CHAPTER 4

Budget & Budgetary Control

Basic Concepts

Budget*
“Quantitative expression of a plan for a defined period of time. It may include planned
sales volumes and revenues; resource quantities, costs and expenses; assets, liabilities
and cash flows.”
Budget Centre*
“Section of an entity for which control may be exercised through prepared budgets. It is
often a responsibility centre where the manager has authority over, and responsibility for,
defined costs and (possibly) revenues.”
Budgetary Control*
“Master budget, devolved to responsibility centres, allows continuous monitoring of actual
results versus budget, either to secure by individual action the budget objectives or to
provide a basis for budget revision.”
Budget Manual*
“Detailed set of guidelines and information about the budget process typically including a
calendar of budgetary events, specimen budget forms, a statement of budgetary
objectives and desired results, listing of budgetary activities and budget assumptions
regarding, for example, inflation and interest rates.”
Budget Period*
“Period for which a budget is prepared and used, which may then be subdivided into
control periods.”
Budgetary Planning
“Budgetary planning is mainly concerned with preparing the short to medium term plan of
the organisation. An organization’s annual budget is considered as an intermediary step
towards achieving the strategic plan.”
Budget Purposes*
“Budgets may help in authorising expenditure, communicating objectives and plans,
controlling operations, co-ordinating activities, evaluating performance, planning and
rewarding performance. Often, reward systems involve comparison of actual with
budgeted performance.”

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 4.2 Advanced Management Accounting

Budget Cost Allowance*

“Calculated after an accounting period, the cost allowance reflects the actual level of
output achieved. Variable costs are flexed in proportion to volume achieved and fixed
costs are based on the annual budget.”
Bottom-Up Budgeting / Participative Budgeting*
“Budgeting process where all budget holders have the opportunity to participate in setting
their own budgets.”
Cash Budget*
“Detailed budget of estimated cash inflows and outflows incorporating both revenue and
capital items.”
Continuous Budget*
“Budget continuously updated by adding a further accounting period (month or quarter)
when the earliest accounting period has expired. Its use is particularly beneficial where
future costs and / or activities cannot be forecast accurately.”
Departmental / Functional Budget*
“Budget of income and / or expenditure applicable to a particular function frequently
including sales budget, production cost budget (based on budget production, efficiency
and utilisation), purchasing budget, human resources budget, marketing budget, and
research and development budget.”
Fixed Budget*
“Budget set prior to the control period and not subsequently changed in response to
changes in activity, costs or revenues. It may serve as a benchmark in performance
evaluation.”
Flexible Budget*
“Flexing variable costs from original budgeted levels to the allowances permitted for actual
volume achieved while maintaining fixed costs at original budget levels. (Variable cost
allowance = Ratio of actual volume achieved to budget volume × original budget variable
cost)”
Full Capacity*
“Output achievable if sales orders, supplies, workforce, for example, were all available.”
Line Item, Budget*
“Traditional form of budget layout showing, line by line, the costs of a cost centre analysed
by their nature (for example salaries, occupancy, maintenance).”
Master Budget*
“Consolidates all subsidiary budgets and is normally comprised of the budgeted profit and
loss account, balance sheet and cash flow statement.”

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 Budget & Budgetary Control 4.3

Negotiated Budget*
“Budget in which budget allowances are set largely on the basis of negotiations between
budget holders and those to whom they report.”
Normal Capacity*
“Measure of the long-run average level of capacity that may be expected. This is often
used in setting the budgeted fixed overhead absorption rate (giving it stability over time,
although budgeted fixed overhead volume variances may be produced as a
consequence).”
Operating Budget*
“Budget of the revenues and expenses expected in a forthcoming accounting period.”
Operational Planning
“It concerns with the short-term or day-to-day planning process. It plans the
utilisation of resources and will be carried out within the framework of the budget.”
Performance Budgeting
“A performance budget is one which presents the purposes and objectives for which funds
are required, the costs of the programmes proposed for achieving those objectives, and
quantities data measuring the accomplishments and work performed under each
programme. Thus it is a technique of presenting budgets for costs and revenues in terms
of functions.”
Practical Capacity*
“Full capacity less an allowance for known, unavoidable volume losses.”
Principal Budget Factor*
“Principal budget factor limits the activities of an undertaking. Identification of the principal
budget factor is often the starting point in the budget setting process. Often the principal
budget factor will be sales demand but it could be production capacity or material supply.”
Strategic Planning
“Strategic planning is concerned with preparing long-term action plans to attain the
organization’s objectives by considering the changes at horizon”
Top-Down Budgeting*
“Budgeting process where budget allowances are set without permitting ultimate budget
holders the opportunity to participate in the process.”
Zero-Based Budgeting*
“Method of budgeting that requires all costs to be specifically justified by the benefits
expected.”
(*) Source- CIMA’s Official Terminology

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 4.4 Advanced Management Accounting

Formulae
Efficiency Ratio = (Standard Hours ÷ Actual Hours) × 100
Activity Ratio = (Standard Hours ÷ Budgeted Hours) × 100
Calendar Ratio = (Available Working Days ÷ Budgeted Working Days) × 100
Standard Capacity Usage Ratio = (Budgeted Hours ÷ Max. Possible Hours in the
Budgeted Period) × 100
Actual Capacity Usage Ratio = (Actual Hours Worked ÷ Maximum Possible
Working Hours in a Period) × 100
Actual Usage of Budgeted = (Actual Working Hours ÷ Budgeted Hours) × 100
Capacity Ratio
Maximum Capacity = Maximum No. of Days in a Period x No. of Workers
Or
Maximum No. of Hours x No. of Workers
Or
[The maximum no. of units that can be produced by a
manufacturing facility in a certain period]
Practical Capacity = Maximum Capacity –
Sundays, Holidays, Normal Maintenance & Idle Time
Normal Capacity = Average of Past 3 Year’s Normal Performance excluding
Abnormal Data
Principal Budget Factor = Factor that Limits the Activities of the Functional
Budgets of the Organization.

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© The Institute of Chartered Accountants of India
 4.6 Advanced Management Accounting

Question-1
What do you mean by a flexible budget? Give an example of an industry where this type of
budget is typically needed?

Solution:
A flexible budget is a budget which, by recognizing the difference between fixed, semi-variable
and variable costs, is designed to change in relation to the level of activity attained.
Examples- Seasonal products – e.g. soft drink industry, Industries in make to order business
like ship building, Industries influenced by change in fashion, Industries which keep on
introducing new products / new designs.

Question-2
What are the advantages and limitations of Zero Base Budgeting (ZBB)?

Solution:

Advantage of ZBB
(i) It provides a systematic approach for evaluation of different activities and ranks them in
order of preference for allocation of scare resource.
(ii) It ensures that the various functions undertaken by the organisation are critical for the
achievement of its objectives and are being performed in the best way.
(iii) It provides an opportunity to the management to allocate resources for various activities
only after having a thorough cost-benefit analysis.
(iv) The area of wasteful expenditure can be easily identified and eliminated.
(v) Departmental budgets are closely linked with corporate objectives.
(vi) The technique can also be used for the introduction and implementation of the system of
‘management by objective’.
Limitations of ZBB
(i) Various operational problems are likely to be faced in implementing the technique.
(ii) The full support of top management is required.
(iii) It is time consuming as well as costly.
(iv) It requires proper trained managerial staff.

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 Budget & Budgetary Control 4.7

Question-3
What are the steps involved in Zero Base Budgeting (ZBB)?
Or
Describe the process of ZBB.

Solution:
Steps involved in the process of Zero Based Budgeting:
(i) Determination of a set of objects is the pre-requisite and essential step in the direction
of ZBB technique.
(ii) Deciding about the extent to which the technique of ZBB is to be applied whether in all
areas of organization activities or only in few selected areas on trial basis.
(iii) Identify the areas where decisions are required to be taken.
(iv) Developing decision packages and ranking them in order of performance.
(v) Preparation of budget that is translating decision packages into practicable units/items
and allocating financial resources.
ZBB is simply an extension of the cost, benefit analysis method to the area of corporate
planning and budgeting.

Question-4

“Because a single budget system is normally used to serve several purposes, there is a
danger that they may conflict with each other”. Do you agree? Discuss.

Solution:
A single budget system may be conflicting in planning and motivation, and planning and
performance evaluation roles as below:

(i) Planning and motivation roles – Demanding budgets that may not be achieved may be
appropriate to motivate maximum performance but they are unsuitable for planning
purposes. For these, a budget should be a set based on easier targets that are
expected to be met.

(ii) Planning and performance evaluation roles - For planning purposes budgets are set in
advance of the budget period based on an anticipated set of circumstances or

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 4.8 Advanced Management Accounting

environment. Performance evaluation should be based on a comparison of active

performance with an adjusted budget to reflect the circumstance under which managers
actually operated.

Question-5

Define the following:

(i) Maximum Capacity (theoretical capacity)
(ii) Practical Capacity
(iii) Normal Capacity
(iv) Principal Budget Factor
(The first three relate to a manufacturing plant)

Solution:

(i) Maximum Capacity = Maximum No. of Days in a Period × No. of Workers or

Maximum No. of Hours × No. of Workers or
[The maximum no. of units that can be produced by a
manufacturing facility in a certain period]
(ii) Practical Capacity = Maximum Capacity –
Sundays, Holidays, Normal Maintenance & Idle Time
(iii) Normal Capacity = Average of Past 3 Year’s Normal Performance excluding
Abnormal Data
(iv) Principal Budget Factor = Factor that Limits the Activities of the Functional Budgets
of the Organization.

Question-6
In each of the following independent situations, state with a brief reason whether ‘Zero Based
Budgeting’ (ZBB) or ‘Traditional Budgeting’ (TB) would be more appropriate for year II.
(i) A company producing a certain product has done extensive ZBB exercise in year I. The
activity level is expected to marginally increase in year II.

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 Budget & Budgetary Control 4.9

(ii) The sale manager of a company selling three products has intuitive feeling that in year II,
sales will increase for one product and decrease for the other two. His expectation can
not be substantiated with figures.
(iii) The top management would like to delegate responsibility to the functional managers for
their results during year II.
(iv) Resources are heavily constrained and allocation for budget requirements is very strict.

Solution:

(i) The company has done extensive exercise in year-I that can be used as a basis for
budgeting in year-II by incorporating increase in costs / revenue at expected activity level.
Hence, Traditional Budgeting would be more appropriate for the company in year-II.
(ii) In Traditional Budgeting system budgets are prepared on the basis of previous year’s budget
figures with expected change in activity level and corresponding adjustment in the cost and
prices. But under Zero Base Budgeting (ZBB) the estimations or projections are converted
into figures. Since, sales manager is unable to substantiate his expectations into figures so
Traditional Budgeting would be preferred against Zero Base Budgeting.
(iii) Zero Base Budgeting would be appropriate as ZBB allows top-level strategic goals to be
implemented into the budgeting process by tying them to specific functional areas of the
organization, where costs can be first grouped, then measured against previous results and
current expectations.
(iv) Zero Base Budgeting allocates resources based on order of priority up to the spending cut-
off level (maximum level upto which spending can be made). In an organisation where
resources are constrained and budget is allocated on requirement basis, Zero Base
Budgeting is more appropriate method of budgeting.

Question-7
Point out the difference between Traditional Budgeting and Zero Based Budgeting.

Solution:
Following are the points of difference between traditional budgeting and zero based budgeting:
(i) Traditional budgeting is accounting oriented. Main stress happens to be on previous level
of expenditure. Zero-based budgeting makes a decision oriented approach. It is very

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 4.10 Advanced Management Accounting

rational in nature and requires all programmes, old and new, to compete for scarce
resources.
(ii) In traditional budgeting, first reference is made to past level of spending and
then demand for inflation and new programmes. In zero based budgeting a decision unit
is broken into understandable decision packages, which are ranked according to
importance to enable to top management to focus attention to only on decision
packages, which enjoy priority to others.
(iii) In tradition budgeting, some managers deliberately inflate their budget request so that
after the cuts they still get what they want. In zero-base budgeting, a rationale analysis of
budget proposals is attempted. The managers, who unnecessarily try to inflate the
budget request, are likely to be caught and exposed. Management accords its approval
only to a carefully devised result-oriented package.
(iv) Traditional budgeting is not as clear and as responsive as zero base budgeting is.
(v) In traditional budgeting. Its for top management to decide why a particular amount should
be spent on a particular decision unit. In Zero-base budgeting, this responsibility is
shifted from top management to the manager of decision unit.
(vi) Traditional budgeting makes a routine approach. Zero-base budgeting makes a very
straightforward approach and immediately spotlights the decision packages enjoying
priority over others.

Question-8
Write a short note on ‘Performance Budgeting (PB)’.

Solution:
Performance Budgeting provide a meaningful relationship between estimated inputs and
expected outputs as an integral part of the budgeting system. ‘A performance budget is one
which presents the purposes and objectives for which funds are required, the costs of the
programmes proposed for achieving those objectives, and quantities data measuring the
accomplishments and work performed under each programme. Thus PB is a technique of
presenting budgets for costs and revenues in terms of functions. Programmes and activities
are correlating the physical and financial aspect of the individual items comprising the budget.

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© The Institute of Chartered Accountants of India
 4.12 Advanced Management Accounting

Cash Budget
Question-1
From the information given below, prepare a Cash Budget of Excel Limited for the first half year of
2014, year of assuming that costs would remain unchanged:
a) Sales are both on credit and for cash, the latter being one third of the former;
b) Realisations from debtors are 25% in the month of sale; 60%, in month following that and
the balance in the month after that;
c) The company adopts a uniform pricing policy of the selling price being 25% over cost;
d) Budgeted sales of each month are purchased and paid for in the preceding month;
e) 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 30th June 2014;
f) The company has to pay the last instalment of advance tax, for assessment year 2014-15,
amounting to ` 54,000;
g) Anticipated office costs for the six-month period are; January ` 25,000; February ` 20,000;
March ` 40,000; April ` 35,000; May ` 30,000 and June ` 45,000;
h) The opening cash balance of `10,000 is the minimum cash balance to be maintained.
Deficits have to be met by borrowings in multiples of `10,000 on which interest, on monthly
basis, has to be paid on the first date of the subsequent month at 12% p.a. Interest is
payable for a minimum period of one month.
i) Rent payable is ` 2,000 per month.
j) Sales forecast for the different months are:
Oct’13 - `160,000; Nov’13 - `1,80,000; Dec’13 - `2,00,000; Jan’14 - `2,20,000; Feb’14 -
`1,40,000; Mar’14 - `1,60,000; Apr’14 - `1,50,000; May’14 - `2,00,000; Jun’14 - `1,80,000
and Jul’14 - `1,20,000.

Solution:

EXCEL LIMITED
CASH BUDGET FOR JAN TO JUN, 2014
Particulars Jan Feb Mar Apr May Jun
(`) (`) (`) (`) (`) (`)
Opening Balance: 10,000 77,500 1,10,250 44,500 10,875 17,775

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 Budget & Budgetary Control 4.13

Receipts:
Cash Sales 55,000 35,000 40,000 37,500 50,000 45,000
(1/4 of total sales)
From Debtors (W.N.1) 1,51,500 1,47,750 1,17,750 1,15,875 1,23,000 1,40,625
Borrowings (W.N. 2) ----- ----- ----- 10,000 10,000 -----
Total Cash Available (A) 2,16,500 2,60,250 2,68,000 2,07,875 1,93,875 2,03,400
Payments:
Purchase 1,12,000 1,28,000 1,20,000 1,60,000 1,44,000 96,000
Office Expenses 25,000 20,000 40,000 35,000 30,000 45,000
Rent 2,000 2,000 2,000 2,000 2,000 2,000
Debenture Interest ----- ----- 7,500 ----- ----- 7,500
Interest on Borrowings ----- ----- ----- ----- 100 200
Advance Tax ----- ----- 54,000 ----- ----- -----
Redemption of Debentures ----- ----- ----- ----- ----- 40,000
Total Payments(B) 1,39,000 1,50,000 2,23,500 1,97,000 1,76,100 1,90,700
Closing Balance (A-B) 77,500 1,10,250 44,500 10,875 17,775 12,700

Working Notes:
1. Receipts from Sundry Debtors:
Particulars Nov Dec Jan Feb Mar Apr May Jun
(`) (`) (`) (`) (`) (`) (`) (`)
Credit Sales 1,35,000 1,50,000 1,65,000 1,05,000 1,20,000 1,12,500 1,50,000 1,35,000
(3/4 of total
sales)
Cash Collection from Debtors:
25% in the same month 41,250 26,250 30,000 28,125 37,500 33,750
60% in the next month 90,000 99,000 63,000 72,000 67,500 90,000
15% in the third month 20,250 22,500 24,750 15,750 18,000 16,875
Total 1,51,500 1,47,750 1,17,750 1,15,875 1,23,000 1,40,625

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 4.14 Advanced Management Accounting

2. Computation of Deficits to be met by borrowings:

Opening Balance 10,000 77,500 1,10,250 44,500 10,875 17,775
Receipts excluding 2,06,500 1,82,750 1,57,750 1,53,375 1,73,000 1,85,625
borrowings
Total Cash 2,16,500 2,60,250 2,68,000 1,97,875 1,83,875 2,03,400
Available before
current financing
Payments 1,39,000 1,50,000 2,23,500 1,97,000 1,76,100 1,90,700
Balance 77,500 1,10,250 44,500 875 7,775 12,700
Add: Borrowings to ----- ----- ----- 10,000 10,000 -----
maintain minimum
cash balance
Closing Balance 77,500 1,10,250 44,500 10,875 17,775 12,700

Question-2
Sri Ganesh has given the sales forecast for Jan to Jul 2014 and actual sales for Nov, Dec. With the
other particulars given, prepare cash budget for five months Jan to May 2014:
Sales (`):
Nov’13 80,000 Apr’14 1,00,000
Dec’13 70,000 May’14 90,000
Jan’14 80,000 Jun’14 1,20,000
Feb’14 1,00,000 Jul’14 1,00,000
Mar’14 80,000
Sales 20% cash 80% credit payable in the third month (Jan sales in Mar)
Variable expenses 5% on turnover, time lag half month.
Commission 5% on credit sales payable in the third month.
Purchases 60% of the sales of the third month.
Payment 3rd month of purchases.
Rent and .other expenses `3,000 paid every month.
Other payments: Fixed Assets Purchase March `50,000.
Taxes paid in Apr `20,000.
Opening cash balance `25,000.

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 Budget & Budgetary Control 4.15

Solution:
CASH BUDGET FROM JAN’14 TO MAY’14
Particulars Jan Feb Mar Apr May
(`) (`) (`) (`) (`)
Opening Balance 25,000 47,050 52,750 24,050 32,550
Cash Sales 16,000 20,000 16,000 20,000 18,000
Collection from Debtors 64,000 56,000 64,000 80,000 64,000
Total Cash Inflow (i) 1,05,000 1,23,050 1,32,750 1,24,050 1,14,550
Payment to Creditors 48,000 60,000 48,000 60,000 54,000
Variable Expenses 3,750 4,500 4,500 4,500 4,750
Commission 3,200 2,800 3,200 4,000 3,200
Rent 3,000 3,000 3,000 3,000 3,000
Fixed Assets ----- ----- 50,000 ----- -----
Taxes ----- ------ ----- 20,000 -----
Total Cash Out Flow(ii) 57,950 70,300 1,08,700 91,500 64,950
Balance (i) –(ii) 47,050 52,750 24,050 32,550 49,600

Working Notes:
(i) Cash Sales and Realization from Debtors:
Particulars Nov Dec Jan Feb Mar Apr May
(`) (`) (`) (`) (`) (`) (`)
Total Sales 80,000 70,000 80,000 1,00,000 80,000 1,00,000 90,000
Cash Sales 20% 16,000 14,000 16,000 20,000 16,000 20,000 18,000
Credit Sales 80% 64,000 56,000 64,000 80,000 64,000 80,000 72,000
Realisation from Debtors 64,000 56,000 64,000 80,000 64,000

(ii) Payment for Purchases made for the third month requirements, i.e. Nov purchases will be for
Jan sales. In addition, payment is made in third month from the purchase i.e. the payment for
Nov purchases will be made in Jan. It means payment for purchases will be 60% of each
month’s sales.

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 4.16 Advanced Management Accounting

Particulars Jan Feb Mar Apr May

(`) (`) (`) (`) (`)
Payment for Purchases:
(equal to 60% of sales of 48,000 60,000 48,000 60,000 54,000
current month)

(iii) Commission @5% on Credit Sales paid in the third month i.e. for Nov month Sales paid in Jan:
Particulars Nov Dec Jan Feb Mar Apr May
(`) (`) (`) (`) (`) (`) (`)
Credit Sales 64,000 56,000 64,000 80,000 64,000 80,000 72,000
Commission 3,200 2,800 3,200 4,000 3,200 4,000 3,600
@5%
Payment for Commission 3,200 2,800 3,200 4,000 3,200

(iv) Variable Expenses:

Particulars Nov Dec Jan Feb Mar April May
(`) (`) (`) (`) (`) (`) (`)
Variable Expenses (5% of Sales) 4,000 3,500 4,000 5,000 4,000 5,000 4,500
Payment: ½ of previous month 1,750 2,000 2,500 2,000 2,500
Payment: ½ of current month 2,000 2,500 2,000 2,500 2,250
Total Payment 3,750 4,500 4,500 4,500 4,750

Question-3
Prepare monthly cash budgets for six months beginning from April, 2014 on the basis of the
following information:
(a) Estimated monthly Sales are as follows:
` `
Jan 1,00,000 Jun 80,000
Feb 1,20,000 Jul 1,00,000
Mar 1,40,000 Aug 80,000
Apr 80,000 Sep 60,000
May 60,000 Oct 1,00,000

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 Budget & Budgetary Control 4.17

(b) Wages and Salaries are estimated to be payable as follows:

` `
Apr 9,000 Jul 10,000
May 8,000 Aug 9,000
Jun 10,000 Sep 9,000
(c) Of the sales, 80% is on credit and 20% for cash. 75% of the credit sales are collected within
one month and the balance in two months. There are no bad debt losses.
(d) Purchases amount to 80% of sales and are made and paid for in the month preceding the
sales.
(e) The firm has taken a loan of `1,20,000. Interest @ 10% p.a. has to be paid quarterly in
January, April and so on.
(f) The firm is to make payment of tax of ` 5,000 in July, 2014.
(g) The firm had a cash balance of ` 20,000 on 1St April, 2014 which is the minimum desired
level of cash balance. Any cash surplus/deficit above/below this level is made up by
temporary investments/liquidation of temporary investments or temporary borrowings at the
end of each month (interest on these to be ignored).

Solution:

COMPUTATION COLLECTIONS FROM DEBTORS

Particulars Feb Mar Apr May Jun Jul Aug Sep

(`) (`) (`) (`) (`) (`) (`) (`)
Total Sales 1,20,000 1,40,000 80,000 60,000 80,000 1,00,000 80,000 60,000
Credit Sales
(80% of total 96,000 1,12,000 64,000 48,000 64,000 80,000 64,000 48,000
Sales)
Collection
(within one month) 72,000 84,000 48,000 36,000 48,000 60,000 48,000
Collection
24,000 28,000 16,000 12,000 16,000 20,000
(within two months)
Total Collections 1,08,000 76,000 52,000 60,000 76,000 68,000

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 4.18 Advanced Management Accounting

MONTHLY CASH BUDGET FOR SIX MONTHS: APRIL TO SEPTEMBER, 2014

Particulars April May June July August Sept.
(`) (`) (`) (`) (`) (`)
Receipts:
Opening Balance 20,000 20,000 20,000 20,000 20,000 20,000
Cash Sales 16,000 12,000 16,000 20,000 16,000 12,000
Collections from Debtors 1,08,000 76,000 52,000 60,000 76,000 68,000
Total Receipts (A) 1,44,000 1,08,000 88,000 1,00,000 1,12,000 1,00,000
Payments:
Purchases 48,000 64,000 80,000 64,000 48,000 80,000
Wages and Salaries 9,000 8,000 10,000 10,000 9,000 9,000
Interest on Loan 3,000 ----- ----- 3,000 ----- -----
Tax Payment ----- ----- ----- 5,000 ----- -----
Total Payment (B) 60,000 72,000 90,000 82,000 57,000 89,000
Minimum Cash Balance 20,000 20,000 20,000 20,000 20,000 20,000
Total Cash Required (C) 80,000 92,000 1,10,000 1,02,000 77,000 1,09,000
Surplus/ (Deficit ) (A)–(C) 64,000 16,000 (22,000) (2,000) 35,000 (9,000)
Investment/Financing:
Total effect of
(Invest)/ Financing (D) (64,000) (16,000) 22,000 2,000 (35,000) 9,000
Closing Cash Balance 20,000 20,000 20,000 20,000 20,000 20,000
(A) +(D)-(B)

Cash Budget & Budgeted Income Statement

Question-4
On 30th September, 2013, the Balance Sheet of Dani Sugar & Co. retailers of sugar, was as
under:

Liabilities (`) Assets (`)

Capital 20,000 Equipments (at cost) ` 20,000
Less: Depreciation 5,000 15,000

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 Budget & Budgetary Control 4.19

Reserves and Surplus 10,000 Stock 20,000

Trade Creditors 40,000 Trade Debtors 15,000

Audit Fees 15,000 Balance at Bank 35,000
85,000 85,000

The firm is developing a system of forward planning and on 1st October 2013 it supplies the
following information:–

Month Credit Sales Cash Sales Credit Purchases

(`) (`) (`)
Sep’13 (Actual) 15,000 14,000 40,000
Oct’13 (Budgeted) 18,000 5,000 23,000
Nov’13 (Budgeted) 20,000 6,000 27,000
Dec’13 (Budgeted) 25,000 8,000 26,000

All trade debtors are allowed one month’s credit and are expected to settle promptly. All trade
creditors are paid in the month following delivery.
On 1st October 2013, all the equipment was replaced at a cost of ` 30,000. ` 14,000 was
allowed in exchange for the old equipment and a net payment of ` 16,000 was made.
Depreciation is to be provided at the rate of 10% per annum.
The audit fees will be paid in December 2013.
The following expenses will be paid:
− Wage ` 3,000 per month.
− Administration ` 1,500 per month.
Rent ` 3,600 for the year to 30th September 2014 (to be paid in Oct’13)
The gross profit % on sale is estimated at 25%.
You are required to:
a) Prepare a Cash Budget for the month of Oct, Nov & Dec.
b) Prepare an Income Statement for the three months ending 31st Dec’13

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 4.20 Advanced Management Accounting

Solution:
(a) CASH BUDGET FOR OCTOBER, NOVEMBER AND DECEMBER, 2013
Particulars Oct Nov Dec
(`) (`) (`)
Opening Balance at Bank (Overdraft) 35,000 (9,100) (12,600)
Receipts:
Sales : Credit 15,000 18,000 20,000
Cash 5,000 6,000 8,000
Total Receipts (A) 55,000 14,900 15,400
Payments:
Creditors 40,000 23,000 27,000
Equipment 16,000 ----- -----
Audit Fees ----- ----- 15,000
Wages 3,000 3,000 3,000
Administration 1,500 1,500 1,500
Rent 3,600 ----- -----
Total Payments (B) 64,100 27,500 46,500
Closing Balance (Overdraft) (A – B) (9,100) (12,600) (31,100)
(b) BUDGETED INCOME STATEMENT FOR THE THREE MONTHS ENDED 31ST
DECEMBER 2013
Particulars (`) (`)
Sales 82,000
Less: Cost of Goods Sold:
Material (`20,000 + `76,000 – `43,500) 52,500
Wages 9,000 61,500
Gross Profit 20,500
Less: Administration 4,500
Rent 900
Depreciation 750
Loss on Sale of Old Equipment 1,000 7,150
Net Profit 13,350

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 Budget & Budgetary Control 4.21

Working Notes:
(i) Statement showing Cash & Credit Sales

Particulars Credit Sales Cash Sales Total Sales

(`) (`) (`)
Oct’13 18,000 5,000 23,000
Nov’13 20,000 6,000 26,000
Dec’13 25,000 8,000 33,000
Total 63,000 19,000 82,000

(ii) Gross Profit for 3 months = 25% of ` 82,000 = ` 20,500

(iii) Cost of Goods Sold = ` 82,000 – ` 20,500 = ` 61,500
(iv) Material Consumed = Cost of Goods Sold – Wages
= ` 61,500 – ` 9,000 = ` 52,500
(v) Closing Stock = Opening Stock + Purchases – Material Consumed
= ` 20,000 + ` 76,000 – ` 52,500
= ` 96,000 – ` 52,500
= ` 43,500

Fixed and Flexible Budgets

Question-5
The PLN Co. presents the following static budgets for 4,000 units and 6,000 units activity levels for
October 2013:
Activity Level
4,000 units 6,000 units
Overhead A `12/hr. x 2 hr. / unit 96,000 1,44,000
Overhead B 1,40,000 1,90,000

Overhead C was omitted to be listed out. It is a fixed plant overhead, estimated at `12.5/hr. at
4,000 units activity level. This has to also feature in the flexible budget. The actual production was
5,000 units and 9,600 hours were needed for production.

© The Institute of Chartered Accountants of India

 4.22 Advanced Management Accounting

You are required to present the flexible budget amount of each overhead to enable appropriate
comparison with the actual figures.

Solution:
Statement Showing Flexible Budget for 5,000 units Activity Level
Particulars Amount (`)
Overhead A 1,20,000
(`12.00 per hour × 2 hrs. per unit × 5,000 units)
Overhead B* 1,65,000
(` 40,000 + ` 25 × 5,000 units)
Overhead C 1,00,000
(` 12.50 per hour × 2 hrs. per unit × 4,000 units)
Total 3,85,000
Working Note (*):
Overhead B
Change in Overhead Cost
Variable Cost (per unit) =
Change in Production Units
` 1,90,000 - ` 1,40,000
=
6,000 units - 4,000 units
`50,000
=
2,000units
= ` 25
Fixed Cost = `1,40,000 – 4,000 units × ` 25
= ` 40,000

Question-6
Strong Ltd. operates on a system of Flexible Budgets. With the aid of the following
information, you are required to prepare Flexible Budget at 80%, 90% and 100%, level of
activity showing the profits that would result at these levels:
a) The present sale of 8,00,000 units at ` 10 each is at the normal level of 80%. If the
output is increased to 90%, the selling price would be reduced by 2½% and if output
reached 100%, the original selling price would be reduced by 5% in order to reach
wider market.

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 Budget & Budgetary Control 4.23

b) The prime cost per unit is ` 5 made up of Direct Material ` 3.50, Direct Labour ` 1.25
and Direct Expenses ` 0.25. If output reaches 90% level of activity and above, a
saving of 5% can be effected in the purchase price of raw materials.
c) Variable Overhead-salesmen's commission will be 5% of the sales value.
d) Semi-Variable Overheads at normal level of activity are:
` `
Supervision 80,000 Salesmen Expenses 60,000
Power 70,000 Indirect Labour 1,00,000
Heat and Light 40,000 Transport Costs 2,00,000
Maintenance 50,000

These are expected to increase by 5% if output reaches 90% level and by a further 10% if
it reaches the 100% level.
e) Fixed Overheads are:
` `
Rent and Rates 1,00,000 Administration 7,50,000
Depreciation 4,00,000 Sales Department 2,00,000
Advertisement 5,00,000
General 50,000

Solution:

STRONG LTD.
FLEXIBLE BUDGET
Particulars Levels of Activity
80% 90% 100%
Units 8,00,000 9,00,000 10,00,000
Sales (`) ..(A) 80,00,000 87,75,000 95,00,000
Cost of Sales(`) :
Variable Cost:
-Direct Material 28,00,000 29,92,500 33,25,000
-Direct labour 10,00,000 11,25,000 12,50,000

© The Institute of Chartered Accountants of India

 4.24 Advanced Management Accounting

-Direct Expenses 2,00,000 2,25,000 2,50,000

-Salesmen’s Commission 4,00,000 4,38,750 4,75,000
Semi Variable Cost:
-Supervision 80,000 84,000 92,400
-Power 70,000 73,500 80,850
-Heat and Light 40,000 42,000 46,200
-Maintenance 50,000 52,500 57,750
-Salesmen Expenses 60,000 63,000 69,300
-Indirect Labour 1,00,000 1,05,000 1,15,500
-Transport Costs 2,00,000 2,10,000 2,31,000
Fixed Cost:
-Rent and Rates 1,00,000 1,00,000 1,00,000
-Depreciation 4,00,000 4,00,000 4,00,000
-Advertisement 5,00,000 5,00,000 5,00,000
-Administration 7,50,000 7,50,000 7,50,000
-Sales Department 2,00,000 2,00,000 2,00,000
-General 50,000 50,000 50,000
Total Cost (`) ...(B) 70,00,000 74,11,250 79,93,000
Profits (`) ...(A)-(B) 10,00,000 13,63750 15,07,000

Question-7
JBC Limited, a manufacturing company having a capacity of 60,000 units has prepared a
following cost sheet:
Direct material (per unit) ` 12.50
Direct wages (per unit) ` 5.00
Semi-variable cost ` 30,000 fixed plus 0.50 per unit
Factory overhead (per unit) ` 10.00 (50% fixed)
Selling and administration overhead (per unit) ` 8.00 (25% variable)
Selling price (per unit) ` 40
During the year 2008, the sales volume achieved by the company was 50,000 units.

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 Budget & Budgetary Control 4.25

The company has launched an expansion program as under:

(a) The capacity will be increased to 1,00,000 units.
(b) The cost of investment on expansion is ` 5 lakhs which is proposed to be financed
through financial institution at 12 per cent per annum.
(c) The depreciation rate on new investment is 10 per cent based on straight line.
(d) The additional fixed overheads will amount to ` 2.00 lakhs up to 80,000 units and will
increase by ` 80,000 more beyond 80,000 units.
After the expansion, the company has two alternatives for operating the expanded plant as
under:
(i) Sales can be increased up to 80,000 units by spending ` 50,000 on special
advertisement campaign to explore new market.
(ii) Sales can be increased up to 1,00,000 units subject to the following:
(a) Reduction of selling price by ` 4 per unit on all the units sold.
(b) The direct material cost would go down by 4 per cent due to discount on bulk buying.
(c) By increasing the variable selling and administration expenses by 4 per cent.
Required-
Construct a flexible budget at the level 50,000 units, 80,000 units and 1,00,000 units of
production and select best profitable level of operation.

Solution:

FLEXIBLE BUDGET

Particulars 50,000 Units 80,000 Units 1,00,000 Units

(` in lakhs) (` in lakhs) (` in lakhs)
Sales 20.00 32.00 36.00
Direct Material [12.5 per unit (reduction 6.25 10.00 12.00
for 1,00,000 units by `0.50)]
Direct Wages [`5.00 per unit] 2.50 4.00 5.00
Semi Variable Cost [Variable] 0.25 0.40 0.50
Factory Overhead [Variable (`5 per 2.50 4.00 5.00
unit)]

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 4.26 Advanced Management Accounting

Selling and Adm. [25% Variable] 1.00 1.60 2.08

Total Variable Cost 12.50 20.00 24.58
Contribution 7.50 12.00 11.42
Fixed Factory Overheads [`5×60,000] 3.00 3.00 3.00
Selling and Adm. [`6 × 60,000] 3.60 3.60 3.60
Semi Variable [Fixed Part] 0.30 0.30 0.30
Increase Due to Expansion ----- 2.00 2.80
Interest ----- 0.60 0.60
Depreciation ----- 0.50 0.50
Special Advertisement Expenses ----- 0.50 -----
Total Fixed Costs 6.90 10.50 10.80
Profit 0.60 1.50 0.62

Therefore activity level 80,000 units is most profitable level.

Question-8
The budgets for activity and cost of PQR Ltd. for the first three quarters of operation are
shown below:

Budgets Quarters I – III

Period Covered Q–I Q – II Q – III
Months 1–3 4–6 7–9
(‘000) (‘000) (‘000)
Activity :
Sales (Units) 9 17 15
Production (Units) 10 20 15
Costs (`) :
Direct Material
A 60 120 90
B 50 100 75
Production Labour 180 285 230

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 Budget & Budgetary Control 4.27

Manufacturing Overheads Excluding Depreciation 90 120 105

Depreciation of Production Machinery 20 20 20
Administration Expenses 25 25 25
Selling & Distribution Expenses 38 54 50

The figures shown above represent the costs structure of PQR Ltd., which have the following
major features:
(i) Fixed element of any cost is completely independent of activity levels.
(ii) Any variable element of each cost displays a linear relationship with activity level, except
that the variable labour cost become 50% higher for activity in excess of 19,000 units per
quarter due to the necessity for overtime working.
(iii) The variable element of selling and distribution expenses is a function of sales. All other
costs with a variable element are a function of production volume.
Activity for each quarter is spread evenly throughout that quarter.
In Quarter IV Production level will be set equal to sales level. Production and sales in this
quarter is expected to range between 15,000 units and 21,000 units. The most likely volume is
18,000 units. In month 9 it will be possible to accurately estimate the sales for Quarter IV.
Cost structure will remain the same as in Quarters I to III except the following:
(i) Labour wage rate will rise by 12½%.
(ii) Variable labour input per unit of output will decrease, due to learning curve effect, such
that 80% of the previous labour input per unit of output will be required in Quarter IV.
The threshold for overtime working remains at 19,000 units per quarter.
(iii) Fixed factory overheads and the fixed element of selling and distribution costs will each
rise by 20% (The variable element of selling and distribution costs will be unaltered.)
Required:
(i) Prepare a Statement to show, under each cost classification given in the budgets, the
variable cost per unit and fixed costs which will be effective in Quarter IV.
(ii) Prepare a flexible budget of production costs for the Quarter IV.

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 4.28 Advanced Management Accounting

Solution:

Working Notes:
1. Direct Material Cost:
` 60,000
A: =`6
10,000 units
` 50,000
B: =`5
10,000 units
Direct material cost (variable cost) for material A and B for all the quarters on
computation comes to ` 6 /- and ` 5 /- for materials A and B respectively.

2. Fixed and Variable Cost Component of production labour cost:

Particulars Quarter I Quarter III Change

Production (units) 10,000 15,000 5,000
Production labour (`) 1,80,000 2,30,000 50,000

Change in Production Labour Cost

Variable Cost (per unit) =
Change in Production Units

` 50,000
=
5,000
= ` 10
Fixed Cost = ` 1,80,000 – ` 1,00,000
= ` 80,000
For Quarter II (20,000 units):
`
Variable Cost of 20,000 units @ ` 10 p.u. 2,00,000
Fixed Cost 80,000
Overtime Premium on 1,000 @ ` 5 p.u. 5,000
Total Production Labour Cost 2,85,000

© The Institute of Chartered Accountants of India

 Budget & Budgetary Control 4.29

For Quarter IV (18,000 units):

`
Variable Cost of 18,000 units @ ` 9 p.u. 1,62,000
(` 10 × 1.125 × 0.80 = ` 9)
Fixed Cost (` 80,000 × 1.125) 90,000
Total Production Labour Cost 2,52,000
3. Fixed and Variable Cost Component of manufacturing overhead:
Quarter I Quarter II Change
Production (units) 10,000 20,000 10,000
Manufacturing Overhead (`) 90,000 1,20,000 30,000
(Excluding Depreciation)
Variable Cost Component of manufacturing overhead:
Change in Manufacturing Overhead Costs
=
Change in Production Units

` 30,000
=
10,000 units
= ` 3 p.u
Fixed Cost Component of manufacturing overhead:
= ` 1,20,000 – 20,000 units × ` 3
= ` 60,000
For Quarter IV:
`
Fixed Cost = 60,000
Add: 20% Increase = 12,000
Total Fixed Cost = 72,000
4. Fixed and Variable Cost Component of selling and distribution expenses
Quarter I Quarter II Change
Sales (units) 9,000 17,000 8,000
Selling & Distribution Expenses 38,000 54,000 16,000

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 4.30 Advanced Management Accounting

Variable Cost Component of selling & distribution expenses:

Change in selling & Distribution expenses
=
Change in sales units
` 16,000
=
8,000
= ` 2 per unit
Fixed Cost Component of selling & distribution expenses:
= ` 54,000 – 17,000 units × ` 2
= ` 20,000
Fixed Cost Component for IV Quarter:
= ` 20,000 × ` 1.20
= ` 24,000
(i) STATEMENT OF VARIABLE COST PER UNIT AND FIXED COSTS UNDER GIVEN
COST CLASSIFICATION EFFECTIVE FOR QUARTER IV

Particulars Total Fixed Cost Variable Cost p.u.

(`) (`)
Direct Materials (W.N.1)
A ----- 6
B ----- 5
Production Labour (W.N.2) 90,000 9
Manufacturing Overhead Ex. Depreciation (W.N.3) 72,000 3
Depreciation of Production Machinery 20,000 -----
Administration Expenses 25,000 -----
Selling & Distribution Expenses (W.N.4) 24,000 2

(ii) FLEXIBLE BUDGET OF PRODUCTION COSTS FOR THE QUARTER IV

Particulars 15,000 units 18,000 units 21,000 units

(`) (`) (`)
Direct Material
A 90,000 1,08,000 1,26,000
(15,000 units × ` 6) (18,000 units × ` 6) (21,000 × ` 6)

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 Budget & Budgetary Control 4.31

B 75,000 90,000 1,05,000

(15,000 units × ` 5) (18,000 × ` 5) (21,000 units × `5)
Production Labour 2,25,000 2,52,000 2,88,000*
(15,000 units × ` 9 + (18,000 units × ` 9 +
` 90,000) ` 90,000
Manufacturing 1,17,000 1,26,000 1,35,000
Overhead (15,000 units × ` 3 (18,000 units × ` 3 (21,000 units × ` 3
+ ` 72,000) ` 72,000) + ` 72,000)
Depreciation 20,000 20,000 20,000
Total Production Cost 5,27,000 5,96,000 6,74,000
* Production Labour (21,000 units level)
`
Variable Cost (21,000 units × ` 9) 1,89,000
Fixed Cost 90,000
Overtime (2,000 units × ` 9 × 0.50) 9,000
2,88,000

Functional Budgets
Question-9
Balrampur Mfg. Ltd. produces and sells a single product. Sales budget for the calendar year
2014 by quarter is as under:

Quarter No. of units to be sold Quarter No. of units to be sold

i 12,000 iii 16,500
ii 15,000 iv 18,000
The year 2014 is expected to open with an inventory of 4,000 units of finished product and
close with an inventory of 6,500 units.
Production is customarily scheduled to provide for two-thirds of the current quarter's sales
demand plus one third of the following quarter's demand.
The standard materials 10 lbs. @ 50 paise per lb.
Direct labour 1 hour 30 minutes @ ` 4 per hour.
Variable overheads 1 hour 30 minutes @ ` 1 per hour.

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 4.32 Advanced Management Accounting

Fixed overheads ` 1,80,000 p.a.

(a) Prepare a Production Budget for 2014, by quarters, showing the number of units to be
produced, and the total costs of direct labour, variable overheads and fixed overheads.
(b) If the budgeted selling price per unit is ` 17, what would be the budgeted profit for the
year as a whole?
(c) In which quarter of the year is the company expected to break even?

Solution:

PRODUCTION BUDGET (FOR THE YEAR 2014 BY QUARTERS)

Particulars Units to be Produced
Q.I [Link] [Link] [Link] Total
2/3 of the Current Quarter’s Sales 8,000 10,000 11,000 12,000 41,000
1/3 of the Following Quarter’s Sales 5,000 5,500 6,000 6,500 23,000
No. of units to be produced 13,000 15,500 17,000 18,500 64,000*
(*) `61,500 + `6,500 - `4,000
STATEMENT SHOWING TOTAL COST OF DIRECT MATERIAL, DIRECT LABOUR,
VARIABLE OVERHEADS AND FIXED OVERHEAD
Particulars Q.I [Link] [Link] [Link] Total
Unit (to be produced) 13,000 15,500 17,000 18,500 64,000
(`) (`) (`) (`) (`)
Direct Material Cost [W.N.1] 65,000 77,500 85,000 92,500 3,20,000
Direct Labour Cost [W.N.2] 78,000 93,000 1,02,000 1,11,000 3,84,000
Variable Overhead Cost [W.N.3] 19,500 23,250 25,500 27,750 96,000
Fixed Overhead Cost [W.N.4] 45,000 45,000 45,000 45,000 1,80,000
Total Cost 2,07,500 2,38,750 2,57,500 2,76,250 9,80,000

Working Notes:

Particulars Q.I [Link] [Link] [Link] Total

1. Direct Materials in (lbs.) 1,30,000 1,55,000 1,70,000 1,85,000 6,40,000
[ @ 10 lbs. per unit]
Direct Material Cost 65,000 77,500 85,000 92,500 3,20,000

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 Budget & Budgetary Control 4.33

[@ ` 0.50 per lb.] In (`)

2. Direct Labour Hours 19,500 23,250 25,500 27,750 96,000
[@ 1.5 hours per unit]
Direct Labour Cost 78,000 93,000 1,02,000 1,11,000 3,84,000
[@ ` 4.00 per hour in (`)]
3. Variable Overhead Cost 19,500 23,250 25,500 27,750 96,000
[@ ` 1 per hour] In (`)
4. Fixed overhead cost has been divided equally over the four quarters

BUDGETED PROFIT STATEMENT FOR THE WHOLE YEAR

`
Total Sales Revenue (61,500 × ` 17) 10,45,500
Total Variable Cost * (61,500 × ` 12.50) 7,68,750
Contribution 2,76,750
Fixed Cost 1,80,000
Profit for the year 96,750
(*) Variable Cost per unit:
Direct Material Cost (10 lbs × ` 0.50) 5.00
Direct Labour Cost (1.5 hours × ` 4.00) 6.00
Variable Overhead Cost (1.5 hrs. × `1.00) 1.50
Total 12.50

BREAK EVEN POINT

Fixed Cost ` 1,80,000
Break Even Point = = = 40,000 units
Contribution per Unit ` 4.50

The total sales in units by the end of 3rd quarter will amount to 43,500. Accordingly, the
company will break even only in the latter part of the 3rd quarter.

Question-10
Super Products Ltd. manufactures and sells a single product and has estimated a sales
revenue of ` 126 lakhs this year based on a 20% profit on selling price. Each unit of the
product requires 3 Ibs. of material A and 1.1/2 Ibs. of material B, for manufacture as well as a

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 4.34 Advanced Management Accounting

processing time of 7 hours in the Machine Shop and 2.1/2 hours on the Assembly Section.
Overheads are absorbed at a blanket rate of 33.1/3% on Direct Labour. The factory works 5
days of 8 hours a week in a normal 52 weeks a year. On an average statutory holidays, leave
and absenteeism and idle time amount to 96 hours, 80 hours and 64 hours respectively, in a
year.
The other details are as under:

Purchase Price Material A ` 6 per lb.

Material B ` 4 per lb.
Comprehensive Labour Rate Machine Shop ` 4.00 per hour
Assembly Section ` 3.20 per hour
No. of Employees Machine Shop 600
Assembly Section 180
Finished Goods Material A Material B
Opening Stock 20,000 Units 54,000 lbs. 33,000 lbs
Closing Stock (Estimated) 25,000 Units 30,000 lbs. 66,000 lbs

You are required to calculate:

(a) The number of units of the product proposed to be sold.
(b) Purchases to be made of Materials A and B during the year in rupees.
(c) Capacity utilisation of Machine Shop and Assembly Section, along with your comments.

Solution:

(a) STATEMENT OF THE NUMBER OF UNITS OF THE PRODUCT PROPOSED TO BE

SOLD

Selling Price per unit `90

Total Sales Revenue `1,26,00,000
Number of Units of the Product (proposed to be sold) 1,40,000 units
(`1,26,00,000 / `90)

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 Budget & Budgetary Control 4.35

Working Notes:
Statement of selling price per unit of the product
`

Direct Material:
A: 3.0 lbs × ` 6 18
B: 1.5 lbs × ` 4 6
Direct Labour:
Machine Shop: 7 hrs × ` 4 28
Assembly Section: 2.5 hrs × ` 3.20 8
Overhead 33 ⅓ % of Direct Labour [(`28+`8) × 33.33...%] 12
Total Cost per unit 72
Add: Profit 20% of Selling Price (or 25% on Cost) 18
Selling Price per unit 90

(b) STATEMENT OF MATERIALS A AND B TO BE PURCHASED DURING THE YEAR IN

RUPEES

Material Consumption Closing Opening Purchase Purchase Amount

Balance Balance Price
(lbs) (lbs) (lbs) (lbs.) (`) (`)
A 4,35,000 30,000 54,000 4,11,000 6 24,66,000
(1,45,000* × 3)
B 2,17,500 66,000 33,000 2,50,500 4 10,02,000
(1,45,000* × 1.5)
Total 34,68,000

(*) Number of units of finished goods to be manufactured during the year

= Sales + Closing Stock – Opening Stock
= 1,40,000 + 25,000 – 20,000
= 1,45,000 units

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 4.36 Advanced Management Accounting

(c) CAPACITY UTILISATION STATEMENT OF MACHINE SHOP AND ASSEMBLY

SECTION

Particulars Machine Shop Assembly Section

Hours Available# 11,04,000 3,31,200
(600 person × 1,840 hrs.) (180 persons × 1,840 hrs.)
Hours Required 10,15,000 3,62,500
(1,45,000 units × 7 hrs.) (1,45,000 units × 2.5 hrs.)
Surplus/(Deficit) Hours 89,000 (31,300)
Capacity Utilization 91.94% 109.45%

(#) Hours Available [5 Days × 8 Hrs. × 52 Weeks – Idle Time (96 + 80 + 64)]
Comments:
Above statement shows that there are 89,000 excess hours in the machine shop and also a
shortage of 31,300 hours in the assembly section. If the workers are interchangeable, the
assembly section should utilise the services of workers which may be moved from the
machine shop to meet the production target of 1,45,000 units. If the workers are not
interchangeable, the assembly section may either resort to overtime working or increase the
strength of workers to achieve the budgeted production.

Question-11
Smart Electronics is manufacturing for export, four models of Television Sets. The major
components viz., Cabinet, High Voltage Transformer and the Speaker are bought out by the
Company. Picture Tubes for three out of the four models are purchased from other firms. Four
Cabinet styles (A, B, C and D), two kinds of Transformers (X and Y): Three kinds of speakers
and three types of picture tubes are assembled in the following ways in the final product:–

Model Cabinet Transformer Speaker Picture Tube

Standard A @ ` 200 X @ ` 200 5” Cone @ ` 300 OWN
Deluxe B @ ` 300 X @ ` 200 5” Cone @ ` 300 BEL @ ` 1,200
Aristocrat C @ ` 500 Y @ ` 300 6” Cone @ ` 400 BEL @ ` 1,200
Royal D @ ` 700 Y @ ` 300 12” Cone @ ` 600 TELETUBE @ ` 1,600

The Company expects the following inventories in hand on 1st Jan 2014:–

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 Budget & Budgetary Control 4.37

Finished Sets:
Standard — 46; Deluxe — 73; Aristocrat — 64; Royal — 69
Sub-Assemblies:
Cabinet:
A — 30; B — 40; C — 20; D — 25
Transformers:
X—31; Y—17
Speakers:
5” Cone — 27; 6” Cone — 47; 12” Cone —18
Picture Tubes:
OWN — 20; BEL — 17; TELTUBE — 34
The Sales Manager estimates that sales of the quarter, January – March 2014, will be:–
Standard — 200; Deluxe — 600; Aristocrat — 500; Royal — 300
The following inventory quantities have been budgeted for 31st March 2014:–
Finished Sets:
25 in each model
Sub-Assemblies:
Cabinet—15 (each model)
Transformers—20 (each type)
Speakers—30 (each type)
Picture Tube
OWN — 30; BEL— 40; TELTUBE—20
You are required to prepare the purchase budget for the various items stated above for the
quarter Jan—Mar’14.

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 4.38 Advanced Management Accounting

Solution:

PRODUCTION BUDGET FOR TELEVISION SETS

Model Sales Closing Total Opening Production

Budgeted Inventory Inventory

Standard 200 25 225 46 179

Deluxe 600 25 625 73 552
Aristocrat 500 25 525 64 461
Royal 300 25 325 69 256

MATERIALS PURCHASE BUDGET [CABINET]

Type Model Production Closing Opening Purchase

Inventory Inventory
A Standard 179 15 30 164
B Deluxe 552 15 40 527
C Aristocrat 461 15 20 456
D Royal 256 15 25 246

MATERIALS PURCHASE BUDGET [TRANSFORMER]

Type Model Production Closing Opening Purchase

Inventory Inventory
X Standard 179
20 31 720
Deluxe 552
Y Aristocrat 461
20 17 720
Royal 256

MATERIALS PURCHASE BUDGET [SPEAKERS]

Type Model Production Closing Opening Purchase

Inventory Inventory
5” Cone Standard 179
30 27 734
Deluxe 552

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 Budget & Budgetary Control 4.39

6” Cone Aristocrat 461 30 47 444

12” Cone Royal 256 30 18 268

MATERIALS PURCHASE BUDGET [PICTURE TUBE]

Type Model Production Closing Opening Purchase

Inventory Inventory
BEL Deluxe 552
40 17 1,036
Aristocrat 461
TELTUBE Royal 256 20 34 242

PURCHASE BUDGET (CONSOLIDATED)

Type Items Qty. Rate Amount

(`) (`)
Cabinet A 164 200 32,800
B 527 300 1,58,100
C 456 500 2,28,000
D 246 700 1,72,200
Transformer X 720 200 1,44,000
Y 720 300 2,16,000
Speaker 5” Cone 734 300 2,20,200
6” Cone 444 400 1,77,600
12” Cone 268 600 1,60,800
Picture Tube: BEL 1,036 1,200 12,43,200
TELTUBE 242 1,600 3,87,200
Total 31,40,100

Question-12
KFA Ltd. manufactures three products K, F and A in two production departments X and D, in
each of which are employed two grades of labour. The cost accountant is preparing the annual
budgets for the next year and he has asked you to prepare, using the data given below:
(a) The production budget in units for products K, F and A.

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 4.40 Advanced Management Accounting

(b) The direct wages budget for departments X and D with the labour costs of product K, F
and A and total shown separately:

Product: (` ‘000) Product K Product F Product A

Finished Stocks: (` ‘000) (` ‘000) (` ‘000)
Budgeted Stocks are
1st Jan. Next year 720 540 1,800
31st Dec. Next year 600 570 1,000

All Stocks are Valued at Standard Cost per unit ` 24 ` 15 ` 20

Standard Profit Calculated as % of Selling Price 20% 25% 16.66… %

Total Product K Product F Product A

Budgeted Sales: (` ‘000) (` ‘000) (` ‘000) (` ‘000)
South 6,600 1,200 1,800 3,600
West 5,100 1,500 1,200 2,400
North 6,380 1,500 800 4,080
18,080 4,200 3,800 10,080

Normal Loss in Production 10% 20% 5%

Standard Labour Times per unit and Standard Rate per hour
Rate Product K Product F Product A
(`) (Hours) (Hours) (Hours)
Department X:

Grade 1 1.80 2.0 3.0 1.0

Grade 2 1.60 1.5 2.0 1.5
Department D:
Grade 1 2.00 3.0 1.0 1.0
Grade 2 1.80 2.0 1.5 2.5

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 Budget & Budgetary Control 4.41

Solution:

Workings:
i) Unit Selling Price:
K: ` 24 × (100 ÷ 80) = ` 30
F: ` 15 × (100 ÷ 75) = ` 20
A: ` 20 × (100 ÷ 83.33..) = ` 24
ii) Budgeted Sales Volume (in ‘000):
K: ` 4,200 ÷ ` 30 = 140
F: ` 3,800 ÷ ` 20 = 190
A: ` 10,080 ÷ ` 24 = 420
iii) Stock Increases/ (Decrease) (‘000 units):
K: {(` 720 – 600) ÷ ` 24} = (5)
F: {(` 540 – 570) ÷ ` 15} =2
A: {` (1,800 – 1,000) ÷ `20} = (40)
iv) Budgeted Good Production (‘000 units):
K: 140 – 5 = 135
F: 190 + 2 = 192
A: 420 – 40 = 380
v) Normal Loss in Production (‘000 units):
K: 135 × (10 ÷ 90) = 15
F: 192 × (20 ÷ 80) = 48
A: 380 ×(5 ÷ 95) = 20
(a) PRODUCTION BUDGET IN UNITS FOR PRODUCT K, F AND A

Product (‘000 units) K F A

Sales Volume 140 190 420
Stock Increase / (Decrease) (5) 2 (40)
Saleable Output 135 192 380
Normal Loss in Production Process 15 48 20
Input to Production 150 240 400

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 4.42 Advanced Management Accounting

(b) DIRECT WAGES BUDGET FOR DEPARTMENTS X & D (WITH LABOUR COSTS OF
PRODUCTS K, F & A & TOTAL)

Particulars K F A Total
Std. (`) Std. (`) Std. (`) (`)
Hrs. ‘000 Hrs. ‘000 Hrs. ‘000 ‘000
Department X:
Grade 1@ ` 1.80/hr. 300 540 720 1296 400 720 2,556
Grade 2@ ` 1.60/hr. 225 360 480 768 600 960 2,088
Total (A) 900 2,064 1,680 4,644
Department D:
Grade 1 @ ` 2.00/hr. 450 900 240 480 400 800 2,180
Grade 2 @ ` 1.80/hr. 300 540 360 648 1,000 1,800 2,988
Total (B) 1,440 1,128 2,600 5,168
Total Direct Wages (A+B) 2,340 3,192 4,280 9,812

Question-13
EXE Ltd manufacturing three types of products P, Q and R and market them at `450, `550
and `650 per unit respectively. The current ratio of sales in quantity of P, Q and R is 1: 2: 4.
Relevant Data of P, Q & R (per unit)

Product Quantity of Parts required therein (In nos.) Labour Hrs. Variable
Frame S T U Skilled Unskiiled Overhead
(`)
P 1 10 2 8 6 8 9
Q 1 2 14 10 4 6 11
R 1 6 10 2 3 6 7

The present purchase price per part is ` 45, ` 15, ` 15 and ` 5 for Frame, S, T and U
respectively. The wages rate per hours for Skilled and Unskilled workers is ` 6 and ` 5
respectively.
The opening stocks as on 1.11.2013 stood at 500, 1,000, 3,000, 1,500, 1,000, 20,000 and
10,000 for P, Q, R, Frames, S, T and U respectively. The company maintains closing stock of
products and parts at 90% of the opening stocks.

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 Budget & Budgetary Control 4.43

The workers work for 8 hours a day for 25 days in a month.

The share of fixed overheads per month comes to ` 15,75,000; ` 5,80,000; and ` 8,45,000 for
production, administration and selling & distribution respectively.
The yearly profit as projected up to October, 2014 is ` 120 lakhs.
You are required to present the following for November, 2013;
(a) Sales Budget in quantity as well as in value for P, Q and R.
(b) Production Budget.
(c) Parts Usage Budget.
(d) Purchase Budget in quantity as well as in value.
(e) Manpower Budget showing labour hours and wages payable for both types of workers.

Solution:

Working Note:
1. Variable Cost per unit of Products P, Q & R

Products : P Q R
(`) (`) (`)
Cost of Parts :
Frame 45 45 45
S 150 30 90
T 30 210 150
U 40 50 10
Wages of Skilled Labour 36 24 18
Wages of Un – Skilled Labour 40 30 30
Variable Overheads 09 11 07
Total Variable Cost per unit 350 400 350

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 4.44 Advanced Management Accounting

2. Sales Quantity of Products A, B and C :

Products P Q R
X 2X 4X
(`) (`) (`) (`)
Selling Price (p.u.) 450 550 650
Less: Variable Cost (p.u.) 350 400 350
(Refer to Note 1)
Contribution (p.u.) 100 150 300
Total Contribution 100X 300X 1,200X 1,600X

Also, Required Contribution p.m. = Profit + Fixed Cost

= `10,00,000 + `30,00,000
= `40,00,000
Since 1,600 X = `40,00,000
Or X = 2,500 units
Hence, the sales quantity of products P, Q and R respectively are: 2,500 units; 5,000 units
and 10,000 units.
(a) SALES BUDGET IN QUANTITY AS WELL AS IN VALUE: FOR A, B AND C

Products P Q R Total
Sales Budget 2,500 5,000 10,000 17,500
(in quantity)
(Refer to W.N. 2)
Sales Value (in ` ) 11,25,000 27,50,000 65,00,000 1,03,75,000
(2,500 × ` 450) (5,000 × ` 550) (10,000 × ` 650)

(b) PRODUCTION BUDGET (IN UNITS)

Products P Q R
Sales in units 2,500 5,000 10,000
(Refer to W.N. 2)
Add: Closing Stock in units 450 900 2,700
(90% of Opening Stock)

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 Budget & Budgetary Control 4.45

Less : Opening Stock in units 500 1,000 3,000

Production Budget in units 2,450 4,900 9,700

(c) PARTS USAGE BUDGET

Products Units to be Parts of Material Required

Produced Frame S T U
P 2,450 2,450 24,500 4,900 19,600
Q 4,900 4,900 9,800 68,600 49,000
R 9,700 9,700 58,200 97,000 19,400
Total 17,050 92,500 1,70,500 88,000

(d) PURCHASE BUDGET (IN QUANTITY AS WELL AS IN VALUE)

Name of Parts Frame S T U

Parts Usage (in units) 17,050 92,500 1,70,500 88,000
Add : Closing Stock in units 1,350 900 18,000 9,000
Less : Opening Stock in units 1,500 1,000 20,000 10,000
Units to be Purchased 16,900 92,400 1,68,500 87,000
Purchase Value (`) 7,60,500 13,86,000 25,27,500 4,35,000
(16,900x ` 45) (92,400 x ` 15) (1,68,500x`15) (87,000 x `5)

(e) MANPOWER BUDGET SHOWING LABOUR HOURS & WAGES PAYABLE FOR BOTH
TYPES OF WORKERS

Products Total Labour Hours

Units to be Skilled Workers Un Skilled Workers
Produced
P 2,450 14,700 19,600
Q 4,900 19,600 29,400
R 9,700 29,100 58,200
Total 63,400 1,07,200
Wages Payable (`) 3,80,400 5,36,000
(63,400 × ` 6) (1,07,200 × ` 5)

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 4.46 Advanced Management Accounting

Question-14
Valley Ltd. produces and markets a very popular product called ‘X’. The company is interested
in presenting its budget for the second quarter of 2014.
The following information are made available for this purpose:
(a) It expects to sell 50,000 bags of ‘X’ during the second quarter of 2014 at the selling
price of ` 9 per bag.
(b) Each bag of ‘X’ requires 2.5 kgs. of a raw – material called ‘Y’ and 7.5 kgs. of raw –
material called ‘Z’.
(c) Stock levels are planned as follows:
Particulars Beginning of Quarter End of Quarter
Finished Bags of ‘X’ (Nos.) 15,000 11,000
Raw – Material ‘Y’ (Kgs.) 32,000 26,000
Raw – Material ‘Z’ (Kgs.) 57,000 47,000
Empty Bag (Nos.) 37,000 28,000

(d) ‘Y’ cost ` 1.20 per Kg., ‘Z’ costs 20 paise per Kg. and ‘Empty Bag’ costs 80 paise each.
(e) It requires 9 minutes of direct labour to produce and fill one bag of ‘X’. Labour cost is `
5 per hour.
(f) Variable manufacturing costs are ` 0.45 bag. Fixed manufacturing costs ` 30,000 per
quarter.
(g) Variable selling and administration expenses are 5% of sales and fixed administration
and selling expenses are ` 25,000 per quarter.
You are required to:
(i) Prepare a production budget for the said quarter.
(ii) Prepare a raw – material purchase budget for ‘Y’, ‘Z’ and ‘Empty Bags’ for the said
quarter in quantity as well as in rupees.
(iii) Compute the budgeted variable cost to produce one bag of ‘X’.
(iv) Prepare a statement of budgeted net income for the said quarter and show both per unit
and total cost data.

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 Budget & Budgetary Control 4.47

Solution:

(i) PRODUCTION BUDGET OF ‘X’ FOR THE SECOND QUARTER

Particulars Bags (Nos.)

Budgeted Sales 50,000
Add: Desired Closing stock 11,000
Total Requirements 61,000
Less: Opening stock 15,000
Required Production 46,000

(ii) RAW–MATERIALS PURCHASE BUDGET IN QUANTITY AS WELL AS IN ` FOR

46,000 BAGS OF ‘X’

Particulars ‘Y’ ‘Z’ Empty Bags

Kgs. Kgs. Nos.
Production Requirements 2.5 7.5 1.0
Per bag of ‘X’
Requirement for Production 1,15,000 3,45,000 46,000
(46,000 × 2.5) (46,000 × 7.5) (46,000 × 1)
Add: Desired Closing Stock 26,000 47,000 28,000
Total Requirements 1,41,000 3,92,000 74,000
Less: Opening Stock 32,000 57,000 37,000
Quantity to be purchased 1,09,000 3,35,000 37,000
Cost per Kg./Bag `1.20 ` 0.20 ` 0.80
Cost of Purchase (`) 1,30,800 67,000 29,600

(iii) COMPUTATION OF BUDGETED VARIABLE COST OF PRODUCTION OF ONE BAG

OF ‘X’

Particulars (`)
Raw – Material
Y 2.5 Kg @1.20 3.00
Z 7.5 Kg. @0.20 1.50

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 4.48 Advanced Management Accounting

Empty Bag 0.80

Direct Labour (` 5 × 9 minutes / 60 minutes) 0.75
Variable Manufacturing Overheads 0.45
Variable Cost of Production per bag 6.50

(iv) STATEMENT OF BUDGETED NET INCOME FOR THE SECOND QUARTER

Particulars Per Bag Total

(`) (`)
Sales Value (50,000 Bags) 9.00 4,50,000
Less: Variable Cost:
Production Cost 6.50 3,25,000
Admn. & Selling Expenses (5% of Sales Price) 0.45 22,500
Budgeted Contribution 2.05 1,02,500
Less: Fixed Expenses:
Manufacturing 30,000
Admn. & Selling 25,000
Budgeted Net Income 47,500

Question-15
Chetak Ltd. produces and markets three products - Chairs, Tables and Benches. The
company is interested in presenting its budget for the next quarter ending 31st March, 2014. It
expects to sell 4,200 Chairs, 800 Tables and 500 Benches during the said period at the selling
price of ` 50, ` 85 and ` 158 per unit respectively. The following information are made
available for the purpose.
(i) Material and Labour requirements:
Particulars Chairs Tables Benches
Timber per unit (in cu. ft.) 0.50 1.20 2.50
Upholstery per unit (in sq. yds.) 0.25 --- ---
Carpenter’s time (minutes per unit) 45 60 75
Fixer and Finisher’s time (minutes per unit) 15 15 30

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 Budget & Budgetary Control 4.49

Timber costs ` 50 per cu. ft. and Upholstery costs ` 20 per sq. yd. Fixing and Finishing
materials costs 5% of the cost of Timber and Upholstery. Carpenter gets ` 6 per hour
while the Fixer and Finisher gets ` 4.80 per hour.
(ii) Inventory Levels planned:
Particulars Timber Upholstery Chairs Tables Benches
(Cu. Ft.) (Sq. Yds.) (Nos.) (Nos.) (Nos.)
Opening 600 400 400 100 50
Closing 650 260 200 300 50
(iii) Fixed Overheads would be ` 8,000 per month.
You are required to:
(a) Prepare a ‘Production Budget’ showing quantities to be manufactured.
(b) Prepare a ‘Raw Materials Purchase Budget’ in quantities as well as in rupees.
(c) Draw a ‘Direct Wages Cost Budget’.
(d) Present a ‘Statement of Variable Cost of Manufacture’ per unit of all three products.
(e) Find out the ‘Budgeted Net Income’ for the said quarter.

Solution:

(a) PRODUCTION BUEGET (IN UNITS)

Particulars Chairs Tables Benches
Units to be Sold 4,200 800 500
Add: Planned Cl. Stock 200 300 50
Less: Planned Opening Stock 400 100 50
Units to be Manufactured 4,000 1,000 500

(b) RAW MATERIALS PURCHASE BUDGET (IN QUANTITIES)

Particulars Timber Upholstery
(Cft.) (Sq. Yds.)
Materials required for Production (W.N. 1) 4,450 1,000
Add: Planned Closing Stock 650 260
Less: Planned Opening Stock 600 400
Raw Materials to be Purchased 4,500 860

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 4.50 Advanced Management Accounting

MATERIAL PURCHASE BUDGET (IN `)

Particulars Quantities to be Rate Amount
Purchased (`) (`)
Timber (Cft.) 4,500 50 2,25,000
Upholstery (Sq. Yds) 860 20 17,200
Total 2,42,200

(c) DIRECT WAGES COST BUDGET

Particulars Total Rate p.h. Amount
(Hrs.) (`) (`)
Carpenter’s Time and Wages (W.N. 1) 4,625 6.00 27,750
Fixer and Finisher’s Time and Wages (W.N.1 ) 1,500 4.80 7,200
Total 34,950

(d) STATEMENT OF VARIABLE COST (PER UNIT)

Particulars Chairs Tables Benches
(`) (`) (`)
Raw Materials:
Timber 25.00 60.00 125.00
(0.50 × ` 50) (1.20 × ` 50) (2.50 × ` 50)
Upholstery 5.00 ----- -----
(0.25 × ` 20)
Fixing and Finishing (W.N. 2) 1.50 3.00 6.25
Wages:
Carpenter 4.50 6.00 7.50
(` 6 × 45/60) (` 6 × 60/60) (` 6 × 75/60)
Fixer and Finisher 1.20 1.20 2.40
(` 4.80 × 15/60) (` 4.80 × 15/60) (` 4.80 × 30/60)
Total Variable Cost (per unit) 37.20 70.20 141.15

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 Budget & Budgetary Control 4.51

(e) BUGETED NET INCOME STATEMENT FOR THE QUARTER

Particulars Chairs Tables Benches Total
(`) (`) (`) (`)
Selling Price per unit (`) 50.00 85.00 158.00
Less: Variable Cost per unit (`) 37.20 70.20 141.15
Contribution per unit (`) ...(A) 12.80 14.80 16.85
Units to be Sold ...(B) 4,200 800 500
Total Contribution (`) ...(A) x (B) 53,760 11,840 8,425 74,025
Less: Fixed Cost (`) 24,000
Budgeted Net Income (`) 50,025

Working Notes:
1. Requirements as to Raw Materials Carpenter’s Time and Fixer’s and Finisher’s Time
Particulars Chair Tables Benches Total
Units to be Manufactured 4,000 1,000 500
Timber (Ctf.) 2,000 1,200 1,250 4,450
(4,000 × 0.50) (1,000 × 1.20) (500 × 2.50)
Upholstery (Sq. Yds.) 1,000 ----- ----- 1,000
(4,000 × 0.25)
Carpenter’s Time (Hrs.) 3,000 1,000 625 4,625
(4,000 × 45 / 60) (1,000 × 1) (500 × 75 / 60)
Fixer and Finisher’s Time (Hrs.) 1,000 250 250 1,500
(4,000 × 15/60) (1,000 × 15/60) (500 × 30/60)

2. Fixing and Finishing Material Cost (per unit)

Particulars Chair Tables Benches
(`) (`) (`)
Total Cost of Timber and 30 60 125
Upholstery
Fixing and Finishing Material 1.50 3.00 6.25
Cost (5% of total cost of timber (` 30 × 5/100) (` 60 × 5/100) (` 125 × 5/100)
and upholstery)

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 4.52 Advanced Management Accounting

Question-16
A Company is engaged in manufacturing two products ‘KX’ and ‘KY’. Product ‘KX’ uses one
unit of component ‘KP’ and two units of component ‘KQ’. Product ‘KY’ uses two units of
component ‘KP’, one unit of component ‘KQ’ and two units of component ‘KR’. Component
‘KR’ which is assembled in the factory uses one unit of component ‘KQ’.
Component ‘KP’ and ‘KQ’ are purchased from the market. The company has prepared the
following forecast of sales and inventory for the next year:
Particulars Product ‘KX’ Product ‘KY’
Sales (in units) 40,000 75,000
At the end of the year 5,000 10,000
At the beginning of the year 15,000 25,000
The production of both the products and the assembling of the component ‘KR’ will be spread
out uniformly throughout the year. The company at present orders its inventory of ‘KP’ and
‘KQ’ in quantities equivalent to 3 months production. The company has compiled the following
data related to two components:
Particulars ‘KP’ ‘KQ’
Price per unit (`) 40 16
Order placing cost per order (`) 3,000 3,000
Carrying cost per annum 10% 10%

Required:
(a) Prepare a Budget of production and requirements of components during next year.
(b) Suggest the optimal order quantity of components ‘KP’ and ‘KQ’.

Solution:

PRODUCTION BUDGET FOR PRODUCT X AND Y

Particulars ‘KX’ ‘KY’
Units Units
Inventory at the end of the year 5,000 10,000
Sales forecast 40,000 75,000
Total requirements 45,000 85,000
Less: Beginning inventory 15,000 25,000
Production 30,000 60,000

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 Budget & Budgetary Control 4.53

BUDGETED REQUIREMENTS OF COMPONENTS ‘KP’, ‘KQ’ AND ‘KR’

Components ‘KP’ ‘KQ’ ‘KR’
For Product ‘KX’: Production 30,000 units
‘KP’: 30,000 × 1 per unit 30,000 − −
‘KQ’: 30,000 × 2 per unit − 60,000 −
For Product ‘KY’: Production 60,000 units
‘KP’: 60,000 × 2 per unit 1,20,000 − −
‘KQ’: 60,000 × 1 per unit − 60,000
‘KR’: 60,000 × 2 per unit − − 1,20,000
For comp ‘KR’: Production 1,20,000 comp
‘KQ’: 1,20,000 × 1 per component ‘KR’ − 1,20,000 −
Total Requirements 1,50,000 2,40,000 1,20,000
OPTIMUM ORDER QUANTITY
‘KP’ ‘KQ’
2 × 1,50,000 × 3,000 2 × 2,40,000 × 3,000
EOQ
40 × 10% 16 × 10%
= 15,000 components = 30,000 components

Question-17
Bintan-Indo Manufacturers Ltd. (BIML) is specialist in the manufacturing of Industrial Products.
They manufacture and market two types of products under the name ‘X’ and ‘Y’. Company
produces two products from three basic raw materials ‘A’, ‘B’, and ‘C’. Company follows a 13-
period reporting cycle for budgeting purpose. Each period is four weeks long and has 20
working days. Data relating to the purchase of raw materials are presented below:
Raw Purchase Standard Reorder Projected Inventory Status Lead Time
Material Price Purchase Point at the end of 5th period (Kg) in Working Days
(Per Kg) Lot (Kg) (Kg) On Hand On Order
A ` 1.00 90,000 72,000 96,000 90,000 10
B ` 2.00 30,000 45,000 54,000 - 25
C ` 1.00 60,000 60,000 84,000 60,000 20

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 4.54 Advanced Management Accounting

Past experience has shown that adequate inventory levels for ‘X’ and ‘Y’ can be maintained if
40 percent of the next period’s projected sales are on hand at the end of a reporting period.
Other relevant information is as follows:
Product Raw Material Specifications Projected Inventory Projected Sales
Levels
A B C At the end of 6th 7th 8th
current (5th ) period Period Period Period
Kg Kg Kg Units Units Units Units
X 1.25 0.50 - 18,000 45,000 52,500 57,000
Y 2.00 - 1.50 16,800 42,000 27,000 24,000
The sales of ‘X’ and ‘Y’ do not vary significantly from month to month. Consequently, the
safety stock incorporated into the reorder point for each of the raw materials in adequate to
compensate for variations in the sales of the finished products.
Raw materials orders are placed the day the quantity on hand falls below the reorder point.
BIML’s suppliers are very trustworthy so that the given lead times are reliable.
The outstanding orders for raw materials ‘A’ and ‘C’ are due to arrive on the 10th and 4th
working day of the 6th period, respectively. Payments for all raw material orders are remitted
by the 10th day of the delivery.
You are required to determine the following items for raw materials ‘A’, ‘B’, and ‘C’ for
inclusion in the 6th period report to management:
(a) Projected quantities (in Kg) to be issued to production.
(b) Projected quantities (in Kg) ordered and the date (in terms of working days) the order is
to be placed.
(c) The projected inventory balance (in Kg) at the end of the period.
(d) The payments for purchases with due date.

Solution:

Projected Raw Material Issues (Kg):

‘A’ ‘B’ ‘C’

‘X’ (48,000 units-Refer Note) 60,000 24,000 ---
‘Y’ (36,000 units-Refer Note) 72,000 --- 54,000
Projected Raw Material Issues 1,32,000 24,000 54,000

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 Budget & Budgetary Control 4.55

Note:

− Based on this experience and the projected sales, the BIML has budgeted
production of 48,000 units of ‘X’ and 36,000 units of ‘Y’ in the sixth period.
= 52,500 × 40% + 45,000 – 18,000
= 48,000
= 27,000 × 40% + 42,000 – 16,800
= 36,000
− Production is assumed to be uniform for both products within each four-week period.
Projected Inventory Activity and Ending Balance (Kg):
Particulars ‘A’ ‘B’ ‘C’
Average Daily Usage 6,600 1,200 2,700
Beginning Inventory 96,000 54,000 84,000
Orders received:
Ordered in 5th period 90,000 - 60,000
Ordered in 6th period 90,000 - -
Sub Total 276,000 54,000 144,000
Issues 132,000 24,000 54,000
Projected ending inventory balance 144,000 30,000 90,000

Note:
− Ordered 90,000 Kg of ‘A’ on fourth working day.
− Order for 90,000 Kg of ‘A’ ordered during fifth period received on tenth working day.
− Order for 90,000 Kg of ‘A' ordered on fourth working day of sixth period received on
fourteenth working day.
− Ordered 30,000 Kg of ‘B’ on eighth working day.
− Order for 60,000 Kg of ‘C’ ordered during fifth period received on fourth working day.
− No orders for ‘C’ would be placed during the sixth period.

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 4.56 Advanced Management Accounting

Projected Payments for Raw Material Purchases:

Raw Material Day/Period Day/Period Quantity Amount Day/Period

Ordered Received Ordered Due Due
‘A’ 20th/5th 10th /6th 90,000 Kg ` 90,000 20th/6th
‘C’ 4th/5th 4th /6th 60,000 Kg ` 60,000 14th/6th
‘A’ 4th/6th 14th /6th 90,000 Kg ` 90,000 4th/7th
‘B’ 8th/6th 13th /7th 30,000 Kg ` 60,000 3rd /8th

Budgeted Financials
Question-18
Star Ltd. manufactures two products A and B. The summarised Balance Sheet of the
company as at 31st March, 2012 is as under :–
Equity and Liabilities (`)
Shareholder’s funds
Share Capital 12,00,000
Reserve and Surplus 96,000
Current Liabilities
Trade Payables 48,000
Short-Term Provisions
Provision for Income Tax 60,000
Total 14,04,000
Assets (`)
Non-Current Assets
Fixed Assets (Net) 9,00,000
Current Assets
Inventories 3,54,000
Trade Receivables 90,000
Cash and Cash Equivalents 60,000
Total 14,04,000
The following information has been furnished to you for the preparation of the budget for the
st
year ending 31 March, 2013:–

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 Budget & Budgetary Control 4.57

(i) Sales forecast :–

Product A 24,000 units at ` 30 per unit.
Product B 15,000 units at ` 40 per unit.
(ii) Raw Materials :–
Particulars Products
A B
Material X @ ` 3 per kg. 2 kgs. 4 kgs.
Material Y @ ` 1 per kg. 1 kg. 2 kgs.
(iii) Direct Labour:–
Dep. P : 2 Hrs @ ` 1 per hour for A.
1 Hrs. @ ` 2 per hour for B.
Dep. Q: 1 Hrs. @ ` 3 per hour for A
1 Hrs. @ ` 3 per hour for B.
(iv) Overheads :–
Particulars Dept. P Dept. Q
(`) (`)
Fixed Overheads per annum :–
Depreciation 48,000 12,000
Others 96,000 30,000
Variable Overheads per hour 0.50 1.50
(v) Inventories :–
(a) Raw Materials :
Opening Stock
X 36,000 kgs.
` 1,14,000
Y 6,000 kgs.
Closing Stock
X 48,000 kgs.
Y 12,000 kgs.
(b) Finished Goods :
Opening Stock

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 4.58 Advanced Management Accounting

A 600 Units
` 2,40,000
B 6,000 Units
Closing Stock
A 6,600 units
B 3,000 units
(vi) Selling, Distribution and Administration expenses are estimated at ` 1,80,900 per
annum.
(vii) The cost of raw material purchases, direct wages, factory overheads, selling,
distribution and administration overheads of the year will be met in full in cash during
the year. The estimated position of debtors and creditors as on 31st March, 2013 is `
1,50,000 and ` 48,000 respectively. Income tax provision standing at the beginning of
the year will be paid during the year. Rate of income tax is 30%. An equipment
purchased at ` 1,20,000 will be paid during the year.
You are required to prepare for the year ending 31st March, 2013:
(a) Cost of Goods Sold Budget.
(b) Cash Budget.
st
(c) Projected Balance Sheet as at 31 March, 2013 in the same format as given in the
question.
The detailed working for each of the above should be shown.

Solution:

Working Notes:
1. Production Budget (Units)
Particulars A B
Sales 24,000 15,000
Add : Closing Stock 6,600 3,000
Total 30,600 18,000
Less : Opening Stock 600 6,000
Production 30,000 12,000

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 Budget & Budgetary Control 4.59

2. Direct Material Cost

Particulars A B Total
(`) (`) (`)
Material X @ ` 3 per Kg. 6 12
Material Y @ ` 1 per Kg. 1 2
Material Cost (per unit) …(a) 7 14
Production (units) …(b) 30,000 12,000
Direct Material Cost (`) …(a) x (b) 2,10,000 1,68,000 3,78,000

3. Direct Labour Cost

Particulars A B Total
(`) (`) (`)
Dept. P : 2 hr @ ` 1 per hr. for A 2
1 hr. @ ` 2 per hr. for B 2
Dept. Q : 1 hr. @ ` 3 per hr. for A 3
1 hr. @ ` 3 per hr. for B 3
Direct Labour Cost (per unit) …(a) 5 5
Production (units) …(b) 30,000 12,000
Direct Labour Cost (`) …(a) x (b) 1,50,000 60,000 2,10,000
4. Direct Labour Hours
Particulars Dept. P Dept. Q
A: P 30,000 × 2 hrs Q 30,000 × 1 hr. 60,000 30,000
B: P 12,000 × 1 hrs Q 12,000 × 1 hr. 12,000 12,000
Total 72,000 42,000

5. Overhead Recovery Rate

Particulars Dept. P Dept. Q
Fixed Overheads: (`) (`)
Depreciation 48,000 12,000
Others 96,000 30,000
Total 1,44,000 42,000
Direct Labour Hours 72,000 42,000
Fixed Overhead (rate per hr.) …(a) 2.00 1.00

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 4.60 Advanced Management Accounting

Variable Overhead (rate per hr.) …(b) 0.50 1.50

Total Overhead (rate per hr.) ...(a) + (b) 2.50 2.50

6. Overhead Expenses
Particulars Dept P Dept Q Total
(`) (`) (`)
Fixed (other than Depreciation) 96,000 30,000
Variable
[72,000 hr × ` 0.50; 42,000 hr × ` 1.50] 36,000 63,000

Total Overheads (other than 1,32,000 93,000 225,000

Depreciation) …(a)
Depreciation …(b) 48,000 12,000 60,000
Total Overheads …(a) + (b) 1,80,000 1,05,000 285,000

7. Cost Sheet
Particulars Products
A B Total
(`) (`) (`)
Direct Material (per unit) 7.00 14.00
Direct Wages (per unit) 5.00 5.00
Overhead (per unit) [Dept. P] 5.00 2.50
[Dept. Q] 2.50 2.50
Total Cost (per unit) ...(a) 19.50 24.00
Production …(b) 30,000 12,000
Total Cost …(a) × (b) 5,85,000 2,88,000 8,73,000

8. Sales
Particulars (`)
A 24,000 units × ` 30 7,20,000
B 15,000 units × ` 40 6,00,000
Total 13,20,000

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 Budget & Budgetary Control 4.61

9. Trade Receivables
Particulars (`)
Opening Balance 90,000
Add: Sales 13,20,000
Total 14,10,000
Less: Closing Balance 1,50,000
Cash Receipts 12,60,000

10. Raw Material

Particulars Material Total
X Y
(Kg.) (Kg.) (`)

Consumption for ‘A’ 60,000 30,000

Consumption for ‘B’ 48,000 24,000
Total Consumption 1,08,000 54,000
Add: Closing Stock 48,000 12,000
Total 1,56,000 66,000
Less: Opening Stock 36,000 6,000
Material to be Purchase 1,20,000 60,000
Purchase Price per Kg. `3 `1
Purchase Value (`) 3,60,000 60,000 4,20,000

11. Trade Payables

Particulars (`)
Opening Balance 48,000
Add: Purchases 4,20,000
Total 4,68,000
Less: Closing Balance 48,000
Paid 4,20,000

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 4.62 Advanced Management Accounting

12. Inventories as on 31.03.2013

Particulars (`)
Raw Material : ‘X’ 48,000 units × ` 3 = `1,44,000 1,56,000
‘Y’ 12,000 units × ` 1 = `12,000
Finished Goods : ‘A’ 6,600 × ` 19.50 = `1,28,700 2,00,700
‘B’ 3,000 × ` 24.00 = `72,000

13. Fixed Assets as at 31.03.2013

Particulars (`)
Opening Values of Fixed Assets 9,00,000
Add: Additions 1,20,000
Less: Depreciation 60,000
9,60,000

Computation of Requirements of Question

(a) Cost of Goods Sold Budget

Particulars (`)
Direct Materials (Note 2) 3,78,000
Direct Wages (Note 3) 2,10,000
Overheads (Note 6) 2,85,000
Total 8,73,000
Add : Opening Stock (Balance Sheet) 2,40,000
Total 11,13,000
Less: Closing Stock (Note 12) 2,00,700
Cost of Goods sold 9,12,300

(b) Cash Budget

Particulars (`)
Opening Balance (Balance Sheet) 60,000
Receipts (Note 9) 12,60,000
Total Receipts …(A) 13,20,000
Payments :

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 Budget & Budgetary Control 4.63

Creditors (Note 11) 4,20,000

Direct Wages (Note 3) 2,10,000
Overheads (Note 6) 2,25,000
Selling, Distribution and Administration Expenses 1,80,900
Income Tax 60,000
Capital Expenditure 1,20,000
Total Payments …(B) 12,15,900
Closing Balance …(A) – (B) 1,04,100
(c) Projected Balance Sheet as at March, 31, 2013
Equity and Liabilities (`)
Shareholder’s Funds
Share Capital 12,00,000
Reserve and Surplus* 2,54,760
Current Liabilities
Trade Payables 48,000
Short-term Provisions
Provision for Income Tax 68,040
Total 15,70,800
Assets (`)
Non-Current Assets
Fixed Assets (Net) 9,60,000
Current Assets
Inventories 3,56,700
Trade Receivables 1,50,000
Cash and Cash Equivalents 1,04,100
Total 15,70,800
* Reserve & Surplus
Particulars (`)
Sales (Note 8) 13,20,000
Less: Cost of Goods Sold 9,12,300

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 4.64 Advanced Management Accounting

Gross Profit 4,07,700

Less: Selling Dist. & Admn. Expenses 1,80,900
Profit before tax 2,26,800
Less: Provisions for tax (30%) 68,040
Profit after tax 1,58,760
Add: Opening Balance of Reserve & Surplus 96,000
Closing Balance of Reserve Surplus 2,54,760

Budget Variance
Question-19
Sterling Works Ltd. has at the factory three production Departments, Machine Shop,
Fabrication and Assembly which are the responsibility of the shop Superintendent. The shop
superintendent along with Materials Manager, Planning Superintendent and Maintenance
Engineer report to the Works Manager at the factory. The office administration, sales and
publicity come under the sales Manager who along with the Works Manager report to the
Managing Director of the Company. The following data relating to a month’s performance are
culled out from the books of the company:

Particulars Budget Variance from Budget

(`) (`)

Sales Commission 800 50 A

Raw Material & Components
– Machine Shop 900 20 A
Publicity Expenses 1,100 100 A
Printing & Stationery 3,200 200 F
Travelling Expenses 4,000 200 A
Wages – Machine Shop 800 10 F
– Fabrication 600 20 A
– Assembly 720 10 A
Material – Assembly 760 40 A
– Fabrication 460 10 A

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 Budget & Budgetary Control 4.65

Utilities – Machine shop 320 10 A

– Assembly 470 60 F
– Fabrication 560 30 F
– Maintenance 400 20 A
– Stores 210 40 F
– Planning 180 20 A
Shop Superintendent’s Office
– Salaries & Expenses 1,100 22F
Depreciation – Factory 3,880 40A
Works Manager’s Office
– Salaries & Administration 3,810 40 A
General Office Salaries & Administration 4,270 30 A
Managing Director’s Salary & 2,800 20 F
Administration

(i) Treating the Machine shop, Fabrication and Assembly as Cost Centres, prepare Cost
Sheets for each centre with the help of this addition information :
The shop superintendent devotes his time amongst Machine shop, fabrication and
Assembly in the ratio 4 : 3 : 4. Other Factory Overheads are absorbed on the basis of
Direct Labour in each Cost centre.
Office, Administration, Selling and Distribution Overheads are borne equally by the Cost
Centres.
(ii) Treating Machine shop, Fabrication and Assembly as Responsibility Centres prepare a
Responsibility Accounting report for the shop Superintendent.

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 4.66 Advanced Management Accounting

Solution:

(i) COST SHEET FOR MACHINE SHOP, FABRICATION AND ASSEMBLY TREATING
THEM AS COST CENTRES

Particulars Machine Shop Fabrication Assembly

Budget Actual Budget Actual Budget Actual
(`) (`) (`) (`) (`) (`)
Raw Material 900 920 460 470 760 800
and Components
Wages 800 790 600 620 720 730
Utilities 320 330 560 530 470 410
Prime Cost 2,020 2,040 1,620 1,620 1,950 1,940
Shop Superintendent’s 400 392 300 294 400 392
Office Salary &
Expenses (4 : 3 :4)
Other Factory 3,200 3,160 2,400 2,480 2,880 2,920
Overheads (W. N. 1)
Factory Cost 5,620 5,592 4,320 4,394 5,230 5,252
Administration, Selling 5,390 5,443 5,390 5,443 5,390 5,444
& Distribution
Overheads (W. N. 2)
Total Cost 11,010 11,035 9,710 9,837 10,620 10,696

Working Notes:

Particulars Budget Actual

(`) (`)
(1) Factory Overheads :
Maintenance 400 420
Stores 210 170
Planning 180 200
Depreciation 3,880 3,920

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 Budget & Budgetary Control 4.67

Works Establishment 3,810 3,850

Total 8,480 8,560
Percentage on Direct Labour 400% 400%
⎛ 8,480x100 ⎞ ⎛ 8,560x100 ⎞
⎜ 2,120 ⎟ ⎜ 2,140 ⎟
⎝ ⎠ ⎝ ⎠
(2) Administration, Selling and Distribution
Overheads :
Sales Commission 800 850
Publicity 1,100 1,200
Printing & Stationery 3,200 3,000
Travelling 4,000 4,200
General Office Establishment 4,270 4,300
Managing Director’s Establishment 2,800 2,780
16,170 16,330

(ii) RESPONSIBILITY ACCOUNTING REPORTS FOR THE MACHINE SHOP,

FABRICATION AND ASSEMBLY AS REASONABILITY CENTRES.

Budget Actual Variance

(`) (`) (`)
A. Machine shop
Material 900 920 20 A
Labour 800 790 10 F
Utilities 320 330 10 A
Total A 2,020 2,040 20 A
B. Fabrication
Material 460 470 10 A
Labour 600 620 20 A
Utilities 560 530 30 F
Total B 1,620 1,620 -----
C. Assembly
Materials 760 800 40 A

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 4.68 Advanced Management Accounting

Labour 720 730 10 A

Utilities 470 410 60 F
Total C 1,950 1,940 10 F
Total (A+B+C) 5,590 5,600 10 A

Note: As shop superintendent’s office – salaries and expenses included his salary also,
it has been assumed that these are not controlled by him, hence not included.

Budget Ratio
Question-20
A company manufactures two products X and Y. Product X requires 8 hours to produce while
Y requires 12 hours. In April, 2004, of 22 effective working days of 8 hours a day, 1,200 units
of X and 800 units of Y were produced. The company employs 100 workers in production
department to produce X and Y. The budgeted hours are 1,86,000 for the year.
Calculate Capacity, Activity and Efficiency ratio and establish their relationship.

Solution:
Particulars Standard Hours Produced
Product X Product Y Total
Output (units) 1,200 800
Hours per unit 8 12
Standard Hours 9,600 9,600 19,200

Actual Hours Worked: (100 workers × 8 hours × 22 days) 17,600

Budgeted Hours per month: (1,86,000 / 12) 15,500
Actual Hours 17,600
Capacity Ratio = × 100 = 113.55%
Budgeted Hours 15,500

Standard Hours Produced 19,200

Efficiency Ratio = ×100 = ×100 109.09%
Actual Hours 17,600

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 Budget & Budgetary Control 4.69

Standard Hours Produced 19,200

Activity Ratio = ×100 = ×100 123.87%
Budget Hours 15,500

Relationship: Activity Ratio = Efficiency Ratio × Capacity Ratio

109.09 × 113.55
= 123.87%
100

Question-21
If the ‘activity ratio’ and ‘capacity ratio’ of a company are 104% and 96% respectively, find out
its ‘efficiency ratio’

Solution:

The various ratios are calculated as under:

Standard Hours (for actual production)
(i) Activity Ratio = × 100
Budgeted Hours

Actual Hours (worked)

(ii) Capacity Ratio = × 100
Budgeted Hours

Standard Hours (for actual production)

(iii) Efficiency Ratio = × 100
Actual Hours (worked)

From the above, it is clear that the efficiency Ratio can be obtained by dividing Activity Ratio
by Capacity Ratio.
Activity Ratio
Efficiency Ratio (in percentage) = × 100
Capacity Ratio

104%
= × 100 = 108.33%
96%

Question-22
Calculate from the following figures:

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 4.70 Advanced Management Accounting

(i) Efficiency ratio,

(ii) Activity, Ratio and
(iii) Capacity Ratio:
Budgeted Production 880 units
Standard Hours per unit 10
Actual Production 750 units
Actual Working Hours 6,000

Solution:

Standard Hours (for actual production)

(i) Efficiency Ratio = ×100
Actual Hours (worked)

750 units × 10 hrs.

= × 100 = 125%
6,000 hrs.
Standard Hours (for actual production)
(ii) Activity Ratio = ×100
Budgeted Hours

750 units × 10 hrs.

= × 100 = 85.23%
880 units × 10 hrs.
Actual Hours (worked)
(iii) Capacity Ratio = ×100
Budgeted Hours

6,000 hrs.
= × 100 = 68.18%
880 units × 10 hrs.

Question-23
ABC Ltd. has produced the following figures relating to production for the week ended 27th Jan
Production (in units)
Budgeted Actual
Product A 800 800
Product B 800 600
Product C 200 280

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 Budget & Budgetary Control 4.71

Standard production times were:

Standard hours per unit
Product A 10
Product B 5
Product C 2
During the week, 11,200 hours were worked on production. You are required to calculate the
production volume ratio and efficiency ratio for the week ended 27st Jan.

Solution:

S tandardHoursPr oduced
Production Volume Ratio = x100
BudgetedHours
(800x10) + (600x5) + (280x2)
= x100 = 93.23%
(800x10) + (800x5) + (200x2)
S tandardHoursPr oduced
Efficiency Ratio = x100
ActualHours
(800x10) + (600x5) + (280x2)
= x100 = 103.21%
11,200

Miscellaneous
Question-24
Aakar Ltd. furnishes you the following information relating to four varieties of products
manufactured by them during the year 2011
A B C D
Output (units) 32,000 20,000 16,000 24,000
` Per Unit
Selling Price 300 600 750 500
Direct Materials 60 140 160 60
Direct Wages 50 80 150 60
Variable Overhead 100 160 300 120
Fixed Overhead 100 160 300 120

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 4.72 Advanced Management Accounting

Anticipation of the company for the Budget for the year 2012 is as follows:
(a) Expected increments are as follows in pursuant of Inflation:
(i) Direct Material 10%
(ii) Direct Wages 20%
(iii) Variable Overheads 20%
(b) Fixed Overhead will increase by `160,000
(c) The market will take up an increase of 10% in the price, if Volume of Sales in
quantities is maintained at the same level as in the year 2011
In order to fight inflation the Marketing Team puts forth the following proposals:
(a) Product A: The price of product A will be further increased by 20% (making in all a total
increase of 30%) resulting thereby in a reduction in the volume of Sales by 10%
(b) Product B: Substitution on direct materials of product B by cheaper materials will bring
about a reduction in direct material cost by `30 per unit. This will reduce the sales
volume in units by10%.
(c) Product C: An allowance of special sales commission of 4% on the increased price on
all quantities sold will increase the sales volume by 20%
(d) Product D: A reduction in selling price by 10% on the price of 2011 will yield an
increase in sales volume by 30%
The direct labour hour rate in 2011 is `4.00 per hour and the number of direct labour hours
cannot be increased in the year 2012.
You are required to:
(a) Present a statement showing Profitability for the year 2011.
(b) Prepare a budget for the year 2012 after taking into consideration the effects of
inflation in costs and prices only.
(c) Evaluate the proposals put forth by the Marketing Team and set an optimum product
mix after taking into consideration the inflation in costs and prices but subject to the
constraint of available labour hours.

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 Budget & Budgetary Control 4.73

Solution:

(a) Statement of profit of 2011

A B C D Total
Sales Units 32,000 20,000 16,000 24,000 92,000
(`In Lacs)
Sales 96.00 120.00 120.00 120.00 456.00
Direct Material 19.20 28.00 25.60 14.40 87.20
Direct Wages 16.00 16.00 24.00 14.40 70.40
Variable Overhead 32.00 32.00 48.00 28.80 140.80
Variable Cost 67.20 76.00 97.60 57.60 298.40
Contribution 28.80 44.00 22.40 62.40 157.60
Fixed Overhead 32.00 32.00 48.00 28.80 140.80
Profit/(Loss) (3.20) 12.00 (25.60) 33.60 16.80

Direct Labour Hours per

Unit 12.50 20.00 37.50 15.00
Direct Labour Hours
Required 400,000 400,000 600,000 360,000 1,760,000
(b) Statement of Budget 2012 (After Impact of Inflation)
A B C D Total
Sales Units 32,000 20,000 16,000 24,000 92,000
(`In Lacs)
Sales 105.60 132.00 132.00 132.00 501.60
Direct Material 21.12 30.80 28.16 15.84 95.92
Direct Wages 19.20 19.20 28.80 17.28 84.48
Variable Overhead 38.40 38.40 57.60 34.56 168.96
Variable Cost 78.72 88.40 114.56 67.68 349.36
Contribution 26.88 43.60 17.44 64.32 152.24
Fixed Overhead (140.80+1.60) 142.40
Profit/(Loss) 9.84

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 4.74 Advanced Management Accounting

A B C D Total
Direct Labour Hours 400,000 400,000 600,000 360,000 1,760,000
Contribution per Labour
Hour (`) 6.72 10.90 2.91 17.87 8.65
(c) Statement of Profit 2012 on the basis of Proposals of Marketing Team
A B C D Total
Sales Units 28,800 18,000 19,200 31,200 97,200
(`In Lacs)
Sales 112.32 118.80 158.40 140.40 529.92
Less: Commission --- --- 6.34 --- 6.34
Net Sales 112.32 118.80 152.06 140.40 523.58
Direct Material 19.01 22.32 33.79 20.59 95.71
Direct Wages 17.28 17.28 34.56 22.46 91.58
Variable Overhead 34.56 34.56 69.12 44.93 183.17
Variable Cost 70.85 74.16 137.47 87.98 370.46
Contribution 41.47 44.64 14.59 52.42 153.12
Fixed Overhead 142.40
Profit/(Loss) 10.72

A B C D Total
Labour Hrs.
Required 3,60,000 3,60,000 7,20,000 4,68,000 1,908,000
Contribution per
Labour Hours (`) 11.52 12.40 2.03 11.20
Revised Position on the basis of the ‘Proposal of Marketing Team’ and Product Mix
after taking into consideration the ‘Inflation in Costs and Prices’ but subject to the
‘Constraint of Available Labour Hours’.
A B C* D* Total
Sales Units 28,800 18,000 16,000 24,000 86,800
(` In Lacs)
Sales 112.32 118.80 132.00 132.00 495.12
Less:
Commission --- --- --- --- ---

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 Budget & Budgetary Control 4.75

Net Sales 112.32 118.80 132.00 132.00 495.12

Direct Material 19.01 22.32 28.16 15.84 85.33
Direct Wages 17.28 17.28 28.80 17.28 80.64
Variable
Overhead 34.56 34.56 57.60 34.56 161.28
Variable Cost 70.85 74.16 114.56 67.68 327.25
Contribution 41.47 44.64 17.44 64.32 167.87
Fixed Overhead 142.40
Profit/(Loss) 25.47

A B C D Total
Labour Hrs
Required 360,000 360,000 600,000 360,000 1,680,000
Contribution per
Labour Hour (`) 11.52 12.40 2.91 17.87

*By following the strategy of Marketing Team, Contribution per Labour Hour has
reduced in case of Product C & D. Therefore strategy of Marketing Team should be
followed in Case of Product A&B only.

Question-25
“It's frustrating working with Denial. He’s very dominant and expects everything to be done his
way. We have done more and better work to get up to budget, and the minute we make it he
tightens the budget on us. We can’t work any faster and still maintain quality. We always seem
to be interrupting the big jobs for all those small rush orders. The accountants seem to know
everything that’s happening in my department, sometimes even before I do. I thought all that
budget and accounting stuff was supposed to help, but it just gets me into trouble. I’m trying to
put out quality work; they’re trying to save money. This is a dead end job. I don't see much of
a future here.” said Mr. Singh, manager of the machine shop of Global Mfg. Ltd. a UK based
Company.
Mr. Singh had just attended the monthly performance evaluation meeting for plant department
heads. These meetings had been held on the third Friday of each month since Mr. Denial,
MBA from Manchester University, had joined the Indian operations a year earlier. Mr. Singh
had just been given the worst evaluation he had ever received in his long career with Global
Mfg. Ltd. He was the most respected of the experienced machinists in the company. Old Plant
Manager had often stated that the company’s success was due to the high quality of the work
of machinists like Mr. Singh. He had been with Global Mfg. Ltd. for many years and was
promoted to supervisor of the machine shop when the company expanded and moved to its

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 4.76 Advanced Management Accounting

present location. As supervisor, Mr. Singh stressed the importance of craftsmanship and told
his workers that he wanted no careless work coming from his department.
When Mr. Denial became the plant manager, he directed that monthly performance
comparisons be made between actual and budgeted costs for each department. The
departmental budgets were intended to encourage the supervisors to reduce inefficiencies and
to seek cost reduction opportunities. The company controller was instructed to have his staff
‘tighten’ the budget slightly whenever a department attained its budget in a given month; this
was done to reinforce the plant supervisor’s desire to reduce costs. Mr. Denial often stressed
the importance of continued progress toward attaining the budget; he also made it know that
he kept a file of these performance reports for future reference.
You are required to identify the problems which appear to exist in budgetary control system
and explain how budgetary control system could be revised to improve the effectiveness.

Solution:

The budgetary control system appears to have several very important shortcomings which
reduce its effectiveness and may in fact cause it to interfere with good performance. Some of
the shortcomings are explained below.
Lack of Coordinated Goals: Mr. Singh had been led to believe high quality output is the goal;
it now appears low cost is the goal. He does not know what the goals are and thus cannot
make decisions which lead toward reaching the goals.
Influences of Uncontrollable Factors: The actual performance relative to budget is greatly
influenced by uncontrollable factors i.e. rush orders. Thus, the variance reports serve little
purpose for evaluation of performance.
The Short-Run Perspectives: The monthly evaluation and the budget tightening on a monthly
basis result in a very short-run perspective. This will result in inappropriate decisions.
The improvements in the budgetary control system must correct the deficiencies described
above. Accordingly:
− Budgetary control system must more clearly define the company’s objectives.
− Budgetary control system must develop an accounting reporting system which better
matches controllable factors with supervisor responsibility and authority.
− Establish budget values for appropriate time periods which do not change monthly simply as
a result of a change in the prior month’s performance.
The entire company from top management down must be educated in sound budgetary
procedures so that all parties will understand the total process and recognize the benefit to be
gained.

© The Institute of Chartered Accountants of India