335_resource_4. Budget & Budgetary Control

8/11/2019 335_resource_4. Budget & Budgetary Control

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Cost Management-Final Course Page- 1

4. Budget & Budgetary Control

Learning Objective:

1. Why organisation prepare forecast or budget

. !dvantage and application of Budgets.". #urposes of Budget4. $evolution and application of budget according to their function%. odern develop'ent in Budgetary control syste'(. #erfor'ance appraisal after co'pare it )ith the Budget

*ntroduction:Budgets are the Alphabets in the pricing, planning, and control. Without Budget it is default tomanagers, and employees to identify their target and goals, In relation to cost and revenue.There are two different aspect of budget- (i Its Identify the authority of spending of the budgetmanagers which they have to insure as a part of the organisation! (ii It devaluates the

performance of the managers by providing a yardstic" against which the current activities aremeasured to chec" whether the target is achieved or not.

+efinition:According to #I$A (The #hartered Institute of $anagements Accountants of %nglandand Wales has defined budget as &a 'uantified plan of action relation to a given period of time.

The #hartered Institute of $anagements Accountants of %ngland and Wales has defined theterms )Budget* + Budgetary #ontrol* as follows

Budgets are usually, set up in the light of past eperience after ta"ing into account the changesthat are epected to occur in the future. It is, therefore, to be epected that actual figure! willcorrespond to the budget unless there is some important change in the conditions. In fact, it must

be the constant %ndeavour of the management to see that actual performance does correspondwith the budget concerned. ince budgets assume the optimum efficiency attainable, the systemof budgetary control helps to increase efficiency and enables the concern to achieve the targets,which are considered attainable.

,he objective of Budgeting:

/. To encourage study in all aspects of a company*s operations.

0. To get all members of management to &put their heads to the basics re'uirement +problems of the business should be run, to ma"e them of a co-ordinate team operating inunison towards clearly defined ob1ectives.

2. To force a definition and crystalli3ation of company policies and aims.

4. To increase the effectiveness with which people and capital are employed.

5. To disclose areas of potential improvement in the company*s operations.

6. To stimulate a study of relationship of the company to its eternal economic environment forimproving the effectiveness of its direction.

7. A budget is a blue print of the desired plan of action or operation.

8. Budgets are means of communication. #omple plans laid down by the top management arepassed on to those who are responsible for putting them into action.


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-trategic planning budgetary planning and Operational #lanning:

It will be useful at this stage to distinguish in broad terms between three different types ofplanning

trategic 9lanning! Budgetary 9lanning!

:perational 9lanning.

These three forms of planning are interrelated. The main distinction between them relates to theirtime span which may be short term, medium term or long-term.

-trategic #lanning:trategic planning is concerned with preparing long-term action plans toattain the organi3ation*s ob1ectives by considering the changes at hori3on.

Budgetary #lanning: Budgetary planning is mainly concerned with preparing the short tomedium term plan of the organisation. It will be carried out within the framewor" of the strategic

plan as already set . An organi3ation*s annual budget is consider as an intermediary step towardsachieving the strategic plan.

Operational #lanning:It concerns with the short-term or day-to-day planning process. It plansthe utilisation of resources and will be carried out within the framewor" of the budget.. %ach stepin the operational planning process is an interim step towards achieving the budget.

,he #reparation of Budgets: The process of preparing and using budgets will differ fromorganisation to organisation. ;owever, there are a number of "ey re'uirements in the design of abudgetary planning and control process.

Co/ordination: ,he budget co''ittee:

Budgets provide a 'eans of co/ordination of the business as a whole. In the process ofestablishing budgets, the various factors li"e production capacity, sales possibilities, andprocurement of material, labour, etc. are balanced and co-ordinates so that all the activitiesproceed according to the ob1ective.


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Ans $aimum capacity @ 2F5 days G /5 wor"ers G 7 hrs p.day @ 42,7DD E;?

9ractical capacity @ H 2F5- (50/7 days J G /5 wor"ers G 7 hrs. p. day - 05D hrs p.m. /0

@ 20,4DD E;?

The capacity utili3ation during last 5 years.

Kears 0DDD C 2D,DDD E;?0DD/ 27,DDD & (to high

0DD0 2/,DDD &0DD2 2D,8DD &0DD4 0F,DDD & (to low

ormal capacity of 0DD5 @ (2D,DDD 2/,DDD 2D,8DD 2 @ 2D,F22 E;?

While preparing the budget we consider the normal capacity as budgeted production level (?efer

#A-0.

/DDL of budgeted capacity always implies the normal capacity.

02planation of -tep/ " & 4.

02a'ple .There are 2 departments with different normal capacity + time re'uired p.u. is given

$achine Assembly


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The other details are as under ?s.

9urchase price $aterial 9 F per lb$aterial N 4 per lb

#omprehensiveEabour ?ate $achine hop 4 per hour

Assembly 2.0D per hour

o. of %mployees $achine hop FDDAssembly /7D


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#losing stoc" (units /4,DDD

*n case of 'ulti product organisation

1. -ale 5 de'and is the principle budget factor

. Capacity is in short supply or li'iting factor i.e. capacity re6uire'entaccording to de'and is than its supply

a. Only one li'iting factorb. ore than one li'iting factor

1. -ale 5 +e'and is the principle budget factor

?e'uire sale mi @ re'uired contribution average contributionAverage contribution @ total contribution from all products total units

02a'ple 49. ;. Etd. has specialised in the manufacture of three "inds of sub-assemblies re'uired by themanufacturers of certain e'uipments. The current pattern of sales of sub-assemblies is in theratio ( I units of / 0 4 for sub-assemblies 9, N and ? respectively.

The sub-assemblies consist of the following components

ub-assembly elling ?e'uirement of componentsprice

?s.


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-olution

7ote 1 #omputation of variable cost per unit of 2 products

Items . 9 N ?u (a-b

9 42D 2D0 /D7 / /D7N 5DD 2/7 /70 0 2F4? FDD 2D2 086 RR4 /,/77

6 /,FFD

Average contribution 026./4

?e'uired profit p.m. ?s. /D,DD,DDD?e'uired fied cost ?s. 08,74,DDD?e'uired contribution ?s. 28,74,DDD

?e'uired sales @ 28.74,DDD(/,FFD>6 @ /F,7DD units

ales 9 /F,7DD/>6 @ 0,4DD

N /F,7DD0>6 @ 4,7DD

? /F,7DD4>6 @ 8,FDD

Capacity is in short supply or li'iting factor i.e. capacity re6uire'ent according tode'and is than its supply : Only one li'iting factor

In case of one limiting factor apply the concept of $arginal costingAllot the limiting resource on the basis of highest contribution per limiting factor.

#roble' 1The sales, cost, selling price and processing time of three different herbal drin"s produced by acompany for year 1ust concluded are given below

9roduct trong ormal $ild

Annual sales (no. of pac"s 05D gm F,DDD 5,DDD /,DDDelling price (?s.>pac" 5D 4D 2DUnit cost (?s..>pac" 40 2F 0/


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9rocessing time> per pac" (hrs /.5 / 0

The total processing hours available to the company is fully utili3ed for this sale. unit ;r.>unit #ontribution>hr. ran"

(a (b (ab

trong 2F /.5 04 IIormal 07 /.D 07 I$ild 02 0.D //.5 III

tatement of Allotment + 9rofit

;rs. units (a #ontribution (b Total (from ote-/9rocess time available /F,DDD


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-alient


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6. It inculcates the feeling of cost consciousness among wor"ers.

Li'itation of Budgetary Control -yste':

The limitations of budgetary control system are as follows

/. Budgets may or may not be true, as they are based on estimates.0. Budgets are considered as rigid documents.2. Budgets cannot be eecuted automatically.4. taff co-operation is usually not available during budgetary control eercise.5. Its implementation is 'uite epensive.

Co'ponents of Budgetary Control -yste': The policy of a business for a defined period isrepresented by the master budget the details of which are given in a number of individualbudgets called functional budgets. These functional budgets are broadly grouped under thefollowing heads

i. 9hysical budgets Those budgets which contains information in terms of physical units

about sales, production etc., for eample, 'uantity of sales 'uantity of production,inventories, manpower budgets are physical budgets.

ii. #ost budgets Budgets which provides cost information in respect of manufacturing,selling, administration etc. for eample, manufacturing costs, selling costs, administrationcosts, research and development cost budgets are cost budgets.

iii. 9rofit budgets A budget which enables in the ascertainment of profit, for eample, salesbudget, profit and loss budget, etc.

iv.


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?s.#ost elements Activity level$aterial, Eabour 9roduction, Volume%lectric, power wh, $whTransport Oistance variable cost?ent, salary Time period

Activity

All these costs are fied per activity

Variable cost>unit also may decrease as the production volume is increase.

"g. If the consumption is more then 5DD "g. The ratio willdecrease to 8.6. This decrease in rate is applicable for whole 'uantity. But if the problemmentioned it for additional Nty. only then we have to calculate the total cost a below.


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as ;UT O:W #:T.


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S @ no. of units# @ fied cost


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additional, above 4,8DD hrs /5D9ower variable up to 2,FDD hrs D.05

for hrs above 2,FDD additional cost, D.0D

Oepreciation up to 5,DDD hrs F5D above 5,DDD hrs. 70D

#learing up to 4,DDD hrs FDabove 4,DDD hrs 7D

Eighting 0,/DD to 2,5DD hrs /0D2,5D/ hrs to 5,DDD hrs /5Dabove 5,DDD hrs /65

(a 9repare fied budget and a fleible budget at 6DL, 75L and //DL of budgeted level ofactivity in one statement.

(b #alculate a departmental hourly rate of overhead absorption.

-olution9articulars hr. 74 4D0 /20 /0D

?epair 0D5 2DD 26D 2DD(/DD252(/DD254FD(/DD254FD6D(/DD254FD

upervision FDD 6DD 85D 85D

(2,5DD05(2,FDD05F5D0D(2,FDD05/,8DD0D

(2,FDD05/,4DD0D

9ower 76.5 /D2 /07 //7Oepreciation. F5D F5D 70D F5D

#learing FD 7D 7D 7DEighting /0D /5D /65 /5D

RRRR RRRR RRRR RRRRTotal cost 0,0FF.5 0,565 2,/85 0,677Absolute terms F46.56 FD5.77 57D.8/ 5/6.F?ate>month D.F46 D.FD5 D.57D8/ D.566F

#roble' ( The following are the details of the Budgeted and the actual cost in a factory for si months from

Xanuary to Xune, 0DD5.


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9roduction (units 0D,DDD /7,DDD ?s. ?s.

$aterial cost 4D,DD,DDD 28,8D,DDD(0,DDD $T Q ?s. 0,DDD (/,8DD $T Q ?s. 0,/DD

Eabour cost 7,DD,DDD(Q?s.0D per hour 6,88,80D (Q ?s.00 per hourVariable overheads 0,4D,DDD 0,/F,DDD


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(e The other ma1or material used is furnace oil which is available at ?s. 2DD per tonne and theconsumption ratio of oil to the finished products is 2DL.

(f 9ower is bought outside from the tate %lectricity Board and a per present tariffs, the cost ofpower would be as under

wh purchased per ?ent per unitAnnum (in la"hs (applicable to entire purchase-in paise05 to 2D /52/ to 25 /42F to 4D /24/ to 45 /0over 45 /D

9ower re'uirements of the plant are normally 0DD "wh per tonne of product at a productionlevel of 0D,DDD tonnes and are estimated to come down to /62 "wh per tonne at aproduction level of 05,DDD tonnes per annum and /5D "wh per tonne at 2D,DDD tonnes per

annum. imilarly, the consumption is epected to be 00D "wh per tonne at a productionlevel lower than 0D,DDD tonne p.a.

(g Eabour is employed on a daily rate basis of ?s. /D per day on an employment of 2DD daysp.a. There are at present 25D men employed and though lower production would result insome 0DL of them being rendered surplus, because of an agreement with the labour union,there cannot be any retrenchment.

(h #onsumption of stores during the last four years had been as underKear production level stores consumed/874 05,DDD tonnes ?s. 5,0D la"hs/872 0D,DDD tonnes 2.74 la"hs

/870 00,5DD tonnes 2.85 la"hs/87/ 05,DDD tonnes 4.DD la"hs

9rices over the base year /87/ have been increasing at the rate of /DL p.a. in the currentyear, the increases is epected to be maintained at the same rate over the prices of /874.

(i elling and distribution overheads are epected to be maintained at ?s. /5 per tonne.

(1 Administrative epenses of the organi3ation in /87/ were ?s. 6.5D la"hs and have beenincreasing at the rate of 5L p.a. over the immediately preceding year*s level. o additionalstaff is epected to be employed for achieving addition production.

Kour wor"ing should form part of the answer.-olution

$>s 9iston Bearings Etd.


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ales FD,DD,DDD 7D,DD,DDD /,DD,DD,DDD /,0D,DD,DDD

Wor"ing otes/.


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#reparation of Budgets:

a Oefinition of ob1ectives A budget being a plan for the achievement of certain operationalob1ectives, it is desirable that the same are defined precisely. The ob1ectives should bewritten out! the areas of control demarcated! and items of revenue and ependiture to be

covered by the budget stated. This will give a clear understanding of the plan and its scopeto all those who must cooperate to ma"e it a success.

b Eocation of the "ey (or budget factor There is usually one factor (sometimes there may bemore than one which sets a limit to the total activity.


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/0. #hange in company*s policy li"e introduction of a new product or design.

/2. pecial conditions affecting the business.


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:n of the condition to be considered in all the compilation of production budget is the level ofstoc" to be maintained. The level of stoc"s will depends upon three factors vi3(a easonal industries in which stoc"s have to be built up during off season to cater to the

pea" season,

(b A steady and uniform level of production to utili3e the plant fully and to avoidretrenchment or lay-off of the wor"ers, and

(c To produce in such a way that minimum stoc"s are maintained at any time to avoidloc"ing up of funds in inventory.

9roduction budget can therefore show (a stabili3ed production every month, say, the maimumpossible production or (b stabili3ed minimum 'uantity of stoc"s which will reduce inventorycosts.

In the case of stabili3ed production, the production facility will be fully utili3ed but the inventory

carrying costs will vary according to stoc"s held. In the case of stabili3ed stoc"s method,however, the inventory carrying will be the lowest but there may be under-utili3ation of capacity.%ample of production budget

A Co'pany#roduction budget in units for the year ending arch "1 DE

9roducts A BBudgeted sales 5,DDD /D,DDDAdd Oesired closing stoc" RR5DD R/,DDDTotal Nty. re'uired 5,5DD //,DDD

Eess :pening stoc" R/,5DD R0,DDDUnits to be produced 4,DDD 8,DDD

#lant ;tiliFation budget:

9lant utili3ation budget represents, in terms of wor"ing hours, weight or other convenient units ofplant facilities re'uired to carry out the programme laid down in the production budget. The mainpurposes of this budget are

(a To determine the load on each process, cost or groups of machines for the budget period.

(b To indicate the processes or cost centers which are overloaded so that corrective actionmay be ta"en such as (i Wor"ing overtime (ii ub-contracting (iii %pansion ofproduction facility, etc.

(c To dovetail the sales production budgets where it is not possible to increase the capacityof any of the overloaded processes.

(d Where surplus capacity is available in any of the processes, to ma"e effort to boost salesto utili3e the surplus capacity.

+irect 'aterial usage budget:


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The steps involved in the compilation of direct materials usage budget are as underi The 'uality standards for each item of material have to be specified. In this connection,

standardi3ation of si3e, 'uality, colour, etc., may be considered.

ii tandard re'uirement of each item of materials re'uired should also be set. While settingthe standard 'uality consideration should be given to normal loss in process. Thestandard allowance for normal loss may be given on the basis of past performance, testruns, technical estimates etc.

iii tandard prices for each item of materials should be set after giving consideration tostoc" and contracts entered into.

After setting standards for 'uality, 'uantity and prices, the direct materials budget can beprepared by multiplying each item of material re'uired for the production by the standard.

A Co'pany+irect 'aterial usage in units and $s.


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Add Total needs /,58,DDD 24,5DDEess :pening stoc" (units RR4,DDD RRR2DDUnits to be purchased /,55,DDD 24,0DDUnits price (?s. RR/.5D RR0.5D9urchase cost (?s. 0,20,5DD 75,5DD 2,/7,DDD

#ersonal 3or Labour cost budget:

:nce sales budget and production budget are compiled and thereafter plant utili3ation budget issettled, detailed amount of the various machine operations involved and services re'uired can bearrived at. This will facilitate preparation of an estimate of different grades of labour re'uired.


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Nuarter 9urchase of raw materials L to total 9rice per "g. Annual re'uirement in e'uity ?s.I 2DL 0II 5DL 2III 0DL 4

The value of the opening stoc" of raw materials in the beginning of the year is ?s.0D,DDD.

Kou are re'uired to present the following for the net year, 'uarter-wise

(i 9roduction budget in units.(ii ?aw material consumption budget in 'uantity.(iii ?aw material purchase budget in 'uantity and value.(iv 9riced stores ledger card of the raw material using


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3iv tore Eedger card

N/ N0 N2 N4

g. ?ate Amt. g. ?ate Amt g. ?ate Amt g. ?ate Amt:pening /D,DDD 0 0D,DDD 4/,5DD 0 72,DDD /,00,5DD 2 0,F6,5DD /,D/,5DD 27,5DD

Q 2

+F2,DDDQ 4

2,F6,5DD

9urchase 84,5DD 0 /,78,DDD /,56,5DD 2 4,60,5DD F2,DDD 4 0,50,DDD -- -- --

#onsu. F2,DDD 0 /,0F,DDD 6F,5DD 4/,5DDQ 0

25,DDDQ 2

/,77,DDD 74,DDD 2 0,50,DDD 8F,5DD 27,5DDQ 2 57,DDD

Q 4

2,46,DDD

#losingstoc"

4/,5DD 0 72,DDD /,00,5DD 2 2,F6,5DD 27,5DDF2,DDD

24

2,F6,5DD 5,DDD 4 0D,DDD

$ulti-product problem where principal budget factor is given ans. procedure as (in prob. 6above.

#roble' HThe direct labour re'uirements of three of the products manufactured in a factory, each involvingmore than one labour operation, are estimated as follows -

Oirect Eabour hours per unit (in minutes 9roduct

/ 0 2:peration / /7 40 2D

0 -- /0 042 8 F --

The factory wor"s 7 hours per day, F days in a wee". The budget 'uarter is ta"en as /2 wee"s

and during a 'uarter lost hours due to leave + holiday are estimated to be /04 hours.

The budgeted hourly rates for the wor"ers manning the operations /,0 and 2 are ?s. 0.DD, ?s.0.5D and ?s. 2.DD respectively.

The budgeted sales of the products during the 'uarter are 9roduct / 8,DDD units

0 /5,DDD units2 /0,DDD units

There is a carry over of 5,DDD units of product 0 and 4,DDD units of product 2 and it is proposed tobuild up a stoc" at the end of the budget 'uarter as follows

9roduct / /,DDD units2 0,DDD units

9repare a man-power budget for the 'uarter showing for each operation, (i direct labour hours,(ii direct labour cost and (iii the number of wor"ers.

-olution$an power Budget for the 'uarter

3i Oirect labour hour

:peration / 9roduct

/ 0 2


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(a Eabour hrs. >unit (minutes /7 40 2D(b 9roduction /D,DDD /D,DDD /D,DDD(c Oirect labour hour. /,7D,DDD 4,0D,DDD 2,DD,DDD

(d Oirect labour hour (cFD 2,DDD 6,DDD 5,DDD

(e ?ate>hr. 0 0 0

3ii Eabour cost (d

c F,DDD /4,DDD /D,DDD

3iii The no. of wor"ers (Eabour hours#apacity >wor"er 5DD 5DD 5DDo. of wor"ers F /4 /D

Oepartment/ /D,DDD H(/7402D>FDJ @ /5,DDD0 /D,DDD H(/004>FDJ @ F,DDD2 /D,DDD H(8F>FDJ @ 0,5DD

Wor"ing note-/

9roduct / 0 2ales 8,DDD /5,DDD /0,DDDAdd #losing stoc" /,DDD --- 0,DDDEess opening stoc" RRR--R 5,DDD 4,DDD

/D,DDD /D,DDD /D,DDD

Wor"ing note-0

9ractical capacity per wor"er. (7 hrs.F days /2 wee"s C/04 hours @ 5DD hrs.

#roble' 1DA single product company estimated its sales for the net year 'uarter wise as under

?uarter -ales ;nits

I 2D,DDD II 26,5DD III 4/,05D IV 45,DDD

The opening stoc" of finished goods is /D,DDD units and the company epects to maintain theclosing stoc" of finished goods at /F,05D units at the end of the year. The production pattern ineach 'uarter is based on 7DL of the sales of the current 'uarter and 0DL of the sales of the net'uarter.

The opening stoc" of raw materials in the beginning of the year is /D,DDD g. And the closingstoc" at the end of the year is re'uired to be maintained of 5,DDD "g. %ach unit of finished outputre'uires 0 g. of raw materials.

The company proposes to purchase the entire annual re'uirement of raw materials in the firstthree 'uarters in the proportion and at the price given below Nuarter 9urchase of raw materials L to total 9rice per "g. Annual re'uirement in e'uity ?s.

I 2DL 0

II 5DL 2III 0DL 4

The value of the opening stoc" of raw materials in the beginning of the year is ?s.0D,DDD.Kou are re'uired to present the following for the net year, 'uarter-wise


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(i 9roduction budget in units.(ii ?aw material consumption budget in 'uantity.(iii ?aw material purchase budget in 'uantity and value.(iv 9riced stores ledger card of the raw material using


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III 0D F2,DDD 4 0,05,DDD

(2,/5,DDD "g.0DL

Total 2,/5,DDD 8,/2,5DD

3iv #eriod stores Ledger Card 3of the ra) 'aterial using


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(i ales budget in 'uantity and value(ii 9roduction budget in 'uantity(iii #omponent usage budget in 'uantity.(iv #omponent purchase budget in 'uantity and value.(v $anpower budget showing the number of wor"ers and the amount of wages payable.

-olutionWor"ing note

/. tatement showing contributionub-assemblies AB# $#B O9 Total ?s. ?s. ?s. ?s.

elling price per unit 50D 5DD 25D$arginal cost p.a.#omponentsBase board FD FD FDI#D7 /FD 4D 4DI#/0 47 /0D 47

I#0F /F 47 F4

Eabour=rade A 4D 2D 0D=rade B F4 47 20

Variable production overhead 2F 04 04Total marginal cost p.u. (B 404 26D 077#ontribution p.u. (# @ (A CB 8F /2D F0ales ratio (O 2 4 0

#ontributionales ratio \(% @(#O] 077 50D /04 820

0. Oesired #ontribution for the forthcoming month Oecember, /887

?s.contributionales ratio

@ ?s. /8,56,0DD>820 (?efer to wor"ing notes / + 0@ 0,/DD

Budgets for +ece'ber 1HHG(i ales budget in 'uantity and valueub-assemblies A#V $#B O9 Total

ales ('ty. (0,/DD240 F,2DD 7,4DD 4,0DD

(?ef. To wor"ing note 2elling price p.u. (?s. 50D 5DD 25Dales value (?s. 20,6F,DDD 40,DD,DDD /4,6D,DDD 78,4F,DDD

(ii 9roduction budget in 'uantityub-assemblies A#B $#B O9

ales F,2DD 7,4DD 4,0DDAdd closing stoc" 60D /,D7D 0,50D(:pening stoc" less /DL --------- -------- ---------Total 'uantity re'uired 6,D0D 8,47D F,60DEess :pening stoc" RR7DD /,0DD 0,7DD


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9roduction F,00D 7,07D 2,80D

(iii #omponent usage budget in 'uantityub-assemblies A#V $#B O9 Totalales F,00D 7,07D 2,80DBase board (/ each F,00D 7,07D 2,80D /7,40D#omponent I#D7 (700 48,6FD /F,5FD 6,74D 64,/FD

(F,00D4 (7,07D0 (2,80D0

#omponent I#/0 (4/D4 04,77D 70,7DD /5,F7D /,02,2FD

(F,00D4 (7,07D/D (2,80D4

#omponent I#0F (0F7 /0,44D 48,F7D 2/,2FD 82,47D

(F,00D0 (7,07DF (2,80D7

(iv #omponent purchase budget in 'uantity + valueub-assemblies Base board A#V $#B O9 TotalUsage in production /7,40D 64,/FD /,02,2FD 82,47D

Add closing stoc" /,44D /,D7D 5,4DD 2,FDD(:pening stoc" less /DL RRRRRRR

/8,7FD 65,04D /,07,6FD 86,D7DEess :pening stoc" RRR/,FDD /,0DD /F,DDD 4,DDD9urchase (Nty. /7,0FD 64,D4D /,00,6FD 82,D7D9urchase price (?s. FD 0D /0 79urchase value (?s. /D,85,FDD /4,7D,DDD /4,62,/0D 6,44,F4D 46,84,/FD

(v $anpower budget showing the number of wor"ers + the amount of wages payableOirect EabourRRRRRRRRRRRR

=rade A =rade Bub- Budgeted ;ours per Total hours per total Total

Assemblies production units hours units hours

A#B F,00D 7 48,6FD /F 88,50D$#B 7,07D F 48,F7D /0 88,2FDO9 2,80D 4 /5,F7D 7 2/,2FD

(A Total hours /,/5,/0D0,2D,04D

(B;ours per man per month 0DD 0DD(#umber of wor"ers per month (A>B 56F /,/50(OWage rate per month (?s. /,DDD 7DD

(% Wages payable (?s. (#O 5,6F,DDD 8,0/,FDD

/4,86,FDD

#roduction or


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c In regard to the estimate of consumption of indirect materials, the age and condition of theplant and machinery are ta"en into consideration.

%ample of factory overhead budget

A Co'pany


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mar"et research, after sales service, etc. are generally grouped together to form part of theresponsibility of the sales manager. While ma"ing a budget, selling costs are divided into fiedand variable. emi-variable costs should also be separated into variable and fied elements. Theproblems faced in the preparation of selling cost budgets are

i ;eavy ependiture on selling and sales promotion may have to be incurred when thevolume of sales is falling off. This will increase the percentage of such costs to total sales,and

ii ometimes intensive sales + promotion efforts are called for in one year and the benefitof such efforts accrue in the subse'uent years. This ma"es it difficult to establish aproportion of selling cost to sales.

In spite of these problems, some relationship between selling cost and volume of sales has to beestablished and it is the duty of the Budget #ontroller to determine the amount of selling costs tobe incurred to achieve the desired level of sales volume. Using the past eperience as a guide,consideration should be given to the future trend of sales, possible changes in competition etc.,

in pre-determination of selling costs.

Oistribution cost has been defined as the cost of the se'uence of operations which begins withma"ing the pac"et of product available for dispatch and ends with ma"ing the re-conditionedreturn of empty pac"age, if any available for re-use. It includes transport cost, storage andwarehousing costs, etc.

9reparation of the adverting cost budget is the responsibility of the sales manager oradvertisement manager. When preparing the advertisement cost budget consideration should begiven to the following factors

a The best method of advertisement must be selected! costs will vary according to the

method selected.

b The maimum amount to be spent in a period, say one year, has to be decided.

c Advertising and sales should be co-ordinated. It means that money should be spent onadvertisement only when sufficient 'uantities of the product advertised are ready forsales.

d An effective control over advertisement ependiture should be eercised and theeffectiveness of the advertisement should be measured.

The choice of the method of advertising a product is based on the effectiveness of the money

spent on advertisement in increasing or maintaining sales. If the output sold increases, theproduction cost will come down because of the economics of large scale production.The amount to be spent on advertisement appropriation, may be settled on the basis of thefollowing factors

i A percentages on the total sales value of the budget period or on the epected profitmay be fied on the basis of past eperience.

ii A sum which is epected to be incurred by the competitors may be fied to be spentduring the budget period.

iii A fied sum per unit of output can be fied and added to cost.

iv An amount is fied on the basis of the ability of the company to spend onadvertising.

v An advertisement plan is decided upon and the amount to be spent is determined.


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Oepending upon the nature of the product and the effectiveness of the media of the advertisingthe company prepares a schedule of various methods of advertisement, to be used for effectivesales promotion. The numbers of advertisements (insertions are determined and the costcalculated as per the rates applicable to each of the media selected. This is a sound method.

#roble' 1S $anufacturing company ta"es over sales from the elling Agents. In the first month ofoperation of direct sales, the following costs have been incurred. 9repare the actual percentageof selling cost on total sales, compare with the standard selling cost.#ompute the variances and offer your comments about the standards, which are based on actualfor the previous year, and performance of the onal offices.

onal offices -ales Budgets 3units -tandard selling e2penses%astern India 0D,DDD ?s. /F,DDDWestern India /0,DDD /0,DDDorthern India F,DDD 7,DDD

outhern India /5,DDD /0,DDD#entral India /D,DDD /D,DDDorthern Western India 5,DDD 7,DDD

elling price per unit C ?s. 05

Actual %.I. W.I. .I. .I. #.I. .W.IUnits sold ()DDD units /8 /D 5.8 /6.5 8.5 5alesmen*s salaries (?s.*DDD 7 6 5 6 F 5ales travelling (?s.*DDD 4 5 2.F 0.6 0.6 /.7;alting charges +Bhatta (?s. 75D 7DD 5DD 5DD 6DD 5DD

alesmen*s commission :n selling prices Q /L /.05L /L D.8L /L /L

!ns)er #:$9A?ATIV% #:T TAT%$%T :< %EEI= %S9%%

%.I. W.I. .I. .I. #.I. .W.I.tandard/. elling ep. (?s. /F,DDD /0,DDD 7,DDD /0,DDD /D,DDD 7,DDD0. Budgeted sales (units0D,DDD /0,DDD F,DDD /5,DDD /D,DDD 5,DDD2. elling cost p.u.

?s. (/(0 D.7D /.DD /.22 D.7D /.DD /.FD

4. Actual sales (units /8,DDD /D,DDD 5,8DD /6,5DD 8,5DD 5,DDD5. tandard selling cost

for actual sales (?s. RRRRRR RRRRRRR RRRRRR RRRRRRR RRRRRR RRRRRRR

(2(4 /5,0DD /D,DDD RR6,786 R/4,DDD R8,5DD RR7,DDD

!ctual selling costs:alesmen*ssalaries (?s. 7,DDD 6,DDD 5,DDD 6,DDD F,DDD 5,DDD

ales travelling 4,DDD 5,DDD 2,FDD 0,6DD 0,6DD /,7DD;alting charges etc. 75D 7DD 5DD 5DD 6DD 5DDalesmen*scommission 4,65D 2,/05 /,465 2,826 0,265 /,05D

F. Total actual selling RRRRRRR RRRRRRR RRRRRRR RRRRRRR RRRRRRRR RRRRRRR


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costs /6,FDD /5,805 R/D,565 /4,/26 R//,665 R7,55D6. selling costs variance

?s. (5 C (F - 0,4DD - 5,8DD - 0,6D7 - /26 - 0,065 - 55D7. Budgeted sales

(Budgeted 'ty.budgeted

price (?s. 5,DD,DDD 2,DD,DDD /,5D,DDD 2,65,DDD 0,5D,DDD /,05,DDD8. Budgeted selling

epenses as a Lof Budgeted sales

(/(7/DD 2.0 4.D 5.2 2.0 4.D F.5

/D. Actual sales (?s. 4,65,DDD 0,5D,DDD /,46,5DD 4,26,5DD 0,26,DDD /,05,DDD//. Actual selling

epenses as a L of actual sales 2.6 F.4 2.0 6.0 4.8 F.7

Co''ents:The above table shows that ecept for southern India and orth C western Indiaonal offices, actual sales epenses widely differ from budgeted selling epenses. ;owever, the

following points have to be noted(i The standards are based on the actual epenses for the last year. Truly spea"ing they are not

standards and, therefore, they cannot provide realistic guidance for eercising control over theselling epenses. Variances may be there because current year*s conditions might havecompletely changed or circumstances which were applicable last year may have ceased tobecome applicable now.

(ii The causes of the variances cannot be correctly spelt out in the absence of details about the&tandard selling epenses. The details of actual selling epenses have been given but thedetails of standard selling epenses have not been given. alesmen*s salaries is a fied charge,variance may be there on account of increase in their salaries. ales travelling epenses are ofa semi-variable nature. Eess volume of sales might have resulted in less recovery of fied sales

travelling epenses such as railway freight, hotel charges.

!d'inistrative e2penses budget:

The administrative epenses are mostly policy costs and are, therefore, fied in nature. The mostpractical method to follow in preparing estimate of these epenses is to follow the pasteperience with due regard to anticipated changes either in general policy or the volume of

business. To bring such epenses under control, it is necessary to review them fre'uently and todetermine at regular intervals whether or not these epenses continue to be ad1usted. %amplesof such epenses are Audit fees, depreciation of office e'uipment, insurance, subscriptions,postage, stationery, telephone, telegrams, office supplies, etc.

$esearch & develop'ent e2penses budget:

?esearch is re'uired in order to develop and> or improve products and methods. When researchresults in definite benefit to the company development function begins. After development, formalproduction can commence on commercial scale and then production function starts. ince theareas of research and development cannot be precisely defined, the costs incurred under boththe functions are clubbed together as research and development costs. ?esearch +Oevelopment (? + O plays a vital role in maintaining the enable sums on ? + O to improve theproducts.


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?esearch may be either pure research or applied research. 9ure research increases "nowledgewhereas applied research aims at producing definite results li"e improved methods of production,?esearch + development epenses should be controlled carefully and hence a limit on thespending is placed. i.e., the amount to be spent is carefully determined or allocated. Thefollowing are the methods of allocation of ? + O epenses.

/. A percentage based on total sales value. This method is good if sales value is steadyfrom /D years.

0. A percentage based on net profit.2. A total sum is estimated on the basis of past eperience and future ? + O plans and

policies.4. A sum is fied on the basis of cash resources available with the company.5. All factors which affect the importance of ? + O are considered.


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#ash budget represents the cash re'uirements of the business during the budget period. It is theplan of receipts and payments of cash for the budget period, analy3ed to show the monthly flowof cash drawn up in such a way that the balance can be forecasted at regular intervals.

#roble' 1"9repare cash budget for Xuly - Oecember from the following information

(I The estimated sales, epenses etc. are as follows (?s. in lac"s

Xune Xuly Aug. ept. :ct. ov. Oec.ales 24 4D 4D 5D 5D FD F59urchase 04 /F /6 0D 0D 05 07Wages and alaries /0 /4 /4 /7 /7 0D 00$iscellaneous 5 F F F 6 6 6Interest ?eceived 0 -- -- 0 -- -- 0ales of hares -- -- 0D -- -- -- --

(ii 0DL of the sales are on cash with 2L cash discount and the balance on credit.

(iii /L of the credit sales are returned by the customers. 0L of the net receivable constitutedbad debt losses. 5DL of the good accounts receivable are collected in the monthfollowing the sales with /L cash discount, 2DL of the good accounts receivable arecollected in the 0ndmonth following the sales and the rest in the 2rdmonth following sales.

(iv The time lag in the payment of misc. epenses and purchases is one month. Wages andsalaries are paid fortnightly with a time lag of /5 days.

(i The company "eeps a minimum cash balance of ?s. 05.DD la"hs. #ash in ecess of ?s.

06 la"hs is invested in 8L =ovt. securities in the multiple of ?s. / la"h. Interest isreceivable on monthly basis . hortfalls in the minimum cash balance are made good byborrowings from ban"s in multiple of ?s.0 la"hs + also repaid by same amount. The rateof interest is /0L p.a. ( compound interest

(ii The opening cash balance is ?s.0F lac"s.

(iii ales in the month April + $ay was ?s. 44 + 4D lac"s. ?espectively.-olution

Wor"ing note-/ ?ec.Eets ales /DD

Eess cash sales R0D 0D86L @ /8.4L of (monthlyOebtors 7DEess ?eturn /L D.D7

68.0et receivableEess Bad debt (0L /.574

=oods Oebtors 66.F/F5DL88L @ 27.40L of 9revious month sales.

$onths followed sales

0ndmonth following sales @ 66.F/F2DL @ 02.07L of 0nd9$

2rd

$onth following sales @ 66.F/F0DL @ /5.50L of 2rd

9$

#ash BudgetXuly Aug. ept. :ct. ov. Oec.

:pening balance 0F 0F.8F 06./D 06.76 06.42 06.06


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#ollection from sales#ash sales /8.4L of B>s 6.6F 6.6F 8.6 8.6 //.F4 /0.F/#ollection 27.40L of 9ms /2.DF /5.26 /5.26 /8.0/ /8.0/ 02.D502.07L of 0nd9ms 8.2/0 6.80 8.2/ 8.2/ //.F4 //.F4/5.50L of 2rd9$s F.72 F.0/ 5.07 F.0/ F.0/ 6.6Fint-Business --- -- 0 -- -- 0=ovt. Bond -- -- D.// D./2 D./4 D./Fales RR--R RR0D RRR--R RR--R RR--R RR--R (a Total F0.8F 74.00 F7.76 60.42 6F.06 74.489ayments-9m (/ m lag 04 /F 6 0D 0D 05- $is eps (/ m lag 5 F F F 6 6-wages + salary (/>0 m lag 6 6 8 8 /D //2M of 9$ RRF R6 R6 R8 R8 R/D(b Total 40 2F 28 44 4F 52(c =ross balance 0D.8F 44.00 08.76 07.42 2D.06 2/.48

(d Borrowing F -- -- -- -- --

(e ?efund of borrowing with interest -- F./0 -- -- -- --(f Inv. in govt. bond RR-- RR/5 RR0 RR/ RRR2 RR4(g et cash balance 0F.8F 06./D 06.76 06.42 06.06 06.48ote-0


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#alculate (i %pected cash collections during


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A B #?s. ?s. ?s.

Oirect $aterials$aterial S Q ?s. F per "g. /0 04 /7$aterial K Q ?s. 4 per "g 7 ^ 4

Oirect Eabour?s. 4 per hour /0 /F 0D


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9roduct $aterial S $aterial Kgs. gs.

A 4F,DDD 0 80,DDD 4F,DDD 0 80,DDD

B 05,DDD

4 /,DD,DDD ^# /D,DDD 2 2D,DDD /D,DDD / /D,DDD

^^^^C ^^^^

Total material re'uired as perstandard 0,00,DDD /,D0,DDDAdd 0L wastage allowance(assumed to be based on output 4,44D 0,D4D

^^^^C ^^^^CTotal $aterial ?e'uirement 0,0F,44D /,D4,D4D$aterial #ost 9rice per "g. ?s. F.0D ?s. 4Total material #ost ?s. /4,D2,807 4,/F,/FD

^^^^^ ^^^^^

(0 #alculation of Oirect Eabour #ost

9roduct ;rs.

A 4F,DDD 2 hrs. /,27,DDD

B 05,DDD 4 hrs. /,DD,DDD

# /D,DDD 5 hrs. 5D,DDD

^^^^C0,77,DDD

Eess aving of 2L due to efficiency 7,F4D

^^^^C;ours to be paid for 0,68,2FD^^^^C

Total Oirect Eabour #ost (0,68,2FD Q ?s. 4>- per hour ?s. //,/6,44D^^^^C

(2 #alculation of Variable


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# /D,DDD units Q ?s. /D per unit /,DD,DDD^^^^C2,4D,DDD

^^^^C

(Indirect $aterial #ost ?s. /,D0,DDD!Indirect Eabour #ost ?s. /,D0,DDD! andIndirect %penses ?s. /,2F,DDD^in the ratio of 2D 2D 4D respectively

(5 #alculation of #ommission of the 0 ones

tandard =ross 9rofit per unit%astern Western

?s. ?s.

(elling price C td. cost priceA 5D C 4/ @ 8 5D C 4/ 8

B FD C 50 @ 7 FD C 5/ 7# 7D C 56 @ 02 7D C 56 02

td. =ross 9rofit for ones A 2D,DDD 8 @0,6D,DDD /F,DDD 8 @ /,44,DDD

B /D,DDD 7 @ 7D,DDD /5,DDD 7 @ /,0D,DDD

# 4,DDD 02 @ 80,DDD F,DDD 02 @ /,27,DDD^^^^ ^^^^

Total =ross 9rofit 4,40,DDD 4,D0,DDD^^^^ ^^^^

/DL of the above 44,0DD 4D,0DD^^^^ ^^^^

Total ?s. 74,4DD

?uestion

$anufacturers Etd. produce three products from three basic raw materials in threedepartments. The company operates a budgetary control system and values its stoc" offinished goods on a total cost basis.


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Oirect Eabour hours 46,7DD F6,/DD F5,0DD

Oirect $aterial$/ $0 $2

toc" at Xuly / /87Fin units 04,5DD 0D,5DD /6,5DD

The company is introducing a new system of inventory control which should reducestoc"s. The forecast is that stoc"s as at 2/ st Xuly /87F will be reduced as follows ?awmaterials by /DL and finished products by 0DL.


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$/ /D ^ 04$0 ^ 4D 2F$2 5 5 ^

^^ ^^ ^^/5 45 FD

Eabour Oept. I /D 5 5Oept. II /0 4 FOept. III 2 05 F /5 8 0D

^^ ^^ ^^ ^^ ^^ ^^4D FD 7D

:ther variable costs /D 0D /5^^ ^^ ^^5D 7D 85

hr. 0D /D /D46,7DDOept II.?s. 0,D/,2DD^^^^^^ @ ?s. 2>hr. /7 F 8

F6,/DDOept. III?s. 2,8/,0DD^^^^^^ @ ?s. F>hr. /0 5D 04 4D 2F 55

F5,0DD ^^ ^^ ^^ ^^ ^^ ^^9roduction #ost /DD /0D /5DAdministration cost 0D 04 2D

elling and Oist. #ost 4D FD 47 60 FD 8D^^ ^^ ^^ ^^ ^^ ^^

Total #ost /FD /80 04D9rofit 4D 04 4D

^^ ^^ ^^elling 9rice 0DD 0/F 07D

^^ ^^ ^^

ales ?evenue /5,DD,DDD /D,7D,DDD /F,7D,DDDales (in Units 6,5DD 5,DDD F,DDD

^^^^^ ^^^^^ ^^^^^(ales revenue elling price

(a #roduction Budget for Iuly 1HG(.

9roductA B #

(units (units (units

ales 6,5DD 5,DDD F,DDDEess :pening toc" (2,DDD (0,DDD (0,5DD

^^^C ^^^C ^^^C4,5DD 2,DDD 2,5DD

Add #losing toc" 0,4DD /,FDD 0,DDD^^^C ^^^C ^^^C

9roduction F,8DD 4,FDD 5,5DD^^^C ^^^C ^^^C


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(b aterial ;sage Budget for Iuly 1HG(

Units of9roducts

$/ $0 $2

Nuant

ity perunit ofproduct

Total unitsof material

Nuantity

perunitofproduct

Total units ofmaterial

Nuantity

perunitofproduct

Total unitsof material

/ 0 /0@2 4 /4@5 F /F@6

9roductionA

B

#

F,8DD

4,FDD

5,5DD

5

^

/0

24,5DD

^

FF,DDD

^

/D

8

^

4F,DDD

48,5DD

5

50

^

24,5DD

2,DDD

^Total usage

(units/,DD,5DD 05,5DD 56,5DD

c aterial #urchase Budget


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K /0,DDD "gs.

(b


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Oirect $aterial #ost (?s. 0,/D,DDD /,F7,DDD 2,67,DDD

". +irect Labour Cost A B Total?s. ?s. ?s.

Oept. 9 0 hrs. Q ?e. / per hr. for A 0/ hr. Q ?s. 0 per hr. for B 0

Oept. N / hr. Q ?s. 2 per hr. for A 2/ hr. Q ?s. 2 per hr. for B 2

^^ ^^Total 5.DD 5.DD

^^ ^^9roduction (units 2D,DDD /0,DDD

^^^C ^^^COirect labour #ost (?s. /,5D,DDD FD,DDD 0,/D,DDD

4. +irect Labour ours +ept. # +ept. ?

A 9 2D,DDD 0 hrs. N 2D,DDD / hr. FD,DDD 2D,DDD

B 9 /0,DDD / hrs. N /0,DDD / hr. /0,DDD /0,DDD

^^^C ^^^C60,DDD 40,DDD

^^^C ^^^C

%. Overhead $ecovery $ate Oept. 9 Oept. N


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:verhead 9 per unit 5.DD 0.5DN per unit 0.5D 0.5D

^^C ^^CTotal cost per unit /8.5D 04.DD

^^C ^^C9roduction 2D,DDD /0,DDDTotal cost 5,75,DDD 0,77,DDD 7,62,DDD

G. -ales ?s.

A 04,DDD ?s. 2D 6,0D,DDD

B /5,DDD ?s. 4D F,DD,DDD

^^^^CTotal /2,0D,DDD

^^^^C

H. +ebtors ?s.

:pening Balance 8D,DDDales /2,0D,DDD

^^^^^Total /4,/D,DDD#losing Balance /,5D,DDD

^^^^^#ash ?eceipts /0,FD,DDD

^^^^^

1D. $a) aterial

9roducts $aterial S ("gs. K ("gs. TotalS K ?s.

g. g.

A 2D,DDD units 0 / FD,DDD 2D,DDDB /0,DDD units 4 0 47,DDD 04,DDD

^^^^ ^^^^/,D7,DDD 54,DDD

#losing toc" 47,DDD /0,DDD^^^^ ^^^^

Total /,5F,DDD FF,DDD:pening toc" 2F,DDD F,DDD

^^^^ ^^^^$aterial to be purchased /,0D,DDD FD,DDD9urchase price per PPP ?s. 2 ?s. /9urchase value (?s. 2,FD,DDD FD,DDD 4,0D,DDD

11. Creditors $s.

:pening Balance 47,DDD9urchases 4,0D,DDD

^^^^CTotal 4,F7,DDD#losing Balance 47,DDD

^^^^C9aid 4,0D,DDD


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^^^^C

1. *nventories as on "D/H1HGH

?aw material S 47,DDD ?s. 2 @ /,44,DDD

K /0,DDD

?e. / @ /0,DDD /,5F,DDD^^^^^^


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Additions /,0D,DDD^^^^C/2,0D,DDD

9rovision for Oepreciation 2,FD,DDD 8,FD,DDD^^^^C

Inventories C?aw $aterials /,5F,DDD


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It ensure that the function underta"en are critical for the achievement of the ob1ectives.

It provides an opportunity for management to allocate resources to various activities

after a proper cost benefit analysis.

It helps in the identification of wasteful ependiture and then their elimination.

If facilitates the close lin"age of departmental budgets with corporate ob1ectives

It helps in the introduction of a system of $anagement by :b1ectives.

#rocess of ero/base Budgeting:

The process of 3ero-base budgeting involves the following steps

/. Oetermination of a set of ob1ectives is one of pre-re'uisites and essential step in the directionof BB techni'ue.

0. Oeciding about the etent to which the techni'ue of BB is to be applied whether in all areasof organi3ations* activities or only in a few selected areas on trial basis.

2. Identify those areas where decisions are re'uired to be ta"en.

4. Oeveloping decision pac"ages and ran"ing them in order of performance.

5. 9reparation of budget that is translating decision pac"ages into practicable units>items andallocating financial>resources.

In real terms the ero base budgeting is simply an etension of the cost, benefit, analysis methodto the area of corporate planning and budgeting. It, however, provides a number of advantages tothe organi3ational efficiency and effectiveness.

!dvantages of ero/base budgeting:

The advantages of 3ero-base budgeting are as follows/. It provides a systematic approach for the evaluation of different activities and ran" them in

order of preference for the allocation of scarce resources.

0. It ensures that the various functions underta"en by the organi3ation are critical for theachievement of its ob1ectives and are being performed in the best possible way.

2. It provides an opportunity to the management to allocate resources for various activities onlyafter having a thorough cost-benefit-analysis. The chances of arbitrary cuts andenhancement are thus avoided.

4. The areas of wasteful ependiture can be easily identified and eliminated.

5. Oepartmental budgets are closely lin"ed with corporation ob1ectives.F. The techni'ue can also be used for the introduction and implementation of the system of

)management by ob1ective.* Thus, it cannot only be used for fulfillment of the ob1ectives oftraditional budgeting but it can also be used for a variety of other purposes.

ero base budgeting s superior to traditional budgeting

ero base budgeting s superior to traditional budgeting in the following manner

It provides a systematic approach for evaluation of different activities.

It ensure that the function underta"en are critical for the achievement of the ob1ectives.


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. -ales anage'ent:

/. Actual sales compared with budgeted sales to measure performance bya 9roducts,b Territoriesc Individual salesmen, andd #ustomers.

0. tandard profit and loss by producta


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v pecial pricing analysisvi $a"e or buy certain componentsvii tatement of surplus available for payment of bonus under the labour appellate tribunal

formula.

Budget $atio

These ratios provide information about the performance level, i.e., the etent of deviation ofactual performance from the budgeted performance and whether the actual performance isfavourable or unfavorable. If the ratio is /DDL or more, the performance is considered asfavourable and if ratios is less than /DDL the performance is considered as unfavourable.

The following ratios are usually used by the management to measure development from budget.

#apacity usage ratio This relationship between the budgeted number of wor"ing hours and the

maimum possible number of wor"ing hours in a budget period.

tandard capacity employed ratio this ratio indicates the etent to which facilities were actuallyutili3ed during the budget period.

Eevel of activity ratio This may be defined as the number of standard hours e'uivalent to wor"produced epressed as a percentage of the budget of standard hours.

%fficiency ratio this ratio may be defined as standard hours e'uivalent of wor" producedepressed as a percentage of the actual hours spent in producing the wor".

#alendar ratio This ratio may be defined as the relationship between the number of wor"ing

days in a period and the number of wor"ing das in the relative budget period.

Budget $atios:

1. 0fficiency $atio K 3-tandard hours !ctual hours 1DD

. !ctivity $atio K 3-tandard hours Budgeted hours 1DD

". Calendar $atio K 3!vailable )or=ing days budgeted )or=ing days 1DD

4. -tandard Capacity ;sage $atio K

3Budgeted hours a2. possible hours in the budgeted period 1DD

%. !ctual Capacity ;sage $atio K

3!ctual hours )or=ed a2i'u' possible )or=ing hours in a period 1DD

(. !ctual ;sage of Budgeted Capacity $atio K

3!ctual )or=ing hours Budgeted hours 1DD

#roble' 14


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td. hours epected to be earned per four wee"s 7,DDD hoursActual hours wor"ed in the four wee" period F,DDD hourstandard hours earned in the four wee" period 6,DDD hours.

The related period is of 4 wee"s. In this period there was a one special day holiday due tonational event. #alculate the following ratios

(/ %fficiency ?atio, (0 Activity ?atio, (2 #alendar ?atio, (4 tandard #apacity Usage ?atio,(5 Actual #apacity Usage ?atio. (F Actual Usage of Budgeted #apacity ?atio.

-olution$aimum capacity in a budget period

@ 5D employees 7 hrs.5 days4 wee"s

@ 7,DDD hrs.

Budgeted hours

4D employees 7 hrs.5 days4 wee"s

@ F,4DD hrs.

Actual hrs. @ F,DDD hrs. (from the sumtandard hrs. for actual output @ 6,DDD hrs.

Budget no. of days @ 0D days @ 0D days (4 wee"s 5 days

Actual no. of days @ 0D-/ @ /8 days

/. %fficiency ratio @ ------------------/DD @ H(6,DDDF,DDD/DDJ @ //F.F6L

0. Activity ratio @ H(6,DDDF,4DD/DDJ @ /D8.265L

2. #alendar ?atio @ (Available wor"ing days budgeted wor"ing days /DD

@ H(/80D/DDJ @ 85L

4. tandard #apacity Usage ?atio @

(Budgeted hours $a. possible hours in the budgeted period /DD

@ H(F,4DD7,DDD/DDJ @ 7DL

5. Actual #apacity Usage ?atio @

(Actual hours wor"ed $aimum possible wor"ing hours in a period /DD

@ H(F,DDD7,DDD/DDJ @ 65L

F. Actual Usage of Budgeted #apacity ?atio @

(Actual wor"ing hours Budgeted hours /DD

@ H(F,DDDF,4DD/DDJ @ 82.65L

Budget >ariance:

It is computed on the basis of fied budgeting system where budget variance @ budgeted cost Cactual cost here. The items are classified first in respective responsibility category + then thedifference are computed individually + totally.

#roble' 11."4

tandard hrs.Actual hrs.


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icefit $anufactures ready made garments by a simple process of cutting the clothes in variousshapes and then sewing the corresponding pieces together to form the finished product.The sewing Oepartment and the cutting department report to the production manager who alongwith %ngineering $anager reports to the Oirector-$anufacturing. The ales $anager, 9ublicity$anager and the #redit $anger report to the Oirector-$ar"eting, who along with Oirect-$anufacturing reports to the $anaging Oirector of the company.

The Accounts Oepartment reports the following for the last 'uarter of /872Budgeted ?s. Actual ?s.

Bad debt Eosses 5,DDD 2,DDD#loth used 2/,DDD 2F,DDDAdvertising 4,DDD 4,DDDAudit fees 6,5DD 6,5DD#redit reports /,0DD /,D5Dales representative Travelling epenses 8,DDD /D,0DDales commission 6,DDD 6,DDD#utting Eabour F,DDD F,FDD

Thread 5DD 45Dewing Eabour /6,DDD /7,4DD#redit Oeptt. alaries 7,DDD 7,DDD#utting utilities 7DD 6DDewing utilities 8DD 85DOirector $ar"eting salaries + Admn. %p. 0D,DDD 0/,4DD9roduction engineering epenses /2,DDD /0,0DDales management office epenses /F,DDD /5,6DD9roduction $anger office epenses /7,DDD /6,DDDOirect $fg. alaries + Admn. %penses 0/,DDD 0D,/DD

Using the above data, prepare responsibility Accounting reports for the director mar"eting, the

Oirector-manufacturing and the production manager.

!ns)er ?esponsibility Accounting ?eports


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Total (A /F,DDD /6,0DD /,0DD (A

ales $anagement:ffice epenses /F,DDD /5,6DD 2DD (


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#oints to re'e'ber

1. apply the behaviour )ise cost definitions in fle2ible budget. apply nor'al capacity". calculate principle budget factor in preparation of functional budget

335_resource_4. Budget & Budgetary Control

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Transcript of 335_resource_4. Budget & Budgetary Control