prepared for each department and then the plans and objectives are presented before the management. o The budgetary control co-ordinates the plans of various departments and master budget is prepared. o Continuous comparison. The essential feature of budgetary control is to conduct continuous comparison of actual performance with budgeted figures, revealing the validations o Budgets are revised, if necessary, according to changed conditions.

ADVANTAGES  Budgets fix, the goals targets, without operation lacks direction.  Reduction in cost and elimination of inefficiency is achieved automatically.  The budget facilitates to maintain ordered effort and brings about efficiency in Results.  An effective system of budgetary control results in co-coordinated effort of all persons involved.  Budgetary control enables the management to decentralize responsibility without closing control of the business since it pinpoints inefficiency.  The Budgetary control and standard costing go hand and the co-operation of the Two gives the most effective result. It promotes mutual co-operation and team Spirits among the person involved.  Budgetary control ensures that the capital employed at a particular level is kept at A minimum level.  It facilitates and intelligent and planned forecast for future.

24

CHAPTER – 4 RESEARCH METHODOLOGY 4.1 RESEARCH DESIGN The methodology used in this study is both analytical and descriptive. The study is primarily is abased on the secondary data collective from Salem District Co-operative Milk Producers union Ltd., The data are extracted from the annual reports for a one year. The data collected were tabulated separately and received by managing data analysis and interpretation for the one year from 2006 to 2007. 4.2 SOURCE IF DATA The study is based on secondary data from publishes source like annual reports and balance sheet of the Salem District Co-operative Milk Producers Union Ltd., additional information was also obtains from the officials of the accounts departments and other officers of the company. 4.3 TOOLS OF ANALYSIS The tool of analysis followed in the study is monthly analytical and partly descriptive in nature. For the financial analysis the financial statements of the company have been used. The following techniques were adopted. According to time Long term budget Short term budget Current budget Flexible Cash budget

25

Sales budget Material Budget Capital Budget CHAPTER – 5 DATA ANALYSIS AND INTERPRETATION CLASSIFICATION OF BUDGET ACCORDING TO TIME I

long term budgets The budgets are prepared to depict long term planning of the business.

The period of long term budgets various five to ten years. Long-term budgets are prepared for some sectors of the concern such as capital expenditure, research and development. Long term finances etc., The long term planning is done by the top level management. ii short term budgets These budgets are generally for one on two years and are in the form of monetary terms. The Consumer Goods industries. Like sager cotton testiles,etc use short term budgets. III current budgets The period of current budgets is generally of months and weeks. The budgets are related are to the current activities of the business. Current budget is a budget, which is established for use over a short period of time and is related to current conditions. (B) BUDGET

CLASSIFICATION

ACCORDING

TO

FLEXIBILITY

FIXED

DEFINITION “a budget which is designed to remain unchanged irrespective of the level of the activity actually attained”

26

This is a budget, which is designed to remain unchanged irrespective of the level of activity actually attained. This is prepared for definite

production and capacity level. It is not adjusted according to activity level attained. The fixed budgets are not effective tools of cost control.These types of budgets have limited use.

FLEXIBLE BUDGET DEFINITION “A Budget, which by recognizing the difference between fixed, Semi-fixed and variable costs, is designed to change in relation to the level of Activity” This is a dynamic budget. It is budget, which is designed to change in accordance with level of activity. Actual output may differ from the budgeted output as such, It is necessary to modify the budget on the basis of changed output. The budget is prepared in such a way as to present the budgeted cost for different levels of activity. It is more realistic and practical, because changes expected at different levels of activity. It is more realistic and practical, because changes Expected at different levels of activity are given due considerations. It is also called variable budget or sliding scale budget. The expenses are divided into three categories such as o Fixed o Variable o Semi-Variable PREPARATION OF FLEXIBLE BUDGET  Decide the range of activity to develop a flexible budget

27

 Determine the cost behavior fixed, variable and semivariable to each  element of cost  Select the activity level

Prepare the flexible budget of Salem district co-operative milk producer’s union ltd., as on 01.04.2006 to 31.03.2007 capacity of units 3,08,000 Packing materials

612.35

Fuel & furnance oil(fixed)

260.51

Power(Steem water) 60%(fixed)

251.22

Consumables(Variables)

29.53

Spares P&M(80% Variables)

25.62

Repairs and maintanance(Fixed 70%)

4.07

Water charges(fixed(40%)

23.48

Insurance(fixed)

1.99

Rate & Tax

1.60

Wages

5.34

Labour Contract (20% variable)

12.32

Labour Contract for Sachet (Fixed)

8.39

Chemicals

2.51

Others

2.48

Analytical Charges

7.07 1246.48

28

You have prepare the flexible budget for the following capacity 3,00,000 unit and 3,16,00 units. The working hours of estimated for the C0-operative milk powder damaged 6,16000 hours

FLEXIBLE BUDGET SALEM DISTRICT CO-OPERATIVE MILK PRODUCER’S UNION LTD PARTICULARS Fixed Expenses Fule of Furance oil Power (Sleem Water) Spares(Palm)20% Repairs 70% Water Charges 40% Insurance 40% Labour contract 20% Labour Contract for Schet 20% VARIABLES Packing Material Power(steem water)40% Consumables Spares(prem)40% Repairs month 30% Water Charges 60% Rate and taxes Wages Labour Contract 80% Labour Contract for shet 80% Chemicals Others Analytical Charge

Units 3,00,000 240.67 62,696.94 36,276.18 1232.23 683.50 2259.89 242.66 592.04 401.92

Units 3,08,000 270.09 70,361.44 40,711.19 1383.94 769.48 2536.68 537.47 665.50 453.21

Units 3,16,000 253.51 66,041.89 38,211.56 1297.97 719.96 2380.45 504.48 623.63 423.36

1,04,365.36

1,17,418.61

1,10,203.30

1,47,374.27 24,182.42 7,106.98 4,931.32 293.62 3,388.63 385.07 1,285.18 2,370.60 1,614.89

1,65,389.61 27,140.80 7,975.75 5,535.75 329.77 3805.03 432.14 1,442.28 2662.01 1812.84

1,55,236.84 25,472.68 7,486.15 5,194.42 309.28 3,569.94 405.62 1,353.74 2,479.07 1701.05

122.74 596.86 1,701.54 1,95,534.22

137.74 669.82 1,909.53 2,19,243.07

129.29 1,799.64 1,779.64 2,05,764.42

29

Actual Expense Cost Per Unit = ----------------Estimated Hours

2,99,719.58 Cost Per Unit = ----------------6,00,000

Actual Expense

Actual Expense

--------------------

--------------------

Estimated Hours

Estimated Hours

3,36,661.68 -------------------6,16,000

3,15,967.72 ------------------6,32,000

Inference The production of 308000 units is produced the cost per units is 0.54 and it may be changed the units the cost per unit is not changed i.e 0.499.

30

Sales Budget Generally sales factor becomes a key factor in the majority of cases, and therefore It is the starting point. This is the most important budget as it is usually the most difficult to forecast. It is prepared by the sales manager. In the preparation the sales of the previous year. o Analysis of the sales of the previous year. o Salesman’s assessment 

General Trade conditions



Availability of raw materials



Availability of funds



Phant capacity



Seasonal fluefunctions



Restrictions imposed by the Govt



Efficiency advertising

The Sales district Co-op milk items SMP Batter, Ghee, the company has divided its maryet into two zones a (Chennai) and zone(Salem) the actual figures for the previous year sales were as under. Zone(A)

Zone(B)

Chennai

Salem 31

Units

U.P

Units

U.P

SMP

4,00,000

85

2,50,000

85

Butter

2,50,000

95

3,50,000

95

Ghee

3,00,000

120

3,00,000

120

For the current year 2006 – 07 it is estimated that sale of SMP will go up by 25,000 units in Zone A. The company plans to introduce a publicity film for butter in the TV network. The budgeted figures for butter are to be incased by 20% in both Zone. The process of the two product are to be maintained but for butter a bonus cut of Rs 5 will be announced. You are required to prepare quantitative cum financial budget for sales in the current year 2006 –07. SALES BUDGET SALEM DISTRICT CO –OPERATIVE MILK PRODUCER’S UNION LIMITED Product Sales Price Zone(A) Chennai Zone(B) Salem Total

SMP(Skin Milk Powder) Rs 85 Units Amount 4,00,000 3,40,00,00 0 2,75,000 2,33,75,00 0 6,75,000 5,73,75,00 0

BUTTER Rs 90 Units 3,00,000 4,20,000 7,20,000

GHEE Amount 2,70,00,00 0 3,78,00,00 0 6,48,00,00 0

Rs 120 Units 3,25,000

Amount 3,90,00,000

3,00,000

3,60,00,000

6,25,000

7,50,00,000

Inference When comparing the Zones A & B Zone A(chennai) is better than the Zone B(Salem) because sale amount higher sales at zone A(chennai). Production Budget

32

The production Budget are prepared by the [roduction manager showing the forecast of output. The objective is to determine the quantity of production for a budgeted period. If is quantity of units to be produced to be produced during the budget period it is based on the on Sales budget.

It is in two parts first part connecting and the other part shows the cost of production. A part from the sales budget optimum utilization of plant availability of raw materials labour etc. are to be considered. It must avoid work in rush seasons. It must maintain a minimum stock ocf finished goods. PRODUCTION BUDGET It is devided in to material cost budget labour cost budget and overhead cost budget because cost of production introduces material layout and overheads. Therefore separate budgets are required for each items. The Salem district Co-op milk producer’s union’s ltd at the production details Product

Sales in units

SMP GHEE BUTTER

75,00,000 3,05,000 1,50,000

Estimated stock in units Jan December 90,000 95,000 80,000 75,000 40,000 60,000

33

PRODUCTION BUDGET SALEM DISTRICT CO -OPERATIVE MILK PRODUCER’S UNION LTD Production Budget Solution SMP Sales as per sales budget

= 7,50,000 = 95,000 -----------8,45,000

(+) Estimated stock on closing Stock of Dec 2006

(-) Estimated stock on opening stock in Jun 2006

90,000 ----------

Budget production

7,55,000 -----------

GHEE Sales as per sales budget

= 3,25,000

(+) Estimated stock on closing stock of December 2006

=

Budgeted production

75,000 ---------4,00,000 80,000 -----------3,25,000 ------------

BUTTER Sales as per sales budget

= 1,50,000 34

(+)Estimated stock on closing Stock of Dec 2006 (-)Estimated stock on opening stock in June 2006 Budgeted production

=

60,000 -----------2,10,000 40,000 ------------1,70,000 -------------

Source – Annual Report Salem District Co- opereative milk producer’s union Ltd.,

Inference The Production budget are considered only three product lie SMP(Skin milk powder) , butter, and Ghee. The skin milk powder are need to next year 7,55,000 units and butter 1,70,000 units and Ghee is 3,20,000 units. MATERIAL BUDGET The Material budget to carry out the production satisfactorily regular supply of materials during the budget period is ensured by preparing a budget. In this the decision regarding the Quantity of materials as shown at different times during that period is followed. Only direct materials are taken into account. Intercede materials are not taken in to account and they are considered under over heads. The materials budget helps proper planning of purchases. It shown the estimated quantities as well as the cost of raw materials required for production as per production budget. SUM Prepare the salem district Co – op milk produces union ltd of the materials budget. The sales director of a manufacturing company report that next year the experts to sell the 1,30,000 units of a particulars product. 35

The prodction manager consults the store keeper and costs his figures as follows two kinds of raw materials Ghee and Butter are required for manufacturing the products each units of the product required 10 units of Ghee and 15 units of Butter. The estimated opening balances at the commencement at the next year area.

Furnished product

= 40,000 units

Materials(Ghee)

= 22,000 units

Materials(Butter)

= 22,000 units

The desirable closing balances at the end of the next year. Furnished product

= 60,000 units

Materials (Ghee)

= 25,000 units

Materials (Butter)

= 30,000 units

Each unit of the product requires 2 units of Ghee and 3 Units of Butter.

MATERIAL BUDGET SALEM DISTRICT CO – OPERATIVE MILK PRODUCER’S UNION LIMITED Units to be produced = Sales + desired closing stock – opening stock = 1,20,000 + 60,000 – 40,000

36

= 1,40,000 units = 1,40,000 * 2 = 2,80,000 = 1,40,000 * 3 = 4,20,000

Materials procurment budget Particulars Budgeted production (+)Estimated opening Balance (-)Estimated closing balance

Finished product units 1,40,000

Materials Ghee units 2,80,000

Butter units 4,20,000

40,000

22,000

25,000

1,80,000 60,000

3,02,000 25,000

4,45,000 30,000

Inference The materials budget are ato be based on the only two commuditys such as Ghee and Butter. The needed up the materials of Ghee 2,77,000 units and butter 4,15,000 units. The finished goods are 1,20,000 units needed to next years.

37

LABOUR BUDGET It is a part of the production budget. The budget is prepared by the personnel departement and it shows and estimate of the requirement of labour to meet the production target on the basis of previous records and budgeted production this budget gives detailed information relating to the number of workers ,rates of the wages and cost of labour hours to be employed.

The Salem district Co-Op milk producer’s Union ltd., labour budget. S.No 1. 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Particulars Salary Dearness allowance Other allowance EPF contribution Local pension contribution Inspection Charges to FPF Bonus Gratuity Group Insurance Double wages Night shift allowance Put of pucket allowance Heave travel concession Surrender leave salary T.A Total

Amount 3,82,56,000 3,12,00,000 53,04,000 57,60,000 25,000 40,000 30,00,000 45,00,000 10,00,000 40,000 2,54,250 25,000 8,62,500 17,25,000 18,00,000 9,37,91,750

38

Ratio 40.78% 33.26% 5.65% 6.14% 0.026% 0.042% 3.198% 4.79% 1.06% 0.042% 0.27% 0.042% 0.919% 1.839% 1.919% 100%

WORKS OVERHEAD BUDGET It work overhead budgets sets out the estimated casts of indirect materials, indirect labour and indirect factory expenses during the budget period in order to achieve the target this is classified into Raced, Variable, and semi-variable. This facilities preparation of budgets and further department wise and sub – division to have effective control. The preparation of budget is based on the previous year’s record for fixed overheads and budget forgets are verified for variable expenses,which are bound to change of output and it can be classified into the following ways. ADMINISTRATION OVERHEAD BUDGET This budget cover the expenditure of administrative office and management salaries. It is prepared with the help of past experiences and expected changes in future. The administration cost of each budget center is drawn separately and incorporated in administrative cost budget. SELLING AND DISTRIBUTION OVERHEADS BUDGET This budget relates to selling and distribution of products for the budget period and is based on sales budget. It is generally prepared territory – wise by the sales manager of each territory. The costs are divided into fixed, variable and semi – variable and estimate is taken on the basis of past records.

39

CAPITAL EXPENDITURE BUDGET This budget shows the estimated expenditure on fixed assets – land, building, pland, machinery etc, It is as long – term budget. The capital Expenditure is necessitated on account of replacement of old machines, increased demand of products. Expansion of industry adoption of new Technological progress. The Salem district Co-op milk producer’s union ltd of the capital budget. Particulars

Amount

Ratio

10,80,000

0.83%

Maintance

4,50,82,000

35.00%

Pre – Pack

13,00,000

10.01%

1 Dairy

Procurement and input Marketing

3,33,10,000 3,56,20,000

25% 27.65%

-------------------

----------------

12,87,80,500

100%

40

--------------------

-----------------

CASH BUDGET This budget represents the amount the cash of receipts and payments and a balance during the budgeted period. It is preopared after all the functional budgets are prepared by the chief accountant either monthly or weekly giving the following hints.



It ensures sufficient cash for business requirement



It proposes arrangements to be made overdraft to meet any shortage of



cash



It reveals the surplus amount and the effect up fluctuations on cash



position.

The objective of cash budget of the proper co ordination of total working capital sales investment and credit. The following Transaction of the Salem Co-op milk producers ltd of the cash budget as per the 2006 – 07 cash balance bank of Rs.

The Salem Co – operative milk prod ltd of the cash budget Months

Sales

Purchase

Wages

41

Factory Expenses

Administrative Selling

May June July August September October

35,00,000 2,00,000 30,00,000 32,00,000 40,50,000 38,50,000

15,00,000 13,50,000 16,00,000 16,00,000 18,00,000 18,55,000

7,50,000 90,000 85,000 82,000 86,000 83,000

55,000 60,000 65,000 60,000 90,000 63,000

Expenses 65,500 63,000 70,000 95,000 90,000 85,000

Cash Balance of July of Rs.15,00,000 The payment period allowed to the customer is 2month and suppliers allowed by month The Salem district Co – op milk producer’s union ltd has purchased a power plant machine of Rs.20,25,000 Janauary but it the payment is to the settled in august All Expenses are paid in deluged in days or week and commission of 5% on sales. You have the prepare the cash budget during the period 2006- 07 of the Salem district Co – op milk producers union ltd.

The cash budget of the Salem District Co – op milk producers union ltd Particulars Payment Cash Balance Sales Total Receipts Purchase Wages Factory Expenses Administrative Expenses Commission on Sale 5% Purchase the powder plant Receipts total Cash Balance of ltd.,

July 15,00,000

August 32,69,500

September 20,60,500

35,00,000 50,00,000

28,00,000 60,69,500

30,00,000 50,60,500

15,00,000 90,000 60,000 63,000

17,50,000 85,000 65,000 70,000

16,30,000 82,000 60,000 25,000

17,500

14,000

15,000

-

20,25,000

17,30,500 32,69,500

40,09,000 20,60,500

42

18,62,000 31,98,500

INFERENCE The Salem District Co – operative milk producer’s union ltd of the cash position is changes from one month to next month lie july month cash position shown of Flexible budget of Rs.32,62,500 and it is the cash position decreased the month of august

of by 12,09,000. The following monthly September the cash was increased by of Rs.11,38,000 the cash position will be flexible from month to month.

ZERO BASE BUDGETING In common proactive building the functional budgets is to base the budget year’s figures on the previous year’s budget. Taking the previous figures as the base the required Adjustment are made for the impart of inflation proposed or decreased level of activity etc in the light of experience thus in the traditional budgeting system, budget are based on trends of historical level of expenditure thus a budget is developed on the concept of incremental basis. Mostly what is done is to add some percentage to the figures of previous year to determine the budget figure is under the increment budgeting system, the figures of the previous budget on the basis of which future budget is drawn, are considered to be acceptable. It is the Experience of many, particularly in the govt departments and public undertaking that the actual expenditure should be in line with the budgeted amount otherwise the higher authorities will reduce the future budgeted and allocated amounts. The managers justify the need to spend more of these of the previous budget but they do not review their past activities and thus expenditure and inefficiencies are brought forward to the subsequent period lie the incremental budgeting perpetual inefficiency instead of promoting operational efficiency in order therefore the expenditure with budgeted figure and to control the cost a new technique called zero base

43

budgeting under this technique no spiritual budget is prepared but the approach is changed.

The use of Zero – base budgeting as a managerial tool has become increasingly popular since the 1970 is it first come into being when ex-president carter of the united states of America introduced it as a means of controlling stock expenditure.

The under taking idea of 2 BB is that there is no given base figure for a budget. A fresh budgeted figure is to be determined keeping the circumstances and requirements this basic concept of 2BB is simple budgeting starts from search is every activity in an organization must be examined and justified any alternative must be considered and the Results evaluated. It is method whereby all activities are re- evaluated each time when a budget is formulated.

IMPLIES THAT 2BB 

Every budget starts with a zero base



No previous figure is to be taken as a base figure for adjustments



Each activity is to be examined afresh



Every budget allocation is to be justified in the light of anticipated



circumstances.



Alternatives are to be given due consideration.

BENEFITS OF 2BB The benefits of 2BB are as given bellows.  Effective cost control can be exercised  Careful planning is facilitation

44

 Management by objectives becomes a reality  Uneconomical activities are identified  Inefficiencies are controlled  Scarce resources are allocated and used beneficially  Each activity is thoroughly Examined and justified.

CAPITAL BUDGETING Capital budgeting is the process of making investment decision in the capital expenditure a progressive business firm always moves ahead its fixed assets and other resources continue to expand or there comes a need for expanding them.

Capital

Budgting actually the process of making investment decision in capital expenditure or fixed assets. A capitals expenditure may be as on expenditure the benefits of which are one which is intened to benefit figure periods and normally includes investment in fixed assets and other development project. It is essentially a long term function and it is also known as investment decision making capital expenditure decision planning capital expenditure etc., Capital budgeting is the must important and complicated problem of management decision because it is concerned with designing and carrying out through a systematic investment programme. It involves the planning of such expenditures which provide yields over a number of years.

DEFINITION Charles T.Horngreen has defined capital budgeting as “Capital budgeting is long term planning for making and financing proposed capital out lays.

45

Richard and green have defined capital budgeting as acquiring inputs with long term return. According to lynch Capital budgeting consists in planning development of available capital for the purpose of maintaining the long term profitability of the concerns.

FEATURES OF INVESTMENT DECESION



The features of investment decisions are as given bellow



Huge funds are invested in long term assets



The future benefits will occur to the firm over a series of years.



They involve the Exchange of current funds for the benefits to be achieved in future



They have a significant effect on the profitability of the concerns

They are strategic

They are irreversible decisions.

46

IMPORTANT OC CAPITAL BUDGETING Capital budgeting means planning for capital assets capital budgeting decisions are among the most crucial and critical business decisions. It is the most important single area of decision making for the management. Unused investment decision may prove to be fatal to the very existence of the concern. The significance of capital budgeting arises mainly due to the following

LARGE INVESTMENT Capital budgeting decisions generally involve large investment of funds. The funds available with the firm are always limited and the demand for the funds for the resources. There funds are raised by the firm from various internal and external resources at substantial cost of capital A Wrong decision prove disastrous for the continued survival of the firm. Hence it is very important for a firm to plan and control its capital expenditure. LONG – TERM COMMITMENT OF FUNDS The

funds involved in capital expenditure are not only large but

more or less permanently blocked also in long term investment. The longer the time, the greater the risk involved greater the risk involved Greater is the need for careful planning of capital expenditure capital budgeting. The long term commitment of funds increases the financial risk involved in the investment decision. Firm’s decision to invest in long term assets has a decision influence on the rate and direction of its growth an unsound investment decision may prove to be fatal to the very Existence of the firm. Hence a careful planning is essential.

IRREVERSIBLE IN NATURE

47

Next investment decisions are irreversible. Once the decision for accepting a permanent asset is taken it is very difficult to reverse that decision. It is difficult to find a market of such capital goods once they have been acquired. The only alternative will be to scrap the capital assets so purchased or sell them at a substantial loss in the event of the decision being proved wrong.

COMPLICATION OF INVESTMENT DECISIONS The long term investment decisions are more complicated in nature. The Capital budgeting decisions require and assessment of future event which are uncertain. It is really a difficult task to estimate the portable future events. In most projects the investment of funds has to be made immediately but the return are expressed over a number of future years both return as well as the length of the period over which they will accrue are uncertain. LONG – TERN EFFECT ON PROFITABILITY Capital budgeting decision have a long – term and significant effect on the profitability of a concern. Capital budgeting is of utmost importance to avoid. Over investment or under investment in fixed assets. An inwise decision may prove disastrous and fatal to the very Existence of the concern. The future growth and profitability of the firm deponds upon the investment decision taken today. Capital expenditure projects exercise a great impact one the profitability of the firm for a very long time. NATIONAL IMPORTACE Investment decision taken by individual concern is of national importance because it determines employement, Economic activities and economic growth. CAPITAL BUDGETING PROCEDURE The capital budgeting procedure are as given bellows. 48

Identification of investment proposal

Screening the proposal Valuation of various proposal

Establishing priorities

Final Approval

Implementing proposal

Performance Review

CLASSIFICATION OF CAPITAL BUDGETING CAPITAL BUDGET

Traditional Methods

Time Adjusted Method

Pay Back Period

Net Present Value method

Rate of return method

Internal Rate of return

Improvement in Traditional Approach

Profitability Index method

To pay back period method 49

PAY – BACK PERIOD METHOD The term pay back raters to the period in which the project will generate the necessary cash to recoup ht initial investment Business units, while selecting investment projects, would consider the recovery of cost as the first and foremost concern even though earning maximum profits is their ultimate goal. This method describes in terms of period of time the relationship between annual savings and total amount of capital expenditure, pay back period is defined as the number of years required for the savings in costs for cash inflow(Net) to recoup the original cost of the project. In simple sentence, it represent the number of years in which the investment is Expected to “Pay for Itself” under this method, various, investments are ranked according to the length of their pay back period in such a manner that theh investment with a shorter pay back is preferred to one which has longer pay back period. The Salem Co- op milk producer’s ltd is producing articles mostly by manual labour and is considering to Replace it by new machine.

There are two alternate model machine(Power Plant) A & B of the new machine. Estimated Life of Machine A 3 years Cost of Machine

Rs.3,27,000

Rs.30,00,000

Estimated Savings in Scarp

Rs.12,75,000

Rs.11,90,000

Estimated Savings in Direct Wages

Rs.4,50,000

Rs.4,48,000

Additional cost Maintance

Rs.4,75,000

Rs.6,50,000

Additional cost supervision

Rs.4,18,000

Rs.4,19,500

The salem co-op milk producer’s union ltd., of payback method

50

B 3 years

Inference

A

B

Estimated savings in scarp

Rs.12,75,000

Rs.13,90,000

Estimated savings in Direct wages

Rs. 4,50,000 --------------A Total Savings

Rs. 4,80,000 --------------

--------------Rs.4,75,000

-------------Rs.6,50,000

Rs.4,18,000 -------------8,93,500 --------------

Rs.4,19,500 --------------10,69,000 ---------------

17,25,000

18,70,000

Additional cost maintance Additional cost supervision A total savings

A Rs.8,31,500

Net Cash inflow

Pay Back Period

B Rs.10,69,500

Original Investment = -------------------------------------(5.2) Annual Average Cash inflow

A 32,70,000 -------------------- =3.93 8,31,500

B 30,00,000 ------------------ =3.74 8,00,000

Inference Machine B is better than the Machine A because B is 3.74 ADVANTAGES •

It saves in costs as if requires lesser times and labors as compared to other methods

•

This method is useful to a concern which is short so cash and is eager to bet back the cash invested in a capital expenditure project

•

As the method considers the cash flows during the pay back period of the project the estimates would be reliable and the result may be comparatively more accurate.

LIMITATIONS

51

•

It does not take into account cash inflows earned after the pay back period and hence the true profitability of the project cannot be correctly assessed.

•

This method does not consider the amount of profit earned on investment after the recovery of cost of investment

II IMPROVEMENT IN TRADITIONAL APPROACH THE PAYBACK PERIOD One of the most commonly used techniques for evaluating capital investment proposal is the cash pay – back method. Some authorities on accountancy, in order to make up the deficiencies of the pay back period, evolved new concepts. It is discussed. (A) POST PAY – BACK PROFITABILITY

One of the limitations of the pay – back period method is that neglects the profitability of investments beyond the pay – back period. According to this period. The project which gives the greatest post pay back period profiles may be accepted. It has been explaned in the following ways.

FORMULAS Post pay back probitability = Annual cash inflow(Estimated life pay back period) POST PAY BACK PROFITABILITY The Salem Co-operative Milk producer’s ltd., are considering two project X and Y(power plant) A

B

52

Cost of Project

Rs.32,70,00

Rs.30,00,000

Life of time

3 years

3 years

Estimated Scrap

Rs.75,000

Rs.90,000

Estimated Savings Rs.15,00,000

Rs.18,00,000

Pay Back Period 32,70,000 A= ------------------=2.18 years 15,00,000

30,00,000 B=-------------------- = 1.67 years 18,00,000

Surplus Life A=(3-2.18) * 15,00,000 B=(3-1.67) * 18,00,000 Post pay back = A 0.82 * 15,00,000 = 12,30,000 = B 1.23 * 18,00,000 =23,94,000 Index of post back profit 12,30,000 A = ------------------*100 =37.61%

23,94,000 B = ---------------*100 =79.8%

30,00,000

32,70,000

Inference Machine is B is best because the return period is 1.67 years and of the profit rate is 79.8% so the machine is selected. (B) PAY BACK RECIPROCAL Sometome Pay back reciprocal method is employed to estimate the internal rate of return generated by a project. Annual Cash inflow Pay back Reciprocal : =------------------------------------(5.3) 53

Total Investment However this method of ranking Investment proposals should be used only when * Annual savings are even for the entire period * The economic life of the project is at least twice of the pay back period. III RATE OF RETURN METHOD This method is also known as Accounting Rate of Return. Accounting to this method various projects are ranised inorder of the rate of earnings. Projects which yield the highest earning are selected and others are ruled out/. The return on Investment can be expressed in several ways.

(A) AVERAGE RATE OF RETURN METHOD Here average profit, after tax are depreciation, is calculated and there it is divided by total capital in the project. This method establishes the ratio between the average annual profits to total outlay. The project giving a higher rate of return will be preferred over those giving lower rate of return. In this way following formula. Average Annual Profits = Average Rate of Return = ---------------------------------- * 100(5.4) Outlay of the project (B) RETURN PER UNIT OF INVESTMENT METHOD In this method the total profit after tax and depreciation is divided by the total investment this gives us the average ratre of return per unit of amount invested in the project. Total Profit = Project per unit of investment = ----------------------------- * 100(5.5) Net Investment (C) RETURN ON AVERAGE INVESTMENT METHOD Under this method, the percentage return on average amount of investment is calculated to the average investment the outlay of the project is divided by two Total Profit depreciation and taxes 54

Return on average Investment = -------------------------------------------- * 100 (5.6) Total Net Investment (D) AVERAGE RETURN ON AVERAGE INVESTMENT METHOD Under this method, average profit after depreciation and taxes in divided by the average amount of investment. This is an appropriate method of rate of return on investment

Average Annual Profit = Average Return on Average Investment = ---------------------------- * 100 (5.7) Net Investment

RATE OF RETURN METHOD A Investment (power plant)

32,27,000

life time

5 years

B 30,00,000 5 years

Project income(Net) (After Interest,depreciation and taxes) Years

project

project

1 2 3 4 5

A 1,86,000 1,80,000 2,25,000 2,05,000 1,90,000

B 1,60,000 1,70,000 2,05,000 1,85,000 2,00,000

If the required of return is 10% which project should be undertaken? No of Years

project

project

A 55

1 2 3 4 5 Total

B 1,60,000 1,70,000 2,05,000 1,85,000 2,00,000 9,20,000

1,86,000 1,80,000 2,25,000 2,05,000 1,90,000 9,86,000

AV Profit = 1,97,200 1,84,000

(A) AVERAGE RATE OF RETURN METHOD Average Profit(Annual) Average rate of return = ------------------------------* 100 Out lay of the project

1,97,200 =------------- * 100 32,70,000 =6.03% 1,84,000 =------------------- * 100 30,00,000 = 6.13%

56

(B) RETURN PER UNIT OF INVESTMENT METHOD Total Profit Return per unit of investment method = ------------------ * 100 Net Investment 9,86,000 = ----------- * 100 32,70,000 = 30.15% 9,20,000 =-------------- * 100 30,00,000 =30.66% (C) RETURN ON AVERAGE INVESTMENT Total Profit after depre taxes return on average investment = -------------------------------------- * 100 Total Investment

57

9,86,000 = ------------- *100 32,70,000/2 = 60.30% 9,20,000 =--------------- * 100 30,00,000/2 =61.33%

(D) AVERAGE RETURN ON AVERAGE INVESTMENT

Average Annual Profit average return on average investment = ------------------------------- * 100 Net investment

1,97,200 = ---------- * 100 32,70,000 =12.06%

1,84,000 = --------- * 100 30,00,000 =12.26%

58

MERITS OF RATE RETURN •

It takes into consideration the total earnings from the project during its life time. Thus this method gives a better view of profitability as compared to pay back period method.

•

It is based upon accountancy concept of profit. It can be calculated form the Financial data.

LIMITATIONS • It ignores the time of money profits earned in different periods are valued equally. • This method may not reveal true and fair view in the case of long term • It does not take into consideration the cash flows which is more important than the accounting profits. • It ignores the fact that profits can be reinvested • There are different methods for calculating the accounting Rate of return. Each method gives different results. This Reduces the reliability of the method. TIME ADJUSTED METHOD NET PRESENT VALUE METHOD This method is also known as excess present value or not Gain method. Under this method, cash inflows and cash outflows associated with each project are first worked out. The present values of these cash inflows and outflows are there calculated at the rate acceptable to the management. This rate of return is considered as the Cut –off rate and is 59

generally determinated on the basis of cost of capital suitably adjusted to allow for the risk element involved in the project.

The present values of total cash inflows should be compared with present values of cash outflows. It the present values of cash inflows are greater this or equal to the outflows the project would be accepted. It will be rejected.

THE SALEM CO-OP MILK PRODUCER’S UNION LTD., IS CONSIDERING THE PURCHASE OF THE TWO POWER PLANT MACHINES WITH THE FOLLOWING DETAILS MACHINE – I

MACHINE - II

Estimated life time Capital Cost

3 YEARS

3 YEARS

Rs.3,27,000

Rs.30,00,000

I

Rs.12,50,000

Rs.11,00,000

II

Rs.1,50,000

Rs.12,55,000

III

Rs.13,50,000

Rs.10,00,000

Net Earning

The interest rate is 10% P.A which machine should be preferable suggest to the organization. Powder Plant Machine Years 1 2 3

PV Factor 0.909 0.826 0.751

Cash inflow 12,50,000 15,00,000 15,50,0001

60

Present value 11,36,250 14,19,000 10,13,850 33,89,100

A Net Present value = 33,89,100 (-) Cost of Machine = 32,70,000 -------------Loss of machine 1,19,100 --------------

Machine (B) (Powder plant)

Years 1 2 3

PV Factor 0.909 0.826 0.751

Cash inflow 11,50,000 12,55,000 10,00,000

Present value 9,99,900 10,36,630 7,51,000 27,87,530

Net present value = 27,87,530 Cost of Machine

=30,00,000

Profit of Machine

61

-----------2,12,470 -----------

Inference The machine B is Better than the machine A because the machine B is earning profit but A machine is earning the loss of the same duration. So the machine B is selected.

MERITS OF NET PRESENT VALUE METHOD •

This method considers the entire economic life of projec

•

It takes into account the objective of maximum profitability

•

It recognizes the time values of money

•

This method can be applied where cash comparison between the project

DEMERITS OF THIS METHOD •

It is not easy to determine an appropriate discount rate.

•

It involves a great deal of calculation. It is more difficult to under stand and operate

•

It is very difficult to forecast the economic life of any investment Exactly.

62

•

It may not give good results while comporting projects with in equal investment of funds.

INTERNAL RATE OF RETURN METHOD This method is popularly known as time adjusted rate of return method or discounted rate of return method. The internal rate of return is defined as the interest rate that equates the present value of the expected future receipts to the cost of investment outlay. This internal rate of return is found by trial and error. First, we compute the present value of the cash flows from and investment using an arbitrarily selected interest rate. Then we compare the present value so obtained with the investment cost. It the present value is higher than the cost figure, we try higher rate of interest and go through the procedure again, conversely, it the present value is lower than the cost lower the interest rate and repeated the process. The interest rate that brings about this equality is defined as the internal rate of return. This rate of return is compared to the cost of capital and the project having higher difference. If they are mutually exclusive, is adopted and other one is rejected. As this determination of internal rate of return in values a number of attempts to make the present value of earnings equal to the investment. This approach is also called the trial and error method. The Salem Co-op milk producer’s union ltd., are considering the initial investment of Rs.62,70,000/Estimated Net Annual Cash Flows. 4

1 years of Rs. 10,85,000

05

2 years of Rs. 10,60,000

06

3 years of Rs. 19,80,000

7

4 years of Rs. 16,55,000

63

CALCULATE THE INTERNAL RATE OF RETURN

Year

Annual Cash flow

PV PV Factor 10%

PV PV Factor 12%

PV PV Factor 14%

PV Pv Factor 15%

1

20,85,00 0

0.909

18,95,26 5

0.892

18,59,82 0

0,877

18,28,54 5

0.869

18,11,865

2

20,60,00

0.856

17,63,36 0

0.797

16,41,82 0

0.769

17,63,36 0

0.756

15,57,360

3

19,80,00

0.751

14,86,98 0

0.711

14,07,78 0

0.674

13,34,52 0

0.657

13,00,869

4

26,55,00 0

0.683

18,13,36 5

0.635

16,85,92 5

0.592

15,71,76 0

0.571

15,15,005

Total

69,58,97 0

65,95,34 5

Inference

64

64,98,18 5

61,86,090

The initial investment is Rs.62,70,000. Hence internal rate of return must be between 14% to 15% (64,98,185 and 61,86,090) the difference comes to Rs. 3,12,095 for different of Rs. 8,12,095. the difference rate is 1%(64,98,185-62,70,000) = 2,28,185 Therefore Exact internal rate of return 2,28,185 = 14%--------------- * 1%(5.8) 3,12,095 =14% + 0.73% = 14.73%

PROFITABILITY INDEX NUMBER It is also a time adjusted method of evaluating the investment proposals. The profitability index also called benefit cost ratio or desirability factor. It is the ratio of the present value of cash inflows at the required rate of return to the initial cash outflow of the investment. The proposal is accepted if the profitability index is more than one. By computing profitability indexes for various projects, the financial manager can rank then in order of their respective ratio of profitability

PV of Cash inflows PROFITABILITY INDEX = --------------------------------(5.9) Initial cost of outlays The initial cash outlay of the project of Rs.62,70,00 Estimated: 04: Years

Rs.23,85,000

05: Years

Rs.15,60,000

06: Years

Rs.19,80,000

07: Years

Rs.26,55,000 Compare the profitability index. The interest rate is at 10% P.A

65

Calculation of Profitability Years 1 2 3 4

Cash inflows 23,85,000 15,60,000 19,80,000 26,55,000

PV Factor 10% 0.905 0.826 0.751 0.683 Total

Total present Value = 67,56,870 (-)Initial Outlay Net present value

= 62,70,000 ------------= 4,86,870

PV of Cash inflow Profitability Index (Gross) = --------------------------------(5.10) Initial cash outflow

67,56,870 =------------------62,70,000 = 1.077 Net Present Values Profitability Index (Net) = --------------------------------(5.11) Initial cash outlay = 4,86,870 -------------62,70,000

66

PV 21,67,965 12,88,560 14,86,980 18,13,365 67,56,870

= 0.077 = 1.077 – 0.077 = 0.077

Net Profitability Index is positive, the proposal can be accepted.

CHAPTER – 6 6.1 FINDINGS After analyzing the various relationship between the budget and budgetary control with help of immense tools of analysis and method of financial statements of the salem district milk producer’s union ltd., The firm has got the status as non – profit making concern during the study period 2006 – 2007. Accounting year that’s relationship enables the most to predict the future over able range of volume and this knowledge useful in flexible budget during the necessarily period.

For immense help to management the analysis of various budget helps in finding right solution at right time. Which also helps for optimum utilization of available of the resources of the company. •

The Flexible budget are to be give the cost per unit of the increase ie 316000 units and decrease the 3,00,000 units cost per unit is 0499.

•

The Sales budget are to the analysis two zones the company is selected zone chennai. It is give more sales.

67

•

The production budget are considered only three product SMP(skin milk powder) butter and ghee. The SMP are need to next year 7,55,000 units and butter 1,70,00 units,and ghee is 3,20,00 units.

•

Cash Budget are to be analysis of the cash positions of the company. The july month cash position is 32,69,500 but August month position is decreased,20,60,500 from previous month coming month up the September of the cash position increased 31,98,500

•

Capital budget are to be based an that following method

•

Pay – Back period given the investment period of the project

•

The rate of return method are analysis of the return from the interest rate of the investment money

•

The Net present value model are to be analysis the Net value of the project with profit

•

The internal rate of return are to be find out the original interest rate.

•

The profitability method are analysis only profit rate.

6.2

SUGGESTIONS The firm no need for holding much amount of cash. They can invest the money

in various sources ideal funds earn nothing. I

Various budget and budgeting methods of the firm helps to reduce the payment

of interest to the outsiders. II

It is suggested that average contribution of the stock in trade with the current

assets should not exceed the actual even though the stock in trade has been hire contribution. III It is suggests that the firm may produce relevance budget and budgetary control methods for utilizing the available Resources without eliminating the waste.

68

IV It is suggest that they can be contribuite that more attentions of prepare the wide range of budget when approaching the contract labors. V

Aavin is the veteran in milk producers in salem district even it has proved it

efficiency in the past years. It is suggest that they can invest their profit with its on coming new project to agreement is profitable in future.

6.3

CONCLUSION Identification of investment opportunities is a strategic question salem

district co-op milk producer’s union ltd., of (firms) desire to maintain high credit worthiness for their debentures and bonds. In formulating financial policy, Minising the Financial risk and financial flexibility budget and Budgetary Control provided necessary conservative policy.

Risk analysis of investment is an important task the budget and budgetary control methods provides and suggestion only a systemizing risk of investment. In real world the concern of strategic management and budgetary control is total of risk and comparing the company product, market, Scope and complexity and environment.

It may not be possible for the diversified unique risk. The firm is threatened by competions, Technologyobsolecences, Govt. Investment and so on.

69

6.4

BIBLOGRAPHY •

Dr.N.MAHESHWARI : Principles of Management Accounting Sultan chand & sons, publication, New Delhi – 2001

•

Dr.R.M.SRIVASTA : Financial Management pragati prakasham publications, meerut.

•

P.V.KULKARANI: Financial Management, Himalaya Publishing house,1987.

Dr.S.P.GUPTA : Financial Management Sultan Chand & Sons Publication, New Delhi 2002

Annual Report provided by the Salem District Co- op milk producer’s union lt from 2006 – 2007.

70

Annexure

71

THE SALEM DISTRICT CO OPERATIVE MILK PRODUCERS UNION LTD

S.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Abstract of capital budget 2006 – 2007 Particulars Amount Civil Section 1345000 Quality Control 308000 Dairy milk sweets 186500 Training center 2191000 Attur CC 250000 P-Velur 599000 Namakkal cc 820000 Transport Section 3200000 Stores 20000 APS 17152000 Powder Plant 6270000 Dairy 1080000 Maintenance Section 45082000 Pre Pack 1300000 Procurement and input 33310000 Marketing 3562000 Grand Total 128780500

72

STAFF SALARY AND ALLOWANCES FOR THE YEAR 2006 –2007 S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Particulars Salary Dearness Allowance Other Allowance EPF Contribution LSC&Pension Contribution Inspection Charges to FPF Bonus Gratuity Group Insurance Double Wages Night Shift Allowance Out of Packet expenses Leave Travel Concession Surender Leave Salary T.A Total Allocation Salary No.of Employees 73

Amount 38256000 31200000 5304000 5760000 25000 40000 3000000 4500000 1000000 40000 254250 25000 862500 1725000 1800000 93791750 690

Cost of Employees Weighted Avg cost per employee

74

135930 11328