11.budgetory Control Printable

CA Megh Raj Aryal Gurukul CA
CHAPTER 11- BUDGETING

Chapter Learning outcomes
1. Meaning of Budget and its types
2. Preparation of Flexible Budget
3. Preparation of Functional Budget
4. Preparation of Cash Budget
5. Preparation of Master Budget
6. Control Ratios
7. Participative Budgeting
8. Zero Based Budgeting
9. Performance Budgeting
10. Responsibility Accounting
11. Types of Responsibility Centers
1
Budget Meaning:-
Budget is a statement to be prepared in advance for the future course of action to control the cost, so that all the resources
can be utilized in optimum manner.
Objectives/Features
a) To Determine target/Goals/ future course of action
b) To Control the cost
c) To utilize the resources in optimum manner
d) To Define Responsibility of different staff
e) To Give basis for performance evaluation
f) To compare the Actual with Budget and take corrective action if any.
Types of Budget
a) Based on Time period:-
i) Long term Budget eg :- Capital budgeting
ii) Short Term Budget eg:- Cash Budget :- Cash budget is a tool for forecasting short term cash requirement of an
enterprises. It provides a blueprint of the cash inflow and outflow that are expected to occur in the immediate
future period. It helps to determine surplus or shortage of funds and take suitable action.
b) Based on Capacity
i) Fixed Budget
ii) Flexible Budget
c) Based on Coverage
i) Functional Budget:- Budget which is prepared for individual functions of an organization. Eg :- Sales Budget,
Production Budget , RM Consumption Budget, RM Purchase Budget, Wages Budget, Cash Budget etc.
ii) Master Budget :- Consolidated summary of various functional Budgets. It serves the basis to prepare Budgeted
PL and Budgeted Balance sheet.
Difference between Fixed Budget and Flexible Budget

Basis of Distinction Fixed Budget Flexible Budget
Definition Budget designed to remain unchanged • Budget designed to change in relation to level
irrespective of level of activity of activity.
• This is done by classification of cost into
Variable, Fixed and Semi variable.
Rigidity The budget does not change with actual The budget can be re-casted on the basis of actual
level of activity level of activity.
Performance If activity level differs from Budgeted Comparison of cost at actual level of activity
Evaluation level of activity, performance evaluation with Budget can be easily done by recasting the
cannot be done. budget at actual level of activity.
Question related to Flexible Budget

Q.1.A factory which expects to operate 7,000 hours i.e. at 70% level of activity, furnishes details of expenses as under:-
Variable expenses Rs. 1,260
Semi- variable expenses Rs. 1,200
Fixed expenses Rs 1,800
The semi - variable expenses go up by 10% between 85% and 95% activity and by 20% above 95% activity.
Construct a flexible budget for 80, 90, and 100 percent activities.
Ans:- Level 70% 80% 90% 100%
Total exp 4260 4440 4740 5040
2
Q.2.Action Plan Manufacturers normally produce 8,000 units of their product in a month, in their Machine Shop. For the
month of January, they had planned for a production of 10,000 units. Owing to a sudden cancellation of a contract in
the middle of January, they could only produce 6,000 units in January.
Indirect manufacturing costs are carefully planned and monitored in the Machine Shop and the Foreman of the shop is
paid a 10% of the savings as bonus when in any month the indirect manufacturing cost incurred is less than the
budgeted provision.
The foreman has put in a claim that he should be paid a bonus of Rs. 88.50 for the month of January. The works
manager wonders how any one can claim a bonus when the company has lost a sizeable contract. The relevant figures
are as under:
Indirect manufacturing Expenses for a normal Planned for Actual in January Rs.
costs month Rs. January Rs.
Salary of foreman 1,000 1,000 1,000
Indirect labour 720 900 600
Indirect material 800 1,000 700
Repairs and maintenance 600 650 600
Power 800 875 740
Tools consumed 320 400 300
Rates and taxes 150 150 150
Depreciation 800 800 800
Insurance 100 100 100
Total 5,290 5,875 4,990
Do you agree with the works manager? Is the foreman entitled to any bonus for the performance in January?
Substitute your answer with facts and figures.
[Ans:- No Bonus, since Budget at 6,000 units Total Indirect manufacturing cost =Rs 4,705]
Q.3.Alpha Mills prepared the following budget for its department for 2010 - 11 for 12,000 unit of production.
Particulars Rs
Raw material @Rs 3 per unit 36,000
Labour 2 hours/ unit @Rs 2.5 per hour 60,000
Production Overheads:
Power (variable) 3,000
Repairs (variable) 1,500
Indirect labour (80% variable) 2,400
Factory rent (fixed) 3,600
Factory insurance (fixed) 1,800
Other manufacturing expenses (50% variable) 600
Total production cost 1,08,900
You are required to present the flexible budget classified under fixed and variable costs for:
(a) Production of 10,000 units. [Ans: Total Cost Rs 91,780]
(b) Production of 15,000 units, for which raw material price increases by 10% for the entire quantity and labour rate
increases by Rs 0.5 per hour for the full direct labour hours. [Ans: Total Cost Rs 154,080]
Q.4.Figures regarding sales, cost and profit at 50% capacity are given below:
Sales 20,00,000
Direct cost 800,000
Factory Overheads 400,000
Office Overheads 200,000
Selling Overheads 300,000
Profit 300,000
Every 10% increase in sales beyond 50% capacity is possible only after reducing the price by 1% on the base level of
50% capacity. Direct material cost is 25% of the total direct cost at 50% capacity. With every 10% increase in capacity
above this level, the price of direct material comes down by 2%. 50% of the factory overheads are fixed and the rest
are fully variable. Office Overheads are of step character. Every 10% increase in output results in 2% increase in office
overheads over 50% capacity. Selling overheads increase in proportion of sales value. Prepare a flexible budget at 80%
capacity. [Ans:- Profit =Rs 645,600]
3
Q.5.SV Ltd manufactures a single product. The selling price of the product is Rs 95 per unit. The following are the results
obtained by the company during the last two quarters.
Particulars Quarter 1 Quarter 2
Sales Units 5,100 units 4,800units
Production units 5,500 units 4,500 units
Rs Rs
Direct Material A Rs 66,000 Rs 54,000
Direct Material B Rs 55,000 Rs 45,000
Manufacturing Wages Rs 156,750 Rs 138,000
Factory OH Rs 86,000 Rs 83,000
Selling OH Rs 179,000 Rs 173,000
The company estimates its sales for the next quarter to range between 5500 units and 6500 units, the most likely
volume being 6,000 units. The manufacturing program will match with the sales quantity such that no increase in
inventory of finished goods is contemplated in the next quarter as such since the effect of stock adjustment is too small
ignore the adjustment of stock.
The following price and cost changes will, however apply to the next quarter.
- The price of direct material B will increase by 10%. There will be no change in the price of direct material A.
- The wages rates will go up by 8%. If the production volume increases beyond 5500 units, overtime premium
of 50% is payable on the increased volume due to overtime working to be done by the variable labour
complement.
- The fixed factory and selling expenses will increase by 20% and 25% respectively.
- A discount in the selling price of 2% is allowed on all sales made at 6,500 units level of output. The selling
price, however will remain unaltered, if the volume of output is below 6,500 units.
While operating at a volume of output of 6,500 units in the next quarter, the company intends to quote for an
additional volume of 2,000 units to be supplied to a government department for its captive consumption. The working
capital requirement of this order is estimated at 80% of the sales value of the government order. The company desires
a return of 20% on the capital employed in respect of this order.
Required:
1. Prepare a flexible budget for the next quarter at 5500, 6000 and 6500 unit levels and determine the profit at
the respective volumes. [Ans: Profit (Rs 79,440), (Rs 70,128), (Rs 73,165)]
2. Calculate the lowest price per unit to be quoted in respect of the Government order for 2000 units.
[Ans: Total sales Rs 181,845]
4
Q.6.The budgets for activity and cost of XYZ Ltd. for the first three quarters of operation are shown below:
BUDGETS QUARTERS I-III
Period Covered Q-I Q- II Q-111
-Months 1-3 4-6 7-9
Activity.
Sales (Units) 9,000 units 17,000units 15,000 units
Production (Units) 10,000 units 20,000 units 15,000 units
Costs (Rs.000)
Direct Materials: A 50 100 75
Direct Materials: B 40 80 60
Production Labour Cost 180 285 230
Manufacturing Overheads excluding Depreciation 80 110 95
Depreciation of Production Machinery 14 14 14
Administration Expenses 30 30 30
Selling & Distribution Expenses 29 37 35
Total Costs 423 656 539
Note: Variable labour costs become 50% higher for activity in excess of 19,000 units per quarter due to the necessity
of overtime working
In quarter IV, the sales volume could range from an extreme low of 15,000 units to an extreme of 21,000 units, but
most likely of 18,000 units. In month 9, it will be possible to accurately estimate sales for Quarter IV and the
production level for that quarter will be set equal to the sales volume. Activity for each quarter is spread evenly
throughout that quarter.
Cost structures will remain same in quarters I to III, but are expected to differ in Quarter IV only in the following
aspects.
i) Material A will rise in price by 20%.
ii) All production labour wage rate will increase by 12.5%. Variable labour input per unit of output will
decrease (due to learning curve effect) to 80%.
iii) The threshold of overtime working remains at 19,000 units.
iv) Fixed factory overheads and the fixed element of selling and distribution costs will each rise by 20%.
The effect of these changes is considered too small to require adjustment of opening stock and closing stock.
Required:
a) Produce a statement which analyses under each cost classification given in the budgets, the variable cost per
unit and the fixed costs which will be effective in Quarter IV.
b) Prepare a flexible budget of estimated costs for quarter IV with step points which will facilitate simple
interpretation of cost for the most likely levels. [Ans: Total Cost Rs 563,000, Rs 632,000, Rs 710,000]
5
Q.7.The performance of a company at two levels of operation during 2002-03 is as under:

Capacity Utilization 50% 60%
Direct materials Rs. 1,00,000 1,20,000
Direct Wages Rs. 1,60,000 1,92,000
Production overheads Rs. 600,000 6,50,000
Adm. Overhead Rs. 1,20,000 1,20,000
Selling Overhead Rs. 2,20,000 2,40,000
The company produced 12,000 units at 60% capacity utilization. The profit margin is 20% on sales.
During the next year 2003-04, the company is poised for increasing the capacity utilization to 75%. The company
desires to have the same profit margin as in 2002-03. The following percentage changes is expected to be applicable
in the next year.
• Direct material prices will increase by 5%.
• Direct wage rates will increase by 3%.
• Direct labour efficiency will fall by 4%.
• Variable production overheads will increase by 6%.
• Fixed Production overheads will increase by 10% up to 80% capacity utilization and by 22% thereafter.
• Variable selling expenses will increase by 10%
• Fixed selling expense will increase by 8%.
• Administrative Overheads will increase by 15%.
The company expects to receive an export order for 3000 units while operating at 75% capacity utilization. The
anticipated export price offer is Rs. 92 per unit.
Required: -
1: - Prepare a flexible budget for 2003-04 and determine the cost per unit of output at the capacity utilization levels
of 75% and 90%. [Ans: 75% Rs 16,30,100, 90% Rs 18,67,600]
2: - Calculate the sales value and Profit-for 2003-04 at 75% capacity.[ Ans: Sales Rs 20,37,625, Profit Rs 407,525]
3: - Advise management as to whether or not the export order at the price of Rs.92 per unit should be accepted.
[Ans: Incremental profit Rs 38,500, accept the order]
Original and revised Budget

Q.8.A company prepared the following budget for a year:
Item R/M Labour Variable Fixed Variable Fixed Profit Sales
Factory Factory Selling Selling Price
OH OH OH OH
Percent 40% 20% 10% 10% 5% 12% 3% 100%
After evaluating the half – yearly performance, it was observed that the company would be able to achieve only 80%
of the original budgeted sales. The revised budgeted sales as envisaged above was estimated at Rs 1,080 lakhs after
taking into account a reduction in the selling price by 10%.
1. Prepare a statement showing the break – up of the original and revised budget for the year.
[Ans: Profit Rs 45 lakh, (Rs 150 lakh)]
2. The Co. has received an export order. The estimated prime cost and special export expenses for fulfilling the
export order are Rs 12 lac and Rs 40,000 respectively.
Find the lowest quotation. [Ans: Min Price Rs 14,40,000]
6
Q.9.Kathmandu Limited having a capacity of 6 lakhs unit has prepared the following cost sheet:
Per unit
Direct Materials Rs 2.50
Direct Wages Rs 1.00
Factory Overheads Rs 2.00 (50% fixed)
Selling and Administration Overheads Rs 1.50 (one-third variable)
Selling Price Rs 9.00
During the year 2008, the sales volume achieved by the company was 5 lakh units. The company has launched an
expansion program, the details of which are as under:
i) The capacity will be increased to 10 lakhs units.
ii) The additional fixed overhead will amount to Rs 4 lakhs uo to 8 lakhs units and will increase by Rs 2
lakhs more beyond 8 lakhs units.
iii) The cost of investments on expansion is Rs 8 lakhs which is proposed to be financed through bank
borrowing carrying interest at 15% per annum.
iv) The average depreciation rate on the new is 10% based on straight line method.
After the expansion is put through, the company has two alternatives for operating the expanded plant as under:
i) Sales can be increased up to 8 lakhs units by spending Rs 1 lakhs on special advertisement campaign to
explore new market, or
ii) Sales can be increased to 10 lakhs units subject to the following:
a) By an overall price reduction of Rs 1 per unit on all the units sold.
b) By increasing the variable selling and administration expenses by 5%.
c) The direct material costs would go down by 1% due to discount on bulk buying.
You are required to:

i) Construct a flexible budget at the level of 5 lakhs, 8 lakhs and 10 lakhs units of production and advise
which level of output should be chosen for operation.
[Ans: Profit, 8 lakh, 13 lakh, and 10 lakh]
ii) Calculate the break-even point both before and after expansion.
[Ans:- BEP units – 3lakh,4.75 lakh, 6.67 lakh]
Q.10. Vevek elementary school has a total of 150 students consisting of 5 sections with 30 students per section. The school
plans for a picnic around the city during the week end to places such as Zoo, amusement park, the planetarium etc. A
private transport operator has come forward to lease out the buses for taking the students. Each bus will have a
maximum capacity of 50 (excluding 2 seats reserved for the teachers accompanying the students). The school will
employ two teachers for each bus, paying them an allowance of Rs. 50 per teacher. It will also lease out the required
number of buses. The following are the other cost estimates:
Cost per student Rs.
Breakfast 5
Lunch 10
Tea 3
Entrance fee to Zoo 2
Special permit fee Rs,50 per bus.

Rent per Bus - Rs.650 per bus.
Block entrance fee at the planetarium Rs.250
Prize to students for games Rs.250
No costs are incurred in respect of the accompanying teachers (expects the allowances of Rs.50 per teacher)
You are required to prepare
(a) A flexible budget estimating the total cost for the levels of 30, 60, 90, 120 and 150 students. Each item of cost is to
be indicated separately. [Ans:- Rs 1900, Rs 3300, Rs 3900, Rs 5300, Rs 5900]
(b) Compare the average cost per student at these levels. [Ans:- Rs 63.33, Rs 55, Rs 43.33, Rs 44.17, Rs 39.33]
(c) What will be your conclusions regarding the break-even level of students if the school proposes to collect Rs. 45per
student ? [Ans:-Range1-50-No BEP, Range 51-100 =BEP 84 students, Range 101-150 =BEP 116 Students]
7
Q.11. The following are the details of the Budget and the actual cost in a factory for six months from January to June 2008.
From the figure given below you are required to prepare the production cost budget for the period from January to
June 2009:
January to June 2008
Budgeted Actual
Production (units) 20,000 18,000
Material cost Rs 40,00,000 Rs 39,90,000
(2000 MT @2000) (1900 MT @2100)
Labour cost Rs 800,000 Rs 799,920

(@Rs 20 Per Hour) (@Rs 22 Per Hour)
Variables overheads Rs 240,000 Rs. 216,000
Fixed Overhead Rs 400,000 Rs 420,000
In the first half of 2009 production is budgeted for 25,000 units. Material cost per ton will increase from last year’s
actual by Rs 100 but is proposed to maintain the consumption efficiency of 2008 as budgeted.
Labor efficiency will be lower by another 1% and labor rates will be Rs 22 per hour. Variable and Fixed overheads
will go by 20% over 2008 actual.
You are required to prepare the production cost budget for the period January – June 2009 giving all the workings.
[Ans: Rs 74,86,450]
Q.12. Sterling Enterprise has prepared a draft budget for the next year as follows:
Particulars 10,000 units
Sale price per unit Rs 30
Variable cost per unit:
Direct material Rs 8
Direct Labour (2 hours *Rs 3) Rs 6
Variable Overhead (2 hours *Re 0.5) Rs 1
Contribution per unit Rs 15
Budgeted Contribution Rs 150,000
Budgeted Fixed Costs Rs 140,000
Budgeted Profit Rs 10,000
The Board of Directors is dissatisfied with his budget, and asks a working party to come up with an alternate budget
with a higher profit figures.
The working party reports back with the following suggestions which will lead to a budgeted profit of Rs 25,000. The
company should spend Rs 28,500 on advertising and put the sales price up to Rs 32 per unit. It is expected that sales
volume would also rise, in spite of the price increase, to 12,000 units.
In order to achieve the extra production capacity, however, the work force must be able to reduce the time taken to
make each unit of the product. It is proposed to offer a pay and productivity deal, in which the wage rate per hour is
increased to Rs 4. The hourly rate for variable overhead will be unaffected. Prepare a revised budget giving effect to
the above suggestions.
[Ans : Lab hrs per unit = 1.75 hrs]
8
Q.13. The Sales Manager of XYZ ltd bases his Sales Budget for a year, on sales of 10,000 tons of castings at Rs 2500 per
ton and submits it to you, in your capacity as CFO of the company. The production manager however tells you that his
normal capacity is for 8,000 tons only.
Data for the operating budget for 8,000 tons for the year have been prepared as follows:
Sales 8,000 Tons at Rs 2500 per ton Rs 2,00,00,000
Less: Expenses
- Raw materials [ all variable] Rs 30,00,000
- Direct wages [all variable] 15,00,000 hours @ Rs 8 per hour Rs120,00,000
- Production Overheads [50% fixed] Rs 14,00,000
- Administration Overheads [all fixed] Rs 6,00,000
- Selling and Distribution [80% fixed] Rs 10,00,000
Budgeted profit Rs 20,00,000
The production manager suggests three ways in which production could be increased to 10,000 tons:-
• Sub-Contracting production of 2,000 tons to a competitor whose price would be Rs 2,050 per ton.
• Introduction of an additional shift providing 400,000 extra direct labour hours at an estimated cost of Rs 10
per hour, without increase in fixed production overhead cost.
• The provision of additional plant to increase normal working capacity, which would involve of Rs 270,000 in
fixed production overhead for the year, but no alteration to the variable expense rate per ton.
In each instance there would arise additional non- production fixed overhead costs in respect of – Administration Rs
100,000, and Selling and Distribution Rs 200,000.
Required:
1. Prepare a statement of sales, costs and profit to be expected from each of the three ways of increasing
production. [Ans: Additional profit Rs 550,000, (Rs 275,000), Rs 455,000]
2. Prepare a revised operating budget in a final form, for presentation to management based on your choice of
action. [Ans: Total Profit Rs 25,50,000]
Functional Budget:-
1) Sales Budget:- First of all, we need to predict the Quantity of sales.
Finished Product A B C
Sales Qty *SP/Unit *** *** ***
1a) Sales Pattern
2) Production Budget:- In order to meet the sales and maintained the certain closing stock, how much Qty to
be produced.?
Finished Product A B C
Sales Qty *** *** ***
Add:- Closing Stock *** *** ***
Less: Opening Stock (***) (***) (***)
Production Quantity *** *** ***
2a) Production Pattern
3) Raw Material Consumption Budget:- How many Raw material need to be consumed to produce above
production Quantity? Given:-
Raw Material RM Q RM R RM S 1 FG of A Req 2 kg of Q
For FP A[Prod Qty * RM/unit] *** *** *** 1 FG of A Req 3 kg of R
For FP B [Prod Qty* RM/unit] *** *** *** 1 FG of A Req 4 kg of S
AND SAME FOR B & C
For FP C[Prod Qty* RM/unit] *** *** ***
RM Consumption Qty *** *** ***
3a) Raw Material Consumption Budget
4) Raw Material Purchase Budget:- How many RM Material need to be purchased in order to meet the RM
Consumption and maintain certain Closing Stock.
Raw Material RM Q RM R RM S
RM Consumption Qty *** *** ***
Add:- Closing Stock of RM *** *** ***
Less: Opening Stock of RM (***) (***) (***)
Purchase Quantity *** *** ***
Multiplied by its Price will give *Rs 2/kg *Rs 3/kg *Rs 4/kg
Raw Material Budget *** *** ***
4a) Raw Material Purchase Pattern
9
5) Labour Budget:- How many Labour Hrs are required to produce above production Quantity?
Labour Hours Skilled Semi Skilled Unskilled
For FP A[Prod Qty * Hrs/unit] *** *** ***
Given:-
For FP B [Prod Qty* Hrs/unit] *** *** *** 1 FG of A Req 2 hrs of skilled
For FP C[Prod Qty* Hrs/unit] *** *** *** 1 FG of A Req 3 hrs of semi sk
Labour Hrs *** *** *** 1 FG of A Req 4 hrs of unskilled
AND SAME FOR B & C
Multiplied by its Rate will give *Rs 2/hr *Rs 3/hr *Rs 4/hr
Labour Cost Budget *** *** ***
Q.14.
i) Sales Quantity:- 20,000 units, Selling price =Rs 20
ii) Finished Goods Stock
-Opening stock -8,000 units
-Closing Stock- 12,000 units
iii) Material Consumption per finished product=2.5 kg per unit
iv) Material Stock
-Opening Stock-4,000 kg
-Closing Stock-9,000 kg
v) Price per kg Rs 5
Required:-
1) Find a) Sales Budget b) Production Budget, Material Consumption Budget and Material Purchase Budget.///
or (Question simply sasys find purchase value of materials.)[Ans:- Purchase value of mat =Rs 325,000]
Sometimes question does not gives sales qty directly, instead it gives sales value. So to calculate the Sales Qty
= Sales Value / SP per unit – (and to calculate the SP per unit certain information of cost and profit will be given in
question.
Q.15.
1) Cost data for 1 unit of FP
Raw material A= 5 Kg@ Rs 6= Rs 30
B= 3 Kg @ Rs 9= Rs 27
Wages of skilled worker 4 hrs @Rs 5= Rs 20
Wages of Unskilled worker 3 hrs @ Rs 4= Rs 12
Overhead Rs 10
Total Cost Rs 99
Selling price provide 10% profit on sales value.
Sales value =Rs 5500000.
2) Stock Finished Goods Raw Material
A B
Closing Stock 15,000 units 20,000 16,000
Opening Stock 7,000 units 10,000 10,000
Find purchase value of materials. [Ans:- Rs 34,20,000]
Q.16. In a company Factory Overheads are applied on the basis of Direct labour hours. The following information is
given:
Particulars Department A Department B
Fixed Factory Overheads Rs 336,000 Rs 126,000
Variable Overheads per Labour hour Rs 0.5 per hour Rs 1.5 per hour
Direct Labour Hours required as per Direct Labour Hour Budget

Particulars Department A Department B
For Product X 140,000 70,000
For Product Y 28,000 56,000
Prepare the product –wise budget for fixed and Variable Overhead Costs.
[Ans: Total FOH Rs 462,000, Total VOH Rs 273,000]
10
Sometimes in addition to above, Question asked – Sales pattern –Qtr wise or monthly
- Production Pattern- Qtr wise or monthly
- Raw material Consumption Pattern- Qtr wise or monthly
- Raw material Purchase Pattern-Qtr wise or monthly.
Q.17.
1) Sales Quantity = 25,000 units 5) Raw Material stock
2) Finished stock -Opening stock -5,000 kg
- Opening Stock 3,000 units -Closing Stock -15,000 kg
- Closing Stock 8,000 units Raw Material used= 3kg per unit
3) Sales Pattern:- Price per kg=Rs 4
Quarter %age 6) Purchase Pattern
1 20% Quarter %age
2 15% 1 20%
3 30% 2 40%
4 35% 3 10%
100% 4 30%
4) Production Pattern:- 100%
-60% of current quarter sales
-40% of next quarter sales.
Prepare Quarter wise Budget [Ans:- Total purchase material= Rs 400,000]
Q.18. A single product company estimated its sale for the next year quarter wise as under:
Quarter Sales (units)
I 30,000
II 37,500
III 41,250
IV 45,000
The opening stock of finished goods is 10,000 units and the company expects to maintain the closing stock of finished
goods at 16,250 units at the end of the year. The production pattern in each quarter is based on 80% of the sales of the
current 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 of the
year required to be maintained at 5,000 kg. Each unit of finished output requires 2 kg. of raw materials.
The company proposes to purchase the entire annual requirement of raw materials in the first three quarters in the
proportion and at the prices given below:
Quarter Purchase of raw materials % to total Price per kg.
annual requirement in quantity Rs.
1 30% 2
II 50% 3
III 20% 4
The value of the opening stock of raw materials in the beginning of the year is Rs. 20,000.
You are required to present the following for the next year, quarter wise:
i) Production budget (in units). [Ans:- 160,000 units]
ii) Raw material consumption budget (in quantity). [Ans:- 320,000 kg]
iii) Raw materials purchase budget (in quantity and value). [Ans:- Rs 913,500]
iv) Priced stores ledger card of the raw material using First in first out method.
11
Q.19. Your company manufactures two products A and B. A forecast of the number of the units to be sold in first seven
months of the year is given below:
Product A Product B
January 1000 2800
February 1200 2800
March 1600 2400
April 2000 2000
May 2400 1600
June 2400 1600
July 2000 1800
It is anticipated that (i) there will be no work in progress at the end of any month, ii) finished units equal to half the
sales for the next month will be stock at the end of each month (including the previous December).
Budgeted production and production cost for the whole year are as follows:-
Product A Product B
Production (Units) 22,000 24,000
Per Unit: Rs Rs
Direct material 12.50 19.00
Direct Labour 4.50 7.00
Total Factory Overhead apportioned 66000 96000
Prepare for the six months ending 30th June, a production budget for each month and a summarized cost budget..[Ans:-
Product A=11100 units, Product B=12700 units, Product A Total Cost =Rs 222000, Product B Total cost =Rs
381000]
Q.20. Sports wear Ltd manufactures sportswear Shirts and Shorts. The production budget for these two products has to be
prepared for the next three months, November, December, and January.
The following information is given:
1. Sales volume every month will be 2%more than the previous months volume for each product.
2. The company carries stock of finished garments sufficient to meet 40% of the next months sale.
3. Closing stock for October 2010 was 6,000 shirts and 8,000 shorts.
You are required to prepare the production budget for each product for November, December and January.
Ans:
Shirts 15,120 15,423 15,731
Shorts 20,160 20,564 20,974
Q.21. Artistic Frames Pvt. Ltd. (AFPL) makes and sells artistic wooden frames for pictures. Arjun, the finance controller,
is responsible for preparing the company’s master budget and has accumulated the following information for the
financial year 2075/76:
Shrawan Bhadra Asoj Kartik Marga
Estimated sales unit 6,000 7,000 7,500 7,000 7,000
Selling price (Rs.) 1,400 1,400 1,550 1,550 1,550
Direct manufacturing labor-hours/ unit 2 2 1.5 1.5 1.5
Wage/ direct manufacturing labor-hour (Rs.) 15 15 18 18 18
In addition to wages, direct manufacturing labor-related costs include pension contributions of Rs. 0.80 per hour,
worker’s compensation insurance of Rs. 0.15 per hour, employee medical insurance of Rs. 0.40 per hour, and Social
Security taxes. Assume that as of Shrawan 1, 2075, the Social Security tax rates are 5% for employers and 5% for
employees. The cost of employee benefits paid by AFPL on its employees is treated as a direct manufacturing labor
cost.
The company has a labor contract that calls for a wage increase to Rs. 18 per hour on Asoj 1, 2075. New labor-saving
machinery has been installed and will be fully operational by Asoj 1, 2075. The company expects to have 9,600 frames
on hand at 2074/75 financial year end, and it has a policy of carrying an end-of-month inventory of 100% of the
following month sales plus 50% of the second following month sales.
Required:
Prepare a production budget and a direct manufacturing labor budget for Artistic Frames Pvt. Ltd. by month and for
the first quarter of 2075/76. The direct manufacturing labor budget should include labor-hours, and show the details
for each labor cost category. [Ans: Total Lab cost Shrawan: Rs 244,530 Bhadra Rs 247,950 Asoj Rs 212,625]
12
Q.22. Nesley Ltd. has prepared the following sales budget for the first five months of 2008:
Month Sales Budget (units)
Jan 20,800
Feb 25,600
Mar 22,200
Apr 20,800
May 18,800
Inventory of finished goods at the end of every month is to be equal to 25 % of sales estimate for the next month. On
1st January, 2008 there were 5,500 units of product on hand. There is no work in progress at the end of any month.
Every unit of product requires two types of materials in the following quantities:
Material A: 2 kg
Material B: 5 kg
Materials equal to one half of the requirement of next month’s production are to be in hand at the end of every month.
This requirement was met on 1st January, 2008.
Prepare the following budgets for the quarter ending 31st March 2008:
(a) Production Budget and [Ans: 68,300 units]
(b) Material Purchase Budget. [Ans: Mat A = 135,200 kg, Mat B 338,000 kg]
Q.23. A Company manufactures two Products A and B by making use of two types of materials, viz., X and Y Product A
requires 10 units of X and 3 units of Y. Product B requires 5 units of X and 2 units of Y. The price of X is Rs. 2 per
unit and that of Y is Rs. 3 per unit.
Standard hours allowed per product are 4 and 3, respectively. Budgeted wages rate is Rs. 8 per hour. Overtime
premium is 50% and is payable, if a worker works for more than 40 hours a week There are 150 workers.
The Sales Manager has estimated the sales of Product A to be 5,000 units and Product B 10,000 units. The target
productivity ratio (or efficiency ratio) for the productive hours worked by the direct worker in actually manufacturing
the product is 80%. In addition, the nonproductive downtime is budgeted at 20% of the productive hours worked.
There are twelve 5-day weeks in the budget period and it is anticipated that sales and production will occur evenly
throughout the whole period.
It is anticipated that stock at the beginning of the period will be, Product A 800 units; Product B 1, 680 units. The
targeted closing stock expressed in terms of anticipated activity during the budget period are Product A 12 days sales;
Product B 18 days sales. The opening and closing stock of raw material of X and Y will be maintained according to
requirement of stock position for Product A and B.
You are required to prepare the following for the next period:
(i) Production budget.[Ans:- FP A=5,200 units, FP B 11,320 units]
(ii) Material usage and Material purchase budget in terms of quantities and values. [
[Ans:- Material Usage RM X=108,600 units, RM Y =38,240 units,
Material Purchase RM X=117,200 units, RM Y=41,480 units, Total Rs 358,840]
(iii) Wages budget for the direct workers. [Ans:- 82,140 Hrs ,Rs 697,680]
Q.24. A company manufactures and sells two products ‘X’ and ‘Y’ using the same raw materials and the same type of
Labour. It is trying to prepare the annual budget for 2002-2003. The marketing department has estimated the average
monthly sales of ‘X’ as Rs 2 lakh and that of ‘Y’ as Rs 4 lakh. Further details relating to the two products are given
below:-
X Y
Standard Cost (Per unit) Rs Rs
Materials (1 kg ) 12 (1.5 kg) 18
Labour 4 6
Overheads (100% Labour) 4 6
Rs 20 Rs 30
Inventory of Finished goods Rs Rs
Value on 01/07/2002 280,000 720,000 (value at standard cost)
Value on 30/06/2003 200,000 360,000
Standard Profit margin (% of sales) 20% 25%
Loss in processing (% of input) 8% 10% (Units lost have no value)
13
Currently the raw material stock is equal to requirement for 1.5 months average production. However the closing stock
will be reduced to one month requirements.
You are required to prepare:
a) Production budget for 2002-2003 [Ans:- FPX =92,000 units, FP Y=108,000 units]
b) Material consumption budget 2002-2003 [In terms of units and value] [Ans:= 280,000 kg, Rs 33,60,000]
c) Wages budget 2002- 2003 [Ans:- Rs 10,16,000]
d) Material purchase budget 2002-2003 [in terms of units and value] [Ans: 268,333 kg , Rs 32,19,996]
Q.25. Nits Ltd specializes in seasonal novelty products and is considering the manufacture of a new range of items to
coincide with a major sporting event of Cricket in the city. The range will initially comprise of 2 products, Flags and
Bunting.
Projected Sales Quantity Sales revenue per item (Rs)
Flags 4,000 18
Bunting 2,000 50
Production requirements: Cost per unit Flags Bunting
Material A Rs 4.00 0.5 m 4m
Material B Rs. 2.00 1.0 m 3m
Finished goods inventory: Flags Bunting
1st July 200 -
31st July 950 1325
There is no opening or closing work in progress, however due to inefficient in the production process, management
expect that 5% of output will not pass quality control and therefore cannot be sold.
Material inventory: A B
1st July 6,000 m 20,000 m
31st July 10,200 m 14,000 m
(m denotes the measurement of cloths in meter)
Labour & Overhead:
The standard direct labour required to produce each Flag unit is 30 minute and a Bunting unit takes 1 hour to produce.
Labour is paid at Rs 10 per hour. Variable overheads (which will be incurred evenly over the year) are projected at Rs
360,000 per annum and these are to be absorbed into production on the basis of direct labour hours.
Prepare the following Budget Statements:
i) Sales Budget [Ans: Flags Rs 72,000, Bunting Rs 100,000]
ii) Production Budget [Ans:- Flags 5,000 Units, Bunting 3,500 units]
iii) Material Purchase Budget [Ans: Mat A Rs 82,800, Mat B 19,000]
iv) Labour Budget [Ans: Rs 60,000]
v) Overhead Absorption Budget [Ans: Flags Rs 12,500, Bunting Rs 17,500]
Q.26. Bridgewater Tyre Company’s budgeted unit sales for the year 2013 were:
Bike tyres 60,000
Bus Tyres 12,500
The budgeted selling price for Bus tyres was Rs 15000 per tyre and for Bike tyres was Rs @ 4500 per tyre.
The beginning finished goods inventories were expected to be 2,500 Bus tyre and 6,000 Bike tyres, for a total cost of
Rs 2,00,25,500 with desired ending inventories at 2,000 and 5,000 respectively, with a total cost of Rs 1,63,23,900.
There was no anticipated beginning or ending work-in-process inventory for either type of tyres. The standard material
quantities foe each type of tyre were as follows:
Bus Bike
Rubber 35 Kgs 15 Kgs
Steel 4.5 Kgs 2.0 Kgs
The purchase price of rubber and steel were Rs 150 and 100 per Kg, respectively. The desired ending inventories for
rubber and steel were 60,000 and 6,000 Kgs, respectively. The estimated beginning inventories for rubber and steel
were 75,000 and 7,500 Kgs respectively.
The direct labour hours required for each type of tyre were as follows:
14
Molding Department Finishing Department

Bus Tyre 0.20 0.10
Bike Tyre 0.10 0.05
The direct labour rate for each department is as follows:
Molding Department Rs. 650 per hour
Finishing Department Rs 750 per Hour
Budgeted factory overhead costs for 2013 were as follows:

Particulars Rs
Indirect Material 85,28,000
Indirect Labour 79,40,000
Depreciation of Building and Equipment 49,16,000
Power and Light 63,00,000
Total 2,76,84,000
Prepare each of the following budgets for the year ended 2013:
a) Sales budget [Ans : Bike Tyres Rs 27,00,00,000, Bus Tyres Rs 18,75,00,000]
b) Production budget [Ans Bike Tyres 59000 tyre , Bus Tyres 12000 tyre]
c) Direct material budget [Ans Rubber Rs 19,35,00,000, Steel Belts Rs 1,70,50,000]
d) Direct labour budget [Ans: Molding Rs 53,95,000, Finishing Rs 31,12,500]
e) Cost of goods sold budget [Ans: Rs 25,28,43,100]
Q.27. Solo products Ltd manufactures and sells a single product and has estimated a sales revenue of Rs 126 lakhs this year
based on a 20% profit on selling price. Each unit of the product requires 3 lbs of material P and 1.5 lbs of material Q
for manufacture as well as a processing time of 7 hours in the machine shop and 2.5 hours in the assembly section.
Overheads are absorbed at a blanket rate of 33.33 % on direct labour. The factory works 5 days of 8 hours a week in a
normal 52 weeks a year. On an average, statutory holidays, leave and absenteeism and idle time amount to 96 hours,
80 hours and 64 hours respectively, in a year.
The other details are as under:-
Purchase price Material P Rs 6 per lb
Material Q Rs 4 per lb
Comprehensive Labour Rate Machine Shop Rs 4 per hour
Assembly Rs 3.20 per hour
No of Employees Machine Shop 600
Assembly 180
Finished goods Material P Material Q
Opening Stock 20,000 units 54,000 lbs 33,000 lbs
Closing Stock 25,000 units 30,000 lbs 66,000 lbs
You are required to calculate:
a) The number of units of the product proposed to be sold. [Ans: 140,000 units]
b) Purchases to be made of materials P and Q during the year in Rupees. [Ans:-P Rs 24,66,000,Q Rs 10,02,000]
c) Capacity utilization of Machine shop and Assembly Section, along with your comments.
Ans:-
[Machine shop=Capacity Underutilization(Surplus hrs) 89,000 hrs, Assembly Shop Deficit 31,300 hours]
Q.28. An article passes through five hand operations as follows:-

Operation No Time per article Grade of worker Wage rate per hour
1 15 minutes A Rs 65
2 25 minutes B Rs 50
3 10 minutes C Rs 40
4 30 minutes D Rs 35
5 20 minutes E Rs 30
The factory works 40 hours a week and the production target is 600 dozens per week. Prepare a statement showing for
each operation and in total the number of operators required, Labour cost per dozen and the Total Labour cost per
week to produce the total targeted output. [Ans: Total Labour cost Rs 513,000, Total operators =300 Operators]
15
Q.29. A factory manufacturing three products, involving more than one labour operation for each product has the following
direct labour requirements for the products.
Operation Direct labour hours per unit (in minutes)
Product 1 Product 2 Product 3
I 18 42 30
II - 12 24
III 9 6 -
The factory works 8 hours per day, 6 days in a week. Each budget quarter has 13 weeks and in terms of leave, holidays
and other causes, 124 hours are lost in each quarter.
Operation I, II and III have the budgeted hourly rates for workers at Rs 16, Rs 20 and Rs 24 respectively.
The budgeted sales of the products during the quarter are :-
Product 1 9,000 units
Stock position
Product Opening Stock Closing Stock
Product 1 Nil 1,000 units
Product 2 5,000 units Nil
Product 3 4,000 units 2,000 units
Prepare a manpower budget for the quarter showing for each operation.
i) Direct labour hours [Ans: OP 1 18,720 hrs , OP II 7,488 hrs, OP III 3,120 hrs]
ii) Direct labour Costs [Ans: OP 1 Rs 299,520, OP II Rs 149,760, OP III Rs 74,880]
iii) The no of workers [Ans: OP 1 30 Workers, OP II 12 workers, OP III 5 workers]
Q.30. A company is engaged in the manufacture of specialized sub assemblies required for certain electronic equipments.
The company envisages that in the forthcoming month, December 1998 the sales will take a pattern in the ratio of
3:4:2 respectively of sub assemblies, ACB, MCB, and DP.
The following is the schedule of components required for manufacture.
Sub assembly Component Requirements
Selling price Base Board IC 08 IC 12 IC 26
ACB 520 1 8 4 2
MCB 500 1 2 10 6
DP 350 1 2 4 8
Purchase price Rs 60 20 12 8
The direct labour time and variable overheads required for each of the sub-assemblies are :-
Sub assembly Labour Hours per sub assembly
Grade A Grade B Variable overheads per sub assembly
Rs
ACB 8 16 36
MCB 6 12 24
DP 4 8 24
Direct wage Rate per hour Rs 5 Rs 4 …..
The labourers work 8 hours a day for 25 days a month.
The opening stock of sub-assemblies and components for December 1998 are as under:-
Sub-assemblies Components
ACB 800 Base Board 1,600
MCB 1,200 IC 08 1,200
DP 2,800 IC 12 6,000
IC 26 4,000
Fixed Overheads amount to Rs 757,200 for the month and a monthly profit target of Rs 12 lacs has been set. The
company is eager for a reduction of closing inventories for December 1998 of sub assemblies and components by 10%
of quantity as compared to the opening stock. Prepare the following budgets for December 1998:-
1. Sales budget in quantity and value. [Ans: ACB 6,300 units, MCB 8,400 units, DP 4,200 units]
2. Production budget in quantity.[Ans: ACB 6,220 units, MCB 8,280 units, DP 3,920 units]
16
3. Component usage budget in quantity.

[Ans: Base board 18,420 com, IC08 74,160 com, IC 12 123,360 com, IC 26 934,80 com]
4. Component purchase budget in quantity and value.
[Ans: Base board 18,260 com, IC08 74,040 com, IC 12 122,760 com, IC 26 93,080 com, Total Rs 47,94,160]
5. Manpower budget showing the number of workers and the amount of wages payable.
[Ans: Grade A 576 worker, Grade B 1152 worker, Total wages Rs 14,96,560]
Q.31. X ltd produces and markets three products- Chairs, Tables and Benches. The company is interested in presenting its
budget for the next quarter ending 31st March. It expects to sell 4200 chairs, 800 tables and 500 benches during the
said period at the selling price of Rs 50, Rs 85 and Rs 158 per unit respectively. The following information is made
available for this purpose:-
1. Material and Labour Requirements
Particulars Rate Chairs Tables Benches
Timber per unit (in cu.ft) Rs 50 per cu.ft 0.5 1.2 2.5
Upholstery per unit (in sq. yds) Rs 20 per sq.yd 0.25 - -
Carpenter’s time (in minutes per unit) Rs 6 per hour 45 60 75
Fixer and Finisher’s time (in minutes per unit) Rs 4.8 per hour 15 15 30
Fixing and Finishing Materials costs 5% of the cost of timber and upholstery.
2. Inventory levels planned:

Particulars Timber (Cu.ft) Upholstery (Sq yd) Chairs (Nos) Tables (Nos) Benches (Nos)
Opening 600 400 400 100 50
Closing 650 260 200 300 50
3. Fixed Overheads would be Rs 8000 per month.

Required:
1. Prepare a production Budget showing quantities to be manufactured.[Ans: 4000 units,1000units,500 units]
2. Prepare a Raw material purchase Budget in quantities as well as in Rupees. [Ans Rs 242,200]
3. Draw a Direct wage Cost Budget. [Ans: Rs 34,950]
4. Present a statement showing Variable Cost of Manufacture per unit of all three products.
[Ans: Chairs Rs 37.2,Tables Rs 70.2,Benches Rs 141.15]
5. Find out the Budgeted Net income for the quarter. [Ans : Rs 50,025]
Q.32. PYE Ltd produce and markets a very popular product called P. The company is interested in presenting its budget for
the second quarter of 2012.
The following information are made available for this purpose:
a) It expects to sell 50,000 bags of P during the second quarter of 2012 at the selling price of Rs 9 per bag.
b) Each bag of P requires 2.5 kgs of a raw material called Q and 7.5 kgs of raw material called R.
c) Stock levels are planned as follows:
Particulars Beginning of quarter End of quarter
Finished bags of P (Nos) 15,000 11,000
Raw material Q (kgs) 32,000 26,000
Raw material R (kgs) 57,000 47,000
Empty bag (Nos) 37,000 28,000
d) Q costs Rs 1.2 per kg, R costs 20 paisa per kg and empty bag costs Rs 80 paisa each.
e) It requires 9 minutes of direct labour time to produce and fill one bag of P. Labour costs is Rs 5 per hour.
f) Variable manufacturing costs are Rs 0.45 per bag. Fixed manufacturing costs Rs 30,000 per quarter.
g) Variable selling and administration expenses are 5% of sales and fixed administration and selling expenses
are Rs 25,000 per quarter.
i) Prepare a production budget for the said quarter. [Ans: 46,000 bags]
ii) Prepare a raw material purchase budget for Q, R, and empty bags for the said quarter in quantity as well as in
rupees. [Ans: Rs 227,400]
iii) Compute the budgeted variable costs to produce one bag of P. [Ans: Rs 6.5]
iv) Prepare a statement of budgeted net income for the said quarter and show both per unit and total cost data.
[Ans: Profit Rs 47,500]
17
Q.33. A Company is engaged in manufacturing two products X' and `Y: Product X uses one unit of component `P' and two
units of component Q'. Product `Y' uses two units of component P; one unit of component `Q' and two units of
component R'. Component 'R' which is assembled in the factory uses one unit of component 'Q'.
Component `P' and `Q' are purchased from the market. The company has prepared the following forecast of sales
and inventory for the next year Product `X' Product `Y'
Sales (in units) 80,000 1,50,000
At the end of the year 10,000 20,000
At the beginning of the year 30,000 50,000
The production of both the products and the assembling of the component `R' will be spread out uniformly
throughout the year. The company at present orders its inventory of `P' and 'Q' in, quantities equivalent to 3 months
production. The company has compiled the following data related to two components:
P Q
Price per unit (Rs.) 20 8
Order placing cost per order (Rs.) 1,500 1,500
Carrying cost per annum 20% 20%
Required
(a) Prepare a Budget of production and requirements of components during next year. [Ans: P=300,000 ,Q 480,000]
(b) Suggest the optimal order quantity of components P' and Q'.[Ans:- P=15,000Comp, Q 30,000 Comp]
(c) Based on optimal order Quantity in (b) above, Calculate the saving arising from switching over to the new
ordering system both in terms of cost and reduction in working capital.
[Ans:- Saving in material associated cost=Rs 150,000, Reduction in Working capital =Rs 960,000]
Q.34. Followings are the extracts from the budgets of Alpine Ltd.:
Period 1 Period 2 Period 3 Period 4 Period 5
Sales and stock budgets (units)

Opening stock 8,000 5,000 6,600 5,000 6,000
Sales 30,000 40,000 33,000 42,000 36,000
Cost budgets (Rs. ‘000)

Direct labour 540.0 888.0 628.0
Direct materials 216.0 332.8 251.2
Production overhead 235.0 308.0 257.0
(Excluding depreciation)
Depreciation 80.0 80.0 80.0
Administration overhead 184.0 213.2 192.8
Selling overhead 120.0 130.0 123.0
The following information is also available:
(i) Production above 36,000 units incurs a bonus in addition to normal wage rates.
(ii) Any variable costs contained in selling overhead are assumed to vary with sales. All other variable costs are
assumed to vary with production.
i) Calculate the budgeted production for period 1 to 4; and

[Ans: 27000 units, 41600 units,31400 units, 43000 units]
ii) Prepare a suitable cost budget for period 4. [Ans: Rs 20,17,000]
18
Selling Expenses Budget

Q.35. Pharma Ltd. sells Ayurvedic medical products through direct orders booked by salesman when they call on potential
buyers and also through mail orders which arise out of sales campaign by salesman.
The company pays the salesman an incentive commission as 5% of sales on orders booked by them directly; 2% of
sales on mail order sales in the territory of the particular salesman, dispatch and billing expenses amount to 5% of
sales revenue on all orders.
The sales budget for the coming year indicates the following mix:
Quarter Total sales Direct booking by salesman (%) Mail order sales (%)
1 10,00,000 80% 20%
2 12,00,000 70% 30%
3 13,00,000 75% 25%
4 15,00,000 80% 20%
Fixed selling expenses for the budget year:
Sales salaries (Rs) 1,00,000
Advertising (Rs) 80,000
Travelling expenses (Rs) 80,000
Sales salaries and travelling are paid uniformly in each quarter.

The advertisement expenses are incurred as under:
Quarter Percentage
1 10%
2 50%
3 30%
4 10%
Required:
(a) Prepare a Quarterly Budget of selling expenses for the year.
[Ans: Qtr 1 Rs 147,000, Qtr 2 Rs 194,200, Qtr 3 Rs 189,250, Qtr 4 Rs 194,000]
(b) It has been observed that 50% increase in Budgeted advertisement expenditure will double the quarter
quantities of mail order sales. Although it would be at the cost of direct sales. It would also reduce travelling
expenditure by 25%. However rates of commission to salesman would remain unaffected. Compute the effect
of the proposal and suggest whether the same acceptable.
[Ans : Accept the proposal, Increased profit Rs 15,550]
Principle Budget Factor

Q.36. In this budget for the period ahead ‘X’ Ltd. is considering two possible sales forecasts for its three products as
follows:-
Particulars Products
A B C
I. Sales (Units) 22,000 40,000 6,000
Selling price per unit Rs 10 Rs 6 Rs 7.50
II. Sales (Units) 30,000 50,000 7,000
Selling price per unit Rs 9 Rs 5.50 Rs 7.50
Variable costs per unit are expected to be the same at the different levels of possible sales. The variable costs per unit
are as follows:-
A (Rs ) B (Rs ) C (Rs )
Direct materials 3.00 2.00 4.00
Direct Labour 2.00 1.50 1.00
Variable Overheads 1.00 0.50 1.00
Fixed overheads are expected to total Rs 100,000. These are expected to be unaffected by the possible changes in
activity which are being considered. Due to recent high labour turnover problems, direct labour will be restricted to a
maximum of Rs 130,000 in the period. It can be assumed that all labour is of the same grade and is freely transferable
between products. Other resources are expected to be generally available.
You are required to
Taking each of the possible sales forecast in turn
i) Say what the principal budget factor is for each of the forecasts.
[Ans: Forecast 1 PVR, Forecast 2 Labour cost]
19
ii) For each forecast calculate the sales budget that you would recommend maximizing profits.
[Ans: Forecast 1 = A 22,000 units, B 40,000 units, C 6,000 units
Forecast 2= A 30,000 units, B 42,000 units, C 7,000 units]
iii) What profit would you expect from sales budget?
[Ans: Forecast 1 Profit Rs 77,000
Forecast 2 Profit Rs 63,500]
Assume that the products will be sold according to the selling price estimated as per forecast and no interchange of the
forecast is allowed.
Q.37. Vegas Electro-mechanical Ltd. provides you the following actual data of cost, prices and output relating to four
varieties of electronic calculators manufactured by them during the year 20x1:
Products Rs. per unit
A B C D
Output (units) 16,000 10,000 8,000 12,000
Selling Price 600 1,200 1,500 1,000
Direct Materials 120 280 320 120
Direct Wages 100 160 300 120
Variable Overhead 200 320 600 240
Fixed Overhead 200 320 600 240
In preparing the budget for the year 20x2, the company anticipated the following increases in costs and prices:
• The market will absorb an increase of 5% in the prices of each of the four products, if the volume of sales
in quantities is maintained at the same level as in the year 20x1.
• The unit cost increases are expected to be:
Direct Materials 5%
Direct Wages 10%
Variable Overheads 10%
• Fixed Overhead will go up by Rs. 320,000
In order to combat inflation, the Marketing Manager puts forth the following proposals in respect of each of the
products manufactured:
Product A: The price of product A will be further increased by 10% (making in all a total increase of 15%)
resulting thereby in a reduction of the volume of sales by 5%.
Product B: Substitution on direct materials of product B by cheaper materials will bring about a reduction in
direct material cost by Rs. 60 per unit. This will reduce the sales volume in units by 5%.
Product C: An allowance of special sales commission of 2% on the increased price on all quantities sold will
increase the sales volume by 10%.
Product D: A reduction of selling price by 5% on the price of 20x1 will yield an increase in sales volume
by15%.
The direct labour rate in 20x1 is Rs. 8 per hour and the number of direct labour hours cannot be increased in
the year 20x2.
Required:
i) Present a statement showing profitability for the year 20x1, [Ans: Profit 16,80,000]
ii) Prepare a budget for the year 20x2 after taking into consideration the effects of inflation in costs and
prices only, and [Ans: Profit 10,88,000]
iii) Evaluate the proposals put forth by the Marketing Manager and set an optimum product mix after
taking into consideration the inflation in costs and prices but subject to the constraint of available labour
hours. [Ans: Profit 22,15,800]
20
Question related to Cash Budget :-

Q.38. Prepare a cash budget in respect of 6 months from July to December from the information relating to a Public
Company gives in table as under:-
Month Sales Materials Wage Overheads
(Credit) Prod Admin Selling Dist R &D
Rs Rs Rs Rs (000) Rs Rs Rs Rs
April 100000 40000 10000 4.4 3000 1600 800 1000
May 120000 60000 11200 4.8 2900 1700 900 1000
June 80000 40000 8000 5.0 3040 1500 700 1200
July 100000 60000 8400 4.6 2960 1700 900 1200
August 120000 70000 9200 5.2 3020 1900 1100 1400
September 140000 80000 10000 5.4 3080 2000 1200 1400
October 160000 90000 10400 5.8 3120 2050 1250 1600
November 180000 100000 10800 6.0 3140 2150 1350 1600
December 200000 110000 10600 6.4 3200 2300 1500 1600
Cash balance on the beginning of July was expected to be Rs 150,000.

Expected Cash flows are as under:-
• Plant and machinery to be installed in August at a cost of Rs 10,000 will be completed on August 1, payable
Rs 2000 per month from completion date.
• Under a hire- purchase agreement Rs 4,000 is to be paid each month.
• Research and Development Rs 40,000 will be incurred one time in September.
• Cash sales of Rs 2,000 per month are expected.
• No commission is payable on cash sale. A sales commission of 5 percent on credit sales is to be paid within
the month following the sales.
• Period of credit allowed by suppliers 3 months
• Period of credit allowed to customers 2 months
• Delay in payment of overheads 1 month
• Delay in payment of wages 1st week of the following month
• Income tax of Rs 100,000 is due to be paid on October 1.
• Preference share dividend of Rs 10 percent on Rs 200,000 is to be paid on November 1.
• 10 percent calls on equity share capital of Rs 400,000 are due to the company on July 1 and September 1.
• Dividend from Investment amounting to Rs 30,000 is expected on November 1.
Ans:
Month July Aug Sep Oct Nov Dec
Closing Bal 244,560 235,800 263,980 189,900 233,680 275,640
Q.39. M/S Handicraft Nepal Ltd. is planning to produce and sell flower vase, wooden vase and clay vase in the Thamel
tourist area. The company will commence trading on 1 July 2017 by Mr. Siddarth and his wife. Mr. Siddarth plans to
invest all of his bank balance of Rs. 75,000, into the company. Mr. Siddarth has prepared the following budgeted
information for the first six months of trading:
i) Sales of wooden vase will be made on a cash basis only. Sales of the clay vase will be on a credit basis with
50% of sales received in following month of sales and these qualify for a 5% early settlement discount. Of the
remaining credit sales, 10% will become bad debts and the balance will be received equally in the third and
fourth month of sales. Wooden vase will have a selling price of Rs. 50 per unit and clay vase will have a
selling price of Rs. 200 per unit. The projected sales, in units, of each are as follows:
Month of Sales Wooden Vase Clay Vase

July 50 0
August 55 30
September 50 35
October 60 40
November 65 50
December 65 70
ii) Wooden vase will be produced in the month they are sold. The variable production cost of one wooden vase
21
will be Rs. 25 and this will be paid in the month incurred.

iii) Production of clay vase will be in the month prior to sale. The production cost of one clay vase will be Rs. 130
and 60% of this will be paid the month after it is incurred with the balance been paid one month later.
iv) In July, Mr. Siddarth will purchase equipment, costing Rs. 60,000 and this will be paid for in October. This
equipment will have a useful life of five years. Depreciation will be assumed to be on a straight line basis.
v) Fixed production overheads are projected at Rs. 3,000 per month and will include the monthly depreciation
charge for the equipment.
vi) Mr. Siddarth has organised for a bank loan, of Rs. 25,000, to be received on 1 st August. Mr. Siddarth will only
make monthly interest repayment at a rate of 12% per annum for 1 st year of loan. Thereafter, Mr. Siddarth will
have to start making capital repayments on the loan in equal monthly instalment.
vii) Mr. Siddarth will employ one sales person, commencing on 1 st July, who will receive a monthly salary of Rs.
2,500 plus sales commission of 4% of the total sales value made during the period. The salary will be paid in
the month incurred while the sales commission will be paid one month in arrears.
Required: 10
Prepare a cash budget for M/S Handicraft Nepal Ltd., on a monthly basis, for the six month period commencing
1st July 2017, showing clearly the closing cash balance at the end of each month.
Ans:
Month July Aug Sep Oct Nov Dec
Closing Bal 71,750 90,935 85,645 21,750 18,930 15,340
Q.40. You are given the following information.

a) Estimated monthly sales are as follows:
Jan Rs 100,000 June Rs 80,000
Feb Rs 120,000 July Rs 100,000
Mar Rs 140,000 Aug Rs 80,000
Apr Rs 80,000 Sep Rs 60,000
May Rs 60,000 Oct Rs 100,000
b) Wages and salaries are estimated to be payables as follows:

Apr Rs 9,000 Jul Rs 10,000
May Rs 8,000 Aug Rs 9,000
Jun Rs 10,000 Sep Rs 9,000
c) Of the sales, 80% is on credit and 20% for cash. 75% of the credit sales are collected within one month and
the balance in two months. There are no bad debt losses.
d) Purchases amount to 80% of sales and are made and paid for in the month preceding the sales.
e) The firm has taken a loan of Rs 120,000. Interest @ 10% p.a has to be paid quarterly in January, April and so
on.
f) The firm is to make payment of tax of Rs 5000 in July, 2014.
g) The firm had a cash balance of Rs 20,000 on Ist April, 2014 which is the minimum desired level of cash
balance. Any cash surplus/deficit above/below this level is made up by temporary investments/ liquidation of
temporary investments or temporary borrowings at the end of each month. (interest on these to be ignored).
Required
Prepare monthly cash budgets for six months beginning from April, 2014 on the basis of the above
information.
Ans:
Month April May June July Aug Sep
(Invest) / Finance (Rs 64,000) (Rs 16,000) Rs 22,000 Rs 2,000 (Rs 35,000) Rs 9,000
22
Q.41. Game Station runs a retail store which sells video games and provides gaming facility along with repairing of game
system. Sales are uniform for most of the year, but pick up in Ashwin and Chaitra, both because new releases come
out and games are purchased in anticipation of festival season and holidays. The forecast of sales and service revenue
for the third quarter of 2076/77 is as follows:
Month Expected Expected Total revenue
sales revenue (Rs.) service revenue (Rs.) (Rs.)
Magh 550,000 100,000 650,000
Falgun 620,000 140,000 760,000
Chaitra 970,000 260,000 1,230,000
Total 2,140,000 500,000 2,640,000
Almost all the service revenue is paid for by bank credit card, so Game Station budgets this as 100% bank card
revenue. The bank cards charge an average fee of 3% of the total. Half of the sales revenue is also paid for by bank
credit card, for which the fee is also 3% on average. About 10% of the sales are paid in cash, and the rest (the
remaining 40%) are carried on a store account. Although the store tries to give store credit only to the best customers,
it still averages about 2% for uncollectible accounts; 90% of store accounts are paid in the month following the
purchase, and 8% are paid two months after purchase.
Required:
i) Calculate the cash that Game Station expects to collect in Falgun and in Chaitra of 2076. Show calculations for
each month. [Ans: Falgun Rs 696,500, Chaitra Rs 10,60,450]
ii) Game Station has budgeted expenditures for Falgun of Rs. 435,000 for the purchase of games and game
systems, Rs. 140,000 for rent and utilities and other costs, and Rs. 100,000 in wages for the two part time
employees. Assume (independently for each situation) that Falgun revenues might also be 5% less and 10% less,
and that costs might be 8% higher. Under each of those three scenarios show the total net cash for Falgun and
the amount Game Station would have to borrow if cash receipts are less than cash payments. Assume the
beginning cash balance for Falgun is Rs.10,000.
[Ans: Net cash :Rs 31,500, (Rs 18,350), Rs 6,575, (Rs 22,500)]
iii) Suppose the costs for Falgun are as described in requirement (ii), but the expected cash receipts for the month
are Rs. 620,000 and beginning cash balance is Rs. 10,000. Game Station has the opportunity to purchase the
games and game systems on account in Falgun, but the supplier offers the company credit terms of 2/10 net 30.
Game Station can borrow money at a rate of 24%. Should Game Station take the purchase discount?
[Ans: Yes]
23
Q.42. A manufacturing company’s budget schedules contain the following figures:
Year Month Sales Wages and Purchases of Production Selling and

including Salaries Materials overhead administration
VAT Rs. ‘000 Rs. ‘000 Rs. ‘000 Overhead
Rs. ‘000 Rs. ‘000
October 2,400 110 420 1,120 250

2014
November 2,200 100 560 1,000 250
December 2,000 130 480 1,280 250
January 2,800 120 420 1,120 250
2015
February 2,400 120 480 1,000 260
March 2,200 120 460 1,120 260
Other relevant information:
i) All sales are on credit terms of net settlement within 30 days of the date of sale. However, only 60% of the
sales value is paid by the end of the calendar month in which the sale is made; another 30% is paid in the
following calendar month; 5% in the second calendar month after invoice date; and 5% become bad debts.
ii) Assume all months are of equal number of 30 days for the allocation of receipts from debtors.
iii) Wages and salaries are paid within the month they are incurred.
iv) Creditors for materials are paid within the month following the purchase.
v) Of the production overhead, 35% represents variable expenses which are paid in the month after they
were incurred. Rs. 328,000 per month is depreciation and is included in the 65% which represents fixed
costs. The payment of fixed costs is made in the month in which the cost is incurred.
vi) Selling and administration overhead payable is paid in the month it is incurred. Rs. 30,000 each month is
depreciation.
vii) Corporate tax of Rs. 15,00,000 is payable in January.
viii) Dividend of Rs. 10,00,000 is payable in March. (Ignore advance corporate tax.)
ix) Value added Tax (VAT), payable monthly one month later than the sales are made, is to be calculated as
follows:
Output tax: 13/113th of the sales including VAT figure.
Less: Input tax of Rs. 220,000 for January
Rs. 250,000 for February,
and Rs. 242,000 for March
x) Capital expenditure commitments due for payment are: Rs. 20,00,000 in January and Rs. 14,00,000 in
March. Both are payments for machinery to be imported from foreign country and assume that VAT is not
payable on machinery import.
xi) Assume that overdraft facilities, if required, are available.
xii) Cash and bank balance at 31st December is expected to be Rs. 29,00,000.

(a) Prepare cash budgets, in a columnar form, for each of the months of January, February and March (working
to nearest Rs. ‘000).
(b) Recommend action which could be suggested to the management to effect a permanent improvement in
cash flow, and a temporary solution to minimize any overdraft requirements revealed by your answer to (a)
above.
[Ans: Balance Rs 112,000, Rs 936,000, (Rs 898,000)]
24
Master Budget
Q.43. The directors of a wholesale business have approved the following budget programme for the six months upto 30th
June.
a) Sales
Month Per month (Rs)
January 10,000
February 15,000
March to June 25,000
b). Expenses
Month Salary Other expenses excluding rent
January to March Rs 2,000 p.m Rs 2,400
April to June Rs 3,000 p.m Rs 4,500
One-eight of each month’s salaries and one quarter of the other expenses would be outstanding at the end of each
month.
(c) Rent at the rate of Rs 2,000 per annum is payable quarterly in arrears at 31st March, 30th June etc.
(d) Stock at the end of the month:
January Rs 10,000
February Rs 11,000
March to June Rs 18,000
(e) New fixed assets will be purchased for Rs 30,000 and are to be paid for on 31st March. These assets are to be
brought into operation on 31st March.
(f) Bank Overdraft facilities have been arranged upto limit of Rs 5,000. The chairman has agreed to subscribe in cash
on 31st March for such additional share capital as may be required to keep the overdraft within the limit, during
the six months.
(g) It has to be assumed that the existing terms of credit will continue and be compiled with.
(h) The gross profit has to be taken at the constant rate of 20% on sale.
(i) The Balance Sheet as at 31st December of the previous year is as given follows:
Capital and Liabilities Amount Rs Assets Amount Rs
Issued share capital 30,000 Fixed assets 19,000
Profit and loss a/c 11,550 [Cost Rs 25,000]
Trade creditors 8,000 Stock 9,000
Accrued Salary 250 Debtors 20,000
Accrued General expenses 200 Cash in Hand 2,000
Total 50,000 Total Rs 50,000
The trade creditors represent the purchase of December of the previous year. The debtors represent sales for November
and December of the previous year at Rs 10,000 per month.
(j) Depreciation on the fixed assets at 10% p.a. on cost has to be provided.
(k) Ignore interest on Bank Overdraft
Required:
(a) Prepare a cash budget month by month, for the six months to 30th June of the budget year showing the share
capital that will be issued on 31st March.
Ans:
Month Jan Feb March April May June
Closing Balance Rs 1200 (Rs 600) Rs 11200 (Rs 5000) (Rs 4500) (Rs 4500)
(b) Prepare a budgeted Trading and Profit & Loss Account for the six months and budgeted Balance Sheet as at
30th June as would appear if the estimates were realized. [Ans: Profit Rs 100, BS total Rs 115,000]
25
Control Ratios:-
• Management calculate certain ratios to evaluate the results.
• These ratios are generally known as control ratios.
• If the ratio is 100% or more , it indicates favorable position and vice versa.
Some of the important ratios are as under:-
a) Efficiency Ratio:- This ratio shows whether actual time taken in production is more or less than the time
allowed in standard.
Efficiency Ratio:- Standard Hours for Actual Output *100
Actual Hours worked
b) Activity Ratio:- This ratio shows the extent to which production facilities have been utilized as compared to
Budget.
Activity Ratio:- Standard Hours for Actual Output *100
Budgeted Hours
c) Actual Capacity Utilization Ratio:- This ratio shows Actual hours worked as a percentage of Budgeted
hours.
Actual Capacity Utilization Ratio:-Actual Hours worked *100
Budgeted Hours
Relationship between above three Ratios:-
Activity Ratio= Efficiency Ratio * Actual Capacity Utilization Ratio
d) Idle Capacity Ratio:- Budgeted Hours (–) Actual Hours Worked *100
Budgeted Hours
OR 100% - Actual Capacity Usage Ratio
e) Standard Capacity Usage Ratio:- Budgeted Hours *100

Maximum Possible Hours in Budgeted Period
f) Calendar Ratio:- Actual no of working days in the Budget Period *100

Budget no of working days in the Budget Period
Q.44. Calculate:- a) Efficiency Ratio, b) Activity Ratio, c) Capacity Ratio, from the following figures.
Budgeted production 88 units
Standard hours per unit 10
Actual production 75 units
Actual working hours 600
[Ans:- Efficiency Ratio=125%, Activity Ratio=85.23%, Actual Capacity Ratio=68.18%]
Q.45. A company manufactures two products X and Y. Product X requires 8 hours to produce while Y requires 12 hours.
In April, 2004 of 22 effective working days of 8 hours a day, 1200 units of X and 800 units of Y were produced. The
company employs 100 workers in production department to produce X and Y. The budgeted hours are 1,86,000 for the
year. Calculate Efficiency ratio, Activity ratio and Capacity Utilization ratio.
[Ans:- Efficiency Ratio=109.09%, Activity Ratio=123.87%, Actual Capacity Ratio=113.55%]
Q.46. A company is engaged in manufacturing of several products. The following data have been obtained from the record
of a machine shop for an average month:
Budgeted:
No. of working days 24
Working hours per day 8
No. of direct workers 150
Efficiency One standard hour per clock hour
Downtime 10%
Actual for August 2010:
Net operator hours worked 20,500
Standard hours produced 22,550
There was a special holiday in August
Required:
Calculate Efficiency, Activity and Standard capacity usage ratio, Calendar Ratio. [Ans: 110%,87%,90%,95.83%]
26
THEORY
Q.1. Meaning of Budget and Types of Budget
Ans:
Budget is a statement to be prepared in advance for the future course of action to control the cost, so that all the
resources can be utilized in optimum manner.
Objectives/Features
a) To determine target/Goals/ future course of action
b) To control the cost
c) To utilize the resources in optimum manner
d) To define Responsibility of different staff
e) To give basis for performance evaluation
f) To compare the Actual with Budget and take corrective action if any.
Types of Budget
1. Based on Time period:-
a) Long term Budget eg :- Capital budgeting
b) Short Term Budget eg:- Cash Budget :- Cash budget is a tool for forecasting short term cash requirement of
an enterprises. It provides a blueprint of the cash inflow and outflow that are expected to occur in the
immediate future period. It helps to determine surplus or shortage of funds and take suitable action.
2. Based on Capacity
a) Fixed Budget
b) Flexible Budget
3. Based on Coverage
a) Functional Budget:- Budget which is prepared for individual functions of an organization. Eg :- Sales
Budget, Production Budget , RM Consumption Budget, RM Purchase Budget, Wages Budget, Cash Budget
etc.
b) Master Budget :- Consolidated summary of various functional Budgets. It serves the basis to prepare
Budgeted PL and Budgeted Balance sheet.
Q.2. Difference between Budget and forecast

Ans :
Difference Between Budget and Forecast
Budget Forecast
Meaning The target/Goal of the business The latest expectation of what really will happen over
estimated in advance. the next few months based on what is happening in
Budget is a plan for where a business the business now.
wants to go. Forecast is the indication of where business is
actually going.
Purpose Prepared for setting a target Performed to understand whether the budgeted target
will be timely met or not.
Methodology It observes the past trends and tries to It analyses the changes in the current circumstances
set a realistic target. and tries to conclude that in the light of such events,
whether the budget will be met or not.
Frequency A budget is formulated once per period. Forecasting is done on a more frequent basis so that
appropriate measures can be timely undertaken to
meet the budgetary requirements.
Variance Analysis Once the budgeted time frame gets over, No such analysis is conducted for the forecasted
the actual results are compared to the numbers. In fact, forecasting in itself is a variance
budgeted goals and variance are analysis technique.
analyzed.
Areas covered Budgeting is a broader analysis, and it The forecast is typically limited to major revenue
includes a larger number of items such and expense line items. There is usually no
as revenues, costs, cash flows, profits, forecast for financial position, though cash flows
items of financial position. may be forecasted.
Awareness level Budgetary goals and objectives are Forecasted numbers are mostly for the management
conveyed to all levels, including the and the team of supervisors so that they are aware of
shop floor levels so that the targeted how to manage the work to meet the targets.
production is achieved.
27
Q.3. What do you mean by a flexible budget? Give an example on an industry where this type of budget is
typically needed?
Ans :
1. Budget designed to change in relation to level of activity is known as Flexible budget.
2. This is done by classification of cost into Variable, Fixed and Semi variable.
3. Flexible budget is useful in case of two types of industries:
a) Industry having season based demand: Eg , Air condition industry, Tourism Industry, Ice cream
industry etc.
b) Industry having no set pattern of demand : Eg , Technology based products, fashion based products etc.
Q.4. Difference between Fixed budget and flexible budget

Ans:
Difference between Fixed Budget and Flexible Budget
Basis of Distinction Fixed Budget Flexible Budget
Definition Budget designed to remain unchanged • Budget designed to change in relation to level
irrespective of level of activity of activity.
• This is done by classification of cost into
Variable, Fixed and Semi variable.
Rigidity The budget does not change with actual The budget can be re-casted on the basis of
level of activity actual level of activity.
Performance If activity level differs from Budgeted Comparison of cost at actual level of activity
Evaluation level of activity, performance evaluation with Budget can be easily done by recasting the
cannot be done. budget at actual level of activity.
Q.5. Short Note on Budget Manual:-

Ans :
Budget Manual is a document or booklet which shows the Budgeting procedures. It shows the instructions on how to
prepare different types of budget applicable to organization. A copy of the Budget Manual is given to each department
head for guidance.
It shows:-
➢ Budget objectives
➢ Define duties and responsibilities
➢ Types of various reports to be submitted at different period of time.
➢ Budget periods, follow up procedures.
Q.6. “Because a single budget system is normally used to serve several purposes, there is a danger that they may
conflict with each other”. Do you agree? Discuss.
Ans:
A single budget system may be conflicting in Planning and Motivation, and Planning and performance evaluation roles
as under.
a) Planning vs Motivating roles: For Planning, a budget should be set based on targets that are expected to be
met. For motivating maximum performance form the employees budget should be set based on higher targets.
Hence there will be planning and motivating roles conflict.
b) Planning vs Performance evaluation roles: - For planning purposes budgets are set in advance of the
budget period based on an anticipated set of circumstances or environment. For performance evaluation firms
compare actual performance with the original budget (adjusted to the actual level of activity ie flexible
budget), but if the circumstances estimated when the original budget was set, have changed then there will a
planning and evaluation conflict.
Conclusion: Thus the statement “ Because a single product is normally used to serve several purpose, there is
a danger that they may conflict with each other” is true
28
Q.7. Write short note on Total Productive efficiency.

Ans:
There are two main types of efficiency: 'allocative efficiency' and 'productive efficiency'. The total productive
efficiency refers to the point where the maximum allocative efficiency and productive efficiency is achieved.
1. Allocative efficiency means that resources are used for producing the goods and services that consumers
wanted to buy. For example, producing computers rather than producing manual typewriters.
2. Productive efficiency means that least costly production techniques are used to produce wanted goods and
services. Productive efficiency occurs when production takes place at the lowest cost.
Q.8. What is Zero Base budgeting? What are its features?

Or what are the advantages of ZBB?
Or State how is ZBB superior to Traditional budgeting.
Or Write short notes on ZBB as on approach towards productivity improvement.
Ans:
• ZBB is an approach to budgeting. Under this approach, each time the budgeting starts from scratch. (Hence Zero
Base- no reference with Past).
• Each time the budget is formulated, every operating plan is subjected to a zero-based comprehensive examination
on the basis of cost benefit analysis.
• In case of traditional budgeting, the budget is prepared on the basis of previous budget by making certain additions
and deductions. As full details are never asked, there are reasonable chances for misutilization of funds.
Features/advantages of ZBB
1. Every budget proposal are evaluated thoroughly, starting from the zero base.
2. Every budget proposal are evaluated on the basis of cost benefit analysis.
3. Budget proposals are ranked on priority basis for resource allocation purpose.
4. Mangers have to justify their demands for resources.
5. Alternative methods for performing the key activities are considered and the best method is selected.
6. ZBB eliminates unwanted activities and spending.
Q.9. What are the steps in Zero Base Budgeting?

Or Describe the process of Zero Base Budgeting.
1. Identify corporate objectives and evaluate key activities.
2. Evaluate alternative methods for performing the key activities.
3. Make cost benefit analysis of each alternative.
4. Decide the paths to be followed.
5. Set priorities. Activities are selected in order of their importance.
6. Formulate the budget.
Q.10. What are the limitations of Zero Based Budgeting?

1. Demoralizing the managers;- Since managers are asked to justify their funds requirement every time.
2. Costly and time consuming.
3. Training to managers required : ZBB should be implemented only after proper training has been given to the
mangers.
4. Complex process.
5. ZBB can increase tensions between managers from different departments. Such tensions could de-motivate the
staff leading to inter- departmental rivalries.
Q.11. Compare between Traditional budgeting and Zero based budgeting.

Ans:
Basis of Distinction Traditional Budgeting Zero Based Budgeting
Meaning Approach of preparing budget that Approach of preparing budget without taking
takes immediately preceding years any reference of past
budget and achievement as a base.
Focuses on Previous level of Expenditure New economic appraisal
Orientation Accounting oriented Decision or project oriented
Justification Justification of current project is not Justification of current and proposed projects
required. is required, considering benefits and costs.
29
Priority Mainly to past level of spending, then Comprehensive cost benefit analysis of each
to demand for inflation and new decision packages is made and ranked
programs accordingly.
Approach Routine Approach Analytical Approach
Q.12. In each of the following independent situations, state with a brief reason whether ‘Zero Base Budgeting
(ZBB) or ‘Traditional Budgeting’ (TB) would be more appropriate for year II.
a) A company producing a certain product has done extensive ZBB exercise in year 1. The activity level is
expected to marginally increase in year 2.
b) The sales manager of a company selling three products has the intuitive feeling that in year 2, sales will
increase for one product and decrease for the other two. His expectations cannot be substantiated with
figures.
c) The top management would like to delegate responsibility to the functional managers for their results
during year II.
d) Resources are heavily constrained and allocation for budget requirements is very strict.
Ans:
a) The company has done extensive exercise in year-I that can be used as a basis for budgeting in year-II by
incorporating increase in costs /revenue at expected activity level. Hence, Traditional Budgeting would be
more appropriate for the company in year-II.
b) In Traditional Budgeting system budgets are prepared on the basis of previous year’s budget figures with
expected change in activity level and corresponding adjustment in the cost and prices. But under Zero Base
Budgeting (ZBB) the estimations or projections are converted into figures. Since, sales manager is unable to
substantiate his expectations into figures so Traditional Budgeting would be preferred against Zero Base
Budgeting.
c) Zero Base Budgeting since Manager of each division should completely justify his budget.
d) Zero Base Budgeting allocates resources based on order of priority up to the spending cut- off level
(maximum level upto which spending can be made). In an organization where resources are constrained and
budget is allocated on requirement basis, Zero Base Budgeting is more appropriate method of budgeting.
Q.13. Write short notes on Rolling Budgets.

Ans:
Rolling budgets can be particularly useful when future events cannot be forecast reliably. A rolling budget is defined
as ‘a budget continuously updated by adding a further accounting period (month or quarter) when the earliest
accounting period has expired. Its use is particularly beneficial where future costs and/ or activities cannot be forecast
accurately.’
For example a budget may initially be prepared for January to December, year 1. At the end of the first quarter, i.e., at
the end of March, year 1, the first quarter’s budget is deleted. A further quarter is then added to the end of the
remaining budget, for January to March, year 2. The remaining portion of the original budget is updated in the light of
current conditions. This means that managers have a full year’s budget always available and the rolling process forces
them to continually plan ahead. A system of rolling budgets is also known as continuous budgeting.
Q.14. Write short note on Participative Budgeting

Ans :
1. Since every functional budget are interlinked between each other (Viz, Sales, Production, Purchase etc). Hence it is
necessary to have coordination among all departments heads by having a budget committee before making final
budget.
2. Participative budgeting (using budget committees) is also called “bottom up budgeting”. It is different from “top
down budget” where the ultimate budget holder does not have any say/participation in the budgeting process.
3. Advantages of participative budgeting include:-
- Better forecast is possible
- Higher level of motivation for the participating mangers
- Better results
30
Q.15. Write short note on “Budgetary Slack”

Ans:
1. Budgetary Slack is the practice of underestimating the budgeted revenue or overestimating the budgeted
expenses of the company intentionally by the person responsible for setting the budget with the motive of
increasing the chances that the actual performance of the company is better than that of the budgeted
goals.
2. When large numbers of employees are involved in the preparation of budgets in the organization then
generally there are more chances of introduction of budgetary slack into the budgets by them so that the
targets can be easily achieved by them. It is done by the management specifically when their bonuses or
performance appraisals are based on the targets achieved by them.
3. Even the senior management can introduce inventory slack into the budgets if they want to report a good
picture of the achievement of their targets to the investment community.
4. It could result in a decrease in the efficiency and performance of the employees of the company because
in that case, the employees of the company will work only within their capability of attaining the goals.
5. In order to prevent the practice of the budgetary slack, the top management of the company should limit
the manager count that is allowed to prepare the budgets and should not make the budget as the basis of
the evaluation of the performance of the company. Further top-level management should review the
budget, actual data of previous years and assess current budget and future budget and correct the slack if
any prevailing the budget.
Q.16. Write short notes on the Principal Budget Factor.

Ans:
1. The principal Budget factor (also called limiting factor, or key factor) is the factor that limits the activities of the
functional budget of the firm. Some examples are Sales demand, Raw material availability, Labour Hours or
Machine Capacity etc.
2. The early identification of this factor is important since it indicates which budget should be prepared first. If sales
volume is the principal Budget factor, sales budget should be prepared first based on available sales forecasts, and
all other budgets should then be linked to the sales budget. If machine capacity is limited, then production budget
should be prepared first, followed by other budgets.
3. In case of single key factor, marginal costing techniques, ie ranking based on the contribution per unit of key
resources shall be applied for resource allocation. In case of multiple key factors with difference in ranking
priority, linear programming techniques may be applied.
Q.17. What is Performance Budgeting? Differentiate between Traditional Budgeting and Performance
Budgeting.
Ans :
Performance budgeting is a technique of presenting budgets for costs and revenues in terms of objectives or goals.
It is a way to allocate the resources to achieve specific objectives based on measurable results. The emphasis is on
performing the activities and achieving the targets. The link between allocated resources and task will produces
effective results.
Traditional budgeting vs. Performance budgeting

i) The objective of traditional budgeting expresses that the actual expenditure cannot exceed the budgeted
allocations for the same. The objective of performance budgeting is, to measure the performance as
shown within the budget allocations.
ii) The traditional budgeting gives more emphasis on the financial aspect than the physical aspects.
However Under PB, the emphasis is more on the objectives or on the purpose for which the expenditure
is incurred and not on each item of expenses.
iii) Traditional budget is prepared on the basis of last year’s performance with some addition and alterations
(i.e., after some adjustments), However Performance budget is prepared on the basis of actual need of
the organization ,on the basis of job analysis.
Q.18. Write short notes on Responsibility accounting

Ans :
1. It is not possible for central management to look over at all the important functions of the organization . Some
degree of decentralization is essential. Hence Responsibility Accounting is a Management control system
based on the principle of delegating responsibility.
2. It involves the creation of various responsibility centers in an organization , classified into a) Cost center (b)
Revenue center (c)Profit center and (d)Investment center.
3. The manager in charge of that center is made accountable on every action of the responsibility center.
31
Q.19. What are the prerequisites of responsibility accounting?

Ans:
1. The responsibility and authority of each center should be clearly defined
2. The set of goals which each manager of a responsibility centre has to achieve should be clearly stated.
3. The performance report of a responsibility center should include only the revenues, expenses, profits and
investments which are controlled by the executive of that center.
4. Performance reports for each responsibility centre should be prepared highlighting the items which requires
management attention.
Q.20. What are different types of responsibility centers?

Ans :
Management delegates its responsibility and authority to various departments or persons to have a better control over
the organization. These departments or persons are known as responsibility centers and are held responsible for
performance in terms of expenditure, revenue, profitability and return on investment.
Performance of these responsibility centers are measured against some set standards (input-output ratio, budgets etc.)
and evaluated against organizational goal and performance targets. There are four types of responsibility centers:
i. Cost Center: The responsibility center which is held accountable (answerable) for incurrence of costs which
are under its control. The performance of this responsibility center is measured against pre-determined
standards or budgets. Example: Purchasing Department The cost centers are of two types:
a) Standards Cost Center: Cost Centre where input-output ratio is clearly identifiable. The actual cost for
inputs is compared with the standard cost [cost that should be incurred for the given output].
Example: Raw Material cost in Production department.
b) Discretionary Cost Center: The cost center whose output cannot be measured in financial terms, thus
input-output ratio cannot be defined. The cost of input is compared with allocated budget for the activity.
Example: Research & Development department, Advertisement department where output of these
departments cannot be measured with certainty and co-related with cost incurred on inputs.
ii. Revenue Center: The responsibility center which are accountable for generation of revenue for the entity. Eg
Sales Department is responsible for achievement of sales target and revenue generation.
iii. Profit Centers: These are the responsibility centers which have both responsibility of generation of revenue
and incurrence of expenditures. Since, managers of profit centers are accountable for both costs as well as
revenue, profitability is the basis for measurement of performance of these responsibility centers. Examples of
profit centers are decentralized branches of an organization.
iv. Investment Centers: These are the responsibility centers which are not only responsible for profitability but
also responsible for rate of return on Investments. The performance of these responsibility centers are measured
on the basis of target Return on Investment (ROI). Examples: SBU (strategic business unit) for an MNC
(multinational company), PSUs for Governments
Q.21. What controllability principle is applied in the concept of responsibility accounting? What problems are
faced in applying this principle in practice?
Ans:
1. Manger should be made responsible only to those cost on which he had significant influenced over those costs.
2. Uncontrollable items should be eliminated while assessing the managers performances
3. The application of controllability principle is difficult because it is not always possible to categorize items into
controllable and non-controllable categories since some of the items fall under the category of partially
controllable type.
32

11.budgetory Control Printable

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

11.budgetory Control Printable

Uploaded by

Copyright:

Available Formats

CA Megh Raj Aryal Gurukul CA

CHAPTER 11- BUDGETING

Difference between Fixed Budget and Flexible Budget

Question related to Flexible Budget

Q.7.The performance of a company at two levels of operation during 2002-03 is as under:

Original and revised Budget

You are required to:

Special permit fee Rs,50 per bus.

Labour cost Rs 800,000 Rs 799,920

Find purchase value of materials. [Ans:- Rs 34,20,000]

Direct Labour Hours required as per Direct Labour Hour Budget

Molding Department Finishing Department

Budgeted factory overhead costs for 2013 were as follows:

Q.28. An article passes through five hand operations as follows:-

3. Component usage budget in quantity.

2. Inventory levels planned:

3. Fixed Overheads would be Rs 8000 per month.

Sales and stock budgets (units)

Cost budgets (Rs. ‘000)

The following information is also available:

You are required to:

i) Calculate the budgeted production for period 1 to 4; and

Selling Expenses Budget

Sales salaries and travelling are paid uniformly in each quarter.

Principle Budget Factor

Question related to Cash Budget :-

Cash balance on the beginning of July was expected to be Rs 150,000.

Month of Sales Wooden Vase Clay Vase

will be Rs. 25 and this will be paid in the month incurred.

Q.40. You are given the following information.

b) Wages and salaries are estimated to be payables as follows:

Q.42. A manufacturing company’s budget schedules contain the following figures:

Year Month Sales Wages and Purchases of Production Selling and

October 2,400 110 420 1,120 250

You are required to:

e) Standard Capacity Usage Ratio:- Budgeted Hours *100

f) Calendar Ratio:- Actual no of working days in the Budget Period *100

Q.2. Difference between Budget and forecast

Q.4. Difference between Fixed budget and flexible budget

Q.5. Short Note on Budget Manual:-

Q.7. Write short note on Total Productive efficiency.

Q.8. What is Zero Base budgeting? What are its features?

Q.9. What are the steps in Zero Base Budgeting?

Q.10. What are the limitations of Zero Based Budgeting?

Q.11. Compare between Traditional budgeting and Zero based budgeting.

Q.13. Write short notes on Rolling Budgets.

Q.14. Write short note on Participative Budgeting

Q.15. Write short note on “Budgetary Slack”

Q.16. Write short notes on the Principal Budget Factor.

Traditional budgeting vs. Performance budgeting

Q.18. Write short notes on Responsibility accounting

Q.19. What are the prerequisites of responsibility accounting?

Q.20. What are different types of responsibility centers?

You might also like