CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A.

AGRAWAL

CHAPTER-15
BUDGET AND
BUDGETARY CONTROL
TABLE OF CONTENTS:
1. Concept of Budget and Budgetary Control
2. Objectives
3. Budgetary Control Aspects
4. Classification of Budgets
5. Presentation of Information in Functional Budget
6. Flexible Budgeting
7. Budgets – Flow Chart
8. Practical Problem
9. Past Exam Theory Questions

1. CONCEPT OF BUDGET AND BUDGETARY CONTROL

A Budget has been defined by I.C.M.A London terminology as “A Financial and / or quantitative statement
prepared and approved prior to a definite period of time of the policy to be pursued during that period
for the purpose of attaining a given objective. It may include income, expenditure and the employment
of capital.”
It is a predetermined detailed plan of actions developed and distributed as a guide to current operations and as
a partial basis for subsequent evaluation of performance.
The budget system is both a ‘Plan’ as well as ‘Control‘ and therefore it also includes within its broad scope
‘Budgetary Control‘. It is an exact and rigorous analysis of the past and the probable and desired future
expectations.
Thus, Budget is concerned with policy making, while Budgetary Control results from the implementation of the
policy.
Budgetary Control system includes -
i. Preparation of budgets,
ii. Co-ordination between the departments and establishing the responsibilities,
iii. Comparison of actual performance with that of budget and acting upon results to achieve maximum
profitability.
A budget is therefore a formal expression of policies, plans, objectives and goals laid down in advance by the
top management for the undertaking as whole and for every sub-division thereof.

2. OBJECTIVES

1. To co-ordinate seasonal variations in production and sales

2. To co-ordinate the activities of various divisions/departments as per company policies
3. To establish divisional and departmental responsibilities
4. To forecast operating activities and financial position
5. To provide a method of measurement of operational efficiency.
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6. To aid for better use of infrastructure facilities
7. To centralise control and decentralise operational responsibilities
8. To reveal variations of actual performance from budgetary performance through a process of
“Management by exception”.

3. BUDGETARY CONTROL ASPECTS

1. KEY FACTOR: It represents some powerful or influential factor which so dominates business operations
as to present obstacles in the achievement of the ambitions contained in the functional budgets. It is
therefore necessary to assess the impact of this factor at the beginning of this budgetary process.
It is also known as limiting factor or principal budget factor. It may be production or demand or any
other factor (e. g. Material, Labour, Machinery, Money, etc.) which affects profit maximisation. A master
budget should be prepared keeping in view the principal budget factor. The key factor is not necessarily a
permanent factor. It is often a temporary one. In the long run it may be possible for the management to
overcome the limitations imposed by the key factor.

2. BUDGET CENTRE: It is said that cost can be controlled at the point of incurrence. The suitable areas of
control therefore have to be selected. The area chosen should conform to the responsibilities of
executives. A budget which refers to a budget centre is a departmental budget. A budget centre may
consists of number of cost centres.

3. CHART OF ACCOUNTS: A close co-operation between the budgeting and accounting functions is
essential. The budget department depends on the accounts department for reliable historical data. The
chart of accounts is the principal means by which the operating plan are translated into monetary budget
values. The budget procedures must involve precisely the same chart of accounts and the same
classification of income and expenditure as of the account department. Thus chart of accounts and
classification of amounts recorded must be consistent.

4. BUDGET PERIOD: The period covered by a budget is known as ‘ Budget Period ‘. There is no general rule
governing the selection of the budget period. The length of the budget period depends upon the nature of
plan and circumstances of business. For control purposes, the budget period may be divided into shorter
periods. Operational budgets are normally prepared annually.

5. ORGANISATIONAL CHART: It highlights the functional responsibilities of each member of the

management team, making responsible for him to know his position in the organisation hierarchy, as
also his relationship with other members.

6. BUDGET COMMITTEE: In large companies a budget committee is often established to formulate a

general programme for preparing budget and exercising overall control.

7. BUDGET MANUAL: A budget manual is a schedule, document or booklet which shows in written forms
the budgeting organisation and procedures. It serves as a guide for departmental heads.

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4. CLASSIFICATION OF BUDGET

5. PRESENTATION OF INFORMATION IN FUNCTIONAL BUDGETS

1. Sales Budget:
* Products or group of products
* Areas, town, salesman and agents etc.
* Type of customers (viz. Government, Home Sales, Retail Department, Export, etc.)
* Period - Months, Quarter, etc.
* Quantity and sale value

2. Production Budget:
* Products or group of products
* Unit-wise Production
* Inventory level of finished stock
* Seasonal variations

3. Plant Utilisation Budget:

* Hours / units of plant facilities
* Machine-wise details
* Normal / Extra-working hours
* Availability of surplus hours

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4. Raw Materials Usage / Purchase Budget:
10. Research and Development Cost Budget:
* Raw material Consumption
* Classification into suitable heads
* Inventory levels
* Product-wise analysis
* Quality standards
* Method of write off
* Economic order quantity for purchases

11. Capital Expenditure Budget:

5. Direct Labour Cost Budget:
* Classification of assets
* Different grades of labour requirement
* Specifications
* Wage rate fixations
* Means of finance
* Normal / overtime working hours
* Timings

6 to 8. Overhead Cost Budgets:

12. Cash Budget:
* Classification into suitable heads
* Receipts and payments (month-wise)
* Method of recovery of overheads
* Classification into suitable heads
* Classification into fixed and variable
* Opening and closing balances
* Area-wise expenditure (viz. Sales)
* Surplus / Deficit funds
* Time lag in receipt and payments
9. Cost of Goods Sold Budget:
* Non-recurring items
* Product-wise analysis
13. Master Budget:
* Unit-wise analysis
* Budgetary / Income statement
* Cost of Production
* Budgetary Balance Sheet
* Inventories at the beginning and at the end
* Cost of production of goods sold
* Overheads
* Cost of Goods Sold

6. FLEXIBLE BUDGETING

Flexible budget is a budget, which recognises the difference in behaviour between fixed and variable costs in
relation to fluctuations in output, turnover, or other variable factors It is designed to change in relation to the
activity attained. The flexible budget is based on the fundamental difference in behaviour of fixed costs,
variable costs and semi-variable costs. Since fixed costs don’t vary with short-term fluctuations in activity, the
flexible budget really consists of two parts: The first is a fixed budget being made up of fixed costs and fixed
component of semi-variable costs. The second part is a truly flexible budgeting that consists solely of variable
costs.
Flexible budgets assume linearity of costs and therefore take no account of, for example, discount for bulk
purchase of materials. Labour costs are unlikely to behave in a linear fashion unless a piecework scheme is in
operation. Inspite of these limitations flexible budgets are an important aid in decision making as it enable an
organisation to predict its performance and income levels at a given range of sales level and activity levels. The
impact of changes in sales and production level can be seen on revenue, expenses and ultimately on income
with the help of flexible budgets. But the Flexible budget is accurate only if costs behave in a predicted manner.

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8. PRACTICAL PROBLEMS

Q1. Production and Purchase Budget REG. PAGE NO.

Peko Electronics is manufacturing for sale, four models of Television Sets. 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 style (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 @ Rs. 200. X @ Rs. 200. 5 “ Cone @ Rs. 300. OWN
Deluxe B @ Rs. 300. X @ Rs. 200. 5 “ Cone @ Rs. 300. BEL @ Rs. 1200
Aristocrat C @ Rs. 500. Y @ Rs. 300. 6 “ Cone @ Rs. 400. BEL @ Rs. 1200
Royal D @ Rs. 700. Y @ Rs. 300. 12 “ Cone @ Rs. 600. TELTUBE @ Rs. 1600
The company expect the following inventories in hand on 1st July:
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 for the quarter, July-September, will be
Model Quantity
Standard 200
Deluxe 600
Aristocrat 500
Royal 300
The following inventory quantities have been budgeted for 30th September:
Finished Sets : 25 in each type
Sub-assemblies:
Cabinet - 15 (each type)
Transformers - 20 (each type)
Speakers - 30 (each type)
Picture Tube - OWN - 30; BEL - 40; TELTUBE - 20
You are required to prepare the production and purchase budget for the various items stated above for
the quarter July September.

Q2. Purchase and Labour Budget REG. PAGE NO.

Concorde Ltd. manufactures two products using two types of material and one grade of labour. Shown
below is an extract from the company’s working paper for the next period’s budget:
Product A Product B
Budgeted sales (units) 2,400 3,600

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 Budgeted material consumption per product (kg.)
Material-X 5 3
Material-Y 4 6
Standard hours allowed per product 3 5

Material-X and Material-Y costs Rs. 4 and Rs.6 per kg. respectively and labours are paid Rs. 25 per hour.
Overtime premium is 50% and is payable, if a worker works for more than 40 hours a week. There are
180 direct workers.
The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct workers
in actually manufacturing the products is 80%, in addition the non-productive down time is budgeted at
20% of the productive hours worked.
There are four 5 days weeks in budget period and it is anticipated that sales and production will occur
evenly throughout the whole period.
It is anticipated that the stock at the beginning of the period will be:
Product A: 400 units Product B: 200 units
Material-X: 1,000 Kgs. Material-Y: 500 Kgs.

The anticipated Closing stock for the budgeted period is as follows:

Product A: 4 days sale Product B: 5 days sale
Material-X: 10 days consumption Material-Y: 6 days consumption

Required to calculate the material purchase budget and wages budget for the direct workers, showing
the quantities and the value for the next month.

Q3. Production, Purchase and Labour Budget REG. PAGE NO.

A Company is engaged in manufacture of specialized sub-assemblies required for certain electronic
equipment. The company envisages that in the forthcoming month, December, the sales will take a
pattern in the ratio of 3: 4: 2 respectively of sub-assemblies, ACB, MCB and DP.
The following is schedule of components required for manufacture:
Component Requirement
Sub-assembly Selling price Base board IC08 IC12 IC26
ACB 520 1 8 4 2
MCB 500 1 2 10 6
DP 350 1 2 4 8
Purchase price (Rs.) 60 20 12 8
The direct labour hours and variable overhead cost required for each of the sub-assemblies are:
Labour hours Variable overhead
per sub-assembly per sub assembly
Grade A Grade B (Rs.)
ACB 8 16 36
MCB 6 12 24
DP 4 8 24
Direct wage rate per hour (Rs.) 5 4 -

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The labourers work 8 hours a day for 25 days a month.
The opening stock of sub-assemblies and component for December, are as under:
Sub-assemblies Components
ACB 800 Base Board 1,600
MCB 1,200 IC08 1,200
DP 2,800 IC12 6,000
IC26 4,000
Fixed overheads amount to Rs. 7,57,200 for the month and a monthly profit target of Rs. 12 lacs has been
set.
The company is eager for reduction of closing inventories for December, of sub-assemblies and
components by 10% of quantity as compared to the opening stock.
Prepare the following budgets for December:
(a) Sales budget in quantity and value assuming sales mix given is (i) sales value mix (ii) sales quantity
mix
Solve part (b) to (e) assuming sales quantity mix.
(b) Production budget in quantity
(c) Component usage budget in quantity
(d) Component purchase budget in quantity and value
(e) Manpower budget showing the number of workers and the amount of wages payable.

Q4. Production Budget REG. PAGE NO.

AK Limited produces and sells a single product. Sales budget for calendar year
Quarters I II III IV
No. of units to be sold 18,000 22,000 25,000 27,000
The year is expected to open with an inventory of 6,000 units of finished products and close with
inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current quarter's
sales demand plus 30% of the following quarter demand. The budgeted selling price per unit is Rs. 40.
The standard cost details for one unit of the product are as follows:
Variable Cost Rs. 34.50 per unit.
Fixed Overheads 2 hours 30 minutes @ Rs. 2 per hour based on a budgeted production volume of
1,10,000 direct labour hours for the year. Fixed overheads are evenly distributed through-out the year.
You are required to:
(i) Prepare Quarterly Production Budget for the year.
(ii) In which quarter of the year, company expected to achieve break-even point.

Q5. Production Budget REG. PAGE NO.

Jigyasa Ltd. is drawing a production plan for its two products Minimax (MM) and Heavyhigh (HH) for the
year 20X3-X4. The company’s policy is to hold closing stock of finished goods at 25% of the anticipated
volume of sales of the succeeding month. The following are the estimated data for two products:
PARTICULARS MINIMAX (MM) HEAVYHIGH (HH)
Budgeted Production (Units) 1,80,000 1,20,000
Direct Material Cost / Unit Rs. 220 Rs. 280

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 Direct Labour Cost / Unit Rs. 130 Rs. 120
Manufacturing Overehads Rs. 4,00,000 Rs. 5,00,000
The estimated units to be sold in the first four months of the year 2018-19 are as under –
PARTICULARS APRIL MAY JUNE JULY
MINIMAX (MM) 8,000 10,000 12,000 16,000
HEAVYHIGH (HH) 6,000 8,000 9,000 14,000
Prepare monthly Production budget for the first quarter.

Q6. Flexible Budget REG. PAGE NO.

Action Plan Manufacturers normally produce 8,000 units of their product in a month, in their Machine
Shop. For the month of January, they had planned for a production of 10,000 units. Owing to a sudden
cancellation of a contract in the middle of January, they could only produce 6,000 units in January.
Indirect manufacturing costs are carefully planned and monitored in the Machine Shop and the Foreman
of the shop is paid a 10% of the savings as bonus when in any month the indirect manufacturing cost
incurred is less than the budgeted provision. The Foreman has put in a claim that he should be paid a
bonus of Rs. 88.50 for the month of January. The Works Manager wonders how anyone can claim a bonus
when the company has lost a sizeable contract. The relevant figures are as under:
IND. MFD. EXP. FOR A PLANNED FOR ACTUAL FOR
EXPENSE HEAD
NORMAL MONTH JANUARY JANUARY
Salary of Foreman 1,000 1,000 1,000
Indirect Labour 720 900 600
Indirect Material 800 1,000 700
Repairs and Maintenance 600 650 600
Power 800 875 740
Tools Consumed 320 400 300
Rates and Taxes 150 150 150
Depreciation 800 800 800
Insurance 100 100 100
TOTAL 5,290 5,875 4,990
Do you agree with work’s manager? Is the foreman entitles to any bonus for the performance in January ?
Substantiate your answer with facts and figures.

Q7. Flexible Budget REG. PAGE NO.

Goodluck Ltd. is currently operating at 75% of its capacity. In the past two years, the level of operations
were 55% and 65% respectively. Presently, the production is 75,000 units. The company is planning for
85% capacity level during 2009-2010. The cost details are as follows:
55% 65% 75%
Rs. Rs. Rs.
Direct Materials 11,00,000 13,00,000 15,00,000
Direct Labour 5,50,000 6,50,000 7,50,000

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Factory Overheads 3,10,000 3,30,000 3,50,000
Selling Overheads 3,20,000 3,60,000 4,00,000
Administrative Overheads 1,60,000 1,60,000 1,60,000
24,40,000 28,00,000 31,60,000
Profit is estimated @ 20% on sales.
The following increases in costs are expected during the year:
In percentage
Direct Materials 8
Direct Labour 5
Variable Factory Overheads 5
Variable Selling Overheads 8
Fixed Factory Overheads 10
Fixed Selling Overheads 15
Administrative Overheads 10
Prepare flexible budget for the period 2009-2010 at 85% level of capacity. Also ascertain profit and
contribution.

Q8. Flexible Budget REG. PAGE NO.

The Cost Sheet of a Company based on a budgeted volume of Sales of 3,00,000 units per quarter is as
under:
Rs. per unit
Direct Materials 5.00
Direct Wages 2.00
Factory overheads (50% fixed) 6.00
S/Adm. overheads (1/3 variable) 3.00
Selling Price 18.000
When the budget was discussed it was felt that the company would be able to achieve only a volume of
2,50,000 units of production and sales per quarter. The company therefore decided that an aggressive
sales promotion campaign should be launched to achieve the following improved operations:
Proposal I:
- Sell 4,00,000 units per quarter by spending Rs. 2,00,000 on special advertising.
- The factory fixed costs will increase by Rs. 4,00,000 per quarter.
Proposal II:
- Sell 5,00,000 units per quarter subject to the following conditions.
- An overall price reduction of Rs. 2 per unit is allowed on all sales.
- Variable Selling and Administration Costs will increase by 5%.
- Direct Material Costs will be reduced by 1% due to purchase price discounts.
- The fixed factory Costs will increase by Rs. 2,00,000 per quarter more, as compared to proposal I.
You are required to prepare a Flexible Budget at 2,50,000, 4,00,000 and 5,00,000 units of output per
quarter and calculate the Profit at each of the above levels of out put.

Q9. Flexible Budget REG. PAGE NO.

A factory which expects to operate 7,000 hours, i.e., at 70% level of activity, furnishes details of expenses
as under:
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 Variable expenses Rs. 1,260
Semi-variable expenses Rs. 1,200
Fixed expenses Rs. 1,800
The semi-variable expenses go up by 10% between 85% and 95% activity and by 20% above 95%
activity. Construct a flexible budget for 80, 90 and 100 per cent activities.
Solution:
Head of Account Control basis 70% 80% 90% 100%
Budgeted hours 7,000 8,000 9,000 10,000
Rs. Rs. Rs. Rs.
Variable expenses V 1,260 1,440 1,620 1,800
Semi-variable expenses SV 1,200 1,200 1,320 1,440
Fixed expenses F 1,800 1,800 1,800 1,800
Total expenses 4,260 4,440 4,740 5,040
Recovery rate per hour 0.61 0.55 0.53 0.50
Conclusion:
We notice that the recovery rate at 70% activity is Re. 0.61 per hour. If in a particular month the factory
works 8,000 hours, it will be incorrect to estimate the cost as Rs. 4,880 @ 0.61. The correct allowance
will be Rs. 4,440 as shown in the table. If the actual expenses are Rs. 4,500 for this level of activity, the
company has not saved any money but has over-spent by Rs. 60 (Rs. 4,500 – Rs. 4,440).

Q10. Flexible Budget REG. PAGE NO.

A department of Company X attains sale of Rs. 6,00,000 at 80 per cent of its normal capacity and its
expenses are given below:
Administration costs: Rs.
Office salaries 90,000
General expenses 2 per cent of sales
Depreciation 7,500
Rates and taxes 8,750
Selling costs:
Salaries 8 per cent of sales
Travelling expenses 2 per cent of sales
Sales office expenses 1 per cent of sales
General expenses 1 per cent of sales
Distribution costs:
Wages 15,000
Rent 1 per cent of sales
Other expenses 4 per cent of sales
Draw up flexible administration, selling and distribution costs budget, operating at 90 per cent, 100 per
cent and 110 per cent of normal capacity.
Solution: Flexible Budget of Department....of Company ‘X
Expenses Basis Level of activity
80% 90% 100% 110%
Rs. Rs. Rs. Rs.

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(1) (2) (3) (4) (5) (6)
Sales 6,00,000 6,75,000 7,50,000 8,25,000
Administration costs:
Office salaries Fixed 90,000 90,000 90,000 90,000
General expenses 2% of sales 12,000 13,500 15,000 16,500
Depreciation Fixed 7,500 7,500 7,500 7,500
Rates & taxes Fixed 8,750 8,750 8,750 8,750
Total administration costs 1,18,250 1,19,750 1,21,250 1,22,750
Selling costs:
Salaries 8% of sales 48,000 54,000 60,000 66,000
Travelling expenses 2% of sales 12,000 13,500 15,000 16,500
Sales office expenses 1% of sales 6,000 6,750 7,500 8,250
General expenses 1% of sales 6,000 6,750 7,500 8,250
Total selling costs: 72,000 81,000 90,000 99,000
Distribution costs:
Wages Fixed 15,000 15,000 15,000 15,000
Rent 1% of sales 6,000 6,750 7,500 8,250
Other expenses 4% of sales 24,000 27,000 30,000 33,000
Total Distribution Cost 45,000 48,750 52,500 56,250
Total Admn., Selling & Dist. Costs 2,35,250 2,49,500 2,63,750 2,78,000
Note: In the absence of information it has been assumed that office salaries, depreciation, rates and taxes
and wages remain the same at 110% level of activity also. However, in practice some of these costs may
change if present capacity is exceeded.

Q11. Flexible Budget REG. PAGE NO.

The expenses budgeted for production of 10,000 units in a factory are furnished below:
Rs. Per unit
Material 70
Labour 25
Variable overheads 20
Fixed overheads (Rs. 1,00,000) 10
Variable expenses (direct) 5
Selling expenses (10% fixed) 13
Distribution expenses (20% fixed) 7
Administration expenses (Rs. 50,000) 5
Total 155
Prepare a budget for the production of (a) 8,000 units, and (b) 6,000 units.
Assume that administration expenses are rigid for all levels of production.
Solution: Flexible Budget for the period ……..
6,000 units 8,000 units 10,000 units
Per unit Total Per unit Total Per unit Total
Rs. Rs. Rs. Rs. Rs. Rs.

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 Materials 70.00 4,20,000 70.00 5,60,000 70.00 7,00,000
Labour 25.00 1,50,000 25.00 2,00,000 25.00 2,50,000
Direct exp.(variable) 5.00 30,000 5.00 40,000 5.00 50,000
Variable overhead 20.00 1,20,000 20.00 1,60,000 20.00 2,00,000
Fixed overhead 16.67 1,00,000 12.50 1,00,000 10.00 1,00,000
Selling exp.: Fixed 2.17 13,000 1.63 13,000 1.30 13,000
Variable 11.70 70,200 11.70 93,600 11.70 1,17,000

Distribution exp.:
Fixed 2.33 14,000 1.75 14,000 1.40 14,000
Variable 5.60 33,600 5.60 44,800 5.60 56,000
Adm. Exp.: Fixed 8.33 50,000 6.25 50,000 5.00 50,000
Total Cost 166.80 10,00,800 159.42 12,75,400 155.00 15,50,000

Working Notes:
1. Material, labour, direct expenses and variable overheads are variable costs and do not change per
unit. Total amount changes in proportion to the number of units produced.
2. Fixed overhead total amount remains at Rs. 1,00,000 at all levels of output. Per unit fixed overhead
is Rs. 1,00,000 divided by the number of units produced.
3. Adm. Expenses are also fixed. It is calculated in the same manner as fixed overhead.
4. Selling expenses are 10% fixed when output is 10,000 units i.e., Rs. 13,000 (Rs. 1.30 × 10,000
units). Variable selling expenses per unit are 90% of Rs. 13 i.e. Rs. 11.70. Total fixed cost of Rs.
13,000 remains the same at each level and per unit is calculated by dividing Rs. 13,000 by the
number of units at each level. Variable selling expenses per unit is Rs. 11.70 which remains the
same at each level. Total variable selling expenses are calculated by multiplying Rs. 11.70 by the
number of units at each activity level.
5. Distribution expenses are calculated in the same way as selling expenses.

Q12. Flexible Budget REG. PAGE NO.

A factory is currently working at 50 per cent capacity and produces 10,000 units. Estimate the profits of
the Company when it works to 60 per cent and 80 per cent capacity assuming that the company can sell
whatever it produces.
At 60 per cent working, raw material cost increases by 2 per cent and selling price falls by 2 per cent.
At 80 per cent, raw material cost increases by 5 per cent and selling price falls by 5 per cent.
At 50 per cent working, the product costs Rs. 180 per unit and is sold at Rs. 200 per unit.
The unit cost of Rs. 180 is made up as follows:
Rs.
Material 100
Labour 30
Factory Overhead 30 (40% fixed)
Administration Overhead 20 (50% fixed)
What comments can you offer?
Solution: Statement showing profit at different capacity levels
Capacity Levels

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50% 60% 80%
Units 10,000 12,000 16,000
Selling price per unit (as per Rs. 200 Rs. 196 Rs. 190
information given)
Material (as per information given) 100 102 105
Labour 30 30 30
Variable Factory overhead 18 18 18
Variable Administration overhead 10 10 10
Total variable cost per unit 158 160 163
Contribution per unit 42 36 27
Total contribution 4,20,000 4,32,000 4,32,000
Less: Fixed cost 2,20,000 2,20,000 2,20,000
Profit 2,00,000 2,12,000 2,12,000
P/V ratio 21% 18.37% 14.21%
Incremental profit (by comparing profit -_ 12,000 -_
at the preceding level)
Comment: P/V ratio is the highest at 50% capacity level. It is beneficial for company to switch over to
60% because at this level profit will be maximum. At this level, impact by increase in sales revenue due to
increase in sales volume and incidence of fixed cost is more than the increase in variable cost. At 80%
capacity level increase in variable cost is more than the increase in sales revenue due to sales volume and
incidence of fixed cost.

Q13. Key Factor Analysis (Material) REG. PAGE NO.

A company produces three products. The cost data are as under:
A B C
Direct Materials Rs. 64 152 117
Direct Labour:
Dept. Rate per hour Hrs. Hrs. Hrs.
Rs.
1 5 18 10 20
2 6 5 4 7
3 4 10 5 20
Variable Overheads Rs. 16 9 21
Fixed overheads Rs. 4,00,000 per annum
The budget was prepared at a time, when the market was sluggish. The budgeted quantities and selling
prices are as under:
Product Budgeted Qty. Selling Price (Rs.)/Unit
A 9,750 270
B 7,800 280
C 7,800 400
Later the market improved and the sales quantities could be increased by 20% for product A and 25%
each for products B and C. The sales manager confirmed that the increased quantities could be achieved
at the prices originally budgeted. The production manager stated that the output cannot be increased

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 beyond the budgeted level due to limitation of direct labour hours in Department 2. Hours in Department
2 cannot be increased beyond the originally Budgeted Hours.
Required:
(i) Present a statement of original budgeted profitability.
(ii) Set optimal product mix and calculate the optimal profit after considering new market conditions.

Q14. Master Budget REG. PAGE NO.

Floatglass Manufacturing Company requires you to present the Master budget for the next year from the
following information:
Sales:
Toughened Glass Rs. 6,00,000
Bent Glass Rs. 2,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ Rs. 150 per month
Factory overheads (Indirect labour):
Works manager Rs. 500 per month
Foreman Rs. 400 per month
Stores and spares 2.5% on sales
Depreciation on machinery Rs. 12,600
Light and power Rs. 3,000
Repairs and maintenance Rs. 8,000
Others sundries 10% on direct wages
Admin, selling & distribution expenses Rs. 36,000 per year

Q15. Budget Ratios REG. PAGE NO.

Following data is available for DKG and Company:
Standard Working Hours 8 Hours per day of 5 Days Week
Maximum Capacity 50 employees
Actual Working 40 employees
Actual hours expected to be worked per 4-week 6,400 Hours
Stad. Hours expected to be earned per 4-week 8,000 Hours
Actual hours worked to be worked per 4-week 6,000 Hours
Stad. Hours earned to be earned per 4-week 7,000 Hours
The related period is of 4 weeks. In this period there was a one special day holiday due to national event.
Calculate the following ratios:
(1) Efficiency Ratio, (2) Activity Ratio, (3) Calendar Ratio, (4) Standard Capacity Usage Ratio, (5) Actual
Capacity Usage Ratio. (6) Actual Usage of Budgeted Capacity Ratio

9. PAST EXAM THEORY QUESTIONS

Q1. Distinguish between Fixed and flexible budget.

Ans. Difference between Fixed and Flexible Budget

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FIXED BUDGET FLEXIBLE BUDGET

It does not change with actual volume of activity It can be recasted on the basis of activity level to be
achieved. Thus it is rigid. achieved. Thus it is not rigid.
It operates on one level of activity and under one It consists of various budgets for different level of
set of conditions activity.
If the budgeted and actual activity levels differ It facilitates the cost ascertainment and price
significantly, then cost ascertainment and price fixation at different levels of activity.
fixation do not give a correct picture.
Comparisons of actual and budgeted targets are It provided meaningful basis of comparison of
meaningless particularly when there is actual and budgeted targets
difference between two levels.

Q2. Explain the Essentials of budget.

Ans. Essentials of budget
• It is prepared in advance and is based on a future plan of actions
• It relates to a future period and is based on objectives to be attained.
• It is a statement expressed in monetary and/or physical units prepared for the implementation of
policy formulated by management.

Q3. State the considerations on which capital expenditure budget is prepared.

Ans. The preparation of Capital Expenditure Budget is based on the following considerations:
1. Overhead on production facilities of certain departments as indicated by the plant utilisation
budget.
2. Future development plans to increase output by expansion of plant facilities.
3. Replacement requests from the concerned departments
4. Factors like sales potential to absorb the increased output, possibility of price reductions,
increased costs of advertising and sales promotion to absorb increased output, etc.

Q4. State the considerations on which capital expenditure budget is prepared.

Ans. There are certain steps involved in the budgetary control technique. They are as follows:
(i) Definition of objectives: A budget being a plan for the achievement of certain operational
objectives, it is desirable that the same are defined precisely. The objectives should be written out;
the areas of control demarcated; and items of revenue and expenditure to be covered by the
budget stated.
(ii) Location of the key (or budget) factor: There is usually one factor (sometimes there may be
more than one) which sets a limit to the total activity. Such a factor is known as key factor. For
proper budgeting, it must be located and estimated properly.
(iii) Appointment of controller: Formulation of a budget usually required whole time services of a
senior executive known as budget controller; he must be assisted in this work by a Budget
Committee, consisting of all the heads of department along with the Managing Director as the
Chairman.
(iv) Budget Manual: Effective budgetary planning relies on the provision of adequate information
which are contained in the budget manual. A budget manual is a collection of documents that
contains key information for those involved in the planning process.

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 (v) Budget period: The period covered by a budget is known as budget period. The Budget Committee
determines the length of the budget period suitable for the business. It may be months or quarters
or such periods as coincide with period of trading activity.
(vi) Standard of activity or output: For preparing budgets for the future, past statistics cannot be
completely relied upon, for the past usually represents a combination of good and bad factors.
Therefore, though results of the past should be studied but these should only be applied when
there is a likelihood of similar conditions repeating in the future.

Q5. Describe the salient features of budget manual.

Ans. Salient features of Budget Manual
• Budget manual contains many information which are required for effective budgetary planning.
• A budget manual is a collection of documents that contains key information for those involved in
the planning process.
• An introductory explanation of the budgetary planning and control process, including a statement
of the budgetary objective and desired results is included in Budget Manual
• Budget Manual contains a form of organisation chart to show who is responsible for the
preparation of each functional budget and the way in which the budgets are interrelated.
• In contains a timetable for the preparation of each budget.
• Copies of all forms to be completed by those responsible for preparing budgets, with explanations
concerning their completion is included in Budget Manual.

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“Success of a person is not just measured with the height of his success but how
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he looks to people Below, while sitting at the Top”. -ANSHUL A. AGRAWAL

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