Budgets and Budgetary Control Cost and Management Accounting

Set I CAP II

Budget: CIMA official terminology has defined the terms ‘budget’ as “Quantitative expression
of a plan for a defined period of time. It may include planned sales volumes and revenues;
resource quantities, costs and expenses; assets, liabilities and cash flows.”

Budgeting: It is a means of coordinating the combined intelligence of an entire organisation

into a plan of action based on past performance and governed by rational judgment of
factors that will influence the course of business in the future.

Budget: It is statement of an estimated performance to be achieved in given time, expressed in

currency value or quantity or both.

Functional budgets - Budgets which relate to the individual functions in an organisation are

AN
known as Functional Budgets. For example, purchase budget; sales budget; production budget;
plant-utilisation budget and cash budget.

Master budget - It is a consolidated summary of the various functional budgets. It serves as the

C
basis upon which budgeted P & L A/c and forecasted Balance Sheet are built up.

-I
Fixed budget - According to Chartered Institute of Management Accountants of England, “a fixed
budget, is a budget designed to remain unchanged irrespective of the level of activity actually
attained”.
s
nt

Flexible budget - According to Chartered Institute of Management Accountants of England, “a

flexible budget is defined as a budget which, by recognizing the difference between fixed, semi-
ra

variable and variable costs is designed to change in relation to the level of activity attained.”

Budget Manual: Effective budgetary planning relies on the provision of adequate information to
pi

the individuals involved in the planning process. Many of these information needs are contained in
the budget manual. A budget manual is a collection of documents that contains key information for
As

those involved in the planning process. Typical contents could include the following:

• An introductory explanation of the budgetary planning and control process, including a statement
of the budgetary objective and desired results.
A

• A form of organisation chart to show who is responsible for the preparation of each functional
C

budget and the way in which the budgets are interrelated.

• A timetable for the preparation of each budget. This will prevent the formation of a ‘bottleneck’
with the late preparation of one budget holding up the preparation of all others.

• Copies of all forms to be completed by those responsible for preparing budgets, with explanations
concerning their completion.

• A list of the organization’s account codes, with full explanations of how to use them.

• Information concerning key assumptions to be made by managers in their budgets, for example
the rate of inflation, key exchange rates, etc
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

Question No. 1 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.

AN
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

C
Material on hand on January 1, 2009 was 19,000 kgs of material X and 29,000 kgs of material Y.
-I
Monthly closing stock of material is budgeted to be equal to half of the requirements of next month’s
production.
s
Budgeted direct labour hour per unit of finished product is ¾ hour.
nt

Budgeted direct labour cost for the first quarter of the year 2009 is Rs.10,89,000.
ra

Actual data for the quarter one, ended on March 31, 2009 is as under:
pi

Actual production quantity : 40,000 units

As

Direct material cost

(Purchase cost based on materials actually issued to production)

Material X : 1,65,000 kgs @ Rs.10.20/kg

A

Material Y : 2,38,000 kgs @ Rs.15.10/kg

C

Actual direct labour hours worked : 32,000 hours

Actual direct labour cost : Rs.13,12,000

Required :

(a) Prepare the following budgets:

(i) Monthly production quantity for the quarter one.

(ii) Monthly raw material consumption quantity budget from January, 2009 to April,
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

2009.

Question No.2 Calculate efficiency and activity ratio from the following data:

Capacity ratio = 75%

Budgeted output = 6,000 units

Actual output = 5,000 units

Standard Time per unit = 4 hours

AN
Question No.3 AK Limited produces and sells a single product. Sales budget for calendar year 2012 by
a quarters is as under:

C
Quarters I II III IV

No. of units to be sold 18,000 22,000

-I 25,000 27,000

The year is expected to open with an inventory of 6,000 units of finished products and close with
s
inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current
quarter’s sales demand plus 30% of the following quarter demand. The budgeted selling price per unit
nt

is Rs.40. The standard cost details for one unit of the product are as follows:
ra

Variable Cost Rs.34.50 per unit

Fixed Overheads Rs.2 hours 30 minutes @ Rs.2 per hour based on a budgeted production volume of 1,
pi

10,000 direct labour hours for the year. Fixed overheads are evenly distributed throughout the year.
As

You are required to:

(i) Prepare Quarterly Production Budget for the year.

A

(ii) In which quarter of the year, company expected to achieve bread-even point.
C

Question No.4 A Light Motor Vehicle manufacturer has prepared sales budget for the next few
months,

and the following draft figures are available:

Month No. of vehicles

October 4,000

November 3,500

December 4,500
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

January 6,000

February 6,500

To manufacture a vehicle, a standard cost of Rs. 2,85,700 is incurred and sold through dealers at an
uniform selling price of Rs. 3,95,600 to customers. Dealers are paid 12.5% commission on selling
price on sale of a vehicle.

Apart from other materials four units of Part-X are required to manufacture a vehicle. It is a policy
of the company to hold stocks of Part-X at the end of the each month to cover 40% of next month’s
production. 4,800 units of Part-X are in stock as on 1st October.

AN
There are 950 nos. of completed vehicles are in stock as on 1st October and it is policy to have
stocks at the end of each month to cover 20% of the next month’s sales.

You are required to

C
(a) Prepare Production budget (in nos.) for the month of October, November, December and
January.
-I
(b) Prepare a Purchase budget for Part-X (in units) for the months of October, November and
s
December.
nt

(c) Calculate the budgeted gross profit for the quarter October to December.
ra

Question No.5 Calculate Efficiency and Capacity ratio from the following figures:

Budgeted production 80 units

pi

Actual production 60 units

As

Standard time per unit 8 hours

Actual hours worked 500

A

Question No.6 Pentax Limited has prepared its expense budget for 20,000 units in its factory for
C

the year 2013 as detailed below:

Rs. per unit

Direct Materials 50

Direct Labour 20

Variable Overhead 15

Direct Expenses 6

Selling Expenses (20% fixed) 15

Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

Factory Expenses (100% fixed) 7

Administration expenses (100% fixed) 4

Distribution expenses (85% variable) 12

Total Rs.129

Prepare an expense budget for the production of 15,000 units and 18,000 units.

Question No.7 A Light Motor Vehicle manufacturer has prepared sales budget for the next few
months, and the following draft figures are available:

AN
Month No. of vehicles

October 4,000

C
November 3,500

December

January
4,500

6,000
-I
s
February 6,500
nt

To manufacture a vehicle, a standard cost of Rs.2,85,700 is incurred and sold through dealers at an
ra

uniform selling price of Rs. 3,95,600 to customers. Dealers are paid 12.5% commission on selling
price on sale of a vehicle.
pi

Apart from other materials four units of Part-X are required to manufacture a vehicle. It is a policy
of the company to hold stocks of Part-X at the end of the each month to cover 40% of next month’s
As

production. 4,800 units of Part-X are in stock as on 1st October.

There are 950 nos. of completed vehicles are in stock as on 1st October and it is policy to have
stocks at the end of each month to cover 20% of the next month’s sales.
A

You are required to

C

(a) Prepare Production budget (in nos.) for the month of October, November, December and
January.

(b) Prepare a Purchase budget for Part-X (in units) for the months of October, November and
December.

(c) Calculate the budgeted gross profit for the quarter October to December.

Question No.8 (RTP May 2014 ICAI) Concorde Ltd. manufactures two products using two types of
materials and one grade of labour. Shown below is an extract from the company’s working papers for
the next month’s budget:
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

Product-A Product-B

Budgeted sales (in units) 2,400 3,600

Budgeted material consumption per unit (in kg):
Material-X 5 3
Material-Y 4 6
Standard labour hours allowed per unit of product 3 5
Material-X and Material-Y cost Rs. 4 and Rs. 6 per kg and labours are paid Rs.25 per hour.
Overtime premium is 50% and is payable, if a worker works for more than 40 hours a week. There are
180 direct workers.

The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct

AN
workers in actually manufacturing the products is 80%. In addition the nonproductive down-time is
budgeted at 20% of the productive hours worked.

There are four 5-days weeks in the budgeted period and it is anticipated that sales and production will

C
occur evenly throughout the whole period.

Product-A 400 units

-I
It is anticipated that stock at the beginning of the period will be:
s
Product-B 200 units
Material-X 1,000 kgs.
nt

Material-Y 500 kgs.

The anticipated closing stocks for budget period are as below:
ra

Product-A 4 days sales

Product-B 5 days sales
pi

Material-X 10 days consumption

Material-Y 6 days consumption
As

Required:
Calculate the Material Purchase Budget and the Wages Budget for the direct workers, showing the
quantities and values, for the next month.
A

Question No.9 A department of Company X attains sale of Rs. 6,00,000 at 80 per cent of its normal
C

capacity and its expenses are given below :

Administration costs: (Rs.)
Office salaries 90,000
General expenses 2 per cent of sales
Depreciation 7,500
Rates and taxes 8,750
Selling costs :
Salaries 8 per cent of sales
Travelling expenses 2 per cent of sales
Sales office expenses 1 per cent of sales
General expenses 1 per cent of sales
Distribution costs :
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

Wages 15,000
Rent 1 per cent of sales
Other expenses 4 per cent of sales
Draw up flexible administration, selling and distribution costs budget, operating at 90 per cent, 100
per cent and 110 per cent of normal capacity.

Question No.10 Action Plan Manufacturers normally produce 8,000 units of their product in a
month, in their Machine Shop. For the month of January, they had planned for a production of 10,
000 units. Owing to a sudden cancellation of a contract in the middle of January, they could only
produce 6,000 units in January.
Indirect manufacturing costs are carefully planned and monitored in the Machine Shop and the

AN
Foreman of the shop is paid a 10% of the savings as bonus when in any month the indirect
manufacturing cost incurred is less than the budgeted provision.
The Foreman has put in a claim that he should be paid a bonus of Rs. 88.50 for the month of January
. The Works Manager wonders how anyone can claim a bonus when the Company has lost a

C
sizeable contract. The relevant figures are as under:

(Rs.)
-I
Indirect manufacturing Expenses for a normal month Planned for January Actual in
costs January
(Rs.) (Rs.)
s
Salary of foreman 1,000 1,000 1,000
nt

Indirect labour 720 900 600

Indirect material 800 1,000 700
600
ra

Repairs and maintenance 600 650

Power 800 875 740
Tools consumed 320 400 300
pi

Rates and taxes 150 150 150

Depreciation 800 800 800
As

Insurance 100 100 100

5,290 5,875 4,990
Do you agree with the Works Manager? Is the Foreman entitled to any bonus for the performance in
A

January? Substantiate your answer with facts and figures.

C

Question No.11 A single product company estimated its sales for the next year quarterwise as
under :
Quarter Sales (Units)
I 30,000
II 37,500
III 41,250
IV 45,000
The opening stock of finished goods is 10,000 units and the company expects to maintain the
closing stock of finished goods at 16,250 units at the end of the year. The production pattern in each
quarter is based on 80% of the sales of the current quarter and 20% of the sales of the next quarter.
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

The opening stock of raw materials in the beginning of the year is 10,000 kg. and the closing stock
at the end of the year is required to be maintained at 5,000 kg. Each unit of finished output requires
2 kg. of raw materials.
The company proposes to purchase the entire annual requirement of raw materials in the first
three quarters in the proportion and at the prices given below :
Quarter annual requirement in quantity Purchase of raw materials % to total Price
per kg.
(Rs.) (Rs.)
I 30% 2
II 50% 3
III 20% 4

AN
The value of the opening stock of raw materials in the beginning of the year is Rs. 20,000. You are
required to present the following for the next year, quarter wise :
(i) Production budget (in units).
(ii) Raw material consumption budget (in quantity).

C
(iii) Raw material purchase budget (in quantity and value).

-I
(iv) Priced stores ledger card of the raw material using First in First out method.

Question No.12 A company is engaged in the manufacture of specialised sub-assemblies required

s
for certain electronic equipments. The company envisages that in the forthcoming month,
nt

December, 2012, the sales will take a pattern in the ratio of 3 : 4 : 2 respectively of subassemblies,
ACB, MCB and DP.
ra

The following is the schedule of components required for manufacture:

Component requirements
Sub-assembly Selling price Base board IC08 IC12 IC26
pi

ACB 520 1 8 4 2
MCB 500 1 2 10 6
As

DP 350 1 2 4 8
Purchase price (Rs.) 60 20 12 8
The direct labour time and variable overheads required for each of the sub-assemblies are:
A

Labour hours per sub-assembly

Grade A Grade B Variable overheads per sub-assembly
C

(Rs.)
ACB 8 16 36
MCB 6 12 24
DP 4 8 24
Direct wage rate per hour (Rs.) 5 4 —
The labourers work 8 hours a day for 25 days a month.
The opening stocks of sub-assemblies and components for December, 2012 are as under:
Sub-assemblies Components
ACB 800 Base Board 1,600
MCB 1,200 IC08 1,200
DP 2,800 IC12 6,000
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

IC26 4,000
Fixed overheads amount to Rs. 7,57,200 for the month and a monthly profit target of Rs. 12 lacs has
been set.
The company is eager for a reduction of closing inventories for December, 2012 of subassemblies
and components by 10% of quantity as compared to the opening stock.
Prepare the following budgets for December 2012 :
(i) Sales budget in quantity and value.
(ii) Production budget in quantity
(iii) Component usage budget in quantity.
(iv) Component purchase budget in quantity and value.
(v) Manpower budget showing the number of workers and the amount of wages payable.

AN
Question No. 13 A factory which expects to operate 7,000 hours, i.e., at 70% level of activity,
furnishes details of expenses as under:
Variable expenses Rs.1,260

C
Semi-variable expenses Rs.1,200
Fixed expenses
-I
Rs.1,800
The semi-variable expenses go up by 10% between 85% and 95% activity and by 20% above 95%
activity. Construct a flexible budget for 80, 90 and 100 per cent activities.
s
nt

Question No. 14 The financial controller of ABC Ltd has prepared the following estimates of
working results for the year ending 31st March 1999:
ra

year ending 31st March 1999

Direct Material Rs/unit 16
Direct Wages Rs/unit 40
pi

Variable overhead Rs/unit 12

Selling price Rs/unit 125
As

Fixed expenses Rs. 675,000 per annum

Sales Rs. 25,00,000 per annum
During the 1999-2000, it is expected that the material prices and variable overheads will go up by
A

10% and 5% respectively. As a result of re-engineering of business processes, the overall direct
labour efficiency will increase by 12%, but the wage rate will go up by 5%. The fixed overheads are
C

also expected to increase by Rs.125,000.

The vice president- manufacturing states that the same level of output as obtained in 1998-1999
should be maintained in 1999-2000 also and efforts should be make to maintain the same level of
profit by suitably increasing the selling price.
The vice president marketing states that the market will not absorb any increase in the selling price
. On the other hand, he proposes that publicity involving advertisement expenses as given below
will increase the quantity of sales as under:
Advertisement expenses (Rs.) 80,000 194,000 320,000 460,
000
Additional units of sales 2,000 4,000 6,000 8,000
Required:
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

Present an income statement for 1999-2000

Find the revised price and the percentage of increase in the price for 1999-2000, if the views of the
vice president manufacturing are accepted.
Evaluate the four alternative proposals put forth by the vice president Marketing. Determine the
best out put level to the budgeted and prepare an overall income statement for 1999-2000 at the
level of output.
Question No. 15 A Company manufactures two products X and Y. Product X requires 8 hours to
produce while Y requires 12 hours to produce. In April 2004, of 22 effective working days, 1200
units of X and 800 units of Y were produced. The company employs 100 workers in production
department to produce X and Y. The budgeted hours are 186,000 for the year. Calculate the capacity
, Activity and efficiency ratio and establish the relationship.

AN
Q.N.3. A company engaged in manufacturing two products X and Y. Product X uses one unit of
component P and two units of component Q. Product Y uses two units of component P and one unit
of component Q and two unit of component R. Component R which is assembled in the factory uses
one unit of component Q.

C
Component P and Q are purchased from the market. The company has prepared the following
forecast of sales and inventory for the next year.

Sales (in units)

-I
Product X
80,000
Product Y
150,000
s
At the end of the year 10,000 20,000
nt

At the beginning of the year 30,000 50,000

The production of both the products and the assembling of the component R will be spread out
ra

uniformly throughout the year. The company at present orders it’s inventory of P and Q in the
quantities equivalent to 3 months production. The company has compiled the following data
related to two components:
pi

P Q
Price per unit (Rs.) 20 8
As

Order placing cost per order (Rs.) 1,500 1,500

Carrying cost per annum 20% 20%
Required:
A

a. Prepare a budget of production and requirements of components during next year.

b. Suggest the optimal order quantity of component P and Q.
C

Question No. 16 A company manufactures two products A and B by making use of two types of
materials, viz. 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.

Standard hours allowed per product are 4 and 3 respectively. Budgeted wage rate is Rs.8 per hour.
Overtime premium is 50% and payable, if workers work for mare than 40 hours a week. There are
150 Workers.

The sales manager has estimated the sales of product A to be 5,000 units and Product B 10,000
units. The target productivity ratio (or efficiency ratio) for the productive hour worked by direct
workers in actually manufacturing the product is 80%. In addition, the non productive down time is
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

budgeted at 20% of the productive hours worked. There are twelve 5 -days weeks in the budget
period and it is anticipated that sales and production will occur evenly throughout the whole period
.

It is anticipated that the stock at the beginning of the period will be:

Product A 800 units and product B 1680 units. The target closing stocks expressed in terms of
anticipated activity during the budgeted period are product A 12 day’s sales, Product B 18 days
sales. The opening and closing stock of raw material of X and Y will be maintained according to
requirement for product A and B.

You are required to prepare the following for the next period:

AN
1. Material usage and Material Purchase Budget in terms of quantities and values.
2. Production Budget.
3. Wages Budget for the Direct workers.

C
-I
Question No. 17 ICAI May 2015 X Y Z Limited is drawing a production plan for its two
products - Product 'xml' and 'Product 'yml' for the year 2015-16. The company's policy is to
maintain closing stock of finished goods at 25% of the anticipated volume of sales of the succeeding
s
month.
nt

The following are the estimated data for the two products:
ra

xml yml
pi

Budgeted Production (in units) 2,00,000 1,50,000

As

Direct Material (per unit) 220 280

Direct Labour (per unit) 130 120

Direct Manufacturing Expenses 4,00,000 5,00,000

A
C

The estimated units to be sold in the first four months of the year 2015-16 are as under:

April May June July

xmI 8,000 10,000 12,000 16,000

yml 6,000 8,000 9,000 14,000

Prepare:

(i) Production Budget (Month wise)

(ii) Production cost Budget (for first quarter of the year)

Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

Question No. 18 ICAI May 2015 A company manufactures one main product (M1) and two by-
products B1and B2. For the month of January 2015, following details are available:
Total cost upto separation point Rs. 2,12,400.
M1 B1 B2
Cost after separation - 35,000 24,000
No. of Units produced 4,000 1,800 3,000
Selling Price per unit 100 40 30
Estimated net profit as percentage to
Sales Value - 20% 30%
Estimated selling expenses as 20% 15% 15%
percentage to Sales Value

AN
There are no opening or closing inventories.
Prepare statement showing:
(i) Allocation of Joint Cost; and
(ii) Product-wise and overall profitability of the company for January, 2015. (8 Marks)

C
Ans: (joint cost M1: 175100 B1: 11,800 B2: 25,500)

-I
Question No.19 The cost accountant of manufacturing company provides you the following details for
year 2012 :
s
(Rs.) (Rs.)
nt

Direct materials 1,75,000 Other variable costs 80,000

Direct Wages 1,00,000 Other fixed costs 80,000
ra

Fixed factory overheads 1,00,000 Profit 1,15,000

Variable factory
Overheads 1,00,000 Sales 7,50,000
pi

During the year, the company manufactured two products A and B and the output and costs were :
B
As

A
Output (units) 2,00,000 1,00,000
Selling price per unit Rs.2.00 Rs. 3.50
Direct materials per unit Rs. 0.50 Rs.0.75
A

Direct wages per unit Rs. 0.25 Rs. 0.50

Variable factory overhead are absorbed as a percentage of direct wages. Other variable costs have
C

been computed as : Product A Rs.0.25 per unit; and B Rs.0.30 per unit.
During 2013, it is expected that the demand for product A will fall by 25 % and for B by 50%. It is
decided to manufacture a further product C, the cost for which are estimated as follows :
Product C
Output (units) 2,00,000
Selling price per unit Rs. 1.75
Direct materials per unit Rs. 0.40
Direct wages per unit Rs. 0.25
It is anticipated that the other variable costs per unit will be the same as for product A. Prepare a
budget to present to the management, showing the current position and the position for 2013.
Comment on the comparative results
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

(Ans: Profit Increases by Rs.10,000 by introducing C )

Zero base Budgeting: A budget which is prepared as a fresh without any reference of past years
data is known as zero base budgets. The technique of ZBB suggests to examine a programme or
function or responsibility from “scratch”. The evaluator proceeds on the assumption that nothing is
to be allowed simply since it was being done previously. It thus implies writing in a clean slate. In
real terms the zero based budgeting is simply an extension of the cost benefit analysis method to
the areas of corporate planning and budgeting.
Characteristics:
Deals practically with all elements of budget proposal
Critical evaluation of all the ongoing activities is also done afresh together with new proposals

AN
It provides managers a combination of choices for arranging proposals in order of preferences
according to the criticality to the organization.
Advantage:
Rank activities in order of preference for the allocation of scarce resources

C
Ensures that various functions carried out by the organizations are critical for the achievement of

-I
it’s objective and are being performed in the best possible ways.
The areas of wasteful expenditure are easily identified and eliminated.
Departmental budget are closely linked with corporate objective.
s
The chances of arbitrary cuts and enhancement of budget in various activities are avoided.
nt

Limitations:
Various operational problems in implementation. It requires whole hearted support from top
ra

management.
Time consuming as well as costly. It needs properly trained managerial personnel to do the
required job.
pi

Advantages of Budgetary Control System:

As

1. Efficiency: The use of budgetary control system enables the management of a business concern to
conduct its business activities in the efficient manner.
2. Control on expenditure: It is a powerful instrument used by business houses for the control of
A

their expenditure. It in fact provides a yardstick for measuring and evaluating the performance of
individuals and their departments.
C

3. Finding deviations: It reveals the deviations to management, from the budgeted figures after
making a comparison with actual figures.
4. Effective utilisation of resources: Effective utilisation of various resources like—men, material,
machinery and money—is made possible, as the production is planned after taking them into
account.
5. Revision of plans: It helps in the review of current trends and framing of future policies.
6. Implementation of It creates suitable conditions for the implementation of Standard Costing
system standard costing system in a business organisation.
7. Cost Consciousness: Budgets are studied by outside fund providers also such as banking and
financial institutions, realising that management encourages cost consciousness and maximum
utilisation of available resources.
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

8. Credit Rating: Management which have developed a well ordered budget plans and which
operate accordingly, receive greater favour from credit agencies.
Limitations of Budgetary Control System:
1. Based on Estimates: Budgets are based on series of estimates which are based on the conditions
prevailed or expected at the time budget is established. It requires revision in plan if conditions
change.
2. Time factor: Budgets cannot be executed automatically. Some preliminary steps are required to
be accomplished before budgets are implemented. It requires proper attention and time of
management. Management must not expect too much during the development period.
3. Co-operation Required: Staff co-operation is usually not available during budgetary control
exercise. In a decentralised organisation each unit has its own objective and these units enjoy some

AN
degree of discretion. In this type of organisation structure coordination among different units are
required. The success of the budgetary control depends upon willing co-operation and teamwork,
4. Expensive: Its implementation is quite expensive. For successful implementation of the
budgetary control proper organization structure with responsibility is prerequisite. Budgeting

C
process start from the collection of requirements to budget and performance analysis. It consumes

-I
valuable resources for these purpose, hence, it is an expensive process.
5. Not a substitute for management: Budget is only a managerial tool and must be applied correctly
for management to get benefited. Budgets are not a substitute for management.
s
6. Rigid document: Budgets are considered as rigid document. But in reality, an organisation is
nt

exposed to various uncertain internal and external factors. Budget should be flexible enough to
incorporate ongoing developments in the internal and external factors affecting the very purpose of
ra

the budget.
pi

Short Notes
As

State the considerations on which capital expenditure budget is prepared.

Answer
A

The preparation of Capital Expenditure Budget is based on the following considerations:

C

1. Overhead on production facilities of certain departments as indicated by the plant utilisation

budget.

2. Future development plans to increase output by expansion of plant facilities.

3. Replacement requests from the concerned departments

4. Factors like sales potential to absorb the increased output, possibility of price reductions,
increased costs of advertising and sales promotion to absorb increased output, etc.

Describe the steps involved in the budgetary control technique.

Answer
Budgets and Budgetary Control Cost and Management Accounting
Set I CAP II

There are certain steps involved in the budgetary control technique. They are as follows:

(i) Definition of objectives: A budget being a plan for the achievement of certain operational
objectives, it is desirable that the same are defined precisely. The objectives should be written out;
the areas of control demarcated; and items of revenue and expenditure to be covered by the budget
stated.

(ii) Location of the key (or budget) factor: There is usually one factor (sometimes there may be
more than one) which sets a limit to the total activity. Such a factor is known as key factor. For
proper budgeting, it must be located and estimated properly.

(iii) Appointment of controller: Formulation of a budget usually required whole time services of a

AN
senior executive known as budget controller; 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.

C
(iv) Budget Manual: Effective budgetary planning relies on the provision of adequate information
which are contained in the budget manual. A budget manual is a collection of documents that
-I
contains key information for those involved in the planning process.

(v) Budget period: The period covered by a budget is known as budget period. The Budget
s
Committee determines the length of the budget period suitable for the business. It may be months
nt

or quarters or such periods as coincide with period of trading activity.

ra

(vi) Standard of activity or output: For preparing budgets for the future, past statistics cannot be
completely relied upon, for the past usually represents a combination of good and bad factors.
Therefore, though results of the past should be studied but these should only be applied when there
pi

is a likelihood of similar conditions repeating in the future.

As
A
C