Suneeta Laboratories Ltd.

Indore (Madhya Pradesh) India

Branch: Cost and Management Accounting
Tool: Budgeting, Budgetary Control and Variance Analysis

Abstract
Budgeting is a significant function in organizations which operate with a policy of planning activities
and attempt to achieve targets as set in the budget through those activities. While planning such
activities, every person responsible to deliver results is involved in the process and is enabled to own
the targets set by the organization for his/her function for the specified period. This is achieved by
facilitating the generation of budget proposals at the lowest level and taken to the top in hierarchy
through bottom-up approach. This process helps instill a sense of ownership in the minds of
functional people working at different levels and they sincerely contribute in keeping their
performance in line with the budget prepared and willingly agreed upon by them.

Budgetary control operates as an effective tool of monitoring and control in routine and specific
functions throughout the organization. With the help of this, top management is assured of achieving
organizational goals and measuring performance of functions objectively.

The present case highlights the importance of budget which incorporates in it every aspect of
organization with the understanding that it has a definite bearing upon the performance of people. It
also highlights the role a static and flexible budget play through budgetary control. When an effective
budgetary control is in place, top management banks upon targets set.

Learning objectives

Objectives of this case are to help students:

1. To learn about significance of a budget in an organisation.

2. To learn using budget figures for effective management planning and control.
3. To learn about budgetary control and Variance Analysis process.
4. To learn about utility of static and flexible budget.
5. To learn about responsibility accounting for taking corrective actions.
 A Case Study on
Suneeta Laboratories Ltd. Indore (Madhya Pradesh) India
Branch: Cost and Management Accounting
Tool: Budgeting and Budgetary Control

“Dr. Nimgaonkar, you would perhaps recollect, actual performance of our organisation for the year
2012-13 was not very encouraging and therefore we all had decided to look into various aspects of
operations which sounded to be responsible for drop in profitability for the period. You would also
remember, we had chalked out a plan for improvement in workers efficiency by which our plant
utilisation could have been increased and we could offer more volume to customers by retaining same
sale price at least for one year, although, I know, the trend for such product is on downward side and
retaining the price with increasing volume would not be that easy.”

Suneeta Laboratories Ltd. Indore was engaged in manufacturing anti-malarial drugs and was
contributing to the National Malaria Eradication Programme (NMEP) undertaken by the
Government of India and also sold a part of its production volume in open market to various
hospitals and druggists. Dr. Subhash Bhaskar, the Managing Director of the organisation wanted to
bring in improvements in all-round operations and better performance in the next year.

“Process improvement was another target we had set for bringing in savings in input consumption;
along with it, we had also agreed for a stronger vendor development drive which seemed to be an
immediate necessity for a better purchase management. Keeping in view all these considerations made
by us, you told me that the profitability which was budgeted for the year recently completed on 31 st
March, 2014, was up at least by 1.15% points over the actual performance of the year 2012-13. Now
actual profitability for the year 2013-14, as shown by Mr. Rajpurohit, which works out somewhere
around 10%, is shocking indeed. You would appreciate, I had made a declaration in last Board
meeting, “we will earn what we had budgeted”. Do you think, functional people are not concerned
about seriousness of budget or there are other reasons leading to such a lackluster? If so, we need to
analyse in details, why it is not happening what is expected? I hope you as the Plant Head would be
equally concerned about all this as I am”.

Dr. Bhaskar was worried about actual performance of the organisation and was sharing his concerns
with Dr. Nimgaonkar, Chief Executive Officer of the Company.

The CEO, after discussing with Finance Controller, Mr. Rajpurohit, met Dr. Bhaskar in the afternoon
next day and briefed him about forecast points which were included in budget for the year 2013-14.
He wanted to convince MD that:

(1) A plan for training the workers was chalked out to be implemented in the month of February,
2013 and also a schedule was prepared for improving erratic working conditions at work
places in the same month which would have a combined effect of increase in efficiency of
workers by 5% in the year 2013-14. In addition, it was also decided to run the plant 10 days
more to increase utilisation of capacity for a larger volume and revenue by selling the product
AMQ BASE. Plant was operated for 350 days in the year 2012-13 for 24 hours. The CEO was
optimistic to sell increased volume by retaining same price in the year 2013-14 which
prevailed in previous year.

(2) A systematic process improvement plan was chalked out and was ready to be undertaken
since 1st February, 2013 till 15th March, 2013, which would result in a 5% saving of material
N FARM consumption during the year 2013-14 over actual consumption of previous year.
E However, the Purchase Manager apprehended for a rise in price of the material by 4% during
O the year.

(3) As the supply of another input DEOFARM could not be stabilized due to uneven quality, it
was estimated that the consumption may rise by around 3% while on account of a systematic
and persistent vendor development programme which was undertaken in the last quarter of
2012-13, a saving in rate was confirmed in 2013-14 at 6% over average rate of previous year
for the material.

(4) Although, no change in packing material consumption pattern was admitted, an increase in
the rate of packing box was found inevitable by 2% over average price of the year 2012-13.

(5) The efforts for improvement in workers’ efficiency were quantified to be a gain by 5% while
the periodic agreement (becoming due after every three years) became due in the year 2013-
14 as a result of which an increase in labour cost was estimated by 8%.

(6) Direct expenses were estimated to be costlier by 10% in the year 2013-14 over previous year
expenses while other variable overheads were thought to be controllable and was decided to
keep them within an increase of maximum 6% over previous years cost. Dr. Bhaskar was of
the view that all processing chemicals which have a little value compared to other raw
material cost should be clubbed in direct expenses.

(7) Although, the company is known to be a good pay-master and declares a minimum 12% rise
in salary every year, managers and other staff people were convinced to manage with a
maximum rise in salary by 6% this year with a hope that something better would be offered in
the year 2014-15 if the performance of the organisation improves in the year 2013-14.

(8) It was unanimously decided by all functional heads to keep all other fixed overheads exactly
same at the level of the year 2012-13.

When Dr. Nimgaonkar discussed above points with Dr. Bhaskar at length, the latter developed a hope
that the profitability would surely show an improvement which was a fact as the it showed an increase
of above 1%age point over previous period; this was not a significant figure, however, it was an
indication of an improvement which was a smoothening factor.

When this discussion was going on, Mr. Rajpurohit also joined the discussion who had come with
actual performance data for the completed year 2013-14 which showed a profitability of 9.98% as
against budget of 13.07% for the same period. Although, Mr. Rajpurohit had shown variances
between budget data and actual performance data to both Dr. Bhaskar and Dr. Nimgaonkar, they
could not reach any conclusion in respect of exact variance as compared to the budget and also in
respect of weaknesses in specific areas where improvements could be brought in future.

On being asked by the MD, the Finance Controller submitted to him a paper which consisted of data
of actual performance of the year 2012-13 which Dr. Bhaskar always referred to as the base document
for casting the budget for the year 2013-14 as a tool for management control. To support his
conclusions, Mr. Rajpurohit also furnished data on actual performance for the year 2013-14 as
shown in Exhibit: 1.
Finally, when Mr. Rajpurohit analysed the data as given in Exhibit:1, MD and CEO had a clear clue
about specific areas where the improvements were highly warranted, although, a further gap analysis
into minutest reasons was entrusted to Mr. Rajpurohit for discussion in a special meeting which was
convened three days later.

Assignment:

(1) How could you help Mr. Rajpurohit to analyse data for the scheduled meeting; also indicate
remedial steps for next budget year.
(2) Whether, according to you, a flexible budget has added value to management of Suneeta
Laboratories Limited?
Exhibit:1 Quantity in Kg; Rate
and Value in Indian Rupees
Actual Performance Actual Performance
2012-‐13 2013-‐14
Qty per Qty per
unit of Avg. unit of Avg.
Particulars sale qty Qty Rate Value sale qty Qty Rate Value
Sale of the product (AMQ
BASE-‐ kg) 50,400 140.00 70,56,000 50,000 137.00 68,50,000
Cost
Input-‐NEOFARM 0.7500 37,800 85.00 32,13,000 0.7100 35,500 86.00 30,53,000
Input-‐DEOFARM 0.3000 15,120 65.48 9,90,058 0.3200 16,000 62.00 9,92,000
Total input cost 42,03,058 40,45,000
Packing material 1.0000 50,400 5.99 3,01,896 1.0000 50,000 6.11 3,05,490
Direct wages-‐Hours 0.1667 8,400 40.00 3,36,000 0.1800 9,000 44.00 3,96,000
Direct expenses 50,400 1.00 50,400 50,000 0.90 45,000
Other variable overheads 50,400 1.40 70,560 50,000 1.40 70,000
Fixed overheads
Salary 9,95,000 10,54,700
Travel expenses 1,00,000 90,000
Administration overheads 65,000 65,000
Selling and distribution
overheads 95,000 95,000
Cost of Sales 62,16,914 61,66,190
Profit 8,39,086 6,83,810