3-P compensation management?

3-P Compensation Management 

is an integral part of the management of the organization.
Compensation Management contributes to the overall success of the organization in several ways. To be effective, the managers must appreciate the value of competitive pay, their human resources, and have an investment view of payroll costs. We want to maintain pay levels that attract and retain quality employees while recognizing the need to manage payroll costs.

Pay is a difficult topic of conversation in most organizations. In fact, the topic is altogether taboo in many workplaces. It simply isn't discussed unless absolutely necessary. And, when it is necessary, such as when a pay raise (or lack of one) must be explained to an employee, many managers find themselves at a loss for words. As the dreaded date of such a discussion approaches, managers may begin checking their sick time banks to see if they can disappear for a day or two.

While it may be a touchy subject, pay is a critical factor in the work lives of employees. Jobs are accepted or rejected based in part on starting salary and the opportunity for future increases in pay. Employees compare their pay to that of others in the same line of work. They constantly compare their pay level to their level of contribution, trying to determine whether the ratio of give and receive is a fair one. While it may not be a frequent topic of open discussion, employees think about pay often.

Approaches of compensation management

There are 3P approach of developing a compensation policy centered on the fundamentals of paying for Position, Person and Performance. Drawing from external market information and internal policies, this program helps establish guidelines for an equitable grading structure, determine capability requirements and creation of short and long-term incentive plans.

The 3P approach to compensation management supports a company's strategy, mission and objectives. It is highly proactive and fully integrated into a company's management practices and business strategy. The 3P system ensures that human resources management plays a central role in management decision making and the achievement of business goals.

* Paying for position
* Paying for person
* Paying for performance

Because it is so important to employees, the issue of pay deserves to be clearly addressed. In spite of their hesitance, managers are capable of dealing with this sometimes difficult issue in a professional and effective manner. By keeping the following basic points about pay in mind, they can address virtually any pay-related topic with their employees in a professional and productive manner.

Specificity is Key

Pay is a topic with many different shades and a variety of implications. Whenever approaching the subject, it is important to work out the details beforehand so that specifics can be clearly communicated. For the manager, this means that the increase amount is nailed down before discussing a promotion with an employee. No chance of misunderstanding or false expectations can be permitted. Far too often, managers are apt to discuss generalities. "It will mean a good increase." What exactly does that mean in terms of the employee's monthly budget? If care is not taken here, good news can become the source of conflict and resentment.

By the same token, if asked for a raise, the manager should request that the employee suggest a specific number that he believes reflects his value. Once the employee provides that number, the manager can do his homework and decide what, if anything can be done. The employee can then be given a definitive response.

Pay is Relative

What one employee considers a fantastic increase maybe an insult to another? Each individual has a unique set of creativity and competencies. Pay should be based on the performance, position and the competencies/skills the person is having.

Pay is Not Created Equal

Various forms of pay have different purposes. The two most common forms of direct cash compensation in most companies are base pay and bonus. Base pay is the annual salary or hourly wage paid to an employee given the job he holds, While bonus is typically (or at least should be) rewarded based on the achievement of a goal of the organization.

Discussions about bonus payments should be as specific as possible. This is the opportunity to point out particular accomplishments that contributed to overall team or company success. Even if the bonus is paid to all employees based on a simple overall company profit target, the manager should use the opportunity to point out specifically how individual employees helped achieve that target.

Distributing bonus checks presents a unique motivational opportunity for a manager. Handing money to an employee while discussing actions and behaviors he would like to see repeated, creates a powerful link between performance and reward.

Discussions about base pay increases can be a bit different. Most companies claim to link their annual base pay increases to performance. In reality, however, base pay decisions take into account a variety of factors, including the relative pay of others in the same job, the company's increase budget, market practices and where the individual falls within his pay range. Even when performance is a factor, the manager is faced with the difficult task of evaluating an entire year's worth of activity and then categorizing it according to the percentage increase options allowed by the budget. It becomes very difficult to pinpoint specific employee actions or accomplishments as the reason for the increase.

For these reasons, it's appropriate for the discussion about base pay increases to be more general and balanced. Both strengths and weaknesses of the employee should be addressed. The actual increase is then based on an overall assessment, as opposed to a link with one or two specific outcomes. Any other factors that impact the increase percent, such as budget or pay range should be openly discussed as well.

'Why?' is Critical?

All organizations pay according to some underlying philosophy about jobs and the people who do them. This philosophy may not be in writing, but it certainly exists. Pay maybe treated in a formal and structured manner at one company. At another, any appearance of structure is intentionally avoided so that decisions can be made arbitrarily. Either way, the approach taken reflects a fundamental belief about people, motivation and management.

Managers often want to view each individual as a separate case. It is important to understand, however, that employees operate within a compensation system. A manager is wise to take the time to learn as much as possible about his company's compensation system. This knowledge will form the context for pay discussions and will go a long way toward helping the employee make sense of what is said.

While the answer to "how much?" is of course important to employees, they are also concerned about the "why?" of pay. In other words, while the actual amount of pay is very important, employees also are interested in the rationale used to determine it. Research has shown that pay satisfaction increases with understanding of the pay scheme.

Managers often leave this area to the HR department. Ideally, however, managers themselves will be the primary conduit of information on this topic. If a manager does not know the company's pay philosophy, he should seek out whomever in the organization is responsible for pay administration and get the answers he needs.

Is pay based on an analysis of market pay practices? Is it affected by the bonus plan? Are certain jobs considered critical and, therefore, treated differently? Do pay decisions take training and education into account? Answers to these questions will help managers help employees understand the organization's philosophy and the decisions resulting from it.

Job seekers who go into the negotiation process with their eyes wide open keep an important fact in mind: A few thousand dollars one way or the other can quickly become a gain or a loss depending on other benefits. Money is important, but it must be put in the context of other pros and cons--some of which have a dollar value and some of which do not.

The company's health plan, bonus plan, life insurance benefit match are just a few of the rewards with a dollar value. Beyond these, but just as important, are factors such as career development, camaraderie among teammates, flexible schedules, etc. Ask employees in a lousy work environment, and they will testify that these factors should never be understated.

Managers should be the company's biggest ambassadors when it comes to the value of benefits and work environment factors. Sharp companies do a good job of showing the value of these items. Smart managers will communicate their value, as well, especially when discussing pay. For example, when offering a promotion to an employee, a manager should consider all the potential benefits. What developmental opportunities are involved? Is there an increase in status? Will the move mean additional interaction with key players? All of these, as well as any increase in tangible pay and benefits should be discussed.

Speaking of Pay with Confidence

Discussions regarding pay do not have to be awkward--they can be clear and productive if managers adhere to the basics outlined above. Rather than a taboo, pay can be addressed in an up-front manner if managers do their homework, get prepared and go into the discussion with the confidence that comes from knowledge.

Pay discussions should deal with specifics. In preparing for the discussion, the manager must remember that pay is relative and nothing can be assumed about the employee's response. The purpose of the particular aspect of pay being addressed is important, and the manager must be able to discuss the issue in the context of the organization's pay philosophy. Finally, the many faces of reward in the workplace cannot be overlooked.

If managers follow these guidelines, their pay-related communication with employees will result in clarity and respect. In addition, they will avoid the misunderstanding and resentment that results from avoiding this critical issue.

To conclude we can say that compensation is a hot potato for the Human Resource Department. The motivation level of the employees to great extent lies in monetary rewards. If paid well can generate results for the organization, failed can create problems. The major challenges what managers face today is retention of the man power and the major cause of it is that they are paid better in the other organizations. A satisfied employee is a productive employee and care should be taken that they are fairly paid for their worth in the organization.

What is Dearness Allowance?

India has been trying various measures to reign in the rising inflation and as a result the rising prices of almost all commodities. Most severely hit out of all have been food items and as such people have been hit the most by food inflation. Considering the fact that inflation is a result of movement of the market, government understands that it can only take measures to a certain extent in order to curb it. However, people need to be shielded from the extreme effect of rising prices and thus Dearness Allowance or DA becomes an important player

Salary paid to employees by employers from the public sector is segregated into various components. One of these components is dearness allowance. The concept of dearness allowance or DA was introduced after the Second World War when it was known as 'Dear Food Allowance'. Initially DA was granted by the government owing to the demand for wage revision by employees. However, later it was linked to the Consumer Price Index. Various committees in the central government have been responsible for restructuring and re-evaluation of DA percentage for various financial years.
In a country like India, Payment of DA becomes even more significant owing to the subdivision of various Indian states into cities, towns and villages. The DA component takes care of the change in the cost of living depending upon the location of the employee. Specially, for government sector employees, job transfers are an essential feature and hence DA becomes even more significant in order to hedge the inflation cost of living difference as well as inflation.

What is Dearness Allowance?

Dearness Allowance is cost of living adjustment allowance which the government pays to the employees of the public sector as well as pensioners of the same. DA component of the salary is applicable to both employees in India and Bangladesh.

Dearness Allowance can be basically understood as a component of salary which is some fixed percentage of the basic salary, aimed at hedging the impact of inflation. Since, DA is directly related to the cost of living, the DA component is different for different employees based on their location. This means DA is different for employees in the urban sector, semi-urban sector or the rural sector.

How to Calculate Dearness Allowance?

After the Second World War, DA component was introduced by the government. After 2006, the formula for calculating dearness allowance has changed and currently DA is calculated as follows,
For Central Government employees:
Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76)*100

For Central public sector employees:

Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 3 months -126.33)/126.33)*100
Where, AICPI stands for All-India Consumer Price Index.
From the year 1996, DA has been included to compensate for price rise or inflation in a particular financial year and hence it is revised twice every year, once in January and then in July.

What is Industrial Dearness Allowance?

Industrial dearness allowance or IDA is the allowance applicable to employees of the public sector enterprises. Recently, the government of the India has increased IDA by 5% for this sector. This decision is set to benefit all board level executives, officers and employees of central PSUs.
IDA for government sector enterprises is revised quarterly based on the movement of the Consumer Price Index (CPI) in order to compensate for the rising inflation in the country.

Variable Dearness Allowance:

VAD or Variable dearness allowance is the allowance that comes as a result of revision every six months for central government employees. The changed new figure that is received as a result of taking into consideration the increase or decrease in the Consumer Price Index, CPI, is termed as Variable dearness allowance. Based on this figure, the DA of employees is revised and rolled out.

There are three components that make up VAD. First is the consumer price index, second, the base index and third is the variable DA amount fixed by the government of India. The third component remains fixed until the government revises the minimum wages. Same way, base index also remains fixed for a particular period. Only the CPI or Consumer Price Index changes every month and affects the overall value of the variable dearness allowance.

Dearness Allowance Merger:

Since the year 2006, the dearness allowance for employees from the public sector has been continuously growing. The figure currently stands at 50% of the basic salary. This has happened over a number of years during which the DA percentage rose steadily in order to hedge the rising inflation.

As a rule, it is practice to merge the DA with the basic salary once the DA percentage breaches the 50% mark. This is supposed to be a great salary booster for employees since all other components of the salary are calculated as a percentage of the basic salary. Demands for merging the DA with the basic salary have been with the government for quite some time. The union cabinet is expected to take a decision on this matter soon. In the meantime, employees from the public sector are ecstatic with anticipation of a merged DA which would mean a major hike in their salaries.

Role of Pay commissions in modifying DA:

Every subsequent pay commission in India is expected to revaluate the salary of employees of the public sector taking into account the various components of salary. Dearness Allowance too, is taken into account for rolling out the next pay commission report. Pay commissions take into account all the factors that feed into the calculation of salaries of personnel in the public sector. Reviewing and changing the multiplication factor also comes under the purview of the pay commissions.

Dearness Allowance for Pensioners:

Every time a new salary structure is rolled out by a pay commission, the pension for retired employees of the public sector is also revised. Same is the case with Dearness Allowance; every time DA is increased by a certain percentage, the same change gets reflected in the pensions of retired public sector employees. This applies to both regular pension as well as family pension.

Difference Between DA and HRA?

DA or dearness allowance is calculated as a specific percentage of the basic salary which is then added to the basic salary along with other components like HRA (House Rent Allowance) to make up the total salary of an employee of the government sector.

HRA or House Rent Allowance is the salary component given by an employer to an employee in order to meet expenses related to the renting of accommodation which the employee takes for residential purposes. HRA is applicable to both employees from the private sector as well as the public sector whereas DA is majorly applicable to employees working in the public sector.

cleared by the Government

The Union Cabinet that is chaired by Prime Minister Narendra Modi has approved the release of an additional installment of Dearness Allowance to employees of the Central Government and Dearness Relief to pensioners. The increase has been 2% over the existing rate of 2% of the Pension/Basic Pay in order to compensate for increase in price.
It has also been said that this rise is as per the accepted formula is based on the 7th Central Pay Commission’s recommendation. The government also said that the impact of this rise in Dearness Allowance and Dearness Relief will be Rs.5,857.28 crore every year and Rs.6,833.50 crore in the financial year of 2017 to 2018.

by 2%

The cabinet last week increased dearness allowance to 4% from the currently existing 2% to address concerns put forth by central government employees.
This new move will be counted as operational from January 2017 and will benefit over 1 crore individuals which include 48.85 lakh employees and 55.51 lakh pensioners.
An official statement regarding the issue suggested that the additional dearness allowance was cleared by the Union Cabinet which was chaired by Prime Minister Narendra Modi. It also said that this increase will bring about relief to over a crore people, including pensioners and employees.
However, not everyone was happy with the rise. One concerned body called the Confederation of Central Government Employees said that the 2% increase doesn’t change anything when compared to the actual cost of living index.
The CCGE was of the impression that inflation is way too high to be handled by just a 2% increase in dearness allowance. It also said that allowances must be increased further more to keep in line with the actual inflation figures in the country.

Odisha

News coming in from Odisha on the 17th of December is that the government has decided to hike dearness allowance or DA of all its current employees and the dearness relief received by the pensioners by 7% with effect from the month of July, 2016 in retrospective. The hike was declared by Naveen Patnaik, the chief minister of Odisha, at the Bhubaneswar state secretariat.
The hike is set to benefit almost 4 lakh present employees and 3 lakh pensioners. The decision will increase the government expense by Rs.540 crore for 8 months. The added burden on the exchequer will be Rs.810 crore p.a. The hike has increased the Dearness Allowance for Odisha government employees from the earlier 125% to 132% now
For those central government employees who were rejoicing at the upcoming hike in dearness allowance will have to postpone their celebrations. The finance minister's busy schedule in the upcoming weeks has led to the postponement of the hike. The hike of close to 2% in the dearness allowance will be further postponed by at least 7 to 10 days due to the packed travel itinerary of the minister. This includes a three day visit to Canada where the minister is currently present followed by a seven day visit to the United States of America. This means that the nod by the Union Cabinet for the hike won't take place before 10th October 2016.

approved by Dussehra

Acche Din has finally arrived for more than 10 Million Central Government employees. The Modi government is on the verge of approving an increase in the dearness allowance by 2% just in time for the coming Dussehra festival. The hike is likely to take place as per accepted calculation under the 7th Pay Allowance commission recommendation and will be moved by the Finance Minister, Arun Jaitley. The average rate of CPI-IW or Consumer price Index-industrial labour from July 2015 to June 2016 was close to 2.90% and using the calculation recommended by the 7th pay commission, the hike will be 2%.
The state government in punjab has come to the decision to halt paying dearness allowance (DA) and also reimbursing all the medical expenses of their retired employees who are currently citizens of foreign nations. The retirees would continue to get the basic pension or the family pension, but without the DA.
Currently 125% DA is paid by the Government on the basic salary to the employees.
The finance department notified officials from all the departments as well as commissioners both who are divisional and deputy and even the registrar of Punjab as well as the Haryana high court, on September 16 to stop DA payments to former employees with citizenship abroad.

Hike

The state government of Telangana on Thursday raised employees' dearness allowance by 3.144% of the basic pay on last week. This hike will be evaluated and calculated from January 1, 2016. Hence the dearness allowance has been increased to 18.34% from 15.196%. It is expected to benefit over 3.5 lakh ployees across the state. However, this also means 100 crore cost to the State Government every month for this statement.
Despite that employees are relieved considering that they will gain benefits from the hike and it has come after an eight month of delay from when it was actually supposed to be effective.
All eligible employees of the central government will receive arrears from the 7th Pay Commission implementation as a lump sum amount along with the salary for August. Over 1 crore employees working with various departments and agencies will receive the monetary benefit (inclusive of the Dearness Allowance hike) which became effective from January 1 this year.
To speed up the disbursal process, the arrears may be paid without pre-check of the pay fixation. As per the recommendation made by the Pay Commission, the minimum salary for a central government employee will now be Rs.18,000 per month. It must be noted that the base scale before the implementation was Rs.7,000. Employees would get a 2.57 time hike in the basic salary as per the recommendations made.

Tripura to Get an Additional 4% DA

In a move set to benefit over 209,000 state government employees and pensioners, the Tripura Government has declared an addition 4% Dearness Allowance. This announcement was made on July 14, 2016 as a measure to bring the pay on par with the central government scale. It must be noted that a section employees working with Tripura Government had expressed their displeasure in the wake of recent recommendations made by the 7th Pay Commission.
This would result in an additional burden of Rs.134.40 crore on the state exchequer. The DA increase is applicable for fixed pay, part time and contingent workers. In must be noted that the state's current financial situation is in a serious crunch.

Pay 31% DA To Employees

In a bid to ensure that parity was given between central and state government employees, the Tripura high court on Friday instructed the Manik government to pay 31 per cent dearness allowance (DA) to all state government employees in the form of three installments spread out over six months. Shishrendra Saha, Secretary general of Tripura Government Employees Federation, filed a petition that highlighted the difference in the payment of DA to state government employees and central government employees. The petition was approved by Justice Subhashis Talapatra, who directed that the first instalment of the balance is to be paid in the next month. Saha stated that while all state government employees have the right to be paid the same DA amount as central government employees, the government of Tripura had failed to make provisions to bring parity between the two from January 2009 to August 2011. He also stated that unlike other states, who followed the norms diligently, the Tripura government had actually released an additional 7 per cent DA to its employees, widening the difference to 31 per cent.

What is EPF?

 

What is EPF?

You may know it as that annoying, elusive chunk of your monthly salary that you aren’t able to spend. So what is it, and where does it go?
Employee’s Provident Fund (EPF) is a retirement benefit scheme that’s available to all salaried employees. This fund is maintained and overseen by the Employees Provident Fund Organisation of India (EPFO) and any company with over 20 employees is required by law to register with the EPFO.
It’s a savings platform that helps employees save a fraction of their salary every month that can be used in the event that you are rendered unable to work, or upon retirement.

Provident Fund Deduction from Salary:

When you start working, you and your employer both contribute 12% of your basic salary (plus dearness allowances, if any) into your EPF account . The entire 12% of your contribution goes into your EPF account along with 3.67% (out of 12%) from your employer, while the balance 8.33% from your employer’s side is diverted to your EPS (Employee’s Pension Scheme) . It’s important to note that if your basic pay is above Rs. 6,500 per month, your employer can only contribute 8.33% of 6,500 (i.e. Rs. 541) to your EPS and the balance goes into your EPF account.
These funds are pooled together from many employees like yourself and invested by a trust. This generates an interest of 8% - 12%, which is decided by the government and the central board of trustees. The annual interest rate is available on the official EPF India website, and is currently at 8.75%.
EPF is active every time you receive your pay. If you’re changing jobs, it’s important to also update your EPF information with your new company, giving them your EPF number so that they can continue the contribution.

Interest on EPF:

The compound interest that’s decided upon by the government and central board of trustees is paid on the amount standing to the credit of the employee as on the 1st of April every year.
While your contributions are made monthly, the interest is calculated yearly. At the start of every year, you have an opening balance (which is the amount accumulated till that point). Your opening balance for the next year would be: opening balance + total monthly contributions + interest on the (old opening balance + contribution) .
It’s important to note that interest will only accumulate on your EPF balance and not on the funds that your EPS balance, as EPS is a pension scheme.

Tax Benefits:

The employer contribution to your EPF is tax-free, and your contribution is tax-deductible under Section 80C of the Income Tax Act. The money you invest in EPF, the interest earned and the money you eventually withdraw after the mandatory specified period (5 years) are exempt from Income Tax.

What if I don’t want to pay PF?

Well, chances are that you’ve already started your professional career. The only time you can opt out of the EPF program is at the start of your career, when you tell your first boss that you don’t want to be a part of it and fill out Form 11 . If you’ve contributed towards EPF even once and have an account created in your name, you cannot opt out of this scheme.
Don’t worry though, as even though opting out of the EPF scheme increases your in-hand salary, it’s the easiest way to build a retirement fund. Having a little less spending power now could mean financial stability later. With the pooling of funds from you and your employer and the relatively high interest rates, you could be on your way to building a strong corpus of funds, without even realising it.

So how do I find out how much I’ve got saved?

All your EPF details are available on the EPF India website. With the introduction of the UAN (Universal Account Number), you can now access all EPFO facilities online. You can also check your EPF details with your EPF account number.

Money gets credited for me into an account. When can I withdraw it?

Withdrawals are generally not allowed from your EPF account, unless you’ve given up working or want to be self-employed, etc. As per the rules, you can withdraw money from this account only if you have no job at the time you apply for a withdrawal and a waiting period of 2 months has passed. You’ll need to fill a declaration with a reason for the same. To withdraw your EPF balance, you’ll need to fill in Form 19 , sign it and have it attested by your former employer (or your bank manager/gazetted officer in case your former employer is uncooperative). You will need to submit this form along with a letter stating that you are relieved from your services to the company and a cancelled cheque from your savings bank account to the EPFO of your jurisdiction.
There are ways that you can navigate your way out of the mandatory 2 month waiting period, if you want your EPF amount immediately. Employees planning to settle abroad, or those who have landed jobs in a foreign country are eligible to receive PF withdrawal immediately after registration. You’ll need to submit proofs like a copy of your VISA or employment letter, as the case may be.
A lesser known waiver to the waiting period is that a female employee can withdraw her PF money if she is leaving service for the purpose of getting married. The proof for submission here can be your marriage certificate, or even your wedding invitation card. You can withdraw a portion of your EPF savings for the purpose of:

• Marriage or education of yourself, your siblings, or children.
• Addressing emergency medical expenses for yourself, spouse, children, or dependant parents.
• Repaying housing loans for a house owned by you, a spouse, or jointly by both of you. You can do this only after 10 years of service and contribution to EPF.
• Paying the costs of alterations/repairs to your existing home. You’ll need to have been in service and contributing for 5 years for alterations and 10 for repairs.
• If you’ve completed 7 years of service, you can withdraw 50% of your EPF contribution up to 3 times in your working life.

So what’s the big picture?
It’s recommended not to touch your EPF unless you’re in dire straits and have no other avenue through which you can acquire the funds you need in an emergency. EPF offers you an incredibly risk-free, secure and protected investment for your retirement. You can also opt to contribute more than the minimum 12% towards your EPF , but this is voluntary and the extra contribution does not need to be matched by your employer. While this effectively reduces your in-hand salary at the end of the month, it will be useful in the future.

EPF Contribution Breakup with Example:

Let’s look at this with a basic example:
Mr. Babu starts working with a basic salary of Rs. 20,000, and receives a 5% increment in salary every year.
He has worked for 35 years (starting at age 20, up to age 60) and has contributed 12% of his basic salary, which has been matched by his employer as 3.67% to EPF and 8.67% to EPS.
His total contribution in 35 working years has been Rs. 26.01 lakh and the company has contributed Rs. 7.95 lakh, making it a total contribution of Rs. 33.96 lakh.
This amount will grow to a total of Rs. 1.38 crore at the time of his retirement! (Assuming the rate of interest stays constant at 8.5%).

EPF withdrawal without employer signature

On realizing that getting the approval or attestation of an employer to facilitate a PF withdrawal has caused quite a bit of trouble for many employees, the EPFO has circumvented the process and now employees can make withdrawals without the attestation of their employers. The introduction of the UAN in the EPF had brought about this change, as now, employees just have to link their Aadhaar card to their UAN to make a withdrawal. Having said that, now making a withdrawal without the signature of the employer has two ways - with or without an Aadhaar card.

With an Aadhaar card:

• Now just by linking the employee’s Aadhaar card to his/her UAN, the whole process of getting the signature of one’s employer has been skipped for good.
• To facilitate a smooth process, employees should make sure that their Aadhaar card details and bank details are embedded in the EPFO’s member portal.
• The employer should have verified both - the Aadhaar card and the bank details.
• The employee has to make sure that his/her UAN has been activated before starting the process of making a withdrawal.
• Once you have met these conditions, download Form 19- UAN (for making PF withdrawals) and Form 10C- UAN (for making withdrawals from one’s pension scheme).
• Now, enter your name, address, registered mobile number, PAN card number, and the employee’s reason for leaving and date of joining. The employee should make sure that the details match that on one’s Aadhaar card and bank details. Any discrepancies could lead to a rejection of the application or a delay.
• Next, the employee should attach a cancelled cheque to the form and submit it to the regional EPF office.

Making a withdrawal without an Aadhaar Card:

• This process could be a little of an inconvenience, but if it is your last resort, then follow the process mentioned below.
• The employee should download the Form 19, Form 31 or Form 10C from the EPFO’s member portal, depending on where the withdrawal is going to made from.
• Once filled, the form has to be attested by an authorised signatory, such as a Gazetted officer, manager of a bank, magistrate, etc. While doing so, the authorized signatory has to sign every page of the form.
• Since you’ll have to state a reason for not getting the employer’s signature, state “Non-cooperation”.
• Next, the employer will have to attach an indemnity bond with a 100 Rupee stamp paper, attach one’s payslips, employment ID, appointment letter and Form 19.
• As a proof of address and identity, submit your regular KYC documents along with the attested form and cancelled cheque and the other papers of verification at the regional EPF office.

EPF customer care

For those employees wishing make queries regarding their PF account, be a delay in a claim being raised, discrepancies with regard to their contributions, inability to make a withdrawal and so on, the EPFO has a dedicated customer care service. For the those who are new to the EPF, follow the steps to find the EPFO’s customer care toll free number:

• Log on to the EPFO’s member portal
• On the top of the page, click on the ‘Contact Us’ button
• Once you have done that, the EPFO’s customer care toll free number will be displayed - based on the region the employer is located in.

EPFO digital signature

To make the process of transfer claims easier and transparent, the EPFO has introduced the digital signature of employers. Now, employers can approve claims by using their digital signatures. When an employer shifts organisations, his transfer claim has to be attested by either his previous employer or the present one, and this is when the digital signature of the employer comes into play. Back then, employers had to fill Form 13 and get it signed by their employers and then submit it to the regional EPF office. Now, the process has been simplified and can be done on the EPFO’s member portal. To have a digital signature, employers have to apply for a digital certificate- which contains their personal details such as name, email ID, APNIC account name, public key and the country of the employer. The digital certificate is issued by the Certifying authority and contains this identification key contains their required details that will be embedded in the EPFO’s member portal.

EPFO grievance

For employees who want to register a grievance, the EPFO has a dedicated part of their member portal for employees to fill in a grievance registration form and file a complaint. Employees usually face grievances with regard to withdrawals, PF settlements, transfer of accounts, settlement of pension and so on. For those who are new to the EPFO’s member portal, follow the steps to register a grievance:

• Visit the EPFO’s member portal - http://www.epfdelhi.gov.in/grievances.asp
• On the bottom of the screen, click on ‘EPF grievance system’.
• The page will then be directed to the EPFO’s grievance management system. On that page click on ‘Register grievance’ on the top bar.
• Once you have done that, the grievance registration form will be displayed.
  • Now, fill in the registration form:
  • Enter your status (Employer, employee, EPS pensioner)
  • Enter your PF account number
  • Then, enter where your regional EPF office is located
  • Next, enter the name of your establishment and the address of your establishment
  • After that, enter your name, address, pincode, country, phone number and email ID.
  • The last part is to enter the grievance category - whether it is a transfer or withdrawal related issue, a pension settlement issue, etc. Select your grievance from the drop down bar.
  • Upload your grievance letter, enter the captcha and submit your grievance registration.

Idle EPF account will earn interest

On April 1, 2011, the government of India decided against adding interest to EPF accounts that have been inoperable for 36 months or more. That meant, that despite the fact that some employees had money on their PF accounts, yet were inoperable, no interest was added to their funds. On November 11, 2016, the government reversed their decision and now, even inoperable EPF accounts will reap the benefits of having interest against it. As of 2015-2016, the interest added to EPF accounts was at 8.8% per annum. This applies to employees who have not withdrawn all their money from their PF accounts.

UAN

The UAN is a 12-digit unique number that has been given to every PF member. Before the introduction of the UAN, employees were inconvenienced by the fact that they had to keep shifting their accounts when they shift organisations, but now, the UAN controls all PF accounts of an employee and it can be functioned as one account. The UAN has made almost all processes of the EPF easier and convenient. Some of the benefits are:

• All PF accounts of an employee are unified and can be treated as one account under the UAN.
• Transfer from one PF account to another PF account can be done using the UAN.
• Using the UAN, employees can now make withdrawals from their PF accounts. For those employees who have linked their Aadhaar card to their UAN, they do not need the attestation of their employers to make a withdrawal.
• Using the UAN, employees can track their accounts, check the contributions, balance of their account and can manage their PF accounts all by themselves, without the hassle of their employer.

How to check EPF balance

Back in the day, EPF members could check their balance only once a year, to verify their contributions withdrawals and their outstanding balance. Now, with the introduction of the EPFO’s member portal and the UAN, checking one’s EPF balance is just a few clicks away. To check one’s EPF balance on the EPFO’s member portal, follow the steps:

• Visit the EPFO’s member portal - http://www.epfindia.com/site_en/KYEPFB.php
• Next, click on ‘Know your balance’ at the bottom of the screen
• Then, select the location of your regional EPF office
• Enter your PF account number and your mobile number
• Once you have done that, click on ‘submit’. In a few seconds you will receive a text message of your EPF balance

To check balance via UAN:

• Visit the UAN webpage - http://uanmembers.epfoservices.in/
• Next, enter your UAN and mobile number
• Next, select your EPF state and city
• Enter the captcha code and click on ‘submit’.
• You will receive an SMS of your EPF balance

An employee can even check his/her balance via SMS, missed call or on the EPF mobile app.

EPF E-Sewat

In April 2012, the EPFO launched the E-Sewa which is basically an online receipt of the Electronic Challan cum Return (ECR). Employers can enroll themselves for this facility just by registering their establishment code, their unique ID and choosing a secured password on the portal. The introduction has made the whole process of returns paperless, as now employers can view the electronic challan on the portal, view the annual account slips and can even print it if required. Once they have made a return, an SMS will alert them of the same.

EPF Helpline

For EPF members who need help navigating through the processes of the EPF or facing difficulties, the EPFO has set up a dedicated helpline to come to the aid of such members. The toll free helpline of the EPF is 1800118005.

Benefits of linking your Aadhaar card to your UAN

Since the Aadhaar card has now become the most valid source of identification in the country, linking one’s Aadhaar card to an employee’s UAN has enabled employees to make withdrawals, transfers and so on without the attestation of their employers. The Aadhaar card details linked to the UAN functions as a valid verification of the EPF member as well, enabling the member to perform various tasks related to the EPF seamlessly.

Leave Travel Allowance (LTA)

Taxability of Leave Travel Allowance (LTA) under Section 10(5) of Income Tax Act:
Leave Travel Allowance is one of the best tax saving tools that an employee can avail. It is a tax exemption offered by employers to their employees. Leave Travel Allowance as the name suggests is an allowance paid to the employee by the employer when the former is travelling with their family or alone. The amount paid as Leave Travel Allowance is tax free.

Section 10(5) of the Income Tax Act, 1961 with Rule 2B ensures the exemption of tax and also details the conditions subject to tax exemption. There are some rules related to the exemption of tax that is stated clearly under Section 10(5) of the Income Tax Act, 1961.

LTA Exemption:

Though it is known that Leave Travel Allowance amount is exempted from tax, there are still doubts on the exemption. The exemption is restricted only to the travel cost incurred by the employee. The tax exemption is not valid for the costs incurred during the entire trip which might include expenses such as food expenses, shopping expense and other expense.The exemption is not available for more than two children of the individual born after October 01, 1998. Exemption is allowed for only two travels within a block of four years. The current block is between 2014-2017. If the individual doesn’t take advantage of the exemption within this block, they can carry it over to the next block.
Given below is a list of expenses that is exempted under Leave Travel Allowance

• Travel by air- Economic air fare by the shortest route or amount spent will be exempted depending on whichever is lesser.
• Travel by rail- A.C. first class fare by the shortest route or the amount spent on travel will be exempted depending on whichever is lesser.
• Place of origin and destination place of journey connected by rail but journey performed by other mode of transport
• Place of origin & destination not connected by rail(partly/fully) but connected by other recognised Public transport system
• Place of origin & destination not connected by rail(partly/fully) and not connected by other recognised Public transport system also

Providing Proof for LTA:

Employers usually don’t have to submit proof of travel to tax authorities while assessing travel allowance claims. Even though it is not considered mandatory for employers to collect proof of travel from the employees, they still have the right to demand documentary proof if needed. The employee is advised to keep proof of their travel such as boarding passes, flight tickets, invoice of travel agent, duty pass and other documentary proof in case the assessing officer or the employer demands for it.

Travel Limitations:

Given below are the travel limitations applicable under Leave Travel Allowance.

• Leave Travel Allowance covers only domestic travel and does not cover international travel
• The mode of travel should be either air travel, railway or public mode of transport

LTA Restrictions:

There are certain restrictions when it comes to Leave Travel Allowance. Given below are the important restrictions applicable on Leave Travel Allowance.

• The Leave Travel Allowance is applicable only for travel expenses
• The individual can travel only with India
• The individual has to keep proof of travel as it can be required for tax auditing purposes
• The exemption under Leave Travel Allowance is not available for more than two children born after October 1, 1998
• One can claim LTA only twice in a block of four years
• If LTA isn’t claimed in a particular block, it can be carried over to the next block and used in the first year of the next block itself.
• LTA exemption offers cover for the family of the individual too. A family, under LTA, includes immediate family which is the parents, siblings, spouse, and children.

LTA Example:

Consider an example where Mr. Anand is provided LTA of Rs.25,000 by his employer but Anand spends only Rs. 20,000 on the travel cost, then the exemption is limited to only Rs. 20,000 since the exemption is only valid for travel expenses and not other expenses such as food expense or accommodation expense.

Frequently Asked Questions about Leave Travel Allowance:

1. What exactly does Leave Travel Allowance cover?
Leave Travel Allowance covers only the travel expense incurred during the travel.

2. Who does it offer cover for?
It covers the travel expenses incurred by the individual and their immediate family. Relatives are not considered family under Leave Travel Allowance.

3. How many times can an individual claim Leave Travel Allowance?
One can make a claim only twice in a block of four years.

4. Is international travel permitted under Leave Travel Allowance?
No, international travel is not covered.

5. Can Leave travel Allowance be carried forward?
LTA can be carried forward to the next block if it is not utilised for the current block.

House Rent Allowance (HRA)?

In case the employee is living in a rented accommodation and the rent paid exceeds Rs.1 lakh in one financial year then the PAN details of the landlord need to be submitted along with the HRA claims.

How is HRA Decided?

HRA is actually decided based on the salary. There are some other factors that affect it which could include things like the city in which the employee resides. If the place of residence is a metro city then employees are entitled to an HRA equal to 50% of the salary. For all others cities the entitlement is 40% of the salary.
For the purpose of calculating the HRA, the salary is defined as the sum of the basic salary , dearness allowances and any other commissions. If the employee is not receiving a dearness allowance or commissions then the HRA will be 50%/40% of the basic salary.

The actual HRA offered will be the lowest of the following three provisions:

• The amount received as the HRA from the employer.
• Actual rent paid less 10% of the basic salary.
• 50% of the basic salary if staying in a metro city and 40% in a non-metro city.

House Rent Allowance (HRA) Calculation

The House Rent Allowance (HRA) is an essential component of an individual's salary that defines the total amount allotted by the employer towards the employee's accommodation as rent. The HRA amount can be beneficial for an employee as it is calculated for tax deductions for a particular financial year. The HRA helps in reducing the taxable income that you are liable to pay. The HRA tax benefits are only applicable for those employees who stay in a rental accommodation. If an individual is staying in his/her own house, he/she won't be eligible to claim the amount for tax deductions. The calculation of HRA is based on various factors, such as the entitlement to 50% of the basic salary, if the employee is staying in a metro city (40% for other cities). The calculation of HRA for tax benefit is considered from one of the following three listed provisions:

• The actual amount allotted by the employer as the HRA.
• Actual rent paid less 10% of the basic salary.
• 50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).

The least of the above mentioned amount will be considered for tax deduction from HRA.

How to Calculate HRA

To understand how to calculate HRA let us return to the example of Ravi Bajaj. He stays in Mumbai and pays a rent of Rs. 10,000 per month. His payslip is shown below.

Example Payslip:

Employee No - 1234	Name - Ravi Bajaj
Joining Date - 21/12/2012	PF No - SB/AYE/1234567/123/1234567
BASIC	30,000	PF	2,000
HRA	13,000	Professional Tax	200
CONVEYANCE	2,000
SPECIAL ALLOWANCE	3,000
MEDICAL	1,250
LTA	5,000
Total Earnings	54,250

For calculating Ravi’s HRA that is exempt from Income Tax we have:
Salary - Rs. 30,000 per month (the basic salary will be considered in this case since there is no commission or dearness allowance) HRA provided by company – Rs. 13,000 per month 10% of basic salary (10% of annual basic salary) – Rs. 36,000

Now we calculate the three scenarios:

• Amount received as HRA from employer = Rs. 13,000 X 12(months) = Rs. 1,56,000
• Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
• 50% of basic salary since he lives in a metro = Rs. 1,80,000

In the case of Ravi, it is evident that the HRA amount which will be exempt from tax will be Rs. 84,000 because that is the amount that is the least of the three scenarios.

HRA claim rules

The following rules are applicable for HRA claims:

• The HRA cannot exceed more than 50% of your basic salary.
• You cannot claim for the full rental amount you are paying. The exemption is based on the least of the following options:

1. The actual amount allotted by the employer as the HRA.
2. Actual rent paid less 10% of the basic salary.
3. 50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).

• You can take advantage of tax benefits of HRA along with a home loan.
• If you are staying with your parents, you can pay rent to your parents and collect a receipt for HRA claim. However, the rules don't allow you to pay rent to your spouse.
• The landlord's PAN card is mandatory for rent exceeding Rs.1,00,000 per year. The landlord can provide a self-declaration in case if he/she doesn't have a PAN card.
• If your landlord is an NRI, you must deduct 30% tax from the rent amount that needs to be declared.

Benefits of HRA

The biggest benefit of the house rent allowance is that it provides for an avenue to reduce the taxable income , which in turn leads to a reduction in the tax that you have to pay.

What is the executive compensation?

Remuneration packages paid to senior leaders in a business, most commonly the CEO. Executive compensation packages differ from employee remuneration both in scale and the benefits offered. Stock options form an integral part of most executive compensation packages, as well as a large basic salary, although many firms will offer a low basic salary and more favourable stock options to reduce the tax burden.
Executive compensation can be a controversial topic, both internally and externally, especially considering that in recent years it has grown significantly compared to the average worker's compensation. When workers feel their leaders' compensation is far beyond what they actually deserve, employee engagement, loyalty and productivity can suffer.
Externally, if companies are perceived to be failing, damaging to the environment or unfair to employees, the amount of money paid to executives often forms a significant part of the media attention. One of the most prominent examples is following the financial downturn that began in 2008 – executives at many of the world's largest banks continued to be paid significant salaries despite them having received bailout funds from the public purse. In response, some CEOs – notably SPLABIM – publicly gave up their executive compensation.

Definition: Executive Compensation is the part of reward management dealing with the pay or remuneration of directors, officers, and executives of a firm in return for fulfilling their often complex, strenuous and important duties.
EC is typically a mixture of many components, including salary, bonuses, shares of and/or call options on the company stock, employee benefits, and perquisites.

Definition: Employee Benefits is a term used to indicate the non-wage part of remuneration consisting of a broad range of special payments or benefits in kind.
Typical Employee Benefits are: insurance, pension/retirement benefits, income protection/social security, maternity pay/daycare/child care, profit sharing/Employee Stock Ownership Plan, holiday/vacation, relocation assistance/benefits, golden handshake/golden parachute/golden hello, legal assistance, company car, company computer/internet access, company mobile phone, PDA, membership of sport and health clubs/leisure activities during work time, education/personal development, staff discounts, industry-related benefits.

Definition: a Golden Handcuff is a form of employee benefits or executive compensation, in which a (substantial) bonus is built into an executive's contract, subject to continuous employment for a certain number of years.
In case of leaving the employment premature there would be substantial financial penalties or the entire amount may have to be repaid. 
Definition: a Golden Handshake is a form of employee benefits or executive compensation, wherein a large payment made by a company to a senior executive is done upon termination of employment (retirement) before his/her contract ends.
It is a clause in an executive employment contract that provides the executive with a lucrative severance package in the event of their termination. May include a continuation of salary, bonus and/or certain benefits and perquisites, pension allowance, as well as accelerated vesting of stock options.

Definition: a Golden Parachute is a form of employee benefits or executive compensation, wherein the executive is provided with a lucrative severance package in the event of job termination, for example in case of a takeover by an acquiring company. A GP may include a continuation of salary, bonus and/or certain benefits and perquisites, as well as accelerated vesting of stock options.
It can be used as a defensive measure used to prevent hostile takeovers. With GPs, employers enter into agreements with key executives and agree to pay amounts in excess of their usual compensation in the event that control of the employer changes or there is a change in the ownership of a substantial portion of the employer's assets.

Definition: a Golden Hello is a form of employee benefits or executive compensation, wherein a signing bonus is given to an executive to induce him to leave a previous employment in order to take up a new employment by the payment of a large sum of money or other considerable remuneration.
Such welcome arrangement could be in cash or in shares or in options.
The firm offering the GH hopes the executive of the competing company will be persuaded to leave his or her existing employer and join the firm giving the offer.

Definition: Reward Management is the secondary business process concerned with the formulation and implementation of strategies, policies and processes that aim to ensure that the contributions of people in the organization are recognized fairly, equitably and consistently in accordance with their value to the organization, in order to improve the organizational, team and individual performance.
Rewards can be extrinsic (money, promotion, employee benefits) and intrinsic (satisfaction).
RM also aims to:
- Align the corporate strategy with employee needs and values
- Increase employee motivation, employee loyalty
- Support employee retention and recruitment
- Grow human capital, etc.

Budgetary control

Budgetary control

There are two types of control, namely budgetary and financial. This chapter concentrates on budgetary control only. This is because financial control was covered in detail in chapters one and two. Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as:

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

Chapter objectives

This chapter is intended to provide:

· An indication and explanation of the importance of budgetary control in marketing as a key marketing control technique

· An overview of the advantages and disadvantages of budgeting

· An introduction to the methods for preparing budgets

· An appreciation of the uses of budgets.

Structure of the chapter

Of all business activities, budgeting is one of the most important and, therefore, requires detailed attention. The chapter looks at the concept of responsibility centres, and the advantages and disadvantages of budgetary control. It then goes on to look at the detail of budget construction and the use to which budgets can be put. Like all management tools, the chapter highlights the need for detailed information, if the technique is to be used to its fullest advantage.

Budgetary control methods

a) Budget:

· A formal statement of the financial resources set aside for carrying out specific activities in a given period of time.

· It helps to co-ordinate the activities of the organisation.

An example would be an advertising budget or sales force budget.

b) Budgetary control:

· A control technique whereby actual results are compared with budgets.

· Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.

Budgetary control and responsibility centres;

These enable managers to monitor organisational functions.

A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit.

There are four types of responsibility centres:

a) Revenue centres

Organisational units in which outputs are measured in monetary terms but are not directly compared to input costs.

b) Expense centres

Units where inputs are measured in monetary terms but outputs are not.

c) Profit centres

Where performance is measured by the difference between revenues (outputs) and expenditure (inputs). Inter-departmental sales are often made using "transfer prices".

d) Investment centres

Where outputs are compared with the assets employed in producing them, i.e. ROI.

Advantages of budgeting and budgetary control

There are a number of advantages to budgeting and budgetary control:

· Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction.

· Promotes coordination and communication.

· Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.

· Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors.

· Enables remedial action to be taken as variances emerge.

· Motivates employees by participating in the setting of budgets.

· Improves the allocation of scarce resources.

· Economises management time by using the management by exception principle.

Problems in budgeting

Whilst budgets may be an essential part of any marketing activity they do have a number of disadvantages, particularly in perception terms.

· Budgets can be seen as pressure devices imposed by management, thus resulting in:

a) bad labour relations
b) inaccurate record-keeping.

· Departmental conflict arises due to:

a) disputes over resource allocation
b) departments blaming each other if targets are not attained.

· It is difficult to reconcile personal/individual and corporate goals.

· Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is often coupled with "empire building" in order to enhance the prestige of a department.

Responsibility versus controlling, i.e. some costs are under the influence of more than one person, e.g. power costs.

· Managers may overestimate costs so that they will not be blamed in the future should they overspend.

Characteristics of a budget

A good budget is characterised by the following:

· Participation: involve as many people as possible in drawing up a budget.
· Comprehensiveness: embrace the whole organisation.
· Standards: base it on established standards of performance.
· Flexibility: allow for changing circumstances.
· Feedback: constantly monitor performance.
· Analysis of costs and revenues: this can be done on the basis of product lines, departments or cost centres.

Budget organisation and administration:

In organising and administering a budget system the following characteristics may apply:

a) Budget centres: Units responsible for the preparation of budgets. A budget centre may encompass several cost centres.

b) Budget committee: This may consist of senior members of the organisation, e.g. departmental heads and executives (with the managing director as chairman). Every part of the organisation should be represented on the committee, so there should be a representative from sales, production, marketing and so on. Functions of the budget committee include:

· Coordination of the preparation of budgets, including the issue of a manual
· Issuing of timetables for preparation of budgets
· Provision of information to assist budget preparations
· Comparison of actual results with budget and investigation of variances.

c) Budget Officer: Controls the budget administration The job involves:

· liaising between the budget committee and managers responsible for budget preparation
· dealing with budgetary control problems
· ensuring that deadlines are met
· educating people about budgetary control.

d) Budget manual:

This document:

· charts the organization

· details the budget procedures

· contains account codes for items of expenditure and revenue

· timetables the process

· clearly defines the responsibility of persons involved in the budgeting system.

Budget preparation

Firstly, determine the principal budget factor. This is also known as the key budget factor or limiting budget factor and is the factor which will limit the activities of an undertaking. This limits output, e.g. sales, material or labour.

a) Sales budget: this involves a realistic sales forecast. This is prepared in units of each product and also in sales value. Methods of sales forecasting include:

· sales force opinions

· market research

· statistical methods (correlation analysis and examination of trends)

· mathematical models.

In using these techniques consider:

· company's pricing policy

· general economic and political conditions

· changes in the population

· competition

· consumers' income and tastes

· advertising and other sales promotion techniques

· after sales service

· credit terms offered.

b) Production budget: expressed in quantitative terms only and is geared to the sales budget. The production manager's duties include:

· analysis of plant utilization

· work-in-progress budgets.

If requirements exceed capacity he may:

· subcontract

· plan for overtime

· introduce shift work

· hire or buy additional machinery

· The materials purchases budget's both quantitative and financial.

c) Raw materials and purchasing budget:

· The materials usage budget is in quantities.

· The materials purchases budget is both quantitative and financial.

Factors influencing a) and b) include:

· production requirements

· planning stock levels

· storage space

· trends of material prices.

d) Labour budget: is both quantitative and financial. This is influenced by:

· production requirements

· man-hours available

· grades of labour required

· wage rates (union agreements)

· the need for incentives.

e) Cash budget: a cash plan for a defined period of time. It summarises monthly receipts and payments. Hence, it highlights monthly surpluses and deficits of actual cash. Its main uses are:

· to maintain control over a firm's cash requirements, e.g. stock and debtors

· to enable a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises

· to show the feasibility of management's plans in cash terms

· to illustrate the financial impact of changes in management policy, e.g. change of credit terms offered to customers.

Receipts of cash may come from one of the following:

· cash sales

· payments by debtors

· the sale of fixed assets

· the issue of new shares

· the receipt of interest and dividends from investments.

Payments of cash may be for one or more of the following:

· purchase of stocks

· payments of wages or other expenses

· purchase of capital items

· payment of interest, dividends or taxation.

Steps in preparing a cash budget

i) Step 1: set out a pro forma cash budget month by month. Below is a suggested layout.

		Month 1	Month 2	Month 3
		$	$	$
Cash receipts
	Receipts from debtors
	Sales of capital items
	Loans received
	Proceeds from share issues
	Any other cash receipts
Cash payments
	Payments to creditors
	Wages and salaries
	Loan repayments
	Capital expenditure
	Taxation
	Dividends
	Any other cash expenditure
Receipts less payments
Opening cash balance b/f		W	X	Y
Closing cash balance c/f		X	Y	Z

ii) Step 2: sort out cash receipts from debtors

iii) Step 3: other income

iv) Step 4: sort out cash payments to suppliers

v) Step 5: establish other cash payments in the month

Figure 4.1 shows the composition of a master budget analysis.

Figure 4.1 Composition of a master budget

OPERATING BUDGET	FINANCIAL BUDGET
consists of:-	consists of
Budget P/L acc: get:	Cash budget
Production budget	Balance sheet
Materials budget	Funds statement
Labour budget
Admin. budget
Stocks budget

f) Other budgets:

These include budgets for:

· administration

· research and development

· selling and distribution expenses

· capital expenditures

· working capital (debtors and creditors).

The master budget (figure 4.1) illustrates this. Now attempt exercise 4.1.

Exercise 4.1 Budgeting I

Draw up a cash budget for D. Sithole showing the balance at the end of each month, from the following information provided by her for the six months ended 31 December 19X2.

a) Opening Cash $ 1,200.

	19X2										19X3
Sales at $20 per unit	MAR	APR	MAY	JUN	JUL	AUG	SEP	OCT	NOV	DEC	JAN	FEB
	260	200	320	290	400	300	350	400	390	400	260	250

Cash is received for sales after 3 months following the sales.

c) Production in units: 240

270

300

320

350

370

380

340

310

260

250

d) Raw materials cost $5/unit. Of this 80% is paid in the month of production and 20% after production.

e) Direct labour costs of $8/unit are payable in the month of production.

f) Variable expenses are $2/unit. Of this 50% is paid in the same month as production and 50% in the month following production.

g) Fixed expenses are $400/month payable each month.

h) Machinery costing $2,000 to be paid for in October 19X2.

i) Will receive a legacy of $ 2,500 in December 19X2.

j) Drawings to be $300/month.

An example

A sugar cane farm in the Lowveld district may devise an operating budget as follows:

· Cultivation

· Irrigation

· Field maintenance

· Harvesting

· Transportation.

With each operation, there will be costs for labour, materials and machinery usage. Therefore, for e.g. harvesting, these may include four resources, namely:

· Labour:

-cutting
-sundry

· Tractors

· Cane trailers

· Implements and sundries.

Having identified cost centres, the next step will be to make a quantitative calculation of the resources to be used, and to further break this down to shorter periods, say, one month or three months. The length of period chosen is important in that the shorter it is, the greater the control that can be exercised by the budget but the greater the expense in preparation of the budget and reporting of any variances.

The quantitative budget for harvesting may be calculated as shown in figure 4.2.

Figure 4.2 Quantitative harvesting budget

Harvesting	1st quarter	2nd quarter	3rd quarter	4th quarter
Labour
Cutting	nil	9,000 tonnes	16,000 tonnes	10,000 tonnes
Sundry	nil	300 man days	450 man days	450 man days
Tractors	nil	630 hours	1,100 hours	700 hours
Cane trailers	nil	9,000 tonnes	16,000 tonnes	10,000 tonnes
Imp, & sundries	nil	9,000 tonnes	16,000 tonnes	10,000 tonnes

Each item is measured in different quantitative units - tonnes of cane, man days etc.-and depends on individual judgement of which is the best unit to use.

Once the budget in quantitative terms has been prepared, unit costs can then be allocated to the individual items to arrive at a budget for harvesting in financial terms as shown in table 4.2.

Charge out costs

In table 4.2 tractors have a unit cost of $7.50 per hour - machines like tractors have a whole range of costs like fuel and oil, repairs and maintenance, driver, licence, road tax and insurance and depreciation. Some of the costs are fixed, e.g. depreciation and insurance, whereas some vary directly with use of the tractor, e.g. fuel and oil. Other costs such as repairs are unpredictable and may be very high or low - an estimated figure based on past experience.

Figure 4.3 Harvesting cost budget

Item harvesting	Unit cost	1st quarter	2nd quarter	3rd quarter	4th quarter	Total
Labour
Cutting	$0.75 per tonne	-	6,750	12,000	7,500	26,250
Sundry	$2.50 per day	-	750	1,125	1,125	3,000
Tractors	$7.50 per hour	-	4,725	8,250	5,250	18,225
Cane Trailers	$0.15 per tonne	-	1,350	2,400	1,500	5,250
Imp. & sundries	$0.25 per tonne	-	2,250	4,000	2,500	8,750
		-	$15,825	$27,775	$17,875	$61,475

So, overall operating cost of the tractor for the year may be budgeted as shown in figure 4.4.

If the tractor is used for more than 1,000 hours then there will be an over-recovery on its operational costs and if used for less than 1,000 hours there will be under-recovery, i.e. in the first instance making an internal 'profit' and in the second a 'loss'.

Figure 4.4 Tractor costs

		Unit rate	Cost per annum (1,000 hours)
		($)	($)
Fixed costs	Depreciation	2,000.00	2,000.00
	Licence and insurance	200.00	200.00
	Driver	100.00 per month	1,200.00
	Repairs	600.00 per annum	600.00
Variable costs	Fuel and oil	2.00 per hour	2,000.00
	Maintenance	3.00 per 200 hours	1,500.00
			7,500.00
	No. of hours used		1,000.00
	Cost per hour		7.50

Master budget

The master budget for the sugar cane farm may be as shown in figure 4.5. The budget represents an overall objective for the farm for the whole year ahead, expressed in financial terms.

Table 4.5 Operating budget for sugar cane farm 19X4

		1st quarter	2nd quarter	3rd quarter	4th quarter	Total $
Revenue from cane			130,000	250,000	120,000	500,000
Less: Costs
	Cultivation	37,261	48,268	42,368	55,416	183,313
	Irrigation	7,278	15,297	18,473	11,329	52,377
	Field maintenance	4,826	12,923	15,991	7,262	41,002
	Harvesting	-	15,825	27,775	17,875	61,475
	Transportation	-	14,100	24,750	15,750	54,600
		49,365	106,413	129,357	107,632	392,767
Add: Opening valuation		85,800	135,165	112,240	94,260	85,800
		135,165	241,578	241,597	201,892	478,567
Less: Closing valuation		135,165	112,240	94,260	90,290	90,290
Net crop cost		-	129,338	147,337	111,602	388,277
Gross surplus		-	66,200	102,663	8,398	111,723
Less: Overheads		5,876	7,361	7,486	5,321	26,044
Net profitless)		(5,876)	(6,699)	95,177	3,077	85,679

Once the operating budget has been prepared, two further budgets can be done, namely:

i. Balance sheet at the end of the year.

ii. Cash flow budget which shows the amount of cash necessary to support the operating budget. It is of great importance that the business has sufficient funds to support the planned operational budget.

Reporting back

During the year the management accountant will prepare statements, as quickly as possible after each operating period, in our example, each quarter, setting out the actual operating costs against the budgeted costs. This statement will calculate the difference between the 'budgeted' and the 'actual' cost, which is called the 'variance'.

There are many ways in which management accounts can be prepared. To continue with our example of harvesting on the sugar cane farm, management accounts at the end of the third quarter can be presented as shown in figure 4.6.

Figure 4.6 Management accounts - actual costs against budget costs Management accounts for sugar cane farm 3rd quarter 19X4

Item Harvesting		3rd quarter			Year to date
		Actual	Budget	Variance	Actual	Budget	Variance
Labour
	- Cutting	12,200	12,000	(200)	19,060	18,750	(310)
	- Sundry	742	1,125	383	1,584	1,875	291
Tractors		9,375	8,250	(1,125)	13,500	12,975	(525)
Cane trailers		1,678	2,400	722	2,505	3,750	1,245
Imp & sundries		4,270	4,000	(270)	6,513	6,250	(263)
		28,265	27,775	(490)	43,162	43,600	438

Here, actual harvesting costs for the 3rd quarter are $28,265 against a budget of $27,775 indicating an increase of $490 whilst the cumulative figure for the year to date shows an overall saving of $438. It appears that actual costs are less than budgeted costs, so the harvesting operations are proceeding within the budget set and satisfactory. However, a further look may reveal that this may not be the case. The budget was based on a cane tonnage cut of 16,000 tonnes in the 3rd quarter and a cumulative tonnage of 25,000. If these tonnages have been achieved then the statement will be satisfactory. If the actual production was much higher than budgeted then these costs represent a very considerable saving, even though only a marginal saving is shown by the variance. Similarly, if the actual tonnage was significantly less than budgeted, then what is indicated as a marginal saving in the variance may, in fact, be a considerable overspending.

Price and quantity variances

Just to state that there is a variance on a particular item of expenditure does not really mean a lot. Most costs are composed of two elements - the quantity used and the price per unit. A variance between the actual cost of an item and its budgeted cost may be due to one or both of these factors. Apparent similarity between budgeted and actual costs may hide significant compensating variances between price and usage.

For example, say it is budgeted to take 300 man days at $3.00 per man day - giving a total budgeted cost of $900.00. The actual cost on completion was $875.00, showing a saving of $25.00. Further investigations may reveal that the job took 250 man days at a daily rate of $3.50 - a favourable usage variance but a very unfavourable price variance. Management may therefore need to investigate some significant variances revealed by further analysis, which a comparison of the total costs would not have revealed. Price and usage variances for major items of expense are discussed below.

Labour

The difference between actual labour costs and budgeted or standard labour costs is known as direct wages variance. This variance may arise due to a difference in the amount of labour used or the price per unit of labour, i.e. the wage rate. The direct wages variance can be split into:

i) Wage rate variance: the wage rate was higher or lower than budgeted, e.g. using more unskilled labour, or working overtime at a higher rate.

ii) Labour efficiency variance: arises when the actual time spent on a particular job is higher or lower than the standard labour hours specified, e.g. breakdown of a machine.

Materials

The variance for materials cost could also be split into price and usage elements:

i) Material price variance: arises when the actual unit price is greater or lower than budgeted. Could be due to inflation, discounts, alternative suppliers etc.

ii) Material quantity variance: arises when the actual amount of material used is greater or lower than the amount specified in the budget, e.g. a budgeted fertiliser at 350 kg per hectare may be increased or decreased when the actual fertiliser is applied, giving rise to a usage variance.

Overheads

Again, overhead variance can be split into:

i) Overhead volume variance: where overheads are taken into the cost centres, a production higher or lower than budgeted will cause an over-or under-absorption of overheads.

ii) Overhead expenditure variance: where the actual overhead expenditure is higher or lower than that budgeted for the level of output actually produced.

Calculation of price and usage variances

The price and usage variance are calculated as follows:

Price variance = (budgeted price - actual price) X actual quantity
Usage variance = (budgeted quantity - actual quantity) X budgeted price

Now attempt exercise 4.2.

Exercise 4.2 Computation of labour variances

It was budgeted that it would take 200 man days at $10.00 per day to complete the task costing $2,000.00 when the actual cost was $1,875.00, being 150 man days at $12.50 per day. Calculate:

i) Price variance
ii) Usage variance

Comment briefly on the results of your calculation.

Management action and cost control

Producing information in management accounting form is expensive in terms of the time and effort involved. It will be very wasteful if the information once produced is not put into effective use.

There are five parts to an effective cost control system. These are:

a) preparation of budgets

b) communicating and agreeing budgets with all concerned

c) having an accounting system that will record all actual costs

d) preparing statements that will compare actual costs with budgets, showing any variances and disclosing the reasons for them, and

e) taking any appropriate action based on the analysis of the variances in d) above.

Action(s) that can be taken when a significant variance has been revealed will depend on the nature of the variance itself. Some variances can be identified to a specific department and it is within that department's control to take corrective action. Other variances might prove to be much more difficult, and sometimes impossible, to control.

Variances revealed are historic. They show what happened last month or last quarter and no amount of analysis and discussion can alter that. However, they can be used to influence managerial action in future periods.

Zero base budgeting (ZBB)

After a budgeting system has been in operation for some time, there is a tendency for next year's budget to be justified by reference to the actual levels being achieved at present. In fact this is part of the financial analysis discussed so far, but the proper analysis process takes into account all the changes which should affect the future activities of the company. Even using such an analytical base, some businesses find that historical comparisons, and particularly the current level of constraints on resources, can inhibit really innovative changes in budgets. This can cause a severe handicap for the business because the budget should be the first year of the long range plan. Thus, if changes are not started in the budget period, it will be difficult for the business to make the progress necessary to achieve longer term objectives.

One way of breaking out of this cyclical budgeting problem is to go back to basics and develop the budget from an assumption of no existing resources (that is, a zero base). This means all resources will have to be justified and the chosen way of achieving any specified objectives will have to be compared with the alternatives. For example, in the sales area, the current existing field sales force will be ignored, and the optimum way of achieving the sales objectives in that particular market for the particular goods or services should be developed. This might not include any field sales force, or a different-sized team, and the company then has to plan how to implement this new strategy.

The obvious problem of this zero-base budgeting process is the massive amount of managerial time needed to carry out the exercise. Hence, some companies carry out the full process every five years, but in that year the business can almost grind to a halt. Thus, an alternative way is to look in depth at one area of the business each year on a rolling basis, so that each sector does a zero base budget every five years or so.

Key terms

Budgeting
Budgetary control
Budget preparation
Management action and cost control
Master budget
Price and quantity variance
Responsibility centres
Zero based budgeting