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    Budgetary Control

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    Anmol poudel
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    Chapter 15 BUDGETARY CONTROL PTER OVERVIEW Plant Utilisation |. Material Usage/ Purchase 3. Labour / Personnel related 5. Production Costs / OH Administrative Costs / OH 3. Selling & Advt Costs 9. R&D Expenditure 10. Capital Expenditure 11, Budget Ratios 412, Principal Budget Factor period of time. (b) Resource Quantities, Costs and Expenses, "Budget is a quantitative expression of a plan fora defined st may include planned ~ (2) Sales Volumes and Revenues, e a (e) Asses, uiaiies and Cash Flows. ‘Tt is a means of - ‘co-ordinating the combined intelligence of an entire organisation, {in the future. Description’ A Budget should have / be ~ ‘organizational structure. ‘assigned to identifiable units within the Entity, of entire organisation to Budgeting ‘and reasonable targets. Scanned with CamScanner ~ _ | (@) Master Budget should be broken down into various Functional Budgets. | Performance | () Variances from Standards should be analysed for each Responsiblity Centre. L —_{©)_Reward System of Employees to be linked effectively to Bur Padika’s Students’ Handbook on Cost and Nonagement Accounting - For CA Inter ! Description: A Budget should have / be — (©) Monitored periodically, (4) Stated in quantifiable terms |(¢) Geary communicated in terms of and, of Performance. 15.1.8 Characteristics/ Features of a Budget ‘Budget Is @ constant endeavour of the Management, and acts as a Business Barometer. The major features of Budgets are — 7. Scope: A Budget is a detailed plan of all the economic activities of a Business. 8. Futuristic: A Budget is concerned for a definite future period. 9, Written: A Budget is a written document. 10. R B. ‘Co-Operation: All the Departments of a Business Unit co-operate for the preparation of a Business Budget. 11. Focus: Budget is a means to achieve business goals, and it is not an end in itself. Past and Present: Budget is usually prepared in the ight of past experience, adjusted for current trends. ‘Continuous and Flexible: Budget should be updated, corrected and controlled whenever circumstances change. 14. Management Tool: Budget helps in Planning, Coordination and Control. 15. Varied: Different types of Budgets are prepared by Businesses, according to their individual requirements. 15.1.4 Objectives of Budgeting w.r.t Management Activities Activity Description Planning Targets include both the Overall Business Targets as well as the specific targets for the individual units within the business. 2. Planning motivates employees to attain goals, and improves overall decision making. During the planning phase of the budget process, all viewpoints are considered, options identified, and cost reduction opportunities are evaluated. 3. Overall Corporate Planning should take place before Unit / Functional Budgets are prepared. Individual Plans at unit level should consider the overall Organizational Plan, i.e. Mission, Corporate ‘Strategy and also the Unit Objectives. Responsibility is assigned to the persons who are responsible for execution of plan. ‘Budget Plans are ~ (a) quantified, and (b) communicated throughout the organization. a ‘After the Budget Plans are laid down, they can be used to direct and coordinate operations in order ‘achieve the stated targets, by executing appropriate actions. 2 Budget is a method to direct and coordinate business activities and units to achieve stated targets. 3. Each Budgetary Unit of an Entity (called Responsibility Centre) is led by a Manager who has the ‘uthority over and responsibility for the Unit's performance. Objectives and of performance ex from a Responsibil i Cast ee ans ee to nge sdieverone Sonn one 4 ] A Feedback is received inthe form of Budget Report from Responsibility Centre, performance of the concerned unit, ea fa oe ine oa 2. Feedback can be used ~ (a) to evaluate (an, Pe used ~ (8) to evaluate performance, (b) to provide direction, and (c) to adhst 3. Substantial /Non-Controllable changes in environmental conditions (subject reparation of Budgets) are considered, and thereafter actual performance ls evalustes, P 4. A Variance Analysis system helps control, identifies deviations, and prevents adverse cost movements: 5. Budget encourages cost consciousness by controling unplanned expenditure, the main of {isto help in snjetive O Budgeting isto help in achieving the overall Enity’s goals through the Management Proceses Ae 15.2 Scanned with CamScanner dgetary Control ~ Meaning and Fea Budgetary Control is defir ——o > ined as “the er of a policy, and the establishment of ities of executives ‘action continuous budgets, relating the responsibilities of the RE of tha yoo coven of ecu it, boa Pon ither to secure DY g: Determining the wo: Deering the tects be ache, orth bt pre, te pts) at ma OS Determining the Vatiety of activities that should be undertaken for achievement of the objectives Drawing up a plan or a scheme fata for tra Na Udoak pence ans ene,” Pe OOP class of activity, in physical as well 26 person, section oF ce Evaluation: ath the Laying out a system of comparison of actual performance by each ; ee ee ‘Action: Ensuring the lanarehot achieved, corrective action are taken, and when corectve Periereatnronriy tiartiipmte rouse once once. ining targets of p ce for each section or department ofthe business. ‘Defining Responsibilities: Laying down the responsibil | pected of him and how he wil be judged. a prer for Performance Evaluation: Providing ed targets and investigation of deviation, Tehelps to take timely corrective measures. use of Resources: Ensuring the best use of al limiting factors. Co-ordination: Co-ordinating the various activities of the business and centralising tf ‘Management to decentraise responsibilty ané delegate author: ‘of careful forethought, assessment of what is possible and an attempt at it. Tt ‘action: Engendering 2 spirit rcs Ha fs © So UP rg 08 Ans i 9 ar meERE SST fc policy Providing a basis fr revon of curent and future Poles of Budgetary Control System to conduct Its business activites in an efficient manner. resources, le. men, material, machinery, methods and money ~ iS ‘each individual so that everyone knows what 's actual. performance with the basis for the comparison of penses from the budgeted if any, of actual performance and ext l avaiable resources to maximise profit or production, subject control, but also making 2 facility Scanned with CamScanner ——_— Padhuka's Students’ Handbook on Cost and Management Accounting For CA Inter 15.1.8 Disadvantages of Budgetary Control System _ 4 ptimaves: Budgets may oF may not be tut 0 they are Based on estates: The emumptons abou re eve » may or may not actually happen. a. Riglaty Bets reconsidered sd document. Too much emphad on budgets may afet doy > 2 Oey and ignores the dynamic state of organisational functioning. 4. oles Sanoe of Security: Mere budgeting cannot lead to profkabity. Gudgets cannot be execied omic. Tray create a false sense of security that everything has been taken care of inthe budgets ‘Lack of co-ordination: Staff co-operation |s usually not available during Budgetary Control exercise. ‘Time and Cost: The introduction and implementation of the system may be expensive 15.1.9 Role of Budget Officer ‘Successful implementation of a Budgetary Control System depend: eaere be composed of all functional heads and a member from the Board to preside over and guide the deliberations The Budget Committee acts through the Budget Officer whose responsibilities include ~ tion of various Budgets by co-ordinating the work of Accounts 1. Functional Budget Preparation: To assist In prepara Department (which normally compiles Budgets), with the relevant functional departments like Sales, Production, Plant Maintenance, etc. Is who are responsible to adhere 2. Communication to Responsibil 1s upon the working of the Budget Committe, which ity Centres: To forward the Budget to the individual te them, and guide them in overcoming any practical difcuites in its working. 3. Co-ordination: To prepare the Periodical Budget Reports for culation to the individuals concerned, co-ordinating ‘with them in the formulation of budgets for subsequent periods. 4. Follow-up: To determine the follow-up action to be taken on the Budget Reports. = udget committee Review: To prepare an overal Budget Woking Report for dscusion at the Budget Commins ocings and to ensure follow-up onthe lines of action suggested by the Commitee. 6 oard Review: To prepare Perodcl Reports for the Board Meeting, comparing the Budgeted Prof & Loss Account ‘and Balance Sheet with the actual results. 45.1.10 Steps involved in Preparation of Budgets 1. Definition of Objectives: Objectives should be defined precisely. ‘areas of control dearly demarcated, i ind expenditure to be covered by the budget. This will give 2 Gear understanding implementation 2 success. 2 dentifieation of Key (or Budget) Factor: A Key Factor represents a resource whose ayaiablty sls en Se aoe td onthe Fs objective of maximum profit. For proper budgeting, the key fair mat bbe located and estimated property. 3. Budget Committee and Controller: Formulation of @ Budget usually requires whole time services of a senior Sat Cmte acai mils work by 0 Budget Committee, consisting of heads of al departments a 52 cacti Meant os the Charman. Te Conrle 5 responsble for co-ordination and development of [programmes and preparing the Budget Manual. 4, Budget Manual: The Budget Manual is a collection of documents, that in the planning process. 5, Budget Period: The Period covered by a Budget Is known as Budget Period. Normally, a calendar co a period co ude Paid Te Pi vee a se Po ten s-ed int Sexe pao—80/ months or quarters or such periods that coincide with period of trading activity. 6. Crandard of Activity or Output: Based on past static known market changes and curent codon sre forecasts of future situations the standards of Activity Levels for future period should be laid down. progressive business, the achievement of a year must exceed those of earlier years, ze bgt ‘contains relevant information for those involved id a i a Scanned with CamScanner Budgetary Control Pocuments, that following mattere 2? "AeVANt information for those involved in the Planning and contol pro able for the preparation 69h Functional Budget, and (b) inter-relatonships between ‘not hold up the reySach Bet. Hote Xe (Ul exlanations of how to use them. Imade by Managers in their budgets, eg. Rate of Inflation, Exchange ts may be dlassified on the following bases - 2. Conditions 4. Coverage (@) Basic Budget and (2) Fixed Budget and (2) Functional Budget and (b) Current Budget. (b) Flexible Budget. (D) Master Budget. 1. BASED ON TIME PERIOD: Long Term Budget ‘Short Term Budget (@) Budgets which are prepared for periods longer | (a) Budgets which are prepared for periods than 2 year are called Long-Term Budgets. © town 2s Short-Term Budgets. ae () Such Budgets are helpful in business forecasting | (b) Such Budgets are prepared in cases where a specific action has 2nd forward planning to be immediately taken to bring any variation under control. | (©) Example: Cash Budget. ‘Note: Current Budget: Current Budget is 2 Budget which is created and established for use over a short period of time and is related! to current ‘conditions. '* Current Budgets relate to the current activities of the business (say months or weeks). Current Budget 7 Budget, which is established for use over a short period of time: and is related to the current conditions, i called Current Budget. Te is a Budget, which by recognising the between semi-variable difference ‘and! variable costs is designed to change in ‘elation to level of activity attained. Ttean be re-casted on the basis of level to be achieved. Thus Its not rigid It consists of various budgets for different of activity, Scanned with CamScanner (@) Effect of variance (@) Use for Decision | ‘Comparison of actual performance with budgeted (A) Performance Wie maanee, speci when there is a difference Evaluation ng ly 4. BASED ON COVERAGE: = ' Functional B T Master Budget Budgets, which ‘relate to the individual | itis a consolidated summary of the various functional budgets, functions in an organisation, are known as | » It serves as the basis upon which budgeted Profit & Loss Account ang Functional Budgets, e.g, Purchase Budget, forecasted Balance Sheet are built up. ‘Sales Budget, Production Budget, Plant- | , ‘When the Master Budget Is approved by Top ‘Management, it Becomes i the standard for the achievement of which all departments have to wor. 15.2.2 Fixed Budgets 1. Meaning: It is 2 Budget designed to remain unchanged irrespective of the level of activity actually attained. 2. Situations: Fixed Budget is most relevant when the following conditions co-exist ~ (2) Uniform Production and Sales throughout the year. (©) Demand of the Product is certain and stable. - (©) Purely Domestic Market, and in case of Exports, Impact of Forex Rates is negligible. \ (@) Supply Orders are issued regularly. (©) Supply of all Production Inputs is regular. (Prices of Inputs and Products is very stable. a (@) No seasonal nature of business. % (f) No impact of external factors on the business activities. (9 No need for Special Labour or Material in production of the products. No restriction on the availabilty of resources, oa ‘Note: Generally, all the above conditions are not found in practice. So, Fixed Budget is not very relevant. 3, Merits and Demerits: (2) Simple to understand. ’ (b) Can be quickly prepared. (©) Variables and Sensitivity Analysis not required. > oan 2 (@) Single Absorption Rate avoids confusion. (2) Misleading since poor perfomance may remain undetected and a good performance eh fe acct rs om ends, (Q)_Not suitable when environment condtions change constanty. 15.2.3 Flexible Budgets $= 1 It is @ Budget, which by recognising the difference between fixed, semi-variable ee eer ee — a : 2. Need: The need for the preparation of Flexible Budgets arises in the following circumstances ~ aa ia. e ((@) Seasonal fluctuations in sales and/or production, (b) Introduction of new products, product designs and versions on a frequent basis, rt 15.6 Scanned with CamScanner Budgetary Control Rexible Budgeting may be resorted to in the following situations ~ basins nce new bess tr, de To ts yal ratre, Kay be ai w fra OE {a) Sales, Costs and Profit can be calculated easily for various levels of production capaci. (©) Change in business conditions are considered and adjusted suitably. (© Output Level required to earn the desired profit can be obtained quickly. (d)_Appropriate OH Recovery Rate can be used to avoid abnormal Over / Underabsorption. {a) Can be prepared only when there Is = () a proper accounting system, (i) perfect knowledge about ‘the factors of production and various business circumstances. (©) Useful only when a Standard Costing System is in use. /Budgets are broadly grouped under the following heads — VPuysical Budgets: Budgets that contain information in terms of physical units about sales, production, et ‘or ‘example, Quart of Sales, Quantity of Production, Inventories, Manpower Budgets. ‘Cast Bagets: Budgets which provide Cost Information in respect. of Manufacturing, Seling, Adminstration, ec. for exampe, ‘Merufacuring Coss, Seling Costs, Administration Cost, R& D Cost Budgets. \Proft Budgets: Budgets that enable the ascertainment of Prof, for example, Sales Budget, Profit & Loss Budget, <8 Financial Budgets: A Budget, vitich faciltates to ascertain the Financial Position of a concer, for example, Cash ‘Budgets, Capital Expenditure Budget, Budgeted Balance Sheet, etc. Expenditure Budget, Cash Budget, Statement and Budgeted Balance Sheet Scanned with CamScanner — vironmental a compen, Padthuka’s Students’ Handbook on Cost and Management Accounting ~ For CA Inter _ Company, whereas the Sales Budget shows how the Management intends to react to ‘Stuation. Thus, the Sales Budget is active rather than passive, 2. Factors: The following factors have to be considered for preparing the Sales Budget — @) Reports by Salesmen who have first-hand information about local conditions prevailing in thelr areas, Competition, or. (b)_Past Sales Analysis-statistical forecasting techniques are used to project the sales volume based On past sales day. (©) General economic and politcal conditions, @) Relative "i @ Market pooniaameapareren provide information like state of the market, fashion changes, preferences, activities of competitors, ability of the consumers to pay ete. (A) Pricing Policies, (@) Advertising and Sales Promotion, (h)_ Quality of sales force. (Competition, Market size and Market Share. , G)_ Seasonal and cyctical variations. (®) Production Capacity of the, oO Shae Cary be harsicton ce ton wea oe (1m) Special conditions affecting the business. For example, an increase in the production of automobiles with increage in demand of tyres, 3. Classification: The Sales Budget is prepared on the following bases to facilitate control ~ (2) Products or groups of products. (b) Areas, Towns, Salesmen and Agents. (© Types of customers e.g. (i) Government, (i) Export, (ii) Local Sales, (iv) Retail Depots. (@) Period ~ months, weeks, etc. 15.3.4 Production Budget 1. Preparation: Production Budget shows the production for the budget period based upon — (2) Seles Budget, (®) Production Capacity of the factory. we (©) Planned increase or decrease in Finished Stocks, and (@) Policy governing outside purchase. 2 ‘Sales and Production Capacity Comparison: (2) The production facity avaiable and the Sales Budget will be compared and co-ordinated to determine the (©) M production facies are not euffcient, factors tke working overtime, working In shits, sub-cotracing & ‘purchasing of additional Plant and Machinery, may be considered. (©) If the production facilities are surplus, due ‘consideration should be given to promote advertising, a Prices to increase the sales, subcontracting of surplus caf bs a 3, Stock Level Determination: The level of stocks will (2) ‘Seasonal industries in which stocks have to be pacity etc. ‘depend upon the following factors ~ built up during off-season to cater to the peak season, ‘the plant fully and to avoid retrenchment of workers, and. nae ‘ocK are maintained at any time to avo locking up of funds in vent ed (b) Steady and untorm level of reduction to use (Q) Production in sucha way that minimum, 4, Effect of Stock Level policy: (©) Producto Budget canbe used to show -() stabilsed production every month maximum 1, Caled micirum quanity of tock, wich wil reduce inventor coe gene” (M Produton fect wil be fuly used but the Inventory Budgetary Control es My hp hanes working hours, welght or other convenient units of plant facilities required to juction Budget. Its main purposes are — race ceca ts cst oF srs of machines forthe Budget Period ithe processes or cost centres which are overloaded so that corrective action may be taken, .9. (i) working {(W) sub-contracting, (i) expansion of production facity, ete ; of : and ater te Sls Prodiction Buds where te et possle to create the capac fan of the p take steps to increase sales in order to utilize available surplus capacity. ‘enables the Company to analyse the under or over-absortion of overeads for proper treatment theref. ameter nnspee copechy AR wid to srmlyee the entotors Or Ferien hapa procera Fst nel Sd WC Corr vr bx comer. age sh Carrara a eng i Now nt nets apecty oo ‘tis necessary for the Cost Auditor to give his comments on capacity utilisation. Capacity utilization is an important factor in Price Fixation. Direct Material Usage Budget 1 ee py ccc 2 eae In this connection, standardisation of size, quality, colour, etc. may be ‘Quantity: Standard requirement of each item of materials required should also be set. While setting the standard ‘ant, consideration should be glven to normal las in process. The Standard lowance for normal loss may De given ‘on the basis of past performance, test runs, technical estimates, etc. 3. Prices: Standard Prices for each item of materials should be set after giving consideration to available stocks anc ‘contracts entered into. ‘After setting standards for quality, quantity and prices, the Direct Materials Budget 's prepared using the formula = Beh hemct mata regret x Standard Price. Sng rc ig nents ri mat ma lr mt es = ‘of the business, = ecsareoriaes ine —— en 5 Paes hack ANN oe reo Scanned with CamScanner Handbook on Cost and Management Accounting = For CA Inter —— Labour —__—_— ear ‘budgets are prepared in relation to Direct Labour Costs ~ Labour Hour Requirement Budget: This is based on the following factors ~ (a) Budgeted Production and Plant Utilisation, (b) Details of various machine operations involved and services required, (©) Estimate of different grades of labour required, direct and indirect labour complement etc. {(@) Standard hours required to be worked. Labour Cost Budget: Standards rates of wages for each grade of labour can be introduced, and then the Diet ang Indirect Labour Cost budget can be prepared. |. Manpower Recruitment Budget: This is based on the following factors ~ (@) Direct Labour Hours required during the period, (b) Effective Hours per worker, for different grades, (©). Existing manpower, their skis, need for training, etc. (@) Labour Tumover rates, (@) Labour market conditions and availabilty of skilled labour. 4. Advantages: The advantages of Labour Budget are ~ (@) Itdefines the direct and indirect labour force required. (b) Tt enables the Personnel Department to plan ahead in recruitment and training of workers so that Labour Turnover ‘ean be reduced to the minimum. (©) Tt reveals the Labour Cost to be incurred in the manufacture, and faciitates preparation of Manufacturing Cost ‘Budgets and Cash Budgets for financing the wage bill. 15.3.9 Production Overhead Budgets 1. _ Items of Cost: Production Overhead consists of all items of Indirect Materials, Indirect Labour and Indirect Expenses. ‘Thus, the estimated Factory OH Costs necessary for production should be included in the Factory OH Cost Budget. The Production OH Budget is useful for working out the Predetermined Factory OH Recovery Rates. 2. Manner of Preparation: (2) This budget usually includes the total estimated cost for each item of Factory OH. So, a careful study and determination of the behaviour of different types of costs will be essential in preparation of Factory OH Budget. (0) ‘Supporting Schedules for Factory OH may be prepared for each department, classifying the OH into those costs for which Departmental Managers are responsible and those costs which are not within their sphere of influence (.. ‘apportioned costs), in order to evaluate performance. 3. Considerations: The following factors are relevant in the preparation of Factory OH Budget ~ (2) Fixed Expenses are Policy Costs and hence they are based on policy matters. (b) For estimating Indirect Labour, work study may be adopted, and a flexible estimated of number of indirect workers ‘require for each level of direct workers employed is made, e.g. one supervisor for every twenty direct workers. (©) For estimating the consumption of Indirect Materials, the age and condition of the plant and machinery should be taken into consideration. 4, Production Cost Budget covers Direct Material Cost, Direct Labour Cost and Manufacturing Expenses. After prepaid Direct Material, rect Labour and Production OH Cost Budgets, the summary Budge, i. Production Cost Bute" 15.3.10 Administrative Expense Budget 1, Items of Cost: Administrative Expenses are mostly Policy Costs and are, hence, fixed in nature. Some ‘Audit Fees, of fut Fees, Depreciation of Oce Equpment, Insurance, Subscritions, Postage, Stationery, Telephone i 15.10 Scanned with CamScanner ‘between Cost and Sales Volume: otal Heavy expenditure on seling and pen the ss dang Won Tew ness he rete period of Benefit: Sometimes, intensive sales and but the benefits arene nabreiet vas Proton tort re werd on Yo Factors: past experience end of sales, poco ea ta pet oe $s a, cnieraon shout be gen te far al Advertising Cost Budget a. . The following factors are to be taken into account ~ “The best method of advertisement must be selected, costs will vary according to the method selected. {b) The maximum amount to be spent in a period has to be decided. (©) Advertsing and sales should be co-ordinated. It means that money should be spent on advertisement only when ‘sufficient quantities of the product advertised are ready for sale. "(@) The effectiveness of the advertisement should be measured. “advertisement Appropriation: The amount of expenditure may be decided based on — “(a) A Percentage on the Total Sales Value of the budget period or on the expected profit that may be fixed on the ‘basis of past experience. 8 ‘sum, which is expected to be incurred by the Competitors, may be fixed to be spent during the budget period © ‘A fixed sum per unit of output can be fixed and added to cost. ‘An amount is fixed on the basis of the ability of the Company to spend on advertising. | (@) Anadertiserent plan is decided upon and the amount fo be spent on advertising Eimaon Sepang go ae one i ns ws pons Te ‘prepares promotion. The '2 schedule of various methods of advertisement, to be used for effective sales : (insertions) is determined, and costs are calculated as per the rates applicable to each of and Development Expense Budget ‘oped Research, Pure Research increases knowledge whereas ike Improved methods of production, et. foome sment Expenses shoud be contd crefuly and hence amit onthe spencing is paced me ef allocation of RAD expenses ie Sad on Total Sales Value, This methods god sles vole s steady Tom year to yer Scanned with CamScanner 15.3.14 Capital Expenditure Budget 1, Meaning: The Capital Expenditure Budget represents the planned outlay on fixed assets lke land, machinery, etc. during the budget period. It is prepared to cover a long period of years and It ‘costs over the period in which the expenditure is to be incurred and the expected earnings. 2. Considerations: The following factors are to be taken into account ~ (a) Sales potential to absorb the increased output, (b) Possibility of Price Reductions, (C) Increased costs of advertising and sales promotion to absorb increased output, etc. (d)_ Overhead on production facilities of certain departments as indicated by the Plant Utilisation Budget, (€) Future development plans to increase output by expansion of plant facilities, (f)_ Replacement requests from the concerned departments. 3. Advantages: > ena @ Te outlines the capital development programme and estimated capital expenditure dunng budget period. ‘andy (©) enables the Company to establish a system of priorities. When there is @ shortage of funds, capital rationing Decomes, necessary, (©) Tt serves as a tool for controlling expenditure, . (@) It provides the amount of expenditure to be incorporated in the future budget summaries for calculation of ‘estimated return on capital employed. walk (©) This enables the cash budget to be finalised. With other cash commitments, capital expenditure commitment should also be considered for the completion of the budget. (It facitates cost reduction programme, e.g. when modemisation and renovation is covered by this budget. A ie 15.3.15 Budget Ratios 7 a The following Control Ratios are used in Performance Evaluation — Ratio Meaning ‘Time-Based Formula Relationship between the 1, Budgeted | budgeted number of working pandgeted Hows hours and the maximum | practical Plant Capacity Hours Scanned with CamScanner imits the oF Key Factor, or Critical Factor) is the factor that i Labour ‘examples are Sales Demand, Raw Material Availability, Important sine it indicates which budget should be prepared fist I Soler red first based on available sales forecasts, and all erie te brebired te; followed By Wy, if Machine Capacity is timited, then on _p the Principal Budget Factor is not identified and at = (@) delay in The Buda Process, (0) possi of rere ‘an early stage, there could be problems of - (a) delay | tn case of Single Key Factor, Marginal Costing techniques i. ranking based on the Contibylor unit of Key ource shall be applied for resource allocation. In ne i mn ranking or Techniques may. nih ‘case of Multiple Key Factors with difference in ranking priority, pevice where each Divisional Hea has to just the requirement of funds foreach Read of ee are the wget accornaly, wit reference tothe past Dudget or ahevernety requires each Manager to justify his entire budget requests In Ts an operating planning and budgeting process, which ‘detail from “scratch” (hence zero-base) ). eee et prac Boost, heey al vs ees, cach re 9 R= © =* deals all the elements of budget proposals. ‘Analytical: A ciitical evaluation of all the ‘setivities is also done afresh, together with new proposals. Each Franager has to justty why he should spend any money ata Mevures that al actives be wenified as declon on poctages, Which wo, Ee eked inorder of importance. It provides the Manager a combination of cho SS ence, according to its importance to the Firm. ‘decisions about the proposed new programmes but it should also, ‘of the existing in a rational manner and allows re-allocation of resources ‘analysis, and ranked in order of results. Scanned with CamScanner " Padhiuka's Students’ Handbook on Cost and Management Accounting ~ For CA Inter 15.4.3 Advantages of ZBB ETRE advantages of Zero~Base Budgeting are — 1. Priority Allocation: It provides a systematic approach for the evan of erent aces and nk ating, Wa. of preference for the allocation of scarce resources. 2. Maximum Efficiency: It ensures that the various furs its objectives and are being performed in the best possi ‘identified and eliminated. 3. Cost Benefit Analysis: It provides an opportunity to the Management to allocate resources ‘after having @ thorough Cost-Benefit Analysis. The chances of arbitrary cuts and enhancement Goal Congruence: Departmental Budgets (i.e. Decision Packages) are linked with overall Corporate Objectives, Management by Objectives: The technique can be used for the introduction and implementation of the system oy “Management by Objectives’ (MBO). tions undertaken by the Firm are critical for the ble way. The areas of wasteful expenditure can are thus avoided," wa 45.4.4 Traditional Budgeting vs Zero-Based Budgeting Traditional Budgeting Zero-Based Budgeting 1. | It is accounting-oriented, with stress laid on the previous years’ level of expenditure. It is decisionoriented, in a rational manner, for allocation of resources for both old and new programmes & activites. 2. | Here, reference is made to the past period levels of Revenues and Costs, and then adjustments are made to recognize factors like inflation trends, market demand situations, etc. Here, a decision unit is broken into understandable Decision Packages, which are ranked according to importance, | enabling Top Management to focus their attention on top Priority Decision Packages. 3. | It is @ routine and direct approach, treating each Division / Decision Unit equally. It is an analytical approach, and immediately highlights the | Decision Packages enjoying priority over others. | 4, | Itis for Top Management to decide why a particular ‘amount should be spent on a particular decision unit. Here, Manager of each Division should completely justy why there should be a budget allocation for his Division 5. | It is comparatively rigid, and not clearly responsive to environmental changes. This is very flexible and responsive to environmental changes. 6. | Managers may deliberately inflate their Budget Cost Request, so that they may stil get the required amount, ‘after cost “cuts” from Top Management. Managers cannot have an adhoc approach for Cost Budgets | Top Management accords its approval only to a carfily devised, result-oriented Decision Package. J Mlustration Sk ie Description ‘Answer, Reason [See previous question for expt) () A Company producing a certain Product has done ‘extensive ZBE exercise in Year |. The activity level is “expected to marginally increase in Year I. ZBB. (It is decision-oriented, in a rational manne’ allocation of resources for both old and new programmes 8 activities.) (ii) The Sales Manager of a Company selling three products fhas the intuitive feeling that in year li, Sales will increase for one Product and decrease for the other two. His expectation cannot be subsiantiated with figures, TB. (In 288, Manager of each Division should complet®y Justify why there should be a budget allocation for his Division, Here it cannot be substantiated with figures) (il) The Top Management would he to delegate responsiblity to the Functional Managers for their results during Year i .2BB (Manager of each Division should completely USthY ‘his Budget, Top Management only accords approval) {iv) Resources are heavily constrained and allocation for Budget requirements is very strict. ‘TB. (Its for Top Management to decide why a amount should be spent on a particular Note: Alternative view / arguments in favour of the other method of Budgeting is also possible. ie 15.14 So ae Scanned with CamScanner ed, gener * ‘Costs are those . Peerancee sat that is approved as part of the normal budget process, © a ranaper mut docs oan ef eves and team cont tht ms be cee ‘made without ‘at a level / amount that is deemed to be appropriate. This justification is to popes fe ‘making reference to previous level of spending in that Department. ‘pplication of ZBB: ZBB is most suited and effective to manage Discretionary Cost for Departments T, A, RO, since ~ ‘The Manager must understand what. of, Cost Centers and Sele pesresvurces being ee ee ee cetyl by Peotone ‘The Entity can ensure prioritization of T decrease ee ou re resources, by evaluating the likely impact of substantial increase or § Limitations Lack of Co-ordination: Various operational problems are likely to be faced in implementing the technique of 256. It requires the wholehearted support from Top Management. Od is Gold Attitude: Generally, Managers are reluctant to start afresh. They tend to plan for future just by reference to past actions and budgets. ‘Time Consuming: It is time consuming & costly. It needs properly trained Personnel to do the required job. Lack of Adequate Data: 288 requires data for justifying the allocation of resources to various alternatives in every period. Sometimes, this data may not be available for analysis. Budgeting Sn 15.5.1 Performance Budgeting - Meaning 1. Performance Budget is one which presents ~ (a) the purposes and objectives for which funds are required, (b) the ‘costs of the programmes proposed for achieving those objectives, and (c) the quantitative data measuring the ‘accomplishments and work performed under each programme. Performance Budgeting is a technique of presenting budgets for costs and revenues, in terms of functions. So, programmes and activities are correlated with the physical and financial aspect of individual items comprising the budget. ‘Steps in Performance Budgeting: (2) Establish a meaningful functional Programme and Activity Classification of operations, (b) Bring the system of Accounting and Financial Management, in accordance with the above classification, (©) Establish suitable norms, yardsticks, work units of performance and unit costs, wherever possible, under each programme and activity, for their reporting and evaluation, (@) Monitor and evaluate performance on the basis of Performance Reports. ‘ivded into speci functions, programmes, activities and tasks, fo for different k if ; a nt levels of ‘standards or performance indicators should be evolved, and expressed in Scanned with CamScanner 5. suitable Accounting and Reporting System should be developed to faciitate monitoring, analysis by comparison with Budgets. Note: In Performance Budgeting, the sequence Is ~ Function / Objective -» Programme > 15.5.3 Performance Budgeting - Features and Advantages Performance Budgeting ~ 1. lays immediate stress on the achievernent of specific goals over a period of time, 2. provides @ meaningful relationship between estimated inputs and expected outputs, 3 ‘aims at'@ continuous growth of the Firm, and meet the dynamic needs of Its growing clientele and 4. enables the Firm to be sensitive and adaptive, preventing it from developing rigidities which may. 'S. requires the preparation of periodic Performance Reports, to compare budget and actuals to find out, 15.5.4 Traditional Budgeting vs Performance Budgeting Traditional 1. | More emphasis on financial aspect, than physical [ Aims at establishing a relationship between aspects or performance. we ‘outputs, with emphasis on performance. 2 | Generally prepared with focus on expenditure control, | Focus is on functions, and not the cost of ‘and highlighting items of expenditure and variances | The functions, programmes, activities between Budgets and Actuals. reported, along with costs thereof. 15.5.5 Important considerations in Performance Reporting ‘The important considerations in drawing up of reports and determining their scope are 1. Signi- ‘* Reliability - Are the facts in the Report reliable? ficance of | + Cause or Effect ~ Does it either call for action or demonstrate the effect of action? @Report | + Materiality - Is it material enough? * Latest time - How late can the information be and still be of use? 2. Timeliness | « Earliest Time - What is the eariest moment at which it could be used if it were available? * Frequency -How frequently is it required? ; * How small should be an inaccuracy which does nat alter an information's significance? eee ls What doubtful elements does it contain? Could any of them or all together make a 4 * — Receiver ~ Is the recipient the right person to take any action that is needed? ao ‘+ Additional Information — Is there any other information which is required to support to anyone else jointly interested? * Will anything be lost by omitting the item? 5 Digerimi- wil any ofthe items gain from the omission? + _Is the responsibilty for suppressing the item acceptable? ‘6. Presen— © — Clarity ~ Is the report clear and unbiased? + _ Form ~ Is the form suitable to the subject and to the recipient? (d) Capital Expenditure and forward commitments together projects in hand, Cash Flow Statements & Fund Flow Statements, ‘Sales, Production, and other appropriate statistics. Scanned with CamScanner ‘Scanned with CamScanner ILLUSTRATIONS 2 Functional Budgets - Production, ie a ‘ Potey ecg 2wiN0 & production plan frit two products ~ Product Sa? and Preuee ‘yi for the year, ; ‘sy Isto maintain Closing Stock of Finished Goods ‘at 25% of the anticipated volume of sales of the L 4 The lowing athe extinted 1 data for the two products: 4 uct haga ote a — ati =a | Direct Material (er unt) 1 Direct Labour (per unit 130 A Direct Manufacturing Expenses 4,00,000 _-The-estimated units to be sod inthe first four months ofthe year ae as under: Product Apri May June xml | 8,000 10,000 _ 12,000 ym i 6,000 8,000 9,000 Prepare: (1) Production Budget (Month wise), (2) Production Cost Budget (for frat ‘quarter of the year). Solution: 1. Production Budget (in units) Particulars Product xml Product ymi r April | _May| June | Total | April May | June |” Total | Sales 8,000 | 10,000 12,000} 30,000 6,000 8,000 | 9,000 | a3a0p jane eat 1 2,500} 3,000) 4,000} 9,500] 2,000 2,250) 3,500) 7750) ~ | Less: Opening Stock 2,000 | _2,500| 3,000 _7,500| 1,500] 2,000} 2,250 5m) I Production Quantity | 8,500 | 10,500 | 13,000| 32,000| 6,500 250 | 10,250 | 25,000, 8, "Note: Opening Stock of Apri = Closing Stock of March, which is as per Companys Policy 25% of next montis Sale 2. Production Cost Budget [ Particulars Product xmt Direct Material 32,000 units x % 220 = % 70,40,000 25,000 units x % 280 = & Direct Labour 32,000 units x % 130 = & 41,60,000 25,000 units x & 120 = & 30,00,000 400,000 a 5,00,000 -t Manufacturing Overhead 0,000 * 32,000 units = & 64,000 50,000 * 25:000 units = 6953 Total 1,12,64,000 1,00,83,333 Note: Manufacturing OH is absorbed for the quantity produced during the above quarter on proportionate basis 2. Production, Material Usage and Purchase Budgets ———— PYE Lid produces and markets a very popular product called P. The Company is interested in presenting is ‘second quarter of the year. The following information is made available for this Purpose. ‘expects to sell 50,000 bags of P during the second quartor ata Selling Price of € 9 per bag. Each bag of P requires 2.5 kgs of Raw Material Q and 7.5 kgs of Raw Material R. Qcosts % 1.20 per kg, R costs 20 paise per kg and Empty Bag costs 80 paise each. requires 9 minutes of direct labour time to produce and fill one bag of P. Labour Cost is € § per hour. Variable Manufacturing Costs are 0.45 per bag. Fixed Manufacturing Costs are % 30,000 per quarter. Variable Selling and Administration Expenses are 5% of Sales, and Fixed Administration and Selling % 25,000 per quarter. _ Co 15.18 Scanned with CamScanner End of Quarter 15,000 nos, 41,000 nos. 32,000 kgs. 26,000 kgs. 57000 kgs. ‘ahi ten 97,000 nos. 28,000 nos. Peden Budget the ur prepare a Raw Materials Purchase Budge Conput te Budgeted Variable Costa ducer yee any eases Prepare a statement of Budgeted Net Income forthe quarter, and show both per unit and total cost data. js 4. Production Budget for Product P: ction = : (in bags) _— Sales + Desired Closing Stock — Available Opening Stock = 50,000 + 11,000 ~ 15,000 = 46,000 bags 2. Raw Materials Budget Particut aN SSS Material Q Material R ‘Empty Bags | 2.5 kgs per bag 7.5 kgs per bag bag ee 46000:2.5=1,15,000 kg | 46000 = 7.5 = 3,45,000 kg | 46000%1= 46,000 bags Desired Closing Stock 26,000 kg 47,000 kg 28,000 bags AE 141,000 kg 3,92,000 kg 74,000 bags popening Stock 32,000 kg 57,000 kg 37,000 bags | Budgeted Purchase Quantity 1,09,000 kg 3,35,000 kg 37,000 bags | Purchase Price 1.20 per kg 0.20 per kg 70.80 per bag | (Gost of Purchase £1,30,800 £67,000 29,600 | %2,27,400 3. Computation of Variable Manufacturing Costs perbag Computation z Q= 2.5 kgs « @ 1.20 per kg 73.00 | R-7.5 kgs = % 0.20 per kg 21.50 450 1 bag « € 0.80 0.80 * 9 9 minutes « 75 per hour “60 «tS Le EEE ee Total Variable Manufacturing Costs per bag 4. Budgeted Net Income: (for 50,000 bags sold) Particulars Per Bag (©) ‘Total (€) | Sales Revenue (acura sate Ea Mee (as. 6. 3,000 aN ne A anit (5% of Sale Price) 0.45, 22.500 2.05 1,02,500 Manufacturing + Selling & Admin 35,000 47,500 ‘principles. Profit under Absorption Costing would differ due Company ! ‘chairs, 800 tables and 500 benches during the said period at the teicher aman a aes pose. = Scanned with CamScanner Rate 50 per cu.ft C20 per sayd 6 por hour 480 por hour ‘Materials costs 8% ofthe cost of timber and uphoistery, 2 Inventory Levels planned: Particulars Timber (cu, Chairs Tables (nos) an phoney ye) i (i) wi oa 650 260 200 300 ‘3. Fixed Overheads would be & 8,000 per month. { ‘Prepare @ Production Budget showing quantities to be manufactured. 1 ‘2 Prepare @ Raw Materials Consumption Budget in quantities as well as in rupees. 3. Draw a Direct Wage Cost budget. 4 Present 2 statement showing Variable Cost of manufacture per unit ofall three products. _" ‘5. Find out the Budgeted Net Income for the quarter. 2 ‘Solution: 1, Production Budget = Particulars Chairs Tables Benches ‘Bodgeted Sales Quantity 4,200 units 800 units 500 units ‘Ade: Chosing Stock of Finished Goods 200 units 300 units ‘Sub-Total 4400 units 1,100 units ‘Less: _ Opening Stock of Finished Goods 400 units 100 units ‘Budgeted Production Quantity_ 4,000 units 4,000 units 2. Raw Materials Usage and Purchase Budget Particulars Timber For Cnairs (4,000 nits) 4/000 * 0.5 = 2,000 cft ForTables (1,000 units) 1,000 x 1.2 = 1,200 eft For Benches (500 units) Scanned with CamScanner SSS ee cot pert 05 x 859 = £25.00 Bin est 500 1.2 x @50 = 760.00 25 x 50 = % 125.00 $5) = an =| Pts 5% of 860 = % 3.00 Sm ofk125=% 6.25 Li. £63.00 - Pees 45/6086 =% 459 15/60 x tae 60/60 x %6=* 6.00 75/60 x26=% 7.50 480=% 1.20 15/60 £480 =% 1.20| 30/60 24.80-% 2.40, it £5.70 © 7.20 79.90 £37.20 70.20 2141.15 Benches Total 158.00 2141.15 z 2 16.85 (e) Budgeted Total Contribution (cxd) aes 2 74,025 ( Budgeted Fixed Costs “| e74,000 (g) Budgeted Net Income (e = 50,025 AK Lnited produces and sls a single product. ales Budget fo calenr year 2012 by quater fs 8 under = Quarters I a m v } No. of units to be sold 18,000 22,000 25,000 27,000 The year is expected to open with an Inventory of 6,000 units of Finished Products, and close with Inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current quarter's sales demand plus 20% of the following ‘quarter demand. The Budgeted Selling Price per unit is © 40. The Standard Cost details for one unit of the product are ~ © Variable Cost & 34.50 per unit ‘+ Fixed Overheads 2 hours 30 minutes at € 2 per hour based on a budgeted production volume of 1,10,000 Direct Labour Hours for the year. Fixed Overheads are evenly distributed throughout the year. ‘You are required to ~ (i) Prepare Quarterly Production Budget for the year. (ii) Ascertain in which Quarter of the year, Company is expected to achieve Break-Even Pint, 5 Production Budget aaa 1 = um v[ Total Budgeted Sales 16,000 22,000 25,000 oe 92,000 r ‘ I ig.) 2, (bal. fig.) 8,1 (al. fig.) 8, ) 8,000| 8,000 Aaa: _Cosng Sto 2p ot 30,100 3, 35,000|] 1,00,000 (given) 6,000 7,200 8, 8; 6,000 aon | 9200] 2aam0|—asean| 2300) Saomn ‘of 22,000 + | (70% of 25,000 + rr aann) | anh of 35.00) | 20 of 2 19,200 42,100 67,700 94,000 [Gumaiative Production “1, Contribution | at m= Sell ites © 40 = Neiabi Cot © 24.50 = ©5.50 pamelor te 15.21 Scanned with CamScanner sis Cpl Sse Fane onal inl enka i wo cone eape 0 ibd MEO Goods at 16,250 units at the end of the year, The production pattern in each quarter is based on 80% of the ‘quarter and 20% of the Sales of the next quarter. ‘The Opening Stock of Raw Materials in the beginning of the year is 10,000 kg and the Closing Stock at the end required to be maintained at 5,000 kg. Each unit of finished output requires 2 kg of Raw Materials. Toe Company proposes to purchase te entre anal requirement of Raw Matai nthe fret tre quarters i snd te prem gen bien - Purchase of Raw Materials % to total annual requirement in quantity oT 30% a 50% " 20% ‘The value of the Opening Stock of Raw Materials in the beginning of the year is € 20,000. Required: Present the following for the next year, quarter-wise ~ Production Budget in units. 1 2 Rew Material Consumption Budget in Quantity. 3. Rew Material Purchase Budget in Quantity and Value. 4. Priced Stores Ledger Card of the Raw Material using First in First Out method. ‘Solution: 1. Production Budget (in units) [ ‘Quarter Ir fia mr | ‘Budg. Sales (given) 37,500 41,250 | Ada: Coosing Stock i Se SP ee ‘Sub-Total 49,750 54,250 Less: Opening Stock _| (gi 11,500] 12,250) ‘Budg. Production 1,500 38,250 42,000 (80% of 37,500 | (80% of 41,250 + + 20% of 37,500) | 20% of 41,250) | __20% of 45,000) Note: Opening and Closing Stock of FG for Quarters 1, II and II! are filed up as balancing figures by reverse ‘Glosing Stock of Previous Quarter is carried over as Opening Stock of Next ‘Quarter IV Production Quantity is calculated in the usual manner (by top-down calculations). aceasta | (b) Raw Material Consumption p.v, He Bape auto < a = ‘AS220 ue Scanned with CamScanner ~3,15,000 * 30% = 94,500 Kg 3,15,000 » 0% « 1,57,500 Kg _3,15,000 « 20% = 63,000 Kg 3,15,000 Kg 4,22,500| _3| 3,67,500| 38,500| 3| 1,15,500) 63,000 4| 252,000} 5000, 4! 20,000) Concorde Ltd manufactures re poner i Labour Cost ge RTP, N95, W 04 (F) (similar) from the Company's working papers for the next mentee br and one grade of labour. Shown below is — Product-A Product-8 Budgeted Sales (in units) 7 veut Budgeted Materials Consumption per unit (in kg): Materia-X 3 7 Material-Y 4 6 ‘Standard Labour Hours allowed per unit of product oe e Materia-X and Material-Y cost & 4 and & 6 per kg and Labourers are paid & 25 per hour. Overtime Premium is $0% and is payable, i a Worker works for more than 40 hours a week There are 180 oes Wetpar” ‘The target Productivity (or Efficiency) Ratio forthe productive hours worked by the Direct Workers in actually manufacturing the products is 80%. In addition, the Non-Productive Down-Time is budgeted at 20% of the Productive Hours worked. There are four S-days weeks in the budgeted period and it is anticipated that Sales and Production will occur evenly throughout the whole period. itis anticipated that stock at the beginning of the period will be: Product A Product B Material X Material Y ] 400 units 200 units 41,000 kgs 500 kgs The anticipated Closing Stocks for the budget period areas below: Product A Product B Material X Material Y Hays sates ~Sidays Sales 410 days Consumption 6 days Consumption Prepare Material Purchase Budget and Wages Budget for Direct Workers, showing the quantities & values, for the next month. 4. Production Solution: = Budget x : Sales (for 4 weeks « 5 days = 20 days) (Given) 2,400 units Teen) sem 4 = ‘Mt: Closing Stock (for 15 and 20 days) 200 A= 480 urs 3,600 5, = 900 unts 2,880 units 4,500 units | lee “Spe ce (Given) 400 units (Given) 200 units | Production iG 2,480 units 4,300 waits 15.23 Scanned with CamScanner Padhua’s Students Handbook on Cost and Management Accu = a. Material Particulars t , Raw — eee weeny 2,480 units x 5 K9 : = Product 8 4,300 uns» 3 = 5288 ‘Sub Total of above = RM Usage ’ 10 12,650 ‘Add: Closing Stock 25,300 kg * 35 * 37,950 ineot™ Gena (1,000), Opening Stock of Raw Materials 36,950 Rate per Kg of Material erate Total Cost of Materials Purchase a Hours and Cost Budget 5 3. Labour ws A ‘Standard Hours for Budgeted Production 2,480 units x 3 = 7,440 hrs. 7,440_hours _ 9,300 Revised Hours for Production at 80% efficiency 20% . 20% of 9,300 hrs = 1,860 hrs | 20% of 26.875 Add: _ Non-Productive Downtime Hours Required to be worked / paid for 14,160 hrs ‘Sub-Total Less: Normal Working Hours 4 weeks x 40 hrs x 180 workers. Balance Overtime Hours required [i Total Wages Payable (28,800 hrs x % 25) + (14,610 hrs x & 37, Time per article 15 minutes 25 minutes 8 10 minutes c 30 minutes D 20 minutes E The Factory works 40 hours a week and the production target is 600 dozens per week. taten ‘operation andi tal the number of operators required, Labour Cost per doses ad tnecheea ace Cost Operation | “600 dozens, i.e. 7,200 units gE «in 4 1 7,200 units « <> = 1,800 hours 1800 = 45 persons (A) 45x 40 x 65 = 300055 0-7 75 Persons (B) = 1,200 1200 — hours | “4o~= 30 persons (C) 2 7,200 units « = = 3,000 hours Scanned with CamScanner — Budgetary Control y manutact MOA (F) ¢ Tartan dete arrce ses NAY AB an The cura ptr of sie of A,B and Ce nthe ao 2 E a | 3 mE e130 170 e4iT 0.50 Kg. 42Kg | 25Ko 0.25 Kg. '. eget = 4 6 | 8 2 2 3 220 U0 | tao Prices of Raw Materials and Direct Materials respectively are & 1 per Kg. Wage : 100 and & 40 per Kg. Wage Rates of Skilled and Semi-Skilled ‘Labour respectively are & 6 and & 5. Each Operator works 8 hours a day for 25 days in a month. ‘The position of inventories are as under — Particulars Raw Materials (units) Direct Materials (units) ‘A(units) | Biunits) | C(units) | es 600 400 400 mo | 2 | Closing 650 260 200 wo | 8 ‘The Fixed OH amount to T 2,00,000 per month, The Company desires a profit of € 1,20,000 per month. ‘Prepare the following for the month - 4. Sales Budget in quantity and value. 2. Production Budget showing the quantity to be manufactured. 3. Purchase Budget showing the quantity and value. 4. Direct Labour Budget showing the number of workers and wages. Solution: +1. Computation of Budgeted Sales Quantities [ Particulars Product A Product B Product C {@) Selling Price per unit (given) 2130 7230 2417 | (b) Variable Costs per unit Raw Materials at © 100 per kg 05% 100=% 50} 12<100=%120| 25x 100=%250 Direct Materials at & 40 per kg 0.25% 40=% 10 Nil Nil ‘Skilled Labour at ® 6 per hour 4x6=% 24| 6x 6=% 36 8x 6=% 48| Unskiled Labour at ® 5 per hour 2x5=8 10 2x 5=% 10 3x 5=t 15 < 20 240 tn 3206 Scanned with CamScanner ~ 13,000 units _Opening Stock 400 units 100 units Budgeted Production Quantity 12,600 units 3,400 units, 4. Raw Material Usage Budget Particulars Product A Product B | Product (2) Budgeted Production (WN 3) 12,600 units 3,400 units |~ 1,600 units (b) Raw Material required per unit 0.50 kg 1.20 kg 2.50 kg (c) Total Raw Materials Required (a x b) 6,300 kg 4,080 kg 4,000 kg (q) Direct Materials required per unit 0.25 kg = 7 (e) Total Direct Materials Required (a x d) 3,150 kg = = 5. Materials Purchase Budget Particulars Raw Materials Direct Materials Total) ‘Budgeted Material Usage (WN 4) 14,380 kg 3,150 kg Add: Closing Stock 650 kg 260 kg ‘Sub-Total 15,030 kg 3,410 kg 5 Less: Opening Stock ___ 600 kg 400 kg Budgeted Purchase Quantity 14,430 kg 3,010 kg Price of Materials % 100 per kg 740 per kg = Cost of Material Purchase %.14,43,000 %1,20,400| 6. Direct Labour Budget (Note: Hours per worker = 25 x 8 = 200) Particulars Product A Product B | Product © (2) Budgeted Production 12,600 units 3,400 units | 1,600 units (b) Skilled Labour hours per unit 4 6 8 (©) Total Skilled DLH required (d x b) 50,400 20,400 12,800 (@) Cost of Skilled Labour at 2 6 p.h (c x € 6) %3,02,400 %1,22,400, 376,800 (©) Skilled Workers Required = (c) + 200 252 102 4 (f) Semi — Skilled Labour hours per unit a 2 3 (g) Total Semi ~ Skilled DLH required (c + f) 25,200 6,800 4,800. (hn) Cost of Semi-Skilled Labour at & 5 p.h (g x 85) %1,26,000 34,000 24,000 () Semi-Skiled Workers Required=(g) + 200 126 4 24 @) Total Labour Cost = (d) + (h) %4,28,400 | __€1,56,400 | 1,00,800 (ie) Total Workforce = (€) + (i) Scanned with CamScanner of the product proposed to be sold Haat tater Pana ing heya Quarts ann Ren. 'Machine Shop and Assembly Section, along with your comments, 2. Computation of Budgeted Sales Quantity Computation PB «3Kgxt6 =t18 Q ASKg x4 =t6 t24 Machine Shop 7 hrs x % 4 =t28 | eae Section 2.5 hrs x ¥ 3.20 =£ 8 = z of Direct. Cost of % 36 &12 ‘Total Cost per unit a 72 Profit per unit Profit 20% of Selling Price, i.e. 1/5® on Price = 1/4" on Cost 218 ‘Sale Price per unit 790 Budgeted Sales Revenue Given % 1,26,00,000 Budgeted Sales Quantity Fraggaene 1,40,000 units Particulars Material P Material Q Total Budgeted Material Usage | 1,45,000 x 3g = 4,35,000 Kg | 1,45,000 x 1.5 = 2,17,500 kg ‘Add: Closing Stock 30,000 kg 66,000 kg | ‘Sub-Total 4,65,000 kg 2,83,500 kg Less: _ Opening Stock 54,000 kg 33,000 ko. Budgeted Purchase Quantity 4,11,000 kg 2,50,500 kg Price of Materials 6 per kg 4 per kg Cost of Material Purchase %24,66,000 %10,02,000 |_% 34,68,000 ‘Hours available during the year = 5 days x 8 hours x 52 weeks Ts ‘statutory Holidays, Leave and Absenteeism & Idle Time (96 + 80 + 64) Scanned with CamScanner = For Handbook on Cost and = Machine is @ surplus of 89,000 hours, which can be The me ee bg «Transfer inward of 18 workers from + Transfer egg” 7 18 workers to Assembly |" — shortage here. 4 fe section shortage + Recruit additional 18 skilled workers, if transf . ome ee ‘ras work) for | * Overtime work for 31,300 hours. ‘outsiders, to utilize spare capac. ‘+ Sub-contracting assembly work in respect + Hie ut spare capacy to outsiders. ‘+ Reduce redundant labour force, if possible. 12,520 units. ee rot Limited has prepared its Expense Budget for 20,000 units init factory fora year as detailed below: Particulars Direct Materials Direct Labour ‘Variable Overhead Direct Expenses Selling Expenses (20% Fixed) Factory Expenses (100% Fixed) ‘Administration Expenses (100% Fixed) Distribution Expenses (85% Variable) Total Prepare an Expense Budget for the production of 15,000 units and 18,000 units, : : ‘Solution: Budget for the year Particulars Situation T Situation 1 Production Level 20,000 15,000 — Direct Material at 50 p.u. 20,000 x 50 = 10,00,000 | 15,000 x 50= 7,50,000 | 18,000 Direct Labour at %20 piu. 20,000 20 4,00,000 | 15,000 x 20= 3,00,000 | Variable OH at 2 15 p.u. 20,000 x 15= 3,00,000 | 15,000 x 15= 2,25,000 Direct Expenses at @ 16 pu. 20,000 * 6 1,20,000 15,000 x 6= 90,000 Fined: (20,000 (20% 0 60,000 (same) 60,000 Variable (80% of 15%) = ® 12 pu. 20,000 » 12= 2,40,000 | 15,000 x 12= 1, 100% 20,000 x 7= 1,40,000 amie 100% Fixed 20,000% 4= 80,000 ‘000 Distribution Expenses: “ 20,000% 12% 15%: = 710.20 p.u. (000% 10,20= 114) ,000 10.20 Scanned with CamScanner Budgetary Control Particulars z Particulars - Direct Material 75 per unit | Factory Expenses (25% fixed) aa Direct Wages 25 per unit | Selling and Distribution Expenses (80% of Variable) ae Variable Overheads 25 per unit | Office and Administrative 100% = e than and Admini Expenses (100% fixed) and find out the profits at respective levels ‘The Company anticipates that the Variable Costs will go up by 10% and Fixed Costs will go up by 15%. You are required to prepare an Expense Budget, onthe basis of marginal cost fr the Company at 80% and 60% level of activity Sobution: Expense Budget for RST Ltd Particulars Present 50% Activity Level | 60% Activity Level 1. Sales Quantity (units) 30,000 ee 60% =36,000 2. Sales Price pu 7200 2200 3, Variable Overhead pu (a) Direct Material w75 [% 75 + 10%] = % 82.50 282.50 (b) Direct Wages %25 [8 25 +10%] = % 27.50 227.50 (©) Direct Expense 215 [% 15 + 10%] = % 16.50 2 16.50 (d) Variable Overheads 25 [% 25 + 10%] = % 27.50 227.50 (©) Factory Expenses 75% x 20= 715 [€ 15 + 10%] = % 16.50 2 16.50 (f)_ Selling & Distribution 80% x 10= 7 08 [% 08 + 10%] = % 08.80 208.80 Sub Total €179.30 £179.30 4. Contribution p.u. (23) 220.70 220.70 5. Total Contribution 7 6,21,000 %7,45,200 | 6. Fixed Overhead (2) Factory Expenses | [25%x20x30,000] +15%=1,72,500 1,72,500 (b) Selling & Dist. [20%x10x30,000] +15%= 69,000 69,000 (©) Office and Admin. [5 x 30,000] +15% = 1,72,500 1,72,500 ‘Sub Total 4,14,000 4,14,000 7. Profit 2,07,000 3,321,200 412. Flexible Budget a aT Pee he ling data of a manuacturing con Variable ee at (50% capacity): z| 48,00,000 och 51,20,000, pene Dees 7,80,000 ‘Semi-Variable Expenses (at 50% Capacity): t Maintenance and Repairs 5,00,000 Indirect Labour 49,80,000 Sales Department Salaries 5,80,000 ‘Sundry Administrative Expenses 520,000 ries eige Slres s Rent, Ras and Taxes does 14,00,000 CF ease ctr vaso UBICRR, Sana pea ma concn Basak oe 165% of capacity whereas it increases by 10% between 65% and 80% capacity and by 20% between 80% and 100% capacity. Scanned with CamScanner Padhula’s Students’ Handbook on Cost and Management Accounting = For CA ote Prepare Flexible Budget at 75% and 100% capacity. Solution; exible Budget (amounts ——— Ss oa B. Variable Expenses: (proportionate from 50%) Materials: 48.00 ‘Labour 51.20 Others 7.60| 15; ‘Sub-Total B.1 | 106.80 __213.69 Semi Variable Expenses: (50% level + 10%) | (50% level + 20%) Maintenance and Repairs 5.00 5.50 6.00 Indirect Labour 19.80 21.78 Be | Sales Department Salaries 5.80 6.38 6.96 | ‘Sundry Administrative Expenses 5.20 5.72 | S24] ‘Sub-Total 8.2 35.80 39.38 4296 ‘Fixed Expenses (same at all levels) Wages & Salaries 16.80 16,80 | 16.80 | Rent, Rates and Taxes 11.20 11.20 1120 Depreciation 14.00 14.00 14.00 ‘Sundry Administrative Expenses 17.80 17.80 17.80 ‘Sub-Total 8.3 59.80 59.80 59.80 8. Total Expenses 259.38 | 316.36 | ‘C.Profit / (Loss) (A- 8) (19.38) | 364) “42. Flexible Budget by analysing Semi-Variable Costs into Fixed and Variable ‘The budgets for activity and cost of XYZ Ltd for the first three quarters of operation are shown below: (in 000's) Particulars, ‘Quarter 1 Quarter 2 Quarter 3 Sales 9 17 15 Production 10 20 15 | Costs: Direct Materials A 60 120 30 6 50 100 5 Production Labour 180 25 wi ‘Manufacturing OH excluding Depreciation 90 2 | a Depreciation of Machinery 2 7 oa ‘Administration Expenses: Pry or 2 Selling & Distribution Expenses 38 a - ‘The figures shown above represent the cost structure of XYZ Ltd, which have the following major features — 1. Fixed element of any cost is completely independent of activity levels 2. ‘Any variable element of each cost displays a linear relationship with activity level, friable Labour become 50% higher for activity in excess of sto ta porter Coo ote ssouuay eeetotie eating - a Te val soma feng and Daibuon Exponent Sls Ache cots witha varie eles a 4. ‘Activity for each quarter is spread evenly throughout the quarter, In Quarter IV production level will be set equal to sales level, Production and ‘quarter is expected Petwoon 15.000 nits and 21.000 uns Th most ly volume is 14000 unks a month 8 & cue pasa saute estimate the sales for Quarter IV. Cost structure will remain the same as in Quarters | to I, except the following ~ 15.30 Scanned with CamScanner {Labour Wage Rate wil ise by 12.5% * valle Labour input pe unit ot ouput wi cop Wil Ae ee such that 80% ofthe previous Labour Per oasa’ in Te aca, fo earn ct woking roan 1000 uns pe r Far rene Fad ag ne to Con woh 2 Te sda SAME a statement t show. under each cost clasiication given in the and the Fixed Costs, budgets, the Variable Costs =a in Quarter W Also prepare exible budget Production Cost fr Gute V solution: 1. Analysis of Fixed and Variable Components of Cost = Since Labour and OM Casts are not fly variable in relation to output, Kg cosefied nto Fnad. end SoMa elements, For this purpose, 1" and 3” ye roduction exceeds 19,000 units ‘and would bora econ Seat quarter pr¢ Particulars Variable Element Fixed Element (based on @-1) | (a) Materials A (based on Q-1) 60,000 __ 6 pu. Nil 10,000 units {(b) Materials B (based on Q-1) ee =t5 pu Nit ie 7 1,80,000 - (7 10 « 10,000 units) eee cena ee ere %1,05,000-% 90,000__, % 90,000 - (%3 x 10,000 units) De al Gs.000—10,000junts “* 2 P = 7 60,000 £50,000 -€ 36,000 738,000 - (® 2 = 9,000 units) (€) SAD OH (based on Sale Qtty) Sica oa =t2pu. per Note: [Fron @-2 8 Q-3 data, teen be observed that Material Costs constant per unit for 2% and 3° Quarters aso, 2. Variable Labour Cost pu. in 4% Quarter = € 10 x 112.5% (Increase) « 80% (learning) = € 9 Pie 3. Learning Curve effect will have an impact on variable element of Labour Cost only. 2. Flexible Budget for 4" Quarter Particulars ‘Minimum Qtty | Most Likely Qty ‘Maximum Qtty ‘Quantity 15,000 units 18,000 units: 21,000 units “Material A Costs at 7 6 15000 = 6=% 90,000 18000 x 6=% 1,08,000 21000 = 6=€ 1,26,000 Material B Costs at 75. 15000 x 5=% 75,000 18000 « 5=% 90,000 21000 = S=% 1,05,000 Labour ~ Variable at & 9 15000 « 9=% 1,35,000 18000 x 9=% 1,62,000 21000 x 9=% 189,000 Labour ~ Fixed 80,000 + 12.5% = 90,000 & 90,000 2 90,000 Labour ~ Overtime Premium Nil Nil 2000 x 9 x S0%=9,000 Mfg OH ~ Variable at 3 15000 x 3=% 45,000 18000 x 3=% 54,000 21000 x 3=% 63,000 ‘Mfg OH ~ Fixed ® 60,000 + 20% 2 72,000 ® 72,000 72,000 Depreciation - Fixed ~ given &_20,000 & 20,000 20,000 Total Conversion Costs €5,27,000 €5,96,000 %6,74,000 ‘Add: Administrative Costs (Fixed) 25,000 © 25,000 225,000 ‘Add: S&D OH Variable at © 2 £30,000 36,000 ©42,000 Fined € 20,000 + 20% £24,000 £24,000 © 24,000 jen Total Costs €6,06,000 €6,81,000 €7,65,000 The performance of a Company attwo levels of operations during financial year a RY, 15.31 Scanned with CamScanner F ‘Padhiias Suuerts’ Handbook on Cost and Management Accounting = For CA Inter a 60% =

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