Budegetory Control
Budegetory Control
Budegetory Control
Budgetary Control
Practical problems
Ques:-1. With the following data for a 60% activity, Prepare a budget at 80% and
100% activity.
Production at 60% capacity- 600 units.
Materials Rs.100 per unit
Labour Rs.40 per unit.
Expenses Rs.10 per unit.
Factory expenses Rs.40000 (40% fixed)
Administration expenses Rs.30000 (60% fixed).
Ques:-2. For production of 10,000 Electrical Automatic Irons, the following are
budgeted expenses.
Per unit
Rs.
Direct materials 60
Direct labour 30
Variable overheads 25
Fixed overheads 15
Variable expenses (direct) 5
Selling expenses (10% fixed) 15
Administration expenses ( Rs.50000 rigid for all levels of production) 5
Distribution expenses (20% fixed) 5
Prepare a budget for the production of 6000, 7000 and 8000 irons, showing
distinctly marginal cost and total cost.
Ques:-4. Goodluck Ltd. is currently operating at 75% of its capacity. In the past two
years, the level of operations were 55% and 65% respectively. Presently the
production is 75000 units. The company is planning for 85% capacity level during
2007-08. The cost details are as follows:
55% 65% 75%
Rs. Rs. Rs.
Direct material 11,00,000 13,00,000 15,00,000
Direct labour 550000 650000 750000
Factory overheads 310000 330000 350000
Selling overheads 320000 360000 400000
Administrative overheads 160000 160000 160000
Profit is estimated @20% on sales.
The following increase in costs are expected during the year:
In %
Direct materials 8
Directs labour 5
Variable factory overheads 5
Variable selling overheads 8
Fixed factory overheads 10
Ques 5: Figures regarding Sales, cost ad profit at 50% capacity are given below:
Rs.
Sales 2000000
Direct cost 800000
Factory Overheads 400000
Office overheads 200000
Selling overheads 300000
Profit 300000
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 2%. 50% of the factory overheads are
fixed and the rest are fully variable. Office overheads are f step character. Every
10%increase in output result in 2% increase in office overheads over 50% capacity.
Selling overheads increase in proportion of sale value.
Prepare a Flexible budget at 80% capacity level.
Ques. 6: The following data are available in a manufacturing company for a half-yearly
period:
Fixed Expenses:
Rs. Rs.
(in lakhs) (in lakhs)
Wages and Salaries 8.4
Rent, Rates and Taxes 5.6
Depreciation 7.0
Sundry Administrative Expenses 8.9 29.9
Semi-Variable Expenses :
( at 50% of capacity)
maintenance and Repairs 2.5
Indirect Labour 9.9
Sales deptt. Salaries etc. 2.9
Sundry administrative Expenses 2.6 17.9
Variable Expenses :
(at 50% of capacity )
Materials 24.0
Labour 25.6
Other Expenses 3.8 53.4
Assume that the fixed expenses remain constant for all levels of production,
semi-variable expenses remain constant between 45% and 65% of capacity increasing
by 10% between 65% and 80% capacity, and by 20% between 80% and 100% capacity.
Sales at the various levels are:
(Rs. Lakhs)
60% Capacity 100.00
75% Capacity 120.00
90% Capacity 150.00
100% Capacity 170.00
Prepare a flexible budget for the half year and forecast the profits at 60%,
75%, 90% and 100% of capacity.
Ques. 7: Gemini Steel Ltd. manufacturers a single product for which market demand
exists for additional quantity. Present sales of Rs. 60000 per month utilizes only 60%
capacity of the plant. Marketing Manager assures that with the reduction of 10% in
price he would be in a position to increase the sale by about 25 % to 30%.
The following data are available :
(i) Selling price Rs.10 per unit
(ii) Variable cost Rs.3 per unit
(iii) Semi-Variable Cost Rs. 6000 Fixed + 50 paise per unit
(iv) Fixed cost Rs. 20000 atpresentlevel estimated
to be Rs.24000 at 80% output.
You are required to prepare the following statements :
(1) The Operating profits at (a) 60% (b) 70% and (c ) 80% levels at current selling
prices, and
(2) The Operating profits at proposed selling price at the above levels.
Illustrate your answer with a formula ad example of each calculated from the
following figures :
Budgeted production 880 Units
Standard hours per unit 10
Actual production 750 Units
Actual Working hours 6000
Ques. 9: The following are the estimates sales of a company for eight months ending
30.11.1998:
As a matter of policy , the company maintains the closing balance of finished goods
and raw materials as follows :
Every unit of production requires 2 kg. of raw material costing Rs.5 per kg.
Prepare production Budget (in units) and Raw Material purchase Budget (in units
and cost ) of the company for the half year ending 30 September, 1998.
Ans.: 655500
Ques. 10 : prepare a case budget for the months of May, June and July 1995 on
the basis of the following information:
(1). Income and Expenditure forecasts
Month credit sales credit purchase wages manufac- office selling
Ques. 11: ABC Ltd. a newly started company wishes to prepare cash budget from
January. Prepare a Cash budget for the first six month from the following estimated
revenue and expenses.:
Ans.: Closing Balances: Jan Rs.18000; feb. Rs.29800; March 27000; April Rs.24700;
May Rs.33100; June Rs.36000.
Q.1. Prepare a flexible budget for production at 80% and 100% activity on the basis
of the following information :
Production at 50% capacity - 5,000 units
Raw Material - Rs.80 per unit
Direct Labour - Rs.50 per unit
Expenses - Rs.15 per unit
Factory expenses - Rs.50,000 (50% fixed)
Administration expenses - Rs.60,000 (60% variable).
Q.2. The monthly budget for manufacturing overhead of a concern for two levels of
activity were as follows :
Capacity 60% 100%
Budgeted production (units) 600 1,000
Rs. Rs.
Wages 1,200 2,000
Consumable stores 900 1,500
Maintenance 1,100 1,500
Power and fuel 1,600 2,000
Depreciation 4,000 4,000
Insurance 1,000 1,000
9,800 12,000
You are required to :
(a) Indicate which of the items are fixed, variable and semi-variable.
(b) Prepare budget at 60%, 80% and 100% capacity.
Q.3. Vivek Elementary School has a total of 150 students consisting of 5 sections
with 30 students per sections. The school plans for a picnic around the city
during the week end to places such as the zoo, the 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 maximum capacity of 50
Q.6. Based on the following information prepare a cash budget for ABC Ltd.
1st Qtr.(Rs.) 2nd Qtr.(Rs.) 3rd Qtr.(Rs.) 4th Qtr.(Rs.)
Opening Cash balance 10,000
Collection from Customers1,25,000 1,50,000 1,60,000 2,21,000
Payments :
Purchase of Materials 20,000 35,000 35,000 54,200
Other expenses 25,000 20,000 20,000
17,000
Salary and wages 90,000 95,000 95,000 1,09,200
Q.7. From the information given below, prepare a Cash Budget of the Jaipur
Refrigerators (P) Ltd., for the quarter January – March, 2005 :
Dec.,04 Jan.,05 Feb.,05 March, 05 April, 05
a) Sales Budget Units 60 60 65 75 80
b) Selling price per unitRs.1,000 1,000 1,000 1,000 1,000
c) Off-season discount 20% 20% 10% --- ---
d) End of Month
Inventory Units 10 12 15 25 25
e) Half the sales proceeds are collected in the month of sale and the other half
in the month following.
f) Materials amounting to Rs.300 per unit manufactured are purchased one
month in advance of manufacture and paid for in cash earning 5% cash
discount on half of the material purchased.
g) Direct Labour Budget was Rs.50 per unit and variable overheads Rs.100 per
unit.
h) Indirect Labour Budget was Rs.6,000 per month.
i) Depreciation was provided uniformly at Rs.3,000 per month.
j) The fixed overheads budget was Rs.6,000 per month during off-season and
Rs.7,000 during the season. Out of this, the quarterly premium for fire
insurance amounting to Rs.600 was payable in the first month of each
quarter.
k) Dividends for the year 2004, amounting to Rs.2,000 were expected to be
declared in March, 2005 and payments were to be spread between March
and April.
l) A machine was sold for Rs.10,000 in December, 2004 on 3 months credit.
m) The cash balance as on January 1, 2005 is Rs.1,000.
Q.9. Narang Ltd. Produces two commodities - Good and Better, in one of its
departments. Each unit takes 5 hours as production time. 1,000 units of Good
and 600 units of Better were produced during March, 1998. Actual man hours
spent in this production were 10,000. Yearly budgeted hours are 96,000.
Compute the various control ratios.
Q.10. The activity ratio of concern is 95.6% whereas the capacity ratio is 105%. What
is the efficiency ratio.
Q.11. XYZ & Co. manufactures two products X and Y and sells them through two
divisions East and West. For the purpose of submission of sales budget to the
budget committee the following information has been obtained :
Budgeted sales for the current year were :
Product East West
X 400 at Rs. 9 600 at Rs. 9
Y 300 at Rs.21 500 at Rs.21
Q.12. A company manufactures two products A and B. Its sales the year ending 31st
December, 2007 based on the assessments of the divisional managers were
Product A :North 2,00,000 units; South 5,00,000 units and East 1,00,000
units.
Product B :North 3,00,000 units; South 4,00,000 units and East NIL
Sales price :A Rs.4 and B Rs.3 in all areas.
Arrangements are made for the extensive advertising of product a and B and it
is estimated that North division sales will increase by 1,00,000 units each of A
and B. Arrangements also made to advertise and distribute product B in the
Eastern areas when sales are expected to be 5,00,000 units.
Since the estimated sales of the South Division represented an unsatisfactory
target, it is agreed to increase both the estimates by 10%.
Prepare a sales budget for the year to 31st December, 2007.
Q.13. A company manufactures two products A and B. A forecast for the number of
units to be sold in the first four months of the year is given below :
Product A Product B
Units Units
January 3,000 6,000
February 3,400 6,000
March 4,200 5,200
April 5,000 4,400
It is anticipated that finished units equal to half the sales for the next month
will be stock at the end of each months (including previous December).
Q.14. From the following data prepare a production budget for the ABC Co. Ltd. Stock
for the budgeted period :
Product As on 1st January As on 30th June
A 8,000 10,000
B 9,000 8,000
C 12,000 14,000
Required to fulfill sales programme :
A 60,000 units
B 50,000 units
C 80,000 units
Normal Loss in production :
A 4%
B 2%
C 6%
Q.15. ABC Ltd. Has prepared the following Sales Budget for the first five months of
2007 :
Sales Budget (in units)
January 10,800
February 15,600
March 12,200
April 10,400
May 9,800
The inventory of finished products at the end of every month is to be equal to
25% of the sales estimate for the next month. On January 1, 2007, there were
2,700 units of the product on hand.
Every unit of product requires two types of material in the following quantities :
Material A 4 units
Material B 2 units
Materials equal to one-half of the next month’s consumption are to be on hand
at the end of every month. This requirement was met on 1st January, 2007.
Prepare Materials budget for the first quarter of 2007 in logical form showing
the quantities of each types of materials to be purchased every month.
Q.19. A company manufactures and sells a single product and has estimated a sales
revenue to Rs.126 lakhs this year based on the 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 ½
hours in the Assembly section. Overheads are absorbed at a rate of 33 1/3% on
Direct Labour. The factory works 5 days of 8 hours a week in a normal 52
weeks a year. On the average statutory holidays, leave and absenteeism and
ideal 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.
Q.20. A single product company estimated it sales 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 is 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 Price
total per kg.
annual requirement in quantity
I 30% 2
II 50% 3
III 20% 4
Q.21 GMR Ltd. has supplied the following summary of its operating resuls for the
year ending 31st MARCH, 2007:
Rs. Lakhs
Sales (40,000 units) 48.00
Less: Trade discount 2.40
Net Sales 45.60
Cost of sales
Direct materials 14.40
Dirct wages 12.60
Factory overheads 6.30
Administration overheads 3.60
Selling and distribution overheads 4.50
The following charges are to be incorporated in the budget for the year ending
31st March, 2008:
1. Sales quantity to be increased by 25%.
2. Material prices to increase by 15%.
3. Direct wage rates to go up by 12%.
4. Factory overheads will increase by 15%. In addition, a new facility will be
added to the factory laboratory at a recurring cost of Rs. 12,500 per annum.
5. Administration and selling and distribution overheads are estimated to go up
by 10% and 14% respectively.
6. There will be no change in the rate of trade discount.
7. All Overheads are fixed.
You are required to present the budget for the year ending 31 st March, 2008
showing the details of total cost, sales and profit.
Q.4. Distinguish between fixed budget and flexible budget. Briefly state the
circumstances in which flexible budgets are used.
Ans.: A flexible budget may be defined as a budget which is designed to change in
accordance with the level of activity actually attained. This is in contrast to a
fixed budget which is defined as a budget designed to remain unchanged
irrespective of the level of activity actually attained.
The figures used in a flexible budget are more adaptable to any given set of
operating conditions. It is more elastic, useful and practical. Flexible budgets
are necessary for control. The object here is to assess what any individual cost
should have been in view of the level of activity actually attained.
Fixed budget is prepared keeping in mind one level of output. If actual output
differs from the budget output, variance will arise.
Flexible budgets are necessary for control. A manager’s actual achievement can
only be compared with what he should have achieved in the actual circumstances
prevailing, not with what he should have achieved under quite different
circumstances.
Q.5. What is zero base budgeting ? What are the advantages of zero base
budgeting?
Ans.: Generally budgets are prepared by taking previous year’s budget as the base.
Adjustment are made in the budget of the last year for any changes that are
likely to take place in the budget period.
Zero Base Budgeting (ZBB) is a new concept in preparation of budgets. In ZBB,
instead of taking previous year’s figures as the base, every item has to justify
its inclusion in the budget. ZBB is defined as a system whereby each budget
item, regardless of whether it is new or existing, must be justified in its
entirely each time a new budget is prepared. Under ZBB there is continuous re-
evaluation of the activities of the organization to ascertain that activities are
absolutely necessary for the organization. ZBB in a way to locate those
activities which are not essential.
The advantage of ZBB are as follows :
1. In ZBB all activities included in the budget are justified on cost benefit
consideration which promotes more effective allocation of resources.
2. ZBB discards the attitude of accepting the current position in favour of an
attitude of questioning and challenging each item of budget.
3. It is an educational process and can promote a management team of talented
and skillful people which lend to promptly respond to changes in the business
environment.
4. It is an educational identification of inefficient and unnecessary activities
and avoid wasteful expenditure.
Q.6. What do you understand by Performance Budgeting ? What steps are required
to be taken for preparing performance budgets ?
Q.7. What are Budget Reports ? What are its essential characteristics ?
Ans.: Establishing budgets in itself is of no use unless there is a continuous flow of
budget reports showing comparison of actual and budget figures. Budget
reports should be prepared at regular intervals showing the reasons for the
differences between actual and budget figures. The reports should be prepared
in such a way that they establish the responsibility for the variance. Reports
should also reveal whether a variance is favourable or unfavourable and also
whether a variance is controllable or uncontrollable.
Essentials of a Budget Report – The following essentials should be kept in mind
while preparing budget reports :
Budgetary control is wide concept than budgeting. It includes following three steps.
(a) establishment of budgets.
(b) Continuous comparison of actual with budgets for achievement of targets and
placing the responsibility for failure to achieve the budget figures.
(c) Revision of budgets in the light of changed circumstances.
Control Ratios :
Three important ratios are commonly used by the
management to find out whether the deviations of actuals from budgeted
results are favorable or otherwise, These ratios are expressed in terms of
percentage. If the ratio is 100% or more , the trend is taken as favorable. The
indication is taken as unfavorable if the ratio is less than 100%.These ratios are
:
2. Capacity ratio : This ratio indicates whether and to what extent budgeted
hours of activity are actually utilized. It is the relationship between the
actual number of working hours and the maximum possible number of working
hours in a budget period.
Actual hours Worked
Capacity Ratio = Budgeted Hours
Responsibility Accounting
Responsibility Centre :
Responsibility Centre is like an engine in that it has
outputs, which are physical quantities of material, hours of various types of
labor, and a variety of services, it works with these resources.
1. Expenses Centre
PERFORMANCE BUDGETING :
Performance Budgeting involves evaluation of
the performance of an organization in the context of both specific as well as overall
objectives of the organization. This requires complete clarity about both the short-
term and long term organization objectives. The responsibility of the various levels of
management should be predetermined in terms of results expected from them and the
authority vested in them.
REVISIONERY PROBLEMS
Q.2 The sales manager of XYZ Ltd. reports that next year he expects to sell
50,000 units of a certain product.
Two kinds of raw materials A and B are required for manufacturing the product.
Each unit of the product requires 2 kg of A and 3 kg of B. The estimated
opening balances at the commencement of the next year are – Finished Product,
10,000 units; A, 12,000 kg; B 15,000 kg. The desirable closing balances at the
end of the next year are: Finished product, 14,000 units; A, 13,000 kg; B,
16,000 kg.
Draw up a Materials Purchase Budget for the next year.
Q.3 Draw up a flexible budget for overhead expenses on the basis of the following
data at 70% , 80% and 90% plant capacity.
AT 60%
CAPACITY
Rs.
Q.4 Prepare flexible budget for the overheads at 50%, 60% and 70% capacity:
AT 80%
CAPACITY
Rs.
Variable overheads:
Indirect material RS. 6,000
Indirect labour RS. 18,000
Semi-variable overheads:
RS. 30,000
Electricity (40% fixed, 60% variable)
RS. 3,000
Repair (80% fixed, 20% variable)
Fixed overheads: RS. 16,500
Depreciation RS. 4,500
Insurance RS. 15,000
Salaries
Q.5 The expenses budgeted for production of 10,000 units in a factory are
furnished below:
Rs. per unit
Materials 70
Labour 25
Variable overheads
25
Prepare a budget for the production of (a) 8,000 units, and (b) 6,000 units.
Assume that administration expenses are rigid for all levels of production.
Q.6 The budget manager of Jupiter Electricals Limited is preparing flexible budget
for the accounting year starting from 1 July, 2006.
The company produces one product – DETX II. Direct material costs Rs. 7 per
unit. Direct labour averages Rs. 2.50 per hour and requires 1.6 hours to produce
one unit of DETX II. Salesmen are paid a commission of Re. 1 per unit sold.
Fixed selling and administrative expenses amount to Rs. 85,000 per year.
Manufacturing overhead is estimated in the following amounts under specified volumes:
Volume of production (in units) 1,20,000 1,50,000
Rs. Rs.
Expenses: 2,64,000 3,30,000
Indirect material 1,50,000 1,87,500
Indirect labour 90,000 1,12,500
Inspection 84,000 1,02,000
Maintenance 1,98,000 2,34,000
Supervision 90,000 90,000
Depreciation of plant and 94,000 94,000
Equipment 9,70,000 11,50,000
Engineering services
Total manufacturing overhead
Q.7 The manager of Repairs and Maintenance Department in response to a request, submitted the
following budget estimates for his department that are to be used to construct a flexible
budget to be used during the coming budget year:
(a) Prepare a flexible budget for the department up to activity level of 10,000
repair hours (use increments of 1,000 hours).
(b) What would be the budget allowance at 8,500 direct repair hours?
Ques.9: Work out a flexible budget for overhead expenses on the basis of the
following data available from the cash records and determine the overhead rates at
70%, 80% and 90% plant capacity levels:
Ques.10 : A company manufacture and sells two products ‘X’ and ‘Y’ using the
same raw materials and the same type of labor. 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 ad that of ‘Y’ as Rs.4 lakh. Further details relating to the two
products are given below:
X Y Remarks
Standard Cost (per unit) Rs. Rs.
Materials (1kg) 12 (1.5 kg) 18
Labor 4 6
Overheads (100%) 4 6
20 30
Inventory of finished good Rs. Rs.
Value on 1.7.2002 280000 720000* Value at
Value on 30.6.2003 200000 360000* Standard cost
Standard profit margin (%of sales) 20% 25%
Loss in processing (% of Input ) 8% 10% Unit Unit lost have no
Value
Ques.12: BMS Ltd. has prepared annual budget for the year ending 31.03.07 on
the basis of 60% capacity utilization. Summarized budget is given below:
Particulars Amount
(Rs. in Lakh)
I. Sales 150.00
II. Direct Materials 36.50
Direct Labor 22.82
Direct Expenses 8.68
III. Semi-Variable Expenses :
Repairs & Maintenance 5.30
Indirect Labor 7.70
Supervision 6.00
Heating & Lighting 3.00
IV. Fixed Expenses:
Salaries- Managerial 9.50
Rent, Rates & Taxes 6.60
Depreciation 7.40
Audit Fees 6.50
V. Total Cost of sales 120.00
VI. Budgeted Profit 30.00