Accounts CIA 2 - Budget

CUIM_MBA_G
BUDGETING AND
BUDGETARY CONTROL
SUBMITTED BY:
ABHIJEET SINGH 1020801

JETA PRAKASH 1020813
MADHUKAR DAS 1020815
NISHANT GUPTA 1020818
TYRONE POPE 1020830
YASH VARDHAN 1020833
NEHA CHAJJER 1020839
NIKITA SHARMA 1020840
PARNITA KUMARI 1020841
VASUNDHARA BHARADWAJ 1020846
CUIM_MBAG_MGMT_ACC_CIA_2
BUDGETING AND BUDGETARY CONTROL
CONCEPT OF BUDGET:
“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”-Brown and Howard
Characteristics:
a) A budget is primarily a planning device but it also serves as a basis for performance
evaluation and control.
b) A budget is prepared either in monetary terms or in quantitative terms or both .
c) A budget is prepared for definite future period.
d) Purpose of a budget is to implement the policies formulated by management for

attaining the given objectives.
Advantages:
1) Compels managers to think ahead –to anticipate and prepare for changing conditions.
2) Co-ordinates the activities of various departments and functions of the business.
3) Increases production efficiency, eliminates waste and controls the cost.
4) Also aids in obtaining bank credits.
5) It ensures that the working capital is available for the efficient operation of the business
and aims at maximizing the profits.
6) Creates necessary conditions for the introduction of standard costing techniques.
7) Assists in delegation of authority and assignment of responsibility.
8) Shows management where action is needed to remedy a situation.
2
CLASSIFICATION OF BUDGETS:
Budgets may be classified into the following categories;
1) ON THE BASIS OF FUNCTION AND SCOPE:
A) Functional budgets
B) Master budget
2)ON THE BASIS OF FLEIBILITY:
A) Fixed budget
B) Flexible budget
A) FUNCTIONAL BUDGETS:
A Functional budget is one which relates to a particular function of the business, eg

Sales Budget , Purchase Budget , etc.
Types of Functional Budgets:
1) Sales Budget
2) Production Budget
3) Production Cost Budget
4) Raw Material Budget
5) Purchases Budget
6) Labour Budget
7) Production Overhead Budget
8) Selling And Distribution Cost Budget
9) Administration Cost Budget
10) Capital Expenditure Budget
11) Cash Budget
3
1) SALES BUDGET:
The sales budget is a statement of planned sales in terms of quantity and value. It
forecasts what the company can reasonably expect to sell to its customers during the
budget period .The sales budget can be prepared to show sales classified according to
product , salesmen ,customers ,territories and periods, etc.
2) PRODUCTION BUDGET:
The Production budget is a plan of production for the budget period. The principal
considerations involved in budgeting production are:
a) Sales Budget
b) Inventory Policy
c) Production Capacity
d) Management Policy
3) PRODUCTION COST BUDGET:
This budget shows the estimated cost of production. The cost of production is shown in
detail in respect of material cost , labor cost, and factory overhead.
3) RAW MATERIAL BUDGET:
This budget shows the estimated quantities of all the raw materials and components
needed for production demanded by the production budget. It serves the following
functions:
A) It assists purchasing department in planning the purchases.
B) It helps in the preparation of purchase budget
C) It provides data for raw material control
4) PURCHASE BUDGET:
4
The purchase budget provides details of the purchases which are planned to be made
during the period to meet the needs of the business .It indicates.
A) The quantities of each type of raw material and other items to be purchased.
B) The timing of purchases.
C) The estimated cost of materials purchased.
Factors to be taken under consideration:
1) Opening and closing stocks to be maintained as it will affect material requirements.
2) Maximum and minimum stock quantities,
3) Economic order quantities.
5) Financial resources available.
6) Purchase orders placed before the budget period.
7) Policy of the management.
5) LABOR BUDGET:
It is classified under direct and indirect. The labor budget represent the forecast of
labor requirements to meet the demands of the company during the budget period. It is
prepared as follows :
I) The standard direct labor hours of each grade of labor required for each unit of
output and standard wage rate for each grade of labor are ascertained.
II) Multiplication of units of finished goods to be produced by the labor cost per unit
gives the direct labor cost. The indirect labor cost is normally a fixed amount.
6) PRODUCTION OVERHEAD BUDGET:
It represents the forecast of all the production overhead (fixed, variable and semi –
variable) to be incurred during the budget period .
The budget expenses for each sub – period during the budget period should be
indicated and the classification of expenses should be the same as used by the
accounting department. The budgeted overhead costs of service departments are
totaled and apportioned to production departments according to the services received.
5
8) THE SELLING AND DISTRIBUTION COST BUDGET :
It represents the plan of all costs incurred in selling and distributing the company’s
products during the budget period. As a general rule , the sales budget and the selling
and distribution budget is prepared simultaneously.
9) ADMINISTRATION COST BUDGET :
This budget represents forecast of all administration expenses like director’s fees ,
managing director’s salary , office lightings , heating and air-conditioning, etc. Most of
these expenses are fixed .
10)CAPITAL EXPENDITURE BUDGET :
It represents the expenditure on all fixed assets during the budget period. It includes
items as new buildings, machinery, land and intangible items like patents, etc. Special
characteristics:
a) Capital expenditure budget deals with items not directly related to profit and loss
account. Expenses related to capital expenditure such as depreciation , repairs , and
maintenance , etc. are , however , correlated to this budget and they are included in
overhead budgets.
b) Capital expenditure is frequently planned a number of year in advance , perhaps

five to ten years , in which case it is broken down into convenient periods like years
or months .
c) This budget involves large amount of expenditure which needs top management
approval.
11)CASH BUDGET:
It is a detailed estimate of cash receipts from all sources and cash payments for all
purposes and the resultant cash balances during the budget period. There are three
methods of preparing cash budgets:
a) Receipts and payment method
b) Adjusted profit and loss method
c) Balance sheet method
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FIXED AND FLEXIBLE BUDGET:
FIXED BUDGET:
A fixed budget is one which is prepared keeping in mind one level of output. It is
defined as budget “which is designed to remain unchanged irrespective of the level of
activity attained”.
FLEXIBLE BUDGET:
It is one “which is designed to change in relation to the level of activity attained” . It has
been developed with the objective of changing the budget figures to correspond with
the actual output received. These are prepared in those companies where it is
extremely difficult to forecast output and sales with accuracy.
USES OF FLEXIBLE BUDGETS:
It is more realistic, practical and useful.
They are useful in control point of view.
ZERO BASED BUDGETING (ZBB)
It is a planning and budgeting process which requires each manager to justify his entire
budget request in detail from scratch (hence zero base).
Main features of ZBB:
1) All budget items, both old and new are proposed, are considered totally afresh.
2) Amount to be spent on each budget item is to be totally justified.
3) A detailed cost benefit analysis of each budget programmed is undertaken and each
programmed has to compete for scarce resources.
4) Departmental objectives are linked to corporate goals.
5) The main stress is not on “how much” a department will spend but on “why” it
needs to spend.
6) Managers at all levels participate in ZBB process and they have corresponding
accountabilities.
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PERFORMANCE BUDGETING:
It lays emphasis on achievement of physical targets, it focuses on functions,

programmes and activities. These budgets are established in such a manner that each
item of expenditure related to a specific responsibility centre is closely linked with the
performance of that sector. It also sometimes called as Program me Budgeting or
Planning, Programme and Budget System (PPBS).
Steps in performance budgeting:
1) Establishment of responsibility centre
2) Establishment of performance targets
3) Estimating financial requirements
4) Comparison of actual with budgeted performance
5) Reporting and action
RESPONSIBILITY ACCOUNTING:
It is one of the basic components of a good control system. The main characteristic
feature is that it is relevant to the measurement of performance of departments or
divisions of an organization while other control systems are applicable to the
organization as a whole. Budgeting and variance analysis (standard costing)are thus
part of the responsibility accounting process.
Horngren has defined responsibility accounting as “ a system of accounting that

recognizes various responsibility centers throughout the organization and reflects the
plans and actions of each of these centers by assigning particular revenues and costs to
the one having the pertinent responsibility”.
Pre-requisites for Responsibility Accounting :
1) The areas of responsibility are well defined at different levels of the organization.
2) There are clearly set goals and targets.
3) Managers actively participate in establishing the budgets against which the

performance is measured
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4) Accounting system generates correct and dependable information for each

responsibility center
5) The managers are held responsible only for those activities over which they exercise
significant degree of control.
6) Managers must try to attain the goals and objectives
7) Goals for each area of responsibility should be attainable with efficient performance
8) Performance reporting should be timely and should contain significant information

relating to the responsibility centre.
RESPONSIBILITY CENTRE:
Responsibility accounting is based on the recognition of individual areas of

responsibility as specified in the organization structure of the firm. These areas of
responsibility are known as responsibility centers. It may be a department , a product
line , a territory or any type of clearly identifiable area of responsibility. It is of the
following three types:
a) Cost Centre
b) Profit Centre
c) Investment Centre
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QUESTION
1) J K Ltd .sells two products Jay and Kay in four areas-- North South East West. The
following sales are budgeted for the month of Jan 1990:
North—Jay 6000 units and Kay 3250 units.

South –Kay 6500 units
East—Jay 8500 units
West---Jay 4500 units and Kay 2750units.
Selling prices—Jay Rs .30 per unit; Kay Rs.15 per unit.
It was decided that additional advertising campaign will be undertaken in South and East
which will result in additional sales of 1500 unit of Jay in South and 2500 units of kay in
east.
You are required to prepare a sales budget for the month of January 1990.
SOLUTION
Sales Budget forJanuary, 1990.
Area Product Quantity Price Amount

Units Rs. Rs.
North Jay 6000 30 180000
Kay 3250 15 48750
Total 9250 228750
South Jay 1500 30 45000
Kay 6500 15 97500
Total 8000 142500
East Jay 8500 30 255000
Kay 2500 15 37500
Total 11000 292500
West Jay 4500 30 135000
Kay 2750 15 41250
Total 7250 176250
Total Jay 20500 30 615000
Kay 15000 15 225000

Total 35500 840000
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QUESTION
2) Madras agro chemicals manufactures chemical X. A forecast for quantity sold in the
first four months of the year is as follows:
Quantity in Units
January 1991 6000
Februar
y 1991 6000
March 1991 5200
April 1991 4400
It is anticipated that
a) there will be no work in progress at the end of any month

b) finished units equal to half the sales for the next month ‘will be in stock at the end of
each month including (December,1990)
You are required to prepare a Production Budget for each of the three months ending
31st March,1991.
SOLUTION
Production Budget
For the month ending 31st March 1991

Jan feb march
units units units
Budget Sales 6000 6000 5200

Add: Closing stock 3000 2600 2200
9000 8600 7400
less: Opening stock 3000 3000 2600
Production 6000 5600 4800

11
QUESTION
3) Glass Manufacturing Company requires you to prepare and present the budget for the
next year from the following information:
Sales :
Toughened Glass Rs 300 000
Bent Toughened Glass Rs 500 000
Factory over head:

Indirect labour
works manager Rs 500
foreman Rs. 400 per month
stores and spares 2.5% on sales
depreciation on machinery Rs 12,600
light and power Rs 5000
repairs and maintenance RS 8000
other sundries 10% on dir.wag
Admin, selling and distribution exp. Rs 14000/yr
SOLUTION
i) Sales Budget: Rs.

Toughened glass 300 000
Bent Toughened Glass 500 000
total sales 800 000
ii)Less: Administration, selling and distribution
expenses 14000
(A) Net sales revenue 786000
Production cost budget:
Direct material(60% of
sales) 480000
Direct wages 36000
Prime cost 516000
Factory overhead:
Variable:stores and spares 20000
(2.5% of sales)
Light and power 5000
Repairs and maintance 8000 33000
549000
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Fixed : Indirect Labour

works manager 6000
Foreman 4800
Depriciation 12600
sundries 3600 27000
(B)Works cost 576000
210000
QUESTION
4) Prepare a Flexible Budget for production at 80 per cent and 100 percent activity on the
basis of the following information:
Production at 50% capacity –- 5000 units

Raw material –- Rs.80 per units .
Direct labour --- Rs 50 per unit
Factory expenses Rs 50000(50% fixed)
Administration expenses --- Rs 600000(60% variable)
SOLUTION
Flexible Budget
Items 80% 100%

(8000 units) (10000 units)
Per unit Total Per unit Total
Rs. Rs. Rs. Rs.
Raw Material 80 640000 80 800000
Direct Labour 50 400000 50 500000
Direct expences 15 120000 15 150000
Prime cost 145 1160000 145 1450000
Factory Expenses
Fixed 3.125 25000 2.5 25000
Variable 5 40000 5 50000
153.12
Factory 5 1225000 152.5 1525000
Adm. Expenses
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Fixed 3 24000 2.4 24000

Variable 7.2 Rs. 57,600 7.2 72000
163.32
Total cost 5 Rs. 13,06,600 162.1 1621000

QUESTION
5) Production cost of a factory for a year is as follows;
Direct wages 180000

Direct material 420000
Production overhead --- Fixed 140000
Variable 180000
During the forthcoming year it is anticipated that;

a)The average rate of direct remuneration will fall from Rs 3 per hour to Rs 2.50 per hr.
b)Production efficiency will remain unchanged:
c)Direct labour hrs will increase by 25%.
The price of material and overhead is remaining the same
Draw up a budget and compute a factory overhead rate, the overheads being absorbed on a
direct wage basis
SOLUTION
Production Cost Budget
Rs.
Direct material 420000
Direct wages 180000 *2.50*125 187500
3.00*100

Prime cost 607500

Factory overhead Fixed 140000
variabl
e 180000 320000
Production cost 927500
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Factory overhead Factory

rate(%of D.wages) = overhead *100
Direct labour cost
320000 *100
170.67
187500 = %
QUESTION
6). A department attains a sale of Rs 600000 at 80% of its normal capacity and its expenses are
given below.
Administrative expenses RS Selling costs RS
1. OFFICE SALARIES 90000 SALARIES 8% OF

SALES
2. GENERAL EXPENSES 2% OF SALES TRAVELLING EXPENSES 2% OF
SALES
3. RATES AND TAXES 8750 GENERAL EXPENSES 1% OF
SALES
4. DEPRECIATION 7500 SALES OFFICE EXPENSES 1% OF
SALES
The distribution costs are: wages- Rs 1500; rent- 1% of sales; and other expenses-4% of sales.
Draw up a flexible administration overhead, selling and distribution overhead costs budget at
80% and 905 of normal capacity.
Solution:
FLEXIBLE BUDGET
PARTICULARS BASIS LEVEL OF ACTIVITY
SALES 80%(600000 90%(6750000

)
Administrative costs
Office salaries Fixed 90000 90000
15
General expenses 2% of sales 12000 13500
Depreciation Fixed 7500 7500
Rates and taxes Fixed 8750 8750
TOTAL ADMIN. EXPENSES (A) 118250 119750
Selling costs
Salaries 8% of sales 48000 54000
Travelling expenses 2% of sales 12000 13500
Sales office expenses 1% of sales 6000 6750
General expenses 1% of sales 6000 6750
TOTAL SELLING EXPENSES (B) 72000 81000
Distribution costs
Wages Fixed 15000 15000
Rent 1% of sales 6000 6750
Other expenses 4% of sales 24000 27000
TOTAL DISTRIBUTION (c) 45000 48750

COSTS
TOTAL COSTS (A)+(B)+(C) 232250 249500
QUESTION
7). Gaurav ltd. Will commence business on 1 Jan when it will issue equity share of Rs 10 each at a
premium of 30% payable in cash to finance.
(A) Capital expenditure
1 Jan – Rs 5 lakh
31 March- Rs 10.1 lakh by cash payment
(b) Working capital for the first six months on the basis of:
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(i) Sales Jan and Feb- Rs 60000 p.m., March-Rs 80000,April- Rs 1 lakh, May to July- Rs 40000 p.m.
collections have to be made on the last day of the month after that on which the goods were sold .
commission at 5% is payable on collection.
(ii) on the first date of each month ,there should be stock to supply all sales of the following month
only. Payments to be made on the last date of the month after goods were purchased.
(iii) salaries and other fixed expenses –Jan to March –Rs 3000 p.m .,April to June- Rs 5000 p.m.
These are payable on the last day of the month .
Prepare month wise cash budget for six months ending June.
Solution :
CASH BUDGET FOR THE PERIOD ENDED 30TH JUNE
PARTICULARS MONTHS
Opening balance receipts Jan feb mar april may june
Nil 147000 111000 4000 - 60000
Issue of equity shares 650000 - - - - -
(working notes)
Collection from debtors - 60000 60000 80000 100000 40000
(A) 650000 207000 171000 84000 100000 100000
PAYMENTS:
- 90000 60000 75000 30000 30000
Creditors raw materials
- 3000 3000 4000 5000 2000
Commission on sales
3000 3000 3000 5000 5000 5000
Salaries and fixed expenses
500000 - 101000 - - -
Capital expenditure
503000 96000 167000 84000 40000 37000
(B)
147000 111000 4000 - 60000 63000
CLOSING BALANCE
WORKING NOTES:
Calculation of amount raised from the issue of equity shares
Month –wise deficit, i.e. excess of payments over receipts
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1. Jan- receipt/nil-payments/Rs 503000 = Rs 503000
2. Feb- Rs 60000-Rs 96000 = Rs 36000
3. March- Rs60000-Rs167000 =107000
4. April- Rs80000-Rs84000= 4000
5. May – no deficit
6. June- no deficit
Thus Rs 650000 woth of capital has to be issued
Issue of equity shares(including premium) Rs 650000
Less: share premium (30/100*Rs650000) Rs 150000
Share capital = Rs 500000
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QUESTION
8). X ltd manufactures two products using one type of material and one grade of labour .
PARTICULARS PRODUCT A PRODUCT B
Budgeted sales 3600 units 4800 units
Budgeted material consumption per 5 kg 3 kg

product.
(standard cost =Rs 12 per kg)
Standard hours allowed per 5 hours 4 hours

product
(standard rate=Rs5 per hour)
Overtime premium is 50% and is payable, if a worker works for more than 40 hours a week. There
are 90 direct workers. The target productivity ratio for the productive hours worked by the direct
workers in manufacturing the product is 80%; in addition the non-productive downtime is
budgeted at 20% of the productive hours worked . there are twelve 5 day weeks in the budget
period and it is anticipated that sales and production will occur evenly throughout the whole
period,.
Stock at the beginning of the period will be, product A-1020 UNITS, PRODUCT B-2400 UNITS and
raw material -4300 units
Closing stocks product A 15 days sales, product B-20 days sales and raw materials – 10 days
consumption.
Solution:
PRODUCTION BUDGET
PARTICULARS PRODUCT A (units) PRODUCT B (Units)
Sales (for 12*5=60 days) 3600 4800
Add: closing stock (for 15 and 20 3600*15/60=900 4800*20/60=1600

days)
Less: opening stock 1020 2400
Budgeted production 3480 4000
Raw materials required per unit 5 kg 3kg
Budgeted raw materials usage 3480*5=17400kg 4000*3=12000kg
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Direct labour hrs required per unit 5hrs 4hrs
Standard hrs for budgeted 3480*5=17400 4000*4=16000hrs

production
QUESTION
9).You are required to prepare a Sales Overhead Budget from the following estimates:
Advertisement Rs.2,500
Salaries of sales department Rs.5,000
Expenses of sales department Rs.1,500
Counter salesman’s salaries and dearness allowance Rs.6,000
Commission to counter salesman at 1% of their sales. Travelling salesman’s commission at 10% on

their sales and expenses at 5% on their sales. The sales during period were estimated as follows:
Counter sales Travelling salesman’s sales
Rs. 80,000 Rs. 10,000
Rs. 1, 20,000 Rs. 15,000
Rs. 1, 40,000 Rs. 20,000
Solution:
Sales Overhead Budget for the period
Rs. Rs. Rs.
Counter sales 80,000 1,20,000 1,40,000
Travelling Sales 10,000 15,000 20,000
Total Sales 90,000 1,35,000 1,60,000
Fixed Overhead
Advertisement 2,5000 2,500 2,500
Salaries of sales dept. 5,000 5,000 5,000
Expenses of sales dept. 1,500 1,500 1,500
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Salaries and DA of 6,000 6,000 6,000

counter salesmen.
15,000 15,000 15,000
(A)Total
Variable Overheads
800 1,200 1,400
Commission of counter
salesmen(1%)
Commission of 1,000 1,500 2,000

travelling
salesmen(10%)
Expenses (5% on 500 750 1,000

travelling sales)
(B)Total 2,300 3,450 4,400
Total sales overhead (A 17,300 18,450 19,400
+B)
QUESTION
10).The following information is provided in respect of Pvt. Ltd. company Prepare a Cash Budget
for April, May and June 2007.
Months Details Sales Purchases Wages Expenses
Jan Actual 80,000 45,000 20,000 5,000
Feb Actual 80,000 40,000 18,000 6,000
March Actual 75,000 42,000 22,000 6,000
April Budget 90,000 50,000 24,000 7,000
May Budget 85,000 45,000 20,000 6,000
June Budget 80,000 35,000 18,000 5,000
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Additional information:
i. 10% of the purchases and 20% of sales are in cash

ii. The average collection period of the company is 1/2 month and the credit
purchases are paid regularly after one month.
iii. Wages are paid half monthly and the rent of Rs.500 included in expenses is
paid monthly. Other expenses are paid after one month lag.
iv. Cash balance on April 1, 2007 may be assumed to be Rs.15,000.
Solution:
CASH BUDGET
For the month ending June 2007
Particulars April May June
RECEIPTS
Opening Balance 15,000 27,200 35,700
Cash Sales 18,000 17,000 16,000
Collection from Debtors 66,000 70,000 66,000
Total say A 99,000 1,14,200 1,17,700
PAYMENTS
Cash purchases 5,000 4,500 3,500
Payments to creditors 37,800 45,000 40,500
Wages 23,000 22,000 19,000
Rent 500 500 500
Other expenses 5,500 6,500 5,500
Total, say B 71,800 78,500 69,000
CLOSING CASH BALANCE, A – B 27,200 35,700 48,700
QUESTION
11). The following information is provided in respect of Rashmi Ltd. Prepare a Cash Budget for
April, May and June 2007.
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Jan Actual 80,000 45,000 20,000 5,000
Feb Actual 80,000 40,000 18,000 6,000
March Actual 75,000 42,000 22,000 6,000
April Budget 90,000 50,000 24,000 7,000
May Budget 85,000 45,000 20,000 6,000
June Budget 80,000 35,000 18,000 5,000
v. 10% of the purchases and 20% of sales are in cash

vi. The average collection period of the company is 1/2 month and the credit
purchases are paid regularly after one month.
vii. Wages are paid half monthly and the rent of Rs.500 included in expenses is
paid monthly. Other expenses are paid after one month lag.
viii. Cash balance on April 1, 2007 may be assumed to be Rs.15,000.
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Solution:
CASH BUDGET
For the month ending June 2007
RECEIPTS
Opening Balance 15,000 27,200 35,700
Cash Sales 18,000 17,000 16,000
Collection from Debtors 66,000 70,000 66,000
Total say A 99,000 1,14,200 1,17,700
PAYMENTS
Cash purchases 5,000 4,500 3,500
Payments to creditors 37,800 45,000 40,500
Wages 23,000 22,000 19,000
Rent 500 500 500
Other expenses 5,500 6,500 5,500
Total, say B 71,800 78,500 69,000
CLOSING CASH BALANCE, A – B 27,200 35,700 48,700
QUESTION
12). Hindustan Ltd. is to start production on January 1, 2008. The prime cost of a unit is expected to
be Rs.40 (Rs.16 per material and Rs.24 for labor). In addition, variable expenses per unit are
expected to be Rs.8 and fixed expenses per month Rs.30,000. Payment for materials is to be
made in the month following the purchases. One-third of sales will be for cash and the rest on
credit for settlement in the following month. Expenses are payable in the month in which they
are incurred. The selling price is fixed at Rs.80 per unit. The number of units to be produced
and sold is expected to be: January 900, February 1,200, March 1,800, April 2,000, May 2,100
and June 2,400. Draw a cash budget indicating cash requirements.
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Solution
CASH BUDGET
For six months ending 30th June
Particulars Jan Feb Mar Apr May June

RECEIPTS
Opening bal - (34,800) (37,600) (32,400) (5,867) 27,600
Cash Sales 24,000 32,000 48,000 53,333 56,000 64,000
Collection - 48,000 64,000 96,000 1,06,667 1,12,000
from
Debtors
A. Total 24,000 45,200 74,400 1,16,933 1,56,800 2,03,600

PAYMENTS
Creditors - 14,400 19,200 28,800 32,000 33,600
Wages 21,600 28,800 43,200 48,000 50,400 57,600
Variable 7,200 9,600 14,400 16,000 16,800 19,200
Expenses
Fixed 30,000 30,000 30,000 30,000 30,000 30,000
Expenses
B. Total 58,800 82,800 1,06,80 1,22,800 1,29,200 1,40,400
0
Closing Bal. (34,800) (37,600) (32,400) (5,867) 27,600 63,200
[A – B]
Working Notes:
Particulars Jan Feb Mar Apr May June

Sales [Units] 900 1,200 1,800 2,000 2,100 2,400
Sales [Rs.] 72,000 96,000 1,44,000 1,60,000 1,68,000 1,92,000
Cash Sales 24,000 32,000 48,000 53,333 56,000 64,000
[Rs.] – 1/3
QUESTION
13).Ranjini Ltd. intends to approach her Bankers for temporary overdraft facility for three months
from 1st June to 31st August, 2007. Prepare a Cash budget for the above period.
Months Sales Purchases Wages
April 3,60,000 2,49,600 24,000
May 3,84,000 2,88,000 28,000
June 2,16,000 4,86,000 22,000
July 3,48,000 4,92,000 20,000
Aug 2,52,000 5,36,000 30,000
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(a) The entire sale is on credit basis out of which 50% is realized in succeeding
month and balance in the second month following sales.
(b) Creditors are paid in the month following purchase.
(c) Estimated cash as on 1st June is Rs.50,000
Solution
Cash Budget for the period ending 31st August
Particulars June July August
RECEIPTS
Opening balance 50,000 1,12,000 (94,000)
Collection from Debtors 3,72,000 3,00,000 2,82,000
A. Total 4,22,000 4,12,000 1,88,000
PAYMENTS
Payments to creditors 2,88,000 4,86,000 4,92,000
Wages 22,000 20,000 30,000
B. Total 3,10,000 5,06,000 5,22,000
Closing Balance [A – B] 1,12,000 (94,000) (3,34,000)
Overdraft needed NIL 94,000 3,34,000
QUESTION
14). Prepare a cash budget from January to April.
Expected Purchases Expected Sales
Jan 48,000 60,000
Feb 80,000 40,000
Mar 81,000 45,000
April 90,000 40,000
26
Wages paid Rs.5, 000 per month. Cash balance on 1 st January Rs.8, 000. Management
decides that:
a) In case of deficit up to of Rs.10, 000, arrangement can be made with the bank.
b) In case of deficit exceeding Rs.10, 000 but within Rs.42, 000, debentures to be issued.
c) In case of deficit exceeding Rs.42, 000, equity shares to be issued.
Solution
CASH BUDGET
Particulars Jan Feb March April
RECEIPTS
Opening balance 8,000 15,000 (30,000) (71,000)
Cash sales 60,000 40,000 45,000 40,000
Total, say A 68,000 55,000 15,000 (31,000)
PAYMENTS
Purchases 48,000 80,000 81,000 90,000
Wages 5,000 5,000 5,000 5,000
Total, say B 53,000 85,000 86,000 95,000
Closing Balance [A – B] 15,000 (30,000) (71,000) (1,26,000)
The total deficit of Rs. 1,26,000 should be raised from the issue of Equity Shares.
QUESTION
15). A company expects to have Rs 37500 cash in hand on 1 st April and requires you to prepare as
estimate of cash position during the three months. April, May and June. The following information is
supplied to you:
Months Sales Purchases Wages Factory exp Office exp Selling exp
February 75000 45000 9000 7500 6000 4500
27
March 84000 48000 9750 8250 6000 4500
April 90000 52000 10500 9000 6000 5250
May 120000 60000 13500 11250 6000 6570
June 135000 60000 14250 14000 7000 7000
Other information:
a. Period of credit allowed by suppliers 2 months

b. 20% of sales is for cash and period of credit allowed to customers for credit is one month
c. Delay in payment of all expenses 1 month
d. Income tax of Rs 57500 is due to be paid on June 15th
e. The company is to pay dividends to shareholders and bonus to workers of Rs 15000 and
22500 respectively in the month of April.
f. Plant has been ordered to be received and paid in May. It will cost Rs 120000.
Solution:
Cash budget for 3 months
Receipts: o/p bal 37500 11700 (-91050)
Cash sales [20% of 18000 24000 27000

sales]
Credit sales 67200 52500 96000
Total 122700 107700 31950
Payments
Creditors 45000 48000 52000
Wages 9750 10500 13500
Income tax - - 57500
Expenses
Office Expenses 6000 6000 6000
Selling expenses 4500 5250 6570
Factory expenses 8250 9000 11250
28
Dividend to share 15000 - -

hold
Bonus 22500 - -
Plant brought - 120000 -
Total 11700 (91050) (11480)
QUESTION
16). Excellent Manufacturers can produce 4000 units of a certain product at 100% capacity. The
following information is obtained from the books of accounts:
Aug.2006 Sept.2006
Units produced 2800 3600
Rs. Rs.
Repairs and maintenance 500 560
Power 1800 2000
Shop labor 700 900
Consumable stores 1400 1800
Salaries 1000 1000
Inspection 200 240
Depreciation 1400 1400
Rate of production per hour is 10 units. Direct material cost per unit is Re. 1 and direct
wages per hour is Rs. 4
You are required to:
i) Compute the cost of production at 100%, 80% and 60% capacity showing the variable,
fixed and semi-variable items under the flexible budget.
ii) Find out the overhead absorption rate per unit at 80% capacity.
Solution:
29
Flexible budget from Aug-Sept. 2006
_____________________________________________________________________________________
100% 80% 60%
Capacity capacity capacity
4000 units 3200 units 2400 units
Rs. Rs. Rs.
Variable cost:
Direct material [@Re 1 per unit.] 4000 3200 2400
Direct wages [@ Rs. 4 per hour for 10 units] 1600 1280 960
Shop labor 1000 800 600
Consumable stores 2000 1600 1200
_____________________________________________
Table ‘A’ total 8600 6880 5160
Semi-variable costs:
Power 2100 1900 2400
Inspection 260 220 180
Repairs and maintenance 590 530 470
Total ‘B’ 2950 2650 2350
Fixed cost:
Salaries 1000 1000 1000
Depreciation 1400 1400 1400
Total ‘C’ 2400 2400 2400
Total (A+B+C) 13,950 11,390 9910
Cost per unit (Total cost /units) 3.49 3.73 4.13
ii) Calculation of overhead absorption rate per unit at 80% capacity
Total cost at 80% Rs. 11 930
30
Less: direct material and wages 4480
Overhead cost 7450
Overhead rate per unit = 7450 /3200 units = 2.33
Working notes:
Calculation of semi-variable costs.
Variable cost per unit = difference in cost/ difference in units
Power = 2000 – 800/3600 – 2800 =200/800= Re. 0.25
At 70% fixed element in power cost= 1800- 700 (i.e. 2800 units @0.25 per unit) = Rs. 1100
Semi variable power cost at 100% = 1100 + 1000 (i.e. 4000 units @ 0.25) = Rs. 2100
Similar calculations for repairs and inspection.
QUESTION
17). A company produces two products and budgets at 60 % level of activity for the year 2006. It
gives the following information:
Product A Product B
Raw material cost per unit Rs. 7.50 3.50
Direct wages per unit Rs. 4.00 3.00
Variable overhead per unit Rs. 2.00 1.50
Fixed overhead per unit Rs. 6.00 4.50
Selling price per unit Rs. 20 15.00
Production and sales units 4000 6000
The managing director is not satisfied with the budgeted results as stated above and wants
to improve the performance. The managing director proposed that the sales quantities of
the products A and B could be increased by 50% provided the selling price is reduced by 5%
in the case of product A and 10% in the case of product B. the price reduction should be
made applicable to the entire quantity of sales of each of the two products.
31
You are required to present the overall profitability under the original budget and revised
budget after taking the increased sales into consideration.
Solution:
Original budget Revised budget
A B A B
total total
Sales (units) 4000 6000 6000 9000
(A) Sales value Rs. Rs. Rs. Rs.

Rs. Rs.
80000 90000 114000 121500

170000 235500
Costs:
Raw material 30000 21000 45000 31000

51000 76500
Labor
16000 18000 24000 27000
Variable O/H 34000 51000
Fixed O/H 8000 9000 12000 13500
17000 25500
24000 27000 24000 27000

51000 51000
(B) Total cost 78000 75000 105000 99000

153000 204000
(C) Profit (A-B) 2000 15000 9000 22500

17000 31500
Working note:
Revised sales figures are computed as follows: A B
Selling price per unit Re. 20 15
Less: 5% and 10% Re. 1 1.50
Rs. 19 13.50
32
Sales value = 6000 units * Rs. 19 = Rs. 114000
= 9000 units * Rs. 13.50 = Rs. 121500
QUESTION
17.) Prepare a Cash Budget for the three months ending 30 th June, 2005 from the information given
below:
(a
) Month Sales Materials Wages Overheads
Rs. Rs. Rs. Rs.
February 14000 9600 3000 1700
March 15000 9000 3000 1900
April 16000 9200 3200 2000
May 17000 10000 3600 2200
June 18000 10400 4000 2300
(b) Credit terms are:
Sales and debtors- 10% of sales are on cash, 50% of the credit sales are collected next month and
the balance in the following month:
Creditors- Materials 2 months
Wages ¼ month
Overheads ½ month
(c) Cash and bank balance on 1st April, 2005 is expected to be Rs. 6000.
(d) Other relevant information are:
(i) Plant and machinery will be installed in February 2005 at a cost of Rs. 96000.
The monthly installments of Rs. 2000 is payable from April onwards.
(ii) Dividend @ 5% on Preference Share Capital of Rs. 200000 will be paid on 1st June.
(iii) Advance to be received for sale of vehicle Rs.9000 in June.
33
(iv) Dividends from investments amounting to RS. 1,000 are expected to be received in June.
(v) Income tax (advance) to be paid in June is Rs. 2000.
Solution
Cash Budget
For three months ending 30th June, 2005
April May June Total

Rs. Rs. Rs. RS.
Balance b/f 6000 3950 3000 6000
Receipts :
1465 1565 1665

Sales* 0 0 0 46950
Dividend 1000 1000
Advance against vehicles 9000 9000
2065 1960 2965

Total 0 0 0 62950
Payments :
Creditors (materials) 9600 9000 9200 27800
Wages 3150 3500 3900 10550
Overheads 1950 2100 2250 6300
Installment for plant 2000 2000 2000 6000
1000
Pref. dividend 0 10000
Income-tax advance 2000 2000
1670 1660 2935

Total 0 0 0 62650
Closing balance 3950 3000 300 300
*working notes:
34
1. Calculation of collection from debtors
March
Feb. Rs. Rs. April Rs. May Rs. June Rs.
Sales 14000 15000 16000 17000 18000
Cash sales (10%) 1400 1500 1600 1700 1800
Credit sales 12600 13500 14400 15300 16200
50% collection in next month 67500 7200 7650
50% collection in the following month 6300 6750 7200
Total collections 13050 13950 14850
Cash sales 1600 1700 1800
14650 15650 16650
2. Payment to creditors for materials wages and overhead have been computed on a similar pattern.
(i) For example, payment for creditors for materials will be : February purchases will be paid in
April, March purchases will be paid in May, and April purchases will be paid in June.
(ii) Payment for overhead in April = (3000*1/4) + (3200*3/4) = Rs. 3150
May = (3000* 1/4) + (3600*3/4) = Rs.3500
June = (3000* 1/4) + (4000 * 3/4) = Rs. 3900
(iii) Payment for overhead in April = (1900* 1/2) + (2000* 1/2) = Rs. 1950.
QUESTION
18). Glass manufacturing Company requires you to present the budget for the next year from the
following information :
Sales :
Toughened Glass Rs. 600000
Bent Glass Rs. 200000
Direct material cost 60% of sales
Direct wages 20 workers @ Rs. 150 per month
Factory overheads :
35
Indirect labour –
Works manager Rs. 500 per month
Foreman Rs. 400 per month
Stores and spares 2.5% on sales
Depreciation on machinery Rs. 12600
Light and power Rs. 3000
Repairs and maintenance Rs. 8000
Other sundries 10% on direct wages
Administration, selling and distribution expenses Rs. 36000 per year
Solution
Master Budget for the year ending
Sales: Rs.
Toughened Glass 600000
Bent Glass 200000
Total sales 800000
Less: Direct materials (60% of Rs. 800000) 480000
Direct wages (20 * 150 * 12 months) 36000
Prime cost 516000
36
Fixed factory overheads:
Works manager’s salary (500*12) 6000
Foreman’s salary (400*12) 4800
Depreciation 12600
Light and power 3000 26400
Variable Factory Overhead:
Stores and spares 20000
Repairs and maintenance 8000
Sundry expenses 3600 31600
Works Cost 574000
Gross Profit 226000
Less: Adm., selling and dist. Expenses 36000
Net Profit 190000
QUESTION
19). Draw up a flexible budget for overhead expenses on the basis of the following data and
determine the overhead rates at 70%, 80% and 90% plant capacity.
Variable overheads: Rs.
Indirect labor 12000
Stores including spares 4000
Semi-variable overheads:
Power (30% fixed, 70% variable) 20000
37
Repairs and maintenance (60% fixed, 40% variable) 2000
Fixed overheads:
Depreciation 11000
Insurance 3000
Salaries 10000
Total overheads 62000
Estimated direct labour hours 124000

hrs
Solution
Flexible Budget for the period
At 70% At 80% At 90%

Particulars capacity capacity capacity
Variable overheads Rs. Rs. Rs.
Indirect labour 10500 12000 13500
Stores including spares 3500 4000 4500
Semi-Variable overheads:
Power: Fixed 6000 6000 6000
38
Variable 12250 14000 15750
Repairs and Maintenance :
Fixed 1200 1200 1200
Variable 700 800 900
Fixed overheads:
Depreciation 11000 11000 11000
Insurance 3000 3000 3000
Salaries 10000 10000 10000
(A) Total overheads 58150 62000 65850
(B) Estimated direct labour hours 102500 124000 139500
Direct labour hour rate (A / B) Re. 0.536 0.5 0.472
Working notes :
1. Indirect labour cost at 70% = 12000*70/80 = Rs. 10500
at 90% = 12000*90/80 = Rs. 13500
Similar calculation for other variable items, i.e., stores.
2. Power – Fixed = Rs. 6000, Variable = Rs. 14000.
Variable power at 70% = 14000*70/80 = Rs. 12250
at 90% = 14000*90/80 = Rs. 15750
Similar calculation for repairs and maintenance
3. Direct labour hours at 70% = 124000*70/80 = 108500
at 90% = 124000*90/80 = 139500
QUESTION
20). For the production department of XXL Ltd you are required to :
(a) Prepare a fixed budget of overheads;
(b) Prepare a flexible budget of overheads at 70% and 110% of budgeted volume;
39
(c) Calculate a department hourly rate of overheads absorption as per (a) and (b) above. The
budgeted level of activity of the department is 5000 hour per period and a study of the
various items of expenditure reveals the following :
Rs. Re. per

hr.
Indirect wages 0.4
Repairs Up to 2000 hours 100
For each additional 500 hours 35

up to a total of 4000 hrs.
Additional from 4001 to 5000 60

hrs.
Additional above 5000 hrs. 70
Rent and rates 350
Power Up to 3600 hours 0.25
For hours above 3600 0.2
Consumable 0.24
supplies
Supervision Up to 2500 hours 400
Additional for each extra 600 100

hours above 2500 and up to
4900 hours
Additional above 4900 hours 150
Depreciation Up to 5000 hours 650
Above 5000 hours and up to 820

6500 hours
Cleaning Up to 4000 hours 60
Above 4000 hours 80
Heat and lighting From 2100 hrs. to 3500 hrs. 120
From above 3500 hrs. to 5000 150

hrs.
Above 5000 hours 175
40
Solution
Fixed and Flexible Budget for the period
Items of Overhead Nature of Overhead Fixed Flexible Budget

Budget
100% 70% 110%
5000 hrs 3500 hrs. 5500 hrs.
Rs. Rs. Rs.
Indirect wages Variable 2000 1400 2200
Repairs Semi-variable 300 205 370
Rent and taxes Fixed 350 350 350
Power Semi-variable 1180 875 1280
Consumable Supplies Variable 1200 840 1320
Supervision Semi-variable 950 600 950
Depreciation Semi-variable 650 650 820
Cleaning Semi-variable 80 60 80
Heat and lighting Semi-variable 150 120 175
Total overheads 6860 5100 7545
Hourly rate of Rs. 6860 Rs. 5100 RS. 7545

overheads
5000 hrs. 3500 hrs. 5500 hrs.
(Total overheads / Hours) =Rs. =Rs. =Rs.

1.37 1.46 1.37
QUESTION
21). J K Ltd. Sells two products Jay & Kay in four areas North, South, East and West. The following
are budgeted for the month of Jan. 2005:
North - Jay 5,000 @ Rs.30 each, and Kay 3,000 units @ Rs.15 each
41
South - Kay 6,000 @ Rs.15 each
East - Jay 7,500 units @ Rs. 30 each
West - Jay 4,000 units @ Rs. 30 each and Kay 2,500 units @ Rs. 15 each
Actual sales for the same period were as follows:
North - Jay 5,750 @ Rs.30 each, and Kay 3,500 units @ Rs.15 each
South - Kay 6,250 @ Rs.15 each
East - Jay 8,250 units @ Rs. 30 each
West - Jay 4,750 units @ Rs. 30 each and Kay 2,625 units @ Rs. 15 each
On the basis of all the relevant factors, the following sales are budgeted for the month of Feb. 2005.
North - Jay 6,000 and Kay 3,250 units
South - Kay 6,500 units
East - Jay 8,500 units
West - Jay 4,500 units and Kay 2,750 units
It was decided that additional advertising campaign will be undertaken in South and East which
will result in additional sales of 1,500 units of Jay in South and 2,500 units of Kay in East.
You are required to prepare a sales budget for the month of Feb. 2005 for presentation to
management also showing the budgeted and actual sales for the month of Jan. 2005 which are to be
provided as a guide in preparing the sales budget.
Solution
Sales Budget
For the month of Feb. 2005
Budget Feb. 2005 Budget Jan 2005 Actual Jan 2005
Produc Quantity Price Amount Quantity Price Amount Quantity Price Amount
Area t units Rs. Rs. units Rs. Rs. units Rs. Rs.
North Jay 6,000 30 180,000 5000 30 150000 5,750 30 172,500
Kay 3,250 15 48,750 3000 15 45000 3,500 15 52,500
Total 9,250 228,750 8000 195000 9250 225000
42
South Jay 1,500 30 45,000
Kay 6,500 15 97,500 6000 15 90000 6,250 15 93,750
Total 8,000 142,500 6000 90000 6,250 93,750
East Jay 8,500 30 255,000 7500 30 225000 8,250 30 247,500
Kay 2,500 15 37,500
Total 11,000 292,500 7500 225000 8,250 247,500
West Jay 4,500 30 135,000 4000 30 120000 4,750 30 142,500
Kay 2,750 15 41,250 2500 15 37500 2,625 15 39,375
Total 7,250 176,250 6500 157500 7,375 181,875
Total Jay 20,500 30 615,000 16500 30 495000 18,750 30 562,500
Kay 15,000 15 225,000 11500 15 172500 12,375 15 185,625
Total 35,500 840,000 28000 667500 31,125 748,125
QUESTION
22).Viveka elementary school has a total of 150 students consisting of 5 sections with 30 students
per section. The school [plans for a picnic around the city during the weekend to places such as
the Zoo, the amusement park, Planetarium etc. A private transport operator has come forward
to lease out the buses door taking out the students. Each bus will have a maximum capacity of
50(excluding 2 seats reserved for teaches accompanying the students).The school will employ
two teachers for each bus, paying them an allowance of Rs 50 each. It will also lease out the
required number of buses. The following are the other cost estimates:
Cost per student

Breakfast 5
Lunch 10
Tea 3
Entrance fee at Zoo 2
Rent Rs650 per bus.

Special permit Fee Rs50 per bus.
Blocked entrance Fee at planetarium Rs250
43
Prize to students for games Rs 250No costs are accompanied per teacher (apart fromRs50
allowance).
You are required to prepare:
(a) A flexible budget estimating the total costs for levels of 30, 60, 90, 120 and 150 students.
(b) Compare the average cost per student at these levels.
(c) What will be your conclusion regarding the break-even level of students if the school
proposes to collect Rs45 per student?
Solution.
Flexible budget to estimate total cost
No. of Students 30 60 90 120 150

Rs. Rs. Rs. Rs. Rs.
Variable Costs:
Breakfast 150 300 450 600 750
Lunch 300 600 900 1200 1500
Tea 90 180 270 360 450
Entrance fee to Zoo 60 120 180 240 300
600 1200 1800 2400 3000
Semi-Fixed Costs:
Rent of Bus 650 1300 13000 1950 1950
Permit Fee 50 100 100 150 150
Allowance to teachers 100 200 200 300 300
800 1600 1600 2400 2400
Fixed Costs:
blocked Entrance Fee at
Pl. 250 250 250 250 250
44
Prizes to stud. For

games 250 250 250 250 250
500 500 500 500 500
Total Costs 1900 3300 3900 5300 5900
Average costs per 3300/6 3900/9 5300/12 5900/18
student 1900/30 0 0 0 0
63.33 55 43.33 44.17 39.33
Breakeven level
Collection per
student 45
Variable cost per
student 20
Contribution per
student 25
Since semi-fixed costs changes for every 50 students, fixed costs + semi-fixed costs for 3 level of
students to be covered are:
51 to 101 to
Level upto50 100 150
Fixed Costs(including semi-fixed costs) 1300 2100 2900
Contribution per student 25 25 25
Break -even point

no. of students to recover fixed costs 1300 2100 2900
including semi-fixed costs 25 25 25
52 84 116
The figure 52 lies outside 1st limit, while 84 and 116 lies within the limit hence they are 2 break-
even points.
QUESTION
45
23). your company manufactures two products A and B. A forecast of the number of the units to be
sold in the seven months of the year is given below:
Produc Produc
tA tB
January 1,000 2800
Februar
y 1,200 2800
March 1,000 2400
April 2,000 2000
May 2,400 1600
June 2,400 1600
July 2,000 1800
It is anticipated that (Í) there will be no work-in-progress at the end of any month, (ii) famished
units equal to half the sales for the next month will be in stock at the end of each month (including
the previous December).
Budgeted production and production costs for the whole year are as follows:
Produ Produ
ct A ct B
Production (Units) 22,000 24,000
Rs. Rs.
Per unit, Direct
Material 12.5 19
Direct Labour 5 7
Total Factory
Overhead 66,000 96,000
apportione
d
Prepare for the six months ending 30th lume, a production budget for each month and a
Summarized production cost budget.
Solution:-
Production Budget
(For six months ending 30th June)
Jan Feb Mar Apl May June Total

(Units) (Units) (Units) (Units) (Units) (Units) (Units)
Produc
tA
46
Sales 1,000 1,200 1,600 2,000 2,400 2,400

(+) Closing Stock 600 800 1,000 1,200 1,200 1,000
1,600 2,000 2,600 3,200 3,600 3,400
(-) Opening Stock 500 600 800 1,000 1,200 1,200
Production
Budget 1,100 1,400 1,800 2,200 2,400 2,200 11,100
Produc
tB
Sales 2,800 2,800 2,400 2,000 1,600 1,600

(+) Closing Stock 1,400 1,200 1,000 800 800 900
4,200 4,000 3,400 2,800 2,400 2,500
(-) Opening Stock 1,400 1,400 1,200 1,000 800 800
Production
Budget 2,800 2,600 2,200 1,800 1,600 1,700 12,700
B) Summarized Production Cost Budget

Product
Product A B Total
Rate Amount Rate Amount
Rs. Rs. Rs. Rs. Rs.
2,41,30 3,80,05
Direct Material 12.5 1.38.750 19 0 0
1,38,85
Direct Labour 4.5 49,950 7 88,900 0
Factory
Overhead 3 33,300 4 50,800 84,100
3,81,00 6,03,00
Total 20 2,22,000 30 0 0
QUESTION
24). Estimate the cash requirement of Meerut Fruit Co. Ltd. For June11998 on basis of data given:
(i)Sales
Feb 1998 Rs.25, 000
Mar1998 Rs.20, 000
47
Apr to June1998 Rs.30, 000 per month

Half the sales are for cash.90%of credit sales are collected in the month following the month of sale
and the balance one month later.
(ii) Fruits are always bought of cash of discount of 5%. The purchase began for 2 nd Quarter was
15,000 per month at Rs1 per basket.
(iii) Wages and salaries for 2nd quarter were budgeted at Rs.5,000 per month.
(iv) Manufacturing and other expenses for the quarter were
Cash expenses Rs, 4,500

Depreciation Rs. 7,500
Selling expenses Rs, 3,000
Administrative expenses Rs. 2,000 (equally in April and May only)
Solutions:-
Cash Budget (For three months ending 30th June, 1998)

Rs. Rs. Rs.
Opening Cash Balance - 2,500 9,250
Add Cash inflows :
(i) Cash Sales (1/2 of sales) 15,000 15,000 15,000
(ii) Cash Collected from Debtors 10,250 14,500 15,000
(A)Total cash available 25,250 32,000 39,250
Cash Outflows:
(i) Cash Purchase (Less Trade
discount) 14,250 14,250 14,250
(ii)Wages and salaries 5,000 5,000 5,000
(iii)Cash Expenses 1,500 1,500 1,500
(iv)Selling Expenses 1,000 1,000 1,000
(v)Administrative Expenses 1,000 1,000 -
(B)Total Payments 22,750 22,750 21,750
©Closing Cash balance(A)- (B) 2,500 9,250 17,500
Working Notes:
(i) As the opening Cash balance for the month of April l has not been given in the question,
it has been assumed to be nil
48
(ii) Closing cash balance of month becomes the opening balance of the next month.
(iii) Cash collections from debtors have been calculated as follows :

Feb March April May June
Rs. Rs. Rs. Rs. Rs.

Credit Sales
(being1/2 of sales) 12,500 10,000 15,000 15,000 15,000
Cash collected from debtors; 9,000 13,500 13,500
(a)90% of prev. months Crdedit sales
(b)10% of credit sales of two months
earlier 1,250 1,000 1,500
10,250 14,500 15,000
QUESTION
25). A company making for stock in the first quarter of the year is assisted by its bankers with
overdraft accommodation. The following are the relevant budgeted figures:
Rs. Rs. Rs.
Purchase
Sales s Wages
November 60,000 41,500 4,900
December 64,000 48,000 5,000
January 36,000 81,000 4,000
February 58,000 82,000 3,800
March 42,000 89,500 5,200
Budgeted cash at the bank on 1st January is Rs.8,600.Credit terms of sales are payment by the end of
the month following the month of supply .On an average, one half of the sales are paid on due date,
while the other half are paid during the next month. Creditors are paid during the month following
the month of supply.
You are required to prepare a cash budget for the quarter from1st January to 31 st March ,showing
budgeted amount of bank facilities required at each month end.
49
Solution
Cash Budget (For the quarter ending 31st March)
Particulars January February March

Rs. Rs. Rs.
Opening bank Balance 8,600 18,600 -16,200
Add Cash Inflows:
Collection from debtors 62,000 50,000 47,000
(A)Total Cash available 70,600 68,600 30,800
Cash Outflows:
(i)Payment to creditors for purchases 48,000 81,000 82,000
(ii)Payment of wages 4,000 3,800 5,200
(B)Total Payments 52,000 84,800 87,200
©Clearing Bank balance(A) - (B) 18,600 -16,200 -56,400
Notes:
(i) Collection from debtors have been calculated as follows:
Nov Dec Jan Feb March

Rs. Rs. Rs. Rs. Rs.
Credit Sales 60,000 64,000 36,000 58,000 42,000
Amount Collected
(i)for sales during the preceding month 32,000 18,000 29,000
(1/2of sales)
(ii)For the sales during the month 30,000 32,000 18,000
preceding the previous month(1/2) of
sales)
Total Collection 62,000 50,000 47,000
(ii) Since the lag in payment of wages has not been given, these shall be treated to bepayable
in the same month.
(iii) The company has to arrange for the bank overdraft facility for Rs.16,200 at February-end
for Rs.56,200 at March –end.
QUESTION
26). From the following forecasts of income and expenditure prepare a Cash Budget for the half-
year ended on 30th June, 1994-
50
Manufacturing
Months Sales Purchases Wages Expenses
(Credit
) (Credit)
1993 Rs. Rs. Rs. Rs.
Nov 25,000 10,000 2,500
Dec 30,000 15,000 2,800
1994
Januar
y 20,000 10,000 2,000
Feb 25,000 15,000 2,200
Mar 30,000 17,500 2,400
Apr 30,000 20,000 2,600
May 40,000 22,500 2,800
June 45,000 25,000 3,000
(1)A sales commission of 5% on sales and due two
months after sales is payable in addition to above
selling expenses.(2) Capital Expenditure-Plant
purchased,1st January for Rs.80,000, payable in two
half-yearly installments, the first payable in
February.(3)A dividend of Rs.5000(net) is payable at
April.(4) Period of credit allowed by creditors and
customers is 2 months.(5) Lag in payment of wages-
1/8th of month(6) Lag in payment of other expenses-
1 month(9( Cash balance on 1st January, was
expected to be 37,500.
Solution:
Particulars Jan Feb Mar

Rs. Rs. Rs.
Opening balance of 37,500 36,275 4,790
cash
51
Receipts received
from 25,000 30,000 20,000
customers
Total 62,500 66,325 24,790
Less payment 26,175 61,535 16,215
Closing balance of
cash 36,225 4,790 8,575
Payments:
Paid to creditors 10,000 15,000 16,000
Wages 2,100 2,175 2,375
Manufacturing
expenses 1,200 1,250 1,150
Administration
expenses 975 1,060 1,040
Selling and
distribution 650 550 650
expenses
Sales 1,250 1,500 1,000
Purchase of plant 10,000
Installment payment
of building 40,000
Dividend
Total payments 26,175 61,535 16,215
Amount of wages which is being paid actually in

various months is calculated as per table given
below:
Wages Lag in
Months for payment Amount actually paid in the month
for month
months of 1/8 month 7/8
Dec-93 2,800 350 -
Jan-94 2,200 250
Feb-94 2,200 275
52
Mar-94 2,400 300
Apr-94 2,600 325
May-94 2,800 350
Jun-94 3,000 375
QUESTION
27). A department attains sales of Rs 600000 at 80%

of its normal capacity. Its expenses are
Office salaries 90,000
General exp 2% of sales
Dep 7500
Rent and rates 8750
Salaries 8% of sales
Travelling exp 2% of sales
Sales office 1% of sales
Gen selling expenses 1% of sales
Wages 15000
Rent 1% of sales
Other exp 4% of sales
Draw flexible budget operating at 90 per cent, 100
per cent and 110 per cent of normal capacity.
Solution
Flexible Budget
80%
90% 100% 110%
Sales 600000
675000 750000 825000
-------------------
53
-------------------------------------------------------------
Administration Costs:
Office salaries(fixed) 90000
90000 90000 90000
General exp(2% of sales) 12000
13500 15000 16500
Depreciation 7500
7500 7500 7500
Rent and rates 8750
8750 8750 8750
-------------------
-------------------------------------------------------------(A)
Total Admin Exp 118250
119750 121250 122750
-------------------
-------------------------------------------------------------
Selling Costs:
Salaries(8% of sales) 48000
54000 60000 66000
-------------------
-------------------------------------------------------------
Travelling exp(2% of sales) 12000
13500 15000 16500
Sales office(1% of sales) 6000
6750 7500 8250
General expenses(1% of sales)6000
6750 7500 8250
-------------------
-------------------------------------------------------------
(A) Total Selling Exp 72000
81000 90000 99000
-------------------
-------------------------------------------------------------
54
Distribution Costs:
Wages 15000
15000 15000 15000
Rent 6000
6750 7500 8250
Other exp 24000
27000 30000 33000
-------------------
-------------------------------------------------------------
(C) Total Dist cost 45000
48750 52500 56250
-------------------
-------------------------------------------------------------
Total cost (A+B+C) 235250
249500 263750 278000
QUESTION
28). The following data relates to the working of a

factory at Wardha for the current year:
Capacity worked, 50%
Fixed costs: Rs
Rs
Salaries 84000
Rent 56000
Dep 70000
Other admin exp 80000
290000
--------
Variable costs:
55
Materials 240000
Labour 256000
Other exp 38000
534000
----------
Possible sales at various levels of working are
Capacity(%) Sales(Rs)
60 950000
75 1150000
90 1375000
100 1525000
Prepare a flexible budget and show the forecast of

profit at 60%, 75%, 90% and 100% capacity.
Flexible budget
-------------------------------------------------------------------
------------------------------------------------------------
60%
75% 90% 100%
-------------------------------------------------------------------
-------------------------------------------------------------
Sales Revenue 950000

1150000 1375000 1525000
-------------------
--------------------------------------------------------
Less
Materials 288000
360000 432000 480000
56
Labour 307200
384000 460800 512000
Other exp 45600
57000 68400 76000
-------------------
-------------------------------------------------------------
(A) Total Var Cost 640000
801000 961200
1068000
Salaries 84000
84000 84000 84000
Rent and rates 56000
56000 56000 56000
Depreciation 70000
70000 70000 70000
Adm exp 80000
80000 80000 80000
-------------------
-----------------------------------------------------
(B) Total fixed cost 290000
290000 290000
290000
_____________________________________________________________
_______________________________________________________
Total cost(A+B) 930800

1091000 1251200 1358000
_____________________________________________________________
________________________________________________________
Forecast of profits 19200
59000 123800 167000
57
QUESTION
29). From the following data, prepare a flexible

budget for production of 40000 and 75000 units,
distinctly showing variable cost and fixed cost as
well as total cost. Also indicate element – wise
cost per unit. Budgeted cost per unit is as follows
Direct material 95
Direct labour 50
Production overhead 40
Production overhead(fixed) 5
Admin overhead(fixed) 5
Selling overhead(10% fixed) 10
Distribution overhead 15
Flexible Budget
1,00,000 units
40000units 75000units
_____________________________________________________________
___________________
Direct Material @ 95 9500000

3800000 7125000
Direct labour @ 50 5000000
2000000 3750000
Prod overhead @40 4000000
1600000 3000000
Selling overhead
10*90/100 @ 9 900000
58
360000 675000
Distribution overhead
15*80/100 @ 12 1200000
480000 900000
--------------------------------------------------------------------
---------------------
Variable cost 20600000
8240000 15450000
-------------------
--------------------------------------------------------------------
---
Fixed cost
Production overhead@5 500000

500000 500000
Admin overhead@12.50 500000
500000 500000
Selling overhead@1 100000
1000000 100000
Distribution overhead@3 300000
3000000 300000
-------------------
----------------------------------------------------------
Total fixed cost 1400000
1400000 1400000
-------------------
---------------------------------------------------------
Total cost 22000000
9640000 16850000
QUESTION
59
30). A large retail stores makes 25% of its sales for

cash and the remainder on 30 days net. Due to
faulty collection practice, there have been losses
from bad debts to the extent of 1 % of credit
sales on average in the past. The experience of
the store tells that normally 60 % of credit sales
are collected in the month following the sale,
25% in the second following month and 14 % in
the third following month. Sales in the preceding
three months have been January 2007
Rs.80,000, February Rs.1,00,000 and March
Rs.1,40,000. Sales for the next three months are
estimated as April Rs.1, 50,000, May Rs.1, 10,000
and June Rs.1, 00,000. Prepare a schedule of
projected cash collection .
Solution:
Statement of expected Cash Receipts
Collection form April May

Cash sales 37500 27,500
Collection from
Debtors :
January 8400 -
February 18750 10,500
March 63000 36,350
April - 67,500
May - -
Total 127650 1,31,750
Assume that the credit policy is enforced strictly

,what would be the cash receipts.
60
Cash sales : Debtors 37,500 27,500

March 1,05,000 -
April - 1,12,500
May - -
Total 1,42,500 1,40,000
Forecasts of cash payments: The items of

expenditures differ from business to business. The
normal items which come under the lists are :
1. Cash purchases
2. Payment to creditors or suppliers
3. Payments to Bills payable
4. Payment to employees in the nature of wages,
salaries
5. Manufacturing, selling and distribution and
administration expenses
6. Repayments of bank load and special obligations
such as bonus, donations, advances
7. Interest and dividend payments
8. Capital expenditures for acquiring assets of
enduring benefit
9. payment of tax liability
10. other expenses of periodic nature
The quantum of amount likely to be spend on the
above each item is generally determined with
reference to functional budgets of the concerns. The
policy of the management will also play a crucial role.
It is the policy which determines the ratio of cash
purchases and credit purchases.
In many cases, the time lag affects the amount of
expenditures to be incurred in a particular period.
The formula adopted for the expenses payable in
next month is : month’s amount x time lag
61
QUESTION
31). The following are the forecasts relating to wages

and factory expenses.
July Aug Sept Oct Nov
Wages 32,000 32,000 32,000 40,000 32,000
Factory expenses 5,000 5,000 5,000 5,000 5,000
The lag in payment of wages is 1 / 8 month and that
in case of factory expenses 1/ 2 month.
Estimate the amounts of wages and factory expenses
payable in each month of September to
November.
Solution
Statement showing the disbursements of cash
Particulars Sept Oct

Wages:
Aug 32,000 4,000 -
Sept 32,000 28,000 4,000
Oct 40,000 - 35,000
Nov 32,000 - -
32,000 39,000
Factory expenses
Aug 5,000 2,500 -
Sept 5,000 2,500 2,500
Oct 5,000 - 2,500
Nov 5,000 - -
5000 5000
QUESTION
32). The following information is provided in respect

o DR Ltd. Prepare a Cash Budget for April, May
62
and June 2007.

(in Rupees)
Jan Actual 80,000 45,000 20,000 5,000
Feb Actual 80,000 40,000 18,000 6,000
March Actual 75,000 42,000 22,000 6,000
April Budget 90,000 50,000 24,000 7,000
May Budget 85,000 45,000 20,000 6,000
June Budget 80,000 35,000 18,000 5,000
a. 10 % of the purchases and 20 % of sales are for
cash
b. The average collection period of the company is 1 /
2 month and the credit purchases are
paid regularly after one month.
c. Wages are paid half monthly and the rent of Rs.500
included in expenses is paid monthly.
Other expenses are paid after one mo nth lag.
d. Cash balance on April 1, 2007 may be assumed to
be Rs.15,000.
Solution
Cash budget for the month ending June 2007
Particulars April May
RECEIPTS
Opening Balance 15,000 27,200
Cash Sales 18,000 17,000
Collection from
Debtors 66,000 70,000
Total , say A 99,000 1,14,200
PAYMENTS
63
Cash purchases 5,000 4,500

Payments to creditors 37,800 45,000
Wages 23,000 22,000
Rent 500 500
Other expenses 5,500 6,500
Total, say B 71,800 78,500
CLOSING CASH
BALANCE, A – B 27,200 35,700
QUESTION
33). DR is to start production on January 1, 2008. The

prime cost of an unit is expected to be Rs.40
(Rs.16 per material and Rs.24 for labor). In addition,
variable expenses per unit are expected to be Rs.8
and fixed expenses per month Rs.30,000. Payment
for materials is to be made in the month following the
purchases. One third of sales will be for cash and the
rest on credit for settlement in the following month.
Expenses are payable in the month in which they are
incurred.
The selling price is fixed at Rs.880 per unit. The
number of units to be produced and sold are
expected to be: January 900, February 1,200./ March
1,800. April 2,000. May 2,100. June 2,400.
Draw a cash budget indicating cash requirements.
Solution
Cash budget for six months ending 30th June
64
Particulars Jan Feb March

RECEIPTS
Opening balance - 34,800 37,600
Cash Sales 24,000 32,000 48,000
Collection from - 48,000 64,000
Debtors
Total, say A 24,000 45,200 74,400
PAYMENTS
Creditors - 14,400 19,200
Wages 21,600 28,800 43,200
Variable 7,200 9,600 14,400
Expenses
Fixed Expenses 30,000 30,000 30,000
Total, Say B 58,800 82,800 1,06,800
Closing balance :
A–B
Debit ( + ) Credit
() 34,800 37,600 32,400
QUESTION
34). DR wish to approach his Bankers for temporary

overdraft facility for the period from June 1 to
August 30th, 2007. During the period of these three
months, DR will be manufacturing mostly for stock.
Prepare a cash budget for the above period.
Sales Purchases Wages

April 3.60,000 2,49,600 24,000
May 3,84,000 2,88,000 28,000
June 2,.16,000 4,.86,000 22,000
July 3,.48,000 4,.92,000 20,000
Aug 2,.52,000 5,.36,000 30,000
(a) 50 % of credit sales are realized in the month

following the sales and remaining in the second
65
following month.
(b) Creditors are paid in the month following the
month of purchase
(c) Estimated cash as on June 1 is Rs.50,000
Solution
Cash budget for the period ending 20th august
Particulars JUNE JULY

RECEIPTS
Opening balance 50,000 1,12,000
Collection from Debtors 3,72,000 3,00,000
Total, say A 4,22,000 4,12,000
PAYMENTS
Payments to creditors 2,88,000 4,86,000
Wages 22,000 20,000
Total, say B 3,10,000 5,06,000
Closing Balance A – B 1,12,000 94,000
Overdraft needed NIL 94,000
QUESTION
35).Bombay Textiles Ltd. wishes to arrange overdraft

facilities with its bankers during the period
April-June 2010 when it will be manufacturing
mostly for stocks. Prepare a cash budget for the
above period from the following data indicating
the extent of the bank facilities the company will
require at the end of each month.
a) Period Sales
Purchases Wages
February 1, 80, 000

1, 24, 000 12, 000
66
March 1, 92, 000

1, 44, 000 14, 000
April 1, 08, 000
2, 43, 000 11, 000
May 1, 74, 000
2, 46, 000 10, 000
June 1, 26, 000
2, 68, 000 15, 000
b) 50% of the credit sales are realized in the

following month following the sales and the
remaining 50% in the second month
following. Creditors are paid in the month
following the month of purchase.
c) Cash at bank on 1st April is Rs.25000.
Solution
Cash Budget
For the three months
ending June 2010
April (Rs.)
May (Rs.) June (Rs.)
A) Opening Balance 25, 000 53,

000 (51000)
Receipts 90, 000 96,
000 54, 000
Sales Realizations (WN: 3) 96, 000 54,
000 87, 000
B) Total Receipts 1, 86, 000

1, 50, 000 1, 41, 000
67
C) Total Cash Available(A+B) 2, 11, 000

2, 03, 000 90, 000
Payments
Purchases 1, 44, 000
2, 43, 000 2, 46, 000
Wages 14, 000
11, 000 10, 000
D) Total Payments 1, 58, 000

2, 54, 000 2, 56, 000
E) Closing Balance(C-D) 53, 000

(51, 000) (1, 66,
000)
Working Notes
1. It has been assumed that wages are paid on
the 1st of following month
2. The company will require overdraft facilities
to the extent of Rs. 51, 000 at the end of May
and Rs. 1, 66, 000 at the end of June.
3. Sales Realization
For April Month, Sales of March
= Rs.1, 92, 000
=50% of the sales
= 50% * (1, 92, 000)
= Rs. 96, 000
For May Month, Sales of April
= Rs. 1, 08, 000
68
=50% of sales
=50% *(1, 08, 000)
=Rs. 54, 000
QUESTION
36).From the following data prepare a cash budget

for the quarter Oct-Dec 2010. Draft a note from
the Management Accountant and a Financial
Controller to accompany this statement.
a) Sales:
Rs.
August 20, 000
September 25, 000
October 30, 000
November 30, 000
December 32, 000
All the sales are on credit. Half of the dues are
collected in the month of sale on which a cash
discount of 20% is allowed and the other half is
realized in the next month.
b) Materials are purchased for cash on

which a rebate of 5% offered by the
supplier. If the company buys on credit,
payment can be deferred by 1 month by
foregoing the rebate. The purchase-
budget for the next quarter was: October-
Rs.12, 500, November –Rs.15, 000 and
December –Rs.18, 000
c) The Direct Labour Budget under---

Department A
Department B
69
(Rs.)
(Rs.)
October 3, 000
4, 000
November 3, 000
4, 000
December 3, 200
3, 800
d) The Manufacturing overheads budget is

given under
Department A
Department B Department C
Rs.
Rs. Rs.
October 2, 400
1, 550 800
November 2, 400
1, 550 800
December 2, 500
1, 650 900
The above estimates include the quarter’s provisions
for department amounting to Rs. 900 for Department
A and Rs.750 for Department B.
e) The General Overhead Budget for the

quarter was Rs.3, 500 (out of which
Rs.200 was Depreciation and Reserve and
Rs.300 for Bad Debts Reserve).
f) An old machine was to be replaced with

an additional cash outlay of Rs.7, 000 in
the month of December.
g) The cash balance on 1-10-2010 may be

taken as Rs.15, 000.
Solution
70
Cash Budget
Period three months ending December 31st, 2010
Details
Cash Receipts
Balance b/d
Collection from customers
Total Cash Available
Cash Disbursement:
Accounts Payable- Purchase Of Materials
Wages
Manufacturing Overheads
General Overheads
Machine Purchased
Total Disbursements
Budgeted Cash Balance C/D

15, 425 15, 975 7, 175
Notes:
1. Collection from Customers: October
November December
Rs.
Rs. Rs.
Collection on current
Month’s sale (1/2 of sale) 15, 000
15, 000 16, 000
Less Cash Discount (20%) 3, 000
3, 000 3, 200
12, 000
12, 000 12, 800
Add other collections
(1/2 of previous month’s sale) 12, 500
71
15, 000 15, 000
Total 24, 500

27, 000 27, 800
2. Accounts Payable: As sufficient cash is

available materials will be purchased for cash
to avail of the rebate of 5%.
3. Payrolls:
October November December
Direct Labour:
Department A 3,
000 3, 000 3, 200
Department B 4,
000 4, 000 3, 800
Total 7,
000 7, 000 7, 000
4. Manufacturing Overheads: October

November December
Rs.
Rs. Rs.
Department A 2, 400
2, 400 2, 500
Department B 1, 550
1, 550 1, 650
Factory 800
800 900
72
Total 4, 750
4, 750 4, 750
Less Depreciation:
Department A 300
300 300
4, 450
4, 450 4, 450
Department B 250
250 250
4, 200
4, 200 4, 500
5. General Overheads
For the quarter

Rs.3, 500
Less: Depreciation Reserve
200
Bad Debts Reserve
300
500
General Overheads for 3 months
3, 000
Monthly Overheads
1, 000
QUESTION
73
36). A factory is running at 50% capacity and

produces 5000 UNITS at a cost of rs 90 per unit
as per details given below
Material 50
Labour 15
Factory overhead 15(Rs 6 fixed)
Admin overheads 10(Rs 5 fixed)
The current selling price is Rs 100 per unit. At 60%
working, material cost per unit increases by 2% and
selling price per unit falls by 2%. At 80% working,
material cost per unit increases by 5 percent and
selling price per unit falls by 2.5%. Prepare a flexible
budget showing profits of the factory at 60% and 80
% working.
Solution:
50% capacity, 5000 units 60% capacity, 6000
units
per unit Total(lakhs) per unit
Raw material 50 2.50 51
Labour 15 0.75 15
Factory 09 9
overhead(Rs 0.45
9 variable)
Admn 5 5
overheads(Rs 0.25
5 variable)
1) Total 79 3.95 80
variable
cost
Factory 6 0.30 ----
overhead (Rs
6 fixed)
Admn 5 0.25 ----
overheads(Rs
5 fixed)
74
2) Total 11 0.55 09
fixed cost
3) Total 90 4.50 89
cost(1+2
)
4) Profit 10 0.50 09
5) Sales 100 5.00 98
1. G.S.Ltd manufactures a single product for

which market demand exists for additional
quantity. Present sales of R.s 60,000 p.m
utilizes only 60% capacity of the plant.
Marketing manger assures that with the
reduction of 10% in the price he would be in
a position to increase the sale by about 25%
to 30%.The following data are available:
1) Selling price Rs 10 per unit
2) Variable cost Rs 3 per unit
3) Semi-variable cost Rs 6000 fixed+5o
paise per unit
4) Fixed cost Rs 20,000 at present
level estimated to be Rs 24000 at 80%
output.
You are required to prepare
1) The operating profits at 60%, 70% and 80%
levels at current selling price and
2) The operating profits at proposed selling
price at the above levels.
Sol:
Statement of cost and profit (at current price)
60% capacity 6000 70% capacity 7000
units units
Fixed cost 20000 20000
Semi variable cost: 6000 6000
fixed 3000 3500
75
Variable @50ps 18000 21000

47000 50500
perunit
60000 70000
Total cost
13000 19500
Sales
Profit
Statement of cost and profit
(at proposed profit)
60% capacity 6000 70% capacity 7000
units units
Total cost 47000 50500
Sales@ Rs 9 per unit 54000 63000
7000 12500
Profit
QUESTION
37). Prepare a cash budget for three months ending

30th june 2005from the information given below:-
(a) Month Sales Materials
Wages Overheads
February 14000 9600

3000 1700
March 15000 9000
3000 1900
April 16000 9200
3200 2000
May 17000 10000
3600 2200
June 18000 10400
76
4000 2300
(b) Credit terms are:

Sales and debtors – 10% of sales are on cash, 50 % of
credit sales are collected next month and balance in
the following month:
Creditors - materials 2
months
Wages ¼
month
Overheads ½
month
(c) Cash and bank balances on 1st April, 2005 is
expected to be Rs 6000.
(d) Other relevant information are :
(1) Plant and machinery will be installed in
February 2005 at a cost of Rs 96000.the
monthly instalment Rs 2000 is payable
from april onwards.
(2) Dividend @ 5 % on preference share
capital of Rs 200000 will be paid on 1st
june.
(3) Advance to be received for sale of vehicles
Rs 9000 in June
(4) Dividend from investment amounting to
Rs 1000 are expected to be received in
june
(5) Income tax to be paid in june is Rs 2000.
Solution:
CASH BUDGET
For three months
ending 30th june, 2005
77
April May
Rs Rs
Balance B/F 6000 3950
Receipts-:
Sales* 14650 15650
Dividend - -
Adv against vehicle - -
Total 20650 19600
Payments-:
Creditors 9600 9000
Wages 3150 3500
Overheads 1950 2100
Instalment for plant 2000 2000
Pref. Dividend - -
Income tax advance - -
Total 16700 16600
Closing balance 3950 3000
Working notes:-
1) Calculation of collection from debtors:-
February March
Sales 14000 15000
Cash sales 1400 1500
Credit sales 12600 13500
50% collection in - -
next month
50% collection in - -
following month
Total collection - -
Cash sales - -
Cash receipts - -
from sales
QUESTION
38). A department of Tek India co. Attains a

sales of Rs 600000 @ 80% of its normal
capacity. Its expenses are given below:-
78
Office salaries
90000
General expenses
2% of sales
Depreciation
7500
Rent and rates

8750
Selling cost:
Salaries
8% of sales
Travelling expenses
2% of sales
Sales office
1% of sales
General expenses
1% of sales
Distribution cost:
Wages
15000
Rent
1% of sales
Other expenses
4% of sales
Draw up flexible administration selling &

distribution cost budget, operating at 90%,
100%, & 110% of its normal capacity.
Solution
80%
79
Rs
Sales 600000
Administration cost:
Office salaries 90000
General expense 12000
Depreciation 7500
Rent and rates 8750
(A)Total admin. cost 118250
Selling cost:
Salaries 48000
Travelling expenses 12000
Sales office 6000
General expenses 6000
(B)Total selling cost 72000
Distribution cost:
Wages 15000
Rent 6000
Other expenses 24000
(C) Total dist. Cost 45000
Total cost (A+B+C) 235250
QUESTION
39). The manager of repairs and maintenance

department in response to a request
submitted the following budget estimate for
his dept. That are to be used to construct a
flexible budget to be used during the coming
budget year:
80
Details of cost planned at 6000

planned at 90000
Direct repair hours

direct repair hours
Employee salary 30000

30000
Indirect repair material 40200

60300
Misc. Cost etc. 13200

16800
(a) Prepare a flexible budget for department

up to the activity level of 10000 repair
hours
(b) What would be the budget allowance at
8500 direct repair hours
(a)
Flexible
budget for the period
Direct repair hours 6000 7000 8000
Rs Rs Rs
Employee salary 30000 30000 30000
Indirect material 40200 46900 53600
Misc. Cost : fixed 6000 6000 6000
Variable 7200 8400 9600
Total 83400 91300 99200
(b) Budget allowance for 8500 repair hours
81
= fixed cost + variable cost for 8500 repair hours
= 36000 + (8500 hrs * 7.90)*
= Rs 103150
Working note:-
(1) Employee salary is fixed cost and thus

same at all levels
(2) Indirect repair material is variable cost @

6.70 per hour
(3) Misc. Cost is semi variable. It is separate

into fixed and variable components as
follows:
Variable
=difference in cost/ difference in hours
= 16800-13200/9000-6000
= Rs 1.20 per repair hours
Fixed
= 13200-(6000 * 1.20)
= 6000
Total fixed cost = employee salary +

Misc. Cost
= 30000+6000
=36000
Total variable cost = indirect material + Misc.

Cost
= 6.70 + 1.20
= 7.90 per hour
82
QUESTION
40). Abc company wishes to arrange overdraft

facilities with its bankers during the period
of april to june of a particular year when it
will be manufacturing mostly for stock.
Prepare a cash budget for the above period
from the following data, indicating the
extent of banking facilities.
a. Month Sales
Purchases Wages
February 180000 124000

12000
March 192000 144000

14000
April 108000 243000

11000
May 174000 246000

10000
June 126000 268000

15000
b. 50% of the credit sales are realized in thr

month following the sales and the
remaining sales in the following second
month, creditors are paid in the following
month of purchase
c. Cash at bank on 1 april estimated at

rs.25000
Soln
Cash budget of ABC company
83
Particulars April May
a. Cash inflows
Collections
During month of sale - -
During second 90000 96000

month 50%
During third month 96000 54000

50%
Total 186000 150000
b. Cash outflows
Purchases 1 month 144000 243000

lag
Wages paid same 11000 10000

month
Total 155000 253000
Net cash balance 31000 -103000
Cash at start of 25000 56000

month
Cash balance 56000 -47000
Overdraft facilities - -47000

req
QUESTION
41). From the following info prepare cash budget

of a business firm for the month of april
84
a. The firm makes 20%cash sales. Credit

sales are collected 40%, 30%, 25% in the
month of sales, month after and second
month after sales. The remaining 5%
becomes bad debts.
b. The firm has a policy of buying enough

goods each month to maintain its
inventory at 2 and 1 and half times the
following month’s budgeted sales
c. The firm is entitled to 2% discount on all

its purchases if bills are paid within 15
days and the firm avails of all such
discounts.
d. Cost of goods sold without considering

the 2% discount is 50% of the selling
price. The firm record inventory net of
discounts.
Sales
January actual – 100000, February actual-

120000, march actual 150000, april
budgeted- 170000, may budgeted- 140000
Inventory on march 31st is rs. 225400, cash on

march 31st rs. 30000, gross purchases in
march rs. 100000. Selling, general and
admin expenses budgeted for april rs. 45000
includes rs.10000 depreciation.
Soln
Cash budget for april
85
Particulars Amount
a. Cash inflows 30000
Balance in beginning 34000
Cash sales 20% of 170000 24000
Collection from debtors 36000
Feb 25% of 96000 54400
March 30% of 120000 178400
April 40% of 136000 49000
14700
Total cash receipts 35000
98700
b. Cash outflows 79700
Payment for purchases
March 100000*98%*1/2
April 29400*1/2
Selling expenses 45000- 10000
Total cash outflows
c. Budgeted cash balance in april
Working notes
Purchase budget for april
Gross
Desired ending inventory 175000

86
Add cost of sales in april 85000
Total reqs 260000
Less beginning inventory 230000
Required purchases 30000
QUESTION
42). A large retail store makes 25% of its sales

for cash and the remainder on 30days terms.
Due to faculty collection practice there have
been losses from bad debts to the extent of
1% of credit sales on an average in the past.
The experience of the company tells that
normally 60% of credit sales are collected in
the month following the sales, 25% in the
second following month and 14% in the
third following month. Sales for jan is rs.
80000, feb rs. 100000, march rs. 140000.
Sales for april, may, june are estimated as
150000, 110000 and 100000.
Prepare a schedule of expected cash collections

during april, may, june.
Soln
Schedule of cash receipts
Particulars jan Feb mar
Total sales 80000 100000 140000
87
Cash sales 20000 25000 35000

25%
Credit sales 60000 75000 105000

75%
Cash sales
First month
following
sales
Second month
Third month
Cash inflows
First
Second
Third
Total
QUESTION
43). The Baja company ltd operates a system of
flexible budgetary control and you are
required to prepare level of activity at 70%
80% and 90%
a. sales based on normal level activity of 70%

(350000 units) at rs 200 each. If output is
increased to 80% and 90% selling prices are to
be reduced by 2.5% and 5% of the original
b. Variable cost are rs 100 per unit (70% is the

cost of raw materials). In case output reaches
80% level of activity or above , the effective
purchase of raw material will be reduced by 5%
c. Variable overheads : salesmen’s commission is

88
2% of sales value
d. Semi variable overheads ( total) at 350000

units are rs 1200000: they are expected to
increase by 5 % if output reaches a level of
activity of 80% and by further 10 % if it reaches
the 90% level.
e. total fixed overheads are rs 20000000 which

are likely to remain unchanged up to 100%
capacity.
The preliminary budget for a company with four

departments is as under :
Department Direct ohds Apportioned ohds

allocation %
1 14200 10
2 7200 30
3 16400 20
4 22600 40
It was decided to establish a new department (5)

and to re organize the existing departments. The
following alterations were agreed to in making a
revised budget :
a. A sum of Rs 15000 being additional

overheads, will be allocated directly to
department (5)
b. Am amount of rs 6600 being overheads

will be allocated directly to department
89
(3) will now be transferred to department

to department (5)
c. Rs 30000 additional overheads expected

to be incurred due to re organization will
be apportioned as follows :
Department 1 2 3 4 5
Proportion % 10 20 - 10 60
d. Revised direct labour hours are expected

to be :
Departments Hours
1 69600
2 200000
3 100000
4 160000
5 90000
You are required to calculate :
a. The department direct labour hour

rates of overheads based on the
preliminary budget
b. The department direct labour hour

rates of overheads based on the
received budget.
c. The overheads chargeable at the

revised rates to one unit of
product X for which the following
hours are spent in each
90
department
Department 1 3 4 5
Hours 6 4 8 3
 A new company commences business on

July 1st and deposits rs 10000 in the bank.
This sum will be insufficient to finance its
operations over a period of six months,
and you are asked to prepare a cash
budget from July to December to
determine the monthly overdraft limits to
seek from company bankers.
Data supplied
a. Sales are made to one distributor only on

30 days term. 3% discount and cheques
are received on the first date of the month
following the due date.
b. Plant purchases totalling Rs 5000 are to

be made in July
c. Budget figures are :
July august september
Purchases 5000 4000 3000
Wages 4000 5000 4000
Cash exp 400 500 400
Sales 60000 7000 8000
All purchases are made on net 30 days terms and
91
cheques are posted to creditors on the last day.
draw up a production cost budget.
Solution
a. Direct labour hour rates of overheads o9f

departments based on the preliminary
budget
Departments
overheads
Direct Apportioned Total (2 +3)

allocation
1 2 3 4
1 14200 17600 31800
2 7200 52800 60000
3 16400 35200 51600
4 22600 70400 93000
60400 176000 236400
b. departmental overheads rates of departments

1-5 based on the revised budget
departments Total Adjustments Revised

overheads budgets (2
+3)
92
1 2 3 4
1 31800 +3000 34800
2 60000 +6000 66000
3 51600 -6600 45000
4 93000 +3000 96000
5 39600* 39600
6 236400 45000 281400
*(15000+ 6600+18000)
c. overheads chargeable at the revised rates to

one unit of product X
Department Direct labour- hr Direct labour – hrs

rate needed
1 2 3
1 .5 6
2 .45 4
3 .60 8
4 .44 3
d. total costs (a+b+c) 55.40

63.15 70.8
budgeted loss 5.5

3.15 14.2
flexible Budget of Bajaj Company ltd
93
Particulars Amount in lakhs
Percentage of
capacity
70% 80%
Sales 700 780
Less expenses
A variable cost
Material 245 266
Other vc @30/unit 105 120
Salesman 14 15.16
commission2%.
364 401
Semi variable 120 126
Fixed overhead 200 200

expenses
Total cost 684 727.6
Budgetary profit 16 52.4
94
QUESTION
44). The royal industries has prepared its annual

sales forecast ,expecting to achieve sales of Rs
3000000 next year .the controller is uncertain
about the pattern of sales to be expected by the
month and asks you to prepare a monthly budget
of sales.
The following sales data pertain to the year

,which is considered to be representative of a
normal year.
Month Sales Month
January 132000 July
February 115000 August
March 100000 September
April 140000 October
May 180000 November
June 225000 December
Prepare a monthly sales budget for the coming

year on the basis of the above data.
Solution
Total sales
2500000
Budgeted sales(next year )

3000000
Budgeted increase in sales

500000
Percentage increase in sales
95
(Rs 500000/2500000) * 100

20%
Based on this rate of increase ,the monthly sales

can be forecast as being 20% higher than for the
previous year.
Month Sales forecast Month
January 132000 July
February 138000 August
March 120000 September
April 168000 October
May 216000 November
June 270000 December
QUESTION
45).Readymade textiles ltd makes and sells baby

suits .it has brisk sales in the oct-dec period as
shown by the following sales budget( in units)
July 5000 oct

8000
August 5000 nov

10000
September 5500
dec 12500
The firm’s normal inventory policy has been to

have a 2 month supply of finished product on the
hand .the production manager has criticized the
policy because it requires wide swings in
production ,which ads to costs. he estimates that
unit-variable manufacturing cost is Rs 2 higher
than normal for each unit produced in excess of
96
9000 units per month .the finance manager also

supports the production manager on this. He
estimates that it costs the firm Rs 1.00 per unit
per month in ending inventory ,consisting of
insurance ,financing, and handling costs. He
stresses that these costs are variable.
All the managers agree that the firm should

have 22500units on hand by the end of oct. the
production manager wants to spread the
required production over the four months
1) prepare a production budget for the july-

oct following the firms current policy
.inventory on the 1st july is 10000 units
2) prepare a production budget using the

production managers preference.
3) Determine which budget gives lower

costs
Solution
9.10) production budget –current policy (jul-oct)

(units)
Month Sales Planned inventory
Closing
1 2 3
July 5000 10500
August 5000 13500
September 5500 18000
Oct 8000 22500
Total
2) the total production for the four months is
97
36000 units .the production manager wishes to

produce an equal amt each month ,so the
required monthly production would be 9000
units(36000/4)
3) determination of additional carrying cost due

to additional inventory-current policy
July August
Opening inventory 10000 14000
Add production 9000 9000
Total units 19000 23000

available
Less sales 5000 5000
Ending inventory 14000 18000
Ending 10500 13500

inventory(current
policy)
Change in inventory 3500 4500

increase/(decrease
)
Total carrying cost 3500 4500

at the rate of Rs 1
per unit
Net increase in carrying cost Rs 4500
Calculation of savings in production cost using

production manager’s preference
Production for which additional costs are

incurred:
Sept-current policy
10000
-revised policy
9000 1000
98
Oct –current policy

12500
-revised policy
9000 3500
Total
4500
Savings in production cost from revised policy

(4500*2) 9000
Net savings (9000-4500)

4500
QUESTION
45) Productions of a factory for the year are as

follows
Direct wages 80000
Direct material 1,20000
Product overhead: fixed 40000
Variable 60000
During the forthcoming year it is anticipated

that:
a) the average rate of direct labour

remuneration will fall from Re 0.80 per
hour to Re 0.75 per hour,
b) production efficiency will be reduced by

5%
c) price per unit of direct material and of the

other materials and services which
comprise overheads will remain
99
unchanged and
d) production in the coming year will

increase by 33 1/3 %
Solution
Production cost budget for the next year
Direct
wages(140000*0.75)
Direct material : present 120000
Add additional 40000

expenses (increase in 1/3
capacity)
Production overhead : 40000

fixed
Variable(140000*0.60) 84000
Total production cost
Working notes
determination of direct wages
Direct labour hours (last year) (total wage bill

/labour rate per hour )=(Rs 80000 / Re 0.80)
=100000.due to decline in efficiency, labor hours
to carry out the present volume of production
will be more by the 5%,i.e. 105000hours. Since
there is an increase in capacity by the one third,
Total direct labour hours required during the
year would be 105000 + 33 1/3 =140000 hours
100
determination of variable overheads
Existing variable overheads rate per hour (total

variable overheads /no of hours)
= (60000 / 100000) =Re 0.60 per hour
QUESTION
46). In a year, 15 workers are working in a dept.

on a single shift basis. Statutory holidays in
that year are 18. Normal maintenance
requires 250 hrs./ p.m. The capacity
utilization during last 5 years.
Labour hour (LHR)
2001: 38,000
2002 : 31,000
2003: 30,900
2004: 26,000
Solution
Maximum capacity = 365 days × 15 workers × 8

hrs p.day = 43,800 LHR
Practical capacity = { 365- (52+18) days } × 15

workers × 8 hrs. p. day - 250 hrs p.m. ×12
= 32,400 LHR
The capacity utilization during last 5 years.
Years
2000 30,000 LHR
2001 38,000 “ (too high)
2002 31,000 “
101
2003 30,900 “
2004 26,000 “ (too low)
Normal capacity of 2005 = (30,000 + 31,000 +

30,900 )/ 3 = 30,633 LHR
*While preparing the budget we consider the

normal capacity as budgeted production level
*100% of budgeted capacity always implies the

normal capacity.
QUESTION
47).The following overheads expenses relate to

a cost center operating at 50% of normal
capacity. Draw up a flexible budget for the
cost center for operating at 75%,100% and
125% of normal capacity. Indicate the basis
upon which you have estimated each item of
expense for the different operating levels.
Foremen 60
Assistant foremen 40
Inspector 65
Shop labourers 40
Machinery repairs 100
Defective work 25
Consumable stores 20
Over time bonus -
Machinery depreciation 110
Total 460
102
Solution:
Flexible budget for cost center
Expenses 50%
Fixed expenses
Machinery depreciation 110
Foremen salaries 60
Inspectors 65
Total 235
Variable expenses
Machinery repairs 100
Defective work 25
Shop labour 40
Consumable stores 20
Total 185
Grand total 530
Note: by assuming and segregating the cost

according to fixed and variable and there is no
semi variable expenses are given.
1. Fixed is always constant amount.
QUESTION
49).The cost of an article at a capacity level of

5000 units is given below. For a variation of
20% in capacity above or below this level,
103
the individual expenses vary as indicated.
Material cost 25000
Labour cost 15000
Power 1250
Repairs and maintenance 2000
Stores 1000
Inspection 500
Depreciation 10000
Administration overheads 5000
Selling overheads 3000
Total 62750
Cost per unit 12.55
Find the unit cost of the product at

production levels of 4000 and 6000 units.
Solution:
Estimated cost of production under the

following unit capacity
capacity 4000 units [-20%]
Variable expenses
materials 20000
labour 12000
stores 800
Fixed expenses
104
depreciation 10000
Semi variable
expense
Power 20% fix 250
Power 80% vary 800
Repair&maintanance 500
25% fix
Repair&maintanance 1200
75% var
Inspection 80% fix 400
Inspection 20% vary 80
Administration 75% 3750

fix
Administration 25% 1000

va
Selling .O.H 50% fix 1500
Selling O.H 50% vary 1200
Total 53480
Cost per unit 13.37
QUESTION
50).Gemini steel ltd manufactures a single

product for which market demand exists for
additional quantity present sales of Rs
60000 per month utilizes only 60% capacity
105
of the plant. Marketing manager assures that

with the reduction of 10% in the price, he
would be in a position to increase the sales
by about 25% to 30%.
The following data are available:
Selling price 10Rs /unit
Variable cost 3Rs/unit
Semi-variable cost Rs 6000 fixed + 50 paise per

unit
Fixed cost Rs 2000 at present level estimated to

be Rs 24000 at 80% output.
You are required to prepare the following

statement showing:
a. Operating profits at 60% 70% and 80%

levels at current selling price and
b. The operating profits at proposed selling
price at the above levels
Solution:
Capacity utilized 60%
Number of units 6000
1. -Selling price 60000
- Variable 18000
cost[3pu]
- Semi variable [f] 6000
-[v]0.5*no of units 3000
-Fixed cost 20000
Profit 13000
2.Proposed selling price 54000
Expected profit 7000
106
Note: 1. Selling price = no of units * selling

price of each product
2. Proposed selling price=[ no of units *

actual selling price-10% which is
expected]
107

Accounts CIA 2 - Budget

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CUIM_MBA_G

ABHIJEET SINGH 1020801

BUDGETING AND BUDGETARY CONTROL

“A Budget is a pre-determined statement of management policy during a given

b) A budget is prepared either in monetary terms or in quantitative terms or both .

c) A budget is prepared for definite future period.

d) Purpose of a budget is to implement the policies formulated by management for

2) Co-ordinates the activities of various departments and functions of the business.

3) Increases production efficiency, eliminates waste and controls the cost.

4) Also aids in obtaining bank credits.

6) Creates necessary conditions for the introduction of standard costing techniques.

7) Assists in delegation of authority and assignment of responsibility.

8) Shows management where action is needed to remedy a situation.

Budgets may be classified into the following categories;

1) ON THE BASIS OF FUNCTION AND SCOPE:

2)ON THE BASIS OF FLEIBILITY:

A Functional budget is one which relates to a particular function of the business, eg

Types of Functional Budgets:

3) Production Cost Budget

4) Raw Material Budget

7) Production Overhead Budget

8) Selling And Distribution Cost Budget

9) Administration Cost Budget

10) Capital Expenditure Budget

11) Cash Budget

3) PRODUCTION COST BUDGET:

3) RAW MATERIAL BUDGET:

A) It assists purchasing department in planning the purchases.

B) It helps in the preparation of purchase budget

C) It provides data for raw material control

B) The timing of purchases.

C) The estimated cost of materials purchased.

Factors to be taken under consideration:

1) Opening and closing stocks to be maintained as it will affect material requirements.

2) Maximum and minimum stock quantities,

3) Economic order quantities.

5) Financial resources available.

6) Purchase orders placed before the budget period.

7) Policy of the management.

6) PRODUCTION OVERHEAD BUDGET:

8) THE SELLING AND DISTRIBUTION COST BUDGET :

9) ADMINISTRATION COST BUDGET :

10)CAPITAL EXPENDITURE BUDGET :

b) Capital expenditure is frequently planned a number of year in advance , perhaps

a) Receipts and payment method

b) Adjusted profit and loss method

c) Balance sheet method

FIXED AND FLEXIBLE BUDGET:

USES OF FLEXIBLE BUDGETS:

It is more realistic, practical and useful.

They are useful in control point of view.

ZERO BASED BUDGETING (ZBB)

Main features of ZBB:

2) Amount to be spent on each budget item is to be totally justified.

4) Departmental objectives are linked to corporate goals.

It lays emphasis on achievement of physical targets, it focuses on functions,

Steps in performance budgeting:

1) Establishment of responsibility centre

2) Establishment of performance targets

3) Estimating financial requirements

4) Comparison of actual with budgeted performance

5) Reporting and action