What is Budget?

Budget is a plan/Financial Plan / Estimation of various operations/activities

( Production, sales, purchase) for future which is expressed in terms of quantity
form

What is Budgeting?

Budgeting means process of preparing Budgets

What is Budgetary control?

Budgetary control means process of preparing Budgets for various activities

( Production, sales, purchase)and comparing the budgeted figures for arriving
at deviation if any which are to be eliminated in future

Simply we should compare what we planned and what we achieved if any

difference(deviation), corrective measures are to be taken

What are the Types of budgets?

Types of Budget

Based on period

1 short term budget

2.Long term budget

3.Current budget

Based on Functions/functional

1 Functional

2.Master

Based on Flexibility

1 Flexible budget

2 Fixed Budget
What is Production Budget ?

Production Budget is a short term Budget that Estimates Numbers of units are
to be produced during the Budgeted periods, Production Budget takes into
account three factors

1) Estimated Sales based on which production budget is prepared

2) Desired closing stock it means manufacturing company has to keep stock
as Desired closing stock because some amount of stock to be kept as
closing stock for precautionary purpose
3) Opening stock it means whatever stock already available in
godown/warehouse these stocks are to be deducted

What is Master Budget?

Master Budget is a Budget which is combines all functional budget . it is

prepared for the entire organisation

What is Fixed Budget?

It is a Budget designed to remain constant irrespective of the level of activity
attained. The Fixed Budget is designed to change according to the level of
activity.
What is Cash Budget?
Cash budget is an important budget. It estimates the amount of cash receipts and
payments,and closing cash balance available during a specific period

What is zero Based Budgeting?

A budgeting practice that begins each year budget from scratch

Zero base budgeting?

Meaning: “Zero base budgeting” was originally developed by peter A.

Pyhrr at Texas Instruments. Peter A. pyhrr has defined ZBB as “an
operating, planning and budgeting process which requires each manager
to justify his entire budget.

Advantages of zero base budgeting:

 Optimum use of financial resources

 Weeding out of wastage
  Participation by all concerned
 Flexibility in budget
 Realistic targets

Zero base budgeting [ZBB] is one of the main techniques for budgeting. It’s
one of the renowned managerial tool.

 It gives accurate budget ; but takes time and energy much.

 Zero base budget is the best route to dynamic organization that is
proactive in taking on new challenges.
 It consider the current year as a new year for preparation of the
budget but the yester year is not to be considered.
 It is more decision oriented. It is towards the achievement of
objectives.
 It operates in both horizontal and vertical direction.
 Its decision package is totally based on the cost benefit analysis.
 It’s stages is to prioritize the activities.
 The zero base budgeting [ZBB]paves way for optimum utilization of
resources available.
 Production Budget : Format (Example)

Production budget for Hundai car company

PRODUCT /BRAND NAME

Particulars Santro i10 i20

Estimated sales XXX XXX XXX
Add: Desired closing stock XXX XXX XXX
XXX XXX XXX
Less
Opening stock XXX XXX XXX
Number of cars are to be XXX XXX XXX
Manufactured

Problem.1 From the following particulars , prepare production budget for 3

month ending 30th June

Months Estimated sales Rs

April 140000
May 160000
June 130000
July 120000

It is the policy of the company to maintain 50% of the month sales as

opening stock
Solutions
Particulars April May June
Estimated sales 140000 160000 130000
Add: Desired closing stock 80000 65000 60000
220000 225000 190000
Less
Opening stock 70000 80000 65000
Number of cars are to be 150000 145000 125000
Manufactured
 Note: Closing stock is not given, opening stock of current month was a
closing stock of previous month this logic can be used when opening
stock/ closing stock are not available, suppose opening stock is not
available, previous month closing stock will be a opening stock of
current month

Problem.2

Lakshmanan Ltd. Plans to sell 1,10,000 units of a certain product line in

the first fiscal quarter. 1,20,000 units in the second quarter, 1,30,000 units
in the third quarter, 1,50,000 units in the fourth quarter and 1,40,000 units
in the fifth quarter. At the beginning of the first quarter of the current
year, there are 14,000 units of the product in stock. At the end of each
quarter, the company plans to have an inventory equal to one-fifth of the
sales for the next fiscal quarter. How many units must be manufactured in
each quarter of the current year.
Lakshmanan Ltd.
Production Budget for the year ending…….
Particulars First Second Third Fourth Total
quarter quarter quarter quarter units
units units units units
Sales 1,10,000 1,20,000 1,30,000 1,50,000 5,10,000
(planned)
Add: Closing 24,000 26,000 30,000 28,000 1,08,000
stock
( desired at
1/5th of next
quarter’s
sales)
1,34,000 1,46,000 1,60,000 1,78,000 6,18,000
Less: 14,000 24,000 26,000 30,000 94,000
Opening
stock
Total units 1,20,000 1,22,000 1,34,000 1,48,000 5,24,000
to be
produced

What is Flexible Budget?

Flexible budget is a budget which is prepared for different levels of
production capacity

Flexible budget format or Example

Cost classification

a)Variable cost

Direct Materials

Direct Labour

Direct expenses

Total Variable expenses

b)Semi-Variable Cost

Partly Fixed & partly Variable

Variable (50%)

Fixed (50%)

C Fixed Expenses

Fully Fixed Expenses

Very important Cost concept

Variable cost Nature

Per unit Fixed
Total Variable

Fixed Cost
Per unit Variable
Total Fixed
Therefore

Variable cost is variable in total

Fixed cost is Fixed in Total

Problem 1.Prepare a flexible Budget For production at 80% and 100% capacity
on the basis of the following Information

Production at 50% capacity 5000 units

Raw material Rs. 80 per unit
Direct labour Rs. 50 per unit
Direct Expenses Rs. 15 per unit
Factory Expenses Rs. 50,000( 50% Fixed)
Administrative Expenses Rs. 60,000( 60% variable)

Problem 2.Prepare a flexible Budget at 80% produces and sells 40000 units
Given below are the expenses per unit

Particulars per unit

Direct material 15
Direct labour 10
Factory Overheads(30%Fixed) 5
Office O/H (60%variable 3
Selling & Distribution 2
overheads(50%fixed )
Selling price 45

Prepare a budget at 60% capacity and 90% Capacity and show cost per unit and
profit per unit at each level

Ans. Total coat at 60% capacity 1087000,Total coat at 80% capacity

14,00,000,Total coat at 90% capacity 15,56,500

Problem.3 for the production of 10,000 electrical goods the following are the
budgeted Expenses

Particulars per unit

Direct material 60
Direct labour 30
 Variable overheads 25
Fixed Overheads ( Rs.150000) 15
Variable expenses ( direct ) 5
Selling Expenses (10%fixed ) 5
Admin Expenses( Rs. 50,000) 5
Distribution Expenses(20% Fixed) 5

Total cost per unit 150

Prepare a budget for the production of 6000, 8000 electrical goods

Problem.4 Draw up a flexible budget for production at 75% and 100% capacity
on the basis of the following data for a 50% activity.

Per unit
Rs.
Direct Materials 100
Direct Labour 50
Direct Expenses 10
Variable expenses (direct) 5
Administrative expenses (50% fixed) 40,000
Selling and distribution expenses (60% fixed) 50,000
Fixed cost
Depreciation 3000
Insurance 2000
Present production (50% activity) 1,000
Selling Price Per unit 300

Capacity Levels(or) production Units

50% Or 75% 100%

Particulars 1,000 units 1,500 units 2,000 units
 Per Total Per unit Total Per Total
unit Rs. Rs.P Rs. unit Rs.
Rs.P Rs.P
Variable
Expenses/ Direct
Expenses
100 100 100
Direct Materials
50 50 50
Direct Labour
10 10 10
Direct expenses
5 5 5
Variable O/H
165 165.00 165
Total Variable
expenses or
Prime cost
Semi-Variable
Cost
Administration
expenses: 20 20.00 20
Variable (50%) 20 13.33 20000 10 20000
20000
Fixed (50%)
205 198.33 195
Selling and
Distribution
expenses:
Variable (40%) 20 20.00 20
30 30,000 20.00 30,000 15 30,000
Fixed (60%)
Fixed Expenses 3000 2,00 3000 3000
Depreciation 3 1,50
2000 1,33 2000 2000
Insurance 2 1,00

260 241.66 232.50

Total Cost
Selling price Per 300 300 300
unit
Profit per unit 40 58.34 67.50
 1. Draw up a flexible budget for production at 75% and 100%
capacity on the basis of the following data for a 50% activity.
Per Unit
Rs.
Materials 100
Labour 50
Variable expenses(direct) 10
Administrative Expenses(50% fixed) 40,000
Selling and distribution expenses(60% fixed) 50,000
Present production(50% activity): 1,000
units
[Madras, B.A Corp. Nov.
1994]

Solution:
Flexible Budget
 Capacity Levels
Particulars 50% 75% 100%
1,000 units 1,500 units 2,000 units
Per unit Total Per unit Total Per unit Total
Rs. P. Rs. Rs. P. Rs. Rs. P. Rs.
Materials 100 1,00,000 100.00 1,50,000 100 2,00,000
Labour 50 50,000 50.00 75,000 50 1,00,000
Variable expenses 10 10,000 10.00 15,000 10 20,000
Prime cost 160 1,60,000 160.00 2,40,000 160 3,20,000

Administration
expenses:

Variable (50%) 20 20,000 20.00 30,000 20 40,000

Fixed (50%) 20 20,000 13.33 20,000 10 20,000
Cost of Production 200 2,00,000 193.33 2,90,000 190 3,80,000

Selling and
distribution
expenses:

Variable (40%) 20 20,000 20.00 30,000 20 40,000

Fixed (60%) 30 30,000 20.00 30,000 15 30,000
Total cost 250 2,50,000 233.33 3,50,000 225 4,50,000

What is Cash Budget?

Cash Budget is a short term budget that estimates the amount of cash receipts
and payments and the balance of cash during the budgeted period

Cash Budget Format

Cash Budget can be prepared month by month

Particulars May June July
Opening Cash balance XXX
Add: cash Receipts
Cash sales XXX
Cash collected from
debtors/customers( incase of credit
sales) XXX
Other cash Receipts (if any) XXX
Total cash receipts ( A) XXX
Less:Cash Payments
Cash purchases XXX
Cash paid to creditors/ suppliers(in case
of credit purchases)
XXX
Expenses:
Salaries/wages XXX
Selling expenses XXX
Factory Overheads XXX
Purchase of Fixed assets XXX
Payment of Tax XXX
Other payments (If any) XXX
Total cash payments ( B) XXX
Closing cash Balance(C)
C= A-B
XXX

Note: closing cash balance=When Total cash receipts is more than Total
cash payments

Bank Over draft = When Total cash receipts is less than Total cash
payments

Problem 1.XYZ company wishes to arrange overdraft facilities with its bankers
during the period April-June,
Prepare cash budget for the above period from the following particulars

Month Sales Purchases Wages

Feb 180000 124800 12000
march 192000 144000 14000
April 108000 243000 11000
 May 174000 246000 10000
June 126000 268000 15000

a)50% of Credit sales is realised in the month following the sales and other 50%
in the second month following,
b) Creditors/suppliers are paid in the month following the month of Purchases
c) wages are paid at the end of the respective month
d) Cash at Bank- 1st April Rs.25000
Problem.2
From the following data forecast the cash position at three months end of april,
may and june 1998.
Month Sales Purchases Wages Sales
1998 Rs. Rs. Rs. expenses
Rs.
February 1,20,000 80,000 10,000 7,000
March 1,30,000 98,000 12,000 9,000
April 70,000 1,00,000 8,000 5,000
May 1,16,000 1,03,000 10,000 10,000
June 85,000 80,000 8,000 6,000

Further information:
Sales at 10% realized in the month of sales. Balance equally realized in
two subsequent months.
Purchases: Creditors are paid in the month following the month of
supply.
Wages: 20% paid in arrears in the following month.
Sundry expenses paid in the month itself.
Income tax Rs. 20,000 payable in June.
Dividend Rs. 12,000 payable in June.
Income from investments Rs. 2,000 received half-yearly in march and
September.
Cash balance on hand as on 1-4-88 Rs. 40,000.
Cash Budget for three months ending June 1998

Particulars April May June

Rs. Rs. Rs.
Opening balance of 40,000 47,700 29,700
cash
 Add: Receipts of
cash:
Cash sales 7,000 11,600 8,500
Cash from debtors:
1st month (W.N.) 58,500 31,500 52,200
nd
2 month (W.N.) 54,000 58,500 31,500
Total receipts 1 1,59,500 1,49,300 1,21,900
Payments: Creditors 98,000 1,00,000 1,03,000
for purchases
Wages: Current 6,400 8,000 6,400
Arrears 2,400 1,600 2,000
Sundry expenses 5,000 10,000 6,000
Income tax _ 20,000
Dividend _ 12,000
Total payments 2 1,11,800 1,19,600 1,49,400
Closing balance of 47,700 29,700 -27,500 (O.D)
cash 1-2
Problem .3 A newly started pushpak Co. wishes to prepare cash budget from
January. Prepare a cash budget for the 6 months from the following estimated
revenue and expenses.

Months Total Materials Wages Production Selling &

sales overhead Distribution
overhead

Rs. Rs. Rs. Rs. Rs.

January 20,000 20,000 4,000 3,200 800
February 22,000 14,000 4,400 3,300 900
March 24,000 14,000 4,600 3,300 800
April 26,000 12,000 4,600 3,400 900
May 28,000 12,000 4,800 3,500 900
June 30,000 16,000 4,800 3,600 1,000

Cash balance on 1st January was Rs.10,000. A new machine is to be installed at

Rs.30,000 on credit, to be repaid by two equal instalments in March and April.
Sales commission at 5% on total sales is to be paid within the month following
actual sales.
Rs.10,000 being the amount of 2nd call may be received in March. Share
premium amounting to Rs. 2,000 is also obtained with 2nd call.
Period of credit allowed by suppliers – 2 month
Period of credit allowed to customers – 1 month
Delay in payment of overheads – 1 month
Delay in payment of wages – ½ month
Assume cash sales to be 50% of the total sales.

Fixed Budget
It is a Budget designed to remain constant irrespective of the level of activity
attained. The Fixed Budget is designed to change according to the level of
activity.
Problem.
A company which supplies its output on contarct basis as components to an
assembling firm has a contract to supply 10,000 units of its only product during
1999. The following were the budget expenses and revenue

Material Rs.15 per unit

Wages Rs. 10 per unit
Work expenses( Fixed) Rs.40000
( Variable) Rs. 4 per unit
General expenses( All Fixed) Rs.60000
Profit is 20% on sale price .
Prepare the budget for 1999 showing
the costs & Profit

Master budget
solution
Particulars Per unit Total
Material Rs.15 1,50,000
Wages Rs. 10 1,00,000
25 2,50,000
Add works expenses: Fixed 4 40,000
Variable 4 40,000
33 3,30,000
Add : general expenses 6 60,000
39 3,90,000
Add. Profit 390000/80 X 20
9.75 97500
sales 487500 48.75
Problem. 2.
Rajan supplies components to ICF on contract basis. For the year 2000. He
agrees to supply 20,000 units at Rs. 80 per unit . the following were his costs
during 1999 for supply of Rs. 15,000 units

Material Rs. 8 per unit

Wages Rs. 22 PU
Over heads Rs. 20 PU(60% Fixed

Other Expenses Rs. 5 per unit ( 100% Fixed)

Prepare budget for the year 2000 showing clearly the budgeted profits
STANDARD COSTING

What is Standard cost ?

What is Standard cost is a Pre-determined cost which is calculated from

Efficient business operations and the relevant necessary expenditures

It is one of the costing techniques used for fixing price and for controlling cost
through variance analysis

Standard costing is a method of ascertaining the costs whereby statistics are

prepared to show:

i. The standard cost

ii. The actual cost
iii. The difference between these costs, which is termed the variance”
the technique of standard cost study comprises of:

• Pre-determination of standard costs

• Use of standard costs
• Comparison of actual cost with the standard costs
• Find out and analyse reasons for variances
• Reporting to management for proper action to maximize efficiency

The objectives of standard costing technique are as follows:

(a) To provide a formal basis for assessing performance and efficiency.

(b) To control costs by establishing standards and analysis of variances.

(c) To enable the principle of ‘management by exception’ to be practised at the
detailed, operational level.

Advantages of Standard Costing:

1. Cost Control: Standard costing is universally recognised as a powerful cost

control system. Controlling and reducing costs becomes a systematic practice
under standard costing.

2. Elimination of Wastage and Inefficiency: Wastage and inefficiency in all

aspects of the manufacturing process are curtailed, reduced and eliminated over
a period of time if standard costing is in continuous operation.

3. Norms: Standard costing provides the norms and yard sticks with which the
actual performance can be measured and assessed.

4. Locates Sources of Inefficiency: It pin points the areas where operational

inefficiency exists. It also measures the extent of the inefficiency.

5. Fixing Responsibility: Variance analysis can determine the persons

responsible for each variance. Shifting or evading responsibility is not easy
under this system.

6. Management by Exception: The principle of ‘management by exception can

be easily followed because problem areas are highlighted by negative variances.

7. Improvement in Methods and Operations: Standards are set on the basis of

systematic study of the methods and operations. As a consequence, cost
reduction is possible through improved methods and operations.

8. Guidance for Production and Pricing Policies: Standards are valuable

guides to the management in the formulation of pricing policies and production
decisions.

9. Planning and Budgeting: Budgetary control is far more effective in

conjunction with standard costing. Being predetermined costs on scientific
basis, standard costs are also useful in planning the operations.

10. Inventory Valuation: Valuation of stocks becomes a simple process by

valuing them at standard cost.

Limitations of Standard Costing:

1. Variation in Price: One of the chief problems faced in the operation of the
standard costing system is the precise estimation of likely prices or rate to be
paid.

2. Varying Levels of Output: If the standard level of output set for pre-
determination of standard costs is not achieved, the standard costs are said to be
not realised.

3. Changing Standard of Technology: In case of industries that have frequent

technological changes affecting the conditions of production, standard costing
may not be suitable.

4. Applicability: It cannot be used in those organizations where non-standard

products are produced. If the production is undertaken according to the
customer specifications, then each job will involve different amount of
expenditures.

5. Difficult to set Standard: The process of setting standard is a difficult task,

as it requires technical skills. The time and motion study is required to be
undertaken for this purpose. These studies require a lot of time and money.

6. Problem in fixing Responsibility: The fixing of responsibility is not an easy

task. The variances are to be classified into controllable and uncontrollable
variances. Standard costing is applicable only for controllable variances.

Advantages of Standard Costing:

A standard costing system has many advantages which include the

following:

a) Budgets are compiled from standards.

b) Standard costing highlights areas of strengths and weaknesses.

c) Actual costs can be compared with standard costs in order to evaluate

performance.

d) The setting of standards should result in the best resources and methods
being used and thereby increase efficiency.

e) Standard costs can be used to value stock and provide a basis for setting wage
incentive schemes.
f) Standard costing simplifies bookkeeping, as information is recorded at
standard, instead of a number of historic figures.

g) It acts as a form of feed forward control that allows an organization to plan

the manufacturing inputs required for different levels of output.

h) It act as a form of feedback control by highlighting performance that didn’t

achieve the standard predicted, thus altering decision makers to situations that
may be out of control and in need of corrective action.

i) It motivates workers by acting as challenging, specific goals that are intended

to guide behaviour in the desired directions.

j) It helps to trace/allocate manufacturing costs to each individual unit produced.

What is variance ?

It means Differences

For example. Actual sales is Rs 1,00,000 and budgeted

sale(Estimated/expected) is Rs.50000 here there is a variance (ie) difference but
this difference is favourable

In case of cost variance the actual cost should be less than standard cost or
predetermined cost

Simple example standard cost for making one pen is Rs 2 and actual cost
incurred for making one pen is Rs 1.50 in this case we should compare standard
cost & actual cost and see the difference / variance

Take the above example . actual cost is less than standard cost

Another example. You have planned to secure 90 marks in Management

accounting , you secured only 60 marks in exam, here there is a
variance/difference is 30 marks the difference is high so, there is adverse.

in case if you have secured 95 marks , the difference is favourable