BUDGETARY CONTROL SYSTEM AND VARIANCE

ANALYSIS OF ZAFA PHARMACEUTICAL

Jeewat Kumar1* (Corresponding Author)

BS-Student, Sukkur IBA University
+92-347-1037802

Jotti Bai2
BS-Student, Sukkur IBA University
+92-315-3449375
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ZAFA PHARMACEUTICALS LABORATORIES (PVT) Ltd.

Abstract

Budgeting is a major tool of planning with which organizations plan their activities to achieve
their targets for the specified period. In those activities, each person involved in a team will be
consistent with outcomes at each level. To achieve the targets, multiple budgetary controls are to
be taken. In addition to this, the number of budget proposals has to be approved and achieved at
each level through a bottom-up approach. By using this tool, companies can estimate their costs
as well as revenue. Not only this, but they can track business performance with the help of
estimated operating costs and income.

Budgeting provides the understanding of organizational financial health through the analysis of
actual outcomes with the budgeted ones. Organizations use budgets for knowing the loopholes in
the organization that hinders achieving financial success. Whereas, without budgeting,
companies are like flying blind and will be unable to take corrective actions for improving the
business performance because they do not have the proper outcomes at each level.

This case gives a clear understanding of the importance of budgeting. Not only this, but it shows
how each person is responsible for the outcomes provided by each level of the organization.
Budgets can be of different types but this case will provide the understanding of a flexible budget
and its need in the organization so that an organization can track and achieve its projected
targets effectively.

Objectives of the case

1) To learn the importance of budgeting in an organization.

2) To learn about the responsibility of accounting in budgeting.
3) To learn about responses to different outcomes.
4) To learn the budgetary controls used in organizations.
5) To gain a clear understanding of the flexible budget and variance analysis.
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Target group

This case is for the students of management and cost accounting studying in the undergraduate
business program with a specialization in accounting and finance.

Keywords: variance analysis, budgets, accounting, budgetary controls, overheads, materials,

significant product.
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ZAFA PHARMACEUTICALS LABORATORIES (PVT) Ltd.

In the early winter morning, taking a cup of tea, Mr. Muhammad Amin was reading a newspaper
in which his eye stopped on news of Feroz and Brothers Company, which was suffering from
severe business losses. That news reminded and clicked his mind that previously they had
planned and managed everything of the company with the expectation of 34% profit, but the
actual profit earned was 7%, over the fact that the company had targeted sales was 25% more
than the previous one but the actual increase in sales was 15%, so he thought to know the actual
causes that which particular area is underperforming. For that, he needs to look at the
performance of all areas in relation to the budget. He thought about assigning this task to his
General Assistant Manager- Sharmin shah. So, he called him to meet him tomorrow early in the
morning. Then he called his secretary to present the budgeting points of the year.

ZAFA is the first Pakistan-based multinational company with its manufacturing facility working
in Khartoum Sudan, founded by its current chairman and chief executive, Mr. Muhammad Amin
Khan. ZAFA laboratories believe in the theory of "Medicines for All1” which they follow while
setting up the price. Its current product range is more than 400 and 13 products are leading in
the market of Pakistan based on per unit sales. However, its major sales are generated from the
sales of Aminoglycoside-based medicines. Aminoglycoside-based medicine sales are 48% of the
total sales of the Zafa laboratories. Aminoglycoside is a drug also known as an antibiotic. It also
includes other antibiotics, such as “gentamicin” as well as “Amikacin”. Aminoglycoside
belongs to the bacterial-based group and is used for the treatment of infections in the abdomen,
endocarditis as well as urinary tract. Zafa laboratories offer a wide variety of medicines made
up of aminoglycoside.

While looking at the beginning, ZAFA laboratories started with the initial investment of Rest.
200000/- and now this is one of the multi-billion enterprises with 6 state of the art of plants.

The next day, Mr. Shah reported to the office. Mr. Main informed him about the actual task and
provided him with budgetary points, which elaborated on the main points for the budgeting.
1
Mission of Zafa
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1. The pricing strategy was the major part of the decision-making. As the company has
decided to reduce prices by 0.75 percent, which will affect the sales and the expected
effect was about to boost up the sales up to 25%. In the previous year, the price per
medicine was Rs. 350, which was thought to have decreased to Rs. 348, and the sales in
the previous year were 40 million and expectations were about 46 million.
2. A systematic process improvement was planned and implemented this year which will
improve the efficiency of Amikacin(as sulfate) by 5 percent and Sodium Metabisulfite by
7 percent. Moreover, due to competition in suppliers and excess supply in the market, it is
expected that the price of Amikacin(as sulfate) will be reduced by 4 percent and Sodium
Metabisulfite by 10 percent.
3. The average cost of distilled water is reduced by 50 percent because of the opening of a
new plant of an existing vender near the factory.
4. Additionally, for cost optimization, a company announced the need for a new vendor for
labeling and packaging in which they have got a vendor with good quality material. A
new vendor is proposing a 2 percent discount than the previous vendor with good quality
material.
5. By looking at the expected increase in sales, the company has decided to increase the
wage rate by 3 percent by including incentives for the employees which ultimately helps
to increase the sales of the company and also satisfy the employees. With the 3% increase
in the wage, it is expected that the efficiency of labor will increase by 1%.
6. With the increase in production of extra units than the previous year, the direct expenses
are expected to be increased by 8 percent and other variable overheads by 7 percent due
to inflation.
7. Fixed costs including travel expenses and general administrative expenses will not be
affected, as the company is working within its capacity.

Along with these budgetary points, Mr. Shah was provided with the actual performance of the
previous and this year provided in Exhibit 1. And he was required to provide a detailed report
about where the loopholes lie and whom to punish and whom to reward, and also the variance so
that improvement could be made in those areas, in the coming meeting of this month.
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In the meeting, Mr. Shah provided them with a flexible budget and variance where the
improvements could be made.

Assignment Questions:

1. How would you help Mr. Shah to analyze data for the meeting?

2. What do you think, whethee the flexible budget has added value to the Zafa

Pharmaceuticals?
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Exhibit 1

Actual Performance Actual Performance

Year 2018-2019 Year 2019-2020

Particulars Q/unit Qty Avg Value Q/unit Qty Avg Value

OF Rate OF Rate
sale Q sale Q
Sales of Amikasin- 40,000 350 14,000,000 46,000 348 16,008,000
base

Cost

Amikacin(as the 30 1,200,000 2.0 2,400,000 29 1,334,000 2.1 2,801,400

sulfate)

Sodium Metabisulfite 40 1,600,000 3.5 5,600,000 36.5 1,679,000 4.1 6,883,900

Distilled Water 30 1,200,000 0.1 120,000 30 1,380,000 0.055 75,900

Total input cost 8,120,000 9,761,200

Labeling and 1 40,000 3.5 140,000 1 46,000 3.5 161,000

packaging
Direct wages hours 0.1 4,000 50 200,000 0.1 4,600 49 225,400

Direct Expenses 40,000 0.5 20,000 46,000 0.55 25,300

Other variable 40,000 1 40,000 46,000 1.04 47,840

overheads
Fixed overheads

Salary 500,000 500,000

Travel expenses 100,000 100,000

General and Admin 75,000 75,000

expenses
Selling and 280,000 280,000
Distribution expenses
Cost of Sales 9,475,000 11,175,740

Profit 4,525,000 4,832,260