UNIT -5:Marginal costng udgetary Control

MODULE -5 : MARGINAL COSTING AND BUDGETARY CONTROL

Formula of contributon and marginal cost equaton

Contributon = sales – variable cost (C= S-V)
Or
Contributon = fied cost + Proft (C= F+P)
Contributon = Fiied cost – loss (C=F-L)
MARGINAL COST EQUATION= S-V=F+P (I,e, Sales – Variable cost = Fiied Cost + Proft)
P/V RATIO = CONTRI UTION / SALES X 100
OR CHANGE IN PROFIT / CHANGE IN SALES X 100
EP IN UNITS = FIXED COST (Rs.)/ CONTRI UTION PER UNIT
EP IN SALES (IN Rs.) = Fiied cost + Desired proft
P/V Rato
Margin of safety = Proft / PV Rato

Problem : 1
Following Data is given :
Total Fiied Cost = Rs.12000
Selling Price = Rs. 12 per unit
Variable Cost = Rs. 9 per unit .
Calculate : a) Contributon, b) P/V Rato c) reak even point in units d) reak even point in Rs.
Soluton:
Contributon = Sales – Variable cost
= Rs.12 per unit – Rs. 9 per unit = Rs. 3 per unit
Contribution Rs .3 per unit
P/V Rato = x 100 = i 100= 25%
Sales Rs .12 per unit

¿ cost ( Rs .) Rs .12000
reak Even Point (in Units)= = = 4000 units.
Contribution Per Unit Rs .3 per unit

Fexed Cost + Desired Profit Rs .12000

reak Even Point (in Rs. )(i.e Sales) = = = 48000 ( 12000 X 100
PV Ratio 25 %
/ 25 = 48000)

Fexed Cost x sales Rs .120000 x 12 per unit

Or = = Rs.48000.
contribution Rs .3

Problem -2
The following data is given
fied cost = Rs.12,000
Selling Price =Rs.12 per unit
Variable cost = Rs.9 per unit

Calculate proft at diferent sales volume

a)What will be the proft when sales are a) 60,000 b) 1,00,000 and
b) what will be the amount of sales if it is desired to earn a proft of a) 6000 b) 15000?

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UNIT -5:Marginal costng udgetary Control

Solution:

Calculaton of P/V rato (gross proft rato)

Contribution
P/v Rato = i100=
Sales
Contributon = sales per unit – Variable cost per unit = Rs.12 per unit – Rs.9 per unit = Rs. 3 per unit

Rs .3 per unit
p/v rato= i 100 = 25%
Rs .12 per unit

a) Contributon when sales is Rs.60,000:

Contributon = Sales i P/V rato,
60,000 i 25% = Rs.15000
b) Contributon when sales is Rs.1,00,000
Contributon = Sales i P/V rato
= Rs.100,000 i 25% = 25,000

a) Net Proft = Contributon- Fiied Cost ; Rs.15000- Rs.12000= Rs.3000

b) Net proft = Contributon –Fiied cost ; Rs.25000 – Rs.12000= Rs.13000

Calculation of Sales when desrred to earn proft rs a)Rs.6000 and b) Rs.15000

¿ cost+ Desired Profit

Sales for Desired proft = P i 100
Ratio
V

Rs .12000+ Rs .6000
a) i 100= Rs.72000 (i.e , 18000 i 100 /25 = 72000)
25 %

Rs .12000+ Rs .15000
b) i 100= Rs.108000 (i.e, 27000 i 100 /25 = 108000)
25 %

Problem – 3

reak even point = Rs.30000

Proft = Rs.1500
Fiied Cost = Rs.6000
What is the amount of Variable cost?

Soluton:
Contributon(Gross Proft) = Fiied Cost + Proft or ( Sales – Variable cost )
= Rs.6000 + Rs.1500 = Rs.7500

Calculaton of Total Sales :

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UNIT -5:Marginal costng udgetary Control

¿ Cost
reak Even Point = i sales
Contribution

Rs .6000
Rs.30,000= i sales
Rs .7500

Rs .7500
Sales = i 30,000
Rs .6000
Therefore total sales = Rs.37500

P/V rato = contributon / Total sales i 100 , Rs.7500/Rs.37500 i 100 = 20%

Therefore Variable cost on Total sales = 100 – p/v rato
= 100 – 20% = 80% of sales is Variable cost
= Rs.37500 i 80% = Rs. 30000 is variable cost
Therefore Variable cost on reak even sales = EP i 80%
= Rs.30000 i 80% = Rs.24000

Problem -4
Sales = 4000 units @ Rs.10 per unit
reak even point =1500 (units)
Fiied cost = Rs.3000
What is the amount of a) Variable cost and b) Proft?

Soluton :

Calculaton of Contributon :

¿ Cost
reak Even Point (in Units) =
Contribution per unit

Rs .3000
1500 units =
Contribution per unit

Rs.3000
Contributon Per unit = = Rs. 2 per unit .
1500units

Therefore Variable cost = Sales per unit – Contributon per Unit

= Rs . 10 – Rs. 2 per unit = Rs. 8 per unit or
= 40000 (4000 i 10) – 8000 ( Rs.2 i 4000) = Rs.32000 rs Varrable cost

Total Contributon at sales of 4000 units = Total sales – Total Variable cost
= Rs.40,000 - Rs.32000 = Rs.8000
Calculation of Net Proft:
Net Proft = Contrrbution – Frxed Cost
= Rs.8000 – Rs.3000 = Rs. 5000

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UNIT -5:Marginal costng udgetary Control

Problem-5
From the following ,fnd out the amount of proft earned during the year using the marginal
costng technique.
Find cost = Rs.250000
Variable cost = Rs.10 per unit
Selling Price = Rs. 15 per unit
Output level = 75000 units

Solution:
Calculaton of Proft
Sales-Varrable cost =Frxed cost + Proft
11,25,000 - 7,50,000 (sales)
(75000 i15) (75000i10) (Variable Cost)

Therefore Proft = 11,25,000 – 7,50,000 = 250000 + Proft

= 3,75,000 = 2,50,000 +Proft
Proft = 375000 – 250000 = 125000

Problem -6:
Sales = Rs.1,00,000
Proft = Rs.10000
Variable cost = 70%Find out a) p/v rato b) Fiied cost c) Sales Volume to earn proft of
Rs.40,000

Solution:
Given ,Sales = 1,00,000
Proft = 10,000
Variable cost = 1,00,000 i 70% = 70,000

Contributon = sales – Variable cost

= 1,00,000 – 70,000
= 30,000

Contribution 30,000
a) P/V rato = i 100 = i 100 = 30%
Sales 1,00,000

b) Calculation of Frxed Cost :

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UNIT -5:Marginal costng udgetary Control

¿ Cost + Profit
Sales = P
ratio
V

¿ Cost +10,000
1,00,000=
30 %

100000i30% = Fiied cost + 10,000

30000 = Fiied cost + 10,000
Fiied Cost = 30,000 – 10,000 = Rs.20,000
Frxed cost = 20,000

c) Sales Volume to earn a proft of Rs.40,000

¿ cost+ Profit
Sales = P
ratio
V

20,000+40,000
= 30 %
i 100
Sales= Rs.2,00,000

Problem : 7
From the following calculate EP in units and in values
Output = 3000 units
Selling price per unit = Rs. 30 per unit
Variable cost per unit = Rs.20 per unit
Fiied cost = Rs.20,000

Soluton:
Contributon= sales per unit – variable cost per unit
= Rs.30 p.u - Rs. 20 p .u = Rs.10 per unit

reak even point (in units) = Fiied cost / contributon per unit
= Rs. 20,000 / Rs.10 per unit
EP in units = 2000 units

reak even point in Value (in Rs.) = Fiied cost / PV rato i 100

P/v Rato = Contributon /sales i100

= Rs.20000 (Rs.10 per unit i 2000 units) / Rs.60,000 i 100 = 33.33%
( OR Rs.10 / Rs.30 i 100 = 33.33%)

Therefore EP in Rs. = Rs.20,000 / 33.33 i100 = Rs.60,000

Problem – 8 (14 marks)

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UNIT -5:Marginal costng udgetary Control

From the following fnd out reak even point

Variable cost = Rs.15 per unit
Fiied Cost = Rs.54000
Selling Price = Rs.20 per unit
What should be the selling price per unit ,if the EP is brought down to 6000 units.

Soluton:
Contributon = Sales – Variable cost
Rs.20 – Rs.15
= Rs. 5 per unit

¿ cost Rs . 54000
EP (in Units) = = = 10,800 unrts
Contibution per unit Rs .5 per unit

If the Sellrng prrce per unrt ,rf the BEP rs brought down to 6000 unrts:
¿ cost
BEP (rn unrts) =
Contibution per unit
Rs .54000
6000 unrts = =
Contibution per unit
54000
Contrrbution per unrt = = Rs. 9 per Unrt
6000units

Calculation of Sellrng prrce :

Contrrbution = Sellrng Prrce – Varrable cost

Rs.9 per unrt = Sellrng Prrce – Rs.15 per unrt
Sellrng Prrce per unrt = Rs.15 +Rs.9
= Rs.24 per unrt.

Problem – 9 :
i) Compute EP in Value and units when the selling price per unit Rs.150 ,Variable cost per
unit Rs.150 ,variable cost per unit Rs.90 and Fiied cost Rs.6,00,000
ii) What will be the selling price per unit if
a) EP is brought down to Rs.8000 units
b) EP if upto Rs.12000 units

Soluton:
¿ cost
i) EP in Units =
Contibution per unit

Contributon per unit = Sales – Variable cost

= 150 – 90
= Rs. 60 per unit

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UNIT -5:Marginal costng udgetary Control

Rs .6,00,000
= = 10,000 unrts
Rs .60 per unit

¿ cost
BEP rn sales =
P /V ratio
Contribution
P/V ratio = x 100
Sales
Rs .60
= x 100
Rs .150
= 40%
Rs .6,00,000
BEP rn sales = = Rs.150,000
40 %

rr) BEP rs dropdown to 8000 unrts, Sellrng Prrce =?

¿ cost
BEP rn unrts =
Contibution per unit

Rs .6,00,000
8000 units =
Contibution per unit
Rs .6,00,000
Contributon per unit =
8000units

= Rs.75 per unit

Calculaton of Selling Price = Contributon per unit = Sales –Variable cost
= Rs. 75 per unit = sales – Rs.90 per unit
= sales = 75 + 95 = Rs.165 per unit

c) If EP increases to 12000 units

Fi xed cost
EP (in units) =
Contibution per unit

Rs .6,00,000
12000 units =
Contibution per unit

Rs .6,00,000
Contributon per unit =
12000 units

= Rs.50 per unit.

Contributon per unit = Sales – Variable cost

Rs. 50 per unit sales – Rs.90 per unit
Sales = Rs.90 + Rs.50
Sales per unit = Rs.140 per unit .

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Problem -10 (14 MARKS)

You are given the following data

Year sales proft

2019 1,20,000 8,000
2020 1,40,000 13,000

Find out :
a) P/v rato and Fiied cost
b) EP
c) Proft when sales are Rs.1,80,000
d) Sales required to earn a proft of Rs. 12,000
e) Margin of safety for the year 2020
f) Variable cost during the year

Soluton :
a) Calculaton of P/v Rato

Change∈Profit
P/v rato = x 100
Change∈Sales

Rs .13000−8000
= x 100
1,40,000−1,20,000
Rs .5000
= x 100
Rs .20,000
P/V ratio = 25%

Calculaton of Fiied cost :

¿ cost+ Profit
Sales = P
ratio
v
¿ Cost +8,000
Rs.1,20,000 =
25 %

(1,20,000)25% = Fiied cost + 8,000

30,000 = Fiied cost + 8,000
Fiied cost = 30,000 – 8000
= 22,000

¿ cost+ Profit
Or sales = p
ratio
v

FC + Rs .13000
1,40,000 =
25 %
(1,40,000)25%= FC + 13000

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UNIT -5:Marginal costng udgetary Control

35,000 = FC + 13,000
FC= 35,000 – 13,000
FC = 22,000

b) Calculaton of EP in sales (in Rs.):

¿ cost
EP in sales = P
Ratio
v
Rs .22,000
= x 100
25 %
BEP rn sales(rn Rs.) = Rs,88,000

c) Calculation of Proft when sales are Rs.1,80,000

¿ cost+ Profit
Sales = P
ratio
V

Rs .22,000+ Profit
1,80,000 =
25 %

(1,80,000)25% = 22,000 + Proft

45,000 = 22,000 + Proft
= 45,000 – 22,000
Proft = 23,000

d) Calculaton of Sales required to earn a proft of Rs.12,000

¿ cost+ Profit
Sales = P
ratio
v
Rs .22,000+12,000
Sales = x100
25 %

Sales = 1,36,000

e) Calculaton of Margin of safety(MOS) for the year 2020

Profit
MOS = P x 100
ratio
V
Rs .13,000
= x100
25 %
MOS = Rs.52,000

f) Varrable cost
2019: sales – Varrable cost = Frxed cost + Proft
1,20,000 – Varrable cost = 22,000 + 8,000
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UNIT -5:Marginal costng udgetary Control

1,20,000 – VC = 30,000
VC = 1,20,000 – 30,000
VC= 90,000

2020: sales – Varrable cost = Frxed cost + Proft

1,40,000 – varrable cost = 22,000 + 13,000
1,40,000 –VC = 35,000
VC= 1,40,000- 35,000
VC = 1,05,000

Problem -10
Year sales proft
2019 5,40,000 12,000
2020 6,00,000 30,000

Find out :
a) P/v rato
b) Fiied cost
c) EP
d) MOS at a proft of Rs.48,000
e) Variable cost during the two year

Soluton:
a) Calculaton of P/v rato:
Change∈Profit
P/V rato = x 100
Change∈Sales
30,000−12,000
=
5,00,000−5,40,000

18,000
= x100
60,000
=30%

b) Calculaton of Fiied Cost :

¿ Cost + Profit
Sales= P
ratio
V
FC +12,000
540000=
30 %
5,40,000 x 30% = FC + 12,000
1,62000 = FC + 12,000
162000-12,000

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UNIT -5:Marginal costng udgetary Control

FC = 1,50,000

c) BEP rn sales (Rs.)

¿ Cost
= P ratio
V

150,000
=
30 %

150000
= x 100
30
= Rs. 5,00,000

d) MOS at a proft of Rs.48000

Profit
MOS = P ratio
V
48,000
=
30 %

48000
= x 100
30
= 1,60,000

e) Varrable cost :

Problem -11

31/3/2019 31/3/2020
Sales 16,20,000 1800,000
Proft 36,000 90,000

Calculate:
a) P/v rato b) Fiied Cost c) EP in amount
d) Sales to earn proft of Rs.6,00,000
e) MOS at a proft of Rs.1,44,000
f) Proft when sales are Rs.2,00,000
g) Variable cost for 2 years.

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UNIT -5:Marginal costng udgetary Control

Soluton :
change∈ Profit 90,000−36,000
a) P/V rato = i 100 = i 100
Change∈Sales 16,20,000−18,00,000
54,000
= i 100= 30%
1,80,000

¿ Cost + Profit
b) Fiied cost : Sales = P
ratio
V
FC +90,000
18,00,000=
30 %

(1800000)30%= FC + 90,000
540000 = FC + 90,000
FC= 540000-90,000
FC= 450000

¿ Cost
4,50,000
c) EP = P = i 100
Ratio 30 %
v
EP in Rs.= 15,00,000

d) Sales to earn proft of Rs. 6,00,000

450000+6,00,000
Sales =
30 %
10,50,000
=
30 %
10,50,000
= i 100
30 %
SALES = 35,00,000

e)MOS at a proft of Rs. 1,44,000

a) MOS at a proft of Rs.1,44,000
Profit
MOS =
ratio
1,44,000
=
30 %

1,44,000
= x 100
30
= 4,,80,000

Problem -12

From the following informaton calculate

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UNIT -5:Marginal costng udgetary Control

a) p/V rato b) EP c) Sales required to earn proft of Rs.4,50,000

Fiied eipenses Rs.90,000
Variable cost per unit :
Direct Material Rs.5 per unit
Direct Labour Rs. 2 per unit
Direct Overheads 100% of Direct Labour
Selling Price per unit Rs. 12

Soluton:
Fiied Cost = 90,000
Variable cost = 5 +2+ 2 (100% i 2 labour) = Rs. 9 per unit
Selling per unit = 12 per unit

Contribution
P/V rato = i 100
Sales

Contributon = sales – variable cost

= 12 - 9 per unit = Rs.3 per unit

3
P/V rato = i 100 = 25%
12

¿ Cost
b) EP in sales = P i100
ratio
V
90,000
= i 100 = Rs.360000
25

c) Sales required to earn proft of Rs.4,50,000

FC + Profit
Sales = P i 100
ratio
V

90,000+450000
= 25
i 100

Sales = 21,60,000

1. From the following information find out

a. P/V ratio
b. Break Even Point in sales
c. Profit when sales are Rs.1,80,000
d. Sales required to earn a profit of Rs.12,000/-
e. Margin of Safety for the year 2020
f. Variable cost

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UNIT -5:Marginal costng udgetary Control

Year Sales Profit

2019 1,20,000 8,000

2020 1,40,000 13,000

Solution:

a. P/V ratio = change in Profit X 100

Change in sales

= 13,000 – 8,000 X 100

140000 – 120000

= 5,000 X 100 = 25%

20,000

b. BEP in sales = Fixed cost

P/V ratio

Fixed cost = ?
Sales = Fixed cost + Profit
P/V ratio
1,20,000 = Fixed cost + 8,000
25%

(1,20,000)25% = Fixed cost + 8,000

30,000 = Fixed cost + 8,000
30,000 – 8,000 = fixed cost
Fixed cost = 22,000/-

BEP in sales = Fixed cost

P/V ratio

BEP in sales = 22,000 = Rs.88,000/-

25%
c. Profit when sales are Rs.1,80,000

Sales = Fixed cost + Profit

P/V ratio

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UNIT -5:Marginal costng udgetary Control

1,80,000 = 22,000 + Profit

25%

(1,80,000)25% = 22,000 + Profit

45,000 = 22,000 + Profit
45,000 – 22,000 = Profit
Profit = 23,000/-

d. Sales required to earn a profit of Rs.12,000/-

Sales = Fixed cost + Profit
P/V ratio

Sales = 22,000 + 12,000

25%
Sales = 34,000
25%
SALES = Rs.1,36,000/-

e. Margin of Safety for the year 2020

Margin of Safety = Profit

MOS P/V ratio

13,000
25%
MOS = 52,000

f. Variable cost

Sales – Variable cost = Fixed cost + Profit

2019
1,20,000 – Variable cost = 22,000 + 8,000
1,20,000 – VC = 30,000
1,20,000 – 30,000 = VC
Variable cost = 90,000/-

2020
1,40,000 – VC = 22,000 +13,000
1,40,000 – VC = 35,000
1,40,000 – 35,000 = VC

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UNIT -5:Marginal costng udgetary Control

Variable cost = 1,05,000/-

Problem 13
31-3-2019 31-3-2020
Sales 16,20,000 18,00,000
Profit 36,000 90,000

Calculate:
a. P/V ratio
b. Fixed cost
c. BEP in amount
d. Sales to earn a profit of Rs.6,00,000/-
e. Margin of Safety(MOS) at a profit of Rs.1,44,000/-
f. Profit when sales are Rs.20,00,000/-
g. Variable cost for 2 years
Solution:

a. P/V ratio = change in Profit X 100

Change in sales
P/V ratio = 54,000 X 100
1,80,000

P/V ratio � 30%

b. Fixed cost � ?

Sales = Fixed cost + Profit

P/V ratio
2019 =
16,20,000 = FC + 36,000
30%
16,20,000 X 30% = FC + 36,000
4,86,000 = FC + 36,000
4,86,000 – 36,000 = FC
Fixed cost = Rs.4,50,000/-

2020

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UNIT -5:Marginal costng udgetary Control

18,00,000 = FC + 90,000
30%
18,00,000 X 30% = FC + 90,000
5,40,000 = FC + 90,000
5,40,000 – 90,000 = FC
Fixed cost = 4,50,000/-

c. BEP in amount (Sales)

BEP in sales = Fixed cost
P/V ratio
2019
= 4,50,000 = 15,00,000/-
30%
2020
= 4,50,000 = 15,00,000/-
30%

d. Sales to earn a profit of Rs. 6,00,000/-

Sales = Fixed cost + Profit

P/V ratio
Sales (2019) = 4,50,000 + 6,00,000
30%
= 10,50,000 � 35,00,000/-
30%
Sales (2020) = 4,50,000 + 6,00,000
30%
= 10,50,000 � 35,00,000/-
30%
e. MOS at a profit of Rs. 1,44,000/-

Margin of Safety = Profit

MOS P/V ratio

= 1,44,000
30%
MOS = 4,80,000/-

f. Profit when sales are Rs. 20,00,000/-

Sales = Fixed cost + Profit
P/V ratio
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UNIT -5:Marginal costng udgetary Control

20,00,000 = 4,50,000 + Profit

30%
20,00,000 X 30% = 4,50,000 + Profit
6,00,000 = 4,50,000 + Profit
Profit = 1,50,000/-

g. Variable cost for 2 years.

Sales – Variable cost = Fixed cost + Profit
2019
16,20,000 – VC = 4,50,000 + 36,000
16,20,000 – VC = 4,86,000
16,20,000 – 4,86,000 = VC
Variable cost = 11,34,000/-

2020
18,00,000 – VC = 4,50,000 + 90,000
18,00,000 – VC = 5,40,000
18,00,000 – 5,40,000 = VC
Variable cost = 12,60,000/-

Problem –
2019 2020
Sales 700000 9,00,000
Proft/loss -10,000 10,000
Calculate a) P/V ratio b) BEP c) Sales to earn proft of Rs.40,000
Solution:
change∈ Profit 10000+10,000
a) P/v ratio= P/V rato = i 100 = i 100
Change∈Sales 9,00,000−7,00,000
20,000
= i 100=10%
2,00,000

¿ Cost + Profit
b) Fiied cost : Sales = P
ratio
V
FC +10,000
9,00,000=
10 %

(900000)10%= FC + 10,000
90000 = FC + 10,000

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FC= 90000-10,000
FC= 80000

¿ Cost
80,000
c) EP = P = i 100
Ratio 10 %
v
EP in Rs.= 8,00,000

d) Sales to earn proft of Rs. 40,000

80000+40,000
Sales =
10 %
120,000
=
10 %
120000
= i 100
10 %
= 12,00,000

Problem :
Sept -2020 Oct-2020
Sales 3,80,000 650000
Proft -- 30,000
Loss 24,000 --
Calculate :
a) P/V ratio b) BEP rn Sales c) Proft or loss at Rs.4,60,000
sales
d ) Sales requrred to earn a proft of Rs.50,000
Solution:
change∈ Profit 30,000+24,000
a) P/v ratio= P/V rato = i 100 = i 100
Change∈Sales 6,50,000−380000
54000
= i 100=20%
270000

¿ Cost + Profit
b) Fiied cost : Sales = P
ratio
V
FC +30,000
6,50,000=
20 %

(650000)20%= FC + 30,000
1,30,000 = FC + 30,000
FC= 13000-30,000

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FC= 100000

¿ Cost
100,000
c) EP = P = i 100
Ratio 20 %
v
EP in Rs.= 50,000

d) proft or loss at sales of Rs. 4,60,000

FC + Profit
Sales =
20 %
100,000+ profit
4,60,000 =
20 %
1,00,000+ profit
460000= i 100
20 %
= (460000)20% = 1,00,000+ Profit
= 92,000 = 1,00,000+profit
Profit = 92,000-1,00,000 = -8000 loss

e)Sales required to earn a profit of Rs.50,000

FC + Profit
Sales =
20 %
1,00,000+ 50,000
Sales =
20 %
Sales = 7,50,000

BUDGETARY CONTROL
Introduction: One of the primary functons of the management is to
plan for the future and to ensure that plans are put into efect .One
way of planning is through budgets. A budget is merely a plan relatng
to a period of tme , eipressed in quanttatve terms. in the business
world , a budget is the formal eipression of the eipected income and
Eipenditures for a defnite future period.

Meanrng of Budget :
A budget is a predetermined statement of management policy during a
given period which provides a standard, for comparison with the results
actually achieved.

Characterrstics :

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UNIT -5:Marginal costng udgetary Control

1. A budget is primarily a planning and control device

2. A budget is prepared in monetary terms or quanttatve terms.
3. A budget is prepared for a defnite future period
4. It shows planned income and eipenditure and also the capital to
be employed
5. Purpose of a budget is to implement the policies formulated by
the management for ataining the given objectves.
Meanrng of Budgeting:
The act of preparing budgets is called udgetng . In other words
“The entre process of preparing the budgets is known as
budgetng “

Meanrng of Budgetary control :

udgetary control is a system of controlling costs through
preparaton of budgets. udgetng is thus a part of the budgetary
control.
Features:
1. Establishment of budgets for each functon/department of the
organisaton
2. Comparison of actual performance with the budgets on a
contnuous basis.
3. Analysis of variance of actual performance from that the
budgeted performance to know the reasons thereof.
4. Taking suitable remedial acton ,where necessary
5. Revision of budgets in view of changes in conditons

Objectives of budgetary control

The following are the objectves of a budgetary control system.
1. Plannrng : A budget a detailed plan of acton for a business over a
period of tme detailed plans relatng to producton, sales ,raw
material requirements ,labour needs etc. are drawn up. y
planning many problems are antcipated long before they arise
and solutons can be sought through careful study .
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UNIT -5:Marginal costng udgetary Control

2. Co-ordrnation:
Efectve planning and organisaton contributes a lot in achieving
coordinaton.there should be co-ordinaton in the budgets of
various departments.for eiample the budget of sales should be in
co ordinaton with the purchase budget and so on. Producton
budget should be prepared in coordinaton with the purchase
budget.
3. Communicaton:
A budget is a communicaton device .The approved budget copies
are distributed to all management personnel which provides not
only adequate understanding and knowledge of the programme
and policies to be followed but also gives knowledge about the
restrictons to be adhered to. It not only communicates the
informaton but the vital informaton is communicated in the act
of preparing budgets and partcipaton of all responsible
individuals in this act.

4. Motvaton:
A udget is a useful device for motvatng mnagers to perform in
line with the company objectves. If individuals have actvely
partcipated in the preparaton of budgets ,it acts as a strong
motvatng force to achieve the targets.

5. Control : control is necessary to ensure that plans and objectves

as laid down in the budgets are being achieved control , as applied
to budgetng is a systematied eforts to keep the management
informed of whether planned performance is being achieved or
not .for this purpose a comparison is made between plans and
actual performance .the diference between the two reported to
the management for taking correctve acton.
6. Performance evaluaton:
A budget provides a useful means of informing managers how
well they are performing in meetng targets they have previously
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UNIT -5:Marginal costng udgetary Control

helped to set. In many companies there is a practce of rewarding

employees on the basis of their achieving the budget targets or
promoton of a manager may be linked to his budget
achievement.

Classifcaton of udgets
udgets may be classifed into
a) Functonal udgets
b) Fiied and Fleiible udgets

a) TYPES OF FUNCTIONAL UDGETS

Sales udget, Producton udget , Producton cost udget , Raw materials
budget , Purchase udget ,Labour udget , Producton O.H udget , Selling
and distributon Cost budget , Administraton cost udget , Capital
eipenditure udget .

FIXED UDGET

A fied budget is one which is prepared keeping in mind one level of output and to remain unchanged
.in other words” which is designed to remain unchanged irrespectve of the level of actvity atained .If
actual output difers from budgeted level of output ,variance will arise.

Fleiible budget:
It is designed to change in relaton to the level of actvity atained .The underlying pricnciple of feiible
budget is of litle use unless cost and revenue are related to the actual volume of producton. Fleiible
budgetng hs been developed with the objectve of changing the budget fgures to correspond with the
actual output Achieved . Thus budget may be prepared for various levels of actvity say 70%,80%,90%
and 100% capacity utliiaton.Then whenever the level of output actually reached it can be compared
with an appropriate level .

1. Prepare a flexible budget for production at 80%, and 100% activity on the basis of the
following information:

Particulars Amount

Production at 50% 5,000 units

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UNIT -5:Marginal costng udgetary Control

capacity

Raw materials Rs 80 per unit

Direct labour Rs 50 per unit

Direct expenses Rs 15 per unit

Factory expenses Rs 50,000 ( 50% Fixed)

Administration expenses Rs 60,000 (60% variable)

Solution:
Flexible budget for the period --------
Cost 80% of capacity 100% of capacity
8,000 units 10,000 units
Per unit Total Per unit Total
Raw materials 80.00 6,40,000 (80x8000units) 80.00 8,00,000 (80 x10,000)
Direct Labour 50.00 4,00,000 (50x8000) 50.00 5,00,000
Direct Expenses 15.00 1,20,000 (15x8000) 15.00 1,50,000 (15x10,000)

PRIME COST 145.00 11,60,000 145.00 14,50,000

Add: Factory
Expenses:
Variable 5.00 40,000 5.00 50,000
(50%variable) (50,000x50%= (5 p.u x 10,000 units)
25000/5000=5 p.u x
8000=40,000)

Fixed (50%fixed) 3.125 25,000 2.00 25,000

(50,000x50%/5000units=3.12 (50,000x50%/10,000=
) 2.5)

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UNIT -5:Marginal costng udgetary Control

WORKS COST 153.125 12,25,000 (12,25,000/8000) 152.50 15,25,000

Administration
Exp:
Variable 7.20 57,600 7.20 72,000 (7.2 x 10,000)
(60,000x60%=36,000/8000
units=7.20)
Fixed 3.00 24,000 2.40 24,000
(60,000 x 40%)(24,000/8000 (60,000 x
units= 3 p.u) 40%=24,000/10,000
units =2.4)
TOTAL COST 163.325 13,06,600 162.10 16,21,000

Note:
b) Total fixed cost for each level remains unchanged
c) Per unit fixed cost decreases when level of output increase and vice versa
d) Total Variable cost increases in proportion to increase in the level of output
e) Per unit variable cost remains unchanged at each level.

2. The expenses budgeted for production of 10,000 units in a factory are furnished
below:

Particulars Amount
(Rs Per unit)

Materials 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 (Rs 50,000) 5

Prepare a budget for the production of a) 8,000 units b)6,000 units

Assume that administration expenses are rigid for all levels of production.

Solution:

Flexible Budget for the period

6,000 units 8,000 units 10,000 units

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UNIT -5:Marginal costng udgetary Control

Particulars Per unit Total Cost Total Cost p.u Total

p.u
Materials 70.00 420000 70.00 560000 70.00 7,00,000
(Variable) (70x600 (70x (70x10,0
0 units) 8,000) 00)
Direct labour 25.00 1,50,000 25.00 2,00,00 25.00 2,50,000
(Variable) (25x600 0 (25x10,0
0) (25x80 00)
00)
Direct.exp.(variable) 5.00 30,000 5.00 40,000 5.00 50,000
(5x (5x800 (5x10,00
6000) 0) 0)
Variable O.H 20.00 1,20,000 20.00 1,60,00 20.00 2,00,000
(20x6,00 0 (20x10,0
0) (20x80 00)
00)
Fixed O.H 16.67 1,00,000 12.50 1,00,00 10.00 1,00,000
(1,00,000/600 (1,00,000/8 0 (1,00,000/10
0) 000) 000)
Selling Expenses: 2.17 13,000 1.63 13,000 1.30 13,000
Fixed (Rs.13 x
(13,000/6000) (13,000/8 (13,000/10
10,000=130,000x10%= 000)
000)
13,000)
11.70
11.70 11.70
Variable 70200 93,600 1,17,000
(130000x90%)=1,17,000/10, (11.70x800
(11.70x6000) 0)
000=11.70 p.u (11.70x1000
0)

Distribution Expenses:
Fixed : 2.33 14,000 1.75 14,000 1.40 14,000
(7 x 10,000 =70,000 x20% (14,000/100
=14,000) (14,000/6000) (14,000/80
00)
00)

Variable : 70,000- 5.60

14,000=56,000/10,000=5.60 33,600 5.60 44,800 5.60
56,000
(5,60x60
00)
Admn.Exp : (fixed) 8.33 50,0000 6.25 50,000 5.00 50,000
(50,000/6
000)

TOTAL COST 166.80 10,00,80 159.42 12,75,4 155.00 15,50,00

0 00 0

3. Draw up a flexible budget for overhead expenses and determine the overhead
rates at 70%, 80% and 90% plant capacity

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UNIT -5:Marginal costng udgetary Control

Particulars Amount (for 80% capacity)

Variable Overheads:
Indirect labour 12,000
Stores including spares 4,000

Semi – Variable overheads:

Power ( 30% fixed) 20,000
Repairs and maintenance(40% 2,000
variable)

Fixed overheads:
Depreciation 11,000
Insurance 3,000
Salaries 10,000

Total Overheads 62,000

Estimated direct labour hours 1,24,000 hrs

Solution:
Flexible budget for the period of …………

At 70% capacity At 80% At 90% capacity

capacity
(given)
Variable overheads:
- Indirect labour 10,500 (12000X70÷80) 12,000 13,500 (12000X90÷80)
- Stores including spares 3,500 (4000 X70 ÷80) 4,000 4,500 (4000 X90 ÷80)
Semi- variable overheads
Power:
- Fixed 6,000 6,000 6,000
- Variable 12,250(14000X70÷80) 14,000 15,750(14000X90÷80)
Repair & maintenances:
- Fixed 1,200 1,200 1,200
- Variable 700 (800 X 70÷80) 800 900 (800 X 90÷80)
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 (A) 58,150 62,000 65,850
ESTIMATED DIRECT LABOUR 1,08,500 Hrs 1,24,000 1,39,500 Hrs
HOURS (B) (124000 X70÷80) Hrs (124000 X90÷80)
DIRECT LABOUR Rs. 0.536 Rs.0.500 Rs. 0.72
HOUR RATE (A÷ B) (58,150 ÷ 1,08,500) (62000 ÷ (65,850 ÷ 1,39,500)
124000)

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 UNIT -5:Marginal costng udgetary Control

4. ABC company is currently working at 50% capacity and produces 10,000 units.
At 50% capacity its cost structure is as follows: ( QP 2016)

Particulars Cost per unit

Direct Materials 50

Direct labour 40

Factory overheads( 50% Fixed) 30

Administration expenses ( Rs 50,000) 80% fixed 5

Selling expenses (80% variable) 5

Profit per unit 20

Selling price per unit 150

Prepare a flexible budget and estimate the profit at 60% and 80% capacity

Cost 50% capacity 60% capacity 80 % capacity

10,000 units (Given) 12,000 units (10,000x60/50) 16,000 units (10,000x80/50)

Per.uni Amount Per.unit Amount Per.unit Amount

t
Raw material 50 5,00,000 50 6,00,000 50 8,00,000
Direct labour 40 4,00,000 40 4,80,000 40 6,40,000
PRIME COST 90 9,00,000 90 10,80,000 90 14,40,000
Factory expenses
- Fixed (50%) 15 1,50,000 12.5 1,50,000 9.375 1,50,000
(15000÷12000 (15000÷16000
- Variable 15 1,50,000 ) 1,80,000 ) 2,40,000
(50%) 15 (12000X15) 15 (16000X15)
Factory cost / work 120 12,00,000 117.5 14,10,000 114.375 18,30,000
cost
Administration
expenses
- Fixed 4 40,000 3.333 40,000 2.5 40,000
- variable (40000÷12000 (40000÷16000
1 10,000 ) 12,000 ) 16,000
1 (12000X1) 1 (16000X1)
125 12,50,000 121.833 14,62,000 117.875 18,86,000
Selling &
distribution

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 UNIT -5:Marginal costng udgetary Control

- Fixed 1 10,000 0.833 10,000 0.625 10,000

- variable (10000÷12000 (10000÷16000
4 40,000 ) 48,000 ) 64,000
4 (12000X4) 4 (16000X4)
Total cost 130 13,00,000 126.666 15,20,000 122.5 19,60,000
Profit [ 20 2,00,000 23.334 2,80,000 27.5 4,40,000

Selling Price 150 15,00,000 150 18,00,000 150 24,00,000

5. The expenses budgeted for the production of 10,000 units are furnished below:
(QP- 2017)

Particulars Rs per unit

Material 140

Labour 50

Variable expenses ( direct) 10

Variable overheads 40

Fixed overheads ( Rs 2,00,000) 20

Administration expenses ( Rs 1,00,000) 10

Selling expenses ( 10% fixed) 26

Distribution expenses (20% fixed) 14

Total cost 310

Prepare a flexible budget for 8,000 and 12,000 units. Assume that the administrative
expenses remain fixed at all levels
Soluton:
Cost capacity capacity capacity
8,000 units 10,000 units 12,000 units
(given)
Per.unit Amount Per.unit Amount Per.unit Amount
Raw material 140 11,20,000 140 14,00,000 140 16,80,000
(8000X140) (10000X140 (12000X140
) )
Direct labour 50 4,00,000 50 5,00,000 50 6,00,000
(8000X50) (10000X50) (12000X50)
Direct expenses 10 80,000 10 1,00,000 10 1,20,000
(8000X10) (10000X10) (12000X10)
PRIME COST 200 16,00,000 200 20,00,000 200 24,00,000

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 UNIT -5:Marginal costng udgetary Control

Variable 40 3,20,000 40 4,00,000 40 4,80,000

overheads (8000X40) (10000X40) (12000X40)
Fixed 25 2,00,000 20 2,00,000 16.667 2,00,000
overheads (200000/8000) 200000/10000 200000/12000
Factory cost / 265 21,20,000 260 26,00,000 256.667 30,80,000
work cost
Administration 12.50 1,00,000 10 1,00,000 8.33 1,00,000
expenses (8000X10) (10000X10) (12000X10)
277.50 22,20,000 270 27,00,000 265.00 31,80,000
Selling &
distribution 3.25 26000 26 26000 2.166 2600
- Fixed (26000/8000) (26000/10000 (26000/12000
(26 x ) )
10,000=
260000x
10%=26
,000
- Variable 23.40 187200 234000 280800
(260000 (23.40x8000) 23.40 (23.40x1000 23.40 (23.40x1200
x90%= 0) 0)
234000/
10,000=
23.40
p .u

Distribution
expenses

Fixed (20% ) = 3.50 28000 =2.80 28000 = 2.33 28,000

(Rs.14 x10000 (28,000/8000 (28000x (28,000/12000
units= 1,40,000 units) 10000) )
x 20%=28000

Variable cost
(1,40,000x 11.20 89600 11.20 1,12,000 11.20 134400
80%= (11.20x8000) (10000x11.2
112000/10000= 0)
11.20 p.u )

TOTAL COST 318.85 2550800 310 31,00,000 304.099 3649200

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UNIT -5:Marginal costng udgetary Control

Cash udget : It is a detailed estmate of cash receipts from all sources and cash payments for all
purpose and the resultant cash balance during the budget period. It makes certain that the business has
sufficient cash available to meet its needs as and when these arise .It is a device for coordinatng and
controlling the fnancial side of the business to ensure solvency and provide a basis for planning and
fnancing required to cover up any defciency in cash .cash budget thus plays an important role in the
fnancial management of a business undertaking .
Purpose :
1.It ensures that sufficient cash is available when required
2. It indicates cash eicesses and shortages so that acton may be taken in tme to invest any eicess cash
or to borrow funds to meet any shortages .
3.

Master udget

Zero ase udgetng

31