Budgetary Contro1

BUDGETARY CONTROL
1.Define the term budget. What are the

essentials of a budget?
A budget is a plan of action expressed in
financial terms or non financial terms. It is
prepared for a definite period of time. It is a
planned estimate of future business
conditions such as the sales, cost and profit. A
budget is a tool which helps the management
in planning and control of business activities.
According to ICMA, England, a budget is,
“a financial and / or quantitative statement,
prepared and approved prior to a defined
period of time, of the time, of the policy to be
pursed during the period for the purpose of
attaining a given objective”.
It is also defined as, “a blue print of a
projected plan of action of a business for a
definite period of time”.
According to the definition, the essential
features of a budget are:
1.It is prepared for a definite period well in
advance.
2.It may be stated in terms of money or
quantity or both.
3.It is a statement defining the objectives to be
attained and the policy to be followed to
achieve them in a future period.
2. Define budgetary control and state its advantages and
limitations.
According to ICMA, England, budgetary control is, “The
establishment of budgets relating the responsibilities of
executives to the requirements of the policy and
continuous comparison of actual with budgeted results,
either to secure by individual action the objectives of that
policy or to provide a basis for its revision”.
According to J. Batty “budgetary control is a system
which uses budgets as a means of planning and controlling
all aspects of producing and / or selling commodities and
services”.
ADVANTAGES
Budgetary control has become an essential tool of the management for
controlling and maximizing profits. It acts as a friend, philosopher, and guide to
the management.
The following are the advantages of budgetary control.
1. Budgetary control defines the objectives and policies of the undertaking as a
whole.
2. It is an effective method of controlling the activities of various departments of a
business unit. It fixes targets and the departments have to work efficiency to
reach the targets.
3. It secures proper co-ordination among the activities of various departments.
4. It helps the management to fix up responsibility in case the performance is
below expectations.
5. It helps the management to reduce wasteful expenditure. This leads to reduction
in the cost of production.
6. It brings in efficiency and economy by promoting cost consciousness among the
employees.
7.It facilitates centralized control with decentralized activity.
8.It acts as internal audit by a continuous evaluation of departmental results and
costs.
9.It facilitates introduction of standard costing.
10.It aids in obtaining bank credit.
11.It helps in estimating the financial needs of the concern. Hence the possibility
of under or over capitalization is eliminated.
12.It provides a basis for introducing incentive remuneration plans based on
performance.
13.It helps in the smooth running of the business unit. There will be no stoppage
of production on account of shortage of raw materials or working capital. The
reason is that everything is planned and provided in advance.
14.It indicates to the management as to where action is needed to solve
problems without delay.
LIMITATIONS
1. The preparation of a budget under inflationary conditions and changing
Government policies is really difficult. Thus, the accurate position of the
business can not be estimated.
2. Accuracy in budgeting comes through experience. Hence it should not
be relied on too much in the initial stages.
3. Budget is only a management tool. It is not a substitute for management
in decision making.
4. Budgeting involves heavy expenditure, which small concerns cannot
afford.
5. There will be active and passive resistance to budgetary control as it
points out the efficiency or inefficiency of individuals.
6. The success of budgetary control depends upon willing co-operation and
team work. This is often lacking.
3.WHAT ARE THE MAIN STEPS IN BUDGETARY CONTROL ?
STATE THE MAIN OBJECTIVES OF BUDGETARY CONTROL.
THE MAIN STEPS IN BUDGETARY CONTROL ARE :
1. Establishment of budgets for each section of the organization.

2. Recording of actual performance.
3. Continuous comparison of the actual performance with the
budget.
4. In case there is a difference between actual and budgeted
performance, taking suitable remedial action.
5. Revision of budgets if necessary.
OBJECTIVES OF BUDGETARY CONTROL :
1. To define the goal of the enterprise.
2. To provide long and short period plans for attaining these goals.
3. To co-ordinate the activities of different departments.
4. To operate various cost centers and departments with efficiency
and economy.
5. To eliminate waste and increase the profitability.
6. To estimate capital expenditure requirements of the future.
7. To centralize the control system.
8. To correct deviations from established standards.
9. To fix the responsibility of various individuals in the organization.
10. To ensure that adequate working capital is available for the
efficient operation of the business.
11. To indicate to the management as to where action is needed to
solve problems without delay.
4.WHAT ARE THE MAIN FUNCTIONS OF
BUDGET CONTROLLER ?
Budget controller is also called budget officer or budget director. He is a
top executive responsible for the efficient working of budgetary control
system. He should possess sound knowledge of accounting, budgetary
control and technical aspects of the business. His main functions are :
1. Arranging for all the meetings of the budget committee.

2. Receiving and checking the budget estimates.
3. Issuing instructions to various departments.
4. Suggesting revisions.
5. Preparing the summary budget and place all budgets before the committee.
6. Ensuring that management prepares their budget in time.
7. Co-ordination all budget work.
5.BRIEFLY DISCUSS THE STEPS IN THE INSTALLATION OF A SYSTEM OF
BUDGETARY CONTROL.
The following steps should be taken in a sound system of budgetary control :

1.Organization Chart
There should be a well defined organization chart for budgetary control.
This will show the authority and responsibility of each executive.
2.Budget Centre
A budget centre is that part of the organization for which the budget is
prepared. A budget centre may be a department, or a section of the
department. (e.g., production department or purchase section).The
establishment of budget centre is essential for covering all parts of the
organization. The budget centers are also necessary for cost control
purpose. The evaluation of performances becomes easy when different
centers are established.
3.Budget Committee
In small companies, the budget is prepared by the
cost accountant. But in big companies, the budget is
prepared by the committee. The budget officers
consists of the chief executive or managing director,
budget officers and the managers of various
departments. The managers of various departments
prepare their budgets and submit them to this
committee. The committee will make necessary
adjustments, coordinate all the budgets and
prepare a Master Budget.
The main functions of the committee are :
1. To receive and scrutinize all budgets.
2. To decide the policy to be followed.
3. To suggest revision of functional budgets
wherever necessary.
4. To approve the finally revised budgets.
5. To prepare the Master Budget after functional
budgets are approved.
6. To co-ordinate the budget programme.
7. To study variations of actual performance from
the budget.
8. To recommend corrective action if and when
required.
4.BUDGET MANUAL
Budget Manual is a book which contains the procedure to be

followed by the executives concerned with the budget. It guides the
executives in preparing various budgets. It is the responsibility of
the budget officer to prepare and maintain this manual.
The Budget Manual may contain the following particulars :
1. A brief explanation of the objectives and principles of budgetary
control.
2. Duties and powers of the budget officer.
3. Functions and duties of the budget committee.
4. Budget period.
5. Accounts classifications.
6. Reports, statements, forms and charts to be used.
7. Procedure to be followed for obtaining approval.
5.BUDGET PERIOD
A budget period is the length of time for which a budget is
prepared and employed. It may be different in the same industry or
business. The budget period depends upon the following factors :
1. The type of budget – whether it is a sales budget, production
budget, raw material purchase budget, or capital expenditure
budget. A capital budget may be for a longer period, i.e. 3 to 5
years; purchase and sales budget may be for one year.
2. The nature of the demand for the product.
3. The timing for the availability of finance.
4. The length of the trade cycle.
5. All the above factors are taken into account while fixing the budget
period.
6.Key Factor
It is also known as limiting factor or governing factor or principal budget factor. A
key factor is one which restricts the volume of production. It may arise due to the
shortage of material, labour, capital, plant capacity or sales. It is a factor which affects
all other budgets. Therefore the budget relating to the key factor is prepared before
other budgets are framed.
6. What are the requirements of a good budgetary control system ?

The following are the requirements of a good budgetary control system.
1. Budgetary control system should have the whole - hearted support of the top
management.
2. A budget committee should be established consisting of the budget director and the
executives of various departments of the organization.
3. There should be proper fixation of authority and responsibility. The delegation of authority
should be done in a proper way.
4. The budget figures should be realistic and easily attainable.
5. Variation between actual figures and budgeted figures should be reported promptly and
clearly to the appropriate levels of management.
6. A good accounting system is essential to make budgeting successful.
7. The budget should not cost more to operate than is worth.
7.Briefly explain the different types of budgets or what
are functional budgets ?
The budgets are classified according to their nature.
The following are the types of budgets which are
commonly used.
A .Classification According to Time :
I. Short period Budget : These budgets are usually for a
period of one year. E.g. Cash Budget, Material
Budget ,etc.
II. Long period Budget : These budgets are for a longer
period say 5 to 10 years. E.g. Capital Expenditure
Budget, Research & Development Budget.
III.Current Budget : These budgets are for a very short
period, say, a month or a quarter and are related to
current conditions.
CLASSIFICATION ACCORDING TO FUNCTION
A functional budget is a budget which relates to any of the functions of an
organization. The following are the commonly used functional budgets.
1.SALES BUDGET : A sales budget is an estimate of expected sales

during the budget period. It may be stated in terms of money or quantity
or both. It contains information relating to sales, month-wise, product
wise and area wise. Sales budget should be carefully prepared as the
preparation of other budgets is dependent on it. This budget is prepared
by the sales manager taking into account the following :
1.Past sales figures
2.Salesmen’s estimates
3.Plant capacity
4.Availability of raw materials
5.Seasonal fluctuations 6. Availability of finance
7.Competition 8. Orders on hand
9.Other factors like political conditions, government policies etc..
2.PRODUCTION BUDGET : The Preparations of production budget is
dependent on the sales budget. Production budget is an estimate of quantity
of goods that must be produced during the budget period. It may be stated in
terms of money be calculated as fools :
Units to produced = Budgeted sales + Desired closing stock –
opening
stock
This budget is prepared by the works manager by taking
into account the following :
1. Sales budget
2. Production capacity
3. Stock of goods to be maintained
4. Decision to make or buy the component parts ?
5. Availability of raw materials and labour.
3.MATERIALS BUDGET : Materials may be director indirect. The materials budget
deals with only the direct materials. Indirect materials are included in the factory
overheads budget. Materials budget can be classified into two categories –
Materials Requirement Budget and Materials Purchase Budget. Materials
Requirement Budget is an estimate of total quantities of material required for
production during the budget period. The Material purchase Budget is an estimate
of quantities of raw materials to be purchased for production during the budget
period. While preparing this budget, the following factors must be taken into
account : -
1. Raw materials required for he budgeted production.
2. Time lag between the placing of order and the receipt of the materials.
3. Storage facilities available.
4. Financial resources available.
5. Price trends in the market.
6. Opening and closing stocks.
4.DIRECT LABOUR BUDGET : This indicates detailed requirements of direct
labour and its cost to achieve the production target. This budget is classified
into two categories namely, labour requirement and labour recruitment. The
labour requirement budget gives information regarding the different classes
of labour required for each department, their rates of pay and the hours to
be spent. The labour recruitment states the additional direct workers to be
recruited.
5.FACTORY OVERHEAD BUDGET : Factory overheads include indirect

material, indirect labour and indirect expenses. Factory overhead budget
indicates the factory overheads to be incurred in the budget period. The
expenses included in the budget are classified into fixed, variable and
semi – variable expenses. Fixed expenses are estimated on the basis of
past records. Variable expenses are estimated on the basis of budgeted
output.
6.ADMINISTRATIVE EXPENSES BUDGET : The budget is

an estimate of administrative expenses to be incurred in he budget
period. E.g. rent, salaries, insurance etc.
7.SELLING AND DISTURBING OVERHEAD BUDGET : The
budget gives an estimate of selling and distributing to be
incurred in the budget period. For example, Salesmen’s
salary, commission, advertisement, transportation costs
etc. It is prepared by the sales executive. It is closely linked
with sales budget.
The following points should be considered in the

preparation of this budget.
(a)The channels of distribution of the product

(b) The advertising and sales promotion policies
(c) The market area to be covered
(d) The credit and collection policies
(e) The mode of packing and dispatch of products to
customers.
8.CAPITAL EXPENDITURE BUDGET : This budget shows the estimated
expenditure on fixed assets during the budget period. Separate budgets may
be prepared for each item of assets, if necessary. For example, building
budget, plant and machinery budget etc. This budget is prepared for a longer
period say 5 years or 10 years. It is prepared after taking into account the
following:
(1)The available production capacity
(2) Probable reallocation of existing assets.
(3) Possible improvement in production techniques.
9.CASH BUDGET : This budget gives an estimate of receipts and payments of cash during the budget period.
It is prepared by the chief accountant. It shows the cash available and needed from time to meet the
capital requirements of the organization. This budget is prepared in two parts – one showing an estimate
of receipts and the other showing an estimate of payments. It is prepared for the following purposes :
Cash budget can be prepared by any of the following methods :
a) Receipts and payments method
b) The Adjusted Profit and Loss Account method
c) The Balance Sheet method.
10.MASTER BUDGET : Finally, master budget is prepared
incorporating all functional budgets. It is defined as, “the
summary budget incorporating the functional budgets which is
finally of budgeted profit and loss account and balance sheet. It
contains sales, production cost, cash position, debtor, fixed
assets, bills payable etc. It also shows the gross and net profits
and the important accounting ratios. It has to be approved by
the board of directors before it is put into operation.
CLASSIFICATION ACCORDING TO FLEXIBILITY :
1.FIXED BUDGET : Fixed budget is also called static budget. It may be defined as, “a
budget designed to remain unchanged irrespective of the level of activity actually
attained”. This budget is most suited for fixed expenses, which have no relation to
the volume of output. it is ineffective for cost control purpose. It is useless for
comparison with actual performance when the level of activity changes.
2.FLEXIBLE BUDGET : Flexible budget is also called variable
budget. It may be defines as, “A budget designed to change in
accordance with the level of activity actually attained”. It shows
estimated costs and profit at different levels of output. If
facilitates comparison of actual performance with the budget at
any level of output. To prepare flexible budget, all costs should
be classified into fixed, variable and semi – variable. It is more
elastic, useful and practical. It is used for the purpose of control :
THIS BUDGET IS USED IN THE FOLLOWING CASES :
1. Where sales cannot be accurately predicted because of the
nature of business.
2. Where the concern is suffering from shortage of materials,
labour, plant capacity etc.
3. Where production during the year varies from period to
period, plant capacity etc.
4. Where it is difficult to forecast the demand accurately.
ZERO BASE BUDGETING
8.What is Zero – Base Budgeting (ZBB) ? Explain

the process of ZBB and its advantages.
Zero base budgeting is a management technique aimed at
cost reduction and optimum utilization of resources. This
technique was introduced by the U.S. Department of
Agriculture in 1961. Peter. A. Phyrr designed its basic frame
work in 1970 and popuarised its wider use in the private
sector. In 1979, president Jimmy Carter issued a mandate
asking for the use of ZBB throughout the federal government
agencies for controlling state expenditure. The technique has
become quite popular in the U.S.
MEANING
•
The traditional technique of budgeting is to take previous year’s cost

levels as a base for preparing this year’s budget. This type of budgeting
assumes that allocation of funds in the past was correct. In most cases, an
addition is made to the previous year’s figure to allow for an increase in
cost. Because of this, budgets (particularly government budgets) take an
upward direction inspite of declining efficiency year after year. Thus, the
inefficiencies of a previous year are carried forward in formulating the
subsequent year’s budget. Managers tend to inflate their budget request
resulting in more demand for funds.
ZBB is starting from scratch. Every year is taken as a new year and
previous year is not taken as the base. Something will not be allowed
simply because it was allowed in the past. ZB proceeds on the assumption
that nothing is to be allowed. A manager has to justify why he wants to
spend. The manager proposing an expenditure or activity has to prove
that it is essential and the amounts asked for are reasonable.
DEFINITION
ZBB is defined as, “a planning and budgeting
process which requires each manager to justify his
entire budget request in detail from scratch ( hence
Zero Base ) and shifts the burden of proof to each
manager to justify why he should spend money at all.
the approach requires that all activities be analysed in
decision ‘packages’ which are evaluated by systematic
analysis and ranked in the order of importance”.
Peter .
A . Phyrr.
STEPS IN ZERO – BASE BUDGETING
1. Determination of Objectives : The first step in ZBB is the other definition of the
objectives of budgeting. The objective may be to reduce expenditure on staff, to
discontinue an activity or project in preference to another etc.
2. Determination of the Extent of Application : Whether ZBB should be introduced in
all operational areas or only in some selected areas is to be decided.
3. Identification of Decision Units : Decision unit refers to a department, a project or
a product line to which ZBB is to be applied. Identification of such units is done in
consultation with managers.
4. Cost – Benefit Analysis : Cost benefit analysis is undertaken for each activity of the
decision unit. It provides answers to the following questions.
 Is it necessary to perform the activity at all? If the answer is in the negative, there is
no need for proceeding further.
 How much is the actual cost and what is the actual benefit of the activity?
 What is the estimated cost and estimated benefit of the activity?
 If the unit is dropped, can the unit be replaced by outside agency?
5. Preparation of budgets : The activities and projects for which benefit is more
than the cost are ranked. Priority is accorded to the most profitable projects /
activities, in the allocation of funds.
ADVANTAGES OF ZBB
1. It provides a systematic way to evaluate different operations and
programmes. No arbitrary cuts or increase in budget estimates are made.
2. It enables the management to allocate resources according to benefit or
importance.
3. It ensures that only essential programs are undertaken and activities are
performed in the best possible manner.
4. It helps in identifying and controlling wasteful expenditure.
5. Zero base budgeting does not allow some expenditure / activity simply
because it was done in the past. Management is required to review
activities before allowing funds for them. This promotes operational
efficiency.
6. Zero base budgeting is appropriate for staff and support areas ( i.e., non –
manufacturing overheads ) whose output is not related to production.
7. Budgeting will be related to organizational goals. Only those activities
which will help in the achievement of organizational goals will be allowed.
8. It is a convenient tool in integrating the managerial functions of planning
and control.
PROBLEMS & SOLUTIONS
PRODUCTION BUDGET :
1.Prepare a production budge for three months ending March 31, 1999 for a factory
producing four products, on the basis of the following information :
Type of Estimated Stock Estimated Sales Desired Closing

product on January 1, during January Stock March 31,
1999 March, 1999 1999
Units Units Units
A 2000 10000 5000
B 3000 15000 4000
C 4000 13000 3000
D 5000 12000 2000
SOLUTION :
Production Budget for 3 months ending 31-3-1999
Particulars A ( Units ) B ( Units ) C ( Units ) D ( Units )

Estimated 10000 15000 13000 12000
Sales
Add : Desired
closing stock 5000 4000 3000 2000
15000 19000 16000 14000
Less : Opening
Stock 2000 3000 4000 5000
Estimated 13000 16000 12000 9000
production
2.Larsen Ltd., plans to sell 1,10,000 units of a certain product line in the first fiscal
quarter, 1,20,000 units in the second quarter, 1,30,000 units in the third quarter and
1,50,000 units in the fourth quarter and 1,40,000 units in the first quarter of the
following year. At the beginning of the first quarter of the current year, there are
14,000 units of product in stock. At the end of each quarter, the company plans to
have an inventory to one – fifth of the sales for the next fiscal quarter.
How much units must be manufactured in each quarter of the current year?
( B.Com., Madras, Bharathidasan
SOLUTION :
PRODUCTION BUDGET
First Second Third Fourth
Particulars Quarter Quarter Quarter Quarter
Units Units Units Units
Sales 110000 120000 130000 150000
Add : Desired closing stock 24000 26000 30000 28000
134000 146000 160000 178000
Less : Opening stock 14000 24000 26000 30000
Estimated production 120000 122000 134000 148000
3.From the following data, prepare a Production Budget for Bajaj Ltd.
Stocks for the budgeted period
Products As on 1st Jan As on 30th June
R 8000 10000
S 9000 8000
T 12000 14000
Requirements to fulfill Normal loss

Sales programme in production
R 60000 units 4%
S 50000 units 2%
T 80000 units 6%
Production Budget for 6 months ending 30th June
R S T Total
(Units ) (Units ) (Units ) (Units )
Budgetary Sales 60000 50000 80000 190000
Add : Closing stock 10000 8000 14000 32000
70000 58000 94000 222000
8000 9000 12000 29000
Less : Opening stock
Production after loss 62000 49000 82000 193000
Add : loss in production
(?) (1) (Net) 2583 1000 5234 8817
Production before loss 64583 50000 87234 201817

(Gross)
Working :
Calculation of Loss for product R :
Total production is assumed as 100
Less Normal loss (4%) 4
--------
Net production 96
---------
If net production is 96, Gross Production is 100
If net production is 62,000, Gross Production = 100 x 62,000 = 2,583

96
Similar calculations are made for products S & T.

4.Your Company manufactures two products A and . A forecast of the
number of units to be sold in first seven months of the year is given below.
Product A Product B
January 1000 2800
February 1200 2800
March 1600 2400
April 2000 2000
May 2400 1600
June 2400 1600
July 2000 1800

It is anticipated that (i) there will be no work – in – progress at the end of any
month (ii) finished units equal to half the sales for the next month will be in
stock at the end of each month (including the previous December)
Budgeted production and production costs for the whole year are as
follows :
Product A Product B
Production (Units ) 22000 24000
Rs. Rs.
Per unit : Direct material 10.00 15.00
Direct labour 5.00 10.00
Total factory overhead 88000 72000

apportioned
Prepare for the six months ending 30th June, a production budget
for each month and summarized production cost budget.
( B.Com., Madras, Bharathidasan )
Solution :
PRODUCTION BUDGET
( For Six months ending 30th June )
Jan. Feb. Mar. April May June

(Units) (Units) (Units) (Units) (Units) (Units)
Product A
Sales 1000 1200 1600 2000 2400 2400
Add : Closing Stock ( half
the sales for next month ) 600 800 1000 1200 1200 1000
1600 2000 2600 3200 3600 3400

Less : Opening Stock ( half 500 600 800 1000 1200 1200
the sales of the cy month )
Budgeted Production 1100 1400 1800 2200 2400 2200
Total Budgeted production for six months :

1,100 + 1,400 + 1,800 + 2,200 + 2,400 + 2,200 = 11,100 units
Jan. Feb. Mar. April May June
(Units) (Units) (Units) (Units) (Units) (Units)
Product B
Sales 2800 2800 2400 2000 1600 1600
Add : Closing Stock 1400 1200 1000 800 800 900
4200 4000 3400 2800 2400 2500

Less : Opening Stock 1400 1400 1200 1000 800 800
Budgeted Production 2800 2600 2200 1800 1600 1700
Total Budgeted production for six months

2,800 + 2,600 + 2,200 +1,800 + 1,600 + 1,700 = 12,700 Units
Closing stock of previous month becomes the Opening stock of the current month.
Summarized Production Cost Budget
Product A Product B Total
Output 11,100 units Output 12,700Units
Per Unit Amount Per Unit Amount
Rs. Rs. Rs. Rs.
Direct Material 10.00 1,11,000 15.00 1,90,500 3,01,500
Direct Labour 5.00 55,500 10.00 1,27,000 1,82,500
Prime Cost 15.00 1,66,500 25.00 317500 4,84,000
Factory Overheads (1) 4.00 44,400 3.00 38,100 82,500
19.00 210900 28.00 355600 566500
Working :
Factory Overheads per unit = Annual Overhead
Annual Output
• Product A = 88,000 = Rs.4 Product B = 72,000 = Rs.3

22,000 24,000
Purchase Budget :
5.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
Raw Materials A 12,000 units; B : 15,00 units
The desirable closing balances at the end of the next year are :
Finished product 14,000 units, A : 13,000 units
B : 16,000 units
Prepare Production Budget and Materials Purchase Budget for the
next year.
( B.Com., Bharathidasan, Maduari & Madras )
Solution :
Production Budget ( Units )
Estimated sales 50000
Add : Desired closing stock 14000
64000
Less : Opening stock 10000
Estimated Production 54000
Materials Purchase or Procurement Budget (Units )

Material A Material B
Estimated consumption 2 x 54,000 1,08,000
3 x 54,000 1,62,000
Add : Desired closing stock 13000 16000
121000 178000
Less : Opening stock 12000 15000
6. Draw a Material Procurement Budget (Quantitative) from the
following information :
Estimated Sales of a product 40,000 units. Each unit of the product
requires 3 units of material A and 5 units of material B.
Estimated opening balances at the commencement of the next year :

Finished product 5,000 units
Material A 12,000 units
Material B 20,000 units
Materials on Order :
The desirable closing balances at the end of the next year :
Finished product 7,000 units
Material on Order :
( B.Com., Madurai )
Solution :
Production Budget ( in units )
Estimated sales 40,000

Add : Desired closing stock 7,000
47,000
Less : Opening stock 5,000
Estimated Production 42,000
Materials Procurement Budget ( in Units )
Material A Material B
Estimated consumption 42,000 x 3 1,26,000

42,000 x 5 2,10,000
Add : Desired closing stock 15000 25000
8000 10000
Material on order ( closing )
149000 245000
Less : Opening stock 12,000 20000
Material on order (opening ) 7,000 11000 19000 31000
Estimated purchases 130000 214000
7.A company manufactures three products A, B and C. These products require
blending of three different materials P, Q and R. Certain data are as follows :
Products
A B C
Sales price Rs. 100 120 140
Sales quantity No. 100 200 150
Inventory :
Opening No. 100 150 50
Closing No. 110 165 55
Materials
P Q R
Price per kg. Rs. 4 6 9
Input : Kg. Kg. Kg.
In product A 4 2 --
B 3 3 2
C 2 1 1
Stock in Hand :
Opening 2,600 2,000 1,200
Closing 3,120 2,400 1,440
Prepare : (i) Sales budget in rupees.

(ii) Production budget in quantities.
(iii) Budget of material usage in quantities.
(iv) Material purchase budget in rupees.
Solution :
Sales Budget
Product Sales Quantity Selling price per unit Sales value
A 100 100 10000

B 200 120 24000
C 150 140 21000
450 55000
Production Budget ( in quantities )
Product A Product B Product C

Units Units Units
Sales Quantity 100 200 150
Add : Closing inventory 110 165 55
210 365 205
Less : Opening inventory
100 150 50
Production quantity 110 215 155
Material Usage Budget ( in quantities )
Material P Material Q Material R
Material Material Material
usage usage usage
per unit Total per unit Total per unit
Product Units of output usage of output usage output Total
kg. kg. kg. kg. kg. kg.
A 110 4 440 2 220 -- --

B 215 3 645 3 645 2 430
C 155 2 310 1 155 1 155
480 1,395 1,020 585

Material Purchases Budget ( in Rs.)
Material P Material Q Material R
kg. kg. kg.
Material usage as per material
usage budget 1,395 1,020 585
Add : Closing stock of materials 3,120 2,400 1,440
4,515 3,420 2,025

Less : Opening stock 2,600 2,000 1,200
Estimated quantity of purchases 1,915 1,420 825

Purchase Price per kg. Rs. 4 Rs. 6 Rs. 9
Estimated material purchases 7,660 8,520 7,425

8.Parker Ltd., manufactures two brands of pen Hero & Zero. The sales
department of the company has three departments in different areas
of the country.
The sales budget for the year ending 31st December 1999 were:
Hero-Department I 3,00,000; Department II 5,62,500; Department III
1,80,000 and Zero-Department I 4,00,000; Department II 6,00,000; and
Department III 20,000. Sales prices are Rs.3 and Rs.1.20 in all
departments.
It is estimated that by forced sales promotion the sale of ‘Zero’ in
department I will increase by 1,75,000. It is also expected that by
increasing production and arranging extensive advertisement,
Department III will be enabled to increase the sale of ‘Zero’ by 50,000.
It is recognized that the estimated sales by department II
represent an unsatisfactory target. It is agreed to increase both
estimates by 20%.
Prepare a Sales Budget for the year 2000.
Solution :
Sales Budget for 2000

Hero Zero
Selling Price Rs. 3 Rs. 1.20 Total
Quantity Rs. Quantity Rs. Rs.
Department I 3,00,000 9,00,000 5,75,000 6,90,000 15,90,000
Department II 6,75,000 20,25,000 7,20,000 8,64,000
28,89,000
Department III 1,80,000 5,40,000 70,000 84,000 6,24,000
Total 11,55,000 34,65,000 13,65,000 16,38,000
51,03,000
9.Kailash Bros. submits the following figures of product X for
the first quarter of 1999.
Sales (units ) January 10,000
February 8,000
March 12,000
Selling price per unit Rs.10.
It is estimated that by reducing the selling price by
10% and by intensive sales promotion measure, the sale of
product X in the first quarter of 2000 will increase by 20%.
A study of the past experience reveals that Kailash
Bros. has lost about 3% of its billed revenue in each quarter
because of returns (constituting 2% of loss of revenue )
allowances and bad debts (1% loss).
Prepare a sales budget incorporating the above
information.
Solution :
KAILASH BROS.
Sales Budget for the first quarter 2000
Jan. Feb. March Total
Sales (units ( (1) 12,000 9,600 14,400 36,000
Sales (value)
( Rs. 10 – 10% = 9 ) 1,08,000 86,400 1,29,600 3,24,000

Less Returns, allowances
andbad debts
(3% on sales value) 3,240 2,592 3,888 9,720
Net Sales 1,04,760 83,808 1,25,712 3,14,280
Working : (1)
Sales ( units given ) 10,000 8,000 12,000 30,000
Add Increase 20% 2,000 1,6000 2,400 6,000
Sales ( units ) 12,000 9,600 14,400 36,000
10. According to the sales of your company, the
sale of the company’s product is slacking and the
budgeted sales of 1,50,000 units per year can
only be met if the trade discount is raised from
25 per cent to 30 per cent. If the discount is
raised to 35 per cent, the sales will increase by 20
per cent over the budget, for which production
capacity exists. Indicate which of the two
alternatives is more profitable. The retail price of
the product is Rs.10 each. The cost of production
is Rs.6 of which Rs.4 is variable.
( B.Com., Bharathidasan )
Solution :
Comparative Statement
30% Discount 35% Discount
Rs. Rs.
Gross sales 15,00,000 18,00,000
Less : Discount 4,50,000 6,30,000
Net Sales (A) 10,50,000 11,70,000
Variable costs 6,00,000 7,20,000
Fixed costs 3,00,000 3,00,000
Total costs (B) 9,00,000 10,20,000
Profit ( A – B ) 1,50,000 1,50,000
From the above statement it is clear that both the

alternative are equally beneficial to the company. If the
company wants to increase sales volume to increase
profits, other promotion policies must be restored to.
11.Gopi & Co. Ltd., produces two products, Alpha and Beta. There are two sales divisions, North and South. Budgeted
sales for the year ended 31st December 1998 were as follows :
Division Products Units Price per unit Rs.
North Alpha 25,000 10
Beta 15,000 5
South Alpha 24,000 10
Beta 30,000 5
Actual sales for the said period were :
Product North South
Alpha 28,000 units @ Rs.10 each 25,000 units @ Rs.10 each
Beta 18,000 units @ Rs.5 each 33,000 units @ Rs.5 each
On the basis of assessments of the salesmen the following are the observations of sales division for the year
ending 31st December, 1999.
North Zone Alpha Budgeted increase of 40% on 1998 budget.
Beta Budgeted increase of 10% on 1998 budget.
South Zone Alpha Budgeted increase of 12% on 1998 budget.
Beta Budgeted increase of 15% on 1998 budget.
It was further decided that because of the increased sales campaign in North an additional sales of 5,000 units of
product will result.

Working :
BUDGET FOR 1999
North : Alpha 25,000 + ( 40% Increase ) 10,000 + 3,125
= 38,125 units
Beta 15,000 + ( 10% Increase ) 1,500 + 1,875 =

18,375 units
South : Alpha 24,000 + ( 12% Increase ) 2,880 = 26,880
units
Beta 30,000 + ( 15% Increase ) 4,500 = 34,500
units
Note : Additional sales of 5,000 units in north division is
distributed for Alpha and Beta in the proportion of 25,000
: 15,000 ( budgeted quantity for 1998 ).
12. Reliance Ltd., manufactures two products X and Y and sells them
through two divisions East and West. 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 East West
X 400 at Rs.9 600 at Rs.9
Y 300 at Rs.21 500 at Rs.21

Actual sales for the current year were :
Product East West
X 500 at Rs.9 700 at Rs.9
Y 200 at Rs.21 400 at Rs.21
Adequate market studies reveal that product X is popular but under priced.
It is observed that if price of X is increased by Re. 1 it will find a ready
market. On the other hand, Y is over – priced to customers and market
could absorb more if sales price of Y be reduced by Re.1. 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 current budget is :
Product East West
X + 10% + 5%
Y + 20% + 10%
With the help of an intensive advertisement
campign, the following additional sales above the
estimated sales of divisional managers are possible :
Product East West
X 60 70
Y 40 50
You are required to prepare Budget for Sales
incorporating the above estimates and also show the
budgeted and actual sales for the current year.
Working :
Budget for future period.
East : Product X 400 + ( 10% increase ) 40 + 60 =
500 units
Product Y 300 + ( 20% increase ) 60 + 40 =
400 units
West : Product X 600 + ( 5% increase ) 30 + 70
= 700 units
Product Y 500 + ( 10% increase) 50 + 50 =
600 units
13.You are required to prepare a Selling Overheads
Budget from the estimates given below :
Advertisement Rs. 1,000
Salaries Rs. 1,000
Expenses of the Sales Department (Fixed) Rs. 750
Salaries and Dearness Allowance Rs. 3,000
Commission at 1% on sales effected
Carriage outwards : Estimated at 5% on sales
Agent Commission : 6 ½ % on Sales
The Sales during the period were estimated as follows :
Rs.80,000 including Agent’s Sales Rs. 8,000
Rs.90,000 including Agent’s Sales Rs.10,000
Rs. 1,00,000 including Agent’s Sales Rs.10,500
(B.Com., Bharathidasan & Madras)

Selling Overheads Budget for the period
Rs. Rs. Rs.
Estimated Sales 80,000 90,000 1,00,000
Fixed Overheads :
Advertisement 1,000 1,000 1,000
Salaries of Sales Department 1,000 1,000 1,000
Expenses of Sales Departm0net (Fixed) 750 750 750
Salesmens’ Remuneration :
Salaries and D.A. 3,000 3,000 3,000
5,750 5,750 5,750
Variable Overheads :
Salesmens’ Commission 720 800 895
Carriage outward 5% on sales 4,000 4,500 5,000
Agent’s Commission 520 650 682.50

10,990 11,700 12,327.50
14.Prepare a Sales Overhead Budget for the months of January,
February and March from the estimates given below :
Rs.
Advertisement 2,500
Salaries of the Sales Department 5,000
Expenses of the Sales Department 1,500
Counter Salesmen’s Salaries and Dearness Allowance 6,000
Commission to counter salesman at 1% on their sales.
Travelling salesman’s commission at 10% on their sales and expenses
at 5% on their sales.
The sales during the period were estimated as follows :
Month Counter Sales Travelling Salesman’s sales
Rs. Rs.
January 80,000 10,000
February 1,20,000 15,000
March 1,40,000 20,000
( B.Com., Madurai )
Solution :
Sales Overhead Budget
January February March
Rs. Rs. Rs.
Counter Sales 80,000 1,20,000 1,40,000
Travelling Salesman’s Sales 10,000 15,000 20,000
Total Sales 90,000 1,35,000 1,60,000
Sales Overheads :
Commission on Counter Sales
@ 1% 800 1,200 1,400
Travelling Salesman’s
Commission@ 10% on
Travelling Salesman’s Sales 1,000 1,500 2,000
Expenses on Travelling
Salesman’s Sales @ 5% 500 750 1,000
Advertisement 2,500 2,500 2,500
Salaries of the Sales Department 5,000 5,000 5,000
Expenses of the Sales Department 1,500 1,500 1,500
Counter Salesman’s Salary
and Dearness Allowance 6,000 6,000 6,000
Total Sales Overheads 17,300 18,450 19,400
Cash Budget :
15.From the particular given below prepare a Cash Budget for the
month June 1999 :
a) Expected sales :
April 99 – Rs.2,00,000; May – Rs.2,20,000; June – Rs.1,90,000.
Credit allowed to customers is two months and 50% of the sales of
every month is on cash basis.
b) Estimated purchases :
May 99 – Rs.1,20,000; June – 1,10,000
40% of the purchase of every month is on cash basis and the balance is
payable next month.
c) Rs,2,000 is payable as rent every month.
d) Time lag in payment of overhead is ½ month.
Overhead : For May Rs.12,000; For June Rs.11,000
e) Depreciation for the year is Rs.12,000.
f) Interest receivable on investment during June and December
Rs.3,000 each.
g) Tax payable during April 99 Rs.10,000.
h) Estimated Cash Balance as on 1 – 6 – 99 is Rs.42,500.
Solution :
Cash Budget for the month of June 1999
Rs. Rs.
Opening balance 42,500
Receipts :
Cash sales 95,000
Debtors 1,00,000
Interest on Investments 3,000 1,98,000
2,40,500
Payments :
Cash Purchases 44,000
Creditors 72,000
Rent 2,000
Overheads : May 6,000
June 5,500 11,500 1,29,500
Closing balance 1,11,000
Note : Depreciation is a non - cash item. Hence, it is not considered.

16. BPL Ltd., wishes to arrange overdraft facilities with its bankers during the
period April to June 2000 when it will be manufacturing mostly for stock. Prepare a
Cash Budget for the above period from the following data, indicating the extent of
the bank facilities the company will require at the end of each month :
(a) Credit Sales Purchases
Wages
Rs. Rs. Rs.
February 2000 1,80,000 1,24,000
12,000
March 1,92,000 1,44,000 14,000
April 1,08,000 2,43,000
11,000
May 1,74,000 2,46,000
10,000
June 1,26,000 2,68,000
15,000
(b) 50 per cent of credit sales are realized in the month following the sales and
the remaining 50 per cent in the second month following.
Creditors are paid in the month following the month of purchase.
(c) Cash at bank on 1-4-2000 (estimated) Rs.25,000.
Solution :
BPL Ltd.
Cash Budget for 3 months ending June 2000
April May June
Rs. Rs. Rs.
Opening balance 25,000 53,000 --
Receipts :
Realization from Debtors 90,000 96,000 54,000
96,000 54,000 87,000
Total 2,11,000 2,03,000 1,44,000
Payments :
Wages 14,000 11,000 10,000
Purchases 1,44,000 2,43,000 2,46,000
Total 1,58,000 2,54,000 2,56,000
Surplus or (Deficit) 53,000 (51,000) (1,15,000)
Estimated overdraft (assumed) ---- 51,000 1,15,000
Closing balance 53,000 ---- ----
Note : It is assumed that payment of wages and for purchases are made in the following
month.
17.ABC Company Ltd. has given the following particulars. You are required to
prepare a cash budget for the three months ending 31st December 1999 :
(a) Months Sales Materials Wages Overheads
Rs. Rs. Rs. Rs.

August 20,000 10,200 3,800 1,900
September 21,000 10,000 3,800 2,100
October 23,000 9,800 4,000 2,300
November 25,000 10,000 4,200 2,400
December 30,000 10,800 4,500 2,500
(b) Credit terms are :
Sales / Debtors ----- 10% sales are on cash basis, 50% of the credit sales
are collected next month and the balance in the following month.
Creditors : Materials 2 months
Wages 1 / 5 month
Overheads 1 / 2 month
(c) Cash balance on 1st October, 1999 is expected to be Rs.8,000.
(d) A machinery will be installed in August, 1999 at a cost of Rs.1,00,000.
The monthly installment of Rs.5,000 is payable from October onwards.
(e) Dividend at 10% on preference share capital of Rs.3,00,000 will be paid
on 1st December, 199.
(f ) Advance to be received for sale of vehicle Rs.20,000 in December.
Solution :
Cash Budget for the three months ending
31st December, 1999
October November December
Rs. Rs. Rs.
Opening balance 8,000 7,390 8,180
Receipts :
Cash Sales ( 10% of Sales) 2,300 2,500 3,000
Collection from Debtors 18,450 19,800 21,600
Advance from sale of vehicle 20,000
Total (A) 28,750 29,690 52,780
Payments :
Creditors (Materials) 10,200 10,000 9,800
Wages 3,960 4,160 4,440
Overheads 2,200 2,350 2,450
Monthly Installment of
Machinery 5,000 5,000 5,000
Preference Dividend (10%) 30,000
Income Tax Advance 5,000
Total (B) 21,360 21,510 56,690
Closing Cash Balance ( A – B ) 7,390 8,180 (-) 3,910
The company will need overdraft facility in the month of December to
the extent of Rs. 3,910 as is evident from the Cash budget.
Working :
1.Calculation of Cash Collected from Debtors
Aug. Sept. Oct. Nov. Dec.
Rs. Rs. Rs. Rs. Rs.
Cash Sales (10%) 2,000 2,100 2,300 2,500 3,000
Credit Sales (90%) 18,000 18,900 20,700 22,500 27,000
Total Sales 20,000 21,000 23,000 25,000
30,000 Collections from Debtors :
1st Month (50%) 9,450 10,350 11,250
2nd Month (50%) 9,000 9,450 10,350
Total 18,450 19,800 21,600
2. Since the period of credit allowed by suppliers is two months, the
payment for purchases of materials in August will be paid in October and
so on.
3. 4 / 5 wages of the current month will be paid in the month itself and 1 / 5
wages of the previous month will be paid in the current month.
4. 1 / 2 of overheads of September and 1 / 2 of those of October will be paid
in October and similarly for other months of November and December.
18.Summarized below are the Income and Expenditure forecasts of Gemini Ltd. for the months of
March to August, 2000 :
Sales Purchases Manufacturing Office Selling
Month (all (all Wages Expenses Expenses Expenses
credit) credit)
Rs. Rs. Rs. Rs. Rs. Rs.
March 60,000 36,000 9,000 4,000 2,000 4,000
April 62,000 38,000 8,000 3,000 1,500 5,000
May 64,000 33,000 10,000 4,500 2,500 4,500
June 58,000 35,000 8,500 3,500 2,000 3,500
July 56,000 39,000 9,500 4,000 1,000 4,500
August 60,000 34,000 8,000 3,000 1,500 4,500
You are given the following further information :

(a) Plant costing Rs.16,000 is due for delivery in July payable 10% on delivery and the balance
after the months.
(b) Advance Tax of Rs.8,000 is payable in March and June each.
(c) Period of credit allowed (i) by suppliers 2 months and (ii) to customers 1 month.
(d) Lag in payment of manufacturing expenses ½ month.
(e) Lag in payment of all other expenses 1 month.
You are required to prepare a cash budget for three months starting on 1 st May, 2000 when
there was a cash balance of Rs.8,000.
(M.Com., Madras)
Solution :
GEMINI LIMITED
Cash Budget for the quarter ended 31 July, 2000
May June July
Rs. Rs. Rs.
Receipts :
Opening Balance 8,000 15,750 12,750
Debtors 62,000 64,000 58,000
Total 70,000 79,750 70,750
Payments :
Creditors 36,000 38,000 33,000
Wages 8,000 10,000 8,500
Manufacturing Expenses 3,750 4,000 3,750
Office Expenses 1,500 2,500 2,000
Selling Expenses 5,000 4,500 3,500
Advance Tax --- 8,000 ---
Delivery of Plant (10%
Payment on delivery ) --- --- 1,600
Total 54,250 67,000 52,350
Closing Balance 15,750 12,750 18,400
19.Prepare a cash budget in respect of 6 months from July to
December 1999 from the information given in table as under :
Month Sales Material Wages Overheads
(all Cr.) Prod. Adm. Selling Dis- Res.
tribu- and
tion
Dev.
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
‘000 ‘000 ‘000 ‘000
April 100 40 10.2 4.4 3,000 1,600 800 1,000
May 120 60 11.2 4.8 2,900 1,700 900 1,000
June 80 40 8.0 5.0 3,040 1,500 700 1,200
July 100 60 8.4 4.6 2,960 1,700 900 1,200
Aug. 120 70 9.2 5.2 3,020 1,900 1,100 1,400
Sep. 140 80 10.0 5.4 3,080 2,000 1,200 1,400
Oct. 160 90 10.4 5.8 3,120 2,050 1,250 1,600
Nov. 180 100 10.8 6.0 3,140 2,150 1,350 1,600
Dec. 200 110 11.6 6.4 3,200 2,300 1,500 1,600
Cash balance on Jul 1 is expected to be Rs.1,50,000.
Expected Capital Expenditure :
Plant and Machinery to be installed in August at a cost of Rs.40,000 will
be payable on September 1.Extension to Research and Development
department amounting to Rs.10,000 will be completed on August 1
payable Rs.2,000 per month from completion date. Under a hire-purchase
agreement Rs.4,000 is to be paid each month.
Cash sales of Rs.2,000 per month are expected. No commission is
payable.
A sales commission of 5 percent on credit sales is to be paid within the
month following the sales :
Period of credit allowed by suppliers 3 months
Period of credit allowed to customers 2 months
Delay in payment of overheads 1 months
Delay in payment of wages 1st week of the following
month
Income-tax of Rs.1,00,000 is due to be paid on October 1. Preference
shares dividend of 10 percent on Rs.2,00,000 is to be paid on November 1.
Ten percent calls on ordinary share capital Rs.4,00,000 is due on July 1
and September 1.
Dividend from investments amounting to Rs.30,000 is expected on
November 1.
20. Draw out cash budget for January to March from the following
information.
(1) Cash and Bank Balances on 1-1-2000 Rs. 2,00,000
(2) Actual and budgeted sales
Rs.
September 6,00,000 ( Actual )
October 6,50,000 “
November 7,00,000 “
December 7,50,000 “
January 8,00,000 ( Budgeted )
February 8,20,000 “
March 8,90,000 “
(3) Purchases – Actual and budgeted figures are :
September 3,60,000 ( Actual )
October 4,00,000 “
November 4,80,000 “
December 4,50,000 “
January 4,80,000 ( Budgeted )
February 4,00,000 “
March 5,00,000 “
(4) Wages and expenses – Actual and budgeted.
Wages Expenses
Rs. Rs.
November ( Actual ) 1,50,000 50,000
December ( “ ) 1,50,000 60,000
January ( Budgeted ) 1,80,000 60,000
February ( “ ) 1,80,000 80,000
March ( “ ) 2,00,000 80,000
(5) Special items :
Advance payment of income tax in
March 2000 Rs.50,000
Plant acquired and price paid in
January 2000 Rs.1,00,000
(6) 105 purchases and sales are on cash basis.
(7) Time
Credit sales 2 months
Credit purchase 1 month
Wages ½ month
Expenses ¼ month
(M.Com., Madurai )
Solution :
Cash Budget for January – March 2000
January February March
Rs. Rs. Rs.
Cash and Bank balances 2,00,000 1,32,000 1,62,000
Receipts :
Cash sales 80,000 82,000 89,000
Debtors 6,30,000 6,75,000 7,20,000
Total receipts (A) 9,10,000 8,89,000 9,71,000
Payments :
Cash purchases 48,000 40,000 50,000
Creditors 4,05,000 4,32,000 3,60,000
Wages 1,65,000 1,80,000 1,90,000
Expenses 60,000 75,000 80,000
Advance Tax --- --- 50,000
Plant 1,00,000 --- ---
Total payments (B) 7,78,000 7,27,000 7,30,000
Closing Balance (A) – (B) 1,32,000 1,62,000 2,41,000

Working :
Collections from Debtors :
Rs.
January : Sales for November 7,00,000
Less : 10% cash sales 70,000
Credit sales 6,30,000
February : Sales for December 7,50,000
March : Sales for January 8,00,000
(ii) Payments to Creditors :
Rs.
January : Purchases for December 4,50,000
Less : 10% cash purchases 45,000
Credit purchases 4,05,000
February : Purchases for January 4,80,000
March : Purchases for February 4,00,000
21. From the following forecasts of income and expenditure of Golden
Co., Limited, prepare a cash budget for six months commencing from
1st June 1999 when the bank balance is estimated to be Rs.1,10,000.
Month Sales Selling Purch- Overheads
OHS ases Wages Factory Adm.
Researech
Rs. Rs. Rs. Rs. Rs. Rs. Rs.
March 82,000 5,000 40,000 10,000 8,400 3,400 2,000
April 88,500 3,250 37,000 8,000 5,680 2,500 2,400
May 84,000 4,100 40,000 8,400 5,920 2,760 2,400
June 93,000 3,710 39,000 8,800 5,440 2,480 2,400
July 72,000 3,210 39,900 6,000 5,880 2,600 2,400
August 82,500 3,600 35,000 9,600 6,000 2,520 2,600
September 98,600 3,450 36,400 8,000 5,680 2,700 2,600
October 92,800 3,210 36,574 8,400 5,360 2,560 2,600
November 1,04,400 3,200 32,800 7,600 5,850 2,620 2,400
Lag in payment of Wages ¼ month
Lag in payment of Factory overhead 1 month
Lag in payment of Administration overhead ½ month
Lag in payment of Selling overhead 1 month
Lag in payment of Research Expenditure 1 month
Period of credit allowed by Creditors 3 months
Period of credit allowed to Debtor 2 months
Other information relevant to the preparation of
cash budget is as follows :
i. A sales commission of 5% on sales, and the two months after sales, is
payable in addition to selling overheads.
ii. Capital expenditure planned is (a) Plant purchased in June
1999 for
Rs.1,00,000 payable on delivery, and (b) Building purchased
in
June 1999 for Rs.8,00,000 payable in four half – yearly
installments,
the first being payable in July 1999.
iii. Interest on Bombay Port Trust Bonds amounting to
Rs.50,000 is to
be received in October 1999.
iv. Cash sales are estimated at Rs.2,000 per month.
v. A dividend of Rs.10,000 is to be paid in September 1999.
vi. Tax amounting to Rs.30,000 is to be paid on 1st August
1999.
vii. A call of Rs.2 per share on Equity Share Capital of
Rs.5,00,000
divided into 50,000 shares of rs.10 each is to be received on 1 st
July 1999.

Hint : Overdraft may be raised to the nearest thousand
Solution :
GOLDEN CO.
Cash Budget for the half – year ending 30th November 1999
June July Aug. Sept. Oct. Nov.
Opening Balance 1,10,000 30,355 345 945 1.135 66.950
Receipts :
Cash sales 2,000 2,000 2,000 2,000 2,000 2,000
Debtors 86,500 82,000 91,000 70,000 80,500 96,600
Interest on Bonds --- --- --- --- 50,000 ---
Call on equity
capital --- 1,00,000 --- --- ----
---
Total receipts 1,98,500 2,14,335 93,345 72,945 1,33,635
1,65,550

Payments :
Creditors 40,000 37,000 40,000 39,000 39,900 35,000
Wages 8,700 6,700 8,700 8,400 8,300 7,800
Administration
Overheads 2,620 2,540 2,560 2,610 2,630 2,590
Factory Overheads 5,920 5,440 5,880 6,000 5,680 5,360
Selling Overheads 4,100 3,710 3,210 3,600 3,450 3,210
Selling Commission
( on total sales ) 4,425 4,200 4,650 3,600 4,125 4,930
Research
expenditure 2,400 2,400 2,400 2,600 2,600 2,600
Plant purchased 1,00,000 --- --- -- --- ---
Building purchased --- 2,00,000 --- --- --- ---
Dividend --- --- --- 10,000 ---- ---
Tax --- --- 30,000 --- --- ---
Total payments 1,68,165 2,61,990 97,400 75,810 66,685 61,490
Surplus of Deficit 30,335 -47,655 4,055 2,865 66,950 1,04,060
Estimated Over-
draft (assumed) -- 48,000 5,000 4,000 -- --
Closing balance 30,355 345 945 1,135 66,950 1,04,060
Working : Wages ( lag ¼ month )
¼ of Previous month 2,100 2,200 1,500 2,400 2,000 2,100
¾ of Current month 6,600 4,500 7,200 6,000 6,300 5,700
8,700 6,700 8,700 8,400 8,300 7,800
Administration Overheads : (lag ½ month)

¼ of Previous month 1,380 1,240 1,300 1,260 1,350 1,280
½ of Current month 1,240 1,300 1,260 1,350 1,280 1,310
2,620 2,540 2,560 2,610 2,630 2,590
Flexible Budget :
22. Draw up a flexible budget for overhead expenses on the basis of the following data
and determine the overhead rates on 70%, 80% and 90% plant capacity.
At 70% At 80% At 90%
Capacity Capacity Capacity
Rs. Rs. Rs.
Indirect labour --- 12,000 ---
Stores including spares --- 4,000 ---
Semi – Variable Overheads :
Power
( 30% fixed, 70% variable ) --- 20,000 ---
Repairs and maintenance
( 60% fixed, 40% variable ) --- 2,000 ---
Fixed Overheads :
Depreciation --- 11,000 ---
Insurance --- 3,000 ---
Salaries --- 10,000 ---
Total Overheads --- 62,000 ---
Estimated direct labour hours : 1,24,000 hrs.

( B.Com., Madras, Bharathidasan & Madras )
Solution :
Flexible Budget for the period ------------
At 70% At 80% At 90%
Capacity Capacity Capacity
Rs. Rs. Rs.
Indirect labour 10,500 12,000 13,500
Stores including spares 3,500 4,000 4,500
Semi-Variable Overheads : XE
Power – Fixed 6,000 6,000 6,000
Variable 12,250 14,000 15,750
Repairs and maintenance
Fixed(60% ON 2000 1200 1200 1200
VARIABLE 700 800 900
Fixed Overheads :
Depreciation 11,000 11,000 11,000
Insurance 3,000 3,000 3,000
Salaries 10,000 10,000 10,000
Total Overheads 58,150 62,000 65,850
Estimated direct labour
hours 1,08,500 1,24,000 1,39,500
Direct labour hour rate Re. 0.536 Rs.0.500 Rs.0.472

ss
Working :
Direct labour rates have been computed as
follows :
At 70% capacity = Rs.58,150 = Re.0.536
1,08,500 hrs.
At 80% capacity = Rs.62,000 = Re.0.500
1,24,000 hrs.
At 90% capacity = Rs. 65,850 = Re.0.472
1,39,500 hrs.
23. The expenses for budgeted production of 10,000 units in a factory
are furnished below :
Per Unit
Rs.
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 5
Total Cost per unit 155
Prepare a budget for production of :
(a) 8,000 units
(b) 6,000 units
(c) indicate cost per unit at both the levels.
Assume that administration expenses are fixed for all levels of
production.
( B.Com., Bharathidasan, Madras & Maduari )
Solution :
Flexible Budget
10,000 Units 8,000 units 6,000 units
Per Total Per Total Per Total
Unit Amount Unit Amount Unit Amount
Production Expenses :
Materials 70.00 7,00,000 70.00 5,60,000 70.00 4,20,000
Labour 25.00 2,50,000 25.00 2,00,000 25.00 1,50,000
Overheads 20.00 2,00,000 20.00 1,60,000 20.00 1,20,000
Direct Variable expenses 5.00 50,000 5.00 40,000 5.00 30,000
Fixed Overheads :
(Rs.1,00,000) 10.00 1,00,000 12.50 1,00,000 16.67 1,00,000
Selling Expenses :
Fixed 1.3 13,000 1.625 13,000 2.17 13,000
Variable 11.7 1,17,000 11.7 93,600 11.7 70,200
Distribution Expenses
Fixed 1.40 14,000 1.750 14,000 2.334 14,000
Variable 5.60 56,000 5.600 44,800 5.600 33,600
Administration Expenses 5.00 50,000 6.250 50,000 8.333 50,000
155.00 15,50,000 159.425 12,75,400 166.80 10,00,800

Working :
Fixed expenses remain fixed irrespective of
the level of output.
Selling expenses Rs.13; Variable expenses
per unit is constant.
Fixed 10% ( i.e. 13 x 10 ) = Rs.1-30
100
For 10,000 units = 10,000 x 1.30 = Rs.13,000
Variable 90% ( i.e. 13 x 90 ) = Rs.11.70

100
24. The cost of an article at a level capacity level of 5,000 units is given under
A below. For a variation of 25% in capacity above or below this level, the
individual expenses. Vary as indicated under B below :

A B
Rs.
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 )
Adm. Overheads 5,000 ( 25% Varying )
Selling Overheads 3,000 ( 25% Varying )
62,750
Cost per unit Rs.12.55
Find the unit cost of the product at production levels of 4,000 units and
6,000 units.
( B.Com., Madras and M.Com., Bharathidasan )
Solution :
Flexible Budget
4,000 Units 5,000 units 6,000 units

Per Total Per Total Per Total
Unit Amount Unit Amount Unit Amount
Material cost 5.00 20,000 5.00 25,000 5.00 30,000
Labour cost 3.00 12,000 3.00 15,000 3.00 18,000
8.00 32,000 8.00 40,000 8.00 48,000
Factory Overheads :
Power : Variable
( 1,250 x 80 / 100 ) 0.20 800 0.20 1,000 0.20 1,200
Fixed ( 1,250 x 20 / 100 ) 0.06 250 0.05 250 0.04 250
Repairs and Maintenance :
Fixed ( 2,000 x 25 / 100 ) 0.13 500 0.10 500 0.08 500
Variable ( 2,000 x 75 / 100 ) 0.30 1,200 0.30 1,500 0.30 1,800
Stores 0.20 800 0.20 1,000 0.20 1,200
Inspection :
Variable ( 500 x 20 / 100 ) 0.02 80 0.02 100 0.02 120
Fixed ( 500 x 80 / 100 ) 0.10 400 0.08 400 0.07 400
Depreciation 2.00 8,000 2.00 10,000 2.00 12,000
Work cost 11.01 44,030 10.95 54,750 10.91 65,470
Administrative Overheads :
Fixed ( 5,000 x 75 / 100 ) 0.94 3,750 0.75 3,750 0.63 3,750
Variable ( 5,000 x 25 / 100 ) 0.25 1,000 0.25 1,250 0.25 1,500
Selling Overheads :
Fixed ( 3,000 x 75 / 100 ) 0.56 2,250 0.45 2,050 0.38 2,250
Variable ( 3,000 x 25 / 100 ) 0.15 600 0.15 750 0.15 900
Total Cost 12.91 51,630 12.55 62,750 12.32 73,870
25. The following data are available in a manufacturing company for
the year 1998 :
Rs. Lakhs
Fixed expenses :
Wages and Salaries 9.5
Rent, rates and taxes 6.6
Depreciation 7.4
Sundry administration expenses 6.5
Semi-variable expenses ( At 50% of capacity ) :
Maintenance and repairs 3.5
Indirect labour 7.9
Sales department salaries, etc. 3.8
Sundry administration salaries 2.8

Variable expenses ( At 50% of capacity ) :
Materials 21.7
Labour 20.4
Other expenses 7.9
Total Cost 98.0
sAssume that the fixed expenses remain constant for
all levels of production; Semi-variable expenses remain
constant between 45 percent and 65 percent of
capacity increasing by 10 percent between 65 percent
and 80 percent capacity and by 20 percent between 80
percent and 100 percent capacity.
Sales at various levels are : Rs. Lakhs
50% Capacity 100
60% Capacity 120
75% Capacity 150
90% Capacity 180
100% Capacity 200
Prepare a flexible budget for the year, 1999 and
forecast the profit at 60 percent, 75 percent,
90percent and 100 percent capacity.
Solution :
Flexible Budget for the year 1999
( Rupees in Lakhs)
Capacity 50% 60% 75% 90% 100%
Sales 100 120 150 180 200
Fixed Expenses :
Wages and Salaries 9.5 9.5 9.5 9.5 9.5
Rent, rates and taxes 6.6 6.6 6.6 6.6 6.6
Depreciation 7.4 7.4 7.4 7.4 7.4
Sundry Adm. expenses 6.5 6.5 6.5 6.5 6.5
Total fixed cost 30.0 30.0 30.0 30.0 30.0

Semi-variable expenses :
Maintenance and repairs 3.5 3.5 3.85 4.20 4.20
Indirect labour 7.9 7.9 8.69 9.48 9.48
Sales dept. salaries, etc. 3.8 3.8 4.18 4.56 4.56
Sundry adm. expenses 2.8 2.8 3.10 3.38 3.38
Total Semi-variable cost 18.0 18.0 19.82 21.62 21.62
Variable expenses :
Material 21.7 26.04 32.55 39.06 43.4
Labour 20.4 24.48 30.60 36.72 40.8
Other expenses 7.9 9.48 11.85 14.22 15.8
Total Variable Cost 50.0 60.00 75.00 90.00 100.0
Total Cost (A) + (B) + (C) 98.0 108.0 124.82 141.62 151.62
Profit 2.0 12.0 25.18 38.38 48.38
26. The following information relates to the production activities of G.
Ltd., for three months ended 31st December, 1999 :
Rs.
Fixed expenses :
Management salaries 2,10,000
Rent and taxes 1,40,000
Depreciation of machinery 1,75,000
Sundry office expenses 2,22,500
7,47,500
Semi-variable at 50% capacity :
Plant maintenance 62,500
Indirect labour 2,47,500
Salesmen’s salaries 72,500
Sundry expenses 65,000
4,47,500
Variable expenses at 50% capacity :
Materials 6,00,000
Labour 6,40,000
Salesmen’s commission 95,000
13,35,000
It is further noted that semi-variable expenses
remain constant between 40% and 70% capacity,
increase by 10% of the above figures between 70%
and 85% capacity and increase by 15% of the above
figures between 85% and 100% capacity. Fixed
expenses remain constant whatever the level of
activity may be. Sales at 60% capacity are
Rs.25,50,000; at 80% capacity Rs.34,00,000 and 100%
capacity Rs.42,50,000. Assuming that all items
produced are sold, prepare a flexible budget at 60%,
80% and 100% production capacity.
( B.Com., Madras and Bharathidasan )
Solution :
Flexible Budget
For three months ended 31st December, 1999
Capacity levels
50% 60% 80% 100%
Rs. Rs Rs. Rs.
Sales (i) 21,25,000 25,50,000 34,00,000 42,50,000
Fixed Expenses :
Management Salaries 2,10,000 2,10,000 2,10,000 2,10,000
Rent and taxes 1,40,000 1,40,000 1,40,000 1,40,000
Depreciation of Machinery 1,75,000 1,75,000 1,75,000 1,75,000
Sundry Office expenses 2,22,500 2,22,500 2,22,500 2,22,500
Total Fixed Expenses (ii) 7,47,500 7,47,500 7,47,500 7,47,500
Semi variable Expenses :
Plant maintenance 62,500 62,500 68,750 71,875
Indirect labour 2,47,500 2,47,500 2,72,250 2,84,625
Salesmen’s Salaries 72,500 72,500 79,750 83,375
Sundry Expenses 65,000 65,000 71,500 74,750
Total Semi-Variable Expenses (iii) 4,47,500 4,47,500 4,92,250 5,14,6
Variable Expenses :
Materials 6,00,000 7,20,000 9,60,000 12,00,000
Labour 6,40,000 7,68,000 10,24,000 12,80,000
Salesmen’s commission 95,000 1,14,000 1,52,000 1,90,000
Total Variable Expenses (iv) 13,35,000 16,02,000 21,36,000 26,70,000
Total Cost ( ii + iii + iv ) (v) 25,30,000 27,97,000 33,75,750 39,32,125
Profit / Loss ( i – v ) (4,05,000) ( 2,47,000) 24,250 3,17,875
27. A Company Produces a standard product. The estimated
cost per unit is as follows :
Raw material Rs.4 : Direct Labour Rs.2 :Variable Overheads
Rs.5.
The Semi Variable cost are : Indirect Materials Rs.235;
Indirect Labour Rs.156, Maintenance and Repairs Rs.570.
The Variable cots per unit included in semi-variable are :
Indirect Materials Re.0.05; Indirect Labour Re.0.08;
Maintenance and Repairs Rs.0.10.
The Fixed Cots are – Factory Rs.2,000; Administration
Rs.3,000; Selling and Distribution Rs.2,500.
The above costs are for 70% of normal capacity producing
700 units. The selling price is Rs.30 per unit. Flexible Budget
for 60%, 80% and 100% normal capacities, with the help of
above.
Solution :
Flexible Budget
Normal Capacity 70% ( 700 units )
Capacity 60% 70% 80% 100%
Units 600 700 800 1,000
Rs. Rs. Rs. Rs.
Variable Costs :
Raw Materials @
Rs.4 per unit 2,400 2,800 3,200 4,000
Direct Labour @
Rs.2 per unit 1,200 1,400 1,600 2,000
Variable Overheads
@ Rs.5 per unit 3,000 3,500 4,000 5,000
Total Variable Cots 6,600 7,700 8,800 11,000
Semi-Variable Costs :
( Rs.200+ 0.05 per unit) 230 235 240 250
Indirect Labour
( Rs.100 + 0.08 per unit ) 148 156 164 180
Maintenance and repair
( Rs.500 + 0.10 per unit ) 560 570 580 600
Total Semi-Variable costs 938 961 984 1,030
Fixed Costs :
Factory Overheads 2,000 2,000 2,000 2,000
Administration Overheads 3,000 3,000 3,000 3,000
Selling & Distribution
Overheads 2,500 2,500 2,500 2,500
7,500 7,500 7,500 7,500
Total Cost 15,038 16,161 17,284 19,530
Sales @ Rs.30 per unit 18,000 21,000 24,000 30,000
Profit 2,962 4,839 6,716 10,470
Working : Semi-variable costs :
Indirect Indirect Maintenance &
Material Labour Repairs
Rs. Rs. Rs.
Total at 70%
Capacity
(i.e. 700 units) 235 156 570
Less :
Variable costs 35 (700 x 0.05) 56 (700 x 0.08) 70 (700 x 0.10)
Fixed Costs
included in
Semi-Variable
expenses 200 100 500
28. ITC. Ltd., has prepared the budget for the
production of 1 lakh units of the only commodity
manufactured by it for a costing period as under :
Rs.(lakh)
I. Raw material 2.52
II. Direct Labour 0.75
III.Direct Expenses 0.10
IV.Works Overhead ( 60% fixed ) 2.25
V.Administrative Overheads ( 80% fixed ) 0.40
Solution :
Flexible Budget
Budget for Revised Budget
1,00,000 units for 60,000 units
Per unit Total Per unit Total
Rs. Rs. Rs. Rs.
Raw Material 2.52 2,52,000 2.52 1,51,200
Direct Labour 0.75 75,000 0.75 45,000
Direct Expenses 0.10 10,000 0.10 6,000
Prime Cost 3.37 3,37,000 3.37 2,02,200
Works Overheads :
Fixed (2,25,00 x 60/100) 1.35 1,35,000 2.25 1,35,000
Variable (2,25,000 x 40/100) 0.90 90,000 0.90 54,000
Works Cost 5.62 5,62,000 6.52 3,91,200
Administrative Overheads :
Fixed(40,000 x 80/100) 0.32 32,000 0.53 32,000
Variable (40,000 x 20/100) 0.08 8,000 0.08 4,800
Cost of production 6.02 6,02,000 7.13 4,28,000
Selling Overheads :
Fixed (20,000 x 50/100) 0.10 10,000 0.17 10,000
Variable (20,000 x 50/100) 0.10 10,000 0.10 6,000
Cost of sales 6.22 6,22,000 7.40 4,44,000
29.From the following information relating to 1999 and conditions
expected to prevail in 2000, prepare a budget for 2000.
State the assumptions you have made.
1999 actuals : Rs.
Sales 1,00,000 ( 40,000 units )
Raw materials 53,000
Wages 11,000
Variable overheads 16,000
Fixed overheads 10,000
2000 prospects :
Sales Rs.1,50,000 ( 60,000 units )
Raw materials 5% price increase
Wages 10% increase in wage rate
5% increase in productivity
Additional plant one lakh Rs.25,000
one drill Rs.15,000
( M.Com., Bharathidasan & Madras)
Solution :
Budget for 2000
Actual for 1999 Budget for 2000
Rs. Rs.
Sales (A) 1,00,000 1,50,000
Variable costs :
Raw materials 53,000 83,475
Wages 11,000 17,286
Variable Overheads 16,000 24,000
80,000 1,24,761
Fixed Overheads 10,000 13,700
Total Cost (B) 90,000 1,38,461
Profit (A) – (B) 10,000 11,539
Working :
(1)Wages = 11,000 x 60,000 x 110 x 100 = Rs.17,286
40,000 100 105
Increase in productivity means that less labour
hours will be required to perform the work.
Hence wages will go down.
(2)It is assumed that 10% depreciation will be
charged on additional plant.
30. Vasu Ltd. manufacturing a single product is facing a
severe competition in selling it at Rs. 50 per unit. The
company is operating at 60% level of activity at which the
sales are Rs.12,00,000. Variable cost are Rs.30 per unit.
Semi-variable cost may be considered as fixed at Rs.90,000
when the output is nil and variable element is Rs.250 for
each additional 1% level of activity. Fixed cost are
Rs.1,50,000 at the present level of activity but if a level of
activity is 80% or above is reached these costs are expected
to increase by Rs.50,000.
To cope up with the competition the management of the
company is considering a proposal to reduce the selling
price by 5%. You arte required to prepare a statement
showing the operating profit at the levels of activity of 60%,
70% and 80% assuming that,
a) the selling price remains at Rs.50
b) the selling price reduces by 5%
(M.Com., Bharathidasan)
Solution :
(a)Statement of Profitability
Capacity 60% 70% 80%
Units 24,000 28,000 32,000
Sales (A) 12,00,000 14,00,000 16,00,000

Variable cost 7,20,000 8,40,000 9,60,000
(24,000x30) (28,000x30) (32,000x3)
Semi-variable cost :
Fixed 90,000 90,000 90,000
Variable 15,000 17,500 20,000
(250 x 60) (250 x 70) (250 x 80)
Fixed cost 1,50,000 1,50,000 2,00,000
Total Cost (B) 9,75,000 10,97,500 12,70,000
Profit ( A – B ) 2,25,000 3,02,500 3,30,000
B. Reduction in selling price by 5%
Sales Rs.11,40,000 13,30,000 15,20,000

Total cost Rs.9,75,000 10,97,500 12,70,000
Profit Rs.1,65,000 2,32,500 2,50,000
31. East and West enterprises is currently working at 50%
capacity and produces 10,000 units. Estimate the profits of
the company when it works at 60% and 70%capacity.
At 60% capacity, the raw material cost increases by 2%
and the selling price falls by 3%. At 705 capacity, the raw
material cost increases by 4% and the selling price falls by
5%.
At 50% capacity 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 :
Material Rs. 100
Wages Rs. 30
Factory overheads Rs. 20 ( 40%
fixed )
Administration overheads Rs. 30 ( 50%
fixed )
(B.Com., Madurai & Madras )
Solution :
Statement of Profitability
Particulars 60% Capacity 70% Capacity
(Output = 12,000 units) (Output = 14,000 units)
Per unit Total Per unit Total
Rs. Rs. Rs. Rs.
Material 102 12,24,000 104 14,56,000
( 100 + 2%) ( 100 + 4% )
Wages 30 3,60,000 30 4,20,000
Factory Overheads:
Fixed 6.67 80,040 5.71 79,940
Variable 12.00 1,44,000 12.00 1,68,000
Administration Overheads :
Fixed 12.50 1,50,000 10.72 1,50,080
Variable 15.00 1,80,000 15.00 2,10,000
Total Cost 178.17 21,38,040 177.43 24,84,020
Profit 15.83 1,89,960 12.57 1,75,980
Sales 194.00 23,28,000 190.00 26,60,000
( 200 – 3% ) ( 200 - 5% )
32. The following overhead expenses relate to a cost centre
operating at 50% of normal activity. Draw up a flexible
budget for the cost centre operating at 75%, 100% and
125%of normal capacity. Indicate the basis upon which you
have estimated each item of expenses for the different
operating levels.
Rs.
1. Foreman 60
2. Assistant Foreman 40
3. Inspectors 65
4. Shop Labourers 40
5. Machinery Repairs 100
6. Defective Work 25
7. Consumable Stores 20
8. Overtime Bonus Nil
9. Machine Depreciation 110
Solution :
Flexible Budget
50% 75% 100% 125%
Rs. Rs. Rs. Rs.
Foreman 60 60 60 60
Assistant Foreman 40 40 80 80
Inspectors 65 80 95 110
Shop Labourers 40 60 80 100
Machinery Repairs 100 150 200 300
Defective Work 25 40 60 90
Consumable Stores 20 30 40 50
Overtime Bonus -- 10 30 60
Machine Depreciation 110 110 110 150
460 580 755 1000
Basis of Estimate :
1. Foreman’s salary has been assumed to remain fixed irrespective of
the production capacity.
2. Assistant foreman’s salary is in the nature of semi-variable cost.
Additional supervision will be required for increased levels of
production.
3. With increased level of output, more inspectors will be required for
the supervision of the output, so it is a semi-variable cost.
4. Wages to shop labourers is a variable cost.
5. Machine repairs is a semi-variable cost. However it may increase
more than proportionately when 100% capacity is exceeded due to
increased load on machines.
6. It is semi-variable expenses because with increased work of
production, proper care as to quality of products may be lacking
and defective work may be more.
7. Consumable stores is a variable cost.
8. It is a semi-variable cost. More overtime is needed to produce more
and more with limited facilities available.
9. It is fixed up to 100% capacity but beyond 100%the depreciation
may be more due to extra shifts being run.
33. A Glass Manufacturing Company requires you to calculate and
present the budget for the next year from the following
information
Sales :
Thoughened Glass Rs.3,00,000
Bent Thoughened Glass Rs.5,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ Rs.1.50 per month
Factory Overheads :
Indirect labour :
Works manager Rs.500 per month
Foremen Rs.400 per month
Stores and spares 2 ½ % on sales
Depreciation on machinery Rs.12,600
Light and Power Rs. 5,000
Other sundries 10% on direct wages
Administration selling and
distribution Rs.14,000 per year
Repairs and maintenance Rs.8,000
( B.Com., Madras, Bharathidasan & Madurai )
Solution :
MASTER BUDGET
For the period ending………………
Rs.
Sales (as per sales budget)
Toughened glass 3,00,000
Bent toughened glass 5,00,000
8,00,000
Less: Cost of production (as per
production cost budget)
Direct materials 4,80,000
Direct wages 36,000
Prime Cost 5,16,000
Factory Overheads :
Variable :
Stores and spares
(2 ½% on sales ) Rs.20,000
Light and power 5,000
Repairs and maintenance 8,000
33,000
Fixed :
Works manager’s salary 6,000
Foreman’s salary 4,800
Depreciation 12,600
Sundries 3,600
27,000
Works cost 5,76,000
Gross profit 2,24,000
Less : Administration, selling and
distribution overheads 14,000
Net Profit 2,10,000
CONTROL RATIOS
34. A factory produces 2 units of a commodity in one standard hour. Actual
production during a particular year is 17,000 units and the budgeted production
for the year is fixed at 20,000 units. Actual hours operated are 8,000. Calculated
the efficiency and activity ratios.
Solution :
2 units are produced in one standard hour
For actual production of 17,000 units, standard hours will be
17,000 = 8,500
2
For budgeted production of 20,000 units, budgeted hours will be
20,000 = 10,000
2
Efficiency Ratio = Standard hours for actual production x 100
Actual hours worked
= 8,500 x 100 = 106.25%
8,000

Activity Ratio = Standard hours for actual production x 100
Budgeted hours
= 8,500 x 100 = 85%
10,000
35. A factory manufactures two types of articles X and Y. Article X takes 10 hours to make and article Y
requires 20 hours. Ina month (25 days of 8 hours each ) 500 units of X and 300 units of Y employs
are produced. The budgeted hours are 8,500 per month. The factory employs 60 men in the
department concerned. Compute Activity Ratio, Capacity Ratio and Efficiency Ratio.
Solution :
Hrs.
Standard hours for actual production :
X : 500 units x 10 5,000
Y : 300 units x 20 6,000
11,000
Budgeted Hours = 8,500
Actual Hours Worked = 60 x 8 x 25 = 12,000
Budgeted hours
= 11,000 x 100 = 129%
8,500
Capacity Ratio = Actual hours worked x 100
Budgeted hours
= 12,000 x 100 = 141%
8,500
Actual hours worked
= 11,000 x 100 = 92%
12,000
36. From the following data, calculate Activity Ratio,
Capacity Ratio and Efficiency Ratio :
A factory manufactures two products A and B.
Standard time to manufacture product A is 2 hours and
product B is 10 hours. The budgeted and actual
production in December, 1999 were as follows :
Budgeted Production Actual
Production
Product A 125 units 100 units
Product B 30 units 24 units
total actual hours worked were 660.
Solution :
Budgeted Hours for December, 1999 :
Product A = 125 units @ 2 labour hours = 250 Hours
Product B = 30 units @ 10 labour hours = 300 Hours
Total 550 Hours
Standard Hours for Actual Production :
Product A = 100 units @ 2 labour hours = 200 Hours
Product B = 24 units @ 10 labour hours = 240 Hours
Total 440 Hours
Budgeted hours
= 440 x 100 = 80%
550
Budgeted hours
= 660 x 100 = 120%
550
Actual hours worked
= 440 x 100 = 66.67%
660
37. Two articles A and B produced in a factory.
Their specifications show that 4 units of A or 2
units of B can be produced in one hour. The
budgeted production for January, 2000 is 800
units of A and 200 units of B. The actual
production at the end of the month was 900
units of A and 180 units of B. Actual labour
hours spent were 350. Find out the Capacity,
Activity and Efficiency ratios for January, 2000.
Solution :
Budgeted Hours for January, 2000 :
Product A = 800 / 4 = 200 Hours
Product B = 200 / 2 = 100 Hours
Total 300 Hours
Standard Hours for Actual Production :
Product A = 900 / 4 = 225 Hours
Product B = 180 / 2 = 90 Hours
Total 315 Hours
Budgeted hours
= 350 x 100 = 116.67%
300
Budgeted hours
= 315 x 100 = 105%
300
Actual hours worked
= 315 x 100 = 90%
350
Additional Problems :
38. Prepare a Cash Budget of XYZ Ltd., on the basis of the following information for
the six months commencing April 1999 :
(a) Cash sales are 25% of the total sales and balance 75% will be credit sales
(b) 60% of credit sales are collected in the month following the sales balance 30% and
10% in the two following months thereafter. No bad debts are anticipated.
(c) Gross profit margin 20%
(d) Sales forecast are :
Jan. Rs. 12,00,000 April 6,00,000 July 12,00,000
Feb. Rs. 14,00,000 May 8,00,000 Aug. 10,00,000
Mar. Rs. 16,00,000 Jun. 8,00,000 Sep. 8,00,000
(e) Anticipated purchases :
April Rs. 6,40,000 June Rs. 9,60,000 Aug. Rs. 6,40,000
May Rs. 6,40,000 Jul Rs. 8,00,000 Sep. Rs. 9,60,000
(f) Wages and Salaries to be paid :
April Rs. 1,20,000 June Rs. 2,00,000 Aug. Rs. 1,60,000
May Rs. 1,60,000 Jul Rs. 2,00,000 Sep. Rs. 1,40,000
(g) Interest at 6% on Debentures of Rs.20,00,000 is paid quarterly and payable in June
and Sept. 99.
(h) Excise Deposit due in July 99 Rs.2,00,000.
(i) Capital expenditure for plant and machinery planned for Sept. Rs.1,20,000.
(j) Company has a cash balance of Rs.4,00,000 as at Mar. 31st 99.
(k) Rent is Rs.8,000 per month.
( M.Com., Bharathidasan )
Solution :
Cash Budget of XYZ Ltd. for 6 months ending 30-9-99
( rupees in thousands)
April May June July Aug. Sept.
Opening balance 400 907 1,034 651 328 490
Receipts :
Cash sales 150 200 200 300 250 200
Debtors 90 105 120 45 60 60
315 360 135 180 180 270
720 270 360 360 540 450
Total receipts 1,675 1,842 1,849 1,536 1,298 1,470
April May June July Aug. Sept.
Less : Payments
Purchases 640 640 960 800 640 960
Wages & Salaries 120 160 200 200 160 140
Int. on debenture -- -- 30 -- -- 30
Excise Dep. due -- -- -- 200 -- --
Plant & Machinery -- -- -- -- -- 120
Rent 8 8 8 8 8 8
Total payments 768 808 1,288 1,208 808 1,348
Closing balance 907 1,034 651 328 490 122
39. Prepare a Cash Budget for the month of Jan. and Feb. 1999 for Lohia Ltd. from the
following information :
(a) Cash Balance on 1-1-99 is estimated at Rs.20,000.
(b) Particulars Opening Stock Closing Stock Cost of Sales
Nov. 98 Nil Rs.20,000 Rs.1,20,000
Dec. 98 ? 40,000 1,40,000
Jan. 99 ? 60,000 1,50,000
Feb. 99 ? 70,000 1,70,000
(c) A steady rate of gross profit of 20% is maintained on cost throughout the year.
(d) 50% of sales are on cash basis, 30% of sales realized in the month following, 15%
in the second month following and the balance being bad debts.
(e) 50% of the purchases are on cash basis and the balance is paid in the following
month.
(f) Rent is Rs.1,000 per month.
(g) Information regarding general expenses are as follows : Particulars General
expenses Outstanding at the end of
each month
Rs. Rs.
Dec. 98 5,000 2,000
Jan. 99 6,000 1,500
Feb. 99 7,000 1,000
General expenses include outstanding of each month.

Solution :
Cash Budget Lohia Ltd. for 2 months ending Feb. 99
Jan. 99 Feb. 99
Rs. Rs.
Opening Balance 20,000 9,500
Receipts : Cash sales (1) 90,000 1,02,500
Debtors 21,600 25,200
50,400 54,000
72,000 79,200
Total Receipts (A) 1,82,000 1,90,700
Less : Payments :
Cash purchases (2) 85,000 90,000
Creditors 80,000 85,000
Rent 1,000 1,000
General expenses 2,000 1,500
4,500 6,000
6,500 7,500
Total Payments (B) 1,72,500 1,83,500
Closing Balance ( A – B ) 9,500 7,200
Working :
(1) Calculation of sales :
Sales = Cost of sales + Gross profit
Nov = Rs. 1,20,000 + 20% = Rs.1,44,000
Dec = Rs. 1,40,000 + 20% = Rs.1,68,000
Jan = Rs. 1,50,000 + 20% = Rs.1,80,000
Feb = Rs. 1,70,000 + 20% = Rs. 2,04,000
Nov. Dec. Jan. Feb.
Sales 1,44,000 1,68,000 1,80,000 2,04,000
Less: Cash sales 50% 72,000 84,000 90,000 1,02,000
Credit sales 72,000 84,000 90,000 1,02,000

Less Realized from Drs.
30% of sales in 2nd month -- 43,200 50,400 54,000
15% of sales in 3rd month -- --- 21,600 25,200
72,000 79,200
(2) Calculation of purchases :
Nov. Dec. Jan. Feb.
Opening stock ---- 20,000 40,000 60,000
+ Purchases (?) 1,40,000 1,60,000 1,70,000 1,80,000
1,40,000 1,80,000 2,10,000 2,40,000
(-) Closing stock 20,000 40,000 60,000 70,000
Cost of sales 1,20,000 1,40,000 1,50,000 1,70,000
Purchases 1,40,000 1,60,000 1,70,000 1,80,000
Less: Cash
purchases 50% 70,000 80,000 85,000 90,000
Credit purchases 70,000 80,000 85,000 90,000
Balance 50% paid
in next month --- 70,000 80,000 85,000
80,000 85,000
(3) General expenses outstanding at the end of each month is paid in

the following month.
(40) Bharath Ltd. has seasonal sales. It sells its goods atRs.50 p. u. Sales are
25% cash and the remainder at 1 ½ months credit. The cost of goods in
terms of percentage of the selling price is as follows :
Material20%, Wages 25%, Variable factory expenses 20%, Fixed
factory expenses Rs.1,00,000 p.m. Income tax Rs.60,000 is payable in July,
Oct. and Dec. The company pays dividend on equity shares in Aug.
totaling Rs.75,000. The company purchases materials a month before the
one in which it is required and payment is made after one month. In
respect of expenses payments are made for nightly, unless otherwise
indicated.
The sales in units for various months are as follows :
April 3,000, May 5,000, June 6,000, July 8,000, August 8,000, Sept. 10,000
Sales in each month is spread uniformly over the month
On 1st July, 99, the company expected to have an overdraft of Rs.54,000.
Prepare a cash budget for three months ending 30-9-2000.
Solution :
Cash Budget of Bharath Ltd. for 3 months ending 30-9-2000
July August September
Rs. Rs. Rs.
Receipts :
Cash sales 1,00,000 1,00,000 1,25,000
Debtors 93,750 1,12,500 1,50,000
1,12,500 1,50,000 1,50,000
Total Receipts 3,06,250 3,62,500 4,25,000
Less : Payments :
Fixed factory expenses 1,00,000 1,00,000 1,00,000
Material 80,000 80,000 1,00,000
Wages 87,500 1,00,000 1,12,500
Variable factory expenses 70,000 80,000 90,000
Income tax 60,000 ---- ---
Dividend --- 75,000 ---
Total Payments 3,97,500 4,35,000 4,02,500
Add : Opening overdraft 54,000 1,45,250 2,17,750
4,51,500 5,80,250 6,20,250
Less : Receipts 3,06,250 3,62,500 4,25,000
Overdraft at the end 1,45,250 2,17,750 1,95,250
Working :
(1) Receipts from debtors : It is assumed that sales on 1st
April is realized on 15th May and sales on 15th April is
realized on 1st June and so on.
Month Cr. Sales ½ of Cr. Sale Due on
1st May 1,87,500 93,750 15th June
15th May 1,87,500 93,750 1st July
1st June 2,25,000 1,12,500 15th July
15th June 2,25,000 1,12,500 1th Aug.
1st July 3,00,000 1,50,000 15th Aug.
15th July 3,00,000 1,50,000 1st Sep.
1st Aug. 3,00,000 1,50,000 15th Sep.
15th Aug. 3,00,000 1,50,000 1st Oct.
(ii) Materials required in July Rs.80,000 ( 8,000 x Rs.10 p. u.) is purchased in
June and payment is made in July and so on.
(iii) Payment of wages and factory expenses will be ½ of the previous month
and ½ of the current month.
Wages = 25% of sales
i.e., 25% of Rs.50 = Rs.12.50 p. u.
June : 6,000 x 12.50 = Rs.75,000

37,000 June 37,500 July
July : 8,000 x 12.50 = Rs.1,00,000

50,000 July 50,000 Aug.
Aug. : 8,000 x 12.50 = Rs.1,00,000

50,000 Aug. 50,000 Sep.
Sept. : 10,000 x 12.50 = Rs.1,25,000

62,500 Sep. 62,500 Oct.

Budgetary Contro1

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Budgetary Contro1

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BUDGETARY CONTROL

1.Define the term budget. What are the

THE MAIN STEPS IN BUDGETARY CONTROL ARE :

1. Establishment of budgets for each section of the organization.

1. Arranging for all the meetings of the budget committee.

The following steps should be taken in a sound system of budgetary control :

Budget Manual is a book which contains the procedure to be

6. What are the requirements of a good budgetary control system ?

1.SALES BUDGET : A sales budget is an estimate of expected sales

5.FACTORY OVERHEAD BUDGET : Factory overheads include indirect

6.ADMINISTRATIVE EXPENSES BUDGET : The budget is

The following points should be considered in the

(a)The channels of distribution of the product

8.What is Zero – Base Budgeting (ZBB) ? Explain

The traditional technique of budgeting is to take previous year’s cost

Type of Estimated Stock Estimated Sales Desired Closing

Particulars A ( Units ) B ( Units ) C ( Units ) D ( Units )

( B.Com., Madras, Bharathidasan

Stocks for the budgeted period

Products As on 1st Jan As on 30th June

Requirements to fulfill Normal loss

Production before loss 64583 50000 87234 201817

If net production is 62,000, Gross Production = 100 x 62,000 = 2,583

Similar calculations are made for products S & T.

February 1200 2800

March 1600 2400

April 2000 2000

May 2400 1600

June 2400 1600

July 2000 1800

Total factory overhead 88000 72000

Jan. Feb. Mar. April May June

1600 2000 2600 3200 3600 3400

Total Budgeted production for six months :

4200 4000 3400 2800 2400 2500

Total Budgeted production for six months

• Product A = 88,000 = Rs.4 Product B = 72,000 = Rs.3

Estimated Production 54000

Materials Purchase or Procurement Budget (Units )

Estimated sales 40,000

Materials Procurement Budget ( in Units )

Estimated consumption 42,000 x 3 1,26,000

Prepare : (i) Sales budget in rupees.

Product Sales Quantity Selling price per unit Sales value

A 100 100 10000

Production Budget ( in quantities )

Product A Product B Product C

A 110 4 440 2 220 -- --

480 1,395 1,020 585

4,515 3,420 2,025

Estimated quantity of purchases 1,915 1,420 825

Estimated material purchases 7,660 8,520 7,425

Sales Budget for 2000

( Rs. 10 – 10% = 9 ) 1,08,000 86,400 1,29,600 3,24,000

From the above statement it is clear that both the

Beta 15,000 + ( 10% Increase ) 1,500 + 1,875 =

Agent’s Commission 520 650 682.50

Note : Depreciation is a non - cash item. Hence, it is not considered.

Rs. Rs. Rs. Rs.

You are given the following further information :

Administration Overheads : (lag ½ month)

Estimated direct labour hours : 1,24,000 hrs.

155.00 15,50,000 159.425 12,75,400 166.80 10,00,800

For 10,000 units = 10,000 x 1.30 = Rs.13,000