Study Note - 3

BUDGETING AND BUDGETArY CONTrOL

This Study Note Includes
3.1 Budgeting
3.2 Budgetary Control
3.1 BUDGETING
The literary meaning of the word Budget is a statement of income and expenditure of a certain period.
In principle, the meaning is same in the context of business also. An individual will have his own budget,
a family, a local authority, state and country etc. All will have their respective budgets. so also the
business concern must have its budget so as to attain their objectives.
CIMA deines a budget as, A budget is a inancial and/or quantitative statement, prepared prior to
a deined period of time, of the policy to be pursued during that period for the purpose of attaining a
given objective.
3.1.1 features of Budget
An analysis of the above deinition reveals the following as features of the budget.
(i)

A Budget must be expressed either in quantitative form i.e., the number of units of different products
or it may be expressed in rupees of each product or it may be quantitative and inancial form i.e.,
the number of units and rupees of each product etc.,

(ii)

It must be prepared before the time for which it is required, for example, if budget is required for
the year 2013-14, it must be prepared in the year 2012-13.

(iii) Budget must be prepared for a deinite period.

(iv) Budget must be prepared in accordance with the policies of the business enterprise.
(v) Budgets are prepared normally for attaining organisational objectives, because policies are
formulated to achieve the objectives and those are translated into quantitative and inancial form.
3.1.2 Objectives of the Budget:
(i)

A budget is a blue print for the desired plan of action. since budgets are prepared in accordance
with the policies of various functions of the organisation such as purchase, production sales etc.,
these will be helpful as plan of action to discharge the above functions.

(ii)

Budgets are useful for forecasting the operating activities and inancial position of a business
enterprise.

(iii) Budgets are helpful in establishing divisional and departmental responsibilities.

(iv) Budgets provide a means of coordination for the business as a whole. When the budgets are
established various factors such as production capacity, sales responsibilities, procurement of
material, deployment of labour etc., are balanced and synchronised so that all the activities are
processed according to the objective. Thereby Budgets are very much useful in coordination of
factors and functions.
(v) Budget ensures good business practice because they plan for future.
(vi) Budgets are means of communication. The complex plans that are laid down by the top
management are to be passed on to the operative personnel, those who actually put the plans
into action. Budgets are very much helpful in processing such information to the lowest personnel
in the organisation.
(vii) Budgets are devised to obtain more economical use of capital and all other inputs.
(viii) Budgets are more deinite assurance of earning of the proper return on capital invested.

CosT And MAnAgEMEnT ACCounTAnCy I 3.1

Budgeting and Budgetary Control

(ix) Budgets facilitate centralised control with delegated responsibilities and authorities. Budgets
are instruments of managerial control by means of which the management can measure the
performances in every part of the business concerns and corrective action can be taken soon
after deviations are found out.
3.1.3 Limitations of Budgets:
(i)

Budgets fail if estimates are not accurate:

Budgets mainly depend upon the accuracy of the estimates. so estimates should be made on
the basis of all the information available. Though forecasting is not an exact science, accurate
estimates can be made by using advanced statistical techniques. Thus preparation of budgets
involves certain amount of judgment and proper interpretation of reports.

(ii)

risk of rigidity:
Budgeting process creates a sense of rigidity in the minds of people who are working in the
organisation. But in the modern business world, which is more dynamic in nature, such rigidity will
create problems. Therefore budgeting process should also be dynamic in nature, so that it can be
updated according to the situation.

(iii) Budgeting is an expensive process:

The installation and implementation of the budgeting process involves too much time and costs.
Therefore small organisations can not afford to it. Even for large organisations cost beneit analysis
should be conducted before installing such a system. It can be adopted only if the beneits exceed
the costs.
(iv) Budgeting is not a substitute for management:
Budgeting is only a tool for management. Installation of Budgeting system does not relieve the
managers from their duties. It involves only in effective management of the resources of the
organisation. It is only a misconception to think that the introduction of budgeting is alone suficient
to ensure success and to guarantee future proits. It is only a means for achieving the end.
(v) Continuous monitoring is required:
Installation of budgeting system does not imply that it is effectively implemented. Management
must continuously monitor the operating system (whether the goals intended) how far the plans
and budgets are helpful in achieving the goals of the organisation.
3.1.4 Classiication of Budgets:
(A) On the basis of time:
(i)

Long term budget: Though there is no exact deinition of long term budget, yet we can say
that a budget prepared covering a period of more than a year can be taken as long term
budget. of course, it may be for 3 years, 5 years, 10 years and even 20 years etc.,

(ii)

Short term budget: It is a budget prepared for a period covering a year or less than a year.

(B) On the basis nature of expenditure and receipts:

(i)

Capital Budget: It is a budget prepared for capital receipts and expenditure such as obtaining
loans, issue of shares, purchase of assets, etc.,

(ii)

revenue Budget: A Budget covering revenue receipts and expenses for a certain period is called
Revenue Budget. Examples: sales, other incomes, purchases, administrative expenses etc.,

(C) On the basis of functions:

functional Budget: If budgets are prepared of a business concern for a certain period taking
each and every function separately such budgets are called functional budgets. Example:
Production, sales, purchases, cost of production, cash, materials etc.

3.2 I CosT And MAnAgEMEnT ACCounTAnCy

The following are the various functional budgets, some of which are briely explained here under:
(i)

Sales Budget: The sales budget is a forecast of total sales, expressed in terms of money or quantity
or both. The irst step in the preparation of the sales budget is to forecast as accurately as possible,
the sales anticipated during the budget period. sales forecasts are usually prepared by the sales
manager assisted by the market research personnel.

factors to be considered in preparing Sales Budget:As business existence depends upon the sales it is going to make and therefore it is an important one to
be prepared meticulously. It is the forecast of what it can reasonably sell to its customers during the period
for which budget is prepared. The companys proit mostly depends upon the ability to sell its products
to customers. In the present era it is indispensable to establish the demand for the product even before
it is produced. It is the sales order book that the companys continuity depends upon. Also, a reasonable
degree of accuracy must be there in preparing a sales budget unless its sales are accurately forecast,
production estimates will also become erroneous. A good amount of experience must be necessary to
prepare the sales budget. yet the following factors must be considered in preparing the sales budget:
(a) The locality of the market i.e., domestic or export
(b) The target customers i.e., industry or trade or a section or group of general public etc.,
(c) The product portfolio i.e., the number of products offered and their popularity among the target
customers.
(d) The market share of each product and its inluence on the product portfolio and the total
market
(e) The effectiveness of existing marketing policy on the current sales volume and value.
(f)

The market share of competitors products and their effect on the companys sales.

(g) Seasonal luctuation in sales.

(h) Expenditure on advertisement and its impact on sales.
(ii)

production Budget: The production budget is a forecast of the production for the budget period.
Production budget is prepared in two parts, viz. production volume budget for the physical units of
the products to be manufactured and the cost of production or manufacturing budget detailing
the budgeted cost under material, labour, and factory overhead in respect of the products.

factors to be considered in production Budget:

next to the sales budget, the main function of a business concern is the production and for this, a budget
is prepared simultaneously with the sales budget. It is the forecast of production during the period for
which the budget is prepared. It can also be prepared in two parts viz., production volume budget for
the physical units i.e., the number of units, the tonnes of production etc., and the cost of production
or manufacture showing details of all elements of the manufacture. While preparing the production
budget, the following factors must be taken into consideration:(a) production plan:Production planning is an important part of the preparation of the production budget. optimum
utilisation of plant capacity is taken by eliminating or reducing the limiting factors and thereby
effective production planning is made.
(b) The capacity of the business concern:It is to be ensured that the capacity of the organisation will coincide the budgeted production or
not. For this purpose, plant utilisation budget will also be necessary. The production budget must
be based on normal capacity likely to be achieved and it should not be too high or too low.

CosT And MAnAgEMEnT ACCounTAnCy I 3.3

Budgeting and Budgetary Control

(c) Inventory policy:While preparing the production budget it is also necessary to see to what extent materials are
available for producing the budgeted production. For that purpose, a purchase budget or a
purchase plan must also be studied. similarly, on the other hand, it is also necessary to verify the
extent to which the inventory of inished goods is to be carried.
(d) sales budgets must also be considered before preparing production budget because it may so
happen that the entire production of the concern may not be sold. In such a case the production
budget must be in line with the sales budget.
(e) A plan of the sequence of operations of production for effective preparation of a production
budget should always be there.
(f)

Last, but not the least, the policy of the management should also be considered before preparing
the production budget.

Objectives and Advantages of production budget:

Optimum utilisation of the productive resources of the organisation;

Maintaining low inventory which results in risk of deterioration and fall in prices;
Focus on the factors that are necessary to frame policies and plan sequence of operations;
Projection of policies framed, on the basis of past performance, into the future to get the desired
results;
To see that right materials are provided at right place and at right time;
Helps in scheduling of production so that delivery dates are met and customer satisfaction is
gained;
Helpful in preparation of projected proit and loss statement, which is useful in evaluation of
performance and proitability.

(iii) Materials Budget: The material budget includes quantities of direct materials; the quantities of each
raw material needed for each inished product in the budget period is speciied. The input data
for this budget is obtained by applying standard material usage rates by each type of material to
the volume of output budgeted.
(iv) purchase Budget: The purchase budget establishes the quantity and value of the various items of
materials to be purchased for delivery at speciied points of time during the budget period taking
into account the production schedule of the concern and the inventory requirements. It takes into
account the requirements for the entire budget plan as per the sales, materials, maintenance,
research and development, and capital budgets. Purchases may be required to be made in respect
of direct and indirect materials, inished goods for resale, components and parts, and purchased
services. Before incorporation in the purchase budget, these purchase requirements should be
suitably ascertained. Purchase budget also includes material procurement budget.
(v) Cash Budget: Cash Budget is estimated receipts and expenses for a deinite period, which usually
are cash sales, collection from debtors and other receipts and expenses and payment to suppliers,
payment of wages, payment of other expenses etc.
(vi) direct Labour Budget.
(vii) Human Resources Budget.
(viii) selling and distribution cost budget.
(ix) Administration Cost Budget.
(x) Research and development Cost Budget etc.

3.4 I CosT And MAnAgEMEnT ACCounTAnCy

Master Budget: Master budget is the budget prepared to cover all the functions of the business
organisation. It can be taken as the integrated budget of business concern, that means, it shows the
proit or loss and inancial position of the business concern such as Budgeted Proit and Loss Account,
Budgeted Balance Sheet etc. Master budget, also known as summary budget or inalized proit plan,
combines all the budgets for a period into one harmonious unit and thus, it shows the overall budget
plan. The master budget incorporates all the subsidiary functional budgets and the budgeted Proit
and Loss Account and Balance sheet. Before the budget plan is put into operation, the master budget
is considered by the top management and revised if the position of proit disclosed therein is not found
to be satisfactory. After suitable revision is made, the master budget is inally approved and put into
action. Another view regards the budgeted Proit and Loss Account and the Balance Sheet as the
master budget.
(D) On the basis of capacity:
(i)

fixed or rigid budget: When budgets are prepared for a ixed or standard volume of activity, they
are called static or rigid or ixed budgets. They do not change with the changes in the volume
of the output. These are prepared normally 3 months in advance of the year. However these will
not be much helpful in comparing the actual activity, as these are prepared at a ixed volume of
output. It, however, does not mean that the ixed budget is a rigid one, not to be changed at all.
Though not adjusted to the actual volume attained, a ixed budget is liable to revision if due to
business conditions undergoing a basic change or due to other reasons, actual operations differ
widely from those planned in the ixed budget.
Fixed budgets are most suited for ixed expenses. In case of discretionary costs situations where
the expenditure is optional and has no relation with the output, e.g. expenditure on research and
development, advertising, and new projects. A ixed budget has only a limited application and
is ineffective as a tool for cost control. Fixed budgets are useful where the plan permits maximum
stabilization of production, as for example, for concerns which manufacture to build up inventories
of inished products and components.

(ii)

flexible Budget: A lexible budget is a budget that is prepared for different levels of activity or
capacity utilization or volume of output. If the budgets are prepared in such a way so as to change
in accordance with the volume of output, they are called lexible budgets. These can be prepared
from ixed budget which are also called revised budgets. These are much helpful in comparison with
actual because the exact deviations are found for which timely corrective action can be taken.
The basic idea of a lexible budget is that there shall be some standard of cost and expenditures.
Thus, a budget prepared in a manner to give budgeted costs for any level of activity is known as
lexible budget. Such budget is prepared after considering the variable and ixed elements of costs
and the changes, which may be expected for each item at various levels of operations. Thus a
lexible budget recognises the difference in behaviour between ixed and variable costs in relation
to luctuations in production or sales and is designed to change appropriately with such luctuations.
In lexible budget, data relating to costs, expenditures may progressively be changed in any month
in accordance with actual output achieved. While preparing lexible budgets, estimates of costs
and expenditures on the basis of standards determined are made from minimum to maximum level
of operations.

Difference between fixed and flexible Budgets:

(i)

(ii)

fixed Budget
It does not change with actual volume of
activity achieved. Thus it is known as rigid or
inlexible budget.
It operates on one level of activity and under
one set of conditions. It assumes that there will
be no change in the prevailing conditions,
which is unrealistic.

flexible Budget
It can be recasted on the basis of activity level
to be achieved. Thus it is not rigid.
It consists of various budgets for different levels
of activity.

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Budgeting and Budgetary Control

Here as all costs like fixed, variable and
semi-variable are related to only one level of
activity so variance analysis does not give useful
information.
(iv) If the budgeted and actual activity levels
differ signiicantly, then the aspects like cost
ascertainment and price ixation do not give a
correct picture.
(v) Comparison of actual performance with
budgeted targets will be meaningless specially
when there is a difference between the two
activity levels.
(iii)

Here analysis of variance provides useful

information as each cost is analysed according
to its behaviour.
Flexible budgeting at different levels of activity
facilitates the ascertainment of cost, ixation of
selling price and tendering of quotations.
It provides a meaningful basis of comparison
of the actual performance with the budgeted
targets.

3.1.5 principal Budget factor:

Budgets cover all the functional areas of the organisation. For the effective implementation of the
budgetary system, all the functional areas are to be considered which are interlinked. Because of these
interlinks, certain factors have the ability to affect all other budgets. such factor is known as principle
budget factor.
Principal Budget factor is the factor the extent of inluence of which must irst be assessed in order to
ensure that the functional budgets are reasonably capable of fulillment. A principal budget factor
may be lack of demand, scarcity of raw material, non-availability of skilled labour, inadequate working
capital etc. If for example, the organisation has the capacity to produce 2500 units per annum. But the
production department is able to produce only 1800 units due to non-availability of raw materials. In this
case, non-availability of raw materials is the principal budget factor (limiting factor). If the sales manger
estimates that he can sell only 1500 units due to lack of demand. Then lack of demand is the principal
budget factor. This concept is also known as key factor, or governing factor. This factor highlights the
constraints with in which the organisation functions.
3.1.6 responsibility Accounting:
One of the recent developments in the ield of management accounting is the responsibility accounting,
which is helpful in exercising cost control. Responsibility Accounting is a system of accounting that
recognizes various responsibility centers throughout the organization and relects the plans and actions
of each of these centers by assigning particular revenues and costs to the one having the pertinent
responsibility. It is also called proitability accounting and activity accounting.
It is a system in which the person holding the supervisory posts as president, function head, foreman,
etc are given a report showing the performance of the company or department or section as the case
may be. The report will show the data relating to operational results of the area and the items of which
he is responsible for control. Responsibility accounting follows the basic principles of any system of cost
control like budgetary control and standard costing. It differs only in the sense that it lays emphasis
on human beings and ixes responsibilities for individuals. It is based on the belief that control can be
exercised by human beings, so responsibilities should be ixed for individuals.
Principles of responsibility accounting are as follows:
(a) A target is ixed for each department or responsibility center.
(b) Actual performance is compared with the target.
(c) The variances from plan are analysed so as to ix the responsibility.
(d) Corrective action is taken by higher management and is communicated.
3.1.7 performance Budgeting:
Performance Budgeting is synonymous with Responsibility Accounting which means thus the responsibility
of various levels of management is predetermined in terms of output or result keeping in view the authority
vested with them. The main concepts of such a system are enumerated below:

3.6 I CosT And MAnAgEMEnT ACCounTAnCy

(a) It is based on a classiication of managerial level for the purpose of establishing a budget for each
level. The individual in charge of that level should be made responsible and held accountable for
its performance over a given period of time.
(b) The starting point of the performance budgeting system rests with the organisation chart in which
the spheres of jurisdiction have been determined. Authority leads to the responsibility for certain
costs and expenses which are forecast or present in the budget with the knowledge of the manager
concerned.
(c) The costs in each individuals or departments budget should be limited to the cost controllable
by him.
(d) The person concerned should have the authority to bear the responsibility.
3.1.8 Zero Based Budgeting (ZBB) : It differs from the conventional system of budgeting mainly it starts
from scratch or zero and not on the basis of trends or historical levels of expenditure. In the customary
budgeting system, the last years igures are accepted as they are, or cut back or increases are granted.
Zero based budgeting on the other hand, starts with the premise that the budget for next period is
zero so long the demand for a function, process, project or activity is not justiied for each rupee from
the irst rupee spent. The assumptions are that without such a justiication no spending will be allowed.
The burden of proof thus shifts to each manager to justify why the money should be spent at all and to
indicate what would happen if the proposed activity is not carried out and no money is spent.
The irst step in the process of zero base budgeting is to develop an operational plan or decision package.
A decision package identiies and describes a particular activity with a view to:
(i) evaluate and allotte ranking the activity against other activities competing for the same scarce
resources, and
(ii) decide whether to accept or reject or amend the activity.
For this purpose, each package should give details of costs, returns, purpose, expected results, the
alternatives available and a statement of the consequences if the activity is reduced or not performed
at all.
The advantages of Zero based budgeting are:
(a) Out of date and ineficient operations are identiied.
(b) Allows managers to promptly respond to changes in the business environment.
(c) Instead of accepting the current practice, it creates a challenging and questioning attitude.
(d) Allocation of resources is made according to needs and the beneits derived.
(e) It has a psychological impact on all levels of management which makes each manager to pay
his way.
3.2 BUDGETArY CONTrOL
Budgetary control is deined 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.
From the above deinition, the steps for Budgetary Control can be drawn as follows: (i) Establishment of Budgets:
Budgetary control primarily aims at preparation of various budgets such as sales Budget, production
budget, overhead expenses budget, cash budget etc.,
(ii) responsibilities of executives:
The budgetary control system is designed to ix responsibilities on executives through preparation of
budgets.

CosT And MAnAgEMEnT ACCounTAnCy I 3.7

Budgeting and Budgetary Control

(iii) policy making:
The established policies of the organisation are designed as budgets so as to ix responsibility on
executives.
(iv) Comparison of actuals with budgets:
After establishing the budgets, the actuals are compared with them and any deviations, if any are
called variances.
(v) Achieving the desired result:
The desired result of the budgetary control system is comparison of actuals with the budgeted results
and the causes of variances, if any, are analysed.
(vi) reporting to Top Management:
After the causes of Variances are analysed, the variances and their causes are reported to top
management so that the remedial action can be taken.
3.2.1 Advantages of Budgetary Control:
(i)

Budgetary control aims at maximisation of proits through optimum utilisation of resources.

(ii)

It is a technique for continuous monitoring of policies and objectives of the organisation.

(iii) It helps in reducing the costs, thereby helps in better utilisation of funds of the organisation.
(iv) All the departments of the organisation are closely coordinated through establishment of plans
resulting in smooth functioning of the organisation.
(v) Since budgets ix the responsibilities of the executives, they act as a plan of action for them there
by reducing some of their work.
(vi) It facilitates analysis of variances, thereby identifying the areas where deiciencies occur and proper
remedial action can be taken.
(vii) It facilitates the management by exception.
(viii) Budgets act as a motivating force to achieve the desired objective of the organisation.
(ix) It assists delegation of authority and is a powerful tool of responsibility accounting.
(x)

It helps in stabilizing the conditions in industries which face seasonal luctuations.

(xi) It helps as a basis for internal audit.

(xii) It provides a suitable basis for introducing the payment by results system.
(xiii) It ensures adequacy of working capital to the organisation.
(xiv) It aids in performance analysis and performance reporting system.
(xv) It aids in obtaining bank credit.
(xvi) Budgets are forerunners of standard costs in the sense that they create necessary conditions to suit
setting up of standard costs.
3.2.2 preliminaries for the Adoption of a System of Budgetary Control:
For the successful implementation of a system of budgetary control certain pre-requisites are to be
fulilled. These are enumerated below:
(i)

There should be an organization chart laying out in clear terms the responsibilities and duties of each
level of executives, and the delegation of authority to the various levels. For complete success, a
solid foundation in this regard should be laid at the outset.

3.8 I CosT And MAnAgEMEnT ACCounTAnCy

(ii)

The objectives, plans and policies of the business should be deined in clear cut and unambiguous
terms.

(iii) The output level for which budgets are ixed, i.e., the budgeted output, should be stated.
(iv) The particular budget factor which will be the starting point of the preparation of the various budgets
should be indicated.
(v) There should be an eficient system of accounting to record and provide data in line with the
budgetary control system.
(vi) For the establishment and eficient execution of the plan, a Budget Committee should be set up.
(vii) There should be a proper system of communication and reporting between the various levels of
management.
(viii) There should be a charter of programme. This is usually in the form of a budget manual.
(ix) The budgets should primarily be prepared by those who are responsible for performance.
(x)

The budgets should be complete, continuous and realistic.

(xi) There should be an assurance from the top management executives of co-operation and
acceptance of the budgetary system.
Illustration 1:
Prepare a Production Budget for three months ending March 31, 2013 for a factory producing four
products, on the basis of the following information.
Type of product

Estimated Stock on Jan.

1, 2013

Estimated Sales during

Jan. To Mar. 2013

Desired closing stock on

31.3.2013

2,000

10,000

3,000

3,000

15,000

5,000

4,000

13,000

3,000

3,000

12,000

2,000

Solution:
production Budget for the 3 Months Ending 31st March 2013
particulars
sales
Add: Closing stock
Less: opening stock
Production (units)

product A

product B

product C

product D

10,000

15,000

13,000

12,000

3,000

5,000

3,000

2,000

13,000

20,000

16,000

14,000

2,000

3,000

4,000

3,000

11,000

17,000

12,000

11,000

Illustration 2:
Budgeted production and production costs for the year ending 31st december are as follows:

Production (units)
direct material/unit
direct wages/unit
Total factory overheads for each type of product (variable)

prODUCT- X

prODUCT -Y

2,20,000

2,40,000

` 12.5

`19.0

` 4.5

`7.0

` 6,60,000

`9,60,000

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Budgeting and Budgetary Control

A company is manufacturing two products X and y. A forecast about the number of units to be sold in
the irst seven months is given below:
MONTH

JAN

fEB

MAr

AprIL

MAY

JUNE

JULY

Product X

10,000

12,000

16,000

20,000

24,000

24,000

20,000

28,000

28,000

24,000

20,000

16,000

16,000

18,000

It is anticipated that:
(a) There will be no work-in-progress at the end of any month.
(b) Finished units equal to half the sales for the next month will be in stock at the end of each month
(including december of previous year).
Prepare for 6 months ending 30th June a Production Budget and a summarised cost of production
budget.
Solution:
production Budget for 6 Months ending 30th June (product X)
particulars
sales
Add: Closing stock
Less: opening
stock
Production (units)

Jan

feb

Mar

Apr

May

Jun

10,000

12,000

16,000

20,000

24,000

24,000

6,000

8,000

10,000

12,000

12,000

10,000

16,000

20,000

26,000

32,000

36,000

34,000

5,000

6,000

8,000

10,000

12,000

12,000

11,000

14,000

18,000

22,000

24,000

22,000

Total Production of X for 6 months = 11,000 + 14,000 + 18,000 + 22,000 + 24,000 + 22,000 = 1,11,000 units.
production Budget for 6 Months ending 30th June (product Y)
particulars

Jan

feb

Mar

Apr

May

Jun

sales

28,000

28,000

24,000

20,000

16,000

16,000

Add: Closing stock

14,000

12,000

10,000

8,000

8,000

9,000

42,000

40,000

34,000

28,000

24,000

25,000

Less: opening stock

14,000

14,000

12,000

10,000

8,000

8,000

Production (units)

28,000

26,000

22,000

18,000

16,000

17,000

Total production of y for 6 months = 28,000 + 26,000 + 22,000 + 18,000 + 16,000 + 17,000 = 1,27,000 units.
Summarised Cost of production Budget for 6 Months Ending 30th June

particulars
Materials

product X

product Y

(1,11,000 units)

(1,27,000 units)

13,87,500

24,13,000

38,00,500

Total
`

direct Wages

4,99,500

8,89,000

13,88,500

Variable Factory overhead (wn)

3,33,000

5,08,000

8,41,000

22,20,000

38,10,000

60,30,000

summarised cost of Production

3.10 I CosT And MAnAgEMEnT ACCounTAnCy

Working Notes:
1. Computation of Variable factory Overhead

6,60,000

1,11,000 = 3,33,000
For Product X =
2,20,000

9,60,000

1,27,000 = 5,08,000
For product y=
2,24,000

Illustration 3 :
draw a Material Procurement Budget (Quantitative) from the following information:
Estimated sales of a product 40,000 units. Each unit of the product requires 3 units of material A and 5
units of material B.
Estimated opening balances at the commencement of the next year:
Finished product = 5,000 units
Material A
= 12,000 units
B
= 20,000 units
Material on order:
Material A
= 7,000 units
Material B
= 11,000 units
The desirable closing balance at the end of the next year:
Finished product = 7,000 units
Material A
= 15,000 units
B
= 25,000 units
Material on order:
Material A
= 8,000 units
B
= 10,000 units
Solution:
Production = sales + Closing stock - opening stock
= 40,000 + 7,000 - 5,000
= 42,000 units
raw Materials purchase Budget
particulars
Material Required
Add: Closing stock
Add: Closing stock on order
Less: opening stock
Less: opening stock on order
Raw Material Purchase

product A
1,26,000
(42,000 x 3)
15,000
8,000
1,49,000
12,000
7,000
1,30,000

product B
2,10,000
(42,000 x 5)
25,000
10,000
2,45,000
20,000
11,000
2,14,000

CosT And MAnAgEMEnT ACCounTAnCy I 3.11

Budgeting and Budgetary Control

Illustration 4:
From the following igures prepare the raw material purchase budget for January, 2013:
Materials
A

Estimated stock on Jan 1

16,000

6,000

24,000

2,000

14,000

28,000

Estimated stock on Jan 31

20,000

8,000

28,000

4,000

16,000

32,000

1,20,000

44,000

1,32,000

36,000

88,000

1,72,000

25 p.

5 p.

15 p.

10 p.

20 p.

30 p.

Estimated Consumption
standard Price per unit
Solution:

raw Materials purchase Budget for January 2013

Type
Estimated Consumption (units)
Add: Estimated stock on Jan 31,
2013 (units)

A
1,20,000
20,000
1,40,000

Less: Estimated stock on Jan1, 2013

(units)
Estimated purchase (units)
Rate per unit (`)
Estimated purchases (`)

16,000
1,24,000

44,000 1,32,000

36,000

8,000

28,000

52,000 1,60,000
6,000

4,000

Total

88,000 1,72,000
16,000

32,000

40,000 1,04,000 2,04,000

24,000

2,000

46,000 1,36,000

38,000

14,000

28,000

90,000 1,76,000 6,10,000

0.25

0.05

0.15

0.10

0.20

31,000

2,300

20,400

3,800

18,000

0.30
52,800 1,28,300

Illustration 5 :
A company manufactures product - A and product -B during the year ending 31st december 2013, it is
expected to sell 15,000 kg. of product A and 75,000 kg. of product B at `30 and `16 per kg. respectively.
The direct materials P, Q and R are mixed in the proportion of 3: 5: 2 in the manufacture of product A,
Materials Q and R are mixed in the proportion of 1:2 in the manufacture of product B. The actual and
budget inventories for the year are given below:
opening
stock

Expected
Closing stock

Anticipated
cost per Kg.

Kg.

Kg.

Material P

4,000

3,000

`12

Material Q

3,000

6,000

10

Material R

30,000

9,000

Product - A

3,000

1,500

4,000

4,500

Prepare the Production Budget and Materials Budget showing the expenditure on purchase of materials
for the year ending 31-12-2013.

3.12 I CosT And MAnAgEMEnT ACCounTAnCy

Solution:
production Budget for the products A & B
particulars

product A

product B

15,000

75,000

1,500

4,500

16,500

79,500

3,000

4,000

13,500

75,500

sales
Add: Closing stock

Less: opening stock

Production

Material purchase Budget for the Year ending Dec 31st 2013
particulars

Total

Material required for product A in the ratio

of 3:5:2

4,050

6,750

2,700

13,500

Material required for product B in the ratio

of 1:2

25,167

50,333

75,500

Total requirement

4,050

31,917

53,033

Add: Closing stock

3,000

6,000

9,000

7,050

37,917

62,033

Less: opening stock

4,000

3,000

30,000

Purchases (in units)

3,050

34,917

32,033

12

10

36,600

3,49,170

2,56,264

Cost per Kg.

Total Purchase cost (`)

6,42,034

Illustration 6:
The following details apply to an annual budget for a manufacturing company.
QUArTEr

1st

2nd

3rd

4th

Working days

65

60

55

60

Production (units per working day)

100

110

120

105

Raw material purchases (% by weight of annual total)

30%

50%

20%

1.05

1.125

Budgeted purchase price/Kg.( `)

Quantity of raw material per unit of production 2 kg. Budgeted closing stock of raw material 2,000 kg.
Budgeted opening stock of raw material 4,000 kg. (Cost ` 4,000)
Issues are priced on FIFO Basis. Calculate the following budgeted igures.
(a) Quarterly and annual purchase of raw material by weight and value.
(b) Closing quarterly stocks by weight and value.

CosT And MAnAgEMEnT ACCounTAnCy I 3.13

Budgeting and Budgetary Control

Solution:
Material purchase Budget
particulars
Production

Quarter 1
6,500

Quarter 2
6,600

Quarter 3
6,600

Quarter 4
6,300

(65x100)
13,000

(60x110)
13200

(120x55)
13,200

(60x105)
12,600

15,000

25,000

10,000

Material Required (Production x 2)

Add: Closing stock
Less: opening stock
Purchases by Weight

Total
26,000
52,000
2,000
54,000
4,000
50,000

Computation of purchases by Value

particulars
Purchases (Weight)
Cost per Kg.
Purchases (`)

Quarter 1
15,000

Quarter 2
25,000

Quarter 3
10,000

Quarter 4
-

(50,000 x 30%) (50,000 x 50%) (50,000 x 20%)

1
1.05
1.125
15,000
26,250
11,250

Total

52500

Budget Showing Closing Quarterly Stocks by Weight and Value

particulars
opening stock
Purchases
Material consumed
Closing stock by Weight
Closing stock by Value (`)

Quarter 1
4,000

Quarter 2
6,000

Quarter 3
17,800

Quarter 4
14,600

15,000
19,000
13,000
6,000
6,000

25,000
31,000
13,200
17,800
18,690

10,000
27,800
13,200
14,600
16,080

14,600
12,600
2,000
2,250

(17,800 x 1.05) {(10,000 x 1.125)+

(2,000 x 1.125)

(6,000 x 1)

(4,600 x 1.05)}
Illustration 7 :
you are required to prepare a selling overhead Budget from the estimates given below:
`
Advertisement

1,000

salaries of the sales dept.

1,000

Expenses of the sales dept.(Fixed)

salesmens remuneration
salesmens and dearness Allowance - Commission @ 1% on sales affected
Carriage outwards: Estimated @ 5% on sales
Agents Commission: 7% on sales
The sales during the period were estimated as follows:
(a) `80,000 including Agents sales `8,000
(b) `90,000 including Agents sales `10,000
(c) `1,00,000 including Agents sales `10,500

3.14 I CosT And MAnAgEMEnT ACCounTAnCy

750
3,000

Solution:
(`)

Selling Overhead Budget

sales

80,000

90,000

1,00,000

Advertisement

1,000

1,000

1,000

salaries of the sales dept.

1,000

1,000

1,000

750

750

750

salesmen remuneration

3,000

3,000

3,000

Total (A)

5,750

5,750

5,750

720

800

895

(72,000 x 1%)

(80,000 x 1%)

(89,500 x 1%)

4,000

4,500

5,000

600

750

788

(8,000 x 7.5%)

(10,000 x 7.5%)

(10,500 x 7.5%)

5,320

6,050

6,683

11,070

11,800

12,433

(A) Fixed overhead:

Expenses of the sales dept.

(B) Variable overhead:

Commission
Carriage outwards
Agents Commission
Total (B)
grand Total (A+B)
Illustration 8:
ABC Ltd. a newly started company wishes to prepare Cash Budget from January. Prepare a cash budget
for the irst six months from the following estimated revenue and expenses.

Month

Total Sales
`

Materials
`

Wages
`

Overheads
production
Selling &
`
Distribution
`

January

20,000

20,000

4,000

3,200

800

February

22,000

14,000

4,400

3,300

900

March

28,000

14,000

4,600

3,400

900

April

36,000

22,000

4,600

3,500

1,000

May

30,000

20,000

4,000

3,200

900

June

40,000

25,000

5,000

3,600

1,200

Cash balance on 1st January was `10,000. A new machinery is to be installed at `20,000 on credit, to
be repaid by two equal installments in March and April, sales commission @5% on total sales is to be
paid within a month following actual sales.
`10,000 being the amount of 2nd call may be received in March. share premium amounting to `2,000
is also obtained with the 2nd call. Period of credit allowed by suppliers 2months; period of credit
allowed to customers 1month, delay in payment of overheads 1 month. delay in payment of wages
month. Assume cash sales to be 50% of total sales.

CosT And MAnAgEMEnT ACCounTAnCy I 3.15

Budgeting and Budgetary Control

Solution:
Cash Budget for the first 6 Months
Particulars

Jan

Feb

Mar

Apr

May

Jun

10,000

18,000

29,800

27,000

24,700

33,100

10,000

11,000

14,000

18,000

15,000

20,000

Collection from debtors

10,000

11,000

14,000

18,000

15,000

share call money (including share

premium)

12,000

20,000

39,000

66,800

59,000

57,700

68,100

opening Balance (A)

Add: Receipts (B)
Cash sales (50%)

Total (A+B)
Less: Payments
Materials

20,000

14,000

14,000

22,000

2,000

4,200

4,500

4,600

4,300

4,500

overheads

4,000

4,200

4,300

4,500

4,100

sales Commission

1,000

1,100

1,400

1,800

1,500

Installment of Machinery purchase

10000

10000

2,000

9,200

39,800

34,300

24,600

32,100

18,000

29,800

27,000

24,700

33,100

36,000

Wages

Total Payments(C)
Closing Balance (A+B-C)

Note: According to credit terms wages to be taken at half of the current month plus half of the previous
month.
Illustration 9:
Prepare a Cash Budget for the three months ending 30th June, 2012 from the information given
below:
(a)
MONTH

SALES
(`)

MATErIALS
(`)

WAGES
(`)

OVErHEADS
(`)

February

14,000

9,600

3,000

1,700

March

15,000

9,000

3,000

1,900

April

16,000

9,200

3,200

2,000

May

17,000

10,000

3,600

2,200

June

18,000

10,400

4,000

2,300

(b) Credit terms are:

sales / debtors : 10% sales are on cash, 50% of the credit sales are collected next month and the balance
in the following month.
Creditors: Materials 2 months
Wages 1/4 month
overheads 1/2 month.
(c) Cash and bank balance on 1st April, 2012 is expected to be ` 6,000.
(d) other relevant information are:

3.16 I CosT And MAnAgEMEnT ACCounTAnCy

(i)

Plant and machinery will be installed in February 2012 at a cost of ` 96,000. The monthly
installment of `2,000 is payable from April onwards.

(ii)

dividend @ 5% on preference share capital of ` 2,00,000 will be paid on 1st June.

(iii) Advance to be received for sale of vehicles ` 9,000 in June.

(iv) dividends from investments amounting to ` 1,000 are expected to be received in June.
Solution:
Cash Budget for the 3 Months Ending 30th June 2012

(Amount in `)

particulars

April

May

June

opening Balance

6,000

3,950

3,000

1,600

1,700

1,800

13,050

13,950

14,850

Advance for sale of vehicles

9,000

dividends from Investments

1,000

20,650

19,600

29,650

Materials

9,600

9,000

9,200

Wages (see note2)

3,150

3,500

3,900

overheads

1,950

2,100

2,250

Installment of Plant & Machinery

2,000

2,000

2,000

10,000

16,700

16,600

27,350

3,950

3,000

2,300

Add: Receipts :
Cash sales
Collection from debtors [see note(1)]

Total (A+B)
Less: Payments

Preference dividend
Total (C)
Closing Balance (A+B-C)
Working Notes:
(i)

(Amount in `)

Computation of Collection from Debtors

Month

Total Sales

Credit
Sales

feb

Mar

Apr

May

June

Feb

14,000

12,600

6,300

6,300

Mar

15,000

13,500

6,750

6,750

Apr

16,000

14,400

7,200

7,200

May

17,000

15,300

7,650

13,050

13,950

14,850

(ii)

Wages payment in each month is to be taken as three-fourths of the current month plus one-fourth
of the previous month.

CosT And MAnAgEMEnT ACCounTAnCy I 3.17

Budgeting and Budgetary Control

Illustration 10:
For production of 10,000 units the following are budgeted expenses:
per Unit
`
direct Materials

48

direct Labour

24

Variable overheads

20

Fixed overheads (`1,20,000)

12

Variable Expenses (direct)

Selling Expenses (10% ixed)

12

Administration Expenses (`40,000 ixed)

Distribution Expenses (20% ixed)

4
128

Prepare a budget for production of 7,000 units and 9,000 units.

Solution:
flexible Budget
particulars

10000 Units
CpU

Total

7000 Units
CpU

9000 Units

Total

CpU

Total

A) Marginal Cost:
direct Material

48

4,80,000

48

3,36,000

48

4,32,000

direct Labour

24

2,40,000

24

1,68,000

24

2,16,000

40,000

28,000

36,000

20

2,00,000

20

1,40,000

20

1,80,000

10.80

1,08,000

10.80

75,600

10.80

97,200

Variable Expenses
Variable overheads
selling expenses
distribution expenses

3.20

32,000

3.20

22,400

3.20

28,800

110.00

11,00,000

110.00

7,70,000

110.00

9,90,000

Fixed overheads

12.00

1,20,000

1,20,000

1,20,000

selling expenses

1.20

12,000

12,000

12,000

Administration overheads

4.00

40,000

40,000

40,000

distribution expenses

0.80

8,000

8,000

8,000

18.00

1,80,000

1,80,000

1,80,000

128.00

12,80,000

9,50,000

11,71,000

Total (A)
B) Fixed Cost:

Total (B)
grand Total (A+B)

3.18 I CosT And MAnAgEMEnT ACCounTAnCy

Illustration 11 :
draw up a flexible budget for overhead expenses on the basis of the following data and d e t e r m i n e
the overhead rates at 70%, 80% and 90%
plant Capacity

At 80%
capacity
`

Variable Overheads:
Indirect labour
stores including spares
Semi Variable:
Power (30% - Fixed: 70% -Variable)
Repairs (60%- Fixed: 40% -Variable)
fixed Overheads:
depreciation
Insurance
salaries
Total overheads
Estimated Direct Labour Hours

12,000
4,000
20,000
2,000
11,000
3,000
10,000
62,000
1,24,000

Solution:
flexible Budget at Different Capacities and Determination of Overhead rates
particulars
(A) Variable overheads:
Indirect labour
stores including spares
Total (A)
(B) semi Variable overheads:
Power (see note)
Repairs (see note)
Total (B)
(C) Fixed overheads:
depreciation
Insurance
salaries
Total (C)
grand Total (A+B+C)
Labour Hours

70%
`

80%
`

90%
`

10,500
3,500
14,000

12,000
4,000
16,000

13,500
4,500
18,000

18,250
1,900
20,150

20,000
2,000
22,000

21,750
2,100
23,850

11,000
3,000
10,000
24,000
58,150
10,8,500

11,000
3,000
10,000
24,000
62,000
1,24,000

11,000
3,000
10,000
24,000
65,850
1,39,500

1,24,000 8

overhead rate per hour (`)

1,24,000 8

= 0.536

= 0.50

= 0.472

58,150
1,08,500

62, 000

1, 24, 000

65,850
1,39,500

CosT And MAnAgEMEnT ACCounTAnCy I 3.19

Budgeting and Budgetary Control

Working notes: semi Variable overheads:
70%

90%

Fixed

14,000 8 =12,250

6,000

14,000 8 =15,750

6,000

Total

18,250

21,750

Fixed

800 8 = 700

1,200

800 8 = 900

1,200

Total

1 900

2 100

Power:
Variable

Repairs:
Variable

Illustration 12 :
The proit for the year of Push On Ltd. works out to 12.5% of the capital employed and the relevant
igures are as under:`
sales

5,00,000

direct Materials

2,50,000

direct Labour

1,00,000

Variable overheads

40,000

Capital Employed

4,00,000

The new sales manager who has joined the company recently estimates for the next year a proit of about
23% on capital employed, provided the volume of sales is increased by 10% and simultaneously there is
an increase in selling price of 4% and an overall cost reduction in all the elements of cost by 2%.
Find out by computing in detail the cost and proit for next year, whether the proposal of sales manager
can be adopted.
Solution:
Computation of fixed Expenses
particulars
sales
Less: Proit [4,00,000 x (12.5/100)]

`
5,00,000
50,000

Total Cost

4,50,000

Less: All costs other than Fixed Cost

3,90,000

Fixed Cost

3.20 I CosT And MAnAgEMEnT ACCounTAnCy

60,000

Statement Showing Computation of Proit

If Salesmans propasal is Adopted
particulars

(i) sales [500000 x 110% x 104%]

5,72,000

(ii) Variable Cost:

direct Material [250000 x 110% x 98%]

2,69,500

direct Labour [100000 x 110% x 98%]

1,07,800

Variable overheads [40000 x 110% x 98%]

43,120
4,20,420

(iii) Contribution [i - ii]

1,51,580

(iv) Fixed Cost [60000 x 98%]

58,800

(v) Proit [iii - iv]

92,780

92,780

100 = 23.195%
% of proit on Capital Employed =
4,00,000

From the above computation, it was found that the percentage of proit is 23.195% on Capital Employed
by adopting the sales managers proposal which is just more than 23% of expected, therefore the
proposal can be adopted.
Illustration 13:
A glass Manufacturing company requires you to calculate and present the budget for the next
year from the following information.
Sales: Toughened glass

` 3,00,000

Bent toughened glass

` 5,00,000

direct Material cost

60% of sales

direct Wages

20 workers @ `150 p.m.

factory Overheads:
Indirect Labour: Works Manager

`500 per month

Foreman

`400 per month

stores and spares

2% on sales

depreciation on machinery

`12,000

Light and power

5,600

Repairs and maintenance

8,000

other sundries

10% on direct wages

Administration, selling and distribution expenses

`14,000 per year.

CosT And MAnAgEMEnT ACCounTAnCy I 3.21

Budgeting and Budgetary Control

Solution:
Master Budget Showing Proit for Next Year
`

Sales:
Toughened glass

3,00,000

Bent Toughened glass

5,00,000
8,00,000

Less: Cost:
Material @ 60%

4,80,000

direct Wages (20 x 150 x 12)

36,000

Gross Proit

5,16,000
2,84,000

Less: factory Overheads:

Indirect Labour: Works Managers salary [500 x 12] = 6,000
Foremans salary [400 x 12] =

4,800

10,800

stores & spares

20,000

depreciation

12,000

Light & Power

5,600

Repairs & Maintenance

8,000

other sundries
Administration & selling Expenses

3,600
14,000

Proit

74,000
2,10,000

Illustration 14:
From the following information relating to 2012 and conditions expected to prevail in 2013,
prepare a budget for 2013.
2012 Actual:
sales (40,000 units)

`
1,00,000

Raw materials

53,000

Wages

11,000

Variable overhead

16,000

Fixed overheads

10,000

2013 prospects:
sales (60,000 units)

1,50,000

Raw Materials

5% increase in prices

Wages

10% increase in wage rate

5% increase in productivity

Additional plant:

one Lathe ` 25,000

one drill `12,000

10% depreciation to be considered.

3.22 I CosT And MAnAgEMEnT ACCounTAnCy

Solution:
Budget Showing Costs and Proits for the Year 2013
I. sales
II. Costs:

1,50,000

6 105

Raw Materials 53,000

4 100

83,475

110 6 100

Wages 11,000
100 4 105

17,285

Variable overheads 16,000

4

24,000

10

Fixed overheads 10,000 3,70,000

100

13,700
1,38,460
11,540

iii. Proit (i ii)

Illustration 15:
Production costs of a factory for a year are as follows:

`
80,000
1,20,000
40,000
60,000

direct Wages
direct Materials
Production overheads: Fixed
Variable

during the forthcoming year it is anticipated that:

a. The average rate for direct labour remuneration will fall from `0.80 per hour to `0.75 per hour.
b. Production eficiency will be reduced by 5%
c. Price per unit of direct material and of other materials and services which comprise overheads will
remain unchanged, and
d. Production in the coming year will increase by 33 1 % . draw up a production cost budget.
3
Solution:
production Cost Budget for the forthcoming Year
particulars

i.

1 0.75 100
Wages 80,000 133 %

3
0.80 95

1,05,263

ii.

Materials 1,20,000 133 %

3

1,60,000

Variable overheads 60,000 133 %

3

iv. Fixed overheads

Production cost

iii.

80,000
40,000
3,85,263

CosT And MAnAgEMEnT ACCounTAnCy I 3.23

Budgeting and Budgetary Control

Illustration 16:
A company manufactures two products, A and B and the budgeted data for the year are as follows:
sales price per unit
direct material per unit
direct wages per unit
Total works overhead
Total marketing overhead

Product A (`)
100
20
5
10,105
1,200

Product B (`)
75
10
4
9,009
1,100

Product A
(units)
28
28
24
20
16
16
18

Product B
(units)
10
12
16
20
24
24
20

The sales manager forecasts the sales in units as follows:

January
February
March
April
May
June
July to January (next year) Per month

It is assumed that (i) there will be no work in progress at the end of any month, and (ii) inished units
equal to half the sales for the following month will be kept in stock.
Prepare (a) A Production Budget for each month and (b) A Summarized Proit and Loss Statement for
the year.
Solution:
(a)

Product A
sales
Add: Closing stock

Less: opening stock

Production
Product- B
sales
Add: Closing stock

Less: opening stock

Production

production Budget (in number of units)

JAn

FEB

MAR

APR

MAy

Jun

JuL

Aug

sEP

28

28

24

20

16

16

18

18

18

18

18

18

14

12

10

42

40

34

28

24

25

27

27

27

27

27

27

14

14

12

10

28

26

22

18

16

17

18

18

18

18

18

18

235

10

12

16

20

24

24

20

20

20

20

20

20

226

6
16

8
20

10
26

12
32

12
36

10
34

10
30

10
30

10
30

10
30

10
30

10
30

10

12

12

10

10

10

10

10

10

11

14

18

22

24

22

20

20

20

20

20

20

3.24 I CosT And MAnAgEMEnT ACCounTAnCy

oCT noV

dEC ToTAL

240

231

(b)

Summarised product Cost Budget

Output

particulars

product A
235 units (`)
4,700

direct Material : A @ ` 20

product B
231 units (`)

Total
(`)

2310

B @ ` 10

7,010
1,175

direct Labour : A @ ` 5

924

B@`4
Works overheads
Total production Cost
Cost per unit

10,105
15,980
68

9009
12243
53

(15,980/235)

(12,243/231)

2,099
19,114
28,223

Summarised Proit and Loss Statement for the Year

particulars

product A
(`)

product B
(`)

Total
(`)

sales

24,000

16,950

40,950

Less:

16,320

11,978

1,200

1,100

17,520

13,078

30,598

6,480

3,872

10,352

Production Cost of goods sold

(240 x 68)
(226 x 53)

Marketing overheads
Total (ii) Cost (ii)
Proit (i - ii)
Illustration 17 :
Three Articles X, y and Z are produced in a factory. They pass through two cost centers A and B. From
the data furnished compile a statement for budgeted machine utilization in both the centers.
(a) sales budget for the year
Product

Annual Budgeted sales

(units)

Opening stock of inished

products (units)

4800

600

Closing stock
Equivalent to 2 months
sales

2400

300

--do--

2400

800

--do--

(b) Machine hours per unit of product

Product
X
y
Z

Cost centers
A

30
200
30

70
100
20

CosT And MAnAgEMEnT ACCounTAnCy I 3.25

Budgeting and Budgetary Control

(c) Total number of machines
Cost Centre:

284

256

Total

540

(d) Total working hours during the year: Estimated 2500 hours per machine.
Solution:
Calculation of Units of production of Different products
particulars

product X

product Y

product Z

4800

2400

2400

800

400

400

5600

2800

2800

600

300

800

5000

2500

2000

sales
Add: Closing stock
Less: opening stock
Production
MACHINE UTILISATION BUDGET
A

Particulars
(i) Production (units)
(ii) Hours per unit
(iii) Total Machine Hours

5000

2500

30

200

1,50,000 5,00,000

(iv) number of Machines

Required

60

200

Total

2000

5000

2500

2000

30

70

100

20

60,000 7,10,000 3,50,000 2,50,000

24

284

140

Total

40,000 6,40,000

100

16

256

Illustration 18 :
The monthly budgets for manufacturing overhead of a concern for two levels of activity were as
follows:
Capacity
Budgeted production (units)
Wages
Consumable stores
Maintenance
Power and fuel
depreciation
Insurance

60%
600
`
1,200
900
1,100
1,600
4,000
1,000
9,800

100%
1,000
`
2,000
1,500
1,500
2,000
4,000
1,000
12,000

You are required to:

(i)

Indicate which of the items are ixed, variable and semi-variable;

(ii)

Prepare a budget for 80% capacity and

(iii) Find the total cost, both ixed and variable per unit of output at 60%, 80% and 100%capacity.

3.26 I CosT And MAnAgEMEnT ACCounTAnCy

Solution:
(i)

Fixed

depreciation and insurance.

Variable

Wages and consumables stores.

semi-variable Costs

Maintenance, Power and fuel.

seggregation of semi Variable Costs

1,500 1,100
Maintenance =
= ` 1 per unit variable and
400

`500 ixed (i.e., 1,100-600)

2,000 1,600
Power and fuel =
= ` 1 per unit variable and
400

`1000 (i.e.,1,600-600) is ixed.

(ii)

Budget for 80% capacity(output 800 units):

`
1,600
1,200
1,300
1,800
4,000
1,000
10,900

Wages @`2 per unit

Consumables stores @ ` 1.50 per unit
Maintenance: ` 500+`. 1.50 per unit
Power & fuel ` 1,000+ `.1 per unit
depreciation
Insurance
Total cost:
(iii)
Capacity
Units

60%
600

80%
800

Total (`) Per unit

Fixed Costs:
depreciation
Insurance
Maintenance
Power and fuel
Variable costs:
Wages @ `2perunit
Consumable stores @ ` 1.50 per unit
Maintenance @ `.1 Per unit
Power and fuel @ `.1 per unit

4,000
1,000
500
1,000
6,500
1,200
900
600
600
3,300

10.83

5.50
16.33

Total (`) Per unit

4,000
1,000
500
1,000
6,500
1,600
1,200
800
800
4,400

8.125

5.500
13.625

100%
1000
Total
Per
(`)
unit
4,000
1,000
500
1,000
6,500
2,000
1,500
1,000
1,000
5,500

6.50

5.50
12.00

CosT And MAnAgEMEnT ACCounTAnCy I 3.27

Budgeting and Budgetary Control

Illustration 19:
X Chemical Ltd. manufacture two products AB and Cd by making the raw material in the
proportion shown:
raw Material

product AB

80%

20%

product CD

50%

50%

The inished weight of products AB and CD are equal in the weight of in gradients. During the month of
June, it is expected that 60 tons of AB and 200 tons of Cd will be sold.
Actual and budgeted inventories for the month of June as follows:
Actual Inventory (1st
June)

Budgeted Inventory
(30th June)

Quantity (Tons)

Quantity (Tons)

15

20

10

40

200

300

250

200

Product AB

10

Product Cd

50

60

The purchase price of materials for June is expected to be as follows:

Material
A
B
C
d

Cost per ton

`
500
400
100
200

All materials will be purchased on 3rd of June, Prepare:

(a) The Production Budget for the month of June,
(b) The Material Requirement budget for June,
(c) The Material Purchase Budget indicating the expenditure for material for the month of June.
Solution:
(a)

production Budget
particulars
sales
Add: Closing stock
Less: opening stock
Production

3.28 I CosT And MAnAgEMEnT ACCounTAnCy

AB
60
5
65
10
55

CD
200
60
260
50
210

(b)

Material requirement Budget

Particulars

Product AB

44

11

Product Cd

105

105

44

11

105

105

Material Required
(c)

purchase Budget
A

Material Required

Particulars

44

11

105

105

Add: Closing stock

20

40

300

200

64

51

405

305

Less: opening stock

15

10

200

250

Purchases (By weight)

49

41

205

55

500

400

100

200

24500

16400

20500

11000

Cost per ton

Purchases (By Rupees)

Total Purchases = ` 24500+16400+20500+11000 = ` 72400.

Illustration 20:
The budget controller of a manufacturing organisation producing three products has compiled t h e
following data for the annual budget for the year 2013.
price per kg

products
A

Kg per unit

raw materials:
RM1

`5.00

12

RM2

2.00

14

RM3

3.00

10

direct Labour

Rate per hour

dept1

`2.00

dept2

3.00

dept3

4.00

Hours per unit

Factory overheads:
Variable
sales value (` Lakhs)
Stock of inished goods on
1.1.2013 (units)

346.50

275.40

263.25

1,200

800

1,000

Fixed factory overhead rate per direct labour hour

`
dept1

5.00

dept2

3.00

dept3

6.00

CosT And MAnAgEMEnT ACCounTAnCy I 3.29

Budgeting and Budgetary Control

The following policies have been laid down for the budgeted year 2013:
(i)

Fixed factory overheads will be absorbed on direct labour hour basis.

(ii)

Administration overheads are absorbed at the rate at 20% of factory cost.

(iii) selling and distribution overheads (one-third variable) are recovered at the rate of 25% of the cost
of production including administration overheads.
(iv) The mark up on the cost of sales for proit is:
Product A 10%, Product B 20%, Product C 30%.
(v) Inventories of inished goods will be reduced by 25% on 31-12-2013.
(vi) The inished goods inventories are valued on marginal cost basis. The marginal cost of the opening
stocks on 1.1.2013 were:
(vii) Product A `80, Product B `120 and Product C `140
You are required to compute:
(a) The number of units of each product estimated to be sold in the budget year.
(b) The number of unit of each product proposed to be produced in the budget year .
(c) The contribution to sales ratio envisaged for each of the products
(d) Valuation of opening and closing stock of inished goods on marginal cost basis.
Solution:
Computation of Selling price for the product
Particulars

RM 1

5.00

30.00

60.00

RM 2

12.00

0.00

28.00

RM 3

18.00

30.00

6.00

35.00

60.00

94.00

dept-1

18.00

8.00

8.00

dept-2

9.00

12.00

6.00

dept-3

8.00

20.00

16.00

35.00

40.00

30.00

70.00

100.00

124.00

4.00

8.00

6.00

dept-1

45.00

20.00

20.00

dept-2

9.00

12.00

6.00

dept-3

12.00

30.00

24.00

70.00

70.00

56.00

140.00

170.00

180.00

(i) Material:

(ii) Labour

PRIME CosT (i +ii)

(iii) factory Overheads:
Variable
Fixed:

FACToRy CosT (i+ii+iii)

3.30 I CosT And MAnAgEMEnT ACCounTAnCy

(iv) Administration overheads

(v) Cost of Production
(vi) selling and distribution overheads
(vii) Total Cost
(viii) Proit
(ix) selling Price

28.00

34.00

36.00

168.00

204.00

216.00

42.00

51.00

54.00

210.00

255.00

270.00

21.00

51.00

81.00

231.00

306.00

351.00

3,46,50,000

231

2,74,40,000

306

2,63,25,000

351

= 1,50,000

= 90,000

= 75,000

1,50,000

90,000

75,000

(x) Expected number of units to be sold

(a)
(b)

production Budget

Particulars
sales
Add: Closing stock
Less: opening stock
Production
(c)

1,50,000

90,000

75,000

900

600

750

1,50,900

1,90,600

75,750

1,200

800

1,000

1,49,700

89,800

74,750

231

306

351

88

125

148

[74+(42/3)]

[108+17]

[130+18]

143

181

203

61.90%

59.15%

57.83%

1200

800

1000

80

120

140

96,000

96,000

1,40,000

900

600

750

88

125

148

72,900

75,000

1,11,000

Computation of Contribution to Sales ratio

Particulars
(i) selling price
(ii) Variable cost
(iii) Contribution [I II]
(iv) P/V Ratio

Statement showing valuation of stocks

(d)
Particulars
opening stock (units)
Variable cost
Value
Closing stock (units)
Variable cost
Value
Illustration 21:

From the information given below, prepare a cash budget of M/s Ram Limited for the irst half of 2013,
assuming that cost would remain unchanged:
(i)

sales are both on credit and for cash, the later being one-third of the former.

CosT And MAnAgEMEnT ACCounTAnCy I 3.31

Budgeting and Budgetary Control

(ii)

Realization from debtors are 25% in the month of sale, 60% in the month of following that and the
balance in the month after that

(iii) The company adopts a uniform pricing policy of the selling price being 25% over cost.
(iv) Budgeted sales of each month are purchased and paid for in the preceding month.
(v) The company has outstanding debentures of ` 2 lakhs on 1st January which carry interest at 15%
per annum payable on the last date of each quarter on calendar year basis. 20% of the debentures
are due for redemption on 30 June 2013.
(vi) The company has to pay the last installment of advanced tax, for assessment year 2013-14,
amounting to ` 54,000.
(vii) Anticipated ofice costs for the six months period are : January ` 25,000; February ` 20,000; March
` 40,000; April ` 35,000; May ` 30,000 and June ` 45,000.
(viii) The opening cash balance of ` 10,000 is the minimum cash balance to be maintained. Deicits
have to be met by borrowers in multiples of ` 10,000 on which interest, on monthly basis, has to
be paid on the irst date of the sub-sequent month, at 12% p.a. Interest is payable for a minimum
period of a month.
(ix) Rent payable is ` 2,000 per month.
(x)

sales forecast for the different months are :

october 2012 ` 1,60,000; november ` 1,80,000; December ` 2,00,000;

January 2013 ` 2,20,000; February ` 1,40,000; March ` 1,60,000;
April ` 1,50,000; May ` 2,00,000; June ` 1,80,000; and July ` 1,20,000.
Solution:
Cash Budget for the Half Ended 30th June 2013
particulars
opening Balance (A)
(B) receipts:
Cash sales
Collection from debtors
Borrowings
(A+B)
(C) payments:
Advance Tax
Ofice Costs
Rent
Purchases (80% on sales of next month)

Jan
`
10,000

feb
`
77,500

Mar
`
11,0250

Apr
`
44,500

May
`
10,875

June
`
17,775

55,000

35,000

40,000

37,500

50,000

45,000

15,15,000 1,47,750 1,17,750 1,15,875 1,23,000 1,40,625

10000
10000
2,16,500 2,60,250 2,68,000 2,07,875 1,93,875 2,03,400
-

54,000

25,000

20,000

40,000

35,000

30,000

45,000

2,000

2,000

2,000

2,000

2,000

2,000

1,12,000 1,28,000 1,20,000 1,60,000 1,44,000

96,000

Interest on debentures

7,500

7,500

Redemption of debentures

40,000

Payment of Interest
Total of C
Closing Balance (A+B-C)

1,39,000 1,50,000 2,23,500

77,500 1,10,250
44,500

3.32 I CosT And MAnAgEMEnT ACCounTAnCy

100
200
19,7000 1,76,100 1,90,700
10,875
17,775
12,700

Working Notes:
Collection from Debtors
Oct
`

Nov
`

Dec
`

Jan
`

feb
`

Mar
`

Apr
`

May
`

Jun
`

Total sales

1,60,000 1,80,000

2,00,000

2,20,000

1,40,000

1,60,000

150000

200000

180000

Credit sales

1,20,000 1,35,000

1,50,000

1,65,000

1,05,000

1,20,000

112500

150000

135000

oct

30,000

72,000

18,000

nov

33,750

81,000

20,250

37,500

90,000

22,500

24,750

dec
Jan

41,250

99,000

Feb

26,250

63,000

15,750

Mar

30,000

72,000

18,000

Apr

28,125

67,500

16,875

May

37,500

90,000

Jun

33,750

30,000 1,05,750

1,36,500

1,51,500

1,47,750

1,17,750

1,15,875

1,23,000

1,40,625

Total Collections
during the
month

purchases
Given that proit margin on Sales is 25% or 20% on Cost. Therefore remaining 80% is cost.
Illustration 22 :
Manufacturers Ltd. produce three products from three basic raw materials in three departments. The
company operates a budgetary control system and values its stock of inished goods on a total cost
basis. From the following data, you are required to produce for the month of July 2013 the following
budgets.
(a)
(b)
(c)
(d)

Production
Material usage
Purchases
P & L A/c for each product and in total.
Budget data for July 2013
Product

sales
Stock of inished products at July 1, 2013 in units

15,00,000

10,80,000

16,80,000

3,000

2,000

2,500

department
I

II

III

2,39,000

2,01,300

3,91,200

direct labour hours

47,800

67,100

65,200

direct material:

M1
24,500

M2
20,500

M3
17,500

Product overhead (`)

stock July 1, 2013 in units

CosT And MAnAgEMEnT ACCounTAnCy I 3.33

Budgeting and Budgetary Control

The company is introduced a new system of inventory control which should reduce stocks. The forecast
is that stocks as at 31st July 2013 will be reduced as follows:
Raw materials by 10% and inished products by 20%.
Fixed production overhead is absorbed on a direct labour hour basis. It is expected that there will be
no work-in-progress as the beginning or end of the month.
Administration costs are absorbed by the products at a rate of 20% of production cost and selling and
distribution cost is absorbed by products at a rate of 40% of production cost.
Proit is budgeted as a percentage of total cost as follows:
Product A 25%, Product B 12% and product C 16

2
3 %

standard data per unit of Product

direct Material

price per unit

Units

Units

Units

M1

2.00

12

M2

4.00

10

M3

1.00

Rate per
Hour
direct Wages

Hours

Hours

Hours

department I

2.50

department II

2.00

department III

1.50

other variable costs

Solution:

` 10

20

15

Statement of Cost and Proit per Unit

particulars

A (`)

B (`)

C (`)

10

24

M2

40

36

M3

15

45

60

dept-I

10

dept-II

12

dept-III

25

15

20

10

20

15

dept-I

20

10

10

dept-II

18

dept-III

12

24

36

(i) Material:
M1

(ii) Labour:

(iii) other Variable cost

(iv) Production overheads:

3.34 I CosT And MAnAgEMEnT ACCounTAnCy

(v) ToTAL PRoduCTIon CosT (i+ii+iii+iv)

(vi) Administration overheads
(vii) selling & distribution overheads

100

120

150

20

24

30

40

48

60

160

192

240

40

24

40

[25% x 160] [12 % x 192]

[16 2/3 % x 240]

(viii) Total Cost (v+vi+vii)

(ix) PRoFIT PER unIT
(x) sELLIng PRICE PER unIT

200

216

280

(xi) number of units sold

7500

5000

6000

(xii) Total Proit [ix xi](`)

3,00,000

1,20,000

24,0,000

(a)

production Budget

particulars

sales

7500

5000

6000

Add: Closing stock

2400

1600

2000

9900

6600

8000

Less: opening stock

3000

2000

2500

PRoduCTIon

6900

4600

5500

M1

M2

M3

(b) & (c ) Material Usage and purchase Budget

particulars
Material required for:
Product A

34500

34500

Product B

46000

23000

Product C

66000

49500

100500

95500

57500

22050

18450

15750

122550

113950

73250

Less: opening stock

24500

20500

17500

PURCHASES

98050

93450

55750

Add: Closing stock

CosT And MAnAgEMEnT ACCounTAnCy I 3.35