1

INTRODUCTION

Cost accounting has developed primarily to provide information to the management
for planning and control. Two important techniques applied for these purposes are budgetary
control and standard costing. They help in forecasting the future activities and compare the
actual results with the plans.
It is universal truth that without planning nothing can be done. The same
fundamental is applicable for successfully running of any organization. Every organization
has to get its goal and for that it has to plan various activities which may include following:
How much to produce?
How much raw material will be required for production and how to arrange for it?
How much labour will be required for production and how to arrange for it?
How much funds will be required and from where to procure?
How much to sell and how to sell?
The list of items may be very long but one thing is clear that if we do not plan then it
is obvious that we are planning to fail.





2

DEFINITION
BUDGET
CIMA London defines a budget as follows: A financial and/or quantitative
statement prepared and approved prior to a defined time of the policy to be pursued during
the period for the purpose of attaining a given objective. I t may include income,
expenditure and employment of capital.
An analysis of the above definition reveals the following features of a budget.
1. Budget is a statement prepared in terms of money or equivalent of money.
2. It is prepared prior to a future period of time
3. The future period for which it is prepared as definite and defined
4. The objectives to be attained and the policies to be adopted are laid down in
advance.


BUDGETARY CONTROL
CIMA London defines budgetary control as the establishment of budgets relating to
responsibilities of executives to the requirement of a policy and continuous comparison of
actuals with budgeted results either to secure by individual action the objectives of that
policy or to provide a basis for its revision.


3

MEANING

Budget Budgeting Budgetary control
Simply speaking budget is nothing
but a plan. Technically
speaking, budget is a plan of
future activity (covering specific
period), it is a layout of future
activities of an organization. A
budget is generally expressed in
monetary terms (e.g. Material
Consumption budget in value),
however, a budget may be for non-
financial terms also (e.g. Material
budget in quantity, labour budget
in hours etc.).
In simple words budget is a future
plan of any particular item, it is
prepared in advanceand it may be
in financial terms or quantitative
terms.
It is the process of
preparing, implementing
and operating the budget
(i.e. plan).
In other words,
budgeting involves the
process of preparing the
budgets and then
implementing and
operating them.
In short, budget is a plan
and the process of
preparing; implementing
etc. of the budget is
called budgeting.
Without planning everything
fails, in the same way without
proper control also everything
fails. Thus, to get success there
should be proper planning with
proper system of control.
Budgetary control is nothing but
the activity of exercising control
with the help of budgets.
Budgetary control may include:
a) Establishing budgets to
set the targets of the
executives of
organization.
b) To compare the actual
results with the desired
results (i.e. budgets).
c) Analyze the deviation
from planning activity if
any and to make required
changes in budgets.





I n brief, budgets are organizational plan of future activity, budgeting
is the activity of preparing these budgets and budgetary control means
the system of achieving the desired target with the help of budgets.
4

ESSENTIAL FEATURES OF BUDGETARY CONTROL

1. Budgetary control is the establishment of budgets,
2. Relating the responsibilities of executives to the requirements of a policy,
3. And the continuous comparison of actual with budgeted results,
4. Either to secure by individual action the objective of that policy, or
5. To provide a basis for its revision.

These aspects are explained in detail below.
1. Executive Responsibility:
Budgets lay down targets and also fix the responsibility on each executive for
achievement of the targets. All executives in an organization have a specific job to
perform. But everyone must work in a co-ordinated manner to achieve the overall
objective of the organization. Budgetary control aims to co-ordinate the actions of all
executives so as to achieve the overall targets. Thus budget is an excellent example of
Management By Objectives (MBO).
2. Requirements of a policy:
Budgets must contain the policies directed towards achieving the targets. The
top management must clearly spell out the steps to be taken by each executive for
achieving the targets. The responsibilities of executives must be related to the
requirements of a policy. Thus budgetary control is an important tool of long term
planning. Budgets specify the objectives of the organization and the policies designed
to achieve those objectives.
5

3. Comparison of actuals with budgets:
Budgets can be a tool of control only when the actual results are compared
with the targets. Thus the actual results must be continuously compared with the
budgets, to ascertain the deviations from the target set.
4. Corrective action:
Management must take immediate corrective action if the actual results are
unsatisfactory when compared with targets set in the budgets. The remedial action
may be of two types-
i. The concerned executive is given detailed information regarding the budget
variances to enable him to take action and make efforts to attain his objective.
The deviations from budgets act as a signal to management. When the actual
results differ from the budget, the concerned executive has to study where and
why the difference has occurred. Thus budget is also an excellent example of
management by exception. The executive concentrates on the problem areas
indicated by the deviations from budget so as achieve his targets.
ii. Management may study the budgets to ascertain if the targets set were
unrealistic, and if so, revise the targets themselves.






6

OBJECTIVES OF BUDGETORY CONTROL

1. Planning the policies
A budget is a plan of the policies to be pursued during a given period of time
for achieving the given objectives. Budgetary control compels effective planning of
all operations well in time.

2. Define targets
Establish the overall aims of the business and determining the targets of
performance for each section or department of the business.

3. Define Responsibilities
Laying down the responsibilities of each of the executives and other personnel
so that everyone knows what is expected of him and how he will be judged.

4. Co-ordinating activities
Various departments and sections of the firm are involved in the task of
preparing budgets. It develops team spirit and secures co-operation from all
departments to achieve the common objective of the firm.

7


5. Controlling costs
Budgets are prepared for every important function and department. Actual
performances are compared with that of budgets. This facilitates control over
different activities and costs.

6. Optimize Resources and Maximize profits
Ensuring the best use of all available resources to maximize profit or
production, subject to the limiting (key) factors.

7. I ncreases efficiency
Well thought plans, carefully selected course of action and a system of
continuous evaluation of performances help to increase the overall efficiency of the
firm.







8

STEPS IN BUDGETARY CONTROL

One type of budgetary control cannot be adopted for all firms. The following steps
are necessary to prepare suitable budgets and effective implementation of the budgetary
control system.
1. Preparation of organization chart:
Authority and responsibility of all executives should be clearly defined. This
will enable the identification of accountability of each executive.

ORGANI SATI ON CHART










TOP MANAGEMENT
SALES
MANAGER
ACCOUNTS
MANAGER
PRODUCTION
MANAGER

PERSONNEL
MANAGER
PURCHASE
MANAGER
PURCHASE/
MATERIAL
BUDGET
LABOUR
BUDGET
PRODUCTION/
MATERIAL/
PLANT
UTILISATION
BUDGET
SALES
BUDGET
OVERHEADS/
CASH/
CAPITAL
EXPENDITURE
BUDGET
9

2. Establish Budget Centres:
CIMA has defined a budget centre as a section of the organization
of an undertaking defined for the purpose of budgetary control. Thus a sales
manager may have different sections reporting to him, such as selling,
advertisement and so on. Each such section may be defined as a budget centre for the
purpose of budgetary control. This helps in fixing the responsibility for control of
costs and achievement of targets on each section of the department.

3. Appointment of budget committee:
In the small organization, the budget officer will formulate the
budget, co-ordinate with heads of various departments, compare the actual results with
the budgets and report the differences to management. In a large organization this task
of administration of budget may be performed by a budget committee consisting of the
chief executive, the budget officer and the heads of the departments. The budget
committee is an advisory committee. The final decisions are taken by the chief
executive. The budget officer acts as the secretary of the budget committee. The main
functions of a budget committee are-
a. Establish budget centres
b. Fix the budget period
c. Determine the principal/key budget factor
d. Receive and study all functional budgets
e. Approve the functional budgets and master budget
f. Lay down the policies to be pursued to achieve targets
g. Fix responsibility of each executive to achieve the targets
h. Obtain the reports of comparison between actual results budgets and
10

i. Recommend action to be taken.
4. Preparation of Budget Manual:
CIMA has defined Budget Manual as-a document which sets out the
responsibilities of the persons engaged in, the routine of, and the forms and records
required for, budgetary control. Budget manual is a document which contains a
detailed procedure about the operation of budgetary control system in an organization.
It contains routine forms and documents to be used and responsibilities of various
persons for the preparation and implementation of budgets. It indicates the dates by
which necessary data, information, budgets and reports are to be prepared and supplied.
All of the above stated facts and forms constitute the contents of a budget manual.

The budget manual serves as a rule book for the implementation of a
budget programme in an organization. It in fact lies down, what is to be done, how it is
to be done, when it is to be done, and by whom. It is always preferable to devote
adequate time in the preparation of the budget, to avoid any confusion in carrying out
various jobs for the effective and successful operation of the budgetary control system.
The budget manual should be circulated to all the departmental managers to facilitate
the work of budgeting.
A budgetary control system will operate smoothly only if there is a
written document which sets out-
a. Objectives of budgetary control
b. Principles of budgetary control
c. Definitions of terms used in budget manual
d. Types of budget to be prepared e.g. basic, current etc.
e. Organisation chart
f. Budget centres
11

g. Budget period
h. Budget key factor
i. Responsibility, duties, authority of each functional manager, and the budget
committee.
j. Routine to be followed, i.e. procedure for formulation, revisions, approval,
comparison and follow up of budget.
k. Forms required in above routine for formulation, comparison , follow up etc.
of budgets.
l. Records required for budgetary control i.e. the accounting records, accounting
codes, budget codes etc.

5. Determination of budgeted period:
CIMA has defined budget period as- the period for which a budget
is prepared and employed. A budget may be prepared for any length of period from a
month to several years. The length of period of budget depends upon the-

a. Nature of I ndustry- The length of period of which budget is prepared and
employed basically depends upon the nature of industry, the nature of demand and
supply of products, the rate of changes in business conditions in that industry, the
length of the manufacturing cycle from raw material to finished product and soon.
Thus capital intensive industries like power generation, shipping, transport etc. use a
long term budget covering a period of 7-10 years. Consumer goods industries may
prepare budget for a shorter period say 1-3 years. Seasonal industries may prepare
budget for still shorter periods say every quarter. Normally however, a budget is
12

prepared for one year to facilitate comparison with the actual results of one financial
year.
b. Need for control - Each function such as sales, production, research is needed to be
controlled in different ways. Production may require to be controlled daily or
weekly, sales may require to be controlled weekly or monthly, research may require
to be controlled quarterly; capital expenditure may require to be controlled yearly
and so on. Hence the functional budgets may be prepared for different periods while
the master budget is prepared annually.

c. Determination of key factor or budget factor:
When budgetary control is being established, there will normally be a
factor which determines the maximum quantity that can be produced or sold. Such factor
is called the principal, key or governing factor. CIMA has defined a principal factor as-
the factor the extent of whose influence must first be assessed in order to ensure that the
functional budgets are reasonably capable of fulfillment. Generally, sales is the
principal factor. When sale is the key budget factor, the maximum quantity that can be
sold is ascertained first. On the basis of the maximum sales quantity the sales budget is
prepared first and all other functional budgets such as production, purchase etc. are
derived there from. In some cases, machinery, labour, raw materials, finance etc. may be
the key factor. If there are two or more key factors, the relative influence of each factor
has to be judged carefully. This is done by mathematical techniques such as operational
research, linear programming etc. Key factors are not permanent; they can change in the
long run. Thus, new machinery can be purchased to increase plant capacity; advertising
can increase demand and sales and so on.

13

TYPES OF BUDGETS

Classification based on flexibility
Fixed or static budget Flexible budget
It is a budget which is prepared for a
particular level of activity, if an activity
level changes, and then revised budget for
actual activity is not prepared.
It is a budget designed to change in
accordance with the level of activity. In
other words, budgets for different level of
activities are prepared, if the activity level
changes then the revised budget for
revised level of activity will be adopted.


Classification based on period
Long- term budget Short-term budget
A long term budget generally covers a
period exceeding one year.
e.g. Research and Development budget,
Capital expenditure budget etc.
Short term budget are budgets other than
long term budget. Generally they cover a
period of less than one year.
e.g. sales budget, purchase budget etc.
Practically the period of classification may slightly differ from organization to
organization. Further, sometimes budgets (on the basis of period) are classified as long
term, short term and current budgets.


14


Classification based on content
Financial budget Quantitative budget
It is a budget which is expressed in
monetary terms.
e.g. sales budget (in value), material cost
budget, labour cost budget etc.
It is a budget which is expressed in non-
monetary terms.
E.g. sales budget (in quantity), material
consumption budget (in units), labour
hours budget etc.

Classification based on coverage
Functional budget Master budget
As name indicates, these budgets are
prepared for various functions of an
organization like sales (sales budget),
purchase (purchase budget), production
(production budget), material/labour
(material cost budget, labour cost budget),
etc.
Functional budgets are also known as
subsidiary budgets or departmental
budgets.
As name indicates, it is a summary of
different functional budgets. Generally
this budget is prepared by adopting total
figures of different functional budgets.
Budgeted profit and loss A/c or budgeted
balance sheet is an example of master
budget.

Various functional budgets:
Functional budgets can be broadly classified as budgets relating to operation of an
enterprise and budgets relating to financial activities of the enterprise.
15

FUNCTIONAL BUDGETS


















FUNCTIONAL BUDGETS
Relating to financial activities
of an enterprise
Relating to operation of an
enterprise
1. Sales Budget (can be in quantity
or in value)
2. Production budget (can be in
quantity or in value)
3. Cost budget/overheads budget
(can be in fixed, variable and/or
semi-variable capacity)
a. Cost of production budget, it
can include,
i. Direct material budget
ii. Direct labour budget
iii. Production overhead
budget
b. Administration cost budget
c. Cost of goods sold budget
d. Selling and distribution cost
Budget
4. Direct material in quantity
5. Plant utilization budget (can be
in time/load machine wise)
6. Closing inventory budget

1. Cash budget
(Receipts/Payments/ba
lance)
2. Capital expenditure
budget
3. Long term Research
and Development cost
budget
16

UNDERSTANDING OF MAJOR FUNCTIONAL BUDGETS

Sales budget
Sales are the ultimate objective of any organization. All other major budgets
are based on sales budget; hence, an inaccurate sales budget may scrap the
entire budgeting process.
Sales budget can be expressed in quantitative terms as well as in terms of
value.

Production budget
After preparation of sales budget, the next step will be to prepare the
production budget to produce the required units. Production will be based on
the budgeted sales and desired closing inventory.
One of the important factor to be considered while preparing production
budget is the production capacity of the firm. If the firm is unable to meet the
desired production, it may think of different options like overtime, sub-
contracting etc.
On the other hand, if the capacity is surplus, the firm may think of suitable
action to dispose of the surplus capacity.



17

Particulars Units
Sales
Add: Closing Stock
Gross quantity acquired
Less: Opening Stock
Production
XX
XX
XXX
XX
XXX

Direct material budget/materials consumption budget
Direct material budget can be prepared after preparation of production budget.
Direct material budget can be prepared in quantitative terms or in value.
Direct materials budget shows the details of raw materials requirements of the
organization.

Purchase budget
After ascertainment of the quantity of raw materials required,
the next step is to design a proper budget determining the quantity/value of raw
materials to be purchased. Purchase budget discloses the quantity/value of raw
materials to be purchased.
Particulars Raw materials (quantity/value)
Consumption (units)
Add: Closing stock (units)

Less: opening stock (units)
Purchase (units)
XX
XX
XXX
XX
XXX
18

*Rate per unit (Rs.)
Purchase value(Rs.)
X
XXX

Direct labour budget
On the basis of budgeted production, labour budget is
designed. Labour budget discloses the budgeted direct labour time (hours, days etc.)
and labour cost involved in production.

Production overhead budget
Production overhead budget is nothing but a simple schedule
showing various elements of total production overheads. Main objective of preparing
production overheads budget is to determine the budgeted recovery rate.

Cost of production budget
Cost of production budget is nothing but a schedule showing
various elements of cost of production. It is similar to Cost Sheet.

Administrative overheads budget
Administrative overheads budget is nothing but a simple
schedule showing various elements of total administrative overheads.

Cost of goods sold budget
Cost of goods sold budget is nothing but a schedule showing
various elements of cost of goods sold.

19

Selling and distribution overheads/cost budget
Selling and distribution cost budget is nothing but a simple
schedule showing various elements of total selling and distribution cost/overheads.

Master budget
Master budget is nothing but a budgeted income statement
and balance sheet. In other words, master budget consists of two elements viz.
budgeted income statement and budgeted balance sheet.

Budgeted income statement for the year ending on ..

Particulars Rs.
Budgeted sales X
Less: Budgeted cost of goods sold (X)
Budgeted gross margin
XX
Less: budgeted selling and distribution expenses (X)
Budgeted operating profit
XX
Add: non operating income X
Less: non operating expenses (X)
Budgeted profit before tax XX
Less: income tax @-----% (X)
Budgeted profit after tax XXX


20

Ending/closing inventory budget
Ending inventory budget is nothing but a schedule showing
details of ending inventory of various items i.e. raw materials, WIP and finished
goods. Information derived from ending inventory budget is used to prepare cost of
goods sold budget and master budget (i.e. income statement and balance sheet).

Plant utilization budget
Plant utilization budget is prepared to ascertain the required
capacity to produce the budgeted output. This budget is generally in terms of
machine hours or number of plants or in terms of both (i.e. machine hours as well as
number of machines).










21

ZERO BASED BUDGETING

Meaning:
It is a technique which was originally devised to help the
management in the difficult task of allocating the resources more efficiently between
the projects and other cost items in the support areas. (The support areas include
production planning, repairs and maintenance, research and development, engineering
design, data processing, quality control, finance, marketing, etc.
It starts from the basic premises that the budget for the next year is zero (nil) and
every process or expenditure has then to be justified thoroughly in order to be
included in the next years budget. The burden of proof thus, shifts to each manager
to justify why the money should be spent on all activities and to indicate what would
happen, if the proposed activity is not carried out and no money is spent.

Requirements:
1. There must be budgeting system within the organization.
2. It requires managers to develop quantitative measures for use in performance
evaluation.




22

Merits:
1. It provides a basis for evaluating decision package on the basis of cost
benefit considerations.
2. It reduces inefficiency and achieves high level of effectiveness.
3. It can be applied to cost reduction programmes.
4. It ensures thorough examination of every function of activity.
5. It facilitates rational analysis, decision making and discard the low
priority activities.

Demerits:
1. Zero based budgeting may emphasize on short term benefits to the detriment of the
long term benefits.
2. It may encourage the false idea that all the decisions have to be made in the budget.
Management must be able to meet unforeseen opportunities and threats at all the
times, and must not feel restricted from carrying out the new ideas simply because
they were not approved by a decision package cost benefit and ranking analysis.







23

PERFORMANCE BUDGETING
Performance budgeting involves evaluation of the performance of the
organization in the context of both specific as well as overall objectives of the organization.
It provides a definite direction to each employee and also controls mechanism to higher
management. The basic objective of performance budgeting is to provide output oriented
budget information with a long range prospective to allocate the resources more effectively.
A performance budget is one which presents-
1. The purposes and objectives for which funds are needed;
2. The costs of activities proposed for achieving these objectives;
3. Quantitative data measuring the accomplishments;
4. Work performance under each activity.
Features of performance budgeting-
a. Performance budgeting has drawn inspiration and much of its form from cost
accounting and scientific management.
b. In performance budgeting, decision making is primarily downward.
c. Performance budgeting requires that budgetary decisions should made by
emphasizing output categories such as goals, purposes, objectives and products or
services
d. Performance budgeting makes prospective approach with its focus on future impacts
of current major decisions or choices.
Departmental heads of the respective department is responsible
for preparing the performance budget in respect of his department. Performance budgeting
requires preparation of periodical performance reports.
24

ADVANTAGES OF BUDGETARY CONTROL

1. Effective use of resources: Budgets are prepared after a careful study of alternative
course of actions. The most profitable alternative is selected in conducting the
business. Thus, budgetary control ensures optimum utilisation of resources in
achieving overall organisational goals.
2. Maximum output: budgets direct capital into the most profitable business activities.
It keeps capital investment at the minimum level and ensures maximum output by the
optimum utilisation of capital.
3. Lays down objectives: budget lays down an objective for the business as a whole. It
sets a goal to achieve and thereby directs the activities of various departmets towards
that common goal.
4. Defines responsibilities and accountability: it clearly defines the responsibilities and
accountability of every person in the organisation. It creates awareness among the
employees of their rights, duties and responsibilities.
5. Ensures teamwork: budgets are prepared by different functional heads. Budget
committee consists of people from different levels of an organisation. Thus, budgetary
control motivates people to work together and march towards a common goal.
6. Efficient planning and decision making: budgetary control encourages an early and
exhaustive study of different problems of management. It makes planning and
adequate study of alternatives a basic act among managers.
7. Control expenditure: budgets provide detailed plans for spending. They regulate
expenditure by clearly showing losses, wastes and inefficiencies.
25

8. Evaluates performances: budgets provide a valuable tool of evaluating managerial
policies and goals periodically. Such evaluations help to establish guidelines for the
entire organisation.
9. Co-ordinates business activities: budgetary control co-ordinates and corelates all
business activities and directs them towards the achievement of a desired goal.
10. Develops cost consciousness: budgets clearly communicate the policies and
objectives of the firm and the total resources to be spent to achieve the goals. They
stimulate the effective use of resource and discourage waste.
11. Provides basis for measuring performaces: it provides budget as a yardstick for
measuring performaces of each department and sectionof the organisation.
12. I ncreases employee productivity: well defined rights and responsibilities of individual
employees, efficient communication of policies and objectives of the firm to the
employees, incentives to perform efficiently and periodic review of performances lead
to higher productivity of employees.
13. Encourages productive competition: it incourages productive competition among
employees through incentive schemes.
14. Management by exception: evaluation of performances points out weak spots, which
are not in accordance with the budgeted performances. Remedial measures are taken
only against such spots.
15. Sets up standard costing: it creates conditions necessary for the adoption of a system
of standard costing.



26

LIMITATIONS OF BUDGETARY CONTROL

1. Planning and budgeting is not an exact science. The future is unpredictable.
Planning and budgeting use approximations and estimates, which may not be cent
percent accurate.
2. Budgets are to be revised from time to time. Changing condition of business may
require rapid revision of budgets, which may be very costly affair.
3. Co-ordination and co-operations of all members of management is difficult to
achieve. The success of the system depends on the co-operation and intensive
participation of all members of management. But it is not easy to achieve these.
4. Budgets may kill managerial initiative. Executives will concentrate only on
achieving the target set by budgets. This limits the innovative ability of the
executives.
5. Budgets are only the tools of management. Budgets do not eliminate or substitute
management. It is dangerous to overweigh the role of budgets in achieving desired
goals.
6. Budgeting is costly and time consuming. Therefore small organisations can not
afford to adopt the system of budgetary control.
7. Excessive emphasis on budgetary control may lead to unhealthy competition and
dishonest behaviour among functional executives. They may submit inaccurate
estimate of future costs and revenues.



27

BUDGETARY PLANNING

Many large businesses take a highly formal view of planning the budget and make use of:
a budget manual, which provides a set of guidelines as to who is involved with the
budgetary planning and control process, and how the process is to be conducted
a budget committee, which organises the process of budgetary planning and control; this
committee brings together representatives from the main functions of the business
Eg: production, sales, administration and is headed by a budget co-ordinator whose job is
to administer and oversee the activities of the committee
In smaller businesses, the process of planning the budget may be rather more informal, with
the owner or manager overseeing and budgeting for all the business functions.
Whatever the size of the business it is important, though, that the planning process begins
well before the start of the budget period; this then gives time for budgets to be prepared,
reviewed, redrafted, and reviewed again before being finally agreed and submitted to the
directors or owners for approval.
For example, the planning process for a budget which is to start on 1 January might
commence in the previous June, as follows:
June Budget committee meets to plan next years budgets
July First draft of budgets prepared
August Review of draft budgets
September Draft budgets amended in light of review
October Further review and redrafting to final version
November Budgets submitted to directors or owners for approval
December Budgets for next year circulated to managers
January Budget period commences
28

ESSENTIALS OF AN EFFECTIVE BUDGETARY CONTROL SYSTEM

For the budgetary control to be effective, the following essentials has to be in
place;
A sound and clearly defined organization with managers responsibilities
should be clearly defined.

Effective accounting records and procedures that are clearly understood
are applied.

Support and commitment of top management for the system of budgetary
control is in place.

Education / training of managers in the development, interpretation and
use of budgets.

Revision of budgets where amendments are needed to make them
appropriate and useful.


29


NEED FOR BUDGETARY CONTROL

According to a Ecoman- competency and training, (2011) gave a detailed need
for budgetary controls as analyzed thus, Budgetary control integrates the
organizations strategic planning with budgets and processes of cost control,
identifies the budgeting / financial skills required for better decision making,
whether for continuing business or project or a new business venture, identifies
sources of financial and business data that provide insights into business and
financial strategies when converted into budgets ,explore traditional versus
innovative budgetary techniques, get to know activity based budgeting and
costing , explore capital budgeting techniques and cash flows, identify key
financial indicators for the business and how and when monitor them, question
to the problems and limitations of budgetary control and look for alternative
tools, understand the importance of balancing financial and non financial
aspects of the business, interpret budgets and performance measurements as
communication tools and finally help to think pro actively beyond budgeting.
In addition to above, budgetary control is needed because of under stated
advantages.
30

Responsibility accounting :- Information is provided to managers responsible
for revenue and expenditure and achievements of targets for operations under
their personal control.
Utilization of resources:- Capital and effort are used to achieve financial
objectives and kept at minimal level in any given organization.
It promotes coordination and communication of all functions and activities
among the various departments in an organization.
Motivation of manager through use of clearly defined objectives and
monitoring of achievements , through employees participating in the setting up
of budgets and acting as a guide to management in the field of research and
development in the future.
Planning ahead gives time to take collective action which compels management
to think about the future, which is probably the most important feature for nay
business to succeed through increases in production efficiency.
Elimination of the wastes and controlling the costs.
Budgetary control establishes the system of control if plans are reviewed
regularly against actual as well as transferring authority to individual managers
for decisions.
31

It provides a basis of performance appraisal, that is, variance analysis where
actual performance is measured and assessed against the budget plan.
Departures from the budget can then be investigated and then the reason for
the difference determined.
Budgetary control also economizes management time by using the
management by exceptional principle.


32

CASE STUDY

Firm Name: Ganesh Engineering Works
Address: E-1, Mandal I ndl. Compound, Road no. 21/34, Adiwasi pada, Wagle estate,
Thane 400604.
Mr. K.B.Pandey and Mr. R.M.Singh are the partners in the
firm. They started the firm in 1996 at small scale and with production of one product i.e.
fusible plugs.
At present, the firm manufactures 3 products, namely fusible
plugs, nozzles and gears. The current pattern of sales is in the ratio of 8:2:1 respectively.
The relevant data are as under:
Products Fusible plugs Nozzles Gears
Selling price per unit Rs. 130 230 417
Raw materials per unit Kg. 0.50 1.2 2.5
Direct materials per unit Kg. 0.25 - -
Skilled labour hours/unit Hrs. 4 6 8
Semi-skilled labour hours per unit Hrs. 2 2 3
Variable overheads per unit Rs. 20 40 80
The prices of raw materials and direct materials respectively
are Rs.100 and Rs.40 per kg. The wage rates of skilled and semi-skilled labour respectively
are Rs.6 and Rs.5. Each operator works 8 hours a day for 25 days in a month.
The positions of inventories are as under:
33


Raw
materials
(kgs.)
Direct
materials
(kgs.)
Fusible plugs
(units)
Nozzles
(units)
Gears (units)
Opening 600 400 400 100 50
Closing 650 260 200 300 50

The fixed overheads amount to Rs. 2, 00,000 per month and the firm desires a profit of Rs. 1,
20,000 per month.


1. Sales budget in quantity and value:
Sales budget
Particulars Fusible plugs Nozzles Gears Total
Units to be sold
(note 1)
12800 3200 1600 17600
*selling price per
unit (Rs.)
130 230 417 -
Sales in value
(Rs.)
1664000 736000 667200 3067200






34

2. Production budget in quantity:
Production budget
Particulars Fusible plugs nozzles Gears
Sales (units) (note
1)
12800 3200 1600
Add: closing stock
(units)
200 300 50
Less: opening
stock (units)
(400) (100) (50)
Production (units) 12600 3400 1600

3. Purchase budget in quantity:
Purchase budget
Particulars Raw materials Direct
materials
Raw material required in production:
Fusible plugs @ 0.50 kg. for 12600 kg.
Nozzles @ 1.20 kg. for 3400 kg.
Gears @ 2.50 kg. for 1600 kg.

6300 kg.
4080 kg.
4000 kg.

Direct material required in production of fusible
plugs @ 0.25 kg for 12600 kg.
-
3150 kg.
Total quantity required in production 14380 kg. 3150 kg.
Add: closing stock 650 kg. 260 kg.
Less: opening stock 600 kg. 400 kg.
Quantity to be purchased 14430 kg. 3010kg.
35

4. Direct labour budget for wages and for number of workers:
Direct labour budget in respect of wages
Particulars Fusible plugs Nozzles Gears Total
Skilled labour hours
required in production
(note 2)
50400 20400 12800 83600
*wage rate per hour Rs. 6 Rs. 6 Rs. 6 Rs. 6
Total wages for skilled
workers (A)
302400 122400 76800 501600
Semi skilled labour
hours required in
production (note 2)
25200 6800 4800 36800
*wage rate per hour Rs. 5 Rs. 5 Rs. 5 Rs. 5
Total wages for semi-
skilled workers (B)
126000 34000 24000 184000
Total labour cost
(A+B)
428400 156400 100800 685600

Direct labour budget in respect of no. of workers
Particulars Skilled labour Semi-skilled labour
Total hours required in production 83600 36800
() labour hours per worker per
month(*)
200 hours 200 hours
Total no. of workers required 418 workers 184 workers
36

(*) Each worker works for 8 hours a day and for 25 days a month, hence total working
hours per month will come to 200 hours (8 hours * 25 days per month).
Note 1: computation of units to be sold
Company desired a profit of Rs. 120000 per month.
Fixed overheads are Rs. 200000 per month.
At total sales, total contribution will be equal to total fixed cost plus profit,
thus at total sales, contribution will be Rs. 320000 (Rs. 200000 + Rs. 120000).
Thus, we can say the total consumption from all the products should be Rs.
320000. This contribution will be derived from sale of product fusible plugs,
nozzles and gears.
To derive sales of each product, we have to divide the desired contribution of
Rs. 320000 in the combined ratio as computed below:
Particulars
Fusible plugs
(Rs.)
Nozzles (Rs.)
Gears
(Rs.)
Raw materials required per unit (kg.) 0.50 1.20 2.50
*cost per kg. 100 100 100
Raw materials cost per unit (A) 50 120 250
Direct materials required per unit (kg.) 0.25 - -
*cost per kg. 40 - -
Direct materials cost per unit (B) 10 - -
Skilled labour hour per unit 4 6 8
*cost per labour hour 6 6 6
Skilled labour cost per unit (C) 24 36 48
Semi- skilled labour hour per unit 2 2 3
*cost per labour hour 5 5 5
Semi-skilled labour cost per unit (D) 10 10 15
Variable overheads per unit (E) 20 40 80
37

Total variable overheads
(F)=(A+B+C+D+E)
114 206 393
Selling price per unit (G) 130 230 417
Contribution per unit (G-F) 16 24 24
*sales ratio 8 2 1
Combined ratio to distribute contribution 128 48 24
By distributing the contribution of Rs. 320000
in above ratio we will get contribution from
each product
204800 76800 38400
() contribution per unit 16 24 24
Sales (units) 12800 3200 1600

Note 2: computation of hours required in production of each product.
Particulars Hours
Skilled labour required in production:
Fusible plugs @ 4 hours for 12600 kg.
Nozzles @ 6 hours for 3400 kg.
Gears @ 8 hours for 1600 kg.

50400
20400
12800
Semi-skilled labour required in production:
Fusible plugs @ 2 hours for 12600 kg.
Nozzles @ 2 hours for 3400 kg.
Gears @ 3 hours for 1600 kg.

25200
6800
4800




38

CONCLUSION

I conclude that Budgetary control is a technique of managerial control in which all
operations are planned in advance in the form of budgets and actual results are compared
with budgetary standards. An effective system of budgetary control manages to plan and
control the use of resource in a systematic and logical manner. Financial objectives and
constraints should be communicated to managers of budget centres and regular monitoring
keeps management informed of progress towards objectives.












39

BIBLIOGRAPHY

BOOK
Taxmans students guide to Cost accounting and Financial management volume 2
- By Chandrana, Bhavesh