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BUDGETARY CONTROL:
Budgetary Control System is a system of controlling costs, which includes the preparation of
budgets, implementation, monitoring and follow up.
Budgetary Control System is only for large organizations and not small concerns because the
installation and operation of budgetary control system is so costly affair and it requires the
employment of specialized staff and involves other expenditure. The small concerns may find it
difficult to adopt. Small firms can make use of Budgetary Control techniques provided benefit
exceeds its costs.
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Question 1
Harrisons Company’s sales forecast for the coming year is as under.
Inventories at the beginning and desired at the end of year are as under:
Question 2
Estimated sales percentages for the first three-month period of the coming year of the Midlands
Company are:
Estimated unit sales (at Rs.2 per unit) by districts for the three months are:
Districts Units Sales
Colorado--------------------------------------------------- 20,000
Kansas----------------------------------------------------- 30,000
Nebraska----------------------------------------------------- 10,000
Missouri------------------------------------------------------ 40,000
Total 100,000
Company policy expects an inventory of 10,000 units at the beginning and at the end of each
three-month period. The production schedule is:
January---------------------------------------55%
February--------------------------------------30%
March----------------------------------------15%
Required:
(1) An estimate of sales by units and dollars for each of the first three months for each
district and in total.
(2) A schedule of the end-of-month inventories by units.
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Question 3
Philips Electronics Corporations has two products lines, high speed printers and electronic
typewriters. The company’s Market Research Department prepared the following sales forecast
for the coming year:
High-Speed Electronic
Printers Typewriters
Industry total sales forecast 25,000 90,000
Company’s share of the market 20% 10%
Sales price per unit Rs.1,800 Rs.500
To establish an acceptable forecast, the budget director averages the two estimates. The resulting
forecast is then broken down by territories in the same ratio as reflected in the estimates of the
sales force.
Required:
Sales forecast showing unit sales and total sales revenue by sales territory and by product lines.
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Question 4
The Amsterdam Company prepared the following figures as a basis for its 2022 budget.
Estimated inventories at the beginning and desired quantities at the end 2023 are:
Purchase Price
Material Beginning Ending Per Kilogram
A------------------------------------------ 10,000kg 12,000kg Rs.20
B------------------------------------------ 12,000kg 15,000kg 10
The direct labor cost is budgeted at Rs.8 per hour and variable factory overhead at Rs.6 per hour
of direct labour. Fixed factory overhead, estimated to be Rs.40,000, is a joint cost and is not
allocated to specific products in developing the manufacturing budget for internal management
use.
Required:
(1) Sales Budget
(2) Production budget.
(3) The budgeted quantities and Rupees amounts of purchase requirements for each material.
(4) DL Budget
(5) FOH Budget
(6) Manufacturing budget, by product and in total.
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Question 5
A budget department gathered the following data concerning future sales and budget
requirements:
Anticipated Sales for 2023 Expected Inventories Desired Inventories
Product Units Price January 1, 2023 December 31, 2023
A 20,000 Rs.55 8,000 units 10,000 units
B 50,000 50 15,000 units 8,000 units
C 30,000 60 6,000 units 9,000 units
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(4) Direct labor budget (Rupees)
(5) Manufacturing Budget
(6) Finished goods inventory, Dec. 31, 2023 (Rupees)
Standard Costing
When you want to measure some thing, you must take some parameter or yardstick for
measuring. We can call this as standard. What are your daily expenses? An average of $50! If
you have been spending this much for so many days, then this is your daily standard expense.
The word standard means a benchmark or yardstick. The standard cost is a predetermined cost
which determines in advance what each product or service should cost under given
circumstances.
Definition
The CIMA, London has defined standard cost as “a predetermined cost which is calculated from
managements standards of efficient operations and the relevant necessary expenditure.” They are
the predetermined costs on technical estimate of material labor and overhead for a selected
period of time and for a prescribed set of working conditions. In other words, a standard cost is a
planned cost for a unit of product or service rendered.
The technique of using standard costs for the purposes of cost control is known as standard
costing.
Advantages
Standard costing is a management control technique for every activity. It is not only useful for
cost control purposes but is also helpful in production planning and policy formulation. It allows
management by exception. In the light of various objectives of this system, some of the
advantages of this tool are given below:
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3. Management by exception-- The targets of different individuals are
fixed if the performance is according to predetermined standards. In
this case, there is nothing to worry. The attention of the management is
drawn only when actual performance is less than the budgeted
performance. Management by exception means that everybody is
given a target to be achieved and management need not supervise each
and everything. The responsibilities are fixed and every body tries to
achieve his/her targets.
4. Cost control-- Every costing system aims at cost control and cost
reduction. The standards are being constantly analyzed and an effort is
made to improve efficiency. Whenever a variance occurs, the reasons
are studied and immediate corrective measures are undertaken. The
action taken in spotting weak points enables cost control system.
5. Right decisions-- It enables and provides useful information to the
management in taking important decisions. For example, the problem
created by inflating, rising prices. It can also be used to provide
incentive plans for employees etc.
6. Eliminating inefficiencies-- The setting of standards for different
elements of cost requires a detailed study of different aspects. The
standards are set differently for manufacturing, administrative and
selling expenses. Improved methods are used for setting these
standards. The determination of manufacturing expenses will require
time and motion study for labor and effective material control devices
for materials. Similar studies will be needed for finding other
expenses. All these studies will make it possible to eliminate
inefficiencies at different steps.
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For instance, if the industry changed the technology then the system will not be suitable. In that
case, we will have to change or revise the standards. A frequent revision of standards will
become costly.
2. Current Standards
A current standard is a standard which is established for use over a short period of time and is
related to current condition. It reflects the performance that should be attained during the current
period. The period for current standard is normally one year. It is presumed that conditions of
production will remain unchanged. In case there is any change in price or manufacturing
condition, the standards are also revised. Current standard may be ideal standard and expected
standard.
3. Ideal Standard
This is the standard which represents a high level of efficiency. Ideal standard is fixed on the
assumption that favorable conditions will prevail and management will be at its best. The price
paid for materials will be lowest and wastes etc. will be minimum possible. The labor time for
making the production will be minimum and rates of wages will also be low. The overheads
expenses are also set with maximum efficiency in mind. All the conditions, both internal and
external, should be favorable and only then ideal standard will be achieved.
Ideal standard is fixed on the assumption of those conditions which may rarely exist. This
standard is not practicable and may not be achieved. Though this standard may not be achieved,
even then an effort is made. The deviation between targets and actual performance is ignorable.
In practice, ideal standard has an adverse effect on the employees. They do not try to reach the
standard because the standards are not considered realistic.
4. Basic Standards
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A basic standard may be defined as a standard which is established for use for an indefinite
period which may a long period. Basic standard is established for a long period and is not
adjusted to the preset conations. The same standard remains in force for a long period. These
standards are revised only on the changes in specification of material and technology
productions. It is indeed just like a number against which subsequent process changes can be
measured. Basic standard enables the measurement of changes in costs. For example, if the basic
cost for material is Rs. 20 per unit and the current price is Rs. 25 per unit, it will show an
increase of 25% in the cost of materials. The changes in manufacturing costs can be measured by
taking basic standard, as a base standard cannot serve as a tool for cost control purpose because
the standard is not revised for a long time. The deviation between standard cost and actual cost
cannot be used as a yardstick for measuring efficiency.
5. Normal Standards
As per terminology, normal standard has been defined as a standard which, it is anticipated, can
be attained over a future period of time, preferably long enough to cover one trade cycle. This
standard is based on the conditions which will cover a future period of five years, concerning one
trade cycle. If a normal cycle of ups and downs in sales and production is 10 years, then standard
will be set on average sales and production which will cover all the years. The standard attempts
to cover variance in the production from one time to another time. An average is taken from the
periods of recession and depression. The normal standard concept is theoretical and cannot be
used for cost control purpose. Normal standard can be properly applied for absorption of
overhead cost over a long period of time.
Revision of Standards
For effective use of this technique, sometimes we need to revise the standards which follow for
better control. Even standards are also subjected to change like the production method,
environment, raw material, and technology.
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Questions on standard Costing
Question 1
New Look Lawn Furniture Corporation uses 12 meters of aluminum pipe at Rs.0.80 per meter as
standard for the production of its Type A lawn chair. During one month’s operations, 100,000
meters of the pipe were purchased at Rs.0.78 a meter, and 7,200 chairs were produced using
87,300 meters of pipe. The materials price variance is recognized when materials are purchased.
Required:
1. Material Price Variance
2. Material Quantity Variance
Question 2
The processing of a product requires a standard of 0.80 direct labour hours per unit for operation
OP2000 at a standard wage rate of Rs.6.75 per hour. The 2,000 units were produced using 1,580
direct labour hours at a cost of Rs.6.90 per hour.
Required:
1. Direct labour rate variance
2. Direct labour efficiency variance.
Question 3
The Osama Corporation uses a standard costing system. The factory overhead standard rate per
direct labour hour is:
Required:
1. Controllable variance
2. Volume variance
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Question 4
From the following information, calculate the following variances:
1. Material Price Variance
2. Material Quantity Variance
3. Labour Rate Variance
4. Labour Efficiency Variance
Information: The budgeted normal monthly capacity of ABL Limited is 100,000 hours, with a
standard of 40,000 units at this capacity. Standard costs per unit are as under:
Material----------------------------------------------10 kg @ Rs.2.50
Labour----------------------------------------------- Rs.18 per hour
During December, actual units produced were 45,000 at a labour cost of Rs.2,300,000. Actual
Labour hours worked during the month were 115,000 and 427,500 Kg material was used at a
total cost of Rs.1,111,500.
Question 5
Budgeted normal capacity of Zahab Corporation is 10,000 direct labour hours, with a standard
production of 8,000 units. Standard costs are as under:
During November, actual factory overheads totaled Rs.17,550 and 9,000 direct labours cost
Rs.76,500. During the month 7,000 units were produced using 14,400 Kg of materials at a cost
of Rs.0.51 per Kg.
Required:
1. Material price variance
2. Material quantity variance
3. Labour rate variance
4. Labour efficiency variance
5. Factory overheads controllable variance
6. Factory overheads volume variance.
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