Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
BCOM III
Cost Accounting
Practical Questions from past years
Topic- Budgetary Control

Q1- The monthly budgets for factory overheads for two levels of activity were as follows:
Budgeted production 60% 100%
(units) 600 1000
₹ ₹
Wages 1,200 2,000
Consumable stores 900 1,500
Maintenance 1,100 1,500
Power & Fuel 1,600 2,000
Depreciation 4,000 4,000
Insurance 1,000 1,000
Total 9,800 12,000
You are required to prepare a budget for 80% capacity.

Q2- The expenses budgeted for production of 10,000 units in a factory are furnished below:
₹ per unit
Material 70
Labour 25
Variable overheads 20
Fixed overheads (₹ 1,00,000) 10
Variable expenses (direct) 5
Selling expenses (10% fixed) 13
Distribution expenses (20% fixed) 7
Administration expenses (₹ 50,000) 5
155
Prepare a budget for the production of:
a) 8,000 units and
b) 6,000 units.
Assume that administration expenses are rigid for all the levels of production.

Q3- A department of AXY company attains sales of ₹ 6,00,000 at 80% of its normal capacity.
Its expenses are given below:
Administration costs:
Office salaries ₹ 90,000
General expenses 2% of sales
Depreciation ₹ 7,500
Rent and rates ₹ 8,750
Selling costs:
Salaries 8% of sales

pg. 1
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
Travelling expenses 2% of sales
Sales office 1% of sales
General expenses 1% of sales
Distribution costs:
Wages ₹ 15,000
Rent 1% of sales
Other expenses 4% of sales
Draw up a flexible administration, selling and distribution costs budget, operating at 90%,
100% and 110% of normal capacity.

Q4- Chandigarh Garments Ltd provides you the following data for 60% activity. Prepare its
budget for 80% and 100% activity:
Production at 60% activity 600 units
Material ₹ 100 per unit
Labour ₹ 40 per unit
Expenses ₹ 10 per unit
Factory expenses ₹ 4,000 (40% fixed)
Administration expenses ₹ 30,000 (60% fixed)

Q5- Draw up a flexible budget for overhead expenses on the basis of the following data and
determine the overhead rates at 70%, 80% and 90% plant capacity.
80% capacity
Variable overheads:
Indirect labour ₹ 12,000
Stores including spares ₹ 4,000
Semi-variable overheads:
Power (30% fixed, 70% variable) ₹ 20,000
Repairs & 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.

Q6- With the following data for a 50% activity, prepare a budget at 80% and 100% activity:
Production at 50% capacity- 500 units
Material ₹ 100 per unit
Labour ₹ 40 unit
Expenses ₹ 10 per unit
Factory expenses ₹ 40,000 (50% fixed)
Administrative expenses ₹ 30,000 (40% fixed)

pg. 2
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
Q7-

Q8- Kartik Limited has prepared a budget for the production of 1,00,000 units of the only
commodity manufactured by them for a costing period as under:
Raw materials Rs 2.52 per unit
Direct labour Rs 0.75 per unit
Direct expenses Rs 0.10 per unit
Works overheads (60% fixed) Rs 2.50 per unit
Administration overheads (80% fixed) Rs 0.40 per unit
Selling overheads (50% fixed) Rs 0.20 per unit
The actual production during the period was only 60,000 units. Calculate the revised budgeted
cost per unit.

Q9- Prepare a Flexible Budget for production at 80 per cent and 100 per cent activity on the
basis of the following information:
Production at 50% capacity - 5,000 units
Raw materials - Rs.80 per unit
Direct labour - 50 per unit
Direct expenses Rs. 50,000 (50% fixed)
Administration expenses - Rs. 60,000 (60% variable)

pg. 3
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
Q10-

Q11-

pg. 4
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
BCOM III
Cost Accounting
Practical Questions from past years
Topic- Budgetary Control

Q1- Prepare a Production Budget for three months ending March 31, 2016 for a factory
producing four products, on the basis of the following information.

Q2- Prepare a Production Budget (in units) for the half year ending on 30th September 2014.
As a matter of policy, the company maintains the closing balance of finished goods as 50% of
the estimated sales of next month. The following are estimated sales for 8 months:

Months Estimated Sales (in units)

April, 2014 12,000
May, 2014 14,000
June, 2014 13,000
July, 2014 8,000
August, 2014 9,000
September, 2014 11,000
October, 2014 10,000
November, 2014 15,000

HINT:
PRODUCTION = SALES + CLOSING STOCK – OPENING STOCK
pg. 5
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
Q3- Prepare a Cash Budget for the months April to July 2014 on the basis of the following
information:
Months Sales (₹) Purchases (₹) Wages (₹) Expenses (₹)
April 60,000 30,000 8,000 4,500
May 58,000 34,000 9,000 3,000
June 58,000 39,000 8,500 4,000
July 62,000 37,000 9,500 3,500
(a) Cash balance as on April 1, 2014: ₹ 18,000
(b) a plant costing ₹ 30,000 is due for delivery in the month of May, payable 10% on delivery
and the balance after 2 months.
(c) Advance tax of ₹ 6,000 each is payable in March and June.
All purchases and sales are in cash.
Ans-
April (₹) May (₹) June (₹) July (₹)
Opening balance
RECEIPTS:
Sales
Total cash available
PAYMENTS:
Purchases
Wages
Expenses
Plant
Advance tax
Total payments:
Closing balance

Q4-

pg. 6
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
Q5-

Theory
BUDGET
In “A Dictionary for Accountants”, Kohler defines budget as:
1. Any financial plan serving as an estimate of and a control over future operations.
2. Hence, any estimate of future costs.
3. Any systematic plan for the utilisation of manpower, material or other resources.
The Chartered Institute of Management Accountants, London, (terminology) defines a budget
as “A plan expressed in money. It is prepared and approved prior to the budget period and
may show income, expenditure and the capital to be employed. May be drawn up showing
incremental effects on former budgeted or actual figures, or be compiled by zero-based
budgeting.”
A budget is a precise statement of the financial and quantitative implications of the course of
action that management has decided to follow in the immediate next period of time (usually a
year).
Thus the essential features of a budget are as follows:
(i) It is a statement expressed in monetary and/or physical units prepared for the
implementation of
policy formulated by the management.
(ii) It is laid down prior to the budget period during which it is followed.
(iii) It is prepared for the definite future period.
(iv) The policy to be followed to attain the given objective must be laid before the budget is
prepared.

pg. 7
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
BUDGETING
Budgeting means the process of preparing budgets. In other words, budgeting refers to the
management action of formulating budgets. Preparation of budgets involves study of business
situations and understanding of management goals as also the capacity of the organisation.
According to Welsch, “budgeting is the principal tool of planning and control offered to
management by accounting functions.”
In the words of J. Batty, “the entire process of preparing the budgets is known as budgeting.”
Rowland and Harr has defined budgeting as, “budgeting may be said to be the act of building
budgets.
The main objectives of budgeting are:
(i) To obtain more economical use of capital.
(ii) To bring about coordination between different functions of an organisation.
(iii) To plan and control the earnings and expenditure of the organisation.
(iv) To create a good business practice by planning for future.
(v) To ensure the matching of sales with production.
(vi) To fix departmental responsibilities on different department managers.
(vii) To prevent wastages or losses and reduce the expenditures, and
(viii) To ensure the availability of working capital in the organisation.

The advantages of budgeting are as follows:

(i) Budgeting helps in solving problems in a disciplined manner.
(ii) Budgeting helps in feeling of cooperation and understanding between different
departments.
(iii) Budgeting is a process of self-examination and self-criticism which is essential for the
success of any business or enterprise.
(iv) Budgeting enables the organisation to review and restate its fundamental goals, policies
and procedures.
(v) It sets responsibilities of employees in relation to each function of business.
(vi) It forces the management to keep adequate and correct historical data in the business.
(vii) It helps the organisation to plan well in advance for mobilising resources needed for
achieving its goals.
(viii) As the performance of managers is measured against budgets, they are motivated to
accomplish high performance.
(ix) Budgeting is that there is an improvement in communication moreover, it also leads to
proper coordination, and
(x) Another advantage is that if facilitates management by exception. This is done through
variance analysis.
The main limitations of budgeting are as under:
(i) Budgeting is a costly affair for business organisations.
(ii) Budgeting is not a substitute for management.
(iii) Budget plan is based on estimates.
(iv) Budget execution is not proper and automatic, and
(v) A budget should not have more details than is necessary as it leads to complications.

pg. 8
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
BUDGETARY CONTROL
Budgetary control is a system of planning and controlling costs. It has been defined as the
establishment of budgets relating the responsibilities of executives to the requirements of a
policy, and the continuous comparison of actual with budgeted results, either to secure by
individual action the objective of that policy or to provide a basis for its revision. In other
words, budgetary control is applied to a system of management and accounting control by
which all operations and output are forecasted as far ahead as possible and actual results
when known are compared with budget estimates.
According to Wheldon, “Budgetary control is the planning in advance of the various function of
a business, so that business as a whole can be controlled.”
In the words of Niles, “budgetary control is an important tool of management. It is fact a tool of
planning which reaches through coordination into control and ties the three aspects firmly
together. It stimulates thinking in advance by requiring specific planning and the anticipation
of operating problems.”
J. A. Scott has defined budgetary control as, “the term budgetary control is applied to the
system of management control and accounting in which all operations are forecast and so far
as possible planned ahead, and the actual results compared with the forecast and planned
ones.”
In view of the above, the following steps are involved in budgetary control:
(i) Preparation of budgets for each function of the organisation.
(ii) Measurement of actual performance at the end of the budget period.
(iii) Calculation of the variances and analysing the reasons for them.
(iv) Revision of budgets in the light of changed circumstances, and
(v) Taking suitable or prompt action to achieve the desired objective.

OBJECTIVES OF BUDGETARY CONTROL

After defining the term budgetary control, it is necessary to explain the objectives of it. The
main objectives of a budgetary control can be stated in the following way:
(i) To incorporate the ideas of all levels of management in preparing a budget.
(ii) To lay down a plan to implement the policy of the organisation.
(iii) To coordinate the activities of the departments of an organisation.
(iv) To provide sufficient working capital for effective operation of the organisation.
(v) To control direct and indirect expenses of the organisation.
(vi) To execute capital expenditures in the most profitable manner.
(vii) To control on output cost, production cost and economy.
(viii) To ensure maximum profitability in output of organisation.

ADVANTAGES OF BUDGETARY CONTROL

Budgetary control is advantageous for all types of organisations whether large or small. The
advantages of budgetary control may be listed as under:
(i) The most important advantage of a budgetary control is to enable management to conduct

pg. 9
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
business in the most efficient manner.
(ii) Budgetary control takes the help of different levels of management in the preparation of
the budget.
(iii) Budgetary control is helpful in reviewing current trends in the business and in determining
further policy of the business.
(iv) Budgetary control is a tool for comparing the actual results with that of the budget.
(v) Budgets can be used as a tool of comparing actual performance in terms of budgeted
performance.
(vi) Budgetary control ensures that the capital employed at a particular level is kept at a
minimum level.
(vii) Budgetary control is a guide to the management in the field of research and development
in future.
(viii) An effective system of budgetary control results in coordinated effort of all persons
involved.
(ix) Budgetary control is a good guide to the management for making future plans.
(x) Budgetary control provides advance information and financial position of the organisation.
LIMITATIONS OF BUDGETARY CONTROL
Budgetary control is a sound technique of control. But, it is not a perfect tool. The budgetary
control as a management control device suffers from the following limitations:
(i) Budgetary control is only technique of the management and is not a perfect tool of
management.
(ii) Budgetary control is time-consuming process. During the preparation period, the business
conditions may change and estimates may go wrong by that time.
(iii) In budgetary control, the managers may have to operate within budget limits even if.
circumstances require a change. Long-term budgets suffer from inflexibility.
(iv) The successful operation and execution of budgets depends upon the efficiency of the
executive personnel.
(v) Budgetary control is an expensive technique.
(vi) Budgets are prepared on the basis of forecasts and estimates about the future.
(vii) Budgetary control is an essential tool of decision-making and it helps the management in
taking sound decisions. But it cannot replace the management.

FORECAST AND BUDGET

pg. 10
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
The following points of distinction can be noted between forecast and budget:

Classification of Budgets
PREPARATION & MONITORING OF VARIOUS TYPES OF BUDGETS

• Long term budget

On the basis of time • Short term budget
• Current budget

On the basis of • Functional budget

functions • Master budget

pg. 11
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
On the basis of • Fixed budget
flexibility • Flexible budget

• Cash budget
• Production budget
• Sales budget
Functional budget
• Reseach and development cost budget'
includes
• Administration cost budget
• Production cost budget
• selling and distribution cost budget

Cash Budget:
Cash forecast precedes a cash budget. A cash forecast is an estimate showing the
amount of cash which would be available in a future period.
This budget usually of two parts giving detailed estimates of (i) cash receipts and (ii) cash
disbursements.
Estimates of cash-receipts are prepared on a monthly basis and depend upon estimated cash-
sales, collections from debtors and anticipated receipts from other sources such as sale of
assets, borrowings etc.
Estimates of cash disbursements are based on estimated cash purchases, payment to
creditors, employees remuneration, bonus, advances to suppliers, budgeted capital
expenditure for expansion etc.

The main objectives of preparing cash budget are as follows:

(i) The probable cash position as a result of planned operation is indicated and thus the excess
or shortage of cash is known. This helps in arranging short term borrowings in advance to
meet the situations of shortage of cash or making investments in times of cash in excess.
(ii) Cash can be co-ordinated in relation to total working capital, sales investment and debt.
(iii) A sound basis for credit for current control of cash position is established.
(iv) The effect of sudden and seasonal requirements, large stocks, delay in collection of
receipts etc. on the cash position of the organisation is revealed.
A cash budget can be prepared by any of the following methods:
(i) Receipts and payments method
(ii) Adjusted profit and loss account method
(iii) Balance sheet method.
FIXED BUDGETS
A budget may be established either as a fixed budget or a flexible budget. A fixed budget is a
budget designed to remain unchanged irrespective of the level of activity actually attained. A
fixed budget is one which is designed for a specific planned output level and is not adjusted to
the level of activity attained at the time of comparison between the budgeted and actual costs.
Obviously, fixed budgets can be established only for a small period of time when the actual
output is not anticipated to differ much from the budgeted output. However, a fixed budget is
pg. 12
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
liable to revision if due to business conditions undergoing a basic change or due to other
reasons, actual operations differ widely from those planned in the fixed budget. These budgets
are most suited for fixed expenses but they have only a limited application and is ineffective as
a tool for cost control.

FLEXIBLE BUDGETS
The Chartered Institute of Management Accountants, London defines flexible budget as a
budget which by recognising different cost behaviour patterns, is designed to change as
volume of output changes. It is a budget prepared in a manner so as to give the budgeted cost
for any level of activity. It is a budget which by recognising the difference between fixed, semi-
fixed and variable cost is designed to change in relation to the activity attained. It is designed
to furnish budgeted cost at any level of activity attained. Flexible budgeting is desirable in the
following cases:
(i) Where the level of activity during the year varies from period to period, either due to the
seasonal nature of the industry or to variation in demand.
(ii) Where the business is a new one and is difficult to foresee the demand.
(iii) Where the undertaking is suffering from shortage of a factor of production such as
materials, labour, plant capacity, etc.
The main characteristic of flexible budget is that it shows the expenditure appropriate to
various levels of output. If the volume changes the expenditure appropriate to it can be
established from the flexible budget for comparison with actual expenditure as a means of
control. It provides a logical comparison of budget allowances with actual cost. When flexible
budget is prepared, actual cost at actual activity is compared with budgeted cost at actual
activity i.e. two things to a like base. For preparation of flexible budget, items of cost have to
be analysed individually to determine how different items of cost behave to change in volume.
Therefore, in-depth cost analysis and cost identification is required for preparation of flexible
budget.
Following are the striking features of flexible budgets:
(i) They are prepared for a range of activity instead of a single level.
(ii) They provide a very dynamic basis for comparison because they are automatically geared
to changes in volume.
(iii) They provide a tailor-made budget for a particular volume.
(iv) These are based upon adequate knowledge of cost behaviour pattern.
Flexible budgets may be prepared in the following method:
(i) Tabular method or multi-activity method
(ii) Formula method or ratio method and
(iii) Graphic method.

Sales Budget:
The sales budget is a forecast of total sales which may be expressed in monetary and
quantitative terms. In practice, quantitative budget is prepared first, then it is translated into
monetary terms. The preparation of sales budget is generally the starting point in the operation
of budgetary control because sales become, more often than not, the principal budget factor.

pg. 13
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
However, sales budget is very difficult to prepare owing to the fact that many of the factors
affecting this budget are beyond the scope of control by business.
A sales budget may be prepared under the following classifications:
1) Products or Groups of products,
2) Areas or Towns,
3) Salesmen or Agents,
4) Types of customers, and
5) Periods, such as month, quarter, year, etc.

Selling and Distribution Cost Budget:

The selling and distribution cost budget is a forecast of the cost of selling and distributing the
goods during the budget period. This budget is generally based upon the sales volume as per
sales budget. However, certain other related information should also be taken into
consideration in the preparation of selling and distribution cost budget.
Example: Heavy amount for advertising may be planned for the budget period but its benefits
may accrue mainly in subsequent budget periods.
The preparation of the selling and distribution cost budget is the responsibility of the sales
manager. However, he will be assisted in this work by the advertising manager, distribution
manager, sales office manager and the accountant. Selling and distribution cost budget may
be prepared by grouping the costs according to elements. The said budget may comprise the
following groups of costs:
(a) Direct Selling Expenses: Such as salaries, commissions and expenses of salesmen,
motor car expenses, etc.
(b) Sales Office Expenses: These expenses are salaries, rent, rates, electricity, depreciation,
postage, stationery, telephone, general expenses, etc.
(c) Distribution Expenses: Such as wages of warehouse staff, rent and rates of warehouse,
electricity, lorry expenses, insurance, export duty, etc.
(d) Advertising Expenses: These expenses are viz. shop window display, radio, roadside,
coupon offers, leaflets, etc.

Production Budget:
Production budget is prepared by the production manager, showing the forecast of output.
The objective is to determine the quantity of production for a budgeted period. It is in quantity
of units to be produced during the budget period. Production budget is based on the sales
budget.
Production budget is divided into two parts, i.e., one part contains the volume of production
and the other part shows the cost of production. Apart from the sales budget, optimum
utilisation of plant, availability of raw materials, labour, etc., are to be considered. It must avoid
overwork in rush reasons. It must maintain a minimum stock of finished goods.
Purchase Budget:
This budget represents the purchases to be made during the budget period. This will include
direct and indirect materials and services. Where, however, finished goods are purchased for

pg. 14
Notes by Dilpreet Kaur 9315976598; 9711899221

dks classes
resale, the purchasing budget should take into consideration the requirements of finished
goods for resale.
The purchasing budget may be expressed in terms of quantity or money. Purchase budget is
generally based upon:
(a) Sales and production budgets,
(b) Capital expenditure budget,
(c) Research and development cost budget,
(d) Purchase orders already placed

Master Budget:
It is defined as a budget which is prepared from and summarises, the functional budgets. The
term summary budget is synonymous. In short, when all the functional budgets are prepared,
they can be summarised to produce:
(a) Budgeted profit and loss account (including appropriations), and
(b) Budgeted balance sheet.
A master budget commonly takes the form of a budgeted profit and loss account and budgeted
balance sheet. Budgeted funds flow may also form part of a master budget. Therefore, a
master budget is an overall business plan and is akin to familiar financial statements, the major
technical difference is that here one is dealing with expected future data rather than with
historical data.
The budget committee will prepare the master budget on the basis of coordinated functional
budgets. When it is approved by the committee, it becomes the target for the company during
the budget period.
Advantages of Master Budget
Following are the main advantages of master budget:
(a) It provides a summary of functional budgets,
(b) It projects the overall estimated profit of the business or organisation for the budget period,
(c) The summary helps in checking the accuracy of functional budgets as the information
disclosed in functional budgets should agree with the information provided in the master
budget,
(d) Forecast balance sheet can be prepared easily as the budget in question provides
necessary information for the purpose, and
(e) The top management is often interested in having meaningful information of the
organisation in summarised form.

pg. 15