Unit 5

Budgets and Budgetary Control

Budgets and Budgetary Control- Meaning-objectives-advantages-Limitations -

Installations of Budgetary control system-Classifications of Budgets based on Time,
Functions and Flexibility. Preparation of Budgets (Sales, Production, Flexible, Cash,
Master Budget and Raw Material Purchase Budget)

Budget
A budget is the monetary and or quantitative expression of business plans and policies to be pursued in the future
period of time. Budgeting is preparing budgets and other procedures for planning, coordination and control of
business enterprise

Difference between forecasts and Budgets

Classification of budgets
a. Classification according to time
1. long- term budgets
2. Short- term budgets
3. Current budgets
b. Classification based on functions
1. Functional or subsidiary budgets
2. Master budget
c. Classification on the basis of flexibility
1. fixed budget
2. flexible budget

Control Ratio
1. Capacity ratio =
2. Activity ratio =
-----------------------------------------
3. Efficiency Ratio =
actual hours worked
----------------------------- x 100
budgeted hours
Standard hours for actual production
X 100
budgeted hours
Standard hours for actual production
------------------------------------ X 100
actual hours worked

4. Calendar ratio = Number of actual working days in a period

------------------------------------------- X100
budgeted working days for the period
 Problem 1:
Quick products ltd. Sells two products X and Y in the two divisions north and south. The following were the
budgeted and actual sales for the year 1999.

For the year 2000, the board of directors has approved the proposal of sales department to increase the price of “X”
to Rs.200 and decrease the price of ‘Y’ to 400. The sales estimates from the divisional managers were as follows:
North: ‘X’ 800 units ‘y’ 500 units
South: ‘X’ 600 units ‘y’ 300 units
An intensive advertising campaign proposed by advertising consultants is expected to result in additional sales 20%
of each product in each division over the estimated sales. Prepare the sales budget for the year 2000 and present it
together with the budgeted and actual sales for 1999.

Sales Budget for the year 2000

Quick products Ltd.

Division Products Budget for 2000 Budget for 1999 Actual sales for 1999

Qty. Price Amount Qty. Price Amount Qty. Price Amount

Units Rs. Rs. Units Rs. Rs. Units Rs. Rs.

North X 960 200 1,92,000 500 180 90,000 600 180 1,08,000

Y 600 400 2,40,000 300 430 1,29,000 200 430 86,000

Total 1560 - 4,32,000 800 - 2,19,000 800 - 1,94,000

South X 720 200 1,44,000 300 180 54,000 400 180 72,000

Y 360 400 1,44,000 200 430 86,000 150 430 64,500

Total 1080 - 288000 500 - 140000 550 - 136500

Total Su X 1,680 200 3,36,000 800 180 1,44,000 1,000 180 1,80,000
mmary

Y 960 400 3,84,000 500 430 2,15,000 350 430 1,50,500

Total 2,640 - 7,20,000 1,300 - 3,59,000 1,350 - 3,30,500

 Workings
1999 2000
Actual
North X 600 800 *20% = 160 = 800+160 = 960
y 200 500 *20% =100 = 500+100 =600

South X 600 *20% = 120 = 600+120 =720

Y 300 *20% =60 = 300+60 = 360

1st 2nd 3rd 4th

quarter quarter quarter quarter

Product A 10,000 12,000 13,000 15,000

B 5,000 4,500 4,000 3,800

2. Malar Ltd. Sells two products A and B Which are produced in its special products division. Sales for the year
2009 were planned as follows: The selling Prices were 20 per unit and Rs. 50 per unit respectively for A and B.
Average sales returns are 5% of sales and the discount and bad debts amount to 4% of the total sales.
Prepare Sales budget for the year 2009

Malar ltd., Sales budget for the year 2009

Particular 1st quarter 2nd quarter 3rd quarter 4th quarter Total
s
Qty Price Value Qty Price Value Qty Price Value Qty Price Value Qty Pri Value Rs
units Rs Rs units Rs Rs units Rs Rs units Rs Rs units ce
Rs

Product A 10,000 20 2,00,000 12,000 20 2,40,00 13,000 20 2,60,000 15,000 20 3,00,000 50,000 20 10,00,00

B 5,000 50 2,50,000 4,500 50 2,25,000 4000 50 2,00,000 3,800 50 1,90,000 17,300 50 8,65,000

Total 15,000 - 4,50,000 16,500 - 4,65,000 17,000 - 4,60,000 18,800 - 4,90,000 67,300 - 18,65,000
Sales
(1)

Less: Sales 22,500 23,250 23,000 24,500 93,250

Return @
5%
Of sales
Discount a 18,000 18,600 18,400 19,600 74,600
nd bad
debts 4 %
on sales
Total (2) 40,500 41,850 41,400 44,100 1,67,850

Net sales 4,09,500 4,23,150 4,18,600 4,45,900 16,97,150

(1-2)
3. You are required to prepare a production budget for the half year ending June 2000 from the following
information

Product Budgeted sales quantity Actual stock on 31.12.99 Desired Stock on 30.6.2000

units units Units

S 20,000 4,000 5,000
T 50,000 6,000 10,000

Production Budget for the half year ending 30.6.2000

Particulars Products Total units

S units T units

Sales 20,000 50,000 70,000

Add: closing stock 5,000 10,000 15,000

25,000 60,000 85,000

Less: Opening stock 4,000 6,000 10,000

Quantity to be Produced 21,000 54,000 75,000

Production = estimated sales + Desired closing stock – Estimated opening stock

4. Lakshmanan ltd. Plans to sell 1,10,000 units of a certain product line in the first fiscal quarter. 1,20,000 units in the
second quarter 1,30,000 units in the third quarter 1,50,000 units in the fourth quarter and 1,40,000 units in the fifth
quarter. At the beginning of the first quarter of the current year, there are 14,000 units of the product in stock. At the
end of each quarter, the company plans to have an inventory equal to one-fifth of the sales for the next fiscal quarter.
How many units must be manufactured in each quarter of the current year.

Lakshmanan Ltd., Production budget for the year ending…

Particulars 1st quarter 2nd quarter 3rd quarter 4th quarter Total units

Sales 1,10,000 1,20,000 1,30,000 1,50,000 510000

Add: Closing stock 24,000 26,000 30,000 28,000 1,08,000

1,34,000 1,46,000 1,60,000 1,78,00 6,18,000

Less: Opening stock 14,000 24,000 26,000 30,000 94,000

Total units to be pr 1,20,000 1,22,000 1,34,000 1,48,000 5,24,000

oduced
Sales
1st quarter – 1,10,000 *1/5 = 22,000
2nd quarter- 120,000*1/5 =24,000

3rd 26,000 ; 4th 30,000

5th 28,000
5. From the following data forecast the cash position at the end of April, may and June 1998

Month 1998 Sales Rs. Purchases Rs. Wages Rs. Sales expenses Rs

February 1,20,000 80,000 10,000 7,000

March 1,30,000 98,000 12,000 9,000
April 70,000 1,00,000 8,000 5,000

May 1,16,000 1,03,000 10,000 10,000

June 85,000 80,000 8,000 6,000

Further Information :Sales at 10% realized in the month of sales. Balance equally realized in two subsequent
months.
Purchases: Creditors are paid in the month following the month of supply
Wages:20% paid in arrears in the following month.
Sundry expenses paid in the month itself .
Income tax Rs. 20,000 payable in June.
Dividend Rs. 12,000 payable in June.
Income from investments Rs. 2,000 received half-yearly in march and September.
Cash balance on hands as on 1.4.88 Rs. 40,000.

Cash budget for Three months ending June 1998

Particulars April May June

Opening balance of cash 40,000 47,700 29,700

Add : Receipts of cash

Cash sales 7,000 11,600 8500

Cash from debtors

1st month 58,500 31,500 52.200

2nd month 54,000 58,500 31,500

Total receipts (I) 1,59,500 1,49,300 1,21,900

Payments:

Creditors Purchases 98,000 1,00,000 1,03,000

Wages Current 6,400 (8,000*80%) 8,000 (10,000*80%) 6400 (8,000*80%)

Arrears 20% 2,400 (12,000*20%) 1,600 (8,000*20%) 2,000 (10,000*20%)

Sundry expenses 5,000 10,000 6,000

Income tax - - 20,000

Dividend - - 12,000

Total payment(II) 1,11,800 1,19,600 1,49,400

Closing balance I-II 47,700 29,700 -27,500

 Workings
Particulars Feb Mar Apr May June

Total sales 1,20,000 1,30,000 70,000 1,16,000 85,000

Less : cash sales @10% 12,000 13,000 7,000 11600 8500

1,08000 1,17,000 63,000 1,04,000 76,500

Credit sales

1st month 54,000 58,500 31,500 52.200

2nd month 54,000 58,500 31,500

Total credit sales 1,12,500 90,000 83,700

6. A newly started pushpak co., wishes to prepare cash budget from January. Prepare a cash budget for the 6 months
from the following estimated revenue and expenses.

Months Total sales Materials Wages Production Selling and distributi

on overhead
January 20,000 20,000 4,000 3,200 800
February 22,000 14,000 4,400 3,300 900
March 24,000 14,000 4,600 3,300 800
April 26,000 12,000 4,600 3,400 900
May 28,000 12,000 4,800 3,500 900
June 30,000 16,000 4,800 3,600 1000

Cash balance on 1st January was Rs10,000. A new machine is to be installed at Rs. 30,000 on credit, to be repaid by
two installment in march and April.
Sales commission at 5% on total sales is to be paid within the month following actual sales.
Rs.10,000 being the amount of 2nd call may be received In march. Share premium amounting to Rs. 2,000 is also
obtained with 2nd call
Period of credit allowed by suppliers-2months
Period of credit allowed by customers – 1 month
Delay in payment of overheads – 1 month
Delay in payment of wages – ½ month
Assume cash sales to be 50% of the total sales.

7. Draw up a flexible budget for production at 75% and 100% capacity on the basis of the following data for 50%
activity

Particulars Per unit

₹
Materials 100
Labour 50
 Variable expenses (direct) 10
Administrative expenses (50% fixed) 40,000
Selling & distribution expenses (60% fixed) 50,000
Present production (50% activity) 1,000 units

Flexible Budget
Capacity levels

Particulars 50% 1000 units 75% 1500 units 100%

2000 units

Per unit Total Per unit Total Per unit Total

Rs. P. Rs. P. Rs. P.

Materials 100 1,00,000 100 1,50,000 100 2,00,000

Labour 50 50,000 50 75,000 50 1,00,000

Variable expenses 10 10,000 10 15000 10 20,000

Prime cost 160 1,60,000 160 2,40,000 160 3,20,000

Administrative expenses 20 20,000 20 30,000 20 40,000

50% variable

50% fixed 20 20,000 13.33 20,000 10 20,000

Cost of production 200 2,00,000 193.33 2,90,000 190 3,80,000

Selling and distribution 20 20,000 20 30,000 20 40,000

Variable 40%

Fixed 60% 30 30,000 20 30,000 15 30,000

Total cost 250 2,50,000 233.33 3,50,000 225 4,50,000

Sum 63: Flexible budget

Particulars Capacity level

40% 60% 80%

Fixed cost

Salaries 30,000 30,000 30,000

Insurance 20,000 20,000 20,000

Variable cost

Materials 60,000 90,000 1,20,000

Wages 50,000 75,000 1,00,000

 Semi variable costs

Maintenance (60% variable) 9,600 14,400 19,200

40% fixed 9600 9600 9600

Lighting (50% fixed) 8000 8000 8000

50% variable 5333.33 8000 10,666.66

Supervision (80% fixed) 24,000 24,000 24,000

20% variable 4,000 6000 8,000

Total cost 2,20,533 2,85,000 3,49,467

75% = 1000/50 *75
100%= 1000/50*100
Administrative 50% fixed
50% variable 40,000
Variable 50% 20,000 50% capacity level p.ut 20,000/1000=20
Fixed 50% 20,000
Selling and distribution 60% fixed – 50,000
60% fixed 50,000*60% = 30,000 ; 50% 30,000/1000=30
40% variable 50,000*40% = 20,000 ; 50% p.ut 20,000/1000 = 20

9. Prepare Production Budget for the year 2010.

Product Sales Sales units Stock Stock

(units) ( July 1, 2009) (June 30, 2010)

A 1,50,000 14,000 15,000

B 1,00,000 5000 4500

C 70,000 8000 8000

Production budget

Particulars A B C

Sales 150000 100000 70,000

Add: Closing Stock 15000 4500 8000

Less Opening stock 14000 5000 8000

Production 151000 99,500 70000