Budgetary Control

Budget - Predetermined financial policy to be

pursued during a given period, to achieve the
organizational objectives

Control - Continuous comparison of actual with

budgeted results to ensure attainment of
objectives
 Budgetary Control
Establishment of
quantitative statement relating
to the responsibilities of the executives
for the purpose of
continuous comparison of
actual with budgeted results
to secure the objectives of the
financial policy
Installation of Budgetary control
system
1. Determination of the objectives
• Clear perspective of the objectives

• To achieve desired / greater profits

2. Organisation for budgeting

• Clearly defined responsibility

• Create hierarchy of positions – jurisdiction begins &

ends
 3. Creation of budget manual
• How to achieve organisational objectives through
budgetary control

• Responsibilities for preparation and execution of budget

• Procedure for approval of expenditure

• Time-tables for all stages of budgeting

• Records to be maintained

• Classification of accounts to be employed

4. Determination of responsibility for
budgeting
• Budget controller – Chief Executive ultimately
responsible for budget program

• Budget committee – Heads of various department to

assist budget controller

5. Determination of budget period

• Based on Nature of business

• Based on Control Techniques

Uses of Budgetary control system
1. Brings economy in working

2. Buck-passing avoided

3. Establishes coordination

4. Guards against undue optimism – over expansion

5. Acts as a safety signal – when to proceed

cautiously

6. Adoption of uniform policy – military type

Uses of Budgetary control system
7. Decrease in production costs – fill in products

8. Adoption of standard costing principles

9. Management by exception

10. Optimum mix – factors of production

11. Favor with credit agencies

12. Optimum capitalization – when & what

extent
 Uses of Budgetary control system
1. Brings economy in working - the budget becomes a game-a goal

to achieve or a target to shoot at-and hence it is more likely to be

achieved or hit than if there was no predetermined goal or

target. The budget is an impersonal policeman that maintains

ordered effort and brings about efficiency in results.

2. Buck-passing avoided - It establishes divisional and departmental

responsibility. It thus prevents alibis and 'buck-passing' when the

budget figures are not met

 Uses of Budgetary control system

3. Establishes coordination - It coordinates the various divisions

of a business, namely, the production, marketing, financial

and administrative divisions. It 'forces executives to think,

and think as a group." This results in smoother operation of

the entire plant

4. Guards against undue optimism – It guards against undue

optimism leading to over-expansion because the targets are

fixed by the executives, after cool and careful thought

 Uses of Budgetary control system
5. Acts as a safety signal – It acts as a safety signal for the

management. It shows when to proceed cautiously and

when manufacturing or merchandising expansion can be

safely undertaken. It serves as an automatic check on the

judgement of the executives as losses are revealed in time

which is a caution to the management to stop wastage

6. Adoption of uniform policy – Uniform policy without the

disadvantage of a military type of business organization can

be pursued by all divisions of the business by means of

centralization of budgetary control

 Uses of Budgetary control system
7. Decrease in production costs – Seasonal variations in

production can be reduced by developing new 'fill in' products.

This results in decreasing the cost of production by increasing

volume of output

8. Adoption of standard costing principles - The use of budget

figures as measures of operating performance and financial

position makes possible the adoption of the standard costing

principles in divisions other than the production division

 Uses of Budgetary control system
9. Management by exception - Budgetary control reveals variations of

actual performance from budgeted performance. The variations

point to the root of inefficiencies and thus enable the management

to consider only the items that do not go according to plan and

leave the others, i.e., to concentrate on exceptions

10. Optimum mix – factors of production - It helps management in

obtaining the most profitable combination of the different factors

of production. This results in a more economical use of capital

 Uses of Budgetary control system

11. Favor with credit agencies - Managements who have

developed a well ordered budget plan and who operate

accordingly, receive greater favour from credit agencies.

12. Optimum capitalization – It is only the technique of

predetermining when and to what extent financing will be

necessary avoiding the possibility of both over and under-

capitalization.
 Limitations of Budgetary control
system

• Opposition against the very spirit of budgeting –

evaluation, whipping post, pressure devices
• Budgeting and changing economy
• Time factor – accuracy through experience
• Not a substitute for management - only a tool
• Cooperation required
 Months Sales Materials Wages Overheads
February 14,000 9,600 3,000 1,700
March 15,000 9,000 3,000 1,900
April 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
June 18,000 10,400 4,000 2,300

Prepare a Cash Budget for the three months ending 30th June, 2012 from the information
given below:
• Credit terms are: Sales / Debtors: 10% sales are on cash, 50% of the credit sales are
collected next month and the balance in the following month.
• Creditors: Materials 2 months
• Wages 1/4 month
• Overheads 1/2 month.
• Cash and bank balance on 1st April, 2012 is expected to be 6,000.
• Other relevant information are:
• Plant and machinery will be installed in February 2012 at a cost of Rs.96,000. The
monthly instalment of Rs.2,000 is payable from April onwards.
• Dividend @ 5% on preference share capital of Rs.2,00,000 will be paid on 1st June.
• Advance to be received for sale of vehicles Rs.9,000 in June.
• Dividends from investments amounting to Rs. 1,000 are expected to be received in June.
• A minimum cash balance of Rs.50000 must be
maintained each month, and the firm pays 8%
annually for short-term borrowing from its
bank. The surplus cash can be invested in
money market mutual funds at 4% per annum.
The cash budget should account for short-
term borrowing and payback of outstanding
loans.
 A company incurs the following expenses to produce 1000
units of an article:

Particulars ₹
Direct Materials 30000
Direct Labour 15000
Power ( 20% Fixed ) 10000
Repairs & Maintenance (15% Fixed ) 8000
Depreciation ( 40% Variable ) 6000
Administrative Expenses ( 100 % Fixed ) 12000

Prepare a flexible Budget showing the Individual expenses of production levels at 1500
units and 2000 units
 1000 units 1500units 2000 units
Particulars Per Unit
Per Unit (₹) Total (₹) Per Unit (₹) Total (₹) Total (₹)
(₹)

A. Variable Cost
Direct Material 30 30000 30 45000 30 60000
Direct labour 15 15000 15 22500 15 30000
Power ( 80% Variable = 80% of
8 8000 8 12000 8 16000
₹10000= ₹8000)
Repairs & Maintenance (85%
6.8 6800 6.8 10200 6.8 13600
Variable = 85% of 8000 =₹6800)
Depreciation ( 40% variable = 40%
2.4 2400 2.4 3600 2.4 4800
of 6000 = ₹2400)
62.2 62200 62.2 93300 62.2 124400
B. Fixed Cost
Power ( 20% Fixed = 20% of
2000 2000 2000
₹10000= ₹2000)
Repairs & Maintenance (15% Fixed =
1200 1200 1200
15% of 8000 = ₹1200)
Depreciation ( 60% Fixed= 60% of
3600 3600 3600
6000 = ₹3600)
Administrative Expenses 12000 12000 12000
18800 18800 18800
C. Total Cost (A+B) 81000 112100 143200
The following data is available in a manufacturing company for a yearly period.

Rs.
Fixed Expenses
Wages and Salaries 4,75,000
Rent/Rates and Taxes 3,30,000
Depreciation 3,70,000
Sundry Admin Expenses 3,25,000
Semi-variable Expenses at 50% Capacity
Maintenance and Repairs 1,75,000
Indirect Labor 3,95,000
Sales Department Salaries, etc 1,90,000
Sundry Admin Salaries 1,40,000
Variable Expenses
Materials 10,85,000
Labor 10,20,000
Other Expenses 3,95,000
Total 49,00,000
You should assume that the fixed expenses remain constant for all
levels of production.

Semi-variable expenses remain constant between 45% and 64%

capacity, increasing by 15% between 65% and 80% capacity, and by
25% between 80% and 100% capacity.
The sales at various levels of capacity are the following:
Capacity Units
50% 100
65% 130
70% 140
85% 170
100% 200

For this task, prepare a flexible budget for the year and forecast the
profit at 65%, 70%, 85%, and 100% capacity.
 Classification of Budgets
According to time:
 Long term Budget: Designed for a long period, generally 5
to 10 yrs. Concerned with the planning of the operations of
a firm over a considerably long period of time.
 Short term Budget : Designed for a period generally not
exceeding 5 yrs.
 Current budgets: Cover a very short period, say a month or
a quarter. They are essentially short term budgets adjusted
to current conditions.
 Rolling Budgets: A new budget is prepared at the end of
each month or quarter for a full year ahead. The figures for
the month or quarter which has rolled down, are dropped
and the figures for the next month or quarter are added.
34
 Classification of Budgets ( Contd )
According to Flexibility:

Fixed Budget : According to CIMA London, ‘ a fixed budget is a

budget which is designed to remain unchanged irrespective
of the level of activity actually attained’. Hence it is
unrealistic yardstick incase the level of activity actually
attained does not conform to the one assumed for
budgeting purposes.

Flexible Budget : According to CIMA London, a flexible budget is

‘ a budget designed to change in accordance to the level of
activity actually attained’.

35
# Fixed Budget Flexible Budget
Does not change with Re-casted on the basis of
1
volume of activity activity level to be achieved
Operates on one set of
2
condition Operates on different conditions
Fixed, variable and semi- Each cost is analysed according
3
variable cost to its behaviour

Comparison of actual Meaningful basis for

4 with budgeted targets will comparison of actual with
be meaningless budgeted targets.
 Functional Budgets
1. Sales Budget – forecasts sales in terms of quantity,
value, items and periods
2. Production Budget – forecasts quantity of production
3. Cost of Production Budget – forecasts the different
elements of costs i.e. material, labour and overhead
4. Purchase Budget – forecasts the quantity and value
of purchases required for production
5. Personnel Budget – forecasts the HR requirements
during a period for production activity
6. Research Budget – forecasts the research work to be
done for improvement in quality or new product

7. Capital Expenditure Budget – forecasts the amount of

capital required for procurement of assets

8. Cash Budget – forecasts the cash position by time

period for a specific duration of time

9. Master Budget – summary budget incorporating all

functional budgets in a capsule form.
 Zero-Base Budgeting

An operating planning & budgeting process

which requires each manager

to justify his entire budget requests

in detail from scratch.

 Procedure
1. Determine objectives of budgeting – Cost reduction
2. Determine scope – Functional areas in Organisation
3. Development of decision units – Decision to continue or
drop a product line
4. Development of decision packages – Effectively
summarize plan and resources required to achieve
5. Review and ranking of decision packages – Put limited
resources at best use - Cost Benefit Analysis
6. Preparation of budget – establish cut-off points and
prepare budget for those decision packages within range
Standard Costing
 5.2 Standard Costing

Preparation and use of standard costs,

their comparison with actual costs and
analysis of variances to their causes and
points of incidence.
 Uses of Standard Costing
• Guide management in formulation of price and
production policies
• Provides a stable basis for comparison of actual
cost with standard costs.
• Creates Cost consciousness in business
• Better capacity to anticipate and prepare more
accurate and effective budget
• Delegation of authority and responsibility
• Management by Exception
• Better economy, efficiency and productivity
 Limitations
• Heavy Costs
– Require high order skill and competence
• Frequent Revision Required
• Unsuitable for Non-standardized Product
• Fixing up of Responsibility is Difficult
– Possible only when controllable and non-controllable
factors are clearly identified
• Adverse Psychological Effects
– Highly set standards create frustration and resistance
• Users Resentment
 Variance in standard costing

• In standard costing, variance means the

difference between the standard cost and the
actual cost.
• I.C.M.A. London defines variances as,
“difference between a standard cost and the
comparable actual cost incurred during a
period”.
• The aim of standard costing is cost control.
• The cost control is exercised by ascertaining
and analyzing the variance and taking
immediate corrective steps.
• If the actual cost is less than the standard cost
it is termed as ‘Favorable variance’.
• On the other hand, if the actual cost is more
than the standard cost, it is known as
‘Adverse’ or ‘Unfavorable variance’.
 Types of Variances
• Direct Material Cost Variances
• Direct Labour Cost Variances
• Overheads Cost Variances
• Sales Variances
Material Cost Variance
• Direct Material Cost Variance = Standard Cost – Actual cost
• Direct Materials Price Variance
= (Standard Rate - Actual Rate) x Actual Quantity

• Direct Materials Usage Variance

= (Standard Quantity - Actual Quantity) x Standard Rate
DMUV = (SQ - AQ) x SR
– Direct Materials Mix Variance
= (Revised Standard quantity - Actual quantity) x Standard Rate
DMMV = (RSQ - AQ) x SR
– Direct Materials Yield Variance =
(Standard output for actual mix - Actual output) x Standard Cost
Per unit
DMYV = (SO - AO) x SC/U
 Standard Actual

Material Quantity Unit Price Total Quantity Unit Price Total

A 400 10 4000 200 35 7000

B 200 20 4000 100 20 2000

C 200 40 8000 300 30 9000

Total 800 20 16000 600 30 18000

Revised Standard quantity

= (Total Actual Mix / Total Standard Mix) x Standard
Quantity
Standard Output – 200 units; Actual Output – 100 units.
 Standard Actual

Material Quantity Unit Price Quantity Unit Price

A 600 0.9 5000 0.85

B 400 0.65 2900 0.6

C 500 0.4 4400 0.45

Standard Output = 80,000 tiles

Actual output = 6,20,000 tiles

Labour Cost Variance
• Direct Labour Cost Variance
= Standard Cost – Actual cost
• Direct Labour Rate Variance (Wage Rate Variance)
= (Standard Rate - Actual Rate) x Actual Hours

• Direct Labour Efficiency Variance

= (Standard Hours - Actual Hours) x Standard Rate
DLEV = (SH - AH) x SR
– Direct Labour Mix Variance
= (Revised Standard Hours - Actual hours) x Standard Rate
DLMV = (RSH - AH) x SR
– Direct Labour Yield Variance =
(Standard output - Actual output) x Standard Rate
DLYV = (SO - AO) x SR
 Standard Actual
Category of Workers Hours Rate Amount Hours Rate Amount

Skilled 1,280 3 3,840 1,120 4 4,480

Semi-skilled 480 2 960 720 3 2,160
Unskilled 240 1 240 160 2 320
5,04
Total 2,000 0 2,000 6,960
Actual output 1800 units
Standard output 2000 units
Revised Standard Hours
= (Total Actual Hours / Total Standard Hours) x Standard Hours
• Calculate the standard hours and cost for actual output
• DLCV = SC - AC
= Rs. 4,536 – Rs.6,960 = Rs.2,424 (A)

Skilled = (3 - 4) x 1,120 = Rs.1,120 (A)

Semi = (2 - 3) x 720 = Rs. 720 (A)
Un = (1 - 2) x 160 = Rs. 160 (A)
• DLEV = (SH - AH) x SR
Skilled = (1,152 – 1,120) x 3 = Rs. 96 (F)
Semi = (432 - 720) x 2 = Rs.576 (A)
Un = (216 - 160) x 1 = Rs. 56 (A)

• DLMV = (RSH - AH) x SR

• DLYV = (SO - AO) x SR
 Standard Actual
Category of Workers Hours Rate Amount Hours Rate Amount

Men 400 1.25 500 520 1.2 624

Women 200 0.80 160 160 0.85 136
Boys 200 0.70 140 120 0.65 78
Total 800 800 800 838
Actual output 960 units
Standard output 1000 units

Revised Standard Hours

= (Total Actual Hours / Total Standard Hours) x Standard Hours
Sales Variance
• Sales Value Variance
= Budgeted Sales– Actual sales
• Sales Price Variance
= (Standard Price - Actual Price) x Actual quantity sold
• Sales Volume Variance
= (Budgeted Quantity - Actual Quantity) x Standard Price
– Sales Mix Variance
= (Revised Standard Quantity - Actual Quantity) x Standard Price
– Sales Quantity Variance
= Budgeted Sales – Revised Standard Sales
 Budget Actual

Product Quantity Unit Price Total Quantity Unit Price Total

A 8,000 12 96,000 9,000 11 99,000

B 12,000 9 1,08,000 6,000 10 60,000
20,000 2,04,000 15,000 1,59,000
Sales Value Variance = Budgeted Sales - Actual sales

= 2,04,000 – 1,59,000 = 45,000 (A)

Sales Price Variance = (Standard Price - Actual Price) x Actual quantity sold

A = (12 – 11) X 9,000 = 9,000 (A)

B = (9 – 10) X 6,000 = 6,000 (F)
Total = 3,000 (A)
Sales Volume Variance = (Budgeted Quantity - Actual Quantity) x Standard Price

A = (8,000 – 9,000) X 12 = 12,000 (F)

B = (12,000 – 6,000) X 9 = 54,000 (A)
Total = 42,000 (A)
Sales Mix Variance = (Revised Standard Quantity - Actual Quantity) x Standard Price
Total Actual Mix
Revised Standard quantity = Total Budgeted Mix
x Budgeted Quantity

A = (15,000 / 20,000) X 8,000 = 6,000

B = (15,000 / 20,000) X 12,000 = 9,000
Sales Mix Variance A = (6,000 – 9,000) X 12 = 36,000 (F)
B = (9,000 – 6,000) X 9 = 27,000 (A)
Total = 9,000 (F)
Sales Quantity Variance = Budgeted Sales - Revised Standard Sales

A = 96,000 – 72,000 = 24,000 (A)

B = 1,08,000 – 81,000 = 27,000 (A)
Total = 51,000 (A)
Overhead Cost Variance
Overhead Cost Variance
= Recovered Overheads – Actual Overheads
Recovered Overheads
= Standard Rate
= Standard perperhour
Rate unit X Standard
Standardhours
hoursforfor actual
actual output
output
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟 ℎ𝑒𝑎𝑑𝑠
Standard Rate per unit = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 ℎ𝑒𝑎𝑑𝑠
Standard Rate per hour = 𝑂𝑢𝑡𝑝𝑢𝑡
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠

Standard hours for actual output =

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠
𝑋 𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡
Fixed Overhead Cost Variance = Recovered Overheads – Actual Overheads
Fixed Overhead Expenditure Variance = Budgeted Overheads – Actual Overheads
Fixed overhead Volume Variance = Recovered Overheads – Budgeted overheads
Budgeted Overheads
Fixed 6,000
Variable 4,000
Budgeted Output 10,000
Budgeted Hours 5,000

Actual Overheads
Fixed 5,000
Variable 5,000
Actual Output 8,000
Actual Hours 5,000
Overhead Cost Variance = Recovered Overheads – Actual Overheads
Recovered Overheads = Standard Rate per unit X Standard hours for actual output
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟 ℎ𝑒𝑎𝑑𝑠
Standard Rate per unit = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡

SRPU = (10,000 / 10,000) = 1

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠
Standard hours for actual output = 𝑋 𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡

SHAO = (5,000 / 10,000) x 8,000 = 4,000

Recovered Overheads = 1 x 4,000 = 4,000

Overhead Cost Variance = 4,000 – 10,000 = 6,000 (A)

Variable Overhead Cost Variance = Recovered Overheads – Actual Overheads

Recovered Overheads = SRPU X SHAO

SRPU = 4,000 / 10,000 = .4
SHAO = 4,000
RO = 4,000 x .4 = 1,600
VOCV = 1,600 – 5,000 = 3,400 (A)
Fixed Overhead Cost Variance = Recovered Overheads – Actual Overheads

Recovered Overheads = SRPU X SHAO

SRPU = 6,000 / 10,000 = .6
SHAO = 4,000
RO = 4,000 x .6 = 2,400
FOCV = 2,400 – 5,000 = 2,600 (A)
Fixed Overhead Expenditure Variance = Budgeted Overheads – Actual Overheads

= 6,000 – 5,000 = 1,000 (F)

Fixed overhead Volume Variance = Recovered Overheads – Budgeted overheads

= 2,400 – 6,000 = 3,600(A)