Budgetary Control

1. Budgetary Control

3. • What is Budgetary control?
• Budgetary control is the process by which budgets are
prepared for the future period and are compared with the actual
performance for finding out variances, if any. The comparison of
budgeted figures with actual figures will help the management
to find out variances and take corrective actions without any
delay.

4. Meaning
• Definitions:
• “According to Brown and Howard,
“Budgetary control is a system of
controlling costs which includes the
preparation of budgets, coordinating the
departments and establishing
responsibilities, comparing actual
performance with the budgeted and
acting upon results to achieve maximum
profitability.”

8. Essentials of Effective Budgetary Control
Support of
Top
management
Participation
by
responsible
executives
Reasonable
goals
Clearly
defined
organization
Continuous
budget
education

9. Maximum
profits
Cost of the
system
Integration
with standard
costing
system
Adequate
accounting
system
Constant
vigilance

11. Essential elements of effective budgetary
control
• 1. Support of Top Management
• Generally budgets are prepared for one year. On the basis of the
budgets, the employees are changing their working methods, habits
and even their inter-relationship also. It leads to the preparation of
every budget with top management support.
• 2. Formal Organization
• An employee can understand his scope of authority and
responsibility with regard to budget. In a formal organization, duties
of every employee are clearly defined and assigned.

12. •3. Participation by Responsible Executives
•The involvement of employees in budget preparation
helps the management for easy implementation of
budgets.
•4. Clear Cut Objectives
•The success of budgetary control programme
depends upon the clear-cut objectives of the
organization. Hence, the management before framing
the objectives should take care.

13. • 5. Attainable Objectives
• If the objectives are not attainable, the budgetary control system
cannot succeed. On the other hand, if the objectives are easily
attainable, there is no need of special efforts and there is no
challenge to anybody. Hence, attainable objectives are framed for
effective implementation of budgetary control system.
• 6. Budget Committee
• A budget committee is formed to prepare and implements the
budgets. The budget committee consists of functional managers
of business organization. The committee should be presided over
by one of the top management personnel, to be called the Budget
Director.

14. • 7. Adequate Accounting System
• Budgets are prepared on the basis of historical data. Hence, accounting
records should be properly maintained. Moreover, actual costs and
revenue are periodically compared with those of budgeted figures. The
accounts are classified in terms of authority and responsibility that
facilitates the introduction of responsibility accounting system.
• 8. Periodic Reporting
• There should be a proper communication in an organization for
effective budgetary control. Each employee of an organization should
know about what is going on and what has been achieved so far with
regard to budget. For which, the management can make an
arrangement through which information about budget performance can
be communicated periodically. The employees can understand the
variances through this system. Moreover, it is highly useful to get
communication for corrective actions.

15. • 9. Budget Education
• A budget can be implemented very successfully with the active
participation of line managers and their sub-ordinates. For which,
there is a need of showing interest by the line managers and their
subordinates. The budget director should take steps to create
interest among the line managers and their sub-ordinates
through budget education.
• 10. Appreciation Uses
• Every employee of an organization should understand the uses
of every budget. No one should have the feeling that the budget
is imposed on him. Nobody can participate mechanically in the
budget preparation and its administration regardless of whether
he likes it or not.

16. • 11. Limitations of Budgeting
• The management should disclose not only the uses of budgets
bud also the limitations of every budgets. Everyone should
realize that budget is only a managerial tool in capable of
managing itself.

18. 1. Operating Budget
An operating budget is the most basic type of budget and is
created to manage the day-to-day operations of a business

20. 2. Capital Budget
A capital budgeting is use
to check and plan for long-
term investments such as
new equipment, property,
or expansion projects.
Capital budgets are
generally creates for a
longer period of time,
basically for three to five
years

22. 3. Master Budget
The master budget is
a complete budget
that brings together
all the different
budgets, including
the operating and
capital budgets, into
a single document.
This budget serves as
a roadmap for a
business and helps in
determining the
overall financial
position of the
organization.

26. 5. Flexible Budget

29. 7. Performance-Based Budget
A performance budget is a budget that is create
based on the expected performance of the
organization. So this type of budgeting
approach focuses on the results and outcomes
that a business wants to achieve and allocates
resources based on the expected performance.

33. Students Presentation
Unit 5

34. 1.Prepare a flexible budget for production at 80 per cent and 100 per cent activity on the basis
of the following information:
Production at 50% capacity 5000 units
Raw materials Rs.80 per unit
Direct labour Rs.50 per unit
Direct Expenses Rs.15 per unit
Factory Expenses Rs.50,000 (50% fixed)
Administration Expenses Rs.60,000 (60% variable)

35. 2. Draw up a flexible budget for overhead expenses on the basis of the following data
and determine the overheads rate at 70%, 80% and 90% plant capacity.
At 80% capacity (Rs.)
Variable overheads:
Indirect labour
Stores including spares
12000
4000
Semi- Variable overheads:
Power (30% Fixed, 70% variable)
Repairs & Maintenance (60% Fixed, 40% variable)
20,000
2000
Fixed overheads:
Depreciation
Insurance
Salaries
Total overheads
11,000
3,000
10,000
62000
Estimated direct labour hours 1,24,000 hours

36. 2. The expenses budgeted for production of 10,000 units in a factory are furnished
below:
Rs. per unit
Material 70
Labour 25
Variable overheads 20
Fixed overheads (Rs.1,00,000) 10
Variable expenses (direct) 5
Selling expenses (10% fixed) 13
Distribution expenses (20% fixed) 7
Administration expenses (Rs.50,000)
Total
5
155
Prepare a budget for the production of a) 8000 units and b) 6000 units.
Assume that administration expenses are rigid for all levels of production.

40. 6. Prepare a cash budget for the 3 months ending 30th June 2018 from the information given
below. a) Month Sales Materials Wages Overheads
Feb 14000 9600 3000 1700
march 15000 9000 3000 1900
april 16000 9200 3200 2000
May 17000 10000 3600 2200
june 18000 10400 4000 2300
b) Credit terms are: sales and debtors – 10% sales are on cash, 50% of the credit sales are collected next month and
the balance in the following month
Creditors- Materials 2 months
Wages ¼ month
Overheads ½ month
c) Cash and bank balance on 1st April, 2018 is expected to be Rs.6000.
d) Other relevant information are:
•Plant and machinery will be installed in feb 2018 at a cost of Rs.96000. the monthly instalment of Rs.2000 is
payable from April onwards.
•Dividend at 5% on Preference Share Capital of Rs.200000 will be paid on 1st June.
•Advance to be received for sale of vehicles Rs.9000 in June
•Dividends from investments amounting to Rs.1000 are expected to be received in June
•Income tax (advance) to be paid in June is Rs.2000

41. 7. The following information related to XYZ Ltd.
Month Wages incurred Material
purchased
Overhead sales
Feb 6 20 10 30
March 8 30 12 40
April 10 25 16 60
May 9 35 14 50
June 12 30 18 70
July 10 25 16 60
August 9 25 14 50
September 9 30 14 50

42. i. It is expected that cash balance on 31st may will be Rs.22000
ii. The wages maybe assumed to be paid within the month they are incurred
iii. It is the company’s policy to pay creditors for materials 3 months after the receipt.
iv. Debtors are expected to pay 2 months after delivery
v. Included in the overhead figure is Rs.2000 per month which represents depreciation on 2 cars and one delivery van.
vi. There is a one month delay in paying the overhead expenses.
vii. 10% of the monthly sales are for cash and 90% are sold in credit.
viii.A commission of 5% is paid to agent on all the sales on credit but this is not paid until the month following the sales to which it relates;
this expense is not included in the overhead figure shown.
ix. It is intended to repay a loan of Rs.25000 on 30th June.
x. Delivery is expected in July of a new machine costing Rs.45000 of which Rs.15000 will be paid on delivery and Rs.15000 in each of
the following months.
xi. Assume that overdraft facilities are available, if required
• You are required to prepare cash budget for the three months of June July and August.

43. Purchase Budget
1. From the following figures, prepare Raw Materials Purchase Budget for January
2017:
Materials Units
A B C
Estimated Opening Stock 16,000 6,000 24,000
Estimated Closing Stock 20,000 8,000 28,000
Estimated Consumption 1,20,000 44,000 1,32,000
Standard Price per unit Rs.1 Rs.1.50 Rs.2

44. 1. Sales manager of ABC Ltd reports that next year he expects to sell 50,000 units of a
certain 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 kg of product A and 3 kg of product B. The estimated
opening balances at the commencement of the next year are finished products-10,000
units, A-12,000 kg and B-15,000 kg. The desirable closing balances at the end of the
next year are: finished products-14,000 units, A-13,000 kg and B-16,000 kg.
Prepare Materials purchases budget for the next year.

45. 3. A company manufactures two products A and B by making use of two
types of materials X and Y.
Product A requires 10 units of X and 3 units of Y. Product B requires 5 units
of X and 2 units of Y.
The price of X is Rs.2 per unit and that of Y is Rs.3 per unit. The sales
manager has estimated the sales of product A to be 5,000 units and that of
product B 10,000 units.
The estimated opening stock of material X for the budgeted period is 2,500
units and that of Y is 3,000 units.
The desired closing stock of material X is 5,000 units and that if Y is 4,000
units.
Prepare materials purchase budget.