Forecasting, Budgeting and Budgetary Control - Management Accounting | CMA Inter Syllabus
1. Introduction
Planning and control systems are linked inextricably to the ways in which people behave. Such systemsconsider and deals with what people are meant to do (missions, objectives, goals, etc.), how they should do it (plans), what they should allocate resources to (budgets) and how well they do it (budgetary control mechanisms).
A budget is often thought of as a financial plan. A budget may, however, be expressed not only in financial terms but also in quantitative terms (e.g. budgets for labour hours, material purchases, or units of sales). Budgets are, of course, internal to the organization and, like most management accounting information, do not form part of the organization’s published financial statements.
Budgeting has come to be accepted as an efficient method of short-term planning and control. It is employed, no doubt, in large business houses, but even the small businesses are using it at least in some informal manner. Through the budgets, a business wants to know clearly as to what it proposes to do during an accounting period or a part thereof. The technique of budgeting is an important application of Management Accounting. Probably, the greatest aid to good management that has ever been devised is the use of budgets and budgetary control. It is a versatile tool and has helped managers cope with many problems including inflation.
Budget is a financial and/or quantitative statement, prepared and approved prior to a defined period of time of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and employment of capital.
The CIMA Official Terminology defines a budget as “a plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective”.
According to Brown and Howard “a budget is a predetermined statement of managerial policy during the given period which provides a standard for comparison with the results actually achieved.”
Budgetary Control
Budgetary control is defined as “the establishment of budgets relating the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results, either to secure by indi-vidual action the objective of that policy or to provide a basis for its revision.”
Uses of budgets
Primary uses:
Secondary uses:
Tertiary uses:
Some questions to be asked when preparing a manufacturing firm’s annual budget:
Questions raised when the product is being manufactured:
Materials:
Labour:
Forecast Vs Budget
Forecast is mainly concerned with an assessment of probable future events. Budget is a planned result that an enterprise aims to attain. Forecasting precedes preparation of a budget as it is an important part of the budgeting process. It is said that the budgetary process is more a test of forecasting skill than anything else. A forecast provides a detailed look at what a business is doing to further its growth and development. Businesses use forecasts as a means of predicting what their operations, customer reach, revenue potential and profitability will look like at a specific time in the future. Generally, forecasts create projections on an annual basis, but businesses can create forecasts that estimate several years ahead. A budget outlines future financial operations to meet revenue goals and reduce costs. Both financial documents rely on accurate reporting and analysis, but there are several differences between a company’s forecast and budget. A budget is both a mechanism for profit planning and technique of operating cost control.
The main differences between budget and forecast can be listed as under:
A Budget is a financial plan expressed in quantitative terms, prepared by the management in advance for forthcoming period whereas, forecast means estimation of future trends and outcomes, based on the past and present data. Budget is the financial expression of a business plan or target but Forecast is the prediction of upcoming events or trends in business, on the basis of present business conditions. Again, Budget sets target but in Forecast, no target is set. Budget is an annual concept but on the other hand Forecast is done on regular intervals. Variance analysis is done between Budgets and Actuals but in Forecast, there is no such provision. Budget primarily means, what business want to achieve but in Forecast, the idea is, what business will achieve.
In order to establish a budget, it is essential to forecast various important variables like sales, selling prices, availability of materials, prices of materials, wage rates etc.
Features of Budget:
1. Financial and/or Quantitative statement
2. Futuristic – prepared and approved prior to a defined period of time
3. Goal Oriented – for the purpose of attaining a given objective
4. Components – income, expenditure and employment of capital
The Objectives of Budgeting are:
1. To encourage self-study in all aspects of a company’s operations.
2. To get all members of management to “put their heads” to the basic question of how the business should be run to make them a coordinated team operating in unison towards clearly defined objectives.
3. To force a definition and crystallization 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 study of relationship of the company to its external economic environment for improving the effectiveness of its direction.
2. Rationale for Budgets
1. Definition of Goals:
Portraying with precision, the overall aims of the business and determining targets of performance for each section or department of the business.
2. Defining responsibilities:
Laying down the responsibilities of each of the executives and other personnel so that everyone knows what is expected of him and how he will be judged.
3. Basis for performance evaluation:
Providing basis for the comparison of actual performance with the predetermined targets and investigation of deviation, if any, of actual performance and expenses from the budgeted figures. It helps to take timely corrective measures.
4. Optimum use of resources:
Ensuring the best use of all available resources to maximize profit or production, subject to the limiting factors.
5. Coordination:
Coordinating the various activities of the business and centralizing control, but also facility for management to decentralize responsibility arid delegate authority.
6. Planned action:
Engendering a spirit of careful forethought, assessment of what is possible and an attempt at it. It leads to dynamism without recklessness. It also helps to draw up long range plans with a fair measure of accuracy.
7. Basis for policy:
Providing a basis for revision of current and future policies. Providing a yardstick against which actual results can be compare.
3. General Principles in the Budgetary Process
Objectives should be defined precisely. They should be written out; areas of control de-marketed and items of revenue and expenditure to be covered by the budget stated. This will give a clear understanding of the plan and its scope to all those who must cooperate to make it a success.
Key Factor is also called as “Limiting Factor” or Governing Factor. While preparing the budget, it is necessary to consider key factor for successful budgetary control. The influence of the Key Factor which dominates the business operations in order to ensure that the functional budgets are reasonably capable of fulfillment. The Key Factors include:
(1) Raw materials may be in short supply.
(2) Non-availability of skilled labours.
(3) Government restrictions.
(4) Limited sales due to insufficient sales promotion.
(5) Shortage of power.
(6) Underutilization of plant capacity.
(7) Shortage of efficient executives.
(8) Management policies regarding lack of capital.
(9) Insufficient research into new product development.
(10) Insufficiency due to shortage of space.
Budget Center:
A Budget Center is defined by the terminology as “a section of the organization of an undertaking defined for the purpose of budgetary control.” For effective budgetary control budget centre or departments should be established for each of which budget will be set with the help of the head of the department concerned.
Budget Committee and Controller:
Formulation of a budget usually requires whole time services of a senior executive; he must be assisted in this work by a Budget Committee, consisting of all the heads of department along with the Managing Director as the Chairman. The Controller is responsible for coordination and development of budget programmes and preparing the Budget Manual.
Budget Officer:
Budget Officer is usually some senior member of the accounting staff who controls the budgetary process. He does not prepare the budget himself, but facilitates and co-ordinates the budgeting activity. He assists the individual departmental heads and the budget committee, and ensures that their decisions are communicated to the appropriate people.
Budget Manual:
The Budget manual is a schedule, document or booklet, which shows in a written form, the budgeting organization and procedure. The manual should be well written and indexed so that a copy thereof may be given to each department head for guidance.
Budget period:
The period covered by a budget is known as budget period. Normally a calendar year or a period coterminous with the financial year is adopted as the Budget Period. It is then sub-divided into shorter periods – it may be months or
quarters or such period as coincide with period of trading activity.
The budget period is the length of time for which a budget is prepared and employed. The period may depend upon the type of budget. There is no specific period as such. However, for the sake of convenience, the budget period may be fixed depending upon the following factors:
(a) Types of Business
(b) Types of Budget
(c) Nature of the demand of the product
(d) Length of trade cycle
(e) Economic factors
(f) Availability of accounting period
(g) Availability of finance
(h) Control operation
Standard of activity or output:
The standards of activity levels for future period should be laid down. These are generally based on past statistics, known market changes and current conditions and forecast of future situations. In a progressive business, the achievement of a year must exceed those of earlier years. In budgeting, fixing the budget of sales and capital expenditure are most important since these budgets determine the extent of development activity.
Essentials of Effective Budgeting:
1. Organization Chart:
For the purpose of effective budgetary control, it is imperative on the part of each entity to have definite “plan of organization.” This plan of organization is embodied in the organization chart. The organization chart explaining clearly the position of each executive’s authority and responsibility of the firm. All the functional heads are entrusted with the responsibility of ensuring proper implementation of their respective departmental budgets. An organization chart for budgetary control is given showing clearly the type of budgets to be prepared by the functional heads.
2. Support of top management:
If the budget structure is to be made successful, the consideration by every member of the management not only is fully supported but also the impulsion and direction should also come from the top management. No control system can be effective unless the organization is convinced that the management considers the system to be important.
3. Team Work:
This is an essential requirement, if the budgets are ready from “the bottom up” in a grass root manner. The top management must understand and give enthusiastic support to the system. In fact, it requires education and participation at all levels. The benefits of budgeting need to be sold to all.
4. Realistic Objectives:
The budget figures should be realistic and represent logically attainable goals. The responsible executives should agree that the budget goals are reasonable and attainable.
5. Excellent Reporting System:
Reports comparing budget and actual results should be promptly prepared and special attention focused on significant exceptions i.e. figures that are significantly different from expected. An effective budgeting system also requires the presence of a proper feed‐back system.
6. Structure of Budget team:
This team receives the forecasts and targets of each department as well as periodic reports and confirms the final acceptable targets in form of Master Budget. The team also approves the departmental budgets.
7. Well defined Business Policies:
All budgets reveal that the business policies formulated by the higher level management. In other words, budgets should always be after taking into account the policies set for particular department or function. But for this purpose, policies should be precise and clearly defined as well as free from any ambiguity.
8. Integration with Standard Costing System:
Where standard costing system is also used, it should be completely integrated with the budget programme, in respect of both budget preparation and variance analysis.
9. Goal Congruence:
All the employees or staff other than executives should be strongly and properly inspired towards budgeting system. Human beings by nature do not like any pressure and they dislike or even rebel against anything forced upon them.
Budgets form the basis for the exercise of budgetary control. A budget is a means, and Budgetary control is the end result. A budget is an integral part of the Budgetary control system. The Budget is a financial plan. Budgetary control results from the administration of the financial plan.
The terms budgetary control and budgeting are often used interchangeably to refer to a system of managerial control. Budgetary control implies the use of a comprehensive system of budgeting to aid management in carrying out its functions like planning, coordination and control. It is a system which uses budgets for planning and controlling different activities of business.
Requirements of a Good Budgeting System
(i) The organizational goal should be quantified and clearly stated. These goals should be within the framework of organizations’ strategic and long-range plans.
(ii) Budgeting process should be backed and supported by the chief executive of an organization.
(iii) The organizational goals must be divided in functional goals.
(iv) The budget should cover all phases of the organization.
(v) All persons in the organization should mentally accept the exercise of budget preparation.
(vi) The persons responsible for execution of budget should participate in budget preparation.
(vii)The budget should be realistic. It should represent goals that are reasonably attainable.
(viii)The budgeting system should be based on information, communication and participate.
(ix) The budgeting should be a continuous exercise.
(x) Periodic reports should be prepared promptly, comparing budget and actual result, i.e., there should be effective follow–up.
(xi) Clear cut organisational lines should be established with appropriate delegation of responsibilities for effective budget implementation.
Types of Budgets
Fixed Budget is used as an effective tool of cost control. In case the level of activity usually attained is different from the level of activity for activity for budgeting purpose, the fixed budget becomes ineffective. A budget may be prepared for, say 1,00,000 units. Actual activity level may be say, 1,20,000 units. If it is a fixed budget, then absolute differences of budgeted figures and actual figures will be found out without any type of adjustment for change in level of activity. Such a budget is quite suitable for fixed expenses.
Fixed budget are established only for short – term periods when the actual results are not anticipated to differ from the budget estimates. This is not a rigid budget, it can be modified, but the level of activity remains one or the same.
(i) When the nature of Business is not seasonal.
(ii) There is no impact of external factors on the business activities.
(iii) The demand of the product is certain and stable.
(iv) Supply orders are issued regularly.
(v) The market of the product should be domestic rather than foreign.
(vi) There is no need of special labour or material in the production of the products.
(vii)Supply of production inputs is regular.
(viii)There is a trend of price stability.
Generally, all above conditions are not found in practice. Hence, Fixed Budget is not important in business concern.
(i) Very Simple to prepare
(ii) Less time consuming.
(i) It is misleading. A poor performance may remain undetected and a good performance may go unrealized.
(ii) It is not suitable for long period.
(iii) It is also found unsuitable particularly when the conditions of the business are changing constantly.
(iv) It takes away the initiative from members of the administrative staff since they do not find any interest in their job.
(v) It is inadequate for control purposes.
(vi) It violates logic. Based on logic, comparison should be made between two things with a like base.
(vii)Accurate estimates not possible.
4. Formulation of Various Types of Budgets
4.1 Fixed and Flexible Budgets
1. Fixed Budget:
A fixed budget is designed to remain unchanged irrespective of the level of activity actually attained. A budget is drawn for a particular level of activity is called fixed budget. According to ICWA London “Fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained.” Fixed budget is usually prepared before the beginning of the financial year.
This type of budget is not going to highlight the cost variances due to the difference in the levels of activity. Fixed Budgets are suitable under static conditions.
2. Flexible Budget:
A flexible budget is a budget which is designed to change in accordance with the various level of activity actually attained. The flexible budget also called as Variable Budget or Sliding Scale Budget, takes both fixed, variable and semi fixed manufacturing costs into account. Flexible Budget is also called Variable or Sliding Scale budget, “takes both the fixed and manufacturing costs into account. Flexible budget is the opposite of static budget showing the expected cost at a single level of activity. According to CIMA, England defined “Flexible Budget is a budget which is designed to change in accordance with the level of activity actually attained.”
According to the principles that guide the preparation of the flexible budget a series of fixed budgets are drawn for different levels of activity. A flexible budget often shows the budgeted expenses against each item of cost corresponding to the different levels of activity. This budget has come into use for solving the problems caused by the application of the fixed budget.
Methods of Preparing Flexible Budget
The following methods are used in preparing a flexible budget:
(1) Multi-Activity Method.
(2) Ratio Method.
(3) Charting Method.
(1) Multi-Activity Method: This method involves preparing a budget in response to different level of activity. The different level of activity or capacity levels are shown in Horizontal Columns, and the budgeted figures against such levels are placed in the Vertical Columns. The expenses involved in production as per budget are grouped as fixed, variable and semi variable.
(2) Ratio Method: According to this method, the budget is prepared first showing the expected normal level of activity and the estimated variable cost per unit at the side expected level of activity in addition to the fixed cost as estimated. Therefore, the expenses as per budget, allowed for a particular level of activity attained, will be calculated on the basis of the following formula:
Budgeted fixed cost + (Variable cost per unit of activity × Actual unit of activity)
(3) Charting Method: Under this method total expenses required for any level of activity, are estimated having classified into three categories, viz., Variable, Semi Variable and Fixed. These figures are plotted on a graph. The expenses are plotted on the Y-axis and the level of activity is plotted on X-axis.
The graphs will thus, help in ascertaining the quantum of budgeted expenses corresponding to the level of activity attained with the help of this chart.
Need for Flexible Budget
The need for preparation of flexible budget arises in the following circumstances:
(i) Seasonal fluctuations in sales and/or production-for example, in soft drinks industry;
(ii) A company which keeps on introducing new products or make changes in the design of its products frequently;
(iii) An industry engaged in make-to-order business like ship building;
(iv) An industry which is influenced by changes in fashion; and
(v) General changes in sales.
Characteristics of Flexible Budget:
(i) Adjustable according to Business Conditions.
(ii) Prepared in advance for various levels of activity.
(iii) It is a dynamic budget.
(iv) Control possible over unfavourable impact of change in future.
(v) Classification of cost in the form of Fixed, Semi-variable and Variable cost.
(vi) Related to a particular period.
(vii)Production possible at any level of activity.
Advantages/Merits/Importance of Flexible Budget:
1. Easy Calculation: With the help of Flexible Budget, the sales, costs and profit may be calculated easily by the business at various levels of production capacity.
2. Easy Adjustment of Change: In Flexible Budget, adjustment is very simple according to change in business conditions.
3. Knowledge about the impact of cost: In Flexible Budget, the cost is classified into three categories, namely, fixed cost, semi-variable cost and variable cost and because of this it is very easy to know the real impact of cost factors on business profits.
4. Comparable: With the help of Flexible Budget, the actual cost of production may be easily compared with budgeted cost in business and industry and right decisions may be taken by the management well in time.
5. Cost Control: After the completion of the year, the actual cost may be compared with budgeted cost and steps may be taken to minimise the variance. Hence, it helps the management in controlling cost.
6. Determination of Production Level: Flexible Budget shows budgeted cost with classification at various levels of activity along with sales and profits. Hence, the management can easily select the level of production which shows the profit predetermined by the owners of the business. It also shows the quantity of product to be produced to earn determined profit.
7. Other Advantages
(i) Free from the impact of future business uncertainties.
(ii) Knowledge about the impact of external factors on economic activities of the business.
(iii) Marginal analysis is possible.
(iv) Free from the disadvantages of Flexible Budget.
(v) More useful for business and industry whose nature is dynamic and seasonal and affected from the change in the income, habit, interest of the consumers and the business which is also affected from the changing government policy, demonstration effect, business cycles and works under the conditions of perfect and monopolistic competition.
Limitations or Demerits of Flexible Budget:
1. The formulation of Flexible Budget is possible only when there is a proper accounting system maintained.
2. Flexible Budget also requires the system of standard costing in business.
3. The formulation of Flexible Budget depends upon availability of cost experts in the business.
4. The formulation of Flexible Budget is possible only when the perfect knowledge about the factors of production and variable business circumstances is available.
5. It is very expensive and labour oriented.
Distinction between fixed and flexible budget
| Basic of Difference | Fixed Budget | Flexible Budget |
| 1. Assumption | It is based on the assumption that business conditions will remain constant. | It is based on the assumption that business conditions are changing. |
| 2. Nature | It has a fixed nature. Change is not possible once prepared. | It has a dynamic/variable nature. Adjustment is possible. |
| 3. Classification of Cost | Cost is not classified according to their nature in Fixed Budget. | Cost is classified into fixed, variable, and semi-variable costs according to their nature. |
| 4. Comparison | It is very difficult to compare between two activity levels on the basis of Fixed Budget. | It is very easy to compare between two activity levels on the basis of Flexible Budget due to classification of costs. |
| 5. Forecast | Pure forecast is not possible on the basis of Fixed Budget. | Pure forecast about various costs of production is possible on the basis of Flexible Budget. |
| 6. Business decisions | Fixed Budget is not more appropriate and suitable for business decisions. | Flexible Budget is more appropriate and suitable for business decisions. |
| 7. Effectiveness | Fixed Budget is not more effective because it is not dynamic. | Flexible Budget is more effective because it is dynamic. |
| 8. Economy | Fixed Budget is less expensive and less time consuming. | Flexible Budget is more expensive and time consuming. |
Classification of Budgets on the Basis of Business Activity
On the basis of business activities, the budgets may be classified into two categories, namely,
i) Secondary/Functional budgets
ii) Master Budget (Co-ordinating Budget)
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 | At 80% capacity (₹) |
| Variable Overheads: | |
| Indirect labour | 12,000 |
| Stores including spares | 4,000 |
| Semi Variable: | |
| Power (30% - Fixed; 70% - Variable) | 20,000 |
| Repairs (60% - Fixed; 40% - Variable) | 2,000 |
| Fixed Overheads: | |
| Depreciation | 11,000 |
| Insurance | 3,000 |
| Salaries | 10,000 |
| Total overheads | 62,000 |
| Estimated Direct Labour Hours | 1,24,000 |
4.2 Functional Budgets
Functional budgets are budgets prepared for each department or process within an organization. A financial or quantitative statement prepared for a function of an organisation; it summarizes the policies and the level of performance expected to be achieved by that function for a budget period. These functional budgets are then summarized to produce the overall summary or master budget for the whole organization. Functional budgets are associated with the functions of an organization. A functional budget can be temporary or permanent, depending on its use. The functional budget is one which relates to any of the functions of an organization. The numbers of functional budgets depend upon the size and nature of business.
The following are the commonly used functional budgets:
Functional Budgets
Budgets, which relate to individual functions in an organisation, are known as Functional Budgets. Following are some of the commonly used Functional Budgets:
1. Sales Budget
A Sales Budget provides an estimate of quantity and Selling Price for each product for each zone or region. The sales budget, a type of operating budget, is a forecast of the expected units a company intends to sell over a period of time and the revenue it should generate from it. It is the basis for preparing the income statement for the business. The Sales Budget may be classified in the following manner:
(i) Products; (ii) Areas or Territories; (iii) Types of customers; (iv) Salesmen or Agents; and (v) Periods (i.e., weekly, fortnightly, monthly, quarterly, half-yearly or yearly)
Factors to be considered in preparing Sales Budget
As business existence depends upon the sales it is going to make and therefore it is an important one to be prepared meticulously. It is the forecast of what it can reasonably sell to its customers during the period for which budget is prepared. The company’s profit mostly depends upon the ability to sell its products to customers.
The following factors must be considered in preparing the sales budget:
(a) The locality of the market i.e., domestic or export
(b) The target customers i.e., industry or trade or a section or group of general public etc.,
(c) The product portfolio i.e., the number of products offered and their popularity among the target customers.
(d) The market share of each product and its influence on the product portfolio and the total market
(e) The effectiveness of existing marketing policy on the current sales volume and value.
(f) The market share of competitor’s products and their effect on the company’s sales.
(g) Seasonal fluctuation in sales.
(h) Expenditure on advertisement and its impact on sales.
XYZ Ltd. produces two products, X and Y and operates three sales divisions for sale of their products. Prepare a sales budget for six months ended 30/06/2022 from the following information.
Budgeted sales for six months ended 31/12/2021:
| Particulars | Divn. I | Divn. II | Divn. III |
| Product X | 1,600 @ ₹10 | 2,400 @ ₹10 | 2,400 @ ₹ 10 |
| Product Y | 800 @ ₹ 9 | 4,800 @ ₹ 9 | 2,000 @ ₹ 9 |
Actual sales during the same period:
| Particulars | Divn. I | Divn. II | Divn. III |
| Product X | 2,000 @ ₹ 10 | 3,200 @ ₹10 | 2,800 @ ₹ 10 |
| Product Y | 400 @ ₹ 9 | 4,000 @ ₹9 | 1,600 @ ₹ 9 |
In the management meeting, following decisions have been taken:
(i) The price of product X should be increased by ₹ 1 as there is a high demand for product X.
(ii) Product Y is not selling at the expected rate as this product has been over-priced. However, if the selling price is reduced by ₹1, it is expected that the market would pick up. Therefore, the divisional sales managers have made the following estimates:
Percentage increase over previous budget (%)
| Product | Divn. I | Divn. II | Divn. III |
| Product X | 20% | 30% | 10% |
| Product Y | 5% | 10% | 8% |
2. Production Budget
The production budget is the basis for developing cost budgets about the raw materials and other consumables to be purchased. It is a type of operating budget.
A Production Budget is prepared for estimating the required production for a given period. This budget is prepared on the basis of estimated sales (obtained from Sales Budget), inventory policy of the firm (with regard to finished goods), production capacity, procurement policy and other relevant factors.
Factors to be considered in Production Budget
Next to the sales budget, the main function of a business concern is the production and for this, a budget is prepared simultaneously with the sales budget. It is the forecast of production during the period for which the budget is prepared. It can also be prepared in two parts viz., production volume budget for the physical units i.e., the number of units, the tonnes of production etc., and the cost of production or manufacture showing details of all elements of the manufacture. While preparing the production budget, the following factors must be taken into consideration:-
(a) Production plan
Production planning is an important part of the preparation of the production budget. Optimum utilisation of plant capacity is taken by eliminating or reducing the limiting factors and thereby effective production planning is made.
(b) The capacity of the business concern
It is to be ensured that the capacity of the organisation will coincide the budgeted production or not. For this purpose, plant utilisation budget will also be necessary. The production budget must be based on normal capacity likely to be achieved and it should not be too high or too low.
(c) Inventory Policy
While preparing the production budget it is also necessary to see to what extent materials are available for producing the budgeted production. For that purpose, a purchase budget or a purchase plan must also be studied. Similarly, on the other hand, it is also necessary to verify the extent to which the inventory of finished goods is to be carried.
(d) Sales Policy
Sales budgets must also be considered before preparing production budget because it may so happen that the entire production of the concern may not be sold. In such a case the production budget must be in line with the sales budget.
(e) Sequence of Operations Policy
A plan of the sequence of operations of production for effective preparation of a production budget should always be there.
(f) Management Policy
Last, but not the least, the policy of the management should also be considered before preparing the pro-duction budget.
Objectives and Advantages of Production budget
Production Budget
From the following information, prepare a production budget for ABC Co. Ltd assuming that
(a) There is no loss in production
(b) Normal loss in production – 5% and 10% for products X and Y, respectively.
Information:
| Sales Budget (units) | Product X | Product Y | |
| 1. | Division I | 2,000 | 1,000 |
| Division II | 3,000 | 6,000 | |
| Division III | 2,500 | 2,250 | |
| Total units | 7,500 | 9,250 | |
| 2. | Stock as on 1 January: | ||
| X – 1,500 | |||
| Y – 2,000 | |||
| 3. | Stock on 31 December: Estimated to be 10% more in quantity | ||
3. Direct Material Budget
Direct Materials Budget is prepared for estimating the quantity of raw material required for budgeted production. This budget is prepared on the basis of Production Budget, inventory policy of the firm (with regard to raw materials), material purchase policy, stock levels to be maintained at the stores, delivery period by supplier etc.
From the following figures prepare the raw material purchase budget for January, 2021:
| Particulars | Materials | |||||
| A | B | C | D | E | F | |
| Estimated Stock on Jan 1 | 16,000 | 6,000 | 24,000 | 2,000 | 14,000 | 28,000 |
| Estimated Stock on Jan 31 | 20,000 | 8,000 | 28,000 | 4,000 | 16,000 | 32,000 |
| Estimated Consumption | 1,20,000 | 44,000 | 1,32,000 | 36,000 | 88,000 | 1,72,000 |
| Standard Price per unit | 25 paise | 5 paise | 15 paise | 10 paise | 20 paise | 30 paise |
4. Direct Labour Budget
Direct Labour Budget is prepared to estimate the labour time required for meeting the budgeting production target, the number of workers required, the labour rate, the labour cost and labour recruitment plan.
A factory works 8 hours per day, 6 days in a week and budget period is one year and during each quarter, lost hours due to leave, holidays and other causes are estimated to be 124 hours.
| Particulars | Product A | Product B |
| Direct Labour per unit | ||
| In P Dept. | 2 hrs @ ₹1 Per Hrs | 1 hr @ ₹2 Per Hrs |
| In Q Dept. | 1 hr @ ₹3 Per Hrs | 1 hr @ ₹3 Per Hrs |
| Units to be produced as per production budget | 10,000 | 4,000 |
Required: Prepare (a) Manpower Budget, showing Direct Labour hours and number of workers; and (b) Manpower Budget showing labour cost.
5. Production Overheads Budget
Production Overheads Budget is prepared for estimating the indirect material, indirect Labour and other Indirect Expenses for production. It is also used for estimating Factory Overhead Absorption or Recovery rates.
The budget manager of Y Ltd is preparing a budget for the accounting year starting from 1 April 2022.
As a part of the budget operations, some items of factory overhead costs have been estimated by him under specified conditions of volume as follows:
| Volume of production in (units) | 60,000 | 75,000 |
| Expenses: | (₹) | (₹) |
| Indirect materials | 1,32,000 | 1,65,000 |
| Indirect labour | 75,000 | 93,750 |
| Maintenance | 42,000 | 51,000 |
| Supervision | 99,000 | 1,17,000 |
| Engineering services | 47,000 | 47,000 |
You are required to calculate the cost of factory overhead items given above at 80,000 units of production.
6. Office & Administration Overheads Budget
The Administrative Cost Budget signifies the expenses which are to be incurred on the operating activities of office during the plan period. It includes all the expenses that are incurred to run the administration whether expenses are of fixed or variable nature. Generally, administrative expenses are of a fixed nature and they do not change with a change in the level of activity.
Administrative expenses in an institution will be incurred for the activities like:
(i) Formulation of business policies;
(ii) Directing the organisation; and
(iii) Controlling the operations of an organization, etc.
Preparation of administration budget involves budgeting for top management functions like legal, finance, accounting, management information services, internal audit and taxation.
7. Selling & Distribution Overheads Budget
The Selling & Distribution overheads are based on sales forecasts because these are directly related with sales. The Selling & Distribution Expenses Budget is prepared by Sales Manager/Officer with the help of Branch
Managers, Regional Manager, Sales Agents, Office Superintendents and Ministerial Staff, Distributors, officer-in-charge for advertisement etc. The expenses including the Selling & Distribution Expenses Budget may be further classified into four categories:
(i) Direct Selling Expenses, e.g., Salaries, Commission, Expenses of Salesmen etc.
(ii) Distribution Expenses, e.g., Rent, Rates, Wages Insurance etc. of the warehouse.
(iii) Cost of Sales Office Expense, e.g., Salaries, Rent, Rates, Light, Heat etc. of the Sales Office;
(iv) Publicity Expenditure, e.g., Press, Window Display, Posters, Radios, Televisions etc.
You are required to prepare a selling overhead Budget from the estimates given below:
| Particulars | (₹) |
| Advertisement | 1,000 |
| Salaries of the Sales dept. | 1,000 |
| Expenses of the Sales dept.(Fixed) | 750 |
| Salesmen’s remuneration | 3,000 |
Salesmen’s and dearness Allowance - Commission @ 1% on sales excluding Agent’s sales.
Carriage outwards: estimated @ 5% on sales.
Agents Commission: 7½ % on Agent’s sales.
The sales during the period were estimated as follows:
(a) ₹80,000 including Agent’s Sales ₹8,000
(b) ₹90,000 including Agent’s Sales ₹10,000
(c) ₹1,00,000 including Agent’s Sales ₹10,500
8. Advertising Cost Budget
An advertising budget is a company’s allocation of promotional expenditures over a specified time period. It is a measure of a company’s planned expenditure on accomplishing marketing objectives.
Advertising Budget and Advertising Cost Budget is prepared for planning the advertisement and publicity, and the cost for advertisement. The budget includes deciding the medium of advertisement, the insertions or frequency, the reach, etc.
9. Research and Development Expenditure Budget
This budget is prepared for estimating the cost of research and development activities of the enterprise. This involves deciding upon the type of research, research plan and procedure, mode of carrying out research and development and the associated cost. The R&D budget covers all costs — including labour, materials, and overhead—associated with discovering new knowledge and translating research findings into plans or designs for new products.
10. Capital Expenditure Budget
The capital expenditure budget represents the expected expenditure on fixed assets during the budget period. It relates to projects involving huge capital outlay and long-term commitment. It may be long-term or short-term. But, it is usually prepared for a longer period, say, 5 to 10 years. If it is prepared for a longer period, it will have to be broken down into short periods. Since there is a high degree of inflexibility, recovery of cost will take a long period of time because of the investment in fixed assets. That is why this budget should be coordinated with other budgets, viz., Cash Budget, Factory Overhead Budget, Balance Sheet Budget etc. Proposal for capital expenditure may be initiated by any one from operating level to top level of management. The request is first appraised by the concerned departmental head, who, if project appears to be sound, makes formal request for “capital appropriation” to top management. Engineering department and finance and accounts department may render useful service to the departmental heads in making a convincing case for technical and financial strength of proposal. However, separate budgets may be prepared for each individual item of fixed assets. The capital investment proposal should be accompanied by comments from the following:
(i) Production Manager, (ii) Works Manager, (iii) Sales Manager, and (iv) Distribution Manager. It is prepared for:
(i) the purchase of additional assets - either required for increased production or for starting a new type of product;
(ii) the replacement of existing assets;
(iii)the installation of improved types of assets due to technological development.
11. Cash Budget
A company needs to produce a cash budget in order to ensure that there is enough cash within the business to achieve the operational levels set by the functional budgets. A Cash budget represents the expected future cash flow of an organization over a defined period of time. It is an estimate of the cash receipts expected in the future over the budget period, the expenditure to be incurred in cash, and finally, the cash balance with the company
at the end of the period.
Cash Budgets are prepared with the help of Sales Budget and all Cost Budgets viz., Material Cost Budget, Labour Cost Budget, Production Overheads Budget, Administration Expenses Budget, Sales Cost Budget, Advertising Cost Budget, Research and Development Expenditure Budget, etc.
Activity-Based Budget
In contrast to the traditional ways of reporting budgets, activity-based cost management attempts to critically assess costs by activity and to provide managers with information on why costs are incurred in any process. It also aims to look at the output from that activity. The process concentrates on cost drivers and divides activities into value-added activities and non-value- added activities. By concentrating on non-value-added activities it is possible in the budget process to reduce these without impacting on the customer’s use of the product or service. Managers are thus able to prioritize where they should be reducing waste and inefficiency.
Under the traditional approach to budgeting, costs are allocated against subjective (i.e. judgmental) headings – payroll, premises costs, and transport and so on. As has been stated above, there is no information linking costs with outcomes from the expenditure. Under activity-based budgets major activities are linked to the resource inputs. In summary, the process is as follows:
The organization is now in a position to focus on managing activities as a way of eliminating waste and reducing delays and defects. This information can be used to directly improve the budgeting and budgetary control processes.
4.3 Master Budget
When the functional budgets have been completed, the budget committee will prepare a Master Budget for the target of the concern. Accordingly, a budget which is prepared incorporating the summaries of all functional budgets. It comprises of budgeted profit and loss account, budgeted balance sheet, budgeted production, sales and costs. It is the summary budget incorporating its functional budgets, which is finally approved, adopted and employed. The Master Budget represents the activities of a business during a profit plan. This budget is also helpful in coordinating activities of various functional departments.
It is the summary Budget, incorporating its component functional budgets, which is finally approved, adopted and employed. Master budget gathers together all the budget gathers together all the budgets all the budgets of various departments and makes a Summary of them. Master budget is prepared in two parts; Forecast income statement and Forecast Balance Sheet. In the former part, the principal items of revenue, expenses, losses and profit are shown. In the Forecast Balance Sheet, the items of Balance sheet i.e., fixed assets, current assets, total capital employed and liabilities are shown. Master Budget is an outlay showing the proposed activity and the anticipated financial results during the coming year or budgeted year. It is presented before the Board of Directors for adoption and approval. After approval of the Master Budget, various functional budgets are sent to the concerned departments, so that, they can plan their working according to their budgets.
4.4 Cash Budget
This budget represents the anticipated receipts and payment of cash during the budget period. The cash budget also called as Functional Budget. Cash budget is the most important of the entire functional budget because; cash is required for the purpose to meeting its current cash obligations. If at any time, a concern fails to meet its obligations, it will be technically insolvent. Therefore, this budget is prepared on the basis of detailed cash receipts and cash payments. The estimated Cash Receipts include:
(1) Cash Sales
(2) Credit Sales
(3) Collection from Sundry Debtors
(4) Bills Receivable
(5) Interest Received
(6) Income from Sale of Investment
(7) Commission Received
(8) Dividend Received
(9) Income from Non-Trading Operations etc.
The estimated Cash Payments include the following:
(1) Cash Purchase
(2) Payment to Creditors
(3) Payment of Wages
(4) Payments relate to Production Expenses
(5) Payments relate to Office and Administrative Expenses
(6) Payments relate to Selling and Distribution Expenses
(7) Any other payments relate to Revenue and Capital Expenditure
(8) Income Tax Payable, Dividend Payable etc.
Prepare a Cash Budget for the three months ending 30th June, 2022 from the information given below:
(a)
| Month | Sales (₹) | Materials (₹) | Wages (₹) | Overheads (₹) |
| February | 14,000 | 9,600 | 3,000 | 1,700 |
| March | 15,000 | 9,000 | 3,000 | 1,900 |
| April | 16,000 | 9,200 | 3,200 | 2,000 |
| May | 17,000 | 10,000 | 3,600 | 2,200 |
| June | 18,000 | 10,400 | 4,000 | 2,300 |
(b)
Credit terms are:
Sales/debtors: 10% 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 1/4 in the following month
Overheads 1/2 in the following month.
(c) Cash and bank balance on 1st April, 2022 is expected to be ₹ 6,000.
(d) other relevant information are:
(i) Plant and machinery will be installed in February 2022 at a cost of ₹96,000. The monthly instalment of ₹2,000 is payable from April onwards.
(ii) Dividend @ 5% on preference share capital of ₹2,00,000 will be paid on 1st June.
(iii) Advance to be received for sale of vehicles ₹9,000 in June.
(iv) Dividends from investments amounting to ₹1,000 are expected to be received in June.
4.5 Zero Base Budgets
Traditional methods of budgeting have taken the current level of operating activity (the base) as the starting point and then adjusted this starting point for expected changes. As these changes are normally made at the margin of the existing budget and do not involve a fundamental review of the base budget, the term incremental budgeting is used to describe this process. In this context it can be seen that any inefficiencies in the base can be overlooked. Again we would, however, point out that many industries are under severe cost pressure so this may present a somewhat simplistic view of the world, and probably considerably more work goes on reviewing the base budget from the previous period than many textbooks appear to suggest.
The alternative solution presented to the problem of inefficiency in the base is termed zero-based budgeting (ZBB) or sometimes priority-based budgeting. As can be imagined, under this system each manager in charge of an authorized programme has to justify each item of expense as if the programme was totally new to the organization. This solution would thus reject the concept of an existing base and raise issues over whether the function should be performed at all, how it should be performed, how much should it cost to perform and so on. Managers are thus constantly questioning the way in which an activity is delivered and if it is to the benefit of their organization.
A variation on ZBB that may add to the efficiency with which it can be made to operate is the use of option budgets. Under this system, managers are required to consider how their department/service would respond to a 5% or 10% cut in expenditure (increases are equally possible). These options are designed to force managers to think through their policies and operating procedures by again forcing them to question what they do and how they do it.
Zero Base Budgeting involves the following important aspects:
(1) It emphasizes on all requisites of budgets.
(2) Evaluation on the basis of decision packages and systematic analysis, i.e., in view of cost benefit analysis.
(3) Planning the activities promotes operational efficiency and monitors the performance to achieve the objectives.
Steps Involved in ZBB
The following are the steps involved in Zero Base Budgeting:
(1) No Previous year performance of inefficiencies are to be taken as adjustments in subsequent year.
(2) Identification of activities in decision packages.
(3) Determination of budgeting objectives to be attained.
(4) Extent to which Zero Base Budgeting is to be applied.
(5) Evaluation of current and proposed expenditure and placing them in order of priority.
(6) Assignment of task and allotment of sources on the basis of cost benefit comparison.
(7) Review process of each activity examined afresh.
(8) Weightage should be given for alternative course of actions.
Advantages of ZBB
Advantages of ZBB are as follows:
The disadvantages of ZBB are:
Disadvantages of ZBB are as follows:
4.6 Performance Budget
Performance Budget has been defined as a “budget based on functions, activities and projects.” Performance of Budgeting may be described as “the budgeting system in which input costs are related to the performance, i.e., end results.”
According to National Institute of Bank Management, Performance Budgeting is, “the Process of analyzing, identifying, simplifying and crystallizing specific performance objectives of a job to be achieved over a period, in the framework of the organizational objectives, the purpose and objectives of the job.”
From the above definitions, it is clear that budgetary performance involves the following:
(1) Establishment of well-defined centers of responsibilities:
(2) Establishment for each responsibility centre - a programme of target performance is - physical units.
(3) Forecasting the amount of expenditure required to meet the physical plan laid down.
(4) Comparison of the actual performance with the budgets, i.e., evaluation of performance.
(5) Undertaking periodic review of the programme with a view to make modifications as required.
4.7 Programme Budget
A planning, programming budgeting system (PPBS) is an approach that seeks to separate the policy planning aspects of budgeting from the short-term financial planning process. From the overall objectives, the organization moves on to identify the programmes that will achieve those objectives. The costs and benefits of each programme are then identified so that they may be given relative priorities. Subjective judgement is required to select the most suitable programmes for implementation and the resources required are then allocated to those programmes.
4.8 Rolling Budget
A rolling budget is a budget which is continuously updated by adding a further accounting period (a month or quarter) when the earlier accounting period has expired.
An alternative approach is for the annual budget to be broken down by months for the first three months and by quarters for the remaining nine. The quarterly budgets are then developed on a monthly basis as the year proceeds. For example, during the first quarter, the monthly budgets for the second quarter will be prepared; and during the second quarter, the monthly budgets for the third quarter will be prepared. The quarterly budgets may also be reviewed as the year unfolds. For example, during the first quarter, the budget for the next three quarters may be changed as new information becomes available.
A new budget for a fifth quarter will also be prepared. This process is known as continuous or rolling budgeting, and ensures that a 12-month budget is always available by adding a quarter in the future as the quarter just ended is dropped. Contrast this with a budget prepared once per year. As the year goes by, the period for which a budget is available will shorten until the budget for next year is prepared.
Rolling budgets also ensure that planning is not something that takes place once a year when the budget is being formulated. Instead, budgeting is a continuous process, and managers are encouraged to constantly look ahead and review future plans. Another advantage is that it is likely that actual performance will be compared with a more realistic target, because budgets are being constantly reviewed and updated. The main disadvantage of a rolling budget is that it can create uncertainty for managers because the budget is constantly being changed.
Rolling budgets are an attempt to prepare targets and plans which are more realistic and certain, particularly with a regard to price levels, by shortening the period between preparing budgets.
Instead of preparing a periodic budget annually for the full budget period, there would be budgets every one, two, three or four months (three to six, or even twelve budgets each year). Each of these budgets would plan for the next twelve months so that the current budget is extended by an extra period as the current period ends: hence the name rolling budgets.
Suppose, for example, that a rolling budget is prepared every three months. The first three months of the budget period would be planned in great detail, and the remaining nine months in lesser detail, because of the greater uncertainty about the longer-term future. If a first continuous budget is prepared for January to March in detail and April to December in less detail, a new budget will be prepared towards the end of March, planning April to June in detail and July to March in less detail. Four rolling budgets would be prepared every 12 months on this 3 and 9-month basis, requiring, inevitably, greater administrative effort.
The advantages and disadvantages of rolling budgets
The advantages are as follows.
(a) They reduce the element of uncertainty in budgeting because they concentrate detailed planning and control on short-term prospects where the degree of uncertainty is much smaller.
(b) They force managers to reassess the budget regularly, and to produce budgets which are up to date in the light of current events and expectations.
(c) Planning and control will be based on a recent plan which is likely to be far more realistic than a fixed annual budget made many months ago.
(d) Realistic budgets are likely to have a better motivational influence on managers.
(e) There is always a budget which extends for several months ahead. For example, if rolling budgets are prepared quarterly there will always be a budget extending for the next 9 to 12 months. This is not the case when fixed annual budgets are used.
The disadvantages of rolling budgets can be a deterrent to using them.
(a) They involve more time, effort and money in budget preparation.
(b) Frequent budgeting might have an off-putting effect on managers who doubt the value of preparing one budget after another at regular intervals.
(c) Revisions to the budget might involve revisions to standard costs too, which in turn would involve revisions to stock valuations. This could replace a large administrative effort from the accounts department every time a rolling budget is prepared
4.9 Outcome Budget
Budget management in a time of severe fiscal stress seems to have been construed as an exercise to control fiscal deficit and government borrowing. Outcome budgeting has been claimed as a major budgetary reform. It involves a movement beyond inputs and outputs towards outcomes, concerning a macro analysis of results, accomplishments and impact. It is a “pre-expenditure instrument” that seeks to educate and involve external stakeholders on government goals, accomplishments and the costs of achieving these results. But important lessons learnt from developed nations as well as the Indian story of performance budgeting need to be incorporated.
Outcome Budget analyses the progress of each ministry and department and what the respected ministry has done with its Budget outlay. It measures the development outcomes of all government programs. It was first introduced in the year 2005
One of the leading budgeting technique followed in India at present is the outcome budgeting or outcome based budgeting. It is practiced by most of the Ministries while preparing their budget details and submitting it to the Ministry of Finance for the preparation of the annual budget towards the end of February.
As per the ministry’s directions, every ministry will have to prepare an outcome budget statement linking outlays against each scheme as well as project with the deliverables and medium term outcomes. Through “outcome-based budgeting”, the ministry is trying to shift from traditional performance-based budgeting by planning expenditure, fixing appropriate targets and quantifying deliverables of each scheme.
It measures the development outcomes of all government programs and whether the money has been spent for the purpose it was sanctioned including the outcome of the fund usage. It is a means to develop a linkage between the money spent by a government and the results which follow. It measures the development outcomes of all government programmes and whether the money has been spent for the purpose it was sanctioned including the outcome of the fund usage.
Outcome budgeting makes government programmes more result oriented, instead of outlay oriented. Under outcome budgeting, the document shows physical dimensions of the financial budget indicating the actual physical performance in the previous year, current year and targeted performance during the projected (next) year.
It seeks to bring correlation between outlay, output and outcome:
Outlay- is the amount that is provided for a given scheme or project in the Budget.
Output- Refers to the direct and measurable product of program activities, often expressed in Physical terms or unit.
Outcome- It is the collective result or qualitative improvements brought about in the delivery of these services, often expressed in terms of improvements over earlier indicators and benchmarks.
Outcome’s Go beyond mere ‘outputs’, they cover the quality and effectiveness of the goods or services.
An interesting feature of outcome based budgeting is that the outcomes of programmes are measured not just in terms of Rupees but also in terms of physical units like Kilowatt of energy produced or tonnes of steel produced. Also outcomes are expressed in terms of qualitative targets and achievements to make the technique more comprehensive. Then move on to discuss the procedure for outcome-based budgeting. Outcome budget is a performance measurement tool which having the following specific undermentioned objectives:
4.10 Budgetary Control
(A) Rationale for Budgetary Control
Budgetary Control is defined as “the establishment of budgets, relating the responsibilities of executives to the requirement of a policy, and the continuous comparison of actual with budgeted results either to secure by
individual action the objective of that policy or to provide a base for its revision.”
Budgetary control is intimately connected with budgets. The Chartered Institute of Management Accountants, London defines ‘Budgetary control; as “the establishment of budgets, relating the responsibilities of executive to the requirements of a policy and the continuous comparison of actual with budgeted results either to secure by individual action the objectives of that policy or to provide a firm basis for its revision”. The process of budgetary control is set up with the objective to closely monitor whether or not the actual sales and expenses are in line with the financial plan. The processes involve setting up goals at the organizational level and then percolate it to match the personal goals of each employee. The employees and departments are rewarded when the goals are achieved, but if the actual results seem to fall well below expectations then correction measures are undertaken.
A budgetary control system secures control over performance and costs in the different parts of a business:
(i) by establishing budgets
(ii) by comparing actual attainments against the budgets; and
(iii) by taking corrective action and remedial measures or revision of the budgets, if necessary.
The budget is a blue-print of the projected plan of action expressed in quantitative terms and for a specified period of time. The budgets put the plan in a concrete form and follow up action to see that plan is adhering to complete the system of control. In other words, while budgeting is the art of planning, budgetary control is the act of adhering to the plan. In fact, budgetary control involves continuous comparison of actual results with the budgets and taking appropriate remedial action promptly
Budgetary control is achieved by comparing the actual results with the budget. The differences are calculated as variances and management action may be taken to investigate and correct the variances if necessary or appropriate. If costs are higher or revenues are lower than the budget, then the difference is an adverse variance. If costs are lower or revenues are higher than the budget, then the difference is a favourable variance.
The main features of budgetary control are:
1. Establishment of budgets for each purpose of the business.
2. Revision of budget in view of changes in conditions.
3. Comparison of actual performances with the budget on a continuous basis.
4. Taking suitable remedial action, wherever necessary.
5. Analysis of variations of actual performance from that of the budgeted performance to know the reasons thereof.
Budgeting is a forward planning. It serves basically as a tool for management control; it is rather a pivot of any effective scheme of control.
The objectives of budgeting may be summarized as follows:
1. Planning: Planning has been defined as the design of a desired future position for an entity and it rests on the belief that the future position can be attained by uninterrupted management action. Detailed plans relating to production, sales, raw-material requirements, labour needs, capital additions, etc. are drawn out. By planning many problems estimated long before they arise and solution can be thought of through careful study. In short, budgeting forces the management to think ahead, to foresee and prepare for the anticipated conditions. Planning is a constant process since it requires constant revision with changing conditions.
2. Co-ordination: Budgeting plays a significant role in establishing and maintaining coordination. Budgeting assists managers in coordinating their efforts so that problems of the business are solved in harmony with the objectives of its divisions. Efficient planning and business contribute a lot in achieving the targets. Lack of co-ordination in an organization is observed when a department head is permitted to enlarge the department on the specific needs of that department only, although such development may negatively affect other departments and alter their performances. Thus, co-ordination is required at all vertical as well as horizontal levels.
3. Measurement of Success: Budgets present a useful means of informing managers how well they are performing in meeting targets they have previously helped to set. In many companies, there is a practice of rewarding employees on the basis of their accomplished low budget targets or promotion of a manager is linked to his budget success record. Success is determined by comparing the past performance with previous period’s performance.
4. Motivation: Budget is always considered a useful tool for encouraging managers to complete things in line with the business objectives. If individuals have intensely participated in the preparation of budgets, it acts as a strong motivating force to achieve the goals.
5. Communication: A budget serves as a means of communicating information within a firm. The standard budget copies are distributed to all management people provide not only sufficient understanding and knowledge of the programmes and guidelines to be followed but also give knowledge about the restrictions to be adhered to.
6. Control: Control is essential to make sure that plans and objectives laid down in the budget are being achieved. Control, when applied to budgeting, as a systematized effort is to keep the management informed of whether planned performance is being achieved or not.
Budgetary control makes all the differences between drifting in an unchartered sea and following a well plotted course towards a predetermined distinction. It serves as a valuable aid to management through planning, co-ordination and control.
The principal advantages of a budgetary control system are enumerated below:
(1) Budgetary control aims at maximization of profits through effective planning and control of income and expenditure - directing capital and resources to the best and most profitable channel.
(2) There is a planned approach to expenditure and financing of the business so that economy is affected in the utilization of funds to the optimum benefit of the concern.
(3) It provides a clear definition of the objective and policies of the concern and a tool for objecting these policies to periodic examination.
(4) The task of managerial co-ordination is facilitated through budgetary control.
(5) Since each level of management is aware of the task and is fully conscious as to the best way by which it is to be performed, maximum effective utilization of men, materials and resources can be attained.
(6) Reports are furnished under the principles of management or control by exception. Only deviations from budgets which point out the weak spots and inefficiencies are properly looked into.
(7) It cultivates in the management the habit of thinking ahead - making careful study of the problems in advance before taking decisions.
(8) A budgetary control system assists delegation of authority and is a powerful tool of responsibility accounting.
(9) Budgets are the fore-runners of standard costs in the sense that they create necessary conditions to suit setting up of standard costs.
(10) The method of evaluating performance against budgets provides a suitable basis for establishing incentive system of remuneration by results as also spotting people with exceptional qualities of leadership and management.
(11) Since it involves foreseeing difficulties of various types, it will lead to their removal in time.
1. It tends to bring about rigidity in operation, which is harmful. As budget estimates are quantitative expression of all relevant data, there is a tendency to attach some sort of rigidity or finality to them.
2. It being expensive is beyond the capacity of small undertakings. The mechanism of budgeting system is a detailed process involving too much time and costs.
3. Budgeting cannot take the position of management but it is only an instrument of management. ‘The budget should be considered not as a master, but as a servant.’ It is totally misconception to think that the introduction of budgeting alone is enough to ensure success and to security of future profits.
4. It sometimes leads to produce conflicts among the managers as each of them tries to take credit to achieve the budget targets.
5. Simple preparation of budget will not ensure its proper implementation. If it is not implemented properly, it may lower morale.
6. The installation and function of a budgetary control system is a costly affair as it requires employing the specialized staff and involves other expenditure which small companies may find difficult to incur. If managers are to use the budgets to control effectively, they must receive regular control information.
The budgetary control reports should be:
(a) Timely: The information should be made available as soon as possible after the end of the control period. Corrective action will be much more effective if it is taken soon after the event, and adverse trends could continue unchecked if budgetary reporting systems are slow.
(b) Accurate: Inaccurate control information could lead to inappropriate management action. There is often a conflict between the need for timeliness and the need for accuracy. The design of budgetary reporting systems should allow for sufficient accuracy for the purpose to be fulfilled.
(c) Relevant to the recipient: Busy managers should not be swamped with information that is not relevant to them. They should not need to search through a lot of irrelevant information to reach the part that relates to their area of responsibility. The natural reaction of an individual faced with this situation could be to ignore the information altogether.
The budgetary reporting system should ideally be based on the exception principle, which means that management attention is focused on those areas where performance is significantly different from budget. Subsidiary information could be provided on those items that are in line with the budget.
Many control reports also segregate controllable and non-controllable costs and revenues, that is, the costs and revenues over which managers can exercise control are highlighted separately in the reports.
(d) Communicated to the correct manager: Control information should be directed to the manager who has the responsibility and authority to act upon it. If the information is communicated to the wrong manager its value will be immediately lost and any adverse trends may continue uncorrected. Individual budget-holders’ responsibilities must be clearly defined and kept up to date in respect of any changes.
(B) Importance and Significance of Budgetary Control
(1) Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organization purpose and direction.
(2) Promotes co-ordination and communication.
(3) Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.
(4) Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors.
(5) Enables remedial action to be taken as variances emerge.
(6) Motivates employees by participating in the setting of budgets.
(7) Improves the allocation of scarce resources.
(8) Economizes management time by using the management by exception principle.
(C) Linkage of Budgetary Control with Standard Costing and Profit Reconciliation
Like Budgetary Control, Standard Costing assume that costs are controllable along definite lines of supervision and responsibility and it aims at managerial control by comparison of actual performances with suitable prede-termined yardsticks. The basic principles of cost control, viz., setting up of targets or standards, measurement of performance, comparison of actual with the targets and analysis and reporting of variances are common to both standard costing and budgetary control systems. Both techniques are of importance in their respective fields are complementary to each other. Thus, conceptually there is not much of a difference between standard costs and budgeted and the terms budgeted performance and standard performance mean, for many concerns one and the same thing.
Budgets are usually based on past costs adjusted for anticipated future changes but standard costs are of help in the preparation of production costs budgets. In fact, standards are often indispensable in the establishment of budgets. On the other hand, while setting standard overhead rates of standard costing purposes, the budgets framed for the overhead costs may be made use of with modifications, if necessary. Thus, standard costs and budgets are interrelated but not inter-dependent.
Table showing linkage of Budgetary Control with Standard Costing and Profit Reconciliation Operating Statement for the period ending…
| Budgeted profit | x | ||
| Sales volume variance | x | ||
| Sales price variance | (x) | ||
| Cost variances | |||
| Materials price | x | ||
| Material usage | x | ||
| Labour rate Variance | x | ||
| Labour idle time Variance | x | ||
| Labour efficiency | x | ||
| Variable overheads expenditure | x | ||
| Variable overheads efficiency | x | ||
| Fixed overheads expenditure | x | ||
| Fixed overheads efficiency | x | ||
| Fixed overheads capacity | x | ||
| Actual Profit | x |
Example
Reconciliation statement incorporating variances
(Note: In this statement, adverse variances are presented in brackets.)
| Particulars | Amount (₹) | Amount (₹) |
| Budgeted net profit | 6,000.00 | |
| Sales price variance | 2,500.00 | |
| Sales margin volume variance | — | |
| Direct materials price variance | (537.50) | |
| Direct materials usage variance | (675.00) | |
| Direct labour rate variance | 1,964.00 | |
| Direct labour efficiency variance | 720.00 | |
| Variable overhead rate variance | (1,473.00) | |
| Variable overhead efficiency variance | 180.00 | |
| Fixed overhead expenditure variance | (1,000.00) | |
| Fixed overhead volume variance | — | |
| Total variances | 1,678.50 | |
| Actual profit | 7,678.50 |
Cost control refers to management actions to keep the costs within standards and/or budget. Cost control can be defined as the comparative analysis of actual costs with appropriate standards or budgets to facility performance evaluation and formulation of corrective measures. It aims at accomplishing conformity between actual results and standards or budgets, keeping expenditures within prescribed limits. Cost control has the following features:
1. Creation of responsibility centres with defined authority and responsibility for cost incurrence.
2. Formulation of standards and budgets that incorporate objectives and goals to be achieved.
3. Timely cost control reports (responsibility reporting) describing the variances between budgets and standards and actual performance.
4. Formulation of corrective measures to eliminate and reduce unfavourable variances.
5. A systematic and fair plan of motivation to encourage workers to accomplish budgetary goals.
6. Follow-up to ensure that corrective measures are being effectively applied.
Like Budgetary Control, Standard Costing assumes that costs are controllable along definite lines of supervision and responsibility and it aims at managerial control by comparison of actual performances with suitable predetermined yardsticks. The basic principles of cost control, viz., setting up of targets or standards, measurement of performance comparison of actual with the targets and analysis and reporting of variances are common to both standard costing and budgetary control systems. Both techniques are of importance in their respective fields are complementary to each other. Thus, conceptually there is not much of a difference between standard costs and budgeted and the terms budgeted performance and standard performance mean, for many concerns one and the same thing.
Budgets are usually based on past costs adjusted for anticipated future changes but standard costs are of help in the preparation of production costs budgets. In fact, standards are often indispensable in the establishment of budgets. On the other hand, while setting standard overhead rates of standard costing purposes, the budgets framed for the overhead costs may be made use of with modifications, if necessary. Thus, standard costs and budgets are interrelated but not inter-dependent.
Despite the similarity in the basic principles of Standard Costing and Budgetary Control, the two systems vary in scope and in the matter of detailed techniques.
Budgets are prepared on the basis of standard costing. Standards which are set up in respect of materials, labour and overheads, are helpful in preparing various budgets. For example, flexible budget, sales budget, etc.
It is well recognized that a control system involves fixing of targets (in the form of specific tasks), collection of information regarding actuals and continuous comparison of actuals with the targets with a view to reporting for action. A budgetary control system, in this sense is also a control system. It is an excellent system for decentralization of authority without losing control over the operations of the firm.
One should not consider (budgets or) budgetary control as something rigid or strait-jacket. It is one of the system whereby dynamism is infused into an organization through the process of targets, the achievement of which will mean progress; of allowing a good deal of freedom of action within the delegated field of executives and of seeing to it that all concerned will work in a concerted manner for achieving the firm’s objectives. There is always a good scope for initiative and drive but not for recklessness or too much caution.
In short, budgetary control means laying down in momentary and quantitative term what exactly has to be done and how exactly it has to be done over the coming period and then to ensure that actual results do not diverge from the planned course more than necessary. The word “necessary” is not to be loosely interpreted. Divergence due to inefficiency is not necessary.
A view is emerging that annual budgeting tends to fix a company’s thinking and response to events when the world is changing. This limits flexibility in responding to these events.
There is an argument that the budget in effect reflects the previous year’s reality, and this is what locks companies and managers into the past rather than thinking about what is happening to the business in the present. Rolling or perhaps monthly forecasting and budgets focus thinking on current and future realities and contexts. This is not seen as managing change as this is outside the control of the organization, but rather as an attempt to be ahead of change or more in control of the response to the challenges facing the organization. This importance may be emphasized in the knowledge-based economies that the western world has increasingly developed. Knowledge-based companies face competition which detracts from any innovation made particularly in respect of the time horizon for the life of products, which is becoming shorter and shorter. Prices are also falling and quality rising. Firms need to be operating at the excellent end of the quality spectrum if they are to continue to flourish and be close to their customers. Managers are also talented people in short supply.
This type of individual seeks freedom, challenge and responsibility. Traditional time-consuming and ‘legalistic’ budget processes can be off-putting for such persons. The rapid production of new solutions to constantly changing issues in the competitive environment and strategies also depends on attracting and retaining such individuals.
In this view of the world the traditional budget is seen as the fixed point around which all management processes are based and aligned. This determines how managers behave and the activities and objectives on which they focus. Annual budgeting is seen as absorbing considerable management time, and the monthly budget actual comparisons as primarily about control. Managers will not exceed their budgets by perhaps spending necessary resources outside the planned budget cycle to react to events because their bonus or even their jobs will depend on it. This, in a globally competitive world where, when the budget was set, circumstances were entirely different from those pertaining when any comparisons are being made and decisions required. Inflexibility is thus seen as the key failing of traditional budgeting and companies are being urged to move towards continuous rolling forecasting to enable speedy and coordinated adaptations to actual and anticipated changes in the business environment.
Under rolling monthly forecasts of financial performance and for other non-financial value drivers, managers are forced to confront current and future opportunities and risks.
In essence, the beyond budgeting model calls for devolving managerial responsibility where power and responsibility go hand in hand.
(D) Benchmarking and Key Success Factor
Benchmarking is the process of identifying and learning from the best practices anywhere in the world. It is a powerful tool for continuous improvement in performance. It involves comparing firm’s products, services or activities against other best performing organizations, either internal or external to the firm. The objective is to find out how the product, service or activity can be improved and ensure that the improvements are implemented.
It attempts to identify an activity that needs to be improved & finding a non-rival organization that is considered to represent world-class best practice and studying how it performs the activity.
Suggested Benchmarking Code of Conduct:
It is a technique for continuous improvement in performance. It involves comparing a firm’s product, services or activities against other best performing organizations, either internal or external to the firm. The objective is to determine how the products, services or activities can be improved and ensuring that such improvements are implemented as well. It is a performance measure that provides the driving force to establish high performance and means to accomplish these goals.
Pre-requisites of Benchmarking:
(i) The objectives of benchmarking should be clearly defined.
(ii) Senior Managers should support bench marking and commit themselves for continuous improvement.
(iii) The scope of the work should be appropriate in the light of the objectives, resources, time and experience of those involved.
(iv) Sufficient resources should be made available to complete projects within the required time.
(v) Benchmarking teams should have the right skill and competencies.
(vi) Stakeholders, staff and others should be kept informed of the reasons of benchmarking.
Stages in the Process of Benchmarking:
The process of benchmarking involves the following stages:
Stage 1:
Stage 2:
Collection of Data and information
Stage 3:
Analysis of the findings based on the data collected in Stage 2
Stage 4:
Formulation and implementation of recommendations
Stage 5:
Constant monitoring and reviewing
Types of Benchmarking:
The benchmarking is a versatile tool that can be applied in variety of ways to meet a range of requirements. The distinct types of benchmarks have been over a period of time. Each has its own benefits and shortcomings, and therefore, each is appropriate in certain circumstances then others.
The Benchmarking is of the following:
1. Competitive Benchmarking: It involves the comparison of competitor’s products, process and business results with own. Benchmarking partners are drawn from the same sector. However, to protect confidentiality it is common for the companies to undertake this type of benchmarking through trade associations or third parties.
2. Strategic Benchmarking: it is similar to the process benchmarking in nature but differed in its scope and depth. It involves a systematic process by which a company seeks to improve their overall performance by examining the long-term strategies. It involves comparing high-level aspects such as developing new products and services core competencies etc.
3. Global Benchmarking: It is a benchmarking through which distinction in international culture, business processes and trade practices across companies are bridged and their ramification for business process improvement are understood and utilized. Globalization and advances in information technology leads to use this type of benchmarking.
4. Process Benchmarking: It involves the comparison of an organization critical business processes and operations against best practice organization that performs similar work or delivers similar services. For example, how do best practice organization process customer’s orders?
5. Functional benchmarking: This type of benchmarking is used when organizations look to benchmark with partners drawn from different business sectors or areas of activity to find ways of improving similar functions or work processes. This sort of benchmarking can lead to innovation and dramatic improvements.
6. Internal Benchmarking: Internal benchmarking involves seeking partners from within the same organization. For example, form business units located in different areas. The main advantages of internal benchmarking are that access to sensitive data and information are easier; standardized data is often readily available; and usually less time and resources are needed. There may be fewer barriers to implementation as practices may be relatively easy to transfer across the same organization. However real innovation may be lacking and best in class performance is more likely to be found through external benchmarking.
7. External Benchmarking: External benchmarking involves seeking help of outside organizations that are known to be best in class. External benchmarking provides opportunities of learning from those who are at the leading edge, although it must be remembered that not every best practice solution can be transferred to others. In addition, this type of benchmarking may take up more time and resource to ensure the comparability of data and information, the credibility of the findings and the development of sound recommendations.
The benchmarking can also be categorized into:
1. Intra-group Benchmarking: In Intra group benchmarking the groups of companies in the same industry agree that similar units within the cooperating companies will pool data on their process. The processes are benchmarked against each other at or operational level. Improvement task forces are established to identify and transfer best practice to all members of the group.
2. Inter-Industry benchmarking: In inter-industry benchmarking a non-competing business with similar process is identified and asked to participate in a benchmarking exercise. For example, a publisher of schoolbook may approach a publisher of university level books to establish a benchmarking relationship. Although two publishers are not in direct competition but there are obviously many similarities in their business with respect to sources of supply, distribution channels. Each will be able to benefit from the experience of other and establish ‘best practices’ in their common business processes.
Critical success factors
Critical success factors (CSFs) are often quoted in management literature as those areas in which an organization needs to perform best if it is to achieve overall success. CSFs have frequently been used to help determine the requirements for executive information systems (EIS), supporting the ‘key indicator’ approach to management control. A number of methods have been developed to identify these key indicators, and the CSF approach is one of the most widely used, which should be measured and monitored using EIS to help manage the strategic direction of an organization.
It is difficult and expensive to gather, store, validate and make available the various types of management information required for decision making. As such, it is important for managers and providers of information support systems to determine, in advance, what is most relevant to them.
It is necessary to identify the ‘key indicators’ that will help a manager to plan, manage, and control an area of responsibility. This method is based on the need for managers to focus, at any point in time, on the most significant aspects of their responsibilities. The development of an EIS, designed to support management control, is based on two main concepts:
The selection of a set of key indicators of the health of the functional business area. Information will then be collected for each of these indicators.
Exception reporting – the ability to make available to a manager, as required, information on only those indicators where performance differs significantly from expectations.
The underlying belief is that an effective control system must be tailored to the specific industry in which the organization operates, and to the specific strategies that it has adopted. It must identify the CSFs that should receive careful and continuous management attention if the organization is to be successful, and it must highlight performance with respect to these key variables in reports available to all levels of management.
The first concept is frequently approached from the viewpoint of CSFs in that a limited number of areas are identified in which results, if they are satisfactory, will ensure successful performance. They are the few key areas, it is believed, where ‘things must go right’ if the organization is to flourish. In turn, each manager must identify the key areas that apply to them, in which results are identified as being absolutely necessary to achieve specific goals. The goals, in turn, support overall organizational goals. The genesis of this approach goes back to the history of warfare, where writers on battles have identified the successful leader as the one who concentrated his forces on the most significant areas.
The current state of performance in these areas should be continually measured. Because these areas are identified as being critical, each manager should have the appropriate information that indicates whether events are proceeding sufficiently well in each area. CSFs and associated performance indicators (PIs) can play a central role in this.
(E) Interpretation of Under and Over Performance and Inferences Drawn for Corrective Actions
Performance management can be defined as a systematic process for improving organizational performance by developing the performance of individuals and teams. It is a means of getting better results from the organization, teams and individuals by understanding and managing performance within an agreed framework of planned goals, standards and competence requirements. Processes exist for establishing shared understanding about what is to be achieved, and for managing and developing people in a way that increases the probability that it will be achieved in the short and longer term. It is owned and driven by line management.
The overall aim of performance management is to establish a high-performance culture in which individuals and teams take responsibility for the continuous improvement of business processes and for their own skills and contributions within a framework provided by effective leadership. Its key purpose is to focus people on doing the right things by achieving goal clarity.
Specifically, performance management is about aligning individual objectives to organizational objectives and ensuring that individuals uphold corporate core values. It provides for expectations to be defined and agreed in terms of role responsibilities and accountabilities (expected to do), skills (expected to have) and behaviours (expected to be). The aim is to develop the capacity of people to meet and exceed expectations and to achieve their full potential to the benefit of themselves and the organization. Importantly, performance management is concerned with ensuring that the support and guidance people need to develop and improve are readily available.
Performance management is a planned process of which the primary elements are agreement, measurement, feedback, positive reinforcement and dialogue. It is concerned with measuring outputs in the shape of delivered performance compared with expectations expressed as objectives. In this respect, it focuses on targets, standards and performance measures or indicators. It is based on the agreement of role requirements, objectives and performance improvement and personal development plans. It provides the setting for on-going dialogues about performance, which involves the joint and continuing review of achievements against objectives, requirements and plans.
But it is also concerned with inputs and values. The inputs are the knowledge, skills and behaviours required to produce the expected results.
Developmental needs are identified by defining these requirements and assessing the extent to which the expected levels of performance have been achieved through the effective use of knowledge and skills and through appropriate behaviour that upholds core values.
Performance management is a continuous and flexible process that involves managers and those whom they manage acting as partners within a framework that sets out how they can best work together to achieve the required results. It is based on the principle of management by contract and agreement rather than management by command. It relies on consensus and cooperation rather than control or coercion.
Performance management focuses on future performance planning and improvement rather than on retrospective performance appraisal. It functions as a continuous and evolutionary process, in which performance improves over time; and provides the basis for regular and frequent dialogues between managers and individuals about performance and development needs. It is mainly concerned with individual performance but it can also be applied to teams. The focus is on development, although performance management is an important part of the reward system through the provision of feedback and recognition and the identification of opportunities for growth. It may be associated with performance- or contribution-related pay but its developmental aspects are much more important.
The main activities are:
Managing performance throughout the year, when action is taken to implement the performance agreement and performance improvement and personal development plans as individuals carry on with their day to- day work and their planned learning activities. It includes a continuous process of providing feedback on performance, conducting informal progress reviews, updated objectives and, where necessary, dealing with performance problems.
Performance review, which is the formal evaluation stage when a review of performance over a period takes place covering achievements, progress and problems as the basis for the next part of the continuous cycle – a revised performance agreement and performance improvement and personal development plans. It can also lead to performance ratings.
Performance management should not be treated as a mechanistic system based on periodical formal appraisals and detailed documentation. The activities described above should be coherent in the sense of contributing to an overall systematic approach in which all aspects of the performance management process are aligned. Thus there needs to be a declaration of intent, which states why performance management is important, how it works and how people will be affected by it. The declaration should have the visible and continuous support of top management and should emphasize that the aim is to develop a high-performance culture and integrate organizational and individual goals. When developing and operating performance management it is necessary to ensure that it is regarded by all concerned as a joined-up process in which performance and development planning recorded in a performance agreement leads to continuous monitoring of performance against plans with built-in feedback. This in turn forms the basis of formal and informal reviews as and when appropriate (not just an annual event), which inform forward planning as part of a renewed performance agreement.
Good performance management is achieved through both parties ensuring that:
Underperformance is when an employee is performing their duties below the required level that has been set and is expected of them. An employee who doesn’t know exactly what’s expected of them can often become unsure in their actions, leading to underperformance. Worse yet, if they’re unaware that they are in fact underperforming. Underperformance jeopardizes the achievement of individual and organizational goals and objectives and is reflected in:
Work outputs which do not meet expectations;
Core competencies not being demonstrated at the expected level;
Complaints from peers, direct reports and/or managers, resulting in conflictual personal relations;
Complaints from those receiving the services of the staff member.
Sometimes, in the case of on-going underperformance, a performance improvement plan may be the best way to address the problems. Such a plan should be prepared, discussed and agreed with the staff member and documented in a format which best suits the particular situation.
Over performance means high performance. A “high-performance work team” refers to a group of goal-focused individuals with specialized expertise and complementary skills, which collaborate, innovate and produce consistently superior results. The group relentlessly pursues performance excellence through shared goals, shared leadership, collaboration, open communication, clear role expectations and group operating rules, early conflict
resolution, and a strong sense of accountability and trust among its members. High performers stand out from average performers in any organization. They consistently exceed expectations and are management’s go-to people for difficult projects because they have a track record of getting the job done. They’re great at their job and take pride in their accomplishments, but may not have the potential (or the desire) to succeed in a higher-level role or to tackle more advanced work.
1. Developing clear job descriptions
2. Determining competency sets and selecting people through an appropriate selection process
3. Negotiating requirements and accomplishment-based performance standards, outcomes, and measures
4. Providing effective orientation, education, and training
5. Imparting on-going coaching and feedback
6. Conducting quarterly performance development discussions.
When the financial controller of Better Company set the budget for the year ahead, it was expected that monthly output of cake packages would be 12,000 units. In March the output was increased to 14,000 per month following negotiation with a chain of corner shops. The following table reports the original budget and the actual outcome for the month of March.
Particulars |
Original Budget | Actual for March |
| Amount (₹) | Amount (₹Particulars) | |
| Cake packages output (units) | 12,000 | 14,000 |
| Direct materials | 48,000 | 53,000 |
| Direct labour | 24,000 | 29,000 |
| Variable overhead | 6,000 | 7,200 |
| Fixed overhead | 4,000 | 4,500 |
| Total production costs | 82,000 | 93,700 |
Financial Controller wants to report about the impact of the above and requested you as a Management Accountant of the company to give a detailed report on these.
From the following information relating to 2021 and conditions expected to prevail in 2022, prepare a budget for 2022.
| 2021 Actual: | Amount (₹) |
| Sales (40,000 units) | 1,00,000 |
| Raw materials | 53,000 |
| Wages | 11,000 |
| Variable Overhead | 16,000 |
| Fixed Overheads | 10,000 |
| 2022 Prospects: | |
| Sales (60,000 units) | 1,50,000 |
| Raw Materials | 5% increase in prices |
| Wages | 10% increase in wage rate |
| 5% increase in productivity | |
| Additional plant: One Lathe | ₹25,000 |
| One Drill | ₹12,000 |
10% Depreciation to be considered.
Production costs of a factory for a year are as follows:
| Particulars | Amount (₹) |
| Direct Wages | 80,000 |
| Direct Materials | 1,20,000 |
| Production Overheads: Fixed | 40,000 |
| Variable | 60,000 |
During the forthcoming year it is anticipated that:
a. The average rate for direct labour remuneration will fall from ₹ 0.80 per hour to ₹ 0.75 per hour.
b. Production efficiency will be reduced by 5%
c. Price per unit of direct material and of other materials and services which comprise overheads will remain unchanged, and
d. Production in the coming year will increase by 33.33%
Draw up a production cost budget.
With the following data for a 60 % activity prepare a budget for production at 80 % and 100 % capacity Production
at 60 % capacity 300 units.
Materials ₹ 100 per unit
Labour ₹ 40 per unit
Expenses ₹ 10 per unit
Factory expenses ₹ 40,000 (40% fixed)
Administrative expenses ₹ 30,000 (60% fixed)
A Glass Manufacturing Company requires you to calculate and present the budget for the next year from the following information:
| Sales: Toughened glass | ₹3,00,000 |
| Bent toughened glass | ₹5,00,000 |
| Direct Material cost | 60% of sales |
| Direct Wages | 20 workers @ ₹150 p.m. |
Factory Overheads:
| Indirect Labour: Works Manager | ₹ 500 per month |
| Foreman | ₹ 400 per month |
| Stores and spares | 2½% on sales |
| Depreciation on machinery | ₹ 12,000 |
| Light and power | ₹ 5,600 |
| Repairs and maintenance | ₹ 8,000 |
Other sundries 10% on direct wages
Administration, selling and distribution expenses ₹14,000 per year.
Prepare the Sales Budget from the following data:
| Product | January | February |
| X | 1200 units | 1800 units |
| Y | 3600 units | 5400 units |
The sales area A and B account for 60% and 40% sale of product X and 30% and 70% sale of product Y respectively.
The selling price per unit of product X: ₹ 24 and the selling price per unit of product Y: ₹ 30 in both the sales areas.
The following information relates to the productive activities of Omega Ltd. For 3 months ending on 31st March 2022:
| Particulars | Amount (₹) |
| Variables Expenses: (at 50% capacity) | |
| – Materials | 6,00,000 |
| – Labour | 6,40,000 |
| – Salesmen’s Commission | 95,000 |
| Total | 13,35,000 |
| Semi-variable Expenses: (at 50% capacity) | |
| Plant Maintenance | 62,500 |
| – Indirect Labour | 2,47,500 |
| – Salesmen’s salaries | 72,500 |
| – Sundries | 65,000 |
| Total | 4,47,500 |
| Fixed Expense: | |
| – Management Salaries | 2,10,000 |
| – Rent and Taxes | 1,40,000 |
| – Depreciation of Machinery | 1,75,000 |
| – Sundry Office Expenses | 2,22,500 |
| 7,47,500 |
It is further noted that semi-variable expenses remain constant between 40% and 70% capacity, increase by 10% of the above figures between 70% and 85% capacity and increased by 15% of the above figures between 85% and 100% capacity.
Fixed expenses remain constant whatever the level of activity may be. Sales at 60% capacity are ₹25,50,000, at 80% capacity are ₹34,00,000 and at 100% capacity are ₹42,50,500.
Assuming that all items produced are sold, you are required to prepare a flexible budget at 60%, 80% and 100% capacity.
The following information at 50% capacity is given. Prepare a flexible budget and forecast the profit or loss at 60%, 70% and capacity.
| Particulars | Amount (₹) |
| Fixed Expenses | |
| – Salaries | 50,000 |
| – Rent and Taxes | 40,000 |
| – Depreciation | 60,000 |
| – Administrative Expenses | 70,000 |
| Variable Expenses | |
| – Materials | 2,00,000 |
| – Labour | 2,50,000 |
| – Others | 40,000 |
| Semi-Variable Expenses | |
| – Repairs | 1,00,000 |
| – Indirect Labour | 1,50,000 |
| – Others | 90,000 |
| Sales | 9,00,000 |
It is estimated that fixed expenses will remain constant at all capacities. Semi –variable expenses will not change between 45% and 60% capacity, will rise by 10% between 60% and 75% capacity, a further increase of 5% when the capacity crosses by 75%.
Estimated sales:
| Capacity | 60% | 70% | 90% |
| (₹) | 11,00,000 | 13,00,000 | 15,00,000 |
Zee Co. Ltd. wishes to arrange overdraft facilities with its bankers from the period August to October 2022 when it will be manufacturing mostly for stock. Prepare a cash budget for the above period from the following data given below:
| Month | Sales | Purchases | Wages | Manufacturing Exp. | Office Exp. | Selling Exp. |
| June | 1,80,000 | 1,24,800 | 12,000 | 3,000 | 2,000 | 2,000 |
| July | 1,92,000 | 1,44,000 | 14,000 | 4,000 | 1,000 | 4,000 |
| August | 1,08,000 | 2,43,000 | 11,000 | 3,000 | 1,500 | 2,000 |
| September | 1,74,000 | 2,46,000 | 12,000 | 4,500 | 2,000 | 5,000 |
| October | 1,26,000 | 2,68,000 | 15,000 | 5,000 | 2,500 | 4,000 |
| November | 1,40,000 | 2,80,000 | 17,000 | 5,500 | 3,000 | 4,500 |
| December | 1,60,000 | 3,00,000 | 18,000 | 6,000 | 3,000 | 5,000 |
Additional Information:
(a) Cash on hand 1-08-2022 ` 25,000.
(b) 50% of credit sales are realized in the month following the sale and the remaining 50% in the second month following. Creditors are paid in the month following the month of purchase.
(c) Lag in payment of manufacturing expenses half month.
(d) Lag in payment of other expenses one month.
The Sales Director of a manufacturing company reports that in the New Year, he expects to sell 27000 units of a certain product. The production manager consults the store-keeper and casts his figures as follows:
Two kinds of raw materials, A and B are required for manufacturing the product. Each unit of the product requires 4 units of A and 6 units of B. The estimated opening balances at the commencement of the next year are: Finished Product: 5000 units, A: 24000 units, and B: 30000 units. The desirable closing balances at the end of the next year are: Finished Product: 7000 units, A: 26000 units, and B: 32000 units. Draw up a Material Purchase Budget for the next year.
The following information is given to you. Prepare Selling and Distribution Cost Budget for six months ending 30th September, 2022.
(i) Direct Selling Expenses: 10% of Sales.
(ii) Advertising: 2% of Sales.
(iii) Distribution Expenses: 5% of Sales.
(iv) Sales office Expenses: North ₹ 10,000; South ₹ 8,000; East ₹ 12000; and West ₹ 15,000.
(v) Sales @ ₹ 50 per unit: North: 6100 units; South: 3800 units; East: 7800 units and West: 4700 units
In each of the following independent situations, state with a brief reason whether ‘Zero Based Budgeting’ (ZBB) or ‘Traditional Budgeting’ (TB) would be more appropriate for year II.
(i) A company producing a certain product has done extensive ZBB exercise in year I. The activity level is expected to marginally increase in year II.
(ii) The sale manager of a company selling three products has intuitive feeling that in year II, sales will increase
for one product and decrease for the other two. His expectation cannot be substantiated with figure.
(iii) The top management would like to delegate responsibility to the functional managers for their results during year II.
(iv) Resources are heavily constrained and allocation for budget requirements is very much restricted.
As a newly appointed management accountant, you are aware that, the present system of Budgeting is not purposeful for the HTL Company. You are required to address to the management about the problems, the Company is facing with respect to preparation of purposeful ‘Budgets’ and outline the correct way of presenting the ‘Budgets’.
Mr. Managing Director is surprised that his profit every year is quite different from what he wants or expects to achieve. Someone advised him to install a formal system of budgeting. He employs a fresh accountant to do this. For two years, the accountant faithfully makes all budgets based on previous year’s accounts. The problem remains unsolved. Advise Mr. Managing Director and the Accountant on what steps they should take. Make assumption about what is lacking
Following are the budgeted expenses for production of an electronic component of TV (10,000 units):
| Particulars | ₹ |
| Direct materials | 50 |
| Direct labour | 20 |
| Variable overheads | 20 |
| Fixed overheads (₹ 1,00,000) | 10 |
| Variable expenses (Direct) | 5 |
| Selling expenses (10% fixed) | 10 |
| Distribution expenses (20% fixed) | 5 |
| Administration expenses (₹ 50,000) | 5 |
| Total cost of sale per unit (to make and sell) | 125 |
Prepare a budget for production of (a) 7,000 units and (b) 9,000 units, showing distinctly marginal cost and total cost. Assume that the administration expenses are rigid for all levels of production
P.C.T. Ltd. provides you the following figures for the year 2021:
| Particulars | Product A | Product B | |
| Sales (in units) : | 1st Quarter | 1,250 | 1,600 |
| 2nd Quarter | 2,950 | 800 | |
| 3rd Quarter | 2,700 | 1,000 | |
| 4th Quarter | 3,100 | 600 | |
| Selling price per unit | ₹ 24 | ₹ 50 | |
| Targets for 2022: | |||
| Sales quantity increase (decrease) | (20%) | 25% | |
| Selling price increase (decrease) | 25% | (20%) |
Sales area X, Y and Z respectively produce 10%, 20%, 70% of Product ‘A’ sales and 70%, 20% and 10% of Product ‘B’ sales.
Required: Prepare Sales Budget for the year 2022.
AB Co. Ltd. manufactures two products A and B and sells them through two Divisions-North and South. For the purpose of submission of sales budget to the budget committee the following information is available: -
Budgeted sales for the current year were:
| Product | North | South |
| A | 4,000 at ₹ 9 | 6,000 at ₹ 9 |
| B | 3,000 at ₹ 21 | 5,000 at ₹ 21 |
Actual sales for the current year were: -
| Product | North | South |
| A | 5,000 at ₹ 9 | 7,000 at ₹ 9 |
| B | 2,000 at ₹ 21 | 4,000 at ₹ 21 |
Adequate market studies reveal that Product A is popular but under-priced. It is observed that if the price of A is increased by ₹ 1 it will still find a ready market. On the other hand, B is overpriced to customers and the market could absorb more if sales price of B be reduced by ₹ 1. The management has agreed to give effect to the above price changes.
From the information based on these price changes and reports from salesmen, the following estimates have been prepared by divisional managers: -
Percentage increase in sales over current budget is :-
| Product | North | South |
| A | + 10% | +5% |
| B | +20% | +10% |
With the help of an intensive advertisement campaign the following additional sales over the estimated sales of divisional managers are possible:-
Additional sales above the estimated sales of divisional managers:
| Product | North (units) | South (units) |
| A | 600 | 700 |
| B | 400 | 500 |
You are required to prepare a budget for sales incorporating the above estimates and also show the budgeted and actual sales of current year.
Prepare a purchase budget of A B Co. Ltd., for materials based on the materials budget and the estimated opening and closing stocks of materials:
| Stock | 11 | 13 | 16 | 17 | 18 |
| Kg | Kg | Kg | Kg | Kg | |
| On 1st Jan | 180 | 25 | 90 | 22 | 12 |
| On 31st Dec | 200 | 60 | 40 | 20 | 50 |
| Consumption during period (Kg) | 1480 | 175 | 330 | 182 | 92 |
| Purchase price | ₹90,000 | ₹12,000 | ₹3,000 | ₹10,000 | ₹2,500 |
1. What is the name given to a budget that has been prepared by re-evaluating activities and comparing the incremental costs of those activities with their incremental benefits?
A. Incremental budget
B. Rolling budget
C. Zero base budget
D. Flexible budget
Answer:- C. Zero base budget
2. A budget is an instrument of management used as an aid in the
A. Planning
B. Programming
C. Control of business activity
D. All of the above
Answer:- D. All of the above
3. Following may be regarded as a summary budget
A. Production budget
B. Master budget
C. Cash budget
D. Sales budget
Answer:- B. Master budget
4. Purchases budget is prepared using the information from
A. Capital expenditure budget
B. Materials budget
C. Both (A) and (B)
D. None of the above
Answer:- B. Materials budget
5. Following budget may be compiled on departmental basis
A. Production budget
B. Purchase budget
C. Materials budget
D. All of the above
Answer:- A. Production budget
6. Production budget is based upon
A. Sales budget
B. Factory capacity
C. Availability of raw material and labour
D. All of the above
Answer:- D. All of the above
7. Budget includes
A. Income
B. Expenditure
C. Employment of capital
D. All of the above
Answer:- C. Employment of capital
8. Functional budget is subsidiary to
A. Variable budget
B. Fixed budget
C. Master budget
D. All of the above
Answer:- D. All of the above
9. A budget should be
A. Rigid
B. Flexible
C. Both (A) and (B)
D. None of the above
Answer:- B. Flexible
10. The object of budgetary control is __________
A. Planning
B. Forecasting
C. Organizing
D. Directing
Answer:- A. Planning
11. The budget which is dynamic is ___________.
A. Flexible budget
B. Sales budget
C. Cash budget
D. Purchase budget
Answer:- B. Sales budget
12. The process of budgeting helps in the control of
A. Cost of production
B. Liquidity
C. Capital Expenditure
D. All of the above
Answer:- D. All of the above
13. Plant utilization budget and Manufacturing overhead budgets are types of
A. Production budget
B. Sales budget
C. Cost budget
D. None of the above
Answer:- C. Cost budget
14. R&D budget and Capital expenditure budget are examples of
A. Short-term budget
B. Current budget
C. Long-term budget
D. None of the above
Answer:- C. Long-term budget
15. The scare factors is also known as
A. Key factor
B. Abnormal factor
C. Linking factor
D. None of the above
Answer:- A. Key factor
16. A budgeting process which demands each manager to justify his entire budget in detail from beginning is
A. Functional budget
B. Master budget
C. Zero base budgeting
D. None of the above
Answer:- C. Zero base budgeting
17. While preparing sales budget, which of the following factors are considered?
A. Non-operational factors
B. Environmental factors
C. Both a and b
D. None of the above
Answer:- B. Environmental factors
18. _______ provides an estimate of the capital amount that may be required for buying fixed assets needed for meeting production requirements.
A. Production budget
B. Cash budget
C. Capital expenditure budget
D. None of the above
Answer:- B. Cash budget
19. _______ is designed after assessment of the volume of output to be produced during budget period.
A. Cost budget
B. Sales budget
C. Production budget
D None of the above
Answer:- A. Cost budget
20. ________ is the first step of budgetary system and all other budgets depends on it.
A. Cost budget
B. Sales budget
C. Production budget
D. None of the above
Answer:- B. Sales budget
21. _______also known as subsidiary budgets.
A. Master budget
B. Functional budget
C. Cost budget
D. None of the above
Answer:- B. Functional budget
22. __________ contains the picture of total plans during the budget period and it comprises information relating to sales, profit, cost, production etc.
A. Master budget
B. Functional budget
C. Cost budget
D. None of the above
Answer:- A. Master budget
23. _________ is stated as a budget which is made to change as per the levels of activity attained.
A. Fixed budget
B. Flexible budget
C. Both a and b
D. None of the above
Answer:- B. Flexible budget
24. _______ is prepared for single level of activity and single set of business conditions.
A. Fixed budget
B. Flexible budget
C. Both a and b
D. None of the above
Answer:- A. Fixed budget
25. On the basis of period, budgets may be classified into _________ groups.
A. Five
B. Four
C. Three
D. Two
Answer:- C. Three
26. Which of the following statements are not true about budget, budgeting & budgetary control?
A. Budgetary control works on the basis of best option
B. Budget is one of the important mediums of communication
C. Budgeting develops the quality of objectivity in planning
D. None of the above
Answer:- D. None of the above
27. Which of the following statements are true about budget, budgeting & budgetary control?
A. Budgeting is business estimates for future periods
B. Budget is the process of preparing business estimates
C. Budgetary control is the means to achieve performance on the basis of budget
D. None of the above
Answer:- C. Budgetary control is the means to achieve performance on the basis of budget
28. Which of the following statements are true about budget, budgeting & budgetary control?
A. Budgetary control is a wider concept whereas Budget and budgeting are narrower concepts
B. If there is budgeting or budget, it is not necessary that there should be budgetary control also
C. If there is budgetary control, budgeting and budget are must
D. All of the above
Answer:- D. All of the above
29. According to George R. Terry, _________ may be described as a process of finding out what is being done and comparing actual results with the corresponding budget data in order to approve accomplishment.
A. Budgetary control
B Budget
C. Budgeting
D. None of the above
Answer:- A. Budgetary control
30. Which of the following are not the objectives of Budgeting?
(A) To express the objectives of the firms in qualitative terms.
(B) To prepare base for evaluation of work performance.
(C) To co-ordinate organizational and managerial units of the firm.
(D) To develop a strong appraisal of objectives and policies of firm.
A. A, B and C
B. B, C and D
C. D, C and A
D. None of the above
Answer:- D. None of the above
1. A budget is often thought of as a financial plan. Answer:- True
2. Forecast is mainly concerned with an assessment of probable future events. Answer:- True
3. Forecast means estimation of future trends and outcomes, based on the past and present data. Answer:- True
4. Portraying with precision, the overall aims of the business and determining targets of performance for each section or department of the business. Answer:- True
5. Objectives should not be defined precisely. Answer:- False
6. Key Factor is also called as “Limiting Factor” or Governing Factor. Answer:- True
7. Formulation of a budget usually requires part time services of a senior executive Answer:- False
8. The Budget manual is a schedule, document or booklet, which shows in a written form, the budgeting organization and procedure. Answer:- True
9. The budget period is the length of time for which a budget is prepared and employed. Answer:- True
10. The standards of activity levels for future period should be laid down. Answer:- True
1. For the purpose of effective budgetary control, it is imperative on the part of each entity to have definite Plan of organization
2. The budget figures should be realistic and represent logically attainable Goals
3. A Fixed budget is designed to remain unchanged irrespective of the level of activity actually attained.
4. A Flexible budget is a budget which is designed to change in accordance with the various level of activity actually attained.
5. According to the principles that guide the preparation of the Flexible budget a series of fixed budgets are drawn for different levels of activity.
6. Functional budgets are budgets prepared for each department or process within an organisation.
7. Cash budget is the most important of the entire functional budget.
8. The alternative solution presented to the problem of inefficiency in the base is termed Zero-based budgeting or sometimes priority-based budgeting.
9. Performance Budget has been defined as a “budget based on functions, activities and projects.”
10. A Planning programming budgeting system is an approach that seeks to separate the policy planning aspects of budgeting from the short-term financial planning process.
1. What do you understand by “Budgeting”? Mention the type of budget that the Management of a big industrial concern would normally prepare.
Answer:-
2. What is budget? What is sought to be achieved by Budgetary Control.
Answer:-
3. What factors would influence the selection of budget period between two firms carrying on diverse activities?
Answer:-
4. What is the mechanism of master budget? How is it prepared?
Answer:-
5. ‘Budgetary control improves planning, aids in coordination and helps in having comprehensive control’. Elucidate this statement.
Answer:-
6. Describe in brief the modus operandi for the purpose of preparation of a production budget. What are the principal considerations involved in budgeting production?
Answer:-
7. What are different types of functional budgets which are prepared by a large scale manufacturing concern?
Answer:-
1. Has ‘Budgetary Control’ any significance with management accounting?
Answer:-
2. Outline a plan for sales budget and purchases budget. What considerations are necessary in the preparation of such budgets?
Answer:-
3. What do you mean by budgetary control with reference to manufacturing-cum selling enterprise.
Answer:-
4. What do you mean by flexible budget allowance? How is it ascertained? Explain with a cogent example.
Answer:-
5. What do you mean by budgetary control? Explain the objectives of budgetary control with special reference to a large manufacturing concern.
Answer:-
6. What is the principal budget factor? Give a list of such factors and explain how you would proceed to prepare budgets in the case of a manufacturing company.
Answer:-
7. Are you in agreement with the view that Budgeting should better be called profit planning and control?
Answer:-
8. ‘Why do responsible people in an organization agree to accept budgetary control in theory but resist in practice’? Explain.
Answer:-
9. Explain the procedure you would follow to prepare a projected Profit and Loss Account and Projected Balance Sheet. Explain also use of these statements.
‘If the sales forecast is subject to error then there is no basis of budgeting’. Do you agree? Also explain how flexible budget can be used to help control cost.
Answer:-
10. What is the mechanism of master budget? How is it prepared?
Answer:-
11. Discuss the difficulties which arise and how are they overcome in forecasting sales and preparing sales budget in a jobbing concern.
Answer:-
12. Write an essay on zero-based budgeting and highlight its procedure, norms and superiority over functional budgeting
Answer:-
1. Production at 60% activity is ₹ 600 units, if flexible budget needs to be calculated at 80% activity what will be units produced?
A. ₹ 800
B. ₹ 600
C. ₹ 1200
D. ₹ 1000
Answer:- A. ₹ 800
2. Given Production at 60% activity, 600 units, Material ₹ 50 per unit, Labour ₹ 20 per unit, Direct expenses Rs 5 per unit, Factory overheads ₹ 20,000 (60% variable) and Administration expenses Rs 15,000 (60% fixed). What will be the total cost per unit for production at 80% capacity?
A. ₹ 1,01,000
B. ₹ 126.25
C. ₹ 122
D. ₹ 1,22,000
Answer:- B. ₹ 126.25
3. A factory produces two types of articles Y and Z. Article Y takes 8 hours to make and Z takes 16 hours. In a month (25 days x 8 hours) 600 units of X and 400 units of Z are produced. Given budgeted hours 8000 per month and men employed are50. Determine Activity ratio, Capacity ratio and efficiency ratio.
A. 112%, 140%, 140%
B. 140%, 112%, 140%
C. 140%, 140%, 112%
D. None of the above
Answer:- C. 140%, 140%, 112%
4. Given the budgeted output in second quarter are 8,000 units. In the first quarter, Fixed overheads were ₹ 40,000; Variable overheads were ₹ 5 per unit (₹ 40,000) and semi variable were ₹ 20,000 ( 60% varying @ ₹ 3 per unit). Determine the total manufacturing overhead budget for the second quarter.
A. ₹ 1,12,000
B. 1,12,000 units
C. Insufficient data
D. None of the above
Answer:- A. ₹ 1,12,000
5. ABC Company plans a sale of 96,000 units of TV product line in the first fiscal quarter, 1,20,000 TV units in second quarter, and 1,32,000 units and 1,50,000 units in third and fourth quarter, and 1,56,000 units in the first quarter of next year. Given that at the beginning of first fiscal quarter, the company has 16,000 units in stock. Also, at the end of each quarter, ABC Company wants to maintain an inventory equal to one-sixth of the sales for the next fiscal quarter. Determine units to be manufactured in first
and second quarter of the year.
A. 10,00,000 and 1,35,000
B. 10,00,000 and 1,22,000
C. Insufficient data
D. None of the above
Answer:- B. 10,00,000 and 1,22,000
1. Prepare a Flexible Budget for the production at 80% and 100% activity on the basis of following information:
| Production at 50% capacity | 5,000 units |
| Raw Material | ₹80 per unit |
| Direct labour | ₹50 per unit |
| Direct Expenses | ₹15 per unit |
| Factory Overhead | ₹50,000 (50% fixed) |
| Administration Overhead | ₹60,000(60% variable) |
2. ABC Ltd. prepared the budget for the production of one lakh unit of the one type of commodity manufactured by them for a costing period as under:
| Raw Material Z | ₹ 2.52 per unit |
| Direct Labour | ₹ 0.75 per unit |
| Direct Expenses | ₹ 0.10 per unit |
| Works overheads (60% Fixed) | ₹ 2.50 per unit |
| Admn. overheads (80% Fixed) | ₹ 0.40 per unit |
| Selling overheads (50% Fixed) | ₹ 0.20 per unit |
Actual production during the period was only 60,000 units. Calculate the budgeted cost per unit.
| Product | As on 1st January 2022 | As on 30th June 2022 |
| A | 8,000 | 10,000 |
| B | 9,000 | 8,000 |
| C | 10,000 | 14,000 |
3. From the following data, prepare a Production Budget for a company: Stocks for the budget period: Requirement to fulfill sales programme:
| A | 60,000 units |
| B | 50,000 units |
| C | 80,000 units |
4. The Tee Manufacturing Company has estimated its sales budget at 5,00,000 units for the quarter ending March 31, 2022. Anticipated sales for January, February, and March are 37.5%, 25%, and 37.5% of the total, respectively. The desired finished goods inventories are as follows
| Units | |
| January 1 | 90,000 |
| January 31 | 87,500 |
| February 28 | 93,000 |
| March 31 | 95,000 |
Prepare a production budget for the first quarter of 2022
5. J Manufacturing Company has estimated its 2022 production requirements to be as follows:
| Month | Units |
| April | 1,500 |
| May | 2,000 |
| June | 2,500 |
| July | 2,800 |
The company wants a direct materials ending inventory of 35% of the next month’s production. The price per unit is ₹ 20, and it takes one unit of direct materials to produce one of finished goods.
Prepare a direct materials purchase budget for the second quarter of 2022 and also prepare a direct materials usage budget.
6. The sales manager of the MR Ltd. reports that next year he anticipates to sell 50,000 units of a particular product.
The production manager consults the storekeeper and casts his figures as follows:
Two kinds of raw materials A and B are required for manufacturing the product. Each unit of the product requires 2 units of A and 3 units of B. The estimated opening balances at the commencement of the next year are:
Finished product: 10,000 units
Raw Materials A: 12,000 units Raw Materials B: 15,000 units
The desirable closing balances at the end of the next year are
Finished products: 14,000 units
Raw materials A: 13,000 units Raw Materials B: 1,000 units
Prepare production budget and materials purchase budget for the next year
7. The following expenses were extracted from the books of M/s AB & Sons and you are required to prepare the sales overhead budget for the year 2022:
| Particulars | Amount (₹) |
| Advertisement on Radio | 2,000 |
| Television | 12,000 |
| Salary to Sales Administrative Staf | 20,000 |
| Sales force | 15,000 |
| Expenses of the sales department | |
| Rent of the building | 5,000 |
| Carriage outward | 5% on sales |
| Commission at sales | 2% |
| Agents’ commission | 6.5% |
The sales during the period were estimated as follows:
| ₹ 80,000 including Agents Sales | ₹ 8,000 |
| ₹ 1,00,000 including Agents Sales | ₹ 10,500 |
8. The expenses for budgeted production of 10,000 units in a factory are furnished below:
| Particulars | Per unit ₹ |
| Material | 70 |
| Labour | 25 |
| Variable overheads | 20 |
| Fixed overheads ₹ 1,00,000 | 10 |
| Variable expenses (Direct) | 5 |
| Selling expenses (10% fixed) | 13 |
| Distribution expenses (20% fixed) | 7 |
| Administration expenses ₹ 50,000 | 5 |
| Total cost per unit: | 155 |
Prepare a budget for production of:
(a) 8,000 units
(b) 6,000 units
(c) Calculate the cost per unit at both levels.
Assume that administration expenses are fixed for all level of production.
9. A company manufactures product - A and product - B during the year ending 31st December 2022, it is expected to sell 15,000 kg of product A and 75,000 kg of product B at ₹ 30 and ₹ 16 per kg respectively. The direct materials P, Q and R are mixed in the proportion of 3: 5: 2 in the manufacture of product A, Materials Q and R are mixed in the proportion of 1:2 in the manufacture of product B. The actual and budget inventories for the year are given below:
| Opening Stock | Expected Closing stock | Anticipated cost per Kg | |
| Kg | Kg | ₹ | |
| Material – P | 4,000 | 3,000 | 12 |
| Material – Q | 3,000 | 6,000 | 10 |
| Material – R | 30,000 | 9,000 | 8 |
| Product – A | 3,000 | 1,500 | - |
| 4,000 | 4,500 | - | |
Prepare the Production Budget and Materials Budget showing the expenditure on purchase of materials for the year ending 31-12-2022.
10. The following details apply to an annual budget for a manufacturing company.
| QUARTER | 1st | 2nd | 3rd | 4th |
| Working Days | 65 | 60 | 55 | 60 |
| Raw material purchases | 30% | 50% | 20% | -- |
| (% by weight of annual total) | ||||
| Budgeted purchase price/Kg. (₹) | 1 | 1.05 | 1.125 | -- |
Quantity of raw material per unit of production 2 kgs. The budgeted closing stock of raw material 2,000 kg. Budgeted opening stock of raw material 4,000 kg. (Cost`4,000). Issues are priced on FIFO Basis. Calculate the following budgeted figures.
(a) Quarterly and annual purchase of raw material by weight and value.
(b) Closing quarterly stocks by weight and value.
11. For production of 10,000 units the following are budgeted expenses
| Per Unit | |
| ₹ | |
| Direct Materials | 48 |
| Direct Labour | 24 |
| Variable Overheads | 20 |
| Fixed Overheads ₹ 1,20,000 | 12 |
| Variable Expenses (Direct) | 4 |
| Selling Expenses (10% fixed) | 12 |
| Administration Expenses ₹ 40,000 fixed | 4 |
| Distribution Expenses (20% fixed) | 4 |
| 128 |
Prepare a budget for production of 7,000 units and 9,000 units.
12. The profit for the year of Push On Ltd. works out to 12.5% of the capital employed and the relevant figures are as under: -
| Amount (₹) | |
| Sales | 5,00,000 |
| Direct Materials | 2,50,000 |
| Direct Labour | 1,00,000 |
| Variable Overheads | 40,000 |
| Capital Employed | 4,00,000 |
The new sales manager who has joined the company recently estimates for the next year a profit of about 23% on capital employed, provided the volume of sales is increased by 10% and simultaneously there is an increase in selling price of 4% and an overall cost reduction in all the elements of cost by 2%.
Find out by computing in detail the cost and profit for next year, whether the proposal of sales manager can be adopted.
1. The ABC Company planned to make 1,000 units of product in June. The static budget showed a perunit cost of ₹10, which consisted of ₹ 3 for variable costs and ₹ 7 for allocated fixed overhead. The company actually made 1,100 units. The actual per-unit cost was ₹ 10, which consisted of ₹ 3 for variable costs and ₹ 7 for allocated fixed overhead. As a Cost Accountant of the company, you are requested to guide the Production Manager in calculating the total flexible budget variance for June.
You are also requested to find the same as favourable or unfavourable?
2. The sales budget for the Highland Company for the first six months of the year is:
| Amount (₹) | |
| January | 12,000 |
| February | 13,000 |
| March | 14,000 |
| April | 13,500 |
| May | 12,600 |
| June | 11,100 |
There are no debtors at the start of January. One month’s credit is allowed to customers.
The management of the company is unable to understand, what is the budgeted cash received in each month? This is very important for the company concerned for projecting its Cash Budget.
As a head of Budgeting Team, you are required to advise management about the amount of budgeted cash to be received in each month.
3. Explain what is meant by flexible budget and its utility? Prepare a proforma of flexible budget of a manufacturing concern for their imaginary activity, levels in a suitable form.
Key Terms
Annual Budget: A budget prepared for a calendar or fiscal year. Long-Term Budget.
Administrative Budget: A formal and comprehensive financial plan through which management can control day-to-day business affairs and activities.
Activity-Based Budgeting (ABB): A budgeting approach that focuses management’s attention on activities with the goal of improving customer value, reducing costs, and increasing profit.
Budget: A plan of financial operation embodying an estimate of proposed expenditures for a given period of time or purpose and the proposed means of financing them.
Budget drivers: Caseload, economic, or demographic factors that have a significant effect on the state budget. Examples include inflation rate changes and state population changes in certain age groups.
Budget Control: Budgetary actions carried out according to a budget plan. Through the use of a budget as a standard, an organization ensures that managers are implementing its plans and objectives. Their activities are appraised by comparing their actual performance against budgeted performance. Budgets are used as a basis for rewarding or punishing them, or perhaps for modifying future budgets and plans
Budgeted accounts: Accounts that are subject to the appropriation and/or allotment process.
Budgeted income statement: An estimate of the expected profitability of operations for the budget period.
Budget Variance: (1) Any difference between a budgeted figure and an actual figure. (2) Flexible budget variance. This is the difference between actual factory overhead costs and standard (flexible budget) costs, multiplied by the standard units of activity allowed for actual production. The budget variance is used in the two-way analysis of factory overhead. It includes the fixed and variable spending variances and the variable overhead efficiency variance that are used in the three-way analysis.
Budgeted balance sheet: A projection of financial position at the end of the budget period.
Budgetary slack: The amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals.
Budget committee: A group responsible for coordinating the preparation of the budget.
Budgetary control: The use of budgets to control operations.
Critical Success Factors (CSFs): A management term for an element that is necessary for an organization or project to achieve its mission
Cash Budget: A budget for cash planning and control, presenting expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in reasonable relationship to its needs. It aids in avoiding idle cash and possible cash shortages.
Direct labour budget: A projection of the quantity and cost of direct labor necessary to meet production requirements.
Direct materials budget: An estimate of the quantity and cost of direct materials to be purchased.
Flexible budget: A projection of budget data for various levels of activity
Factory Overhead Budget: A schedule of all expected manufacturing costs except direct material and direct labor. Factory overhead items include indirect material, indirect labor, factory rent, and factory insurance. Factory overhead may be variable, fixed, or a combination of both.
Financial Budget: A budget that embraces the impacts of the financial decisions of the firm. It is a plan including a budgeted balance sheet, which shows the effects of planned operations and capital investments on assets, liabilities, and equities. It also includes a cash budget, which forecasts the flow of cash and other funds in the business.
Incremental budgeting: Any budget development approach that focuses on incremental changes to a previous spending level or other defined expenditure base.
Long-Term Budget: A projection that covers more than one fiscal year. It is also called a strategic budget. The five-year budget plan is the most commonly used.
Manufacturing overhead budget: An estimate of expected manufacturing overhead costs for the budget period.
Master (Comprehensive) Budget: A plan of activities expressed in monetary terms of the assets, equities, revenues, and costs that will be involved in carrying out the plans. Simply put, a master budget is a set of projected or planned financial statements.
Operating budget: A biennial plan for the revenues and expenditures necessary to support the administrative and service functions of state government.
Performance budgeting: The act of considering and making funding choices based on desired outcomes. Performance budgeting focuses on the results to be gained through investment decisions.
Participative Budgeting: A budgeting system that gets employees involved throughout an organization in the budgetary process. It is a bottom-up approach to budgeting.
Production Budget: A schedule for expected units to be produced. It sets forth the units expected to be manufactured to satisfy budgeted sales and inventory requirements. Expected production volume is determined by adding desired ending inventory to planned sales and then subtracting beginning inventory.
Rolling Budget: A budget that is always available for a specified future period. It is created by continually adding a month, quarter, or year to the period that just ended. In this process, budget allocations can be constantly adjusted to meet changing market conditions.
Sales Budget: An operating plan for a period expressed in terms of sales volume and selling prices for each class of product or service. Preparation of a sales budget is the starting point in budgeting, since sales volume influences nearly all other items.
Selling and administrative expense budget: A projection of anticipated selling and administrative expenses for the budget period.
Static budget: A projection of budget data at one level of activity.
Zero-Base Budgeting (ZBB): A planning and budgeting tool that uses cost benefit analysis of projects and functions to improve resource allocation in an organization. Traditional budgeting tends to concentrate on incremental change from the previous year. It assumes that the previous year’s activities and programs are essential and must be continued. Under zero-base budgeting, however, cost and benefit estimates are built up from scratch, from the zero level, and must be justified.
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"Koncept perfectly justifies what it sounds, i.e, your concepts are meant to be cleared if you are a Konceptian. My experience with Koncept was amazing. The most striking experience that I went through was the the way Yash sir and Ruchika ma'am taught us in the lectures, making it very interesting and lucid. Another great feature of Koncept is that you get mentor calls which I think drives you to stay motivated and be disciplined. And of course it goes without saying that Yash sir has always been like a friend to me, giving me genuine guidance whenever I was in need. So once again I want to thank Koncept Education for all their efforts."
"Hello everyone, I am Kaushik Prajapati. I recently passed my CA Foundation Dec 23 exam in first attempt, That's possible only of proper guidance given by Yash sir and Ruchika ma'am. Koncept App provide me a video lectures, Notes and best thing about it is question bank. It contains PYP, RTP, MTP with soloution that help me easily score better marks in my exam. I really appericiate to Koncept team and I thankful to Koncept team."
"Hi. My name is Arka Das. I have cleared my CMA Foundation Exam. I cleared my 12th Board Exam from Bengali Medium and I had a very big language problem. Koncept Education has helped me a lot to overcome my language barrier. Their live sessions are really helpful. They have cleared my basic concepts. I think its a phenomenal app."
"I cleared my foundation examination in very first attempt with good marks in practical subject as well as theoretical subject this can be possible only because of koncept Education and the guidance that Yash sir has provide me, Thank you."
