The document discusses the importance and purpose of budgetary control for organizations. It explains that a budget is a financial planning tool that estimates income and expenses over a set period of time, usually a year. Budgets help organizations plan effectively, monitor spending, ensure transparency and accountability, and identify funding gaps. The document provides guidance on key aspects of developing a budget, including basing it on organizational goals and past financial data, categorizing income and expenses, addressing potential surpluses or deficits, and adjusting the budget as needed over the course of the year.

1. 1
SYDENHAM COLLEGE OF COMMERCE &
ECONOMICS
2015-16
Program under faculty of commerce
MASTER OF COMMERCE (EVENING)
Project Title:
BUDGETARY CONTROL
IN PARTIAL FULLFILMENT OF THE REQUIRNMENT UNDER SEMESTER
BASED ON
CREDIT & GRADING SYSTEM FOR POST GRADJUATION SEMESTER – I
SUBMITTED BY:
CHINTAN CHIMANBHAI KANABAR
Roll no. 27 (Div – A)
PROJECT GUIDE:
Dr. Uttam Kattermal

2. 2
DECLARATION
I, CHINTAN CHIMANBHAI KANABARof Sydenham College of commerce & eco-
nomics ‘B’ Road, Church gate, Mumbai – 400020 currently studying in M.com –I (Even-
ing), Hereby declare that I have completed this project on BUDGETARY CONTROL
for semester –I of the academic year 2015-16. The information given under the project is
true and fair to the best of my knowledge.
Signature of Student:
.
CHINTAN CHIMANBHAI KANABAR
Roll No. 27 (DIV-A)

3. 3
CERTIFICATE
This is to certify that MR. CHINTAN CHIMANBHAI KANABARof the M.COM – I
(Evening) Semester-I has successfully completed project on BUDGETARY CONTROL
under the Guidance of Mr.Uttam Kattermal
1. Project Guide. : Uttam Kattermal
2. Internal Examiner :
3. External Examiner :
Date :
Time :

4. 4
INDEX

5. 5
AKNOWLEDGMENT
I would firstly like to thank “UNIVECITY OF MUMBAI” For giving us the liberty to select
the topic which will benefit to us in the future. I would like to thanks to the principle of Syd-
enham College of commerce & economics Dr. Annasaheb khemnar for giving me an oppor-
tunity to study in the
Esteemed college and doing the course of accounting. I would like to express my sincere grati-
tude and thanks to professor Dr. Uttam Kattermal who is my project guide , as he has
been guiding light on this project and also provided me with the best of his knowledge, advice
and encouragement which helps in the successful completion of my project.
My colleague and specially my parent who has also supported and encourages me the success
of this project to the large extant is also dedicated to them.
I would like to thanks all those who helped me but I forgotten to mention in this space
Signature of Student:
.
CHINTAN C KANABAR
Roll No. 27 (DIV-A)

6. 6
Budgetary Control
Why should organizations use budgets?
Running a business often requires owners to carefully plan and review their finances. Most
companies use some form of accounting for identifying, measuring, analyzing and reporting
their financial information. Accounting tools may include budgeting, financial statements,
forecasts and other tools for managing financial information. Business budgets for maybe one
of the most important accounting tools of company may use in their business.
Every organization survives by receiving some money from members, donors, fund-raising or
selling of services this is called income. Organizations also spend money to run its program-
mers and these are called expenses. The budget is a table which shows the actual amounts that
the organization expects its expenses and income to be for a fixed period of time, such as one
year. The budget tells you how much the organization thinks it will need to do its work, where
it hopes it will come from and how much money it still needs to find.
The budget is an essential to tool help you run a more effective organization. In the same way
that the government needs to draw up an annual budget, to make sure that all plans and pro-
grammers are properly funded, an organization needs to prepare a budget in careful detail.
Budgeting is part of planning - you start with setting your objectives, then you draw up action
plans and budgets. [See Guide on Planning]
Unless you know how much money you will need to carry out your plans, and where you ex-
pect to get that money from, you may end up halfway through the year with no money to go
any further. Preparing a budget forces you to plan your spending and your fund-raising and to
be realistic about what you can afford to do. Without a budget there can be no effective imple-
mentation.

7. 7
A budget also serves a lot of other purposes:
 It is a simple way to make financial information accessible to all people in the organiza-
tion who need to use it. Each member or staff member should know how much money is
available for what part of your work.
 It helps you to understand exactly what your work will cost and what limitations you
have so that your plans can be made more realistic.
 It clarifies where you have gaps and need to do more fund-raising. It also helps to write
fund-raising proposals based on realistic costing.
 All financial statements should be written in terms of the budget so that it is easier to be
transparent and accountable and to ensure that no money is spent on costs that you have
not budgeted for.
 It helps members or executive members or management to monitor expenditure through-
out the year and to make sure that it is in line with the budget amounts - monitoring
should happen every month or two and should be in terms of the budget categories.
 It makes reporting to members or funders much easier since the expenditure can be com-
pared to the amounts that you actually budgeted.
 A good budget can also help to avoid waste. When every amount is carefully calculated,
it is easy to see how your money is being spent and to decide whether you are making
any unnecessary expenditure.

8. 8
Important things to know about budgets
A budget should be drawn up on the basis of three main factors:
 A budget should always be based on proper plans, drawn up to make sure that you reach
your goals for that year. A budget should be the summary of all the costs and income that
you will receive that will make sure that your plans are implemented.
 The costs in the budget should be based on your financial statements of the previous year
and the budget items should compare the expenditure of the previous year to this year.
This will show that your budget is based on fact and experience.
 The budget should be realistic and should also show what income you expect and what
income you would still need to raise.
 Every budget should contain a number of categories. The two main categories are "Ex-
pected Expenditure" and "Expected Income".
Under the Expected Expenditure the categories could be:
Capital costs
Things that you have to buy like computers, cars etc.
Running costs
Expenditure that will help your organization to run an office and administration to do its work:
items like rent, electricity, telephone, hiring of equipment.
Staff costs
Salaries, staff benefits, staff training etc.
Project costs or operational costs
Costs that are linked to the specific projects or campaigns that you plan to run that year. This
would include things like buying materials, printing costs, transport costs, workshop costs, ca-
tering, media production, venues, sound systems etc.

9. 9
Under the Expected Income of the organization you should include
Categories like:
Donor funds
List each funder and the amount you expect from them,
Membership fees
If your members pay fees list the amount you expect to get this year,
Donations
List the amount you expect to get from small public donations,
Fund-raising events
If you plan to organize events, list what profit you expect to make and
Sales
If you sell your services or any products.
The budget should clearly show whether there is a difference between your Expected Expendi-
ture and your Expected Income. If you will get more money than you will spend, this is called
an expected surplus; if you will get less money it is called a deficit. When your budget shows a
deficit you will obviously need to either cut the budget or do some serious fund-raising to
make up the amount.
It is very important to write a budget in such a way that all amounts are justified and explained.
For example if you want to spend R100 000 on salaries, you should explain how many people
will be employed for how much money. For example:
SALARIES 100,000
1 coordinator @ R60 000 per year
1 administrator @ R40 000 per year.

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 The budget can be drawn up by anyone in the organization who is clear about the plans of
the organization as well as the possible income and expenditure. It is usually done by the
treasurer, the co-ordinator or director or by a budget or finance committee. Whoever pre-
pares the budget must work together with others, especially people in charge of the pro-
grammers of the organization and people responsible for bookkeeping. Once the budget
has been prepared, it needs to be checked and discussed by other members of your organi-
zation such as executive or staff who will be using the money.
 Budgets are usually drawn up for one year but you can also draw it up for a few years at a
time, or have a budget that is just for a specific project that may only last a month or two.
A budget should be used as the basis for any audits that are done of your organization.
Audits are usually done by independent accountants who go through all your financial
records to check that the money was spent for what it was intended. A budget is used as
the main tool for judging this.
 The budget is not simply a document for funders and executives to see whether you have
used the money properly. It should be a living tool for financial management. The budget
is never set in stone. Circumstances and the needs of your organization may change during
the year and a budget can also be changed if necessary. The overall budget of your organi-
zation is an internal one, and can be amended.
 A budget for a specific project that you send to a funder is not so easy to change, since
you have promised to do the work that is reflected in the budget and you only have a set
amount of money available to do this work. If you want to change a budget that has been
approved by a funder, you should only do that in consultation with, and with the permis-
sion of the funder.
 Sometimes it is necessary to have two different budgets for your organization. One as the
ideal budget that you would like to have and a second one as a minimum budget of the
money that is absolutely necessary for your organization to survive. Often when your
draw up the ideal budget, you are not yet sure that your will get all the money your need
and a minimum budget will help you to decide which costs can be cut, if you don't manage
to raise the necessary funds.

11. 11
Budgetary control
Definition:
“Budget is a financial & / quantitative statements, prepared & approved prior to a defined peri-
od of time of the policy to be pursued during that period for the purpose of attaining a given
objective. They may include income, expenditure & the employment of capital”.
Budgetary Control
“It is the process of utilizing the various budgets like production budget, sales budget, etc,. for
the purpose of internal control”. This is done with intention of minimizing the wastage & max-
imizing the efficiency of various departments.
According to ICMA terminology budgetary control as “the establishment of budgets relating
the responsibilities of executives to the requirements of the policy & the continuous compari-
son of actual with the budgeted results either to secure by individual actions the objective of
that policy to provide basis for its revision”.
Steps involved in the Budgetary Control Techniques:
a) Fise the objectives clearly.
b) Formulating the necessary plans to ensure that the desired objectives are achieved.
c) Translating the plans into budgets.
d) Relating the responsibilities of executives to the budgets.
e) Continuous comparison of the actual results with that of the budget & the ascertainment of
deviations (Positive/negative).
f) Investigating into the deviations & establishing the causes.
g) Presentation of information to the management relating the variances to individual respon-
sibilities.
h) Corrective action of the management to present recurrence of variance

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TYPES OF BUDGET
LONG -TERM BUDGETS:
The long-term budgets prepared for a long period of five to ten years. They are concerned with
planning the operations of a firm over a considerably long period of time. The financial “con-
troller” exclusively for the top management usually prepares long-term budgets. These budgets
are very useful in terms of physical units (i.e. quantities) or percentages, since accrued values
may be difficult to forecast over such long-period. Capital expenditure, research and develop-
ment budgets, etc, are examples of long-term budgets.
SHORT TERM BUDGETS:
Short-term budgets are budgets prepared for a short period of one to two year. They are pre-
pared for those activities the trend in which cannot be for seen easily over long periods. These
budgets are very useful in case of consumer goods industries such as sugar, cotton, textiles, etc.
they are generally prepared in terms of physical units (i.e... quantities) as well as monetary
units (i.e. values) materials budget. Each budget etc, are example of short-term budget. They
are useful to lower level of management for control purpose.
CURRENT BUDGETS:
Current budget is a budget, which is established for use over a short period of time and is relat-
ed to current conditions. Thus current budgets are essentially short term budgets adjusted to
current (i.e., present or prevailing) condition or circumstances. They are prepared for a very
short period. Say, a quarter or a month. They related to current activities of the budgets.
INTERIM BUDGETS:
Interim budgets are budgets, which are prepared in between two budget periods. These budgets
may get integrated with the budget of the following period.

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Types of Budget
Basedon Functions Basedon Rigidity
a) Production Budget
b) Production Cost Budget
c) Materials Budget
d) Materials Cost Budget
e) Cash Budget
f) Capital Budget
g) Sales Budget
h) Selling Cost Budget
i) Plant Utilisation Budget
j) Labour Budget
k) Labour Cost Budget
l) Research & Development
Budget
m) Administration Cost Budget
a) Fixed Budget
b) Flexible Budget

14. 14
MasterBudget:- It is a budget which summarizes all the functional budgets.
According to ICMA, “A master budget is the summary budget incorporating its components
functional budgets & which is finally approved, adapted & employed”.
According to ICMA, “A budget which is designed to remain unchanged irrespective of the
volume of output/turnover attained”. – Fixed Budget.
According to ICMA, “A budget which, by recognising the difference in behaviour between
fixed & variable cost in relation to fluctuations in output/turnover, is designed to change ap-
propriately with such fluctuations”.

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BUDGETARY CONTROL
Meaning of Budget:
According to Brown and Howard, “A budget is a pre-determined statement of management
policy during a given period which provides a standard for comparison with the results actually
achieved.”
Budgeting:
The act of preparing budgets is called budgeting. In the words of Batty, “the entire process of
preparing the budgets is known as budgeting.
Meaning of Budgetary Control:
Budgetary control is a system of controlling costs through preparation of budgets. Budgeting is
thus only a part of budgetary control. According to CIMA, “Budgetary control is the estab-
lishment of budgets relating the responsibilities of executives of a policy & the continuous
comparison of the actual with the budgeted results, either to secure by individual actions the
objective of that policy to provide basis for its revision”.
Forecast & Budget:
It is important to note carefully the distinction between a forecast and a budget.
A forecast is a prediction of what may happen as a result of a given set of circumstances. It is
an assessment of probable future events. A budget, on other hand, is a planned exercise to
achieve a target. It is based on the pros and Cons of a forecast. Forecasting thus precedes the
preparation of a budget.

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Thus the main point of distinction between the two is that forecast is concerned with ‘probable
events’ while budget relates to ‘planned events’. Furthermore, forecast can be made by any-
body, whereas a budget, being an enterprise objective, can be set only by the authorized man-
agement.
Objectives of Budgetary Control
The following are the objectives of a budgetary control system:
Planning:
A budget provides a detailed plan of action for a business over definite period of time. De-
tailed plans relating to production, sales, raw material requirements, labour needs, advertising
and sales promotion performance, research and development activities, capital additions etc.,
are drawn up. By planning many problems are anticipated long before they arise and solutions
can be sought through careful study. Thus most business emergencies can be avoided by plan-
ning. In brief, budgeting forces the management to think ahead, to anticipate and prepare for
the anticipated conditions.
Co-ordination:
Budgeting aids managers in co-ordinating their efforts so that objectives of the organization as
a whole harmonise with the objectives of its divisions. Effective planning and organization
contributes a lot in achieving coordination. There should be coordination in the budgets of var-
ious departments. For example, the budget of sales should be in coordination with the budget
of production. Similarly, production budget should be prepared in co-ordination with the pur-
chase budget, and so on.

17. 17
Communication:
A budget is a communication device. The approved budget copies are distributed to all man-
agement personnel which provides not only adequate understanding and knowledge of the
Programmers and policies to be followed but also gives knowledge about the restrictions to be
adhered to. It is not the budget itself that facilitates communication, but the vital information is
communicated in the act of preparing budgets and participation of all responsible individuals in
this act.
Motivation:
A budget is a useful device for motivating managers to perform in line with the company
objectives. If individuals have actively participated in the preparation of budgets, it act as a
strong motivating force to achieve the targets.
Control:
Control is necessary to ensure that plans and objectives as laid down in the budgets are being
achieved. Control, as applied to budgeting, is a systematized effort to keep the management
informed of whether planned performance is being achieved or not. For this purpose, a
comparison is made between plans and actual performance. The difference between the two is
reported to the management for taking corrective action.
Performance Evaluation:
A budget provides 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 achieving the budget targets or promotion of a
manager may be linked to his budget achievement record.

18. 18
Advantages of Budgetary Control:
 Budgetary control provides the following advantages:
 Budgeting compels managers to think ahead i.e. to anticipate and prepare for changing
conditions.
 Budgeting co-ordinates the activities of various departments and functions of the
business.
 It increase production efficiency, eliminates waste and controls the costs.
 It pinpoints efficiency or lack of it.
 Budgetary control aims at maximization of profits through careful planning and control.
 It provides a yardstick against which actual results can be compared.
 It shows management where action is needed to remedy a situation.
 It ensures that working capital is available for the efficient operation of the business.
 It directs capital expenditure in the most profitable direction.
 It instills into all levels of management a timely, careful and adequate consideration of
all factors before reaching important decisions.
 A budget motivates executives to attain the given goals.
 Budgetary also aids in obtaining bank credit.
 Budgeting also aids in obtaining bank credit.
 A budgetary control system assists in delegation of authority and assignment of
responsibility.
 Budgeting creates cost consciousness and introduces an attitude of mind in which waste
and efficiency cannot thrive.

19. 19
Limitations of Budgetary Control
The list of advantages given above is impressive, but a budget is not a cure all for organiza-
tional ills. Budgetary control system suffers from certain limitations and those using the system
should be fully aware of them.
The budget plan is based on estimates:
Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is
not possible in forecasting and budgeting. The strength or weakness of the budgetary control
system depends to a large extent, on the accuracy with which estimates are made. Thus, while
using the system, the fact that budget is based on estimates must be kept in view.
Danger of rigidity:
A budget program must be dynamic and continuously deal with the changing business
conditions. Budgets will lose much of their usefulness if they acquire rigidity and are not
revised with the changing circumstances.
Budgeting is only a tool of management:
Budgeting cannot take the place of management but is only a tool of management. ‘The budget
should be regarded not as a master, but as a servant.’ Sometimes it is believed that introduction
of a budget program alone is sufficient to ensure its success. Execution of a budget will not
occur automatically. It is necessary that the entire organization must participate enthusiastically
in the program for the realization of the budgetary goals.
Expensive Technique:
The installation and operation of a budgetary control system is a costly affair as it requires the
employment of specialized staff and involves other expenditure which small concerns may find
difficult to incur. However, it is essential that the cost of introducing and operating a budgetary
control system should not exceed the benefits derived therefrom.

20. 20
Essentials of Effective Budgeting:
A budgetary control system can prove successful only when certain conditions and attitudes
exist, absence of which will negate to a large extent the value of a budget system in any busi-
ness. Such conditions and attitudes which are essential for effective budgeting are as follows:
Support of Top Management:
If the budget system is to be successful, it must be fully supported by every member of the
management and the impetus and direction must come from the very top management. No
control system can be effective unless the organization is convinced that the top management
considers the system to be import.
Participation by Responsible Executives:
Those entrusted with the performance of the budgets should participate in the process of setting
the budget figures. This will ensure proper implementation of budget program.
Reasonable Goals:
The budget figures should be realistic and represent reasonably attainable goals. The
responsible executives should agree that the budget goals are reasonable and attainable.
Clearly Defined Organization:
In order to derive maximum benefits from the budget system, well defined responsibility
centers should be built up within the organization. The controllable costs for each responsibil-
ity centers should be separately shown.
Continuous Budget Education:
The best way to ensure the active interest of the responsible supervisors is continuous budget
education in respect of objectives, potentials & techniques of budgeting. This may be
accomplished through written manuals, meetings etc., whereby preparation of budgets, actual
results achieved etc., may be discussed.

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Adequate Accounting System:
There is close relationship between budgeting and accounting. For the preparation of budgets,
one has to depend on the accounting department for reliable historical data which primarily
forms the basis for many estimates. The accounting system should be so designed so as to set
up accounts in terms of areas of managerial responsibility. In other words, responsibility
accounting is essential for successful budgetary control.
Constant Vigilance:
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 those
expected.
Maximum Profit:
The ultimate object of realizing the maximum profit should always be kept uppermost.
Costof the System:
The budget system should not cost more than it is worth. Since it is not practicable to calculate
exactly what a budget system is worth, it only implies a caution against adding expensive
refinements unless their value clearly justifies them.
Integration with Standard Costing System:
Where standard costing system is also used, it should be completely integrated with the budget
programmer, in respect of both budget preparation and variance analysis.

22. 22
Standard Costing VS. Budgetary Control
Standard costing and budgetary control have the common objective of cost control by
establishing pre-determined targets. The actual performances are measured and compared with
the pre-determined targets for control purposes. Both the techniques are of importance in their
respective fields and are complementary to each other.
Points of Similarity:
There are certain basic principles which are common to both standard costing and budgetary
control. These are:
1. The establishment of pre-determined targets of performance
2. The measurement of actual performance
3. The comparison of actual performance with the pre-determined targets.
4. The analysis of variances between the actual and the standard performance
5. To take corrective measures, where necessary.
Points of Difference:
In spite of so much similarity between standard costing and budgetary control, there are some
important differences between the two, which are as follows:

23. 23
Standard Costing Budgetary Cotrol
Scope
Standard costs are developed
mainly for the manufacturing
function and sometimes also
for making and administra-
tion functions
Budgets are compiled func-
tions of the business such as
sales, purchase, production,
cash, capital expenditure, re-
search & development, etc.,
Intensity
Standard costing is intensive
in application as it calls for
detailed analysis of variances
Budgetary control is exten-
sive in nature and the intensi-
ty of analysis tends to be
much less than that in stand-
ard costing.
Relation
to
accounts
In standard costing, variances
are usually revealed through
accounts
In budgetary control, vari-
ances are normally not re-
vealed through accounts and
control is exercised by statis-
tically putting budgets and
actuals side by side.
Usefulness
Standard costs represent real-
istic yardsticks and, are there-
fore, more useful for control-
ling and reducing costs.
Budgets usually represent an
upper limit on spending
without considering the ef-
fectiveness of the expenditure
in terms for output.
Basis
Standard cost are usually es-
tablished after considering
such vital matters as produc-
tion capacity, methods em-
ployed and other factors
which require attention when
determining an acceptable
level of efficiency.
Budgets may be based on
previous year’s costs without
any attention being paid to
efficiency.

24. 24
Summarized below are the Income and Expenditure forecast for the month March to August
2011.
Month
Credit
Sales
Rs.
Credit
Purchases
Rs.
Wages
Rs.
Mfg.
Expenses
Rs.
Office
Expenses
Rs.
Selling
Expenses
Rs.March 60,000 36,000 9,000 4,000 2,000 4,000
April 62,000 38,000 8,000 3,000 1,500 5,000
May 64,000 33,000 10,000 4,500 2,500 4,500
June 58,000 35,000 8,500 3,500 2,000 3,500
July 56,000 39,000 9,000 4,000 1,000 4,500
August 60,000 34,000 8,000 3,000 1,500 4,500
You are given following further information
i. Plant Costing Rs. 16,000 due for delivery in June. 10% on delivery and balance after
three months.
ii. Advance Tax Rs. 8,000 is payable in March and June.
iii. Period of credit allowed, Suppliers 2 months and Customers 1 month.
iv. Lag in payment of manufacturing expenses half month.
v. Lag in payment of all others expenses one month.
vi. Cash balance on 1st May 2008 is Rs. 8,000
Prepare Cash Budget for three months starting from 1st May 2010

25. 25
Solution:
Cash Budget
May-August 2010
Particulars May June July
I Opening Cash Balance 8,000 15,750 12,750
II Expected Cash Receipts:
A
Collections from Debtors
[Credit 1 month]
62,000 64,000 58,000
III Total Expected Receipts 62,000 64,000 58,000
IV Total Cash Available [I+III] 70,000 79,750 70,750
Expected Payment
A Purchases [2 months credit] 36,000 38,000 33,000
Manufacturing Expenses
[Half month credit]
3,750 4,000 3,750
C Wages [Half month credit] 8,000 10,000 8,500
D
Office Expenses
[one month credit] 1,500 2,500 2,000
E
Selling Expenses
[one month credit] 5,000 4,500 3,500
F Purchase of Machine 1,600
G Advance Tax 8,000
VI Total Payment
[A+B+C+D+E+F+G] 54,250 67,000 52,350
VII Closing Balance 15,750 12,750 18,400
There is delay of half a month for payment of Manufacturing Expenses and wages and hence
current month’s 50% and previous month’s 50% are paid in the current month.
A manufacturing company is currently working at 50% capacity and produces 10,000 units at a
cost of Rs. 180 per unit as per the following details.

26. 26
Materials: Rs.100
Labor: Rs.30
Factory Overheads: Rs.30 [ 40% fixed ]
Administrative Overheads: Rs.20 [50% fixed]
Total Cost Per Unit: Rs.180
The selling price per unit at present is Rs.200. At 60% working, material cost per unit increases
by 2% and selling price per unit falls by 2%. At 80% working, material cost per unit increases
by 5% and selling price per unit falls by 5%.
Prepare a Flexible Budget to show the profits/ losses at 50%, 60% and 80% capacity
utilization.
Solution:
Flexible Budget
Particulars
Capacity
Utilization
Capacity
Utilization
Capacity
Utilization
50% 60% 80%
A Number of Units 10,000 12,000 16,000
B Selling Price Per Unit Rs.200 Rs.196 Rs.190
C Variable Cost Per Unit
• Direct Material Rs.100 Rs.102 Rs.105
• Direct Labor Rs.30 Rs.30 Rs.30
• Factory Overheads[60%] Rs.18 Rs.18 Rs.18
• Administrative Rs.10 Rs.10 Rs.10
Overheads[50%]
D Total Variable Cost Per Unit Rs.158 Rs.160 Rs.163
E Total Variable Cost [A X D] Rs.15,80,000 Rs.19,20,000 Rs.26,08,000
F Fixed Costs Rs.2,20,000 Rs.2,20,000 Rs.2,20,000
[Rs.12 + Rs.10 = Rs.22 per unit at exist-
ing level 10,000 units.]
G Total Cost[E + F] Rs.18,00,000 Rs.21,40,000 Rs.28,28,000
H Sales Revenue [A X V] Rs.20,00,000 Rs.23,52,000 Rs.30,40,000
I Profits/ Losses [H - G ] Rs.2,00,000 Rs.2,12,000 Rs.2,12,000

27. 27
Following is the sales budget for the first six months of the year 2009 in respect of PQR Ltd.:
Month : Jan Feb March April May June
Sales (units) : 10,000 12,000 14,000 15,000 15,000 16,000
Finished goods inventory at the end of each month is expected to be 20% of budgeted sales
quantity for the following month. Finished goods inventory was 2,700 units on January 1,
2009. There would be no work-in-progress at the end of any month.
Each unit of finished product requires two types of materials as detailed below:
Material X: 4 kgs @ Rs. 10/kg
Material Y: 6 kgs @ Rs.15/kg
Material on hand on January 1, 2009 was 19,000 kgs of material X and 29,000 kgs of material
Y. Monthly closing stock of material is budgeted to be equal to half of the requirements of next
month’s production.
Budgeted direct labour hour per unit of finished product is 4 hour.
Budgeted direct labour cost for the first quarter of the year 2009 is Rs. 10,89,000.
Actual data for the quarter one, ended on March 31, 2009 is as under:
Actual production quantity: 40,000
units Direct material cost
(Purchase cost based on materials actually issued to production)
Material X: 1,65,000 kgs @ Rs.10.20/kg
Material Y: 2,38,000 kgs @ Rs.15.10/kg
Actual direct labour hours worked: 32,000 hours
Actual direct labour cost: Rs.13,12,000
(a) Prepare the following budgets:
 Monthly production quantity for the quarter one.
 Monthly raw material consumption quantity budget from January, 2009 to April, 2009.
 Materials purchase quantity budget for the quarter one.

28. 28
(b) Compute the following variances:
 Material cost variance
 Material price variance
 Material usage variance
 Direct labour cost variance
 Direct labour rate variance
 Direct labour efficiency variance
Answer:
(a) (I) Production Budget for January to March 2009 (in quantity)
Jan Feb Mar April
Budgeted Sales 10,000 12,000 14,000 15,000
Add: Budgeted Closing Stock 2,400 2,800 3,000 3,000
(20% of sales of next month) 12,400 14,800 17,000 18,000
Less: Opening Stock 2,700 2,400 2,800 3,000
Budgeted Output 9,700 12,400 14,200 15,000
Total Budgeted Output for the Quarter ended March 31, 2009
(9,700 + 12,400 + 14,200) = 36,300 Units
(b) (II) Raw Material Consumption Budget(in quantity)
Month Budgeted
Output
(Units)
Material
‘X' @ 4
kg per
unit
(Kg)
Material
‘Y' @ 6
kg per
unit
(Kg)
Jan 9,700 38,800 58,200
Feb 12,400 49,600 74,400
Mar 14,200 56,800 85,200
Apr 15,000 60,000 90,000
Total 2,05,200 3,07,800
(c) (III) Raw Material Purchases Budget (In quntity)
X Y
Raw material required for produc-
tion
1,45,200 2,17,800
Add: Closing Stock of raw material 30,000 45,000
1,75,200 2,62,800
Less: Opening Stock of raw material 19,000 29,000
Material to be purchased 1,56,200 2,33,800

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Alternative Solution
Raw Material Purchases Budget (In quntity)
Jan Feb Mar Total
Raw material required for production(x) 38800 49600 56800 145200
Add: Closing stock of raw material 24800 28400 30000 83200
63600 78000 86800 228400
Less: Opening stock of raw material X 19000 24800 28400 72200
Materials to be purchased X 44600 53200 58400 156200
Jan Feb Mar Total
Raw material required for production(Y) 58200 74400 85200 217800
Add: Closing stock of raw material 37200 42600 45000 124800
95400 117000 130200 342600
Less: Opening stock of raw material Y 29000 37200 42600 108800
Materials to be purchased Y 66400 79800 87600 233800
B) Calculation of Variances :
Calculation of Material cost variance
X- 10 x 4 x 40,000 16,00,000
4
X- 10 x— x 4, 03,000
= 10
16,12,000
Y- 15 x 6 x 40,000
3,60,000 £
Y- 15 x — x 4,03,000
= 10
36,27,000
Std Price x Actual Mix x
Actual Qty
Actual Price x Actual Mix x
Actual Qty.
X- 10 x 1,65,000 =
16,50,000
X- 10.20 x
1,65,000 =
16,83,000
Y- 15 x 2,38,000 =
35,70,000
Y- 15.10 x
2,38,000
35,93,800
52,20,000 52,76,800
Direct Material Cost Variance = Direct Material Usage Variance + Direct Material Price
= 20,000 (A) + 56,800 (A)
= 76,800 (A)

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Calculation of Material price variance
Direct Material Price Variance = (c - d) X- 16,50,000 -
16,83,000 = 33,000 (A)
Y - 35,70,000 - 35,93,800 = 23,800 (A)
52,20,000 - 52,76,800 = 56,800 (A)
Direct Material Cost Variance = (a - d) X- 16,00,000 -
16,83,000 = 83,000 (A)
Y - 36,00,000 - 35,93,800 = 6,200 (F)
52,00,000 - 52,76,800 = 76,800 (A)
Calculation of Material usage variance
Direct Material Usage Variance = (a - c) X- 16,00,000 -
16,50,000 = 50,000 (A)
Y- 36,00,000 - 35,70,000 = 30,000 (F)
52,00,000 - 52,20,000 = 20,000 (A)
Calculation of Direct labour cost variance
Budgeted output for the quarter = 36,300 units
Budgeted direct labour hours = 36,300 x % hrs
= 27,225 hours
Standard or Budgeted labour rate per hour
= Budgeted direct labour hours = Rs. 10,89,000 / 27,225 hours
= Rs.4
Calculation of Direct labour rate variance
Direct Labour Rate Variance = Actual hrs. x (Std. Rate - Actual Rate)
= 32,000 x (40 - 41)
= Rs.32,000 (A)
Calculation of Direct labour efficiency variance
Direct Labour Efficiency Variance = Standard Rate x (Std. hrs - Actual hrs.)
= Rs.40 x (30,000 - 32,000)
= Rs.80,000(A).