1$

Cu;ncity Utilisotiort
pcrcenl FOB Unit costs
Rs.
70
97
80
92
90
87
t00
82
The corrrpany has received three fbr
Sourcc A : 5,000 units ar Rs. 55 per unit FOB
, .. ,nd.-
Sorrrcc l] : 10,000 units at Rs.52 per unit FOB BUDGETINGANI)
Sourcc: (.' : 10,000 units at Rs. 5l per unit FOB
Advisc lhc company as to rvltether any
or ail the export orders should be accepted
BUDGETARY CONTROL
[Arrs.
'f 'lrc
company shourd accept ail the export
or nol.
orders.] (i) currentRatio = 2.5
(ii) Working Capital: Rs. 90,000.
l:irrtl rrrrt : (a) Current Assets, and (b)
Cu*ent Liabilities. . Understand the meaning, objectives and importance of budgetary control.
. Types of budgets commonly used.
. Difference betlveen a fixed and a flexible budget.
. Preparing various budgets.
. Performance budgeting vs. programme budgeting.
. Zero-base budgeting.
. Activity based budgeting and rolling budgets.

INTRODUCTION
Planning is the basic managerial function. It helps in determining the course of action to be followed
for achieving organisational goals. It is decision in advance; what to do, rvhen to do, how to do and who will
do a particular task ? Plans are framed to achieve better results. Control is the process of checking whether
the plans are being adlrered to or not, keeping a record of progress, comparing it with the plans and then
taking corrective measures for future if there is any deviation. Every business enterprise needs the use of
control techniques for surviving in the highly compciitive and changing economic world. There are various
control devices in use. Budgets are the most important tool of profit planning and control. They also act as
ooooo an instrument of co-ordination.
This chapter presents a general vierv of budgeting, its meanirigl, objectives, essentials, advantages.
limitations. classification and preparation of budgets. An attempt has also been made to explain the concepts
of Performance Budgeting and Zero-Base Budgeting.

MEANING OF A BUDGET
A budget is the monetary orland quantitative expression of business plans and policies to be pursued
in the future period of time. The term budgeting is used for preparing budgets and other procedures for
planning, co-ordination and control of business enterprise. According to CIMA, Official Terminology, "A
budget is a financial and/or quantitative statement prepared prior to a defined period of time, of the policy to
be pursued during that period for the purpose of attaining a given objective." In the words of Crown and
Howard, "A budget is a pre-determined statement of management policy during a given period which provides
a standard for comparison with the results actually achieved."

MEANING AND NATURE OF BUDGETARY CONTROL

Budgetary control is the process of determining various budgeted figures for the enterprises for the

f\ .r
 I
r I

IlulgtIirt11 untI IItttlgtllrr1' ( ottlntl t\.

future period and then comparing the budgeted figures with the actual perfbrnlancc lor cllculating variances.
if any. First of all budgets are prepared and then actual results are recordcd. The conrprrrisorr of budgeted and ('t I n R.,\ ( "t't,ltUs'l'l('S ( )t,' ( i( x )t ) Bt I tx;E'l'lN(;
actual figures will enable the managen.lent to find out discrepancies and take rcrncdial rncasurcs at a proper time. I A ;'ootl r,\",1('nr',lrortkl itrvolvc pcrsons at tlilll'rcnt lcvels while preparing the bud-uets.
lrrrtll',t'1111,,
The budgetary control is a continuous process which helps in planning and co-ordination. lt provides a method l ltr' '.ttlrotrltttltlc', ',lrorrlrl rrol lr't'l irrry irrrposiliorr on (lrcttt.
of control too. A budget is a means and budgetary control is the end-result. .' llt.tr' '.ltottLl lrr' ;r propt'r lixrrliorr ol':rrrlhorily arrtt rcsponsibility. The delegation of authgrity
-_
According to Brown and Howard, "Budgetary control is a systcrn of controlling costs which includes
.,lrnrrlrl Itt.rlont. ut;r
lltol)(.1 \vit\/
the preparation of budgets, co-ordinating the department and establishing responsibilities, comparing actual I llrl l.uli{'l', ol lltr lrttrh'r't'. r,ltottkl lrt: rcalistic, il'thc targcts arc difficult to be achieved then they
performance with the budgeted and acting upon results to achieve maximunr profitability." Wheldon characterises
rvtll ttol rltllltt'.t' lltt' pt't',t,tt', ttlttt't'rtlctl.
budgetary control as 'planning in advance of the various functions of a business so that the business as a
'l A 1'orrrl ',\',lcttr ol ,tt r orrrrlrrryi ir lrlso csscntial to nrake tlrc brldgetirtg successful.
whole is controlled'.
5 llrc lrrrtll'.r'trn11 .,\',,lrrrr '.lrorrltl lr;rvt. ir rvlrolc-lrclrtcd strpport ol'the top management.
(r 'l lrr. r.rrrIlo!,r'r.'. .,lrorrlrl lrr.
rrrrll:rrtt.tl lrrrtlqctirrg cducalion. Thcre should be meetings arrd
J. Batty defines it as "A system which uses budgets as a means of planning and controlling all aspects tlt';t tt'.';tott', ;ttt,l llt,' l,tr;'r'l', ',lrrrrrkl lrc cxlllrrilrcrl to thc cnrployees concerned.
of producing and/or selling cornmodities and services." Welsch relates budgetary control with-day-to-day 7 A Itopr't tr'llorlrtrl'',\',l.rrr',lrorrlrl lrc irrlrotlrrt'crl, tlrc actrrat results should be promptly reported
control process. According to him, "Budgetary control involves the use of budget and budgetary reports, :,o llr;rl pctlorlt,rrrr r. .rppr.rr.,.rl r,, rtntlt.ltirkcrt.
throughout the period to co-ordinate, evaluate and control day-to-day operations in accordance with the goals
specified by the budget". From the above given dehnitions it is clear that budgetary control involves the nEQtilsl'l'tt,ts t,'()tr A sIr('('t,,sst,'tIt, tilltx;t,l't'n Ry CONTROL sysrEM
following: lior ttt:rktttli .t lrttrll'r'l,tt\ r onllol ',1";lt'tn srrtt'csslirl, firllrtrving rctluisites are required :
(a) The objects are set by preparing budgets.
(6) (l) ('lrtril1irr11 olrltrltrlr llrl lrtttll't'l:;;rrt'rrst'tl kl lt'irlisc olr.jcctivcs of the business. The objectives
The business is divided into various responsibility centres for preparing various budgets.
(c) The actual figures are recorded. must llc clc;rll\' ',prll ortl '.o llr.tl I'tt,ll'r'1,, ,u(' l)tol)('r11, prclxrlctl. ln tlrc absenCe Of Clear gOalS, the bUdgetS
(d) The budgeted and acfual figures are compared for studying the performance of different cost will also bc tttttt'.rlt',1r,
centres. (2) I'r'optr lh'h'1';tltort ol ,,\rrlhor ill :rrrrl llcs;lorrsilrililr'. llutlgct preparation and control is done at
(e) lf actual perforrnance is less than the budgeted norrns, a remedial action is taken immediately. cvcry lcvcl ol trt.ttt,tt','trrttl I vrtt lltortl'lr lrrrrll'r't', ;rrt' lrrr;rliscrl irt lop lcvel btrt involvement of persons fronr
Thus, the three cardinal features of budgetary control are : lorvt:r lcvcls ol ttt,ttr,t;'t'ttr('rrl r', r",',r'nlt,rl lor llrr'rr ',1( ( (',,., llri.; ncccssitirlcs [)ropcr delegation of authoritl, and
(r) Planning rcsponsibilil'y
(il) Co-ordination, and (-l) l'ro;ttt ( rtttttttrrttttulrott\1rlcttt. Artt'llt't'lrvc:i\':,t('tnol t:orrrnrrrnicirlionisrequiredforasuccessful
(iii) Control. btrdeCtary t'ottltol llrr' ll,rrr ol tttloll.rltol tlri;rrtlrrrl', lrrrrll'.cls slt6rrltl lrt: tlrrick SO that tlfeSe are implemented.
'l-lrc ttprvirtrl ( or1111111tt,, irlr'rr rr'rll lrlll' rrr krrorvrrr;', tlrc rlillicrrllics
irr irrrplcrrrcnlllion of budgets. The performance
BUDGET, BUDGETING AND BUDGETARY CONTROL rcpor(s ol v.tttott', lcr','l', srll lrclp logr nr.rrr:rlt'rnt'nt irr lltrrl.u.ctlrry crlrrtlol.
A budget is a blue print of a plan expressed in quantitative terms. Budgeting is technique for (.1) llrrrllir'l l,llrrurlrorr llrt' r'rrrPlr1,1't..; slrorrltl bc properly cclucatcd about the benefits of budgeting
formulating budgets. Budgetary control, on the other hand, refers to the principles, procedures and practices systclll. llrt''y' :,lrorrlrl lrt crlut,tllrl ,rlrorrl llrcir rolc in thc succcss ol'this syslctn. Budgetary control may not
of achieving given objectives through budgets. bc llrkt:tt ottll, :t', :t r ottltol tlr'Vtt r' lrt, tlrt't'rrrplgyecs llrrt it shotrld bc usccl as a tgot tO imprOVe their efficienCy.
Rowland and William have differentiated the three terms as : "Budgets are the individual objectives (5) I'rrt litiprtltort ol All l'irrrplol'ccs. llrrrlgcting is tlonc lirr cvcry scgnrcnt of the business. lt will also
of a department, etc., whereas Budgeting nray be said to be the act of building budgets. Budgetary control rctlrrirc llrt' irclrvc Iiult( tltitlt()lt irrrtl rrrvolvcnrcnl ol'all cnrplol,ccs. In practice thc budgets are to be executed
embraces all and in addition includes the science of planning the budgets to effect an overall management tool at lorvfl lcvcl:; ol nr,ulrt',('rn('lrl Ilro:;t' lor rvlrorn thc lrtrdgcts arc franrcd should bc actively associated with
for the busincss plantring rnd control"l tltcir PtcPrrt;tliott ;rtttl cxt'r'trlron llrc errrployccs, on tlrc lllsis <ll'lhcir ptrst cxpcrience, may give more practical
antl usclirl :iul',!'.('.;lton\ llrc .,rrt't't',;s ol brrttgclurl, control sl,stcln dcpcnds upon the participation of all
OBJECTIVES OF BUDGETARY CONTROL cntployecs ol llrt' ()ll',itnt:,;tlt()n
Budgetary control is essential for policy planning and control. lt also acts as an instrument of co- ((') l''le ribililr'. ljlcxrlrrlily ir; lrrttllicls is rcrlrrircd to make thern suitable under changed circumstances.
ordination. The main objectives of budgetary control are as follows : Iludgcls:uc l)r('l):rr('(l lir llrc lrrlrrre. rvlrich is always uncertain. Even though budgets are prepared by
l. To ensure planning for future by setting up various budgets. The requirements and expected consitlt:rirrlq lhc lirlrrrc possibililics lrrrt still sonlc occurrences later on may neccssitatc certain adjustrnents.
performance of the enterprise are anticipated. Flcxibilily u,ill rrrlrkc tlrc lrrr<llicls nlorc itppropriate and realistic.
2. To co-ordinate the activities of different departments.
3. To operate various cost centres and departments with efficiency and econorny.
(7) l\lolivalion- lludgcts arc to be irnplemented by human beings. Their successful implententation rvill
dcpcntl tt1'rttn lltcr intcrcst sltorvn by the ernployees. All persons should be motivated to inrprove their rvorking
4. Elimination of wastes and increase in profitability.
so llrat brrtlgcling is succcsslLl" A proper systcm of motivation should be introduced for making this systern
5. To anticipate capital expenditures for future.
6. To centralise the control system. a succcss.
7. Correction of deviations from the established standards. BSSENTI ALS OF BTJD(; I,I'I'AITY CONTROL
8. Fixation of responsibility of various individuals in the organisation.
Thcrc arc ccrtain stcps rvhich arc nccessary fbr the successful implementation of a budgetary control
l. Budgeting for Management Control, p. l. system. 1'lrey arc as ltlllows :

l
I
I

I
I
 Budgeling artd Budllclilr.t' ( t)tt!' t,t
Budgcling artd Budgelary Control 105

nisation for budeetarv control.
I)etcrmination of key factor.
l. Organisation for Budgetary Control. The proper organisation is essential for thc succes',lrrl
prcparation, main(cnance and administration of budgets. A Budgetary Commiftee is formed which conrplise s tlr,'
departnrental lreads of various departments. All the functional heads are entrusted with the responsibilitl' ,'l
crrsuring propcr irrrplcmentation of their respective departmental budgets. An organisation cltart for butlr.t't,rrr
(iv) A proper table for budgets including the sending of perfgrmance reports is drawn so that every
work starts in time and a systematic control is exercised.
(v) The specimen forms and number of copies to be used for preparing budget reports will also be
stated. Budget centres involved should be clearly stated.
(vi) The length of various budget periods and control points be clearly given.
(vi) The procedure to be followed in the entire system should be clearly stated.
(viii) A method of accounting to be used for various expenditures should also be stated in the manual.
A budget manual helps in knowing in writing the role of every employee, his duties, responsibilities,
rhc ways of undertaking various tasks etc. it also helps in avoiding ambiguity of any time.
4. Budget Officer. The Chief Executive who is at the top of the organisation, appoints some person
as Budget Officer. The budget officer is empowered to scrutinise the budgets prepared by different functional

conlrol is givc bckrrv : heads and to make changes in them, if the situation so demands. The actual performance of differenr
departments is communicated to the Budget Oflicer. He determines the deviations in the budgets and takes
ORGTTNISATION CIIART FOR BIIDG ITARI' CONTROL necessary steps to rectiff the deficiencies, if any. He works as a co-ordinator among different depamments and
(clrrEF EXECr.rTrvE) monitors the relevant information. He also informs the top management about the performance of different
+ departments. The budget offtcer will be able to carry out his work fully well only if he is conversant with the
(BUDCET OFFICER)
working of all the departments.
J
(BUDGEI COMMTl"l'tiE) 5.Budget Committee. In srnall scale concerns, the accountant is made responsible for preparation

t-
(l'l(()l)t,( ll()N
Illr\NA(il li)
(SALES (FINANCII
(ACCOUN'|S (PERSONNEL (RI_Sr_,\tr('il.t
MANAGER) MANAGER) MANAGER) DEVEL()I'MI:N
1
and implementation of budgets. In large scale concerns a commiftee known as Budget Committee is formed. The
heads of all the important departments are made members of this committee. The committee is responsible for
preparation and execution of budgets. The members of this committee put up the case of their respective
MANAGER) I
departments and help the committee to take collective decisions, if necessary. The Budget Oflicer acts as co-

BUD.ET' I [^S,!S:'i:,'l.
ordinator of this committee.
[ ^S**'-, uuDGEr) I f ,^.)-., .*l
[I I || I l"sz';,|
,,::. ::::J f n.lnovnnrrse- llulnnvveNrsl[ ]
f,, on.,,J
ll,,rs,'*llJlri.r,-n,,n,,*,r
L )l\ RrID(;Fr)
6" Budget Period. A budget period is the length of time for which a budget is prepared. The budget
pcriod depends upon a number of factors. It may be different for different industries or even it may be different
s^n()N I IMENT II BUDGET) I )
|
in the same industry or business. The budget period depends upon the following considerations :
L ) LcosrnuocrljL ) (a) The type of budget r.e., sales budget, production budget, raw materials purchase budget, capital
',,rtxitrt) expenditure budget. A capital expenditure budget may be for a longer period i.e., 3 to 5 years ;
'llrc ('lricl'l]xecutive is the overall incharge of budgetary system. He constitutes a budget conrnrillt't'
purchase, sale budgets may be for one year.
lirr prcPrrrinq rcrrlistic budgets. A budget officer is the convener of the budget committee who co-ordinatos llr(' (b) The nature of demand for the products.
lrrrtlsct.s ol rlilli'rcnt departments. The managers of different departments are made responsible for thcir
rlcp:tt ltttcttt:rl lrurlgets.
(c) The timings for the availability of the finances.
(d) The economic situation of the cycles.
2. llurlgct Centres. A budget centre is that part of the organisation for which the budget is preparctl (e) The length of trade cycles.
A lrrrtlgct ccntrc may be a department, section of a departnrent or any other part of the department. 1hc
cstablishnrcnt ol'budget centres is essential for covering all parts of the organisation. The budget centres arc All the above mentioned factors are taken into account while fixing the period of budgets.
irlso ncccssary' lirr cost control purposes. The appraisal of performance of different parts of the organisation 7. Determination of Key Factor. The budgets are prepiired for all functional areas. These budgets
bccorncs casy rvhcn different centres are established. are inter-dependent and inter-related. A proper co-ordination :rmong different budgets is necessary for making
3. lludgct Manual. A budget manual is a document which spells out the duties and the also thc the budgetary control a success. The constraints on some budgets may have an effect on other budgets too.
rcsponsibilitics of the various executives concerned with the budgets. It specifies the relations among variorrs A factor which influences all other budgets is known as Key Factor or Principal Factor. There may be a limitation
lirnctionarics. on the quantity of goods a concern may sell. In this case, sales will be a key factor and all other budgets will
A butl.qct manual covers the following matters : be prepared by keeping in view the amount of goods the concern will be able to sell. The rarv material supply
(i) A budget nranual clearly defines the objectives of budgetary control system. It also gives thc may be limited ; so production, sales and cash budgets will be decided according to raw materials budget.
bcnefits and principles of this lystem. Similarly, plant capacity may be a key factor if the supply of other factors is easily available.
(ii) 'l'he duties and responsibilities of various persons dealing with preparation and execution ol
budgets are also given in a budget manual. It enables the management to know of persons dealing The key factor may not necessarily remain the same. The raw material supply may be limited at one
rvith various aspects of budgets and clarify their duties and responsibilities. time but it may be easily available at another time. The sales may be increased by adding more sales staff, etc.
(iii) lt gives infonnation about the sanctioning authorities of various budgets. The financial porvers Similarly, other factors may also improve at different times. They key factor also highlights the limitations of
ol- different managers are given in the nianual for enabling the spending of amount on variorts the enterprise. This will enable the management to improve the working of those depanments where scope for
cxpenses. improvement exists.

(\ e)
 Budgeting ond Budgelory Control
lluilgrlrng tnil lSttlgrtnty ('onlntl to.7

BUDGETING VS. FORECASTING ll. ( ollrciott"ltt'ls. ll ctt'ltlcs buth:ct consciousness among the employees. By fixing targets for t6e
Forecasting may be needed for future planning or budgeting but it cannot be confused with the later. t'tttIloycr",. lltr'1'.ttt'ltt,trlt'r'ott:,r'irrus ol tlrcil rcsponsibility. Everybody knows rvhat he is expected to do
Forecasts are only will-educated guesses or inferences as to what the future may be. The management has to ittul ltc rottltttttr". rvrllr lrr,. rvork ttrtirtlctrtrpltttl
make predictions while preparing plans for the future. According to Henry Fayol, father of modern management,
tr- llctlttctt ('ttrlr, lrt lltc prcscttl rlity cotnpctitivc world budgetary control has a
significant role to
the entire plan is made up of series of separate plans called forecasts. Forecasting provides a logical basis for lllity. l'vcrY lrlt'.tttr".',ttt,rlr lrtr", lo tt'rlttt't' llrc Ctrs( <ll'production for increasing sales" He tries to have those
preparing the plans/budgets. The actual perfonnance of the past, the present situation and likely trends in the rll Itrrrlttt l', tvltctr' Irolrllrlrility is ntrtrc.
t:rltttltttlitltott',
future are considered while preparing budgets. A budget is the monetary or/and quantitative expression of lll- lttltorltrcltorr ol lrtt't'rtlive Scltctttts. lludgctary control system also enables the introduction of
business plans and policies to be pursued in the future period of time. ittcctrlivt' ',tltctrtt", rtl tr'ttttlttr't,tltot1 ll1.' torrrpirrisorr ol'lludgctcd and actual performance wilt enable the use
The difference between budgeting and forecasting can be summarised as below : ol' sttclr st'ltt'tttt".
l. Forecasts are merely well-educated estimates or inferences about the future probable events whereas
a budget relates to planned events and is the quantitative expression of business plans and policies to be [
,,,,,',., ,,,,.t
pursued in the future
2. Budgeting begins where forecasting ends. In fact, forecasting provides the logical basis for I

preparing the budgets. I

3. A bpdget provides a standard for comparison rvith the results actually achieved and. thus, is an I
important control device for the management, rvhile a forecast represents mcrely a probable event over which
no control can be exercised.

ADVANTAGES OF BUDGETARY CONTROL

The budgetary control system helps in fixing the goals for the organisation as a rvhole and concerted
efforts are made for its achievements. It enables economies in the enterprise. Some of the advantages of
budgetary control are :
l. Maximisation of Profit. The budgetary control aims at the maximisation of profits of the enterprise.
To achieve this aim, a proper planning and co-ordination of different functions is undertaken. There is a proper
control over various capital and revenue expenditures. The resources are put to the best possible use.
2. Co-rodination. The working of different departments and sectors is properly co-ordinated. The
budgets of different departments have a bearing on one another. The co-ordination of various executives and
suboridnates is necessary for achieving budgeted targets.
LIMI'l'/\'l'l( )Ns ( )t,' Bl ttx it,,'t'/\Ry ('oN'fltol-
3. Specific Aims. The plans, policies and goals are decided by the top management. All efforts are
put together to reach the common goal of the organisation. Every department is given a target to be achieved. l)t'rPtlc ttt.tttl' liootl porrtl:, ol lrrrtlgctary control there are some limitations of this system. Some of
thc lirtritirtiolr:; iur' rlr.,t u,,.,t'rl ir:, lirllorvs
The efforts are directed towards achieving some specific aims. If there is no definite aim then the efforts rvill
be wasted in pursuing different aims. l. lltttct'lritr l"ttlttt'c. llrt: btrtlgcls are prepared for the future period. Despite best estimates made
4. Tool for Measuring Performance. By providing targets to various department. budgetary control
ftrr thc lirlrrrc, llrc prcrlrctrotr:, lliry n<lt always come true. The future is ahvays uncertain and the situation which
lo |tcv:ttl ttt lttltrtc rrrly cltangc. The change in future conditions upsets the budgets which have
is prcstttttt'tl
provides a tool for measuring managerial performance. The budgeted targets are compared to actual results
to bc Prt:;rirtcrl ort lltc lr:rsis ol'ccrlitin assumptions. The future uncertainties reduce the utility of budgetary
and deviations are determined. The performance of each department is reported to the top management. This control syslcnt.
system enables the introduction of management by exception.
2. llrrrlgcl:rr.l' ltcvisions Rcquired. Budgets are prepared on the assumptions that certain conditions
5. Economy. The planning of expenditure will be systematic and there willbe economy in spending.'. will prcv:ril. llccrtttsc ol lirtrrrc ttnccrtainties, assumed conditions may not prevaii necessitating the revision of
The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry budgctary lirr!',cls. Ihc licqtrcnt rcvision of targets will reduce the vaiue olbudgets and revisiJns involve huge
and then to national economy. The national resources will be used economically and wastage will be eliminated, cxpcndilurcs loo.
6. Determining Weaknesses. The deviations in budgeted and actual performance will enable the J.
l)iscourage.s Flfficicnt Persons. Under budgetary control system the targets are given to every
determination of weak sports. Efforts are concentrated on those aspects where performance is less than the pcrsotr in thc orgatlisatiott. 'l'ltc comtnon tendency of people is to achieve the targets only. There may
be sontl
stipulated. ellicicnt porsons who can exceed the targets but they will also feel contentea by ,"u"tting the targets. So
7. Corrective Action. The management will be able to take corrective measures whenever there is budgcls rnay scrvc as constraints on managerial initiatives.
ii!
I il
l ii a discrepancy in performance. The deviations will be regularly reported so that necessal'y action is taken at 4- Problcm of Co-ordination. The success of budgetary control depends upon the co-ordination
iii!i the earliest. In the absence of a budgetary control system the deviations can be determined only at the end alnong dill'crcnt dcpartments. The performance of one department affects the results of otherdepartments.
; To
of the financial period. overconlc thc problcm ofco-ordination a Budgetary Officer is needed. Every concern cannot afford to appoint
trl a Budgctary ofllccr The lack of co-ordination among different departments results in poor performanie.
it
i{* i_
 .-

Budgeti ng and B u a b el or.t' (' t t tt t r t, I Conlrol

r0.8 Badgeting flnd Budgetory 10.9

5. Conflict among Different Departments. Budgetary control may lead to conflicts alnong functtotr:rl /i/ Programme Budget, and
departments. Every departmental head wonies for his department goals without thinking of business goal. l:vcr r (irl Responsibility Budget.
l departrnent tries to get maximum allocations of funds and this raises a conflict among different departrrtcrrt'' (i) Programme Budget. It consists of expected revenues and costs of various products or projects

il
6. Depends upon Support of Top Management. Budgetary control system depends upon the strl)l)orl that are termed as the major programmes of the firm. Such a budget can be prepared for each product line or
' of top management. The management should be enthusiastic for the success of this system and should givt' project showing revenues, costs and the relative profitability of the various programmes. Programme budgets
,i full support for it. If at any time there is a lack of support from top management then this system will collaps.' are, thus, useful in locating areas where efforts may be required to reduce costs and increase revenues. They
are also useful in determining imbalances and inadequacies in programmes so that corrective action may be
CLASSIFICATION AND TYPES OF BUDGETS taken in future.
The budgets are usually classified according to their nature. The following are the rypes of btrtli'.q'1.' (ii/ Responsibility Budget. When the operating budget of a firm is constructed in terms of
which are commonly used. responsibility areas it is called the responsibility budget. Such a budget shows the plan in terms of persons
(A) Classification According to Time responsible for achieving them. [t is used by the management as a control device to evaluate the performance
l. Long-term budgets. of executives who are incharge of various cost centres. Their performance is compared to the targets (budgets),
2. Short-term budgets. set for them and proper action is taken for adverse results, if any. The kinds of responsibility areas depend
3 Current budgets. upon the size and nature of business activities and the organisational structure. However, responsibility areas
(B) Classification on the Basis of Functions nray be classified under three broad categories :
l. Operating Budgets (a) Cost/Expense Centre
2. Financial Budgets (b) ProfrtCentre
3. Master Budget (c/ Investment Centre.
(C) Classilication on the Basis of Flexibility We have discussed the concept and technique of responsibility budgeting in detail under a separate
l. Fixed budget. chapter on 'Responsibility Accounting' latter in this book.
2. Flexible budget
2. Financial Budgets. Financial budgets are concerned with cash receipts and disbursements, working
(A) Classification According to Timc capital, capital expenditure, financial position and results of business operations. The commonly used financial
l. Long Term Budgets. The budgets are prepared to depict longterm planning of the busincss lltt' budgets are :
period of long tcrm budgets varies between five to ten years. The long term planning is done by thc top lo't'l (a) Cash Budget
management ; it is not generally known to lower levels of management. Long time budgets are prepared for sttttlt' (6/ Working Capital Budget
'l'llc:i(' (c) Capital Expenditure Budget
i'
sectors of the concern such as capital expenditure, research and development, long term finances, etc.
ll
budgets are useful for those industries where gestation period is long i.e., machinery, electricitv, (d) Income Statement Budget
!;
1l engineering ctc. (e/ Statement of Retained Earnings Budget
al 2. Short-term Budgets. These budgets are generally for one or fwo years and are in the fornr ol (/) Budgeted Balance Sheet or Position Statement Budget.
tl
monetary tcrms. The consumers goods industries like sugar, cotton, textile, etc. use short-term budgets 3. Master Budget. Various functional budgets are integrated into master budget. This budget is
prepared by the ultimate integration of separate functional budgets. According to I.C.W.A. London, "The
^ 3. Current Budgets. The period of current budgets is generally of months and weeks. These budgcts
Master Budget is the summary budget incorporating its functional budgets". Master budget is prepared by
relate to the current activities of the business. According to I.C.W.A. London, "Current budget is a budg,et
u
t
I the budget oflicer and it remains with the top level management. This budget is used to co-ordinate the activities
i which is established for use over a short period of time and is related to current conditions."
!;
i
of various functional departments and also to help as a control device.
(B) Classiticrtion on the Basis of Functions
(C) Classification on the Basis of Flexibility
l.Operating Budgets. These budgets relate to the different activities or operations of a firm. flrc
number of such budgets depends upon the size and nature of business. The comm6nly used operating budgets
I .
Fixed Budget. The fixed budgets are prepared for a given level of activity, the budget is prepared
before the beginning of the financial year. If the financial year starts in January then the budget will be prepared
are:
a month or two earlier, i.e., November or December. The changes in expenditure arising out of the anticipated
(a/ Sales Budget
changes will not be adjusted in the budget. There is a difference of about twelve months in the budgeted and
(b) Production Budget
actual figures. According to I.C.W.A. London, "Fixed budget is a budget which is designed to remain
/c/ Production Cost Budget unchanged irrespective of the level of activity actually attained." Fixed budgets are suitable under static
(d) Purchase Budget
(c) Raw Material Budget conditions. If sales, expenses and costs can be forecasted with greater accuracy then this budget can be
t; (/) Labour Budget advantageously used.
(g/ Plant Utilisation Budget 2. Flexible Budgets. A flexible budget consists of a series of budgets for different level of activity.
(h) Manufacturing Expenses or Works Overhead Budget It , therefore, varies with the level of activity attained. A flexible budget is prepared after taking into
(l/ Administrative and Selling Expenses, Budget, etc. consideration unforeseen changes in the conditions of the business. A flexible budget is defined as a budget
T5c operating budget for a firm mav be constructed in terms of programmes or responsibility areas. which by recognising the difference between fixed, semi-fixed and variable cost is designed to change in relation
and hence rnay consist of : to the level of activity.

ii
10.10 Budgeling uutl lludgatun'Control
Rudgtl i n N un il ll uilEt t uq, ('ont rol

The flexible budgets will be useful where level of activity changes from tinrc to tirnc. Whcrr the
fbrecasting of demand is uncertain and the undertaking operates under conditions of slroflagc ol- nratcrials. Arhrrrtrrslrltrvt I:xpctrscs t0.00 50.000 7.28
labour etc., then this budget will be more suited. ( irsl ol I'lxlrre liorr
r05.00
51.000
5.25.000 99.42 6,96.000
Scllirrg,& I )islr rbutiorr l.ixpcrrscs
DF'FERENCE BETWEEN A FDGDAI{DFLEKBLE BTJDGET Scllrrrl'. l.lx1r.rrv.s 600 30.000
I )islr ihrrtrolr lirpcrrses
5.66 39.600
Basic of Dislitrclion Fixed Budgel Fle.tible Budgct .lirl:rl ('osl -5.00 25.000 4.86 l4.OQg
ol .Sirlt-s il6.00 5.80.000 109.94 7.69.6W
l. Rigidity A fixed budget remains the same irre- A flexible budgetis rccast to suit the
spective of changed situations. It changed circumstanccs. Su itable ad-
Illusl rnI iorr 2. llrc lirllorving inlirrrnation at 5O%o capacity is given. Prepare a
flexible budget and
justments are madc lilrccasl lltc grrolll or Ioss irl 601\,, 10,,./o and 90yo capacity.
remains inflexible even if volume of if thc situation
business is changed. so demands. Expenses at 50% crprra'A
z. Uondlttons ljixctl lrxpcrrsc:;
A fixed budget assumes that condi This budgEt i.s changCd il le-vel ot R.r.
Sll:uics
tions will remain constant. activitv varies. l{ctrl nrrtl 'l irxt.s 50,000
3. Cost Classification ln Fixed budgets costs are not classi- The costs arc studicd as pcr lheir [)cprccia(rotr 40,000
60.000
fied according to their nature. nature, i.c., flxed variablc. senri- Adnrilrislrulrvc l:xpcrrscs
Variablc lixpcrrscs ' 70.000

4. Malcrills
Changes in Volume If the level of activity
changes then The budgets arc redralied as pcr the
Labour 2,00,000
budgeted and actual results cannot changed volrrrnc arrtl ir c<lrrrpurisorr Olhcrs 2,50,000
be compared because of change in between budgetcd :urd actrral lig- Scrni-V:rriablc I :x1 rt.rrscs 40,000
basis. uresrvill be possitrlc. Repairs
lndircct l.:rlxrrrr 1.00.000
5. Forecasting Forecasting ofaccurate results is dif- Flexible budgcts clcarlv shou' llre 1.50,000
Olhcrs
ficult. intpact ol' cxpcrrscs orr oJrcrirtions 90,000
and it hclps in nraking trccrrrltq lorc- It is cstirnillc<l lltlrt lircrl ('\l)('ltri('\ wtll rt:rrrirrn t'onr;tiurl ,,r,,tt.,,puciri.s.
S"rl-V*rbla
change betwcctt 4'59ir irntl (r0()'cltP;tcil1', rvill ri:;t'hy l0'lo bctrvccn (1096
casts. an<l 75%ocapacity, a"^""r*,"11 ""t
further increase
6. Cost Ascer-tainment Under changed circurnstances costs 'fhe costs cirn bc casily asccrtained of 5oh whcn cirp;rcily cnrsscs 75'l{r
cannot be ascertained. under diffcrelrl lcvcls ol' activity. Estintalctl sirlcs ;rl v;rrious lcvcls ol'caplrcity arc :
This hclps in fixing priccs. - Crur^'ii,
Capocity
6t v" Soles (Rs.)
Illustration l. The expenses for the production of 5,000 units in a fhctory arc givcn as lollorvs 70"/, I I,00,000
13,00,000
I'ar unil Rs. ')(loti'
r5,00,000
Materials 50 Solution :
Labour 20
Variable Overheads t5
Fixed Overheads (Rs. 50,000) IO FlexibteBudget
Adnrinistrative expenses (5% variable) t0 (\h<>v,in1i Profit & Loss at l,arious Capacitics)
Sel ling expenses (20% Fixed) 6
Distribution expenses ( l0% Fixed) 5
-fotal
cost of sales per unit I{s. I 16
You are required to prepare a budget for the production of 7,000 units.
50,000 50.000 50'000
Solution : 40,000 40.000 40,000
60.000 60.000 60,000
70,000 70.000 70,000
Flexible Budget
ParTiculon Oulput 5,000 Units Oulpul 7,000 Units 2,00,000 2,40.000 2.80.000
rer ut tl An ourrl Urril I
I'cr Atrtoutl 2,50,000 3,00,000 3,50.000
Rs. Rs fslns -Variablc l:xpcnscs .
40,000 48,000 56.000
Materials 50.00 2,50,000 50.00 3.50.000
Labour 20.00 r.00.000 1,00,000 r,00,000 |.00,000
20.(x) 1.40.000
Prirne Cost 70.00 3,50,000 70.00 4.90.000
I,50,000 1,50,000 |.65,000
Factory Overheads : 90.000 99.000
Variable Overheads 10,50,000 I1,48,000 t2,80,000
15.00 75,000 15.(x) 1.05.00t)
Fixed Overheads 10.00 50.000 7.t4 50.000 - 48.000 + 20,000
Works Cost 95.00 4.75.000 92.t4 6.45.000

(1
 Y

10.t2
,r,l Budgeling and Budgetary Control 10.13
lllustration 3. The following infonnation relates to a flexible
budget at 600A capacity,. Finrl out tlrr. I-abour
overhead costs at 50%o and 70o/o capacity and also determine Rs. 40 per unit
the overhead rates : Direct Expenses Rs. l0 per unit
Factory overheads Rs. 40,000 (40o,zo fixed)
Expenses al 60% Capacity
Variable Overheads : Administration Expenses Rs. 30,000 (60%fixed)
R.r-
lndirect [.abour
Indircct Materials r0.500 Solution :
Senri-Variable Overheads : 8.400
Repairs and Maintenancc Flexible Production Budget
(70% fixcd. 307o variable) 7.000
Llectricity (50% fixed, 50olo variable) 60% Capacity 80% Capacity 100% Capocity
Fixcd Overheads : 25.200 600 Units 800 Units 1,000 Units
Office cxpenses including salaries Unit Tokrt Unit Tolal Unit Totnl
70.000
Itrsurancc Cost Cost Cost Cmt Cost
4.000 Cosl
Dcprcciation Rs. Rs Rs Rs Rs Rs
[.,stirnated direct labour hours 20.000
1.20.000 Materrals t00 60,000 t00 E0,000 100 I.00,000
Labour 40 24,000 40 32,000 40 40.000
Solution :
Direct Expenses l0 6 000 l0 8.000 l0 10.000
Prime Cost t50 90,000 150 1,20,000 r50 t,50.000
Flexible Budgct & Overhead Rates Factory Overheads :
Fixed (40% of Rs. 40,000) 26.67 t6,000 20 r6.000 l6 16.000
Variable' 40 24.000 40 32.000 40 40.000
Works Cost 2t6.67 1,30,000 210 r,68.000 206 2,06,000
Administrative Expenses :
Variablc Overheads : Fixed : (60% ofRs. 30,000) 30 18,000 22.50 r8,000 t8 r8,000
Indirect Labout. Variable 20 r2,000 20 16,000 20 20,000
Indirect Materials l2.l50 Total cost 266.67 t.60.000 252.50 2.02.000 244 2.44.000
Semi-Variablc Overheads 9.ll(x)
:

Repairs and Maintenance ( | )

Electriciry (2)
7..150 SOME IMPORTANT BUDGETS
Fixcd Overheads : 27..1( )()
SALES BUDGET
O{fice expenses including salaries
Insurance 70,(x)() A sales budget is an estirnate of expected sales during a budget period. A sales budget is known as
,1.0(X)
Depreciation a nerve centre or backbone of the enterprise. The degree of accuracy with which sales are estimated will
20.000
Total Overheads determine the practicability of operating budgets. A sales budget is the starting point on which other budgets
I,45,100
are also based.
A sales budget lays down potential sales figures in value as well as in quantity. It lays down a
comprehensive plan and programme for sales departmenf. The sales manager.is made ,"sponiibl" foi preparing
Working Notes : sales budget. He uses all possible information available from internat and ixternal sources. The possible
fu"to.i
to be taken into account while preparing a sales budget are discussed as follows :
( I) Repairs and maintenance amount to Rs.
7,000 at 50o/o capacity. out ortt* 70o/o (i.e., Rs. r,900) l- Past Sales Figures. The sales forecasts are based on past sales figures. The sales figures of a
is fixed and 30% (i.e., 2'100) is variable' Rs" 4,900 will remain
the same at the all capacities while variable parr number of years enable in the deternrination of trends of sales. The upward unJ do*n**d sales trends will
be of great use in fixing future sales. The actual past sales figures willbe the most reliable criterion on which
will vary. variable cost at 50% capacity witt be (#-ro] *r. ,,rro and at 70%o capacit, (r,)!o "ro j nr. sales budgets should be based. The expected seasonal fluctuations, potential demand and position of
trade
2A50. So totat expenditure will be (4,900 * i,ZSO) nr. (OSO and (4,900 + cycles will also be helpful in preparing sales budgets.
Rs. 2,450) nr. Z\SSbO'ut SO,/luna
7 0o/o capacities respectively" 2, Assessmeht and Reports by Salesmen. The Salesmen are the most appropriate persons for
(2) Electricity at 60%o capacity is Rs. 25,200. of which 500/o part(r.e., Rs. 12.600) estimating future demand. They are in touch with the market and the customers. Their'expirience wilt enable
is fixed and 50% is thent to forecast sales figures more realistically. The sales manager should cautiously s.rulini.e the
variable. Rs. 12,600 (fixed) rvilr be the same at all capacitiies figures of
but variables will be '. at 50o/o capacity salesmen so as to eliminate their bias. The attitude and personal thinking of the salesmen may temptihem
to
underestimate or overestimate sales estimates. The sales manager gets an idea about the market situation
(*fl::').:.]:,"' and at 70yo capacity[#'zo)ns 14,700. Total electricity cost rvill
be (12,600 salesmen's estimates. He should rvisely use these figures for-incorporating them in sales budget.
from
+ I 0,500) Rs' 23' I 00 and ( I 2'600 + I 4,700) Rs. jz,3o0 at
50{/o and 70o/o capacities respecrively.
Illustration 4' with the following data for a 60Yo activity, prepare a budget Sales Budget
production
for g0zo
at and 1009/o
capacity : Produa I Produa II Product III Total Sales
ilIonth QuanliSt Volue Quantity
Production at 60olo activity
600 units
Volue Quantily Ytrlue Quantily Vnlue
Matcrials January
Rs. 100 per unit February
.i$-.tq,i..,

<-\
\;\.'r-
 tj1L1lxr r1 n s,t,!U!:!t!!:!g' co nt ror

Solrtliorr :
March
April
June Sales Budget
July
August n t r,, ts r, ry.ii;;
,,----
C;, cn t y;;1-
September
llrut II'nuluct I
October
November
December Allrir I l{;r1;r I .trxl[ .l
l(:rrrr I t(x) I lt
I otrrl I /tttt
lkrtttlrrt\ j ll:r;,t I r,611 ,l
3. Availability of Raw Materials. The availability of raw materials is an important lactor in preparing Itiurr | \oo I
a sales budget. [n some cases, raw material is a key factor. The quantum of raw materiuls available to
:r
the 'lirtal lor:rl I t ttxt
enterprise will enable the sales manager to anticipate sales figures. Moreover, the smooth supply of
materials I l(:r1:r I t.rxrrr
is necessary for achieving sales targets.
lirtal Sllcs I I lt(X,
4- Seasonal Fluctuations. The effect of seasonal fluctuations should also be considered while
preparing a sales budget. The demand for goods may be more in some periods while they may Working Nolcs
be in less
demand at other times. An effort should be made to reduce the seasonal effect by givirrg discounts or
other Ilurlgclcrl S:rlcs fol A11 :r
concessions during off seasons.
Rojo
5. Availability of Finances. The availability of finances sometimes becomcs a limiting factor. The
Units
Roni
llurk',ctctI Units
finances will be required for purchasing various inputs. The sales budget is prepared alongwith the financial
zirlr/ 400
lrrt rc;r.,t. 300
bud-eet. The expansion of sales effort will need additional capital outlay. Financial aspect should be
taken into fi|%t 40 (20o/o') 60
consideration while preparing a sales budget. lncrt.:rsc tluc lrr r\rlvt.r I t\(.nlcnl 440 360
60
6- Plant Capacity.The goods will be sold only when they are produced, the capacity for producing 500
40
goods should be taken into account. On the other hand sales effort must ensure full utitisation llurlgclcrl Sltts lirr lkrnrbuy 400
oiptauicapacityl
Illustration 5. Mr. Atulya manufactures two fypes of toys Raja and Raniand sells them in Agra and
Raja Rani
Bombay markets. The following information is made available for the culent year : I lurl11.tt.r I
Units Units
..lri/ lrrr'rc;r.;t. 600 500
lllarket Dpes Budgeletl Salcs Acluol Sales
(5%t 30 (t0%) 50
Agra Rqia htcrc:rsc tlrrc lo Arlvcr tt\cntcnl 630 550
400 at Rs. 9 each 500 at Rs. 9 each
70
Rani 300 at Rs. 2l each 200 at Rs.2l each lirtirl 50
Bombay Raja 600 at Rs. 9 each 700 600
700 at Rs. 9 each
Rani 500 at Rs. 2l each 400 at Rs. 2l each. I'RO|)t t( "t't()N BUIX;0.[
Market studies reveal that toy Raja is popular as it is under priced. It is observed that if its price 'lltc pr.rltrt:li'rl
is increased by Re. I it will find a ready made market. On the other hand, Rani is over-priced and market lrrttlgct is prepared in relation to the sales
could pro<lrrcctl itt litrtt: budget. whatever is to be sold should
s. lltltl it is dcliveied to the customer. It is a forecast be
absorb more sales if its selling price is reduced to Rs. 20. The management has agreed to give effect oithe production for the budget period.
to the I)rotlttcli'tt l'rtlgcl is prcparcd tbr the number
above price changes. of units to be produced and also for the cost to be incurred on
lircrorv overheads' Two importun,
on the above basis, the following estimates have been prepared by Sales Manager : ,ll',i,llil;,,'ffi,"]t" "o'nriJ.rutions
are invorved in the preparation of
Produc'l % increase in sales overcurrenl budget (tt) Whlt is to bc produced ?
Agra
(h) Whcn is it to be produced ?
Bombay
Raja +l|Yo +5Yo l'c of production budget invorves the fotorving stages
Rani :
+2UYo +10%o l' l'roduction
'rcparationPlanning' A proper production
planning schedule
budgct lhc nutttbcr ol'physical i"i"io-i.-produced is essential for preparing production
With the help of an intensive advertisement compaign, the following additional sales above the is determiled- The utilisation of optimum plant
estimated sales of salcs manager are possible attd avoidancc ol' bottlenecks due capacity
: to shortage of materials and rabour, etc. is
productirrr pran production pranning whire preparing a
Prodacl Agra Eombay
rvilr ensure a smooth production schedure."onria"iJ
2' consideration
of Plant capacity. The number of units of different
s
be dctcrtttincd and the.capacitywhichit. products to be produced should
ptunt will be abre io-wort< throughout
bc decidcd' one should::ln-,th..ofu.-i-ry1irher the budgeted period shourd
You are required to prepare a budget for sales incorporating the above estimates a realistic estimate shoutd
too hid;ri;o;w.
A normar prant capacity which w'r be
be budgeted.
3' Stock Quantity to be lleld' The quantity of finished goods to be carried
forward should be decided.
to.l6 Budgeting and Budgetory Control Budgeting and Budgetary Controt 10'17

September 1,700
October 1,900
of the stock. While fixing production target, the required closing stock figures will be added to the estimatetl November 2sffi
sales figures and opening stock figures will be deducted from it. The work in progress will also be taken into December 23m
account while fixing a production target. January2009 2.000

4. Considering Sales Burlget. The production budget is fixed with reference to sales budget. Thc (i, There will be no work in progress at the end of any month.
sales budget will provide a guideline for production planning. If both the budges are not co-ordinated thcn /iiy' Finished units equal to half the sales for the next month will be in stock at the end of each month
there may arise problems of either selling the whole stock or of producing it. In case the sales are not undertaken (including June, 2008)
as per rrn"Autr then production should be reduced or vice+,ersa. A production budget may be
prepared as
(iv) Budgeted production and production cost for the year ending 3lst December, 2008 are as follows:
given under: Production (units) 22,W
Direct materials (per unit) Rs. l0
Direct Wages (per unit) Rs.4
Total Factory Overheads apportioned to products Rs. 88,000.
Solution :

(y' ProductionBudget
([or each monthfrom July, 2008 to December, 2008)
January
Month Opening Stock Sales Closing Stock Protluction
February (Unils)
2000 (units) (Units) (Anils)
March
April July 550 I,100 550 I, t00
May 550 I,r00 850 1,400
August
June 850 1,700 950 1,800
September
July October 950 1,900 r,250 2,200
August November t.250 2,500 I.t50 2,400
December I,150 2,300 1.000 2.t50
September
Total I 1.050 unitr
October
November Production : Sales + Closing stock - Opening stock
December
/ir) Production Cost Budget
for six months ending 3lsl Dec. 2008
(Prodaction Unils I 1,050)
COST OF PRODUCTION BUDGET unit
Rote per Amounl
(Re) (Rs-)
The production budget determines the number of units to be produced. When these units arc
converted into monetary terms, it becomes a cost of production budget. The cost of production budget
is thc Dfirctrnateriats 10.00 I'10'500
DirectWages 4.00 44'200
total to be spent on producing the units stipulated in the production budget. The physical units are broken ( ss'ooo )
into elements i.e., material, quanttty, labour, tirne and manufacturing overheads. The materials cost, labour
cost
Factory overheads lffi) 4.oo 44.200
and overheads required for-manufacturing are totaled together to make it a cost of production budget.
A \-''vvvl'
Total RtJ',8.,00
specimen of the cost of production budget is given below :
Illustration 7. A company manufactures two products A and B and the budgeted data for the year
Cost ofProduction Budget
are follows :
Malerials Labour M onuloduri n g Over h e otls
pePafr- t otot ProduaA Product B
Itcms vuanu.l ^gae I OlOt uPefu- Hours fitre IOW COSI LOSI
ol labour ment Cost pef (R&) (Re)
ment of lor pet Molerial lion Pet
mote- anil cosl Iabour hour cost unil Sales price per unit 100 75
malerials
required riols Direct materials per unit 20 t0
Direct wages per unis 5 4
I
Total Works Overhead 10,105 9.009
2 r,200 t. t00
Total Marketing Overhead
lllustration 6. a production Budget for each month and a summarised Production Cost Budget
prepare The sales manager forecasts the sales in units as follows :

for the six months period ending 3lst December,2008 from the following data of product'X'. ProduclA Producl B
(i) The units to be sold for different months are as follows : (units) (units)
July,2008
1,100
January 28 l0
August 1,100
FcbruarY 28 t2

. + ..,i.

\\"*
 -?--
I

Ity t6 yr t n g.n n, ! !!!!t:!!rt:!,'t ro! 10.\.

24 l() thc lirlr'pt'r rrrrrl ol nrtv tn:rlcrial will give us a figure of material cost. The raw materials budget will serve the '\
March
April 20 20 lirllotvtttli ptlll)(f\cs :

May l(r t{ I l hc l)rrrt:lursc l)cJrartntent will be able to plan the purchase of raw materials at different times.
.lune t6 2.1
.) ll rvrll cnablc thc lixation of minimum stock level, maximum stock level and re-ordering level.
July to December, each month l8 20
I llrt. rirw rnulcrials purchasc budget will be determined.
It is assumed that (i) there will be no work-in-progress at the end of any month and (rrl firtishcd uttits .l I lrc lrrrtll'.clctl cosl ol'raw nraterials will be determined.
equal to half the sales for the following month will be kept in stock. lltrrslrnlion tl. llrc salcs rlircctor of a manufacturing company reports that next year he expects to sell
Prepare a production budget for each month and production cost budget. 40,(XX) rrrrrl:; ol lr gr:ulicrrl;rr prorlrrc:t.'l'hc production department gives the following figures :

Solution :
lrvo krrrtls ol rlrv rtt:rlcrials A and B are required for manufacturing the product. Each product requires
'l units ol rrrllcr iirl A irrrtl I rrrrits ol- rnatcrial B. The estimated opening balances next year will be :
Production Budget (Units) ljinislrcrl grrorlrrcl 10,(XX) urrits, ntaterial A- 12,000 units, material B-15,000 Units.
'l'lrc tlcsirrrblc ckrsirrl', balirrrccs at the end of the year are :

l.r'.rr I'rodut'liott l;irrislrcrl prothrcl 16,(XX) rrrrits, ntaterial A-14,000 units, material B-15,000 units.
optnirg
sktt'k
l)urw rrp lr rrrirlclr:rls prrrcltlsc budget.
(r ) ll Solution :
January
26 8 (t I4
February
March 22 t0 1l l8 l\la (crials Purchase Budget (Quantitative)
April l8 l2 l0 22
a,{
May t6 l2 l2 .'t

.lune l7 l0 ll 22
July l8 l0 l(l 20 N4atcrials rcquirctl lo ptorltrt'c .l(r,(XX) I lrtitsr :
August r8 l0 l() 20 Malcriirl A trrl I rrrrils lrrr.l(r,(XX) rrrtits
Septernber l8 l0 l0 20
Mltcriuls lI krt.) trrtrls lirr .l(r.(XX) rrrrits
October t8 l0 l0 20
Dcsircrl closurtr'. lr:rl;ttte e ol rturlct irtls lt thc cnd of ycar
November l8 l0 l0 20
December t8 l0 l0 20
. Opcnirrl'. lrll:urt't's ol rrrittcriul al thc hcginning of the year
/,e.r'.r
Total Matcriuls rcqrtttt:rl kr lrr: ptttcluts.:tl tlrrring thc ycar

Note : Opening stock is half of the the budgeted sales for the sanre tnonth bccausc closing stock of Working Nolcs :
finished goods is equal to half the sales in the next month- (l) l'rrxlrrcliorr tlrrling lhc ycar is calculated as:
lislinrirtctl s:rlcs rrrrits I l)csircd Closing Stock of finished goods- Opening Stock of finished goods.
Summarised Production Cost budget (40,(XX) I 16.0(X) 10,000=46,000units)
o: ,tt. fi
.,llluslralior, l]:,,t "1,"*i"*
fslRr Materials(Units)
Direct material 4.700 2.3t0 | 7.010 C

Direct labour 1.1 75 924 I 2.099 tlrtirn"l,"l .l,rf; J"r,,,"r), I r6,000 6,000 24,000 2,000 t4,000 28,000
lislinralctl skrck orr Jiuruury 3I 20,000 8,000 28,000 4,000 16,000 32,000
Works Overheads r0.t05 9.009 | l9.ll4 listinralcd ( irrrsurrrptiorr r,20,000 44,000 t,32,000 36,000 88,000 |,72,000
Total Production Cost r5.980 t2.247 | 28.233 Slantlartl I'ricc pcr urril 25 P. 5P. l5P. l0P. 20P. 30 P.
Cost per unit 68
Solution :

MATBRIALS BUDGET Raw Materials Purchase Budget

The material budget is concerned with determining the quantity of raw materials required for for January, 2008
production. The programme for purchasing raw materials is adjusted according to the production budget. Ihe I Al sl cl ol eI r
materials are purchased as per the requirements of production department. The requircments of materials are []stirnatc consurnption (urrits) 1.20,000 44,000 1,32,000 36,000 88,000 t,72,000
determined product-wise. The rates of consumption of raw materials are also determined. The number of units zlclr/. Estinratcd slock on .lan. 3l (units) 20.000 8.000 28.000 4.000 r 6.000 32.00i
to be produced multiplied by the rate of consumption (raw materials required for producing one unit) will give 1,40,000 52,000 t,60,000 40,000 I,04,000 2,04,000
Less . l:stimated stock on Jan. I (units) 16.000 6.000 24.000 2.000 14.000 28.000
the figure of materials required. The stocks of materials required in hand at any time are added to the ntaterials Dstimatcd l'urchasc (units) r.24.000 46.000 r.36.000 38.000 90.000 r.76.000
required for production. The opening stock of materials is deduced from the figures detennined as above. In Ratc pcr unit (Rs.) 0.25 0.05 0.r5 0. r0 0.20 0.30
thii way, the requirement of materials in units willbe determined. The units of materials required rnultiplied by Eslirnated Purchasc (Rs.) 31.000 2.300 20.400 3.800 r 8.000 52.000

Sr,?)^
 Budgeling and Budgetary Contntl Burlgg!1ng m4 luetganry Controt

DIRECT LABOUR BUDGET lVorking Notes :

The labour required for production may be classified into direct and indirect labour. The labour
(l) Production Budget

required for manufacturing the product is known as direct labour. The labour which cannot be specified with Prodact (Units)
production is called indirect labour. Though two budgets may be prepared, direct and indirect labour, but frorn 2
Sales
costing point of view only direct labour budget is prepared because indirect labour is made a pan ol 9,000 r5,000
/dd: Closing Stock t.000
r2,000
manufacturing overheads. 2.000
10,000 t 5.000
The labour content of each item is determined in terms of grades of workers required as per production less: Opening Stock t4.000
Production Budget s.000 4.000
budget. The labour time needed for each job, process and operation is determined with the help of time antl t0.000 t0.000
motion study. The rates of pay including all allowances are multiplied by labour time for calculating labour cost (2) Total Hours Available@
I f labour incentive schemes are in operation then labour rates should be suitably increased. If piece-rate systenrs Total hours 8x6x 13=624
for paying wages is in operation then labour cost will be calculated by multiplying budgeted units by the labour f,ess : Hours lost due to leaves etc. 124
Total hours available per man
rate per unit. 500
(3) Direct Labour Hours
l.abour budget is useful for anticipating labour time required for production. The personnel departrncnt Product I
is also able to make arrangements for recruitment of workers, etc.
18x10.000
lllustration 10. The direct labour hour requirements of three of the products manufactured in a factory. Operation I +=3,000
each involving more than one labour operation, are estimated as follows :
9 x 10.000
Direct labour hours per units (In minutes) Operation 3
Products Product 2 -;-:r'500
) 42 x 10-000
Operation I r8 42
Operation I a=7,000
Operation 2 t2
Operation 3 9 6 Operation2 13.!9,000:2,996
The factory worked 8 hours per day, 6 days in a week. The budget quarter is taken as 13 rveeks attd 6x10.000
during a quarter, lost hours due to leave and holidays and other causes are estimated to be 124 hours. Operation3 ----------:--: I, 000
The budgeted hourly rates for the workers manning the operation 1,2 and 3 are Rs.2,00 ; Rs.2.50 Product 3
and Rs. 3.00 respectively.
Operation I _-=5,000
30x10.000
The budgeted sales for the products during the quarter are :

Product.l 9.000 units 24 x 10.000

Operation 2 -------:_-:4, 000
Product 2 15,000 units
Product 3 12,000 units (4) Direct Labour Cost
Product I
There is a carryover of 5,000 Units of Product 2 and 4,000 units of product 3 and
Operation I = 3,000 hours x Rs.2 = Rs. 6,000
build up a stock at the end of the budget quarter as follows : Operation 3
Product 2
:
= 1,500 hours x Rs. 3 ns. A,SOO
Product I 1.000 units
Product 3 2,000 units Operation I
= 7,000 hours x Rs. 2 :Rs. 14,000
Operation2 = 2,000 hours x Rs. 2.50 : Rs. 5.000
Prepare a man-power budget for the quarter showing for each operation, (i) direct labour hours, /l/ Operation 3
direct labour cost, and (iii) the number of workers. Product 3
= l,000hours x Rs. 3.00 : Rs. 3,000

Solution' :
Operation I : 5,000 hours x Rs. 2.00:Rs. 10,000
Operation2 :4,000 hours
(5) Number of Men Required x Rs.2.50= Rs. I 0;000
Quarterly Man-Power Budgct
Product I Producl2 Producl3 Tolal Number of Men Required _ Direct labour hours required
lperations Hourly Total available hours per man
Rate Direct CosT Direcl Cost DirecT Cosl Direct CosT No. of 15.000
Lobour Lobour Labour Labour worken Operation I =30men
Hr* .Rs Hrc fis Hts. Rs Hts- Rs *
I 2.00 3,000 6.000 7,W0 14,000 5,000 10,000 1s,000 30,000 30 6.000
Operation2
2 2.50 2,000 5,000 4,000 10,000 6,000
2,500
r 5.000
7.500
l2
5
tr=12men
3 3.00 1.500 4.500 1.000 3,000
Operation
2,500
3 = ) men
500

fl t2)
 {
ii
ll 10.22 Budgeting ortd Butlgetan Control
jr
I
li
Srtlrrlitln
I
li, MANUFACTURING OVERHEADS COST BUDGET :

lit
lii The manufacturing overheads cost is that part of works cost which arises liottt indirect labour, indirect SalesOverhead Budget
t;;
materials, overheads and other factory expenses. manufacturing cost is excluded frotn direct trlaterial and direct
l,,
ii, labour. Manufacturing overheads cost may be classified into fixed cost, variable cost and scnti-variable cost.
il The fixect works overheads cost remains constant irrespective of output and it is eslimated on the basis 90.000 | t.35,000
ili
't'
of past experience. l'he variable works overhead cost is determined per unit of cost and it is calculated by l,'irerl ()vcrherds :
2.500 I 2.500
multiplying the rate per unit by the budgeted output. The semi-variable cost increascs tvtth the increase in Atlvcrl isctttcrrt
5.000 I 5.000
S:rllncs ol'sulcs dcparlrncttl
output but the rate per unit decreases with the increase in output. While budgeting ruanufhcturing overheads
I:xPcttscs ol s:rlcs dcpartlllcnt
r.500 I t.500
cost, management must consider the level of activity to be attained in future so that tlts expenses arc estimated ('ountcr s:tlcsrtran's salarics & I).n. 6,000 I 6.000
15.000
accurately.
Iltustration 11. From the information given below, prepare a tnanufacturing overhcad budget forthe Varinble ()verhends : o'ir
(irtutlcr Sllcsrrrarr's Cotrtrnission (rl I on :alcs
quarter ending December 31, 2008 :
I ravc g su lcsntcn's colrrrnission 7rr] I On'it
I I i rr

Budget output during the qttartcr : 5.000 units llxpcnscs ktl 57o
I:ixed overheads . lls i0.000
Its. 'I'otal
Variable Overheads (varying at thc rate of Rs. 5 per unit) 15.0()0 Salcs ovcrhcatls
Scmi-Variable Overheads (40% fixcd and 607ovarying @ Rs- 3 per unit)

Solution : CASTI BUDGET

Man ufacturin g Overheads Budget

A cash budget is an estinrals sf cash receipts and disbursements during a future period of time. lt
proceeds various other budgets like materials budgets and research and development budget. "The cash budget
for the quarter ending Dec. 3 I, 2008 over a future, short or long period of time. It is a forecast of expected
is an analysis of florv of cash ;x n 6gsiness
fis
Fired overheads 30.000 cash intake and outlay"r.
Variable Overheads (5,000 x 5) 2i.000 The cash rcceipts fpsm ynlious 5ptrrces are anticipated. The estimated cash collectiry fgl sales, debts,
incomes and sale of investments and other assetsivill be taken
Semi-Variable Overheads : bills receivables, intcrests, dividends 3pd other
Fixed (409'") 6.0(X)
otl purchase of materials, payment to creditors and meeting various
into account_ The amounts to be spent
Varinble ((@ Rs. 3 per unit) 15.000 .000
2 t

Total Overheads Ctlst
SELLING AND DISTRIBUTION OVBRHEAD BUDGET
This budget includes all expenses relating to selling, advertising and distribution of goods. These
expenses may be analysed according to products, territories, salesmen, etc. The fixed expenses undcr this category
may be estimated on the basis of past experience and anticipated changes. Variable selling and distribution
overheads sales figures. The responsibility for preparing this budget lies rvith the
will vary with t5e anticipated
executives of sales departments. The volume of these expenses should be in direct proportiott to expected sales
figures. The future expectations, estimated by the management, advertising policies. research programmes and
76.000 otler rcvcrruc and capital expenditure ngcds should be considered. Cash forecasts will include all possible
sources lionr which cash rvill be receivu'd and the channels in which payments are to be made so that a
consolid:rted cash position is determined'
T.he cash budset should be co-ordinated with other activities of the business. The functional budgets
may be adjustcd o..oriing 1s ths cash 61rdget. The available funds should be fruitfully used and the concern
should nol suffer for rvant of funds'
Iltustration 13. A company is elpecting to have Rs' 32,000 cash in hand on 1.4.2008 and it requests
you to prepare cash budget for the three flonths, April to Jme 2008. The following information is supplied to
you :

nature of these expenses will influence the preparation of selling and distribution overhead budget. Month Wages (Rs.) Expenses (Rs.)
Illustration 12. You are required to prepare a Sales Overhead Budget fronr the estirnates given belorv :
44,W 6,000 5,000
fs. 80,000 56,000 9,000 6,000
Advertisement 2.500 e6,W 60,000 9,000 7,000
Salaries of the sales department 5.000 1,6p,000 68,m0 I1,000 9,000
Expenses of sales dePartment 1.500 t20,wo 62,m 14,000 q000
Counter salesrnen's salaries and dearness allowance 6.000
Other information :
fru*ttilg Sutesmen's Commission at l}Yo on their sales and expenses at 5%o on their sales.
Sales during the period were estilnated as follorvs :
(a)Periodofcredit3llgwedb/suppliersistwomonths'
Travel li ng Sa lcs nten's
(b) 2l%of sales is for cash 3pd the period of credit allowed to customers for credit sales is one month.
CounlerSales
Rs. R.s.
(c) Delay in payment sf wage5,and expenses one month'
(di tncome tax is' 28,000 is to be paid in June 2008'
80,000 t0.000
I,20,000 I _s.000
20.000 ffiook of Business 46tinistration'
I,40.000

f\ ,.)
 Budgeting and Budgetaqv ('ontnn
Burlgeting an4 Budgetary Control
t0.25
l. Figures in brackcts indicate bank overdraft.
Cash Budget 2. Receipts from debtors :
for the months from April to June 2008 Aprir : 50%o of sares for February + 500/oof sares
for March: i{s. g0.000 + 96,000: Rs- r.g6,000
May I ,lune May:50Vo of sales for March + S}yoof sales forApril :
nr. 9O,OOO + 54.000 = Rs. 1.50,000
June : 50% of_sales for April + SOVoo-f sales
for May = Rs.54.000 + g7.000 = Rs. 1.41.000
Ilecc tltl s lllustration 15' Fronr the following forecasts of income
and expenditure, prepare a cash budget for
Opcnrng balance ofcash in hand' 32.000 I j7.or.rtr 82.(t(tt t the months January to April, 200g :
Reccipts liorn cash sales (25026) 3o'(tt-tt'
(lash realised liorn debtors (75ozo ot .lales Purchoses lVoges Monufacturing
Months (Credit) Adninistrative Salling
prcvlous nronth's salcs) (Credit) etperrses otPenses etPcnses
I oral (a) R.r, ,tRr
^Rs. fr.r R* Rs.
I'uyile nts'. 2007 Nov. 30.000 t 5,000
Crctlitors fbr purchascs (Feb. paid April Dec.
3.000 i.t50 t.060 500
35.000 20,000 3.200
and so on) 60.0()() 2008 .lan.
t.22s 1.040 550
25,000 t 5.000 2.500 990 I.t00 600
Wages I I.{XX) Feb. 30.000 20.000 3.000 t.050 I,t50
llxpenses 9.00(, Mar. 35.000 22,500 620
2.400 l. t00 1.220
lncome'l'ar 28.(X)( t April 40"000 25.000 2.600
570
lbtal (b) 1.180 t.200 7t0
Closrng Balance of Cash (a-b) Additional information is as follows :
l. The customers are allorved a credit period of 2 months.
lllustration 14. X Y Co. wishes to arange overdraft facilities with bankers during the perioo Aprrl ro 2. A dividend of Rs. 10,000 is payable in April.
June of a particular year, when it will be nranufacturing mostly for stock. Prepare a cash budger for tlre aborc 3' Capital expenditure to be incurred : Plant purchased on l5th of January
on lst March anci the payments are to be made in rontl,,i! : a Buildin,s
period from the following data. indicating the extent of the bank facilities. the company will require at thc t:utl for Rs. 5.000
ol each month : [Trffit::|,..,l"tto initatments oi
(a) 4. The creditors are allowing a credit of 2 months.
5. Wages are paid on the Ist of the next month.
Illonth Sales (Rs.) Purchoses (Rs.) lVnges ( Rs.)
6 Lag in payment of other expenses is one month.
February I,80,000 t.24.800 12.(xx) 7. Balance of cash in hand on lst January,200g is
N4 arch r.92.000 L^14.00(, l.l.(x)0 Rs. 15,000.
April i.08.000 2.43.(Xx) ll.(XXr
Ma)' t.?4-000 2.4(r-$.X! l().lr{()
.lrritc r.26.000 ?.68.(x)lr I i {)llil
Cash Budget
(b) 50% of the credit sales are realised in the month follorving the sales and the rernaining sales for the monlhs from January to April 200g
second rnonth following.
(c) Creditors are paid in the following month of purchase.
(d) Cash at bank on lst April Rs. 25,000.
r 8,985 28,795
Cash rcalised fronr Dcbtors 30.97s
Cashavailablc 35.000 25.000 30.000
Paynenls : 53.985 r3-lg5 60.975
Cash Budget Pal,menls of creditors(lbr purchases; I
for the months from April to June 2008 wages I
I:,OOO
r,zoo
20,000
2,500
15,000 20,000
Manufacturing Expenses 3.000 2.400
I I.ZZS 990
Expenses
Adminrstrative
I ,,OqO
|,050 r, t00
SellingExpenses I SSO
I,100
600
r"t50 t.220
Paymcnt of Dividend 620
I
570
Ii z:.ooo
1.86.000
56.00(l | -r a?.crt)u r
Purchase ofplant
I

I ,.OoO
t0.000
Instalments ofBuilding Loan i
Toral payments 2.000 2.000
Closingbalance I 26Jil 5 22.820
i q.r+,rrt ti i t.*r.ruo i r.4(r.rxxr i jt.sas
30.975
37.290

I rt.oor.r i ro.ooo i is.ooo

Illustration
23,685

l.55.ooo i 2"i3.ooo . 2.6 i.{rtr('

and June 2008
16. From the following budget data. forecast the cash position
at the end of April. May
'
ash i.rt Llan k/Overtlrali' i 56.000 | -{47.000) | { 1.6?.(XX) i :

lllonth Sales Purchnsas lYogLs lliscellaneous

rRr Rc. R.r
February
Its
r.20.000 84.000 10.000 7.000

(\ ,t)
-fr-
 Brulgetunlg!!!!! Iltllirlttty ttnl llurlgrtnrf /'t,ulrol
rn tK Builgeting otttl
/ ,,r r t',,, rlt.,r ottttl
r,30.000 |.00.000 12.000 tt.()()0 151
March (r.(XX)
April 80,000 t.04,000 8.000 t7.2r8
10.000 ll.(XXl l,t,l 4lt",,,rl l(., l. l(',(X)O (S:rlt:s lor Nlirv) 46.40b
May I, t6.000 r.06.000
8.000 (r.(X)0 l,l,l ltt",, rrl l{l) (l(X) (S;r[r',,6l Aprrl)
32.000
June 88.000 80,000
95-64E
( .t I I ,tlt ttlrrlrrtrt t,l I'ttl tttt.nl ltn ll',t1.t:i
Additional Information :
.,lpril
Sales : 20%o realised in the month of sales. discount allowed 2oh. Balance rcalised equally in tr,vo
.t')",, ll lt., l.t (XlO ( \\';r1'r.,, lor rrurrt.h) 3.000
subsequent months. / \" r, , rl l(., l{ (X)(t ( Wrrl,t.s lor Alrr il)
t'.000
Purchases.' These are paid in thc month following the month of supply. 9.000
llltlr'
Llrages : 2596 paid in arrears following month'
.'\",, ol l(., l(.(XX)(W,r1,t.., lor Aprrl)
Miscellaneous expenses- Paid a month in arrears' /\",, ol l(., lO.(XXt ( Wirl't'., lor lvlirt')
2,000
7.500
Rent: Rs. 1.000 per month paid quarterly in advance due in April 9.500
Income-tax: First instalment of advance tax Rs.25,000 due on or bclbrc l5th -ltrttc. Jnnr
Income from investmenls : ils. 5,000 received guarterly, in April, Juil' ol l(., l(| (X)() (\V,r1,r.., lor
,'1 '. .)5"o [1,1,,t
-/top 1
2.500
ol l(., t{,lXX) (W:r1,t.., lor lurrr.}
Cash in hand : Rs. 5,000 on lst April, 2008' 6JQO
8.500
Solution :
lllrrsll:rliolr 17. Irorrr llrt. lollowrrrg lorccasts of income and expenditure, you are required to prepare
Cash Budget a cilsll bttrllicl lor llrrct' ntotrllt', crrrlirrri i0tlt Novcnrber. The bank balance on lst September was Rs. 10.000
for the months front April to June 2008 tlonth Sa/es Purchases Woges Factory Exp. Office Exp.
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
lrrlr rt0.000 40.000 5.600 3.900 I 0{xx)
.\rr1'rrsl 76.500 42.000 5.800 .1. t00 t 2.000
5,680 ( ) 7.084 Scplctnlrt't 78.000 38.500 5,800 4.200 t4.000
Opcningbalance ( )ctohtr
l,06,736 95-648 9(f .000 37.500 5.900 5.t00 t6.000
Receipts from Debtors and Sales ( I ) Novcrrrlrcr 95.000 43.000 5,900 6,000 t 3.000
lncome from Investments
fiT7[6 A s,tlcs ((,rrrrrtt\:,r()tt rrl ,l'l ,, ott sltlcs, due in the month in which sales dues are collected is payable
Payments : in addition lo ollrtt'(.\lx.n:,(.s Irrctl irsscts rvortlr Rs.6,5,000 will be purchased in Septemberto be paid in the
Creditors follorvingtttotrllr l{',.1(1,(XX)itttcsJt.'t:lol rlcbcntureinterestwill bcpaidinOctober.Theperiodofcreditallowed
Wages(2)
Rent
to cttstlllttt:t:i r\ l\1'() Ittottllls;urrl onc rnrlnth credit is obtained from supplies of goods. Wages are paid trvice
Miscellaneous ExPenses itt a tttottllt rttt lr,l:rrrrl l(rlh respcctivcly. Ilxpcnses are paid in the montlr in which they are due.
Incometax
Cash Budget
ClosingBalance I
{ f rr tlu .llorrtlt.s cnditrs fi.onr -10th Septenzber to 30th Novenrbcr
.,:J

Working Notes : t?
I.l
(l) Calculation of amount received from debtors and sales rnl
';i
Rs' llauk I llrl;rrrt r:/( )vcrrlrirli at tlrt: hcrirrrrirrq ol'nrontlr
.ri (';trlt rt:irlrst'tl lnrnr tlclrtors {56.2r0)
Ir 78.000
April 16.000 Iol;rl (lr)
Cash sales (20Voon 80.000) I'ol ttrctt!.s
320 rl
.

Less 2oh discount ('rcrlrltrls lirr prrrclr:rsc ol'goods

15.680
52.000 Wagcs
Add 4\o/oof Rs. 1,30.000 (Sales of March) l;actory cxpcnscs
48.000
Add 40y.of Rs. 1.20,000 (Sales of Feb.) ( )llicc cxpcnscs
1.15.680
('orrrnrission orr salcs (47ool'previous 2 month's sales)
Mo! 23,200 l;ixcrl asscts prrrchascd
Cash sales (20% of I, 16.000) l)chcntrtrc intcrcst
464 'lirtal (h)
Less 2%odiscount
22,736 I ,53,5 l0
32.000 Ilank llirlarrcc/Ovcrdrall at thc end of nronth (a-b)
Add 40o/o of Rs. 80,000 (Sales of April)
52.000
Add 40Y"of Rs. 1,30,000 (Sales of March) lllustration 18. l'he following details of estimates are obtained in respect of the retail business of Fancy
1.06.736
Ltd. fbr the rnonths of January to March, 2008.
June
Cash sales 20% of88,000
17.600 (i) IVorking Capiral qs on lsr January, 2008 has becn estimateci as under

(\ ,,)
rn a0 Butlselinc and Budgetary Control Bu dg et i n g o nd Budgetary Co nt ro I

fr.
10.9(x) (2) Payments to Creditors for matcrials and expenses
Cash and bank balancc 51.4(X) Opening balance of creditors 42,200 40,000 39,000
Debtors 42.2(X I ,{dd: Outstanding expenses (opening balancc) 4.000 4.000 4.000
Creditors 4.(xx) 46,200 44.000
Outstanding cxPenses 9.7(Xr Add : C.ash cost of sales (3 below) 29,000 24.400 22.900
Dividcnd due 6.4(X) Administrative, sel ling and distribution cxpenses 6 300 5.400 5.1 00
Tax due 2(r.O(X ) 8l,500 73.800 7 t.000
Stock Less : Closing balance of creditors (40.000) (39.000) (38.000)
Outstand in-a cxpenses (closing balances) (4,000) (4.000) (4.000)
(ii) Budgeted prortt stutements for the three months are :
Pal,nrents to Creditors tbr materials and cxpenses 7.500 30.800 29.000
tannary February IIarch 2005
(Rs-) (Rs) (
(Rs.) (3) Calculation of cash cost of salcs
(XX)
34.(X Cost of sales (given) 32.700 28. r 00 26.600
42,000 36.000
6(X)
26.6( .4daJ: Closing stock 24.000 22.00a 20.000
32.700 28 t00
Cost of Salcs 7,900 1.4( )o 50. I 00 46.600
9,300
Gross profit 5.400 5" l( X) Less : Opcning stock (26,000) (24.000) (22,000)
6.300
Adrninistrative, sell ing arxl distribution expenses 2.500 Xr Deprcciation (being non-cash item) ( 1.700) ( 1.700) ( 1.700)
3,000
Net profit bcfore tax Caslr cost of sales 29.000 400 2.900

(iii) Budgetecl balance at the end oJ each month :

January February tllirch 2\tts
(Rs.) (Rs.) (Rt l CAPITAL EXPENDITURE BUDGET
22.000 2() (Xl() The budget lays dou,tr the anrount of estimated expenciiture to be incurred on fixed assets during the
.17 (xx)
50,000
Debtors llt.(x x )
buciget period. As the arnount involved in capital expenditure is usually high this requires careful attention
39.000
Crcditors 4,000 ,1.(xx I of the top management. The budget is based upon the annual forecasts of capital expenditure of various
Oustanding expenses ciivisions or departments. Each division or departrneni of an organisation sends the annual forecast of capital
Dividend due 6.400 6 ,t(x) expenditure of its own department to Capital Expenditure Sanction Committee. The Committee after considering
l'ax due
the profitabilit-v of the capital expenditure sanctions the expenditure and then the anlount is incorporated in the
uded in the budgeted expenditure of each nr,r,,l
t,
budget. A specirnen of the Capital Expenditure Budget is give below :
for the three months on receipt and pa1'tttt'ttt
you are required to prepare a monthwise Cash Budget
basis. Capital Expcnditrrre Budget
Pedod -.
Solution : trcjel Descrir. ExlenalC osa tntet nalCost Tolel Fslimaa€d Benelils Asset lo be rcpl eced
No- lion of (Exlemal Lile ol
Fircd Cost ot btivety fotal ,tatsi.tl Lebour Ovs plus Assels rareof relurn Descrip- Cost Rema*s
Assets Asefs and orher h€ds lntemal orcoslseving tion
for three months Jan-, Feb', and lvlarch 2008 Chrrg€s costs,l orcash inftow
Rs- Rs- Rs. Rs. Rs. Rs- Rs. (YqE)

Receipls: t4.800 12..1(x)

dpening balance ofcash and bank
Receipts from debton (l)
Pqments:
- -''
Cuyt"ntt to creditors for
Dividend Paid
Closing balance ofcash and bank
@eived
Openingbalanceofdebtors. .
Sales during the month (all credit)
ldd:
Less : Closing balance of debtors
Amount received from dcbtors
38.000 37.0(X)
MASTER BUDGET
The master budget is the summary of various functional budgets. lt is prepared by integrating various
materials and cxpenses (2) budgets into one consolidated budget so as to represent the budgeted profit and loss account and the budgeted
balance sheet as at the end of tlre budget period. In the words of Rowland and Willianr H. Harr, the master budget
is. "a summary of the budget schedules in capsule form made for the purpose of presenting in one report the
highlights of the budget forecast." The Institute of Management Accountant, London, defines it as, "the summary
budget, incorporating its component t'unctional budgets and which is finally approved. adopted and ernplo1,ed."
The master budget is prepared by the budget officer and requires the approval of the Budget Committee
before it is put into operation. Thisbudget is used to co-ordinate the activities of various functionai
from debtors departrnents and also to serve as a control device.
..
The various steps involved in the preparation of this budget include the construction of : ril sales
budget. as the starting point ; (iy' production budget '. (iii) cost of production budget ; /rvi cash budget :
and (v) the projected income statement and the balance sheet.

1A"r.^
 llulgrlltrg ttttl lSttlgrlur'1' ('ontntl l0.r

Illustration t9" A Glass Manufacturing Company requires you to calculatc alttl llrescrti thc
lrrrtlgct
li,rrr rn.rlt rr,rl li (ll' ) 57.000 47.000
for the next year from the following information' I rtlll\ lr.tl' (NJo', ) 37,000 28.000
Sales: 1rl/ (.) r o,.1., l(,; I .'O pcr kc lt costs 20 paise per kg. and empty bag costs 80 paise each.
l(s l.(X).0(X)
'Thoughened Glass
Bent Toughened Glass
tts 5.(X).(X)()
tr') ll tt'r1ttttt", () nunutcs ol tlirccl labour time to produce and fill one bag of P. Labour cost is Rs-
't |r'l lrotil
\
of sales
Diiect rnaterial Cost 6%o
20 rvorkers @ Rs. 150 Per month
(l) Vittt,tlrlc ttt:tttttlittltttittr'. t'osts arc Rs.0.45 per bag. Fixed manufacturing costs Rs.30,000 per
Direct Wages
r;tr,rt lr't
Factory Overheads :
Indirect Labour (t) V,ttr;tlrlt' '.t'lltttl rrttrl irrlrrrirristriltion cxpcnses are 57o of sales and fixed administration and selling
Works N'lanager Rs. 500 Pcr month. ('\ lx'n\(',, .rr t' l( s .) 5,(XX) l)cr quarter.
Stores & Spares 2rlr7oon sales /?.s
12.600 Yott irtr' rct;trrrcrl lo
I)cpreciation on MachinerY (t) I'rcp,rrr' .r protlrrt'lrorr brrtlqet lor the said quarter.
5.000
Light and Porver
{t.000 1tt) l'tr'p;rtt' rr t;rtv rrrirlcriirls prrrchase budget for Q. R and empty bags for the said quarter in quantity
Repairs and maintenance
Other sundries l07o on direct u'ages .r', w'r'll .r\ ur lul\('crJ
Adnrinistration, sell in g and distribtrtion expenses Rs. 14.000 per year. (ttt) ( ()nlllut(' tlrt' lrrrrlr'.t'tctl variable cost to produce one bag of P.
(n') I'rr'p,rrt';r.,t,lt('nt('nl ol lrrrdgctcdnetincomeforthesaid quarterandshowbothperunitand total
Solution :
r o',1 rl,tl,t

MasterBudget Solulion :

for the pcriod ...

/y' SalesBudget
--- -T' Rs. l)roduction Budget for Product P
./ttr Sccond tf 11nr1c/ si ]0AE
I
.-1.(X].()00
Thoughened Glass I
_s_00.00c
Bent Thoughened Glass I Bogs (Nos.)
8-0a.a00 []tttl1',c:lt'rl S:rlt",
I 50,000
n Production Cost Budget I
,lrlr/ Itllttrrrctl Lcvt'l ol { losrttl', Slot k
. r r.000
I
1.80.000
Direct materials, 60% of sales I'utrrl llt:t1rru crucrrt r 61.000
/.r.ss . I'l:tttttcrl Lr'r cl ol ( )pcnrrrr Stock
I
16.000
Direct rvages I t5.000
I 5. r6.000
Prime Cost I Itrorlrrt'l iorr llcrilrrr t:rrrcrrls lor llrc Qrrirrlct 46.000
i
Factory Overheads : ,il n""trl"t"ri"f p"rcft"r" nuOg"t
R.r I f
20.(xx) i _-T-
Variable : Stores and sPares I
R EmptyBags
(2ti-oh\ on sales I (kgs.) (kss.) (Nos.)
5.000
Light and pou'er I
1.5
8.000 13.000 I
Repairs atrd maintetrance ctlurt'rtrctrl., lor,l(r.(XX) lxrgs ol' l'
I
5.49.000 I,l l. !5.000 3.45.000 4(r.000
l
.1tlrl l'l:rttttctl l.t:r,t'l ol t:losirrg stor;k _?4!94 47.000 :8.000
Fixed : Indirect labour :
I
lirt:rl llctlrrircnrcnls
6.000 3.92,000 74_000
Works Manager I
i/.r,.s,s I'l:trrnctl l.t:vcl rrl ( )pcning Stock 32.000
4,800 57.000 37.000
Forematr I
Qrtlntrt) ol l(rrrv N,t:rlcrral lo hc I'rrrchascd 1.09.000
r2,600 3.35.000 37.000
[)epreciatiort I
('osl ol'l{itrv M;rlcri:rl pcr kgihl.q Rs. 1.20 Rs. 0.20
3.600 I 27.000 R-s. 0.80
Sundries (lost o(-l{irrv rrurlcrial lo bc purchascd lbr the Quarler
i
5.76.000 Rs 1.30.800 Rs. 67.(,00 lLs. ?9"600
Works Cost
(l-ll) i 2.211.000 Computation of Budgeted Variable Cost to Produce One Bag of p
llt. Cross Profit I

14,000
firl
IV. Adrninistration, Selling and Distribution Cost i

2.10.000
Rnw llalerid : Qtv. Rate(Rs.) Rs. ltr'.
V. Expectcd Net Profit (lll-lv) a 2.5. (kg.) t.20 3.00
l{ 7.s (kg.) 0.20 r.50 4.50
Illustration 20. PYE Ltd. produces and markets a very popular product called P. l'he company
ts
liruply Ilag l (No.) 0.80 0.80 0.80
interested in presenting its budget for the second quarter of 2008' 9
l)ircct labour Clost 9 5.00 x5
The following information are made available for this purpose : 60
(a) ltexpect; to sell 50,000 bags of P during the second quarter of 2008 at the selling price of Rs' Variahlc Manulacturing Cost
(Minutes) (per hour)

9 per bag.
(b) Eich bag of p requires 2.5 kgs. of a raw-material called Q and 7.5 kgs- of raw-materral called R'
(iv) Statement of Budgeted Net Income
/c) Stock levels are planned as follorvs :
Beginning of quarter End of quarler for the Second Quarter of 2008

t5,000 I t.000 Salcs llevenuc (50.000 x 9) Tolal

Finished bags of P (Nos.)
Rarv-rnaterial Q (Kgs.)
32.000 26.000 /.c.rs Variablc (lost : 4.50.000

(\ v)
 r0.32 Budgeling and Budgelary (-ontrtil Badgeting ml Budgetary Control

Solution :
Manul;tclttnttr (iosl (i(),(X)0 x (r.50) 3.25.000
Sclling iurtl Anrirrrslr:rtivc 22.500
PerforrnanceBudget
/s \
for the nrcnth of ..,
I rpt'ttscs ' 4'so'(){x)
\| l(x)
I

)
1ji)" ol s:rlcs)

/-r'rs ljirctl ('osl .

l:ixcd lvllnulactunng Cost 30,000

l'ircrl Adrrrinistration and Sclling Ctlst 25.000 55.000
Sales 5000 | 10.00 isoooo
Ilrrdgctcd Ncl lrrcornc
less Variable Cost 5.000i 4.00 lzo.ooo 4000
44.000
t8.000
-47i00- Contribution
I -otla i 3o,.ooo
I

26.000
Less. Fixed cost
I I 2o.ooo
I

I
21.0(x)
PERFOITMANCE BUDGETING
Pcrfbrrnance bud_eet has been deflned as a "bud-qet based on functions. activities and pro.iects ' Sumrnary Report on profi t plan
Perfornrancc budgeting rnay be described as the budgeting system in whiclr input costs are related to tlrt'
fs.
pcrforrnance, i.e., end results. lt is a system of budgeting which provides for appraisal of perfonnance as r.r't'll Planncd Incourc
Scllin-e Pricc Variance(Duc ro incrcase in sellingpricc. 4000 x I r0.000
as follow up rr"reasures. ) 4.000 (F)
Variable (lost Variancc (D.uc to increiue in cosiof production 4600 x
0.50) 2,000 (A)
Under conventional systent of budgeting. a budget represents a statement of various atnounts provrrlcrl Activit.v variance (Loss of contribution due to shortagcd ol-rarv
rnaterial iotttt oy 6,000 (Ai
for different kinds of expenditures to be incurred. It takes tlre fonn of rvhat is called as'List olappropri:rtiorr.,' l-'ixed cost Variance (Duc to Rcscarch and Dcvelopnrint rvhich
n"J to o" iot.n "to nroclify prpducti.rr
process)
and so long as expenses incurred by the concerned department do not exceed the budgctcci ?rrorrrl. llrt'rt' Actual Incorne 1000 (A)
is no apparent irregularity. Thus, the conventional budgeting lays entphasis only on the alnount of expcnst's 5000

to be incurred. The performance budgeting, on the otlrer hand, Iays emphasis on the results achieved or tlrc PERFORMANCE BUDGETING VS. PROGRAMME BUDGETING
perfonnance ratlrer than the expenditure inculred. Tlre performance budget as defined in the Report ol tlrt'
Programme budgeting, also known as Planning, Programming
Estirnates Committee on Budgetary reform reads as follows : and Budgeting System (ppBS), is a
budgetary process that is aimed at nraking government operations
"The performance budget is a budget based on firnctions, activities and prolects rvhiclt focus attcntiorr more efficient and rnore effective. ppBS was
first introduced in the u.S- Department of Defence in tqit. In
Britain, it is termed as..output budgeting,,. The
on the acconrplishment, the general and relative impoftance of the work to be done and the service lo lrt' pufpose of programnre budgeting is to reform the assignments
of funds rvithin the public sector and ro improve
rendcred rather than upon the means of accornplishments such as personnel, service, supplies. equiptnent. ctc thc'allocation of ftrnds be['r'een the pnvate and public secrors. ppBS
treats bud.geting.r."'"it".";;.';r"*r;
Under this system, the functions of various organisational units would be split into prograrntrles of activitrt's, and cunsiders buclgct as a statement of policy. lt is not an
annual t-'xercise rike a conventrona! revcnrc bucigei
sub-programmes and cotrlponent schemes, etc. and estimatcs would be presented for each." but a long-term progralnme say lbr 3 to 5 years. In PPB
systcnl, expenditure is classitieci according ro the
objectives rather than functions.
Perfornrance budgeting seeks to establish relationship between inputs (costs) and their direct otrtprrts
According to National Institute of Bank Management. performance budgeting is. "the process of analysirrgt, Though, the concepts of both programne and perfbrmance
budgeting lay greater ernphasis on the
economy and efficiency aspects of progranrme planning
identifying, sinrplifying and crystallising specific perfonnance objectives of a job to be acltieved over a period. and management, th; t*o ,yst",i.,, differ from each other
as below :
in the framervork of the organisational objectives. the purpose and objectives of the job. The technique is
characterised by its specific direction towards the business objectives of the organisation."
Pctfonnancc budgeling iwolves .. /y' development of perforrnance criteria for various programmes . 4rl Retrospcctive in outlook.
assessment of perfbrnrance of each programme and by' each responsibility unit : (iii) comparison of the actual 2. Dualuatii@
perfornrance rvith the budget : and (iv) undertaking periodic review of the programme witlt a view to tnakc Concerned rvith the process otu,txtc
Concerned rvith the purpose oF**.orli
modifications as required. Activity anaiysis aimecfio achGiJEiliii Output analysis aimed to acttieue sociiiJ6iEiiGi
lllustration 21. The follorving data relate to a company which had a profit plan approved fbr selling 5. Focuses on rvork Jrrogrammes.
Focuses on process of attocatingJ'un,fa
5000 units per month at an average selling price of Rs. l0 per unit. The budgeted variable cost of production 6. Releventtoffi Il.elevent to ttre prout@
levels ofmanagement.
rvas Rs. 4 per unit and fixed costs were budgcted at Rs.20,000, planned income being Rs. 10,000 per montlr
Because of shortage of raw materials the plant could produce only 4000 units and the cost of production rvas Citv Police Department traditionaily
increased by 0.50 per unit. Consequently the selting price was raised by Re. 1.00 per unit. To modifo production no' there:t::t;t,l*: ?,lh1c1a
is discussion
has prepared a Functionat Budget
about using u piogru,n,ne budget in an efforr to conrrol activities
and

processes in order to meet material slrorlage, the contpany incurred an expenditure of Rs. I 000 in Research and jobof securing resources from the state -Govcrnment. ffiffi"d.i;;#.;
Below are the proposed functional budget fbr the nexr
year and estirnated
Development. Set out a perforntance budget and a summary report. data- concerning the percentage of functional itern costs assignable to each of the four ma"jor
programmes of the police deparonent.
10.J4 Bu ilgeti n g t u tl ll u tlg cIu 4, Co rtt rol
llutl6t'ttttlg tttttl llutlgttttr l' ('otttnil
1
Good City Police Department Proposed Functional Budget :

(Rs.) (lll)|illtl'tl'llr.1,lllrlirlS'.|.''{@"'oo ""

Sakuies 5.25,000 Actual Hours Worked " ,\
Vehicle costs 2,50.000 particurarperiod trthis ratios is r30%then
,l,ll',,','i]i::,ll'i':i''lil;;.i'i;;',ll:,:lilill:l;i.',,':"t:;f;rj;t: it'r'o*'
Supplies
Utilities
t.25.000
50.000
,,','|
Nunrbcrof Actual Working Days in period
\
Miscellaneous
//r,/ ('lh.rrrlnr lt:tlio
44.000 a
Total e.9.+.000 N,,,,,b";, " 100

Percentage of costs assigned to each programme: lltt" t;tll. rvltt'lltcl itclttltl rvorking clays available are more or
"lr.rv'; less than the budgeted working
Crime Criminol Criminul --iroIJtc tlirl's ll lltt' t'tlt, l" rlr(tt('llrittt l(10'l'ir llrcrr aclual working days are more
than the budgeted number of working
Preventiott Invcstigutiott Pntceeilings llloventent rl;rys irrrrl t,r,.. r.,./ \r, rl llrc rlrlio is lcss tllur l00o/o.
Salaries 60Va 20010 I ( )ozo t0%- lllrlrlt:rlr,rr l'l I't'tlttcl X tilkcs .j ltottrs ro make and Y requires l0 hours.
In a month of 25 effective
1tt/
Vehicle Costs 70o/o 2OVo ri 59r tl'r\",l l'l ltrrttt" 'r 'l'tt. l(l(x) rrrrilr'l X irtttl 6(x) urrits of Y were produced. The
Supplies 20Yo 300io 20u,,, company employs 50 workers
300,,o
trt tltt'Pt.rltt(lr.rr (l('l)'rrllrrcrrl llre lrrrtlsctctl h.urs arc 1,02,000
utilities t096 60% 21lot" l(lo/o ior the year. calculate iapacity ratio. activity
Miscellaneous 30o/o 25% 20'lo 1<O,',
LJ /O
t:tlro ;ttlrl cllrt tcrrt v l,rlro
Solulion :
Required : Prepare a Programme budget for the next year.
Solution : Slirtrrl;rrrl I lurrr., lor r\r lrr,rl I'rorlrrt.lrolr
l'rtxlrrtlX l(X)(t,\ = 5,000 Hours
Furtclional Crime Crininol Crintinul Trtrffic Totol \ ('(,(1. l(l
l'rrxlrrtl : 6.000 Hours
Progromnte Itreventiott Invesligalions Procealings llloyennut R.r.
I 1.000 Hours
Salaries 3,r5,000 (60%) r,05,000(20%) 52.500( r0%) 52.5(X) ( 1091,) 5.25.000
llurll't'tt'rl I lorrrr (rrrorrtlrlv) I l,()1.(XX) : l2l : 8,500 l{ours
Acttr;rl lorrr., \\/rrrLt.rl
Vehicle costs I,75.000 (709l") 50,000(20%) 5,000 (2%) 20.(x)0(ti -(')(,) 2.50-000
I
'= 50 x 25 x 8: 10.000
Supplies 25,000 (20o/') 37,500(30%) 25,000(209i,) 17.5(X) (.10')i,) l,25.000 Actual lxrrrrs rvorked
Utilities 5,000 (r0%) 30,000(60%) r0,000(20%) 5.(XX) ( I0.ii,) 50.000 /ti ( irltucrlt l{:tlro _.=-_*-- \ 100
Ilutlgc(cd hours
Miscellaneous 13.200 (30%) I1.000(25%) ll,(xx) (25't,;) 44.000
'[otal 5.33.200 2,33.500 l,0 t.300 I 2(r (XX) 9.94.000 I0.(.x)0
n-.(x) "loo - l17.65\0

GOOD CITY POLICE DEPAR'I'M T] N-T lrrl tr'tir rlr l(:rlro Itl'1,!r,t hglg.,r.r,rtlg',t!!lgI
[]uJ.gctcd ii,lrrr-..
PROCRAMMEBUDGE'T
I l.tlU(t
I Rs: , l()i) ll' i l9 i.
Crimc Preventron I s.r:.zoo tJ._5()r)

Criminal Invcstigation | 2,33.500 trrri l,.llit.icrtcy ll:rlio Starrtlurd hours lbrlctuul production
.
CriminalProceddings 11,01.300 Actual llours Worked
, UO

TrafficMovement | 1.26.000
I t-000
Total Budgeted Amount | 9.94.000 = tt0%
,Jr-100
CONTROL RATIOS
The management wants to know whether perfonnance of its busincss is going as per schedule or not.
With this purpose in vierv some conirol ratios are calculated. lf thc ratios are lnore (han 100%, then the zcr' brtsc brrtlgctirtg is the latest technique of budgeting and it has an increased
use as a managerial
performance rvill be favourable but if these ratios are less than 100%, tlren the pcrfonnance will be unfavourable Itrrrl Ilris tcclttrit;trc w'its lirst used in Arnerica in 1962. r'ne drmeipresident
of Arnerica. Jimmy carter used this
or unsatisfactory. The following control ratios are calculated : lcclrrrirlrrt' rvhc' hc rv's lhc Govenror of Gorgia for
controlling state expenditure.
Actual Hou^ w'rked
(i) capacitv Rrtio = Bil;;il H;; "
t00 Ii As lhc nmrc.srggJsts' it is starting from a'scratch'. The
normal technique of budgeting is to use
trr'rvft'|r'\ 1"" * o^r r.".L o. u.t u.. ro. p-."pa,iig ,r,ii'-y.u, . uagr. This rnerhod .s
carries previous ve

,,r,i",,"r*'" -srandardH:e'rsltcsgLircduction.,o0 Ii [::]:;::,::1ilTl"+{i,^id::ii",ff-}ft:fi:1"'J'iH'':1'":l'iih:,i:"';,,nH-;xl;-

siruxti,r,s tn drc words ofpeter
A plher,,A plannin; and b ------- --'v.gn.s,v nE p,vJ!,n
t.,;trstily ltis crrlirc budget request in detail from scraich (Hence"zero base) and rr,it,
rrr('!rsser r\'.,uJrtrJ lYtry rrE srruul(j .1.i1
tr,L uu;#;il;-;,
speno money at arr.
all. rhe.
lhe approach requires that ail
I ;:':i,,ill::::::':::,i:::II
,--'".",
ttt 'tlccision packages' .:llh:
'h:"19
which are evaluated by systematic anatyiii and ranked
all activities be ana
anaryscrr
I in order of imponance.,.
d*4

J
 t0.36 Budgeting and Eudgetary Control and Control
10.37
In zero-basc budgctirrg a nrlnirscr is to justify why he wants to spend. The preference of spending.
on various activitics rvill dcpcnd uporr llrcir.iustification and priority for spending will be drawn. lt will havc
to be proved that arr activity is csscntial and the amounts asked for are really reasonable taking into account
fi,f"f;Ti:::::':T:#l*'':lls::,ly:::^:.::lryf
ro egonomicar activities and arternative courses
of action wiil arso 3nd
wa.1etu areas Emphasis wi,, be given
ue srudiedl
! qrrq w4)[gl I

the volunre of activity.

,fl lfi il#:i:ffi,:;,,:,"t"^"?:1:ff1^:_:*__q", u." or...,*,**. wiil be undertaken
Traditional Budgeting Vs. Zero Base Budgeting ;l'J.iliil,"r:,[til'#:',i'"":tion.
principle in fixing the priority.
A list orprioriti"' i; ;;;;; .#l,lli-J"1,""fffi:il:iJ"J,ift"";:tf;i
"*o"nditure
tng
(5) Zero-base budgeting will
Basis of Dilference Troditional Budgeting I Zero-Base Budgeting be appropriate for those
areas. whose output is not rerated
It becomes difficult to evaluate the performance of to production.
I Drnphasis Itismoreaccountingorientcdthandecisionoriented. I lt
is decision orientcd. La1,s ernphasis orr those sides which are not directry
rerated to production but
Dcpcnds upon past dataand lays cmphasis on 'hou' | 'rvhv'. This teci'rique witl be hetpfur in a.*.,nining
;itf[:"::::r.activities' trre utnity oi-ei"r, una every activiry
2. Approach i
',Tlfnr"..n is monitoring toward erpcnditurcs. | ,,, uooruu.h is towards achievenrent ot (6)
Budgeting will be related to organisational
objcctives. goals. Something will not be ailowed on the plea
it was done in the past' only those things will that
3. I?ocus I lts lbcus is on increase or decrease in cxpcnditures I Its tbcus is on cost bcnefit analysis. be allowld *r,i.r, *itt r,""rp in ,""riJ"g
organisrionar goars.
ovcr thc past.
4. Comrnunication LIMITATIONS OF ZERO.BASE BUDGETING
I ln traditional budgcting, conrruunication is usually I ltencouragescornmunicationbothvertically'
vcrtical. I and horizontally. Inspite of many advantages, there
5. Ir4cthod are a number of limitations arising
I The rnethod preparation of traditional budgct rs I lts prcparation is based upon selcction ol operation of ZBB. some of the important limitations mainly from difficultiees in
based upon extrapolation. I decision package in vicvv ol' cost-trcnclir are as berow :
analysis.
t benefit analvsis, which is .rr.n,iur for
ff#:Hi*"jL:::"" ZBB, is not possibte in respect of non-
t and ranking of decision padages as
PROCESS OF OR STEPS INVOLVED IN ZBB every manaser may not have the
The following steps are involved in zero base budgeting
"o.i5tt:'$":il*l$:"tion
' ffi-:il;:i"i"iT::ase.budgeting has no scope ro adjust for the changes and,thus,
:
flexibre
(l)The objective of budgeting should be detennined. When the objective is clear, then efforts rvill
4' It invorves a rot of time and cost of operating ZBB
be made to acliieve that objective. Different organisations may have different objectives. One corrcenr rnay is arso very high.
try to reduQ3) the expenditure on staff, another nlay try to discontinue one project in preference to another. So ACTIVITY BASED BUDGETING (ABB)
the first step will decide about the object and then other steps will be possible.
In the traditional method of making budgets
(2) The extent to whiclr zero base budgeting is to be applied should be decided. Wlrether it shoultl it certain overages are acded for increase
the previous year,s figures are taken
as the base and to
be used tbr all operational areas.or its should be applied in some areas only should be decided beforelrantl. in costs-.for the next period. this ietnoa
indirect costs because it is very difficult is rotto*"a particularly for
(3) 1'he next step in ZBB is developing of 'decision packages'. A decision package is ''a docurrrcul to establish exact relationship between
indirect costs' But it makes the budgets the levet of activities and the
that identifies a specitic activity in such a manner that managenlent can evaluate and rnnk it against othcr more of guestimates than predetermined
policy' Direct cost budgets' under statement of manager:. .t
activities conrpeting fbr linrited resources, and decide nhether to approver or ciisapprove it." con-ventional budleting, ur" ro."
inputs and outputs can be clearly accurate because the rerationship
established. However. between
(4) Cost and beneflt analysis should be undertaken. We slrould consider the cost involved and lhc the direct processing costs in
ii'th".tunging scenario where indirect costs
o situations, one cannot be content with outweigh
likely benefits to accrue. Only those projects should be taken first rvhere benefit is more as compared to tlrc 'nuny
years in dealing with the indirect rough and ready methods of yester
cost involved. Cost benefit analysis will help in fixing priority for various projects on the basis of their utility costs. Activity Based nuag.iing (ABB),
Management (ABCM)' helps in bridging also called Activity Based cost
pr ranking of decision packages. this gup orho*i.ag;b,
more scientifically on the basis to make indirect cost budgets
(5) T'he final step involved in zero-based budgeting is concerned with selecting, approving decisiort of lweiof activities rather thin a guess
"n.ouruging
work. Activity based budgets can be
has alreadv completed a"tiuiry e"red
packages and finalising the budget. ff,|lf'Jli;i,ff;Tff,lion costing tesit
identitoing activities/

BENIFITS OR ADVANTAGES OF ZERO.BASE BUDGETING ROLLING/CONTINUOUS BUDGETS

ZBB is a revolutionary concept and is relatively a new management tool for planning and control of clMA official Terminology defines. a rolling
activities. It involves people at all levels in the organisation and promotes team spirit. The plans and budgets further period' say a month or quart;;,
budget *
"?:1g.., continuously updated by
adding a
based upon ZBB are much improved than those based upon traditional budgeting. There are a number ol' and ded.ucing thJ p*iod,," The need for preparing a rolling
arises due to the elementof uncertainty in budgeting "u.ti;, budget
benefits that arise from zero-base btrdgeting. Some of the irnportant advantages of ZBB are enumerated belorv: known as continuous budgets,
particurarr'y ih" pri." Ievel changes.
Roting budgets, arso
( l) It enables management to allocate funds according to the jurisdiction of the programme. The prioritl,
u'" p'"p..i ro, u sno.t-term as ii" a.gr., of uncertainty
these budgets are continuously is much rower and
can be fixed fbr various activities and their implementation rvill be in the same oder.
toiin"al"*iended for the next p.;;"J-kA* t'"t"*'ri;
have taken place' Thus' changes that might
control becomes more effective with
(2)
Zero-base budgeting ilnproves efficiency of the management. Every manager rvill have to justify Plans However, it invorves more time, effort and money
the'use of rolling budget as it
is based upon recent
the demand for resources. Only those activities will be undertaken.which will have justification and rvill be in prrp.ution
of roiling budgets.
Illustration 24' (Advanced)' The Twin Products
essential for the business. tlre budget Ltd. manufactures trvo products A and
for the year ending 30th september 200g, B. For preparing
the following data are relevent :

tA "*
3Tr \
T
I

Bu dget i n g and B rt tlggllgryC ory!191 I

iOJE
y1,rr rrrt.rctpriretl to l)rcprrrc with all the necessary supporting schedules the following:
BalanceSheet :r 'llrt' t o:,1 rrl' 1',ootls stlld budget-
as at 30.9.2007 lr Ilrc r;t:'lt llorv llrltlgct lor the year.
fts'. Rs.
t llrt. lrrrrll,,cterl Sululcc shcet as at 30th September, 2008, in the same format as given in the

Share capital
4,00,000
32.000
.1.32.000
(l I l(",1 l( )tl \
Retained income Solulion :

Represented bY: 4,00,000

Plant and machinerY 3.00.000
Less: Provision for dePreciation
IAA,oaa ,\,'ln',lttl,' ( t) Sales Budget
38.000
Selling Price (Rs.) Sales Value (Rs.)

l-
Raw materials 1.18.000 I'nulucl Uuils
tt0.000
Finished goods 30,000 ti.000 30 2.40,000
Debtors 20.000 ll 5.000 40 2.00.000
Cash 4.68.000 4.40.000
l(r,000
Less: Creditors 36.000 ,\, ln',lttlr' ()) Production Budget (Units)
20.000
Provision for Taxation
lgjg ProduclA
8.000
Protlucl B
5,000
d 5'000 units of Product Iutlgctctl Srrlcs
2.200 1.000
'.stirnatctl ( 'Lr',rrt1' Slot k rtl l'irrisllctl ( iootls
B at an expected sEilin! price p.., lntj o.f R1
:o ana 10,200 6.000
|1,^49^:"^t:j.1i":,l,lr. ^,^,r,,"ri.,n Materials
Mareriats
irirr,ine depanmenr are. concerncd with production. (200) (2.000)
r,,, ;#;:;ffift;ffi:"i';;;il. )pcning StocL ol l'tttt'.llerl ( iootls
y oiitr."p..9ucts. The direct material a.d dircct labour content Inits to lx' lttotlttt crl 10.000 4.000
X and -.ur"o'l,i,nffiuiuiuinit. ' -.Si -
i" .r.ft unit of finished product are estimated as : - /u',/ tth' 1 11 R aw MaterialsUt ;agr Budget
AB Iluteriol X Moterial Y Total

ilHl''.1f*6'[::l';:l'"Tl"n """' 2 units

tunit
4 units
2units
'""1*-[ n
lroduct Il
ri.rxr0, z:z0,ooo,-itt
r
4,0()0x4= t (r.000 units
10.000x1=10.000 units
4.000x2:8.000 units
MaterialY @Re. lperunit t,t;:fi irtal l(r.000 units 18.000 units
Direct labour: Machining Dept' I ffi; Pricc pct trtttt I1s.3.00 Re.l.00
Finishing DePt. l{s Rs. 18.000 Rs. 1.26.000
Liosl ol l(irrv lrlirlt'l r:rl I l';ctl 1.01t.000
nt g ptt luuour hour * 0,"^l] j:d t]' Direct labour cost
Direct labour cost in the Finishing Dept. is Scln',lttl,'(J) Ra w MaterialsPurcha seB udget
t; ne. r per raboir hour for A and Rs. 2 per labour hour for B'
in tr," 1al"i"iiilil; hours. At the expected output levels Material X Materinl Y Tolol
(iv) Factory;";rl6; are applied on-,rt. Lutir of direct iabou.
forecasted: ll;iltlclr(l I l\;u'c 36.000 units 18.000 utiits
the foilowing-costs are -< ('kr:;ttt1' Slot k ol l(lrrr Nl;rte t:rl
I
t 6.000
.1.000
Uoctrnng Deptt. Finishing DePtt' r I

52.000 22.000
I
(2.000)
Fixectcosts: ,,,.f;l; u.,f,i ( )l)( nurl, \lor k ol ll;rrr lrlitlct tirl I
( 12.000)
_20J08
Indirect labour l(lrrr lrl:rlt'tt.rl lo lrt' l'tttt lt;tsctl 40.0(xl
1,00U i.000 I
Re. 1.00
Repairs 12.00U 2,000 I'tit't'pct ttrttl I
Rs. 3.00
Rs. 1,40.000
Rates 16.000 4.000 I'ttrt lt:rsc ( ttsl I R s. I,20,000 Rs.20,000
Depreciation 2,000 1.000
,\t'ln'tlttlt'(5) DirectLabourCostBudget
Power 0.50 1.50
Machinine Depfl. I fi,rishing DePn'
Variable cost Per labour hour Protlucl B Total
Inventoryforecasl: X@nits) Y(unils)
Raw materials

Sil:'1,"#ifl:iing
stock iO.OOO
lil:1,3
4,000

, ,itl,i
I )ircel l,:tlxrttr I lottrs

l.;rlrorrr l(atc pcr hour

20,000
( I 0,000x2)
Re. 1.00
4,000
(4,000x1)
Rs.2.00
t0,000
(10,000x I )
Rs.3.00
4,000
(4,000x l)
Rs.3.00
Finishedgoods ^ 2,200 1,009 l )ircct Lalrour Cost Rs. 20,000 Rs.8,000 Rs.30,000 Rs. 12.000 Rs.70,000
Estimated closing stock 200 2,000
Opening stock
t:t,:!,,u6) FactoryOverhead Budget

(v)
tuIachining Deptt. I Finishing Deptt. Tolal

(vi) ;ffi:::T"ii:iffi:l'.".Lilffiffi;1';e1H;;' r*''v-"1".t1*' j,:l'1"1 l':':liil"".: ili, I lrrdl',clcrl l;ixccl ( lost

ffi ;i;l"nf l#il:'',itfi H;:?i^dffi;i!:'$19:d^::o::lt':"?:'^-di'":'":::',t11X1+'# lrttlircct l.lbour Rs 14,000
| Rs. 6,000

ffil[[Tl",lr':HH:.' ;l' ;:iil;J yl; *il 4 Ri:T*q.^::.

Rs 6.000 respectiverv raxr
l{cpai rs 4.000
I r,ooo

il:ht ;di"ting of the year will be paid during the year' Ililtcs r2,ooo
I z,ooo
owing
l )cprcciation t6,000
| 4,000
Profitsaretaxedatanaveragerateof50%'Machinerypurchases'duringtheyear"estimatedtocost I'orvcr 2,ooo I t.oo!
Rs. 4u,000 will be paid during the year" Rt-48"ooo | *. t+.ooo Rs. 62.000
10.40 Budgeting and Budgaory Control
Budgeting and Budgetary Control t0.4r

Direct Labour hours 24,0N 14,000

(20,00or-4,000) (10,000+4,000) (a) CostOfGoodsSoldBudget
Fixed Overhead Ratc Pcr I lour Rs.2.00 Re.l.00 lor the year ending 30.9.2008
Variablc Ovcrhcads Pcr I lour (given) Rc.0.50 Rs. 1.50
Variablc Ovcrhcads (Rs. ) 24,000x0.50 14,000x 1.50
Rs
= Rs. 12,000 = Rs. 21,000 Rs.33.000 Direct MaterialConsumed (Sch.3) I,26.000
Rs. 95.000 Dircct Labour (Sch.5) 70,000
Factory Overheads (Sch.6) 95.000
Schedule (7) ComputationofCostofProduction@erUnit)and Cost of Production 2,9 t.000
Val uation of Closing Stock of Finished Goods Add: Opening stock offinished goods (given) 80.000
Less: Closing stock offinished goods (Sch. 7) 3.7t,000
Cost of Goods Sold 66,900
Direct Material:
3.04. t 00
X (2x3)d.00 (4x3112.00
Y (lxlFI_.0Q 7.00 (Zxt)=z'oo 14.00 (b) CashFlowBudget
Direct Labour : the year ending 30.9.2008
(2xl\2.00 (lx2):2.00 for
Machining Deptt.
(!x3)= 3'00 J(s ,(.s
Finishing Deptt. Ltr3F3.00 5.00 5.00
Opening balance ofcash 20,000
Variable Overheads:
Machining Deptt. (2x0.50|1.00 (1x0.50F0.50 Add: Collection from debtors (Sch. E) 4.20.000
(!x1.50fl.50 Total cash available 4.40.000
Finishing Deptt. 0xl.50Fl=5Q 2.50 2.00
FixedOverheads:
less: Outflows :
(2x2)4.00 (1x212.00 Payment to creditors (Sch. 9) r,40,000
Machining Depn.
(lxlFl:00 Direct Labour (Sch. 5) 70,000
Finishing Deptt. LLxlFI.OQ 5.00 3.00
Factory overheads less depreciation (Sch. 5) 75,000
Total Cost (per unit) r9.50 24.00
Sell ing, d istribution & administration expenses 60,300
ValueCiosing Stock
(1000x24) Payment of taxes (given) 20,000
of Finished Goods (2200x19.50) 42,900 24.000
Purchase of machincry (given) 40.000 4.05.300
Schedule ,(8) BudgetedCollectionfromDebtors Closing balance ofcash 34.700
(c) BudgetedBalanceSheet
Add: Budgeted sales during the year as at 30.9.2008

less: Debtors at thc cnd ofthe year (given) .Rs. Rs

Budgeted collection from debtors Sharc Capital(given) 4,00,000
Retained income(Sch. l0) 69.S00 4i9J00
Represented by :
Schedule (9) PaymenttoCreditors Plant and machinery 4,00,000
I R.* ldd Purchases 40.000 4,40,000
Creditors at the bcginning ofthe ycar ! to.Oo<l Less: Provision for depreciation
x l)
1.20.000 3.20.000
Add: Budgeted purchases during the year i 1.40.000 Raw materials (16,000 x 3)+(4,000 52,000
I 1.56,000 Finished goods (Sch. 7) 66,900 I,18.900
less: Creditors at the end ofthe year I fe.OOO Debton (given) 50.000
Cash (statement (b)) 34.700
5,23,600
Schedule (10) Budgeted Income Statement Less: Creditors (given) 16,000
(for theyear ending 30.9.2008) Provision for taxation (Sch. I 0) 37.800 53.800
4.69.800
(Sch. l) Illustration 25. (Advanced) Carryon Ltd. manufactures two products B and T. It is going to prepare
Iess.' Cost of goods sold (As pcr stat€ment (a) below) 4,40,000
Cross Profit 3.04. r 00 its budget for the year ending 3lst December 2008, Expectations for 2008 include the following :
t.35.900 OpcningBalances Rr. fs
Less: Selling, distribution and administration expenscs (given) 60.300 Fixed Assets:
Profit before tax 75,600 Land 20,000
less; Provision for tax (50%) 37.800 Buildings and plant 1,50,000
Profit after tax 37,800 Cumulative depreciation (60.000) t.t0.000
Add: Opening balance ofretaincd income (given) 32,000 Current Assets :
Total retained income 69,800 Stocks : Raw Materials 3,000
B 3,400
T 7.200
r3.600

\\"*
-T'
rol Ilutlgtlinl3 und lluilgelory Conlrol \
Iltt tlgal ing un il Il u tlgctury C onl
t0.42

Debtors
Cash/Bank -Ll,ili
68.6(xi
I l, I Production Budget (Units)

less.' Current Liabilities : Creditors 29'000

28'000
Itrrrlll'tcrl Sirlcs
Taxation -s;/-'0(x) -f.#*ffi ,1,/,/ ( lorrrrli Sloch ol'liintshcd Goods

: /.r'r.r ( )|rcrtttry,' Stoe L ol l:itrishcd (ioods

Represented bY 71.6(Xl
Share Capital 50,([X) -!.2 .60(l
I

Retentions B T l)irect Materials Budget (Usage and Purchases)

-b butletedsares
Finished Products
,i;'lil
,r.l"lilil
units) 200
J;l!3
N'lllcrrll lcrgttttt'rl lor I'rotlttct l] (ke.) (6000x5):30.000 (6000x3):18.000
il:ffi:tl:lll5|i'"',',n.0 r""0,
300
(in
l'2(x) 200 lVllrtcr rlrl tcrlttttetl lor I'rotlttet
'l' (kg.) (900x2):1,800 (900x4):3.600
units)
iin otll l)rrcct Mitlct tirl I lsirgc (ke.) 31.800 21.600
Budgetedclosingstock I

c. Production details P A N'tllct tll l)t i( c l)cl k['. (Rs.) 0.50 1.00
li, Direct IIaterials Irrlitl ('osl ol M;rlcri:rl I ls<:tl (Rs.) 15,900 2t,600
Rarv Material per unit of production 5 kg 3 kg l-)itccl Mitlcrr;tl l'tttt lt;tsc
B zki 4ke 'I
otal l )rlcet lr4ittt't ttrl I l:;rr1ic (ke.) 3l,800 2t,600
T 2.900 krr 2.000 kg. ,y',/r/. f-'losirrtt Sloe l ol lrlirtcr llrl (ke.) 2,500 1.500

3ffi1:13.':ffffJ:l;:il"":" ',illi:i,
Cost'per kg of material Purchased
lorlrs are required to
/,c.s.r'. ()pclrirr11 Slocl oI N'lltlt:ttitl (ke.)
34,300
2,000
32,300
23,r00
2.000
2l,100
( (Rs.) 32.300x0.50 2l,l00x 1.00
(tt) urrecr uruuur
are required for one unit of l'.
"iJi['. I)urchascs o'.1
:16,r50
i;# ."i ir"f""i torrr Rs'
=2 1,100

3ilrilllt ;, r,o, been estimateJ inut ru.tory on"rh.uJr, wit bc Its. 33,750.including ai DirectLabour Budget
r,,, Fl".llii r,
ure absorbed on a direct labottr hotrr basis'
11,750 ro, a.pr.liu,i"".-i".a.y ou.rrr"uJt -Protluct I lnils I'roilut'eil
be ignored (i.e. no opening or closing stocks)'
(iv) work in progr"r' itri, i, n.gtigiut. anJ cun
tJUe Rs' ll'625' They arc charged to goods
Administrative Overheads: These are
estimateO
d. nnitttto goods stocks and are absorbed as a percent'age
(r (XX) r8,000
leaving work in progress and entering
(XX} 4,500
of factory cost' E5W
rl-",::l':,'t;I":**o:.1'" to'oon rhev are charged to
e. "J",t,iitr'T,,ioilirt,iuution.overheads'percentase of the sellinq pil:. (c) ( )vcrhcad Absorption Rate (Factory Overheads Budget)
i,iJ"iil, basis of a
"ir;1.;';;;;
$il";Hl'#'t;:J';.";;J"; ;;;d;;;at Re'9q"l:it j'ffks or raw
I (Rs' 2'000)
ma'leriars are 2'000 kg llrrJgctctl liirt lrtty t lvcrlrcl.is
llutlllclt:tl I )irccl l.itlrottt' I lottts
Rs. 33.750
22,500
ii" }i ni. o]io tioi.oooju"a 2,000 kg of Q
jo'ooo is expected to be llrrtlgctcrl lr:rt'lrrrv ( )vcrlrt::rtls Absorption Rate (per labour hour) (33,750/22,500) Rs. 1.50
s raxation on 2005 proin"i""iimated aiRs ,clu"9:{ f'l'll,i:'lL::nt'
i::1;::;.S.. ffiJiilil ;iii t; paid during the third quarter of trre vear Closing Stock Budget
absorption costing
budgets for 2005 for Carryon Ltd' using
You are required to prepare the following Qtv.(ks.)
lllrv N'tltcriirls.
methods: 2,500
It
a. Sales budget (.) 1,500
b. Production budget (quantities only) Ijinislrctl iootls (
c. Oir.., materials budget (usage and pr'rrchases) I,200
d. Direct labour budget 200
e. Overhead absorPtion rate Computation of Cost Per Unit of Finished Goods
f, Closing stock budget
o
5' Cost of goods sold budget
h. Budgeted Profit & Loss Account I)ircct Matcrial : I

l, (5x0.50F2.50 (2x0.50)=t.oo I 2.50

() (3x.00F3.00 (4x1.00!4.00
i;;i:ooH.do ! I
3.00
I)ircct l,abour (3x2.00f6.00 (5x2110.00 | 6'00
Selling Price (Rs.) Factury Overheads (3x1.50|4.50 (5x1.50F7.50 i 4.50
Factory (Works) Cost | 16.00
5.000 | -rU l 'Jv'vvv Add:l}o/oF'orAdministrationOverheads(11,62511,16.250x100:10%) | 1.60
i:;ooisoi-lg i

Cost per unit | 17.60

{,\ ,,)
 t
3" What are the objectives of budgetary
k) Cost of Goods Sold Budget 4. List the various essentials of bJdgetarycontrol ?
Product T - Tutut 5. What is .budget period, ? "onool.
R.s. llr. 6. What is .budget manual, ?
Opening Stock of Finished Goods (given) 7,200 I 0.(r(X ) 7. What is a .key factor, ?
Dircct Malcrial tlscd (c) 2l,600 3 7.50( ) 8. Budgeting Vs. Forecasting.
Dircct Labour (d) 9,000
Factory Ovcrhcads (given)
45.(xx )
9. What are operatins budeits r
l-t 750
l0' wrire a brief note;r p;;;::"e.Budget-and
Administration Overhead (given) I r.62j Responsib'iry
Cost of goods rnanufactured 1.38.47i ll. What do you understand 6y Flexible g"ag.ring;' Budget.
Less: Closing Stock of Finished Goods (f)
_2(r.07{)
12. Write a note on cash budget.
Cost of Goods Sold r. r2.4{ls 13. Write a short note on per6rmance
Budgeting.
Budgeted Profit & Loss Account 14. What is Zero Base Budgeting
? -
15. What are control ratios i
/tir.
Sales (a) 16. performance Budgeting Vs. progtamme
2,(X).(XX) Budgeting.
[,ess: Cost of Goods Sold (e) 1.12,405 17. Write a short note on acrivity U*"a
Gross Margin
U"Ag"f;"g'iigel.
87.5()5 18. What do you understand by ,rolling
Less: Selling & Distribution Overheads (given) UuJirtr;-2.""
_2_().(x)0 C. Essay Type euestions
Operating Profit (before interest) 67 5()5
Less: Interest on Overdraft (given) \r)\
Profit betbre tax
_
(r7.(X i. ffiff 1"JH"ifffie*#i:ftr ? what are the characteristics ora good budget?
less. Tax
X )
sb;:l:fi
Profit after tax
(given) .10.( x ){) 3' what do you understat'a uv Budgetary control ? what are the advantages
.l7.0( ){ )
4. Describe the essential steps of a Budgetary of this system ?
--:t Controi Syrt.r.
5.
_.

Explain in detail the classihcation of buidgeti

a"co.aiig to.(a) time/6/ functions and (c)flexibility.

A. Objective Type Questions

" ;i'iffiP";:T:"i#ixq?#'li'*:hxf'"ii'i"t'"" un"'ii''r"vnJ'"' u'" pranning' co-
7' Discuss the proced,re-s for preparing
the roiio*ing budgets
l. Fill up the blanks (a/ Sales budget (b) produition UrJg"t :

f"/ M;;k budget.

:

(a) Budgetary control is a system of controlling ...... * for the preparation of budgets. BrLg
(b) A Budget manual spells out ... of various executives concerned with budgets flttot"'j[r'll!.ot*unttution out crearry the rore of key factor
(c) A factor which influences all other budgets is called factor. t ? Discuss the principal factors that shoutd
(d) Master Budget incorporates all ...... ...... budgets. ,HLi:r"olfl;:r"'o*et be considered in devetoping
(e) Zero-Base Budgeting was first used by t" 'Budgeting' ? Mention rhe tlpe of budgets
[Ans. (a/ costs (b/ duties and responsibilities (c) key (d) functional (e) limmy Carter. Hiil:,jll',:i'",|Lff-ff' normany prepared by a
2. State whether these statements are true or.false : ll' "A cash budget is the pi-an of ,l: and. paynents
(a) Efficiency ratio determines the capacity used by the factory. f:r.riojs
up so that the balance can be forecast gf cash for the budget period, drawn
(b) Calendar ratio calculates the ratio between Actual and Budgeted days. tt Budgeting ?
at regular i-ntervals." Explain this statement.
.'rn;;;le aiffereit si"or^i"""r*d
(c) Zero base budgeting will be appropriate in areas where output is not related to production ,yl,#il'i?:,,1J ffJi,,l,:T in it and how
(d) Flexible budgets change with the level of activity. t"tdl,d|H:?fl. b/..f:?ffsed Budgeting"' ? How is it different from
(e) Budgeting may be said to be an act of determining costing standards. ]l14" Write short notes on
ffi;:,fni traditionar
[Ans. True-(b), (c) (d) ; False-(o), (e)] :
3. (a) The basic difference between a fixed budget and flexible budget is that a fixed budget (a) performance Budgeting
(y' is concerned with fixed expenses whereas flexible budget deals with variable expenses. (b) Master Budget
(ii) cannot be changed whereas flexible budget can be easily changed. (cl Budgeting Vs. Forecasting.
(iii) is a budget for single measure of activity whereas flexible budget is on different activity levels.
(D) A flexible budget requires careful study and classification of expenses into :
(r) Past and current expenses
(ir) Fixed, semi-variable and variable expenses ,000 units in a factory are furnished below
(ili) Adrninistrative, selling and factory expenses. Per Unil
[Ans. (a) (iir) ; (6) (ii)] Materials Rs.
Labour 70
B. Short Answer Type Questions Variable Overheads 25
I What do you mean by a budget ? Fixed Overheads ( 1,00,000) 20
2 Compare budget, budgeting and budgetary control Direct Variable Overheads t0
5

(\ ,,)
Ifi

10.6 Bu dgel i ng un il IJU tlg et tn, Co ntrol Iluilgrtiug unil Iluilgt,tury ('ttutntl
Selling expenses ( I 5% fixed) t3
Distribution expenses (20% fixcd) l')r' 5' 4 l;tt krtv ts tttttt'ttll,rv' rv.rking to 50% capacity and produces
I 10,000 units. Estimate the
Adrninistrative expenses (Rs. 50"000) of lltt'totttlr;ttty rvltctt tl rvotks:rl (ro"i, lrntl [i09,1, capacity and offer your
5 critical cornments.
__t$ nl ('0""rvorliitti't;tl!tttltlctiul coslirrcrcascs by2o/oandsellingpricefalls
by2%.Attheg0o/oworking,
Prepare a budget the production of 8.000 units. rir\v rrrirl('li;rl cosl ut( l(.,t\(.ri lry Jrru urrtl scllirrg pricc fails by
5%.
. [Ans. Cost per unit Rs. 159.58 ; Total Cost Rs. 12,76,7007 Al 50"" (ill)il(llv $otkitts lltc ltroclttl costs Rs. 180 per unit and is sold at Rs.200 per unit.
Hint : Administrative expenses should be taken as fixed. lhc rrrrrt t.ost ol' l(s lttO is rrratlc up as lbllows :
Ex. 2. Draw up a flexible budget for overhead expenses on the basis of the followinq data arrd deterriiie
the overhead rates at 70Vo, 80Vo and 90%o plant capacity. N4:rlcr rirl .Rs"

At Litlrotrr r00
70% At 809',o At90%
lirtr:lot1 ( )r,r.r lrt.irrl 30
Capacil1, Copacit.l' Cnpacity
Atltttinislr ;rl r r't' ( )r'1.1 30 (40% fixed)
Rs fr'. Rs l;q.;1,1
20 (50% fixed)
Variable Overheads: lArrs. l(s .1.(X),0(X) , tts. I.11,000: Rs.2,12,0001
Indirect labour
l" x' (r' I ltc t'.rt ,l rttr itrl it:lc at capacity lcvel
t2.0(x)
Stores including spares .1.(XXl of 5,000 units is given under A. For a variati on
Semi-variable Overheads : :tlttivt' ,r lrck^v this lcvcl, lltc individual expenses vary of 25o/o
11l--:'lll11tity as indicated under B below :
Porver (607o fi xed, 40ou'o variable) 2Ql)0lI
Repairs and maintenance (60% fi xed, 40o/o v ariable) _2000
Fixed Overheads: Rs.
Mittcrilrl ('o:,1
Depreciation I I,(XX) l,aborrr ('osl 25.000 100% varying
Insurance 1.0(x) I)<l tvcr
t5.000 I 007o varying
Salaries 10.(xx) 1.250 80%ovarying
l{cplirs irrrtl l\1;rurlen;rrrr.c
Estimated direct labour hours-1.24.000 Hours. Slor cs
2.000 75o/ovarying
Ittspccl iorr t.000 l00olo varying
[Ans. Overhead expenses at70o Rs. 58,900 ; 809/o Rs. 62.000 ; at 90oh Rs. 65,100 Ovcrhead rates :
I)cprcci:rt rorr
500 20o/ovarying
0.54;0.50 ; 0.471 Adttrittrstrrrl iorr ( )r,er lrc:rrlr
t0.000 100% tixed
'follows 5.000 25%ovarying
Ex. 3. Production costs of Oriental Enterprises Limited are as :
Scl lirrg { )vr'r lrt':rtl:,
3.000 50% varying
Level of oclivill, (.'rtst prr rrrrrl 62,750
60% 70% 80% Rs. 12.55
Rs fr.r'. fts. l:irrtl llrc rrrrit cosl ,,rt ti". nr*tu
Output (in Units) t.200 l.4(x) 1.600 and 6,000 urrits
Cost (Rs.)
Direct materials 24,000 28.0(x) 32,000
lAns. l(s. 5l,4ttO ; lts. 62,750 ; Rs. 72,0201
Direct labour 7,200 tt.400 9.600 I'lx. 7- 'l'hc lirlkrrvirrg data
are avairabre in a manufacturilng company for a yearly
Factory overhead 12.800 I l.(r00 14.400
period :
liixctl cxllcrrst:s:
Works Cost 44.000 50.(xx) 56.000 (Rs. lakhs)
Wl1lcs irrrtl Sirlitrrcs
llclrl, rirtcs lrrrl taxcs 9.50
A proposal toincrease production to90%o level of activitv is under the consideration of management.
6.60
I)cprcciirlion
The proposal is not expected to involve any increase in fixed factory overheads. Prepare a statement showing 7.40
Srrntlry, arlnrinistnrtivc cxpcnses
the prime cost, total marginal cost and total factory cost at 90o/o level activity. Scrni-Vrrri:rblc cNpcnscs : 6.50
[Ans. Rs.46,800 ; Rs. 54,000 ;62,000] (:rt 50116 ol' clptrcit_r,)
N'luinlcrlrncc lnd rcpairs
Ex. 4. The following overhead €xpense relates to a cost centre at 50o/o of normal capacity. Draw up 3.50
Intlircct labour
a flexible budget for the cost centre for operating at75o ,100% and l25o/oof normal capacity S:rlcs rlcpirr trrrcnt salaries 7.90
Indicate the basis and assumptions upon which various expenses are divided. Sunrlrl, tulministrative expenses 3.80
Variublc cxpcnsc.s : 2.80
Rs. (at 50% ol-capacity)
Foreman 100 lVtatcrials
Assistant Foreman 40 2t.70
Lubour
Inspectors 65 ( )thcr cxpcnses 20.4('
Shop Labourers 50 7.90
Machinery Repairs 120 98.00
Defbctive Work 25
Consumable Stores 20
Overtime Bonus
by 20% between 80%o and 100%io capacity. Sales
Machine Depreciation t40
"ir"ri"",l.u?iu." ,

[Ans. At 75% Rs. 725 ; at 100% Rs. E80 ; at l25olo Rs. 1.125] (Rs.lokhs)
100

(\"i^
 Budgeting orul Budgetary Control
10.48 Budgeling ond Budgaary Contntt
t0.49
Direct materials per unit
60%;o capacity 120
Direct wages pcr unit Rs. 10.00
75ot6 capacity l5(,
Total factory overheads apportioned 4.00
90o/o c^pacity l8()
88.000
100%o capacity 200 It is required to
prepare :
Prepare a flexible budget, for the year and forecast the profits at 60%o,75Yo and 100% capacity. (a) Production Budget for the rast six months of 200g
(b) Production Cost Budget for the same period ; and
[Ans. At 50% Rs.2 Iakhs At l00oh Rs. 48.40 lakhsl
At6OYo Rs. l2 lakhs fAns. 22,100 units ; (b) Rs.3,53,600]
At75Yo Rs.25.20 lakhs Ex' ll' A company manufactures two products A and B. A forecast of the number
At90yo Rs.38.40 lakhs sold in the first six months of the year is given below : of units to be

Ex. 8. The production costs of a factory are given as follows :

January
i.r'. February 1,500 3,000
DirectWages 90.000 March 1,700 3,000
Direct Materials l,20.000 April 2,t00 2.600
Production Overheads : Fixed 40.000 May 2,500 2,200
: Variable 60-0(x) June 2,900 t,800
2.900 2.000
During the forthcoming year it is anticipated that : Itisanticipatedthat(r)therewillbenowork-in.p'
(a) Average rate for direct labour remuneration will fall from Rs. 0.90 per hour to Re. 0.75 per hour the sales for the next month will be in sto.tiut the
(D/ Production efficiency will be reduced by SYo. end of each month (including preuious
n::ffirf'f
(c) Price per unit of direct material and of other materials and services which comprise overhcatls Budgeted production and production costs for the
will remain unchanged ; whole year are zts follows :

(d) Direct labour hours rvill increase by 33t/r%o. Draw up a budget. ProductA Product B
Production (units)
25,000
[Ans. Rs.3,68,000] Per unit : Direct material
(Rs.)
26.000
13.00 t8.50
Ex. 9. Jamuna Printing Co. Pvt Ltd. ended with the following ProfiUloss during the year 2007. Direct labour
(Rs.) 5.50
Total factory overhead for the year 8.00
(Rs. in lohhs) (Rs.) 75,000 t.04,000
Sales 35.5tt Prepare for five months ending May 3l, u produ.
Less Expenses l budget.
Rawmatdial 7.42
Stores 7 4.88 [Ans. Cost of production : product A : Rs. 2,45,105 product B : Rs. 3,69,050]
bxpenses 20.40
Interesf 2.00
Ex. 12- Fo'owing information is given about a Ltd. concern.
You are required to prepare a Selling
Depreciation 2.00 36.70 Overheads Budget:
Loss fgr the ycar t.t2
The press had been rvorking at 60%o of capacity during 2004. Of the expenses of Rs. 20.40 lakhs, 25% Advenisement Rri
is variable. Salaries of salcs department 2,000
Expenses ofSales department fixed 2.000
In 2008, production/sales volume at80o/o of capacity is expected to be achieved. Fixed cost, however,
Salesmen's remuneration 950
is expected to increase by l.2Olakhs. :

Salaries
Draw the 2008 budgeJ. 6,000
Commission @ l%o on sales affected
[Ans. Profit Rs. 3,74,000 ; Total cost Rs. 43,70,000] Caniage Outwards : Estirnated
@ 5% on Sales
Ex. 10. The followirrg information has been made available from the accounting records of Payment Agent's Commission 60Z on sales
Precision Tools Limited for tlie last six months of 2008 (and of only the sales for January 2009) in respect of Sales during the period rvere estimated as follows
:
Fishpfate. X produced by it: ' Rs. I,00,000 including Agent's sales Rs. 10,000
(, The units to be sold in different months are :
Rs. 1,50,000 including Agenr,s sates Rs. 20,000.
Rs. 2,00,fi)0 including Agenr's sales Rs. 20,000.
July 2,200 November 5.000
August 2,200 Decernber 4,600 [Ans. Rs. 17,450; Rs.20,950; Rs.23.950]
September 3,400 January 2009 4.000 Ex' 13' Gama Engineering company Limited manufactured two products
October 3,800 number of units expected to be sold in X and y. An estirnate of the
tire hrst seven months of 200g is as follows
t'ii) There will be no work-in-progress at the end of any month. :

(ii y' Finished units equal to half the sales for the next month will be in stock at the end of every month ProduaX PrududsY
(including June, 2008) (units) (units)
/ivl Budgeted production and production costs for the year ending Dec.. 2008 are as thus: 500 t,400
600 1,400
Production (units)

tA"*
 \
Il u ilwt i tt g u ttil Il u tlgt'lury Co nlrol llulgttittli unil lluilgt'lurt ('onlntl
10.50
8{Xl 1.200 l,lr. l(r. A rrov (()lnl)illry c()nrucr.lccs husiness on lst July,2008 and deposits Rs. 10,000 in the\

\l
March l.(xx) r.000 Ilu., lrrrorrrrt rvill lrc rrurrlt'r;rurtt: lo lirrarrcc ils operations over a period of six months and you are askedl
'800
April 1,2(x) l)tcl)iu('ir('ir.;lrllrrtll',ctrrplo Ilsll)ct: 200ti toclctcrnrinethemonthlyoverdraftlimitstoseekfromthe company'S
May 1.2(x) 800 hlrttLct s
June 1.0(x) 900
July
I lrc rl;rlir lrrrrtisltcrl to yott arc as tllus :

1rl S:rles;rrc rruulc to onc distributor only on thirty days'terms.3olo discount and the cheques are
It is anticiPated that :
rcccrvcrl on tlrc lirst datc of the rnonth following the due date.
(:; [. no work-in-progress at.the end of anv month'
*io') il;J-;in'unio l(X)5 are as fbllorvs ('t) t'lrurt prrrclur,;cs lolalitrg, Its.5,000 arc to be made in July.
iffi;J -r r^ L^ri +Lo anririnnted qales for the next l)cccrttller'
:
.q'ut to tralt' - - Pr"rlurt Y (tit) All l)ut('lt:l:ics irrc nrirdc: ()n nel thirty days' terms and cheques are paid to creditors on the last
Product X
I 1.000 12.000 tlirY ol lltt' trortllt tlttc.
Production (units) t2 l9 (tr') llrrtllicl lir',tttcs ittc
Direct meterials Per unit (Rs') 5 i Jult' Sepl. Nov.
Direct Wages Per unit (Rs')
Augusl Oct. Dec.
48.000
to each typc of product (Rs')
i 33.(X.X) Itr: R.s. Rs Rs Rs. Rs.
other manufacturing .t org.t apportionable
I'tt tcl tir',t". 5.(XX) 4.000 3,000 4,000 4.000 5.000
You are required to PrePare :
Wirlic'. .1.0(x) s,000 4,000 4,000 5.000 4.000
LTffi ;,I#;,io*ins{re.nu1u.1?t:i::,:"^::i1"i:::llY,:'Tl;,,:';';11] ('itslt l .x;'t'rt',c', 4(X) 500 400 400 500 400
[j : $ffi#;;,"il;;;';;;, i"oel, f"iu T:1,1s period- January to runc 2008 S:rlcs 6 (XX) 7.000 8.000 8.000 9.000 r 2.000

of Production : X Rs' l'1l'000 ; Y' Rs'

""Hffi I'90'500
[A.nr. Cort Also rrrtcrprt't tlrt' rcsrrlls ur; shown by the preparation of Cash Budget.
Attqust, 200tr arc given as rollows:
l;:;:il;;;;;;; e*penaito." forecasts ror
lonl:orYurl,o qJlice t selting lArrs. t )r'r'rtlr:rll lrrrrrl', Jtrll'=-Nil Oct.-Rs. 610
Sa/es Purchues @"icxeDerrs,.'sla'rTcrrse'sicxpenses Aug.-Rs. 10,500 Nov.-Rs. 1,740
Monilts
(Credit) (Credit)
I
R.r:.
'r{s. i n' i n" Dec.-Rs. 6401
Scpt. --Rs. 2.580
Ri. tlilrt : ()vr.rrh:rli lirrrits should bc calculated rvithout taking into account opening balances.
l'rtr o.-T l.(xx) |
^Rs 4'ooo
9'ooo I
M.t.h- 60,000 36.000
8:oooI r.z:ir I t''oo I s'ooo l,lx. 17. I rorrr tlrc lirllowing clata, prepare a Cash Budget for the quarter October-December.
April
May
62,000
64.000
38,000
33.000 ';:;oo I
'n.oto I
o'uu., | :'stlo |
r.tso | :.txro I
+'soo
3'5oo
(,t) S:rlt's ltor llrc tttottths tlf' .

s.,u,,, I t'ttott I rts.

June 58,000
56,000
35,000
39,000 ;:ffi1 :'2,,,, L-- l'soo I
l'soo
Attlitt:;l 20.000
July
August 60,000 34.000 - i
8:ooo 4'5oo
Scptcttrlrt'r 25,000
()r'tolrct 30.000
Vou *"-gluen the following further information
:
Novt'ntlrct 30,000
l07o on clr:livery and the balance after
(a) plantcosting nr. iJ,oo"o is due for delivlrv in July payable I )ct errrlx'r 32.000
3 months. All tlrr.s:rtt'rrrrt.orrcrctlit. llall'ofthe duesarecollectedinthemonthofsaleonwhichacashdiscount
(b) Aivance tax of Rs' 8,000 is payable-
in March and June eaclt'
of Cash iurrl lltc otltcr lralf are realised in the next month.
2;t;th, una debtors are paying onc ntontlt lrrtc Opcning llerlance rll -l()"(' r.i irll()\vc(l
(c) Creditors allow
"..a'it (l't Muterirrls urc purchased for cash on which a rebate of 5o/o is ofTered by the supplier. If the
Rs. 8000. Lag of one month in expenses
May to July' conll)iury lrrrys orr crcdrt, payrnent can be deferred by one month foregoing the rebate. The purchase budget
Prepare a Cash Budget for the months
Rs' l2'750 ; July Rs' l8'400] lirr tlrc ncxt t;rrirrlcr is : Oclober Rs. 12,500, November Rs. 15,000 and December Rs. 18,000.
Rs' 15,750 ; June
t;l:;#;,
[Ans. Balance ; May
months of Januarv to April :
(,') I lrc tlircct labour Budget is as under :
*.'ri,,"*ing information, prepare a cash budset for the ExpectedSales Dept. A Dept. B
Expecletl Purchoses
Rs.
R.s. fis frs
( )clohcr 3,000 4,000
48,000 60,000
Novt:ruhct 3.000 ,l-000
January 40.000
80"000 )cccrrrbcr 3,200 3,800
45,000 I
February 8 r,000
March 40.000
90.000 (<l) 1'hc manufacturing Overhead budget is as under :
April
Rs. 8,000.
month" Balance at Bank on lst January Dept. A Dept. B General Facto4'
W"C* ," b" paid to workers Rs' 5'000 each f,s. Rs R.r-

It has been decided by the management that : <i.ri,tto 2,400 1,550 800
l,lTJ.T: $::T:',"J'ili.iTif,i;q'#{:i,1';ll'.ll1l,tflT*:#'l1T:?'#:B'gi[*']
",r'. ir'ir or Rs 42,000' issue or Novcmbcr 2,400 I,550 800

tl,'r:'#:"ii:*:'i';?HJ"#:Jil;'il'i;,d;;;riii"
debentures is to be preferred' . . ,,--.
I )cccnrbcr 2,500 r,650 900

the fact The above estimates include the quarter's provision for depreciation amounting to Rs. 900 for Dept.
issue of shares is prefened (considering
rt,t i;;;;;oideficit of $n! elceefi:g^T'1"1?:9i
"' iitui A and Rs. 750 for Dept. B.
i,-it *itttin the limit of authorised capital)'
1,26'000 ; Total receipts Rs' 1,93,000 ; Total Payments Rs' 3,19,0001
[Ans. Total deficiency Rs'

J
 1
10.52 - Budgeting ond Butlgerary Controt Bu dgeli ng and B udg et an' Cont rol
I
I
1053
(e)
The general overheads for the quarter are Rs. 3,500 (out of which Rs. 200 is for depreciation (ir) Activiry Ratio and
rescrve. Rs. 300 for bad debts reserve). (in) Capacity Ratio .
A An old rnachincry is to be replaced with an additional outlay of Rs. 7,000 in the month of December.
(g) The cash balance on lst October may be taken Rs. 15,000 StaniardnouisFirunit re
Actual Production t0
[Ans. Balance; Oct. Rs. 15,425 ;Nov. Rs. 15,975;Dec. Rs.7,175) Actual Working }Iours 750 units
Ex. 18. A large retail store makes 25Yo of its sales for cash and remainder on 30 days' terms. Due to 6,000
faulty collection practice, there have been losses from bad debts to the extent of lolo ofcredit sales on an average [Ans. (r) 125%o; (ii)
85.227%; (iii)ig.W)
in the past. The experience of the company tells that normally 600/o of credit sales are collected in the month production unit of a companv has a capacitv
ratio of 0.E and an activity ratio
following the sale, 25o,'o in the second following month and l4Vo in the third following month. Sales in the is its ernliln :; :X: of l .2. what
preceding three months of 2008 have been-Jan. Rs. 80,000 Feb., Rs. 1,00,000 and March, Rs. 1,40,000. Sales [Ans. 1.5]
for the next three months are estimated as April, Rs. 1,50,000 May, 1,10,000 and June, Rs. 1,00,000. Ex' 23' Goodluck Ltd' is currentlv operating atlilo/oof
is-capacity. In the past two years, the level
Prepare a schedule of thc expected cash collections during the month of April. May and Junc 2001t of operations were 55%o and 65%o respec;ty"]lrl.t*irv, ,rtr"p."a;&""'i;
isi,lidfrr,s. The company is
for presentation to tlre Finance Department. What will be the cash receipts if the credit policy is enforced strictly' planning for 8s%o capa.,ity level during 2o0s-2b06.
rn..*t
a.tiirs are as follows :
so that there are no overdue accounts and bad debts ? o/
April lt[ay June (Rs.)
/o
(RL
[Ans. Cash receipts Rs. 1,27,650 Rs. 1,31,750 Rs. I.1 7.325 Rs.)
'-
After enforcing credit policy Rs. 1,42,500 Rs. 1,40,000 Rs. 1.07.5001 Oirect t abour
Factory Overheads 5,50,000 6,50,000
Ex. 19. A company expects to have Rs. 25,000 in bank on lst May 2008 and requires you to prcparc 3,1q000 3,30,000
7,50,000
SellingOverheads 3,50,000
an estimate of cash position during ihe three months-May, June and July, 2008. Administrative Overheads 3,20,000 3,60,000 4,00,000
t,60,000 1,60,000
The following information is supplied : Profit is estimated @-0%TnEid 1,60,000

Month Sa/es Purclrcses lYages Oflice Foctory Sellirtg The following increases in costs are expected
during the year :
Expenses Expenses Expensas
^Rs Rr' rts fs Rs. itr ercentage

April
DirectLaoour'-
56,000 32,000 6,500 4,000 5.500 3.000 Variable Factory Overheads 5
May 60,000 35.000 7,000 4,000 6,000 3.500 Variable SellingOverheads 5
June 80.000 40,000 9.000 4,000 7.500 4.500 Fixed Factory Overheads 8
Ju ly 90,000 40,000 9,500 4,000 8.000 4.500 Fixed Sel lingOverheads t0
Other Information : Administrative Overheads l5
l0
(i) 20% of sales are in cash, remaining arnount is collected in the month following that of sales. Prepare fl.*ibl.
(if Suppliers supply goods at two month's credit. [Ans. Profit Rs. 9,46,300.1
(iir/ Wages and all other expenses are paid in the month following the one in which thev are incurred. Ex' 24' Bharat consumer Products employ l0 trucks
of l0 tons-capacity to deriver products to their
(iv) The company pays dividends to shareholders, and bonus to workers of Rs. 10,000 and Rs. I 5,000 The vehicles rernain empty on itt" ,iturn
iourney. The foltowifi'd;;r;i"- to tt , month of May,
respectively in the month of May.
lffiiuu'ott'
-
(v) Plant has been ordered and is expected to be received in June. It will cost Rs. 80,000 to be paid
in June. Load carried (tons)
No. of Truck'tripi 4,999
("i)
Income tax Rs. 25,000 is payable in July. Journey (hours)' 500 3,800
450
[Ans. Balance May Rs. 7,800 June Rs. (-) 60,700 in July. Rs. (-) 63,700]. Loading time (trours) 3'000 2,500
Ex.20. From the following data, calculate : Km. tra_velled -
1,000 g00
Diesel used (litres) ?f,000 25,000
(a/ Activity Ratio Fixed cosr ._ . l2,5oo l3;ooo
(b/ Capacity Ratio Cost per litre of diesel (Rs.) 8,000 8;000
(c) Efficiency Ratio No. of drivers Rs') l'oo 0.95
No. of machines l2 n
A factory manufactures two products A and B. Standard time to manufacture product A is 2 hours wages per driver per month 5 5
and product B l0 hours. The budgeted and actual production in December 2008 were as follows : Exp-ensisp.t-u"hini'n.rmonth (Rs') l'000
rvr "'v'!' 1,050
-e00
Budgeted Production Acluol Productiott
spi.es roirepai;--"'- tS I 2,000
(Rs.) - 999
2,500
Product A 125 Units 100 Units Prepare a statement for managem"n
Product B 30 Units 24 Units [Ans. Total operating cost : Budgeted Rs. 3g,500, Actual
Total actual hours worked were 660. Rs. 39,950]
Ex' 25' The Board of Directors of Puniab cable
Factory Ltd., have arranged for repayment
[Ans. (a) 80%; (b) 120%; (c) 66'z1r%] to a financial institution' You have been of a loan
asked tL prepare u p-ffi,ra profit
and ross account for 200g on the
basisof figures available for 2006 and2007 and io submit
Ex. 21. Calculate from the following figures :
estimated as the fair amount for repayment
it"i"t cash flow. rf 7so/oof the net cash flow is
(r) Efficiency Ratio, of loan, ascertain the sum that may be borrowed.

tA"*
 ;
I

FffirnalossAccount

io
To Raw

iibitlie'p"n"'
*r-_
ni* materlals
materials

T: ilfl:t*","ring
Deprecialion
To l)eprecta-ttut'
To Net Prottt
Expenses
il'ir''xiit,;
1,00,(X),(XX)
I'(x)'(x)'(x)o
l.llilliil',li
.'r[T0.00,(X)t)
-rt:T0.n0IX)f)
ifl3388[

+ffi
2006
- --:==:
---:=-
i.IO,OO,OOO
i'oo.og'qgg

RE S PONSIBILITY AC C OUNTING
11
---lTId!q:qqq-
ercOitSide
inifiod-
5.(lu,\^t'\t\'\'
1.00.00,(x)o 1,50,00,000 "io.oo.ooo (INCLUDING TRANSFER PRICING)
-Bi sr"'^
Ulostng stoct
Rv blosing () $91^r!1)_'1[l
lo (X).tx,tt
-qiiiix),it(ro --'I.60'-.oo,m
)---- -: t-- -==::-->_
ny Misc. income --::. -1 ,,,..,^.,faetrrrins

[]ii:T#:i[
u.-u,,u"o
Understand thc mcaning and essential features of responsibility accounting.
Steps involvcd in responsibility accounting.
,-t""tryilli;"b'*1.,ffiij.ji"..';T'Tile":il':xxl **"#fi,ili,ii'Tliiill.'l'",i,f Responsibility centrcs- cost, profit and investment centres.
stock
the closing .ts." ran.,re lncome-tax' Transl'er priccs.
-^,, .,-
- ^ rr,80'00'(x)ttl
Rs
o'\ /rrr
^nol
|l:,"i:"1ig"':'""t:Tlli;:8;ltff::'fi"il"Jil, ,,00,00,000; Loan Advantagcs of rcsponsibility accounting.
[Ans' N'P'
Rr

INTRODUCTION

**,llmf*#t#$gg[-tr"*@u'ury
ii ior",'ol and labour requirements
:
-
-'iiiirn";,
t2
6encttc'
---.;1_
As stated carlicr, onc olthe fundamental functions of management accounting is facilitating managerial
control. Various dcviccs are uscd by the nlanagement in performing this important function. Responsibility
accounting is one ol'thc most rcccnt developments in this field. It has assumed great significance and is rightly
described as modcrn approach to nranagerial control and reporting. The growth of responsibility accounting
f i. - 0.25 15 is aftributed to thc realisation that the results of operations must be regarded as human responsibilities and
filiuilit 1in cu (,o
irTiHl#i ii! :* Si;t #'J'', 45 t5 30 not as abstracl conccpts. While the other. control techniques, available under conventional accounting, are
directed towards dclcrnrining the total and unit product cost for the organisation as a whole, responsibility
accounting lays cruphasis orr pcrformance of individuals where responsibilities are fixed for persons and
El1"l"ffiI::'."'' divisions accountablc lor thc same. The concept of responsibility accounting is closelyrelated to the systems
timbt of budgctary control arrd standard costing. According to Schaltke, R.W. and Johnson, H.G., "the management
5% of the cost of
perhour.
per hour. r __-r^-ronne4

(cu.It) Tsq.Yds)
40o
400
2oo
-aw 'w -_ffi
100
1(X)
50
accouttting syslern lhat tics budgeting and performance reporting to a decentralised organisation is called
responsibi I ity :rccount ing."

TI{EANIN(; AND DBFINITION OF RESPONSIBILITY ACCOUNTING

opening 600
:33 260 --- ---'.:"'' 'l'he systerns of costing like standard costing and budgetary control are useful to management for
Closing controlling thc costs. In those systems the emphasis is on the devices of control and not on those who use
- such dcviccs. Rcsponsibility Accounting is a system of control where responsibility is assigned for the control
iou ut" required to : ^ -o.rrf;rcturcd.
l'J'iiu; of costs. 'l'hc persons are made responsible for the control of costs. Proper authority is given to the persons
i.u**u:lt6*^p""1?::,'lJ"g3-:iil't$"li,r^TT:f
(a)
(b)
ffJ#
wx;1ql{{iii".tT,' -EgHilH;"i':.'
ll:iil:; ilii""i *ug" ::1.*d?:'.
if.i,l, h!'fih'i:,'i,,': :1, reH3$ure
]l::
Pc. :: : ::";
I I ol' all
I I I three Products
so that thcy are able to keep up their performance. In case the performance is not according to the
predetcrnrined standards then the persons who are assigned this duty will be personally responsible for it. In
il3If i':*,6ri
('c)
responsibility accounting the emphasis is on men rather than on systems. For example, if Mr. A, the mana-ger
(d) o,[:'. to''n"
(e) lfi i'Tl;"lru':it {i iT; of a departnrent, prepares the cost budget of his department, then he will be made responsible for keeping ihe
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+ooo"; t9o^Xot' sq vds, Rs 17'200 budgets undcr control. A will be supplied rvith full information of costs incurre{ by his department. In case
"':'"i tn costs arc more than the budgeted costs, then A will try to find out reasons and take n"."strry corrective
2o ; r4r r5 lll€asures. A will be personally responsible for the performance of his department.

d Ftliiillo "Responsibility accounting is a system of accounting that recognizes various responsibility centres
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