Example – 1 : Sales Budget

ABC & Co manufactures two products X and Y and sells them through two
divisions North and South. For the purpose of submission of sales budget to the
budget committee the following information has been made available:

Budgeted Sales for the current year were:

Product North South

X 400 @ Rs. 9/- 600 @ Rs. 9/-
Y 300 @ Rs. 21/- 500 @ Rs. 21/-
Actual sales for the current year were :
Product North South
X 500 @ Rs. 9/- 700 @ Rs. 9/-
Y 200 @ Rs. 21/- 400 @ Rs. 21/-
Adequate market studies reveal that Product X is popular but under-priced. It
is observed that even if price of X is increased by one rupee, it will find a ready
market. On the other hand Y is over-priced to customers and market could absorb
more if sale price of Y is reduced by one rupee. The management has agreed to give
effect to the above price changes.

From the information based on these price changes and reports from
salesmen, the following estimates have been prepared by Divisional Managers :
Percentage increase in sales over budget is :
Product North South
X + 10% + 5%
Y +20% +10%
With the help of an intensive advertisement campaign the following additional
sales above the estimated sales of divisional managers are possible :

Product North South

X 60 70
Y 40 50
You are required to prepare a Budget for sales incorporating the above
estimates and also show the budgeted and actual sales of the current year.

Example – 2

Alpha Manufacturing Ltd., manufactures three products A, B and Z and sells them
through three divisions – North, South and West.

Sales Budget for the current year based on the estimates of the sales division
managers were ; A – North 36000, South 30,000 and West 24,000; B – North
15,500, South 16,000 and West 17,560; and Z – North 33,000, South 41,000 and
West 18,000. Current sale prices are Rs. 50, Rs. 30 and Rs. 10 for product A, B and
Z respectively in all areas.
Actual sales for the year were A – North 38,200, South 35,000 and West
25,600; B – North 15,800, South 15,850 and West 18,000 and Z – North 33,100,
South 41,050 and West 17,500.
A market research conducted by the management of the company reveals
that by reducing its price by 10%, sale of product A can be increased by 20% in
North and South zones and by 15% in west zone. The survey also indicated that
price of product B can be increased by 10% without affecting its sales. In fact, inputs
by Salesmen indicates that the sale of Product B will increase by 5%, 8% and 10% in
North, South and West Zones respectively. Product Z is properly priced but
extensive advertisement could increase its sale by 5% and 10% in North and West
Zones.
 The management has decided to launch an extensive sales campaign which
will increase the sales of all the products as under:-

A – North 1,500, South 240, West 55; B – North 600, South 1,000, West
1,050 and Z – North 600, South “nil” and West 700.

Prepare a Sales Budget and also show the budgeted actual sales of current
year.

Example – 3 : Production Budget

Bell Flag Company plans to sell 1,08,000 units of its product in the first fiscal quarter;
1,20,000 units in the second quarter; 1,32,000 units in the third quarter and 1,56,000
in the fourth quarter. It also plans to sell 1,38,000 units in the first quarter of the
following year. At the beginning of the first quarter of the current year, there are
18,000 units of product in the stock. At the end of each quarter, the company plans
to have an inventory equal to one-sixth of the sales for the next fiscal quarter.
You are required to prepare a Production Budget (schedule).

Example – 4 : Production Budget & Purchase Budget

The following are the estimated sales of a company for eight months ending 30 th
November of a year:
April – 12,000; May – 13,000; June – 9,000; July – 8,000; August – 10,000;
September – 12,000; October – 14,000; November – 12,000.
As a matter of policy, the company maintains the closing balance of finished
goods and raw materials as follows:
Finished Goods – 50% of the estimated sales for the next month
Raw Materials – Estimated consumption for the next month.

Every unit of production requires 2 kgs of raw material costing Rs. 5 per kg.
Prepare Production Budget (in units) and Raw Material Purchase Budget (in
units and cost) of the Company for the half year ending 30 th September.

Example – 5 : (Direct Materials) Purchase Budget

The Sales Director of a manufacturing company reports that next year he expects to
sell 50,000 units of a particular product.
The Production Manager consults the storekeeper and casts his figures as
follows:
Two kinds of raw materials, A and B are required for manufacturing the
product. Each unit of the product requires 2 units of A and 3 units of B. The
estimated opening balances at the commencement of the next year are:
Finished product : 10,000 units, A : 12,000 units; B : 15,000 units.
The desirable closing balance at the end of the next year are:
Finished product : 14,000 units; A : 13,000 units; B : 16,000 units.
Draw up a quantitative chart showing Materials Purchase Budget for the next year.

Example – 6 : Direct Labour Budget

Bhandari Foods Pvt Ltd manufactures two products using one type of material and
one grade of labour. Details extracted from the company’s records are as under:-

Product A Product B
Budgeted Sales (units) 3,600 4,800
Budgeted material consumption, per unit (kg) 5 3
Budgeted materials cost (per kg) Rs. 12 Rs. 12
Standard hours allowed per unit 5 4
 Budgeted wage rate Rs. 8 Rs. 8

a. The target productivity ratio (or efficiency ratio) for the productive hours
worked by the direct workers in manufacturing is 80%; in addition the non-
productive down-time is budgeted at 20% of the productive hours worked.
b. Overtime premium is 50% and is payable if a worker works for more
than 40 hours a week. There are 90 direct workers.
c. There are twelve 5-day weeks in the budget period and it is anticipated
that sales and production will occur evenly throughout the whole period.
d. It is anticipated that stock at the beginning of the period will be :
Product A – 1020 units; Product B – 2400 units; Raw material – 4,300 kgs.
e. The target closing stock expressed in terms of anticipated activity
during the budgeted period are : Product A – 15 days sales; Product B – 20
days sales; Raw material – 10 days consumption.
Required : Prepare the material purchase budget and the wages budget for
the direct workers, showing the quantities and values, for the next period.

Example – 7 : Overhead Budget

Budget manager of Yardley Chemicals Ltd was tasked to prepare a overhead budget
for the accounting year commencing 1 st April 2022. Since he had to proceed on
emergency leave he could not complete the task. The management desires that you
prepare a budget for the overheads. On searching the desk of the Budget manager
you find the following information:-

Volume of Production (in units) 1,20,000 1,50,000

Expenses :
Indirect Materials (Rs) 2,64,000 3,30,000
Indirect Labour (Rs) 1,50,000 1,87,500
Maintenance Expenses 84,000 1,02,000
Engineering Services 1,98,000 2,34,000
Supervision Cost 94,000 94,000

Calculate the cost of factory overhead at 1,30,000 and 1,40,000 units of production.

Example – 8 : Operating Budget

KPK Ltd., has supplied the following summary of its operating results for the year
ending 31 March 2022:
Rs. In Lakhs
Sales (40,000 units) 48.00
Less : Trade discount 2.40
Net Sales 45.60
Cost of Sales :
Direct Materials 14.40
Direct Wages 12.60
Factory overhead 6.30
Administration overhead 3.60
Selling and distribution overhead 4.50

The Following changes are to be incorporated in the budget for the year ending 31
March 2023:
(i) Sales quantity to be increased by 25%
(ii) Material prices to increase by 15%
(iii) Direct wages rates to go up by 12%
(iv) Factory overhead will increase by 15%.
 (v) A new facility will be added to factory laboratory at a recurring cost of Rs.
12,500 per annum
(vi) Administration and Selling & Distribution overhead are estimated to go up
by 10% and 14% respectively.
(vii) There will be no change in the rate of trade discount
(viii) There will be no change in the selling price of the product.
You are required to present the budget for the year ending 31 March 2023, showing
the details of total cost, sales and profit. (Assume that only Dir Material and Dir
Wages are the variable elements)

Example – 9 : FLEXIBLE BUDGET

The cost of an article at a capacity level of 5000 units is given under Column A
below. For a variation of 20% in capacity above or below this level, the individual
expenses vary as indicated under Column B below:

Item A (Rs) B
Material Cost 25,000 100% varying
Labour Cost 15,000 100% varying
Power 1,250 80% varying
Repairs and maintenance 2,000 75% varying
Stores 1,000 100% varying
Inspection 500 20% varying
Depreciation 10,000 100% varying
Administration Overhead 5,000 25% varying
Selling Overhead 3,000 50% varying
Total 62,750
Cost per unit Rs. 12.55
Find the unit cost of the product under each individual expenses at production levels
of 3000 units and 7000 units.

Example – 10: Cash Budget

From the following data forecast the cash position at the end of April, May and
June 2022.

Month Sales (Rs) Purchases Wages (Rs) Sales

(Rs) Expenses (Rs)
February 1,00,000 90,000 10,500 2,500
March 1,10,000 1,00,000 11,000 2,600
April 60,000 1,10,000 7,000 2,000
May 1,20,000 1,15,000 10,500 3,000
June 80,000 90,000 8,500 2,200

Further information:

1. Sales at 10% realized in the month of sales. Balance equally realized in two
subsequent months.
2. Purchases : Creditors are paid in the month following the month of supply
3. Wages : 20% paid in arrears in the following month
4. Sales expenses paid in the month itself.
5. Income tax of Rs. 30,000 payable in June
6. Dividend of Rs. 12,000 payable in June
7. Income from investments amounting to Rs. 5,000 received half-yearly in
March and September.
8. Cash balance in hand as on 01 April 2022 – Rs. 50,000
Example – 11: Cash Budget

From the following data forecast the cash position at the end of each month.

Month Total Sales Materials Wages Production Selling &

(Rs) (Rs) (Rs) overhead Distribution
(Rs) overheads
(Rs)
January 20000 20000 4000 3200 800
February 22000 14000 4400 3300 900
March 28000 14000 4600 3400 900
April 36000 22000 4600 3500 1000
May 30000 17500 4000 3200 900
June 40000 20000 5000 3800 1000

Additional Info:-
1. Opening Balance of Cash as on January – Rs. 10000
2. A new machine has to be installed for Rs. 20,000 in credit. Payment for the
same will be done in two equal instalments in the month of March and April.
3. Sales commission @ 5% on total sales is to be paid in the month following the
sales.
4. Rs.10,000 being the amount on second call may be received in the month of
March. Share premium amounting to Rs.2000 is also expected to be received
along with the second call.
5. Period of credit allowed by suppliers is two months.
6. Period of credit allowed to customers is one month.
7. Delay in payment of overheads is one month.
8. Wages are paid with half month delay.
9. Assume cash sales to be 50% of total sales.

Example – 12

Based on the following information prepare a cash budget for XYZ Ltd :

Quarter Q1 Q2 Q3 Q4
Opening balance 10,000
Collection from customers 1,25,000 1,50,000 1,60,000 2,21,000
Payments
35, 35, 54,
Purchase of materials 20,000 000 000 200
20, 20, 17,
Other Expenses 25,000 000 000 000
95, 95, 1,09,
Salary and wages 90,000 000 000 200

Income tax 5,000 - - -

20,
Purchase of machinery - - - 000

The Company desires to maintain a cash balance of Rs. 15,000 at the end of
each quarter. Cash can be borrowed or repaid in multiples of Rs. 500 at an interest
of 10% per annum. Management does not want to borrow cash more than what is
necessary and wants to repay as early as possible, In any event, loans cannot be
extended beyond four quarters. Interest is computed and paid when principal is
repaid. Assume that borrowing take place at the beginning and repayments are
made at the end of the quarters.
Example – 13

G Ltd manufactures two products called ‘M’ and ‘N’. Both products use a common
material Z. The raw material Z is purchased@ Rs. 36 per kg from the market. The
company has decided to review inventory management policies for the forthcoming
year. The following information has been extracted from departmental estimates for
the year ended 31 March 2018 (the budget period):

Product M Product N
Sales (units) 28,000 13,000
Finished goods stock increase by year -end 320 160
Post-production rejection rate (%) 4 6
Material Z usage (per completed unit, net of wastage) 5 kg 6 kg
Material Z wastage (%) 10 5
Additional information:
o Use of raw material Z is expected to be at a constant rate over the period.
o Annual cost of holding one unit of raw material in stock is 11% of the material
cost.
o The cost of placing an order is Rs.320 per order.
o The management of G Ltd has decided that there should not be more than 40
orders in a year for the raw material Z.

Required :
1. Prepare functional budgets for the year ended 31 st March 2021 under the
following headings:
a. Production budget for Products M and N (in units)
b. Purchases budget for Material Z (in kgs and value)
2. If there is a sole supplier for the raw material Z in the market and the supplier
do not sell more than 4000 kg of material Z at a time. Keeping the
management purchase policy and production quantity mix into consideration,
calculate the maximum number of units of Product M and N that could be
produced.

MISC EXAMPLES
Production costs of a factory for a year are as follows:

Direct wages - Rs. 80,000

Direct Materials - Rs. 1,20,000
Production overheads – Fixed - Rs. 40,000
Production overheads – Variable - Rs. 60,000

During the forthcoming year it is anticipated that :

(a) Average rate for direct labour remuneration will fall from Rs. 3 per hour to Rs.
2.50 per hour.
(b) Production efficiency will remain unchanged.
(c) Direct labour hours will increase by 33 1/3 %
The purchase price per unit of other materials and services which comprises
overheads will remain unchanged.

Draw up a budget and compute factory overhead rate; the overheads being
absorbed on direct wages basis.

Material Cost = Qty X Price

Hint : Calculate the Labour Cost = Labour rate x No of hours

Misc Examples
 From the following information given below prepare a Cash Budget of XYZ Ltd. for
the quarter January to March 2022.
Particulars Dec 21 Jan 22 Feb 22 Mar 22 Apr 22
Sales (Units) 60 60 65 75 80
SP per unit (₹) 1,000 1,000 1,000 1,000 1,000
Off-Season Discount 20% 20% 10% - -
End of month Inventory (Units) 10 12 15 25 25
a) Half the sale proceeds are collected in the month of sale and the other half in the
month following.
b) Materials amounting to ₹ 300 per unit manufactured are purchased one month in
advance of manufacture and paid for in cash earning 5% cash discount on half of
the material purchased.
c) Direct Labour Budget was ₹ 50 per unit and variable overheads ₹100 per unit.
d) Indirect Labour Budget was ₹ 6,000 per month
e) Depreciation was provided uniformly at ₹ 3,000 per month.
f) The Fixed Overheads Budget was ₹ 6,000 per month during off-season and ₹
7,000 during the season.
g) Dividends for the year 2021 amounting to ₹ 20,000 were expected to be declared
in March 2022 and payments were to be spread between March and April.
h) A machine was sold for ₹ 10,000 in December 2021 on 3 month’s credit.
i) The Company had overdraft arrangements with the State Bank of India up to ₹
50,000.

[Ans. Closing Balances – Jan ₹ 6,410; Feb ₹ 12,797.50; Mar ₹ 30,597.50]