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.

- Brown and Howard

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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 On the basis of flexibility On the basis of function Long term * Fixed * Sales Short term * Flexible * Production Current * Material

* Labor* Overheads

* plant utilization

* Cash

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* 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.

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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, self-

responsibility, 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 co-

operative 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 co-

operatives 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 20 th

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 co-

operative’s real estate, or have membership and occupancy rights in a not-for-profit co-

operative (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) Co-

operative 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 co-

operatives) 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 co-

operatives, 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 co-

operatives. 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’de-

mutualised’ into conventionally-owned banks in the 1980’s & 1990). The UK Co-

Operative 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 co-

operatives, 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.sxi. No of emergency cases treated 2,877.xii. Processing capacity in VPD

(a) Salem Dairy - 3,00,000

(b) Chilling center Attur - 1,30,000

Namakkal - 50,000 P.Velur - 50,000

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Xiii Handling at present

(a) Salem Dairy - 1,70,000

(b) Chill ting center - Attur - 1,30,000

Namakkal - 50,000 P.Velur - 50,000

Xiv Production Capacity per day

AUTTER - 9MT

GHEE - 6MT

SMP - 10 MT

XV. 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

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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

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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.

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.

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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 life-

state, firm, business etc.,

BUDGET MEANING

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.

22

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.

23

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

Sales budget

Material BudgetCapital Budget

25

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) CLASSIFICATION ACCORDING TO FLEXIBILITY FIXED BUDGET

DEFINITION

“a budget which is designed to remain unchanged irrespective of

the level of the activity actually attained”

This is a budget, which is designed to remain unchanged

irrespective of the level of activity actually attained. This is prepared for definite

26

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

Determine the cost behavior fixed, variable and semi-variable to each

element of cost

27

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

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

28

FLEXIBLE BUDGET SALEM DISTRICT

CO-OPERATIVE MILK PRODUCER’S UNION LTD

PARTICULARS Units 3,00,000 Units 3,08,000 Units 3,16,000Fixed Expenses 240.67 270.09 253.51Fule of Furance oil 62,696.94 70,361.44 66,041.89Power (Sleem Water) 36,276.18 40,711.19 38,211.56Spares(Palm)20% 1232.23 1383.94 1297.97Repairs 70% 683.50 769.48 719.96Water Charges 40% 2259.89 2536.68 2380.45Insurance 40% 242.66 537.47 504.48Labour contract 20% 592.04 665.50 623.63Labour Contract for Schet 20%

401.92 453.21 423.36

1,04,365.36 1,17,418.61 1,10,203.30VARIABLESPacking Material 1,47,374.27 1,65,389.61 1,55,236.84Power(steem water)40% 24,182.42 27,140.80 25,472.68Consumables 7,106.98 7,975.75 7,486.15Spares(prem)40% 4,931.32 5,535.75 5,194.42Repairs month 30% 293.62 329.77 309.28Water Charges 60% 3,388.63 3805.03 3,569.94Rate and taxes 385.07 432.14 405.62Wages 1,285.18 1,442.28 1,353.74Labour Contract 80% 2,370.60 2662.01 2,479.07Labour Contract for shet 80%

1,614.89 1812.84 1701.05

Chemicals 122.74 137.74 129.29Others 596.86 669.82 1,799.64Analytical Charge 1,701.54 1,909.53 1,779.64

1,95,534.22 2,19,243.07 2,05,764.42

29

Actual Expense Actual Expense Actual Expense

Cost Per Unit = ----------------- -------------------- --------------------

Estimated Hours Estimated Hours Estimated Hours

2,99,719.58 3,36,661.68 3,15,967.72Cost Per Unit = ----------------- -------------------- -------------------

6,00,000 6,16,000 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

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

31

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 SMP(Skin Milk Powder)

BUTTER GHEE

Sales Rs 85 Rs 90 Rs 120Price Units Amount Units Amount Units AmountZone(A) Chennai

4,00,000 3,40,00,000 3,00,000 2,70,00,000 3,25,000 3,90,00,000

Zone(B) Salem

2,75,000 2,33,75,000 4,20,000 3,78,00,000 3,00,000 3,60,00,000

Total 6,75,000 5,73,75,000 7,20,000 6,48,00,000 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

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.

32

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 Estimated stock in unitsJan December

SMP 75,00,000 90,000 95,000GHEE 3,05,000 80,000 75,000BUTTER 1,50,000 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

(+) Estimated stock on closing Stock of Dec 2006 ------------ 8,45,000

(-) 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 = 75,000 ----------

4,00,000 80,000

------------Budgeted production 3,25,000

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

BUTTER

Sales as per sales budget = 1,50,000

(+)Estimated stock on closing Stock of Dec 2006 = 60,000 ------------ 2,10,000

(-)Estimated stock on opening stock in June 2006 40,000-------------

Budgeted production 1,70,000-------------

34

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.

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.

35

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

= 1,40,000 units

= 1,40,000 * 2 = 2,80,000

= 1,40,000 * 3 = 4,20,000

36

Materials procurment budget

Particulars Finished product units

MaterialsGhee units Butter units

Budgeted production

1,40,000 2,80,000 4,20,000

(+)Estimated opening

40,000 22,000 25,000

Balance 1,80,000 3,02,000 4,45,000(-)Estimated closing balance

60,000 25,000 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 Particulars Amount Ratio1. Salary 3,82,56,000 40.78%2 Dearness allowance 3,12,00,000 33.26%3 Other allowance 53,04,000 5.65%4 EPF contribution 57,60,000 6.14%5 Local pension contribution 25,000 0.026%6 Inspection Charges to FPF 40,000 0.042%7 Bonus 30,00,000 3.198%8 Gratuity 45,00,000 4.79%9 Group Insurance 10,00,000 1.06%10 Double wages 40,000 0.042%11 Night shift allowance 2,54,250 0.27%12 Put of pucket allowance 25,000 0.042%13 Heave travel concession 8,62,500 0.919%14 Surrender leave salary 17,25,000 1.839%15 T.A 18,00,000 1.919%

Total 9,37,91,750 100%

38

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

1 Dairy 10,80,000 0.83%

Maintance 4,50,82,000 35.00%

Pre – Pack 13,00,000 10.01%

Procurement and input 3,33,10,000 25%

Marketing 3,56,20,000 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 Factory Expenses

Administrative Selling Expenses

May 35,00,000 15,00,000 7,50,000 55,000 65,500June 2,00,000 13,50,000 90,000 60,000 63,000July 30,00,000 16,00,000 85,000 65,000 70,000August 32,00,000 16,00,000 82,000 60,000 95,000September 40,50,000 18,00,000 86,000 90,000 90,000October 38,50,000 18,55,000 83,000 63,000 85,000

41

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 July August September PaymentCash Balance

15,00,000 32,69,500 20,60,500

Sales 35,00,000 28,00,000 30,00,000Total 50,00,000 60,69,500 50,60,500 ReceiptsPurchase 15,00,000 17,50,000 16,30,000Wages 90,000 85,000 82,000Factory Expenses 60,000 65,000 60,000Administrative Expenses

63,000 70,000 25,000

Commission on Sale 5%

17,500 14,000 15,000

Purchase the powder plant

- 20,25,000

Receipts total 17,30,500 40,09,000 18,62,000Cash Balance of ltd.,

32,69,500 20,60,500 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

42

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

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.

43

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

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.

44

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.

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.

45

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.

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

46

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

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.

47

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.

Identification of investment proposal

Screening the proposal

Valuation of various proposal

48

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

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

49

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 B 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

Inference A B

Estimated savings in scarp Rs.12,75,000 Rs.13,90,000

Estimated savings in Direct wages Rs. 4,50,000 Rs. 4,80,000--------------- --------------

A Total Savings 17,25,000 18,70,000

--------------- --------------Additional cost maintance Rs.4,75,000 Rs.6,50,000

Additional cost supervision Rs.4,18,000 Rs.4,19,500

50

-------------- --------------- A total savings 8,93,500 10,69,000

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

A BNet Cash inflow Rs.8,31,500 Rs.10,69,500

Original InvestmentPay Back Period = -------------------------------------(5.2)

Annual Average Cash inflow

A B 32,70,000 30,00,000-------------------- =3.93 ------------------ =3.74 8,31,500 8,00,000

InferenceMachine 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

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

51

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

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

52

Pay Back Period

32,70,000 30,00,000A= ------------------=2.18 years B=-------------------- = 1.67 years

15,00,000 18,00,000

Surplus Life A=(3-2.18) * 15,00,000B=(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 23,94,000A = ------------------*100 =37.61% 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 inflowPay back Reciprocal : =------------------------------------(5.3)

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.

53

(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 taxesReturn 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

54

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

RATE OF RETURN METHOD

A B

Investment 32,27,000 30,00,000(power plant)

life time 5 years 5 years

Project income(Net)

(After Interest,depreciation and taxes)

Years project

A

project

B1 1,86,000 1,60,0002 1,80,000 1,70,0003 2,25,000 2,05,0004 2,05,000 1,85,0005 1,90,000 2,00,000

If the required of return is 10% which project should be undertaken?

No of Years project

A

project

B1 1,86,000 1,60,0002 1,80,000 1,70,0003 2,25,000 2,05,0004 2,05,000 1,85,0005 1,90,000 2,00,000Total 9,86,000 9,20,000

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

55

(A) AVERAGE RATE OF RETURN METHOD

Average Profit(Annual)

Average rate of return = ------------------------------* 100Out lay of the project

1,97,200 =------------- * 100

32,70,000

=6.03%

1,84,000=------------------- * 100

30,00,000

= 6.13%

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(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 taxesreturn on average investment = -------------------------------------- * 100

Total Investment

9,86,000= ------------- *100 32,70,000/2

= 60.30%

9,20,000 =--------------- * 100 30,00,000/2

=61.33%

57

(D) AVERAGE RETURN ON AVERAGE INVESTMENT

Average Annual Profitaverage 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%

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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

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.

59

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 3 YEARS 3 YEARS

Capital Cost Rs.3,27,000 Rs.30,00,000

Net Earning

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

The interest rate is 10% P.A which machine should be preferable suggest to the organization.

Powder Plant Machine

Years PV Factor Cash inflow Present value1 0.909 12,50,000 11,36,2502 0.826 15,00,000 14,19,0003 0.751 15,50,0001 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--------------

60

Machine (B) (Powder plant)

Years PV Factor Cash inflow Present value1 0.909 11,50,000 9,99,9002 0.826 12,55,000 10,36,6303 0.751 10,00,000 7,51,000

27,87,530

Net present value = 27,87,530

Cost of Machine =30,00,000------------

Profit of Machine 2,12,470-----------

Inference

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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.

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

62

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.

04 1 years of Rs. 10,85,000

05 2 years of Rs. 10,60,000

06 3 years of Rs. 19,80,000

07 4 years of Rs. 16,55,000

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CALCULATE THE INTERNAL RATE OF RETURN

Year Annual Cash flow

PV Factor 10%

PV PV Factor 12%

PV PV Factor 14%

PV PV Factor 15%

Pv

1 20,85,000 0.909 18,95,265 0.892 18,59,820 0,877 18,28,545 0.869 18,11,865

2 20,60,00 0.856 17,63,360 0.797 16,41,820 0.769 17,63,360 0.756 15,57,360

3 19,80,00 0.751 14,86,980 0.711 14,07,780 0.674 13,34,520 0.657 13,00,869

4 26,55,000 0.683 18,13,365 0.635 16,85,925 0.592 15,71,760 0.571 15,15,005

Total 69,58,970 65,95,345 64,98,185 61,86,090

Inference

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%

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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 inflowsPROFITABILITY 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

Calculation of Profitability

Years Cash inflows PV Factor 10% PV1 23,85,000 0.905 21,67,9652 15,60,000 0.826 12,88,5603 19,80,000 0.751 14,86,9804 26,55,000 0.683 18,13,365

Total 67,56,870

Total present Value = 67,56,870

(-)Initial Outlay = 62,70,000 -------------

Net present value = 4,86,870

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PV of Cash inflowProfitability Index (Gross) = --------------------------------(5.10)

Initial cash outflow

67,56,870

=-------------------

62,70,000

= 1.077

Net Present ValuesProfitability Index (Net) = --------------------------------(5.11)

Initial cash outlay

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

= 0.077

= 1.077 – 0.077

= 0.077

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

66

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.

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

67

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.

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.

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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 Abstract of capital budget 2006 – 2007S.NO Particulars Amount1 Civil Section 13450002 Quality Control 3080003 Dairy milk sweets 1865004 Training center 21910005 Attur CC 2500006 P-Velur 5990007 Namakkal cc 8200008 Transport Section 32000009 Stores 2000010 APS 1715200011 Powder Plant 627000012 Dairy 108000013 Maintenance Section 4508200014 Pre Pack 130000015 Procurement and input 3331000016 Marketing 3562000

Grand Total 128780500

72

STAFF SALARY AND ALLOWANCES FOR THE YEAR 2006 –2007

S.No Particulars Amount1 Salary 382560002 Dearness Allowance 312000003 Other Allowance 53040004 EPF Contribution 57600005 LSC&Pension

Contribution25000

6 Inspection Charges to FPF

40000

7 Bonus 30000008 Gratuity 45000009 Group Insurance 100000010 Double Wages 4000011 Night Shift Allowance 25425012 Out of Packet expenses 2500013 Leave Travel

Concession862500

14 Surender Leave Salary 172500015 T.A 180000016 Total 9379175017 Allocation Salary

No.of Employees 690Cost of Employees 135930Weighted Avg cost per employee

11328

73