BUDGET AND BUDGETARY CONTROL

Budget and Budgetary Control: Budget, Use of Budgets, Process of

develop of Budgets, Benefits of Budgeting, Master Budget, Operating
Budgets, Sales Budget Production Budget, Direct Materials Budget,
Direct Labor Budget, Cash Budget, Fixed and Flexible Budget, Zero base
budgeting , Impact of Credit and Debit Card Sales on Budgeting.
 BUDGET

• A Budget is plan expressed in quantitative and monetary term.

• Budget can be function as a device not only for planning and
coordination but also for control.
• A budget provides a comprehensive financial overview of
planned company operations. It is usually short term financial
plan.
• Budget is a formal statement of the financial resources set aside
for carrying out specific activities in a given period of time.
• ‘Budget’ is a set of financial goals that management wants to
achieve.
 Characteristics of Budget:
1. Budget is quantitative statement express in terms of money or quantity
2. It is prepared in advanced and approved prior to a defined period of
time.
3. It is related to future time.
4. A budget is prepared for the implementation of the policy formulated by
the management for the purpose of attaining a given objectives.
5. Budget involve as many people as possible in drawing up a budget.
6. It is a Comprehensive embrace plan of an organization.
7. Budgets is based on established standards of performance.
 Importance of Budget
• Budget provides planed approach to business affairs in expenditure
and financial activities.
• It directs/guide capital expenditure is most profitable channel.
• It coordinate activities of variance department by setting goals.
• Ensures efficient use of resources of business.
• Motivates employees to attain the given goals.
• Provide incentives when set results are achieved.
• Create necessary conditions for introducing of standard costing.
• It assist in delegation of authority and assignment of responsibility.
 Budgetary Control
Budgetary control is the process of determining various actual results with
budgeted figures for the enterprise for the future period and standards set then
comparing the budgeted figures with the actual performance for calculating
variances, if any.
Definitions:
• Brown and Howard defines: “Budgetary control is a system of controlling
costs which includes the preparation of budgets, coordinating the
departments and establishing responsibilities, comparing actual
performance with the budgeted and acting upon results to achieve
maximum profitability.”
• J. Batty defines it as, “A system which uses budgets as a means of planning
and controlling all aspects of producing and/or selling commodities and
services.
Objectives of Budgetary Control:

• To ensure planning for future

• To centralize the control system.

• Tool for Measuring Performance

• Elimination of wastes.

• Maximization of Profits

• Co-ordination

• Determining Weaknesses

• Economy

• Corrective Action
 Essentials of Budgetary Control
There are certain steps which are necessary for the successful implementation

budgetary control system.

1. Organization for Budgetary Control

2. Budget Centres

3. Budget Manual

4. Budget Officer

5. Budget Committee.

6. Budget Period

7. Determination of Key Factor

 Essentials of Budgetary Control
There are certain steps which are necessary for the successful implementation
budgetary control system.
1. Organization for Budgetary Control: For preparation of budget a Budgetary
Committee is formed, which comprises the departmental heads of various
departments. The Chief Executive is the overall in-charge of budgetary
system. He constitutes a budget committee for preparing realistic budgets.
2. Budget Centres: A budget centre is that part of the organization for which
the budget is prepared. A budget centre may be a department, section of a
department or any other part of the department. The budget centres are
also necessary for cost control purposes.
3. Budget Manual: A budget manual is a document which spells out the
duties and also the responsibilities of various executives concerned with
the budgets. It specifies the relations amongst various functionaries.
5 Budget Officer: The Chief Executive, who is at the top of the organization, appoints some
person as Budget Officer. The budget officer is empowered to scrutinize the budgets
prepared by different functional heads and to make changes in them, if the situations so
demand. The actual performance of different departments is communicated to the Budget
Officer.
6 Budget Committee: In small-scale concerns the accountant is made responsible for
preparation and implementation of budgets. In large-scale concerns a committee known as
Budget Committee is formed. The heads of all the important departments are made
members of this committee.
7 Budget Period: A budget period is the length of time for which a budget is prepared and
employed. The budget period depends upon a number of factors. It may be different for
different industries or even it may be different in the same industry or business.
8 Determination of Key Factor: A factor which influences all other budgets is known as Key
Factor or Principal Factor. Example: sales is key factor of inventory, purchase, cash etc
 Organization for Budgetary Control

Chief Executive

Budget Office

Budget Committee

Production Purchase Sales Personal R&D

Manager Manager Manager Manager Manager
 Classification of Budget

A. On the Basis of Time

• Long-term Budget: Long-term budgets are prepared on the basis of long-term

forecasts. It portrays a long range planning which extend from five to ten
years.
• Short-term Budget: Short-term budgets are those, which are prepared on the
basis of short-term forecasts i.e. for a period of more than one to five years.
• Current Budgets : These budgets are prepared for a period that extends from
one month to twelve months.
 Classification of Budget
B. On the Basis of Flexibility:

(i) Fixed Budget: Fixed Budget are prepared for a fixed or standard volume of
activity. They do not change with the change in the volume of activity. These
budgets are prepared well in advance. They are not helpful for making comparison.
(ii) Flexible Budget: Basically, the idea of a flexible budget is that there shall be
some standard of expenditure for varying levels of output. The preparation of
budgets necessitates the analysis of all overheads into fixed, variable and semi-
variable costs.

Costs:
• Fixed cost: a cost which tends to be unaffected by variation in volume of
output.
• Variable cost: a cost that tends to vary directly with the volume of output.
• Semi-variable: a cost which partly fixed and partly variable.
 FIXED AND FLEXIBLE BUDGET

Problem: 1
The Expenses budgeted for production of 10, 000 units in a factory are furnished below:
Per unit (SR)
Material : 70
Labour : 25
Variable overhead : 20
Fixed overhead : 10
Variable expenses : 5
Selling exp (10% fixed) : 13
Distribution exp (20% fixed) : 7
Administration exp (50,000) : 5
---------
155
Prepare a budget for 6000 units and 8000 units. Administration expenses are fixed at for all
levels of production.
 Solution:

Per unit 10000 Units 8000 Units 6000 Units

Material 70 700000 560000 420000

Labour 25 250000 200000 150000

V. Overhead 20 200000 160000 120000

Fixed Overhead 10 100000 100000 100000

V expenses 5 50000 40000 30000

Selling Exp.(F) 1.3 13000 13000 13000

Selling Exp.(V) 11.7 117000 93600 70200

Distribution (F) 1.4 14000 14000 14000

Distribution (V) 5.6 56000 44800 33600

Admin (Fixed) 5 50000 50000 50000

TOTAL 155 1550000 1275400 1000800

 FIXED AND FLEXIBLE BUDGET

Problem: 2
The Expenses budgeted for production of 4, 000 units in a factory are furnished below:

Per unit 4000

Material 40 160000
Labour 20 80000
V. Overhead 5 20000
Fixed Overhead 10 40000
Selling Expense 6 24000
Distribution (Fixed) 3 12000
Administrative Expenses 4 16000
88 352000

If Sales per unit is 100 per unit. Prepare budget for 6000 units and 8000 units and find profit
for it.
Solution:

Per unit 4000 6000 8000

Material 40 160000 240000 320000

Labour 20 80000 120000 160000

V. Overhead 5 20000 30000 40000

Fixed Overhead 10 40000 40000 40000

Selling Expense 6 24000 36000 48000

Distribution (Fixed) 3 12000 12000 12000

Administrative Expenses 4 16000 24000 32000

Total Cost 88 352000 502000 652000

Calculation of Profit or Loss

Per unit 4000 6000 8000

Sales @ 100 100 400000 600000 800000

Cost - 352000 502000 652000

PROFIT /LOSS 48000 98000 148000

 Fixed and Flexible Budget

Problem: 3
A Factory is presently working at 50% capacity and incurs the following:

Material : 3,00,000
Wages : 1,50,000
Fixed Overhead : 1,75,000
Variable Overhead : 40,000
Semi Variable overhead : 60,000
(40% variable)

Prepare flexible budget for 60% and 90%

Solution: Fixed and Flexible Budget

Particular 50% 60% 90%

Material 300000 360000 540000

Wages 150000 180000 270000

Fixed Overhead 175000 175000 175000

Variable Overhead 40000 48000 72000

Semi Variable overhead 0 0 0

Fixed 60% 36000 36000 36000

Variable 40% 24000 28800 43200

TOTAL COST 725000 827800 1136200

 Fixed and Flexible Budget
Problem: 4
The cost per unit of an article at the capacity of 5000 units is SR 12.55 and the
expenses are given below:
Material : 25000
Wages : 15000
Power (80% Variable) : 1250
Repair (75% Variable) : 2000
Stores : 1000
Inspection (20% Variable) : 500
Administrative Exp. (25% Variable) : 5000
Selling Overhead (50% Variable) : 3000
Depreciation : 10000

Prepare flexible budget for production below and above 20% capacity level.
 Fixed and Flexible Budget
Solution:
4000 (Below 20%) 5000 6000 (Above 20%)
Particular Cost Per unit Total Cost Cost Per unit Total Cost Cost Per unit Total Cost

Material 5.00 20000 5.00 25000 5.00 30000

Labour 3.00 12000 3.00 15000 3.00 18000
Power (Fixed) 0.06 250 0.05 250 0.04 250
Power (Variable) 0.20 800 0.20 1000 0.20 1200
Repair (Fixed) 0.13 500 0.10 500 0.08 500
Repair (Variable) 0.30 1200 0.30 1500 0.30 1800
Stores 0.20 800 0.20 1000 0.20 1200
Inspection (80% Fixed) 0.10 400 0.08 400 0.07 400
Inspection (20% Variable) 0.02 80 0.02 100 0.02 120
Administration Exp (75% Fixed) 1.00 4000 0.80 4000 0.67 4000
Administration Exp (25% Variable) 0.20 800 0.20 1000 0.20 1200
Selling Overhead (50% Fixed) 0.38 1500 0.30 1500 0.25 1500
Selling Overhead (50% Variable) 0.30 1200 0.30 1500 0.30 1800
Depreciation 2.00 8000 2.00 10000 2.00 12000
Total Cost 12.8825 51530 12.55 62750 12.33 73970
 Classification of Budget
C. On the Basis of Function

Functional budgets are those that are prepared on the basis of approved forecasts
for individual department.

A. Sales Budget: Sales Budget is a part of Functional Budget. Sales budget is

concerned with forecasting of what company can expect to sell during
the budget period. A Sales budget shows what product will be sold in
what quantities and at what prices. It is usually the responsibility of the
sales manager to prepare budget through proper market research.
B. Production Budget: Production Budget is usually prepared after the
preparation of Sales budget and desired inventory levels. Production
budget shows a number of unit that must be produced during the budget
period to meet the market demand.

Estimate of Production: Estimated Sales + Closing Stock – Opening Stock

Exercise:
Prepare a Production Budget of Iyar Co Ltd Damam for 2004-2005 from the
following information:

Product Sales of Assets per sales Estimated Stores (in units

budget
1 Jan 2005 31 Dec 2005
A 2,44,000 16000 22000
B 1,87,500 32500 45000
C 3,00,000 25000 25000
D 5,00,000 5000 30000
Solution: PRODUCTION BUDGET

PARTICULAR PRODUCT – A PRODUCT –B PRODUCT – C PRODUCT - D

ESTIMATED Sales 2,44,000 187500 300000 200000

Add Closing Stock 22000 45000 25000 30000

266000 232500 325000 230000

Less Opening Stock: 16000 32500 25000 5000

Estimated Production 250000 200000 300000 225000

(C) Cash Budget: A Cash Budget represent the amount of cash receipt and payment and the
balance during the budgeted period. It is prepared after the preparation of all
functional budgets. It is prepared to know estimated cash receipt and estimated cash
disbursements over the budget period and know the position of cash.
(D) Master Budget : Master Budget, in a broader sense, is a summary budget
incorporating all financial budgets in a capsule form. A Master budget is an overall plan
of future operations. It gathers together of all the budgets of various departments and
make summary of them.
(i) Operating budget : Focuses on the effects that the operating budget and other plans will
have on cash balances.
(ii) Financial budgets: Focuses on the Income Statement and supporting schedules or
budgeted expenses
(E) Others: Raw Material Budget, Labour Budget, Plant Budget, Research and
Development Budget, Overheads Budget, Capital Budget and Expenditure Budget.
Exercise: (CASH Budget)
A company to have SR 25000 cash in hand on 1 April 2013 and it required you to
prepare cash budget for 3 months April to June 2013. The following information is
supplied to you.

Months Sales Purchase Wages Expenses

Feb 70000 40000 8000 6000

March 80000 50000 8000 7000

April 92000 52000 9000 7000

May 100000 60000 10000 8000

June 120000 55000 12000 9000

Other Information:
1. Period of Credit allowed by supplier in 2 months
2. 25% of Sales is for cash and the period of credit allowed to customer for credit sales
in one month
3. Delay in payment of wages and expenses one month
4. Income tax SR 25000 is to paid in June 2013
 Cash Budget for 3 months Ending June 2013

APRIL MAY JUNE

OPENING 25000 53000 81000
Sales (Cash) 23000 25000 30000
Sales (Credit) 60000 69000 75000
TOTAL RECEIPTS 108000 147000 186000
PAYMENT
Creditor 40000 50000 52000
Wages 8000 9000 10000
Expenses 7000 7000 8000
Income Tax 0 0 25000
Total Payment 55000 66000 95000
Closing Balance 53000 81000 91000

Note:

(1) Cash Sale : only 25% is cash out of 92000 April Sales
(2) Credit Sale of March 75% will get in April month = 80000 x 75% = 60000
(3) Creditor: Supplier give us 2 months credit, in April we will pay Feb payment.
(4) Wages: We can delay payment for one month. It mean In April we will pay March wages
and Exp.
Practical Problem:
A Glass Manufacturing company requires you to calculate and present the budget for the next
year from the following information:

Sales:
Toughened glass : 300000
Bent Toughened Glass : 500000
Direct Material Cost : 60% of Sales
Direct Wages : 20 workers at SR 150 per month

Factory Overhead:

Works manger : SR 500 per month

Foreman : SR 400 per month
Store and Spares : 2.5% of Sales
Depreciation of Machine : 12600
Light & Power : 5000
Repairs & Maintenances : 8000
Others sundries 10% of Direct Wages, administrative selling & distribution exp SR 14000 per
year.
Solution:
Master Budget
Particular
Sales of Toughened Glass 300000
Sales of Bent Glasses 500000
800000
Less : Cost of production
Direct Material 480000
Direct Wages (20x150x12) 36000
Prime Cost 516000
Factory Overheads
Stores & Spares (2.5% of Sales) = 800000 x 2.5 x 1/100 20000
Light and Power 5000
Repair and Maintenances 8000
Work manager Salary (500 x 12) 6000
Fireman Salary (400 x 12) 4800
Depreciation 12600
Sundary Exp (36000 x 10%) 3600
60000
Gross Profit 224000
Less: Administrative Expenses 14000
NET PROFIT 210000
 ZERO BASED BUDGETING
• Zero based budgeting is a new technique which was first introduced in USA in
1969.

• This technique is usual both in Government and Organizational involved in

non-manufacturing activities.

• Zero Based Budgeting is the process of creating a budget from nothing without
using the prior year’s budget or spending numbers.

• In Zero based budget, to previous year expenditure is not taken as granted and
each manger explain the entire expenditure included in the budget.

• Features:

– It is framed for every 3-5 years

– ZBB has always start from Zero point (0)

– The entire expenditure is analyzed.

– Rational analysis of entire demand is done.

 PROCESS OF ZERO BASED BUDGETING
The Step to implement ZBB are as follows:

(1) Identify the task.

(2) Possible ways of accomplishing the task.
(3) Evaluate these solutions and also evaluate alternative of sources of funds.
(4) Rank each activity in terms of profitability or for cost benefit analysis.
(5) Allocate the resources in accordance with the ranking of activities and with the
resources available with the organization.
Zero Based Budgeting Advantages
• Accuracy: Against the regular methods of budgeting that involve just making some
arbitrary changes to the previous year’s budget, zero-based budgeting makes every
department relook each and every item of the cash flow and compute their operation
costs. This to some extent helps in cost reduction as it gives a clear picture of costs
against the desired performance.
• Efficiency: This helps in efficient allocation of resources (department-wise) as it does
not look at the historical numbers but looks at the actual numbers
• Reduction in redundant activities: It leads to the identification of opportunities and
more cost-effective ways of doing things by removing all the unproductive or
redundant activities.
• Budget inflation: Since every line item is to be justified, zero-based budget overcomes
the weakness of incremental budgeting of budget inflation.
• Coordination and Communication: It also improves coordination and communication
within the department and motivates employees by involving them in decision-
making.
Zero Based Budgeting Disadvantages

• Time-Consuming: Zero-based budgeting is a very time-intensive exercise for a

company or a government-funded entities to do every year as against incremental

budgeting, which is a far easier method.

• High Manpower Requirement: Making an entire budget from the scratch may

require the involvement of a large number of employees. Many departments may

not have an adequate time and human resource for the same.

• Lack of Expertise: Explaining every line item and every cost is a difficult task and

requires training the managers.

Practicing Exercises
 Flexible budget

Prepare a Flexible budget for overheads on the basis of the following data. Ascertain
the overhead rates at 50% and 60% capacity.

Variable overheads: At 60% capacity (USD)

Indirect Material 6,000
Labour 18,000

Semi‐variable overheads:
Electricity: (40% Fixed & 60% variable) 30,000
Repairs: (80% fixed & 20% Variable) 3,000
Fixed overheads:
Depreciation 16,500
Insurance 4,500
Salaries 15,000

Total overheads 93,000

Answer: Total Overhead for 50% = 85,900

Total Overhead for 60% =93,000
 Fixed and Flexible budget

The expenses budgeted for production of 1,000 units in a factory are furnished
below:
Particulars Per Unit USD.
Material Cost 700
Labour Cost 250
Variable overheads 200
Selling expenses (20% fixed) 130
Administrative expenses (USD. 2,00,000) 200
Total Cost 1,480
Prepare a budget for production of 600 units and 800 units assuming
administrative expenses are rigid for all level of production.

Answer: for 600 units = 9,78,400; for 800 units=12,29,200

 Fixed and Flexible budget
A factory engaged in manufacturing plastic buckets is working at 40% capacity and
produces 10,000 buckets per month.
The present cost break up for one bucket is as under:
Materials USD. 10
Labour 3
Overheads 5 (60% fixed)
The selling price is USD 20 per bucket. If it is desired to work the factory at 50% capacity
the selling price falls by 3%. At 90% capacity the selling price falls by 5% accompanied
by a similar fall in the price of material.
You are required to prepare a statement the profit at 50% and 90% capacities and also
calculate the break‐ even points at this capacity production.

Solution hints:
Contribution = Sales – Variable Cost
Profit = Contribution – Fixed Cost
Break even point (in units) = Fixed Cost / Contribution
Break even points (in currency) = Fixed cost x Sales / Contribution
Solution:
 Flexible Budget
The expenses budgeted for production of 1,000 units in a factory are furnished below:
Particulars Per Unit SAR.
Material Cost 700
Labour Cost 250
Variable overheads 200
Selling expenses (20% fixed) 130
Administrative expenses (SAR. 2,00,000) 200
Total Cost 1,480
Prepare a budget for production of 600 units and 800 units assuming administrative
expenses are rigid for all level of production.
Ans:
For 600 Units: Total : 9,78,400 ; For 800units : Total = 12,29,200
 Practicing Question: Cash Budget
Al Bayan Holding Group wishes to arrange overdraft facilities with its bankers from the period August to
November 2010 when it will be manufacturing mostly for stock. Prepare a cash budget for the above period
from the following data given below:

Month Sales Purchase Wages Manufacturing Exp. Office Exp. Selling Exp.

June 180000 124800 12000 3000 2000 2000

July 192000 144000 14000 4000 1000 4000

August 108000 243000 11000 3000 1500 2000

September 174000 246000 12000 4500 2000 5000

October 126000 268000 15000 5000 2500 4000

November 140000 280000 17000 5500 3000 4500

December 160000 300000 18000 6000 3000 5000

Additional Information:
(a) Cash on hand 1‐08‐2010 Rs.25,000.
(b) 50% of credit sales are realized in the month following the sale and the remaining 50% in
the second month following. Creditors are paid in the month following the month of
purchase.
(c) Lag in payment of manufacturing expenses half month.
(d) Lag in payment of other expenses one month.

Answers:
Total Receipts(A) 2,11,000 1,94,500 74,250
Total payments(B) 1,66,500 2,61,250 2,69,750
Closing Balance(A‐B) 44,500 (66,750) (1,95,500)
Solution

Answers:
Total Receipts(A) 2,11,000 1,94,500 74,250
Total payments(B) 1,66,500 2,61,250 2,69,750
Closing Balance(A‐B) 44,500 (66,750) (1,95,500)