Budget-and-Budgetary-Controlb.pdf

qqq

1. CHAPTER

LEARNING OUTCOMES
State the meaning and essentials of budget

Discuss the objectives and importance of budget and
budgetary control

Describe the process of preparing budgets
List the different types of budgets

Differentiate between fixed and flexible budget.

Prepare fixed and flexible budget.

2. Essentials of Budget

Objectives of Budgeting

Types of Budgets

Zero-based Budgeting
88)

mance Budgeting

Budget Ratio

Capacity wise

Petiod-wise

Master Budget

8. 1

Efficiency

The use of budgetary cé

the management of a busines
conduct its busin
manner.

tem enables
concern to
ess activities in the efficient

9. Control on It is a powerful instrument used by business

expenditure houses for the control of their expenditure. It
in fact provides a yardstick for measuring and

evaluating the performance of individuals and

their departments,

Finding deviations | It reveals the deviations to management, from

the budgeted figures after making a
comparison with actual figures.

Effective utilisation of | Effective utilisation of various resources like—
resources men, material, machinery and money—is made
possible, as the production is planned after
taking them into account.

Revision of plans It helps in the review of current trends and
framing of future policies.

Implementation of |it creates suitable conditions for the
Standard Costing implementation of standard costing system in
system a business organisation,

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.

Credit Rating Management which have developed a well
ordered budget plans and which operate
accordingly, receive greater favour from credit
agencies.

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

10. . Co-operation
Required

. Expensive

. Not a substitute for
management

5. Rigid document

15.10 COST AND MANAGEMENT ACCOUNTING

before budgets are implemented. It requires
proper attention and time of management
Management must not expect too much during
the development period.

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 degree of discretion. In

¡pe of organisation structure, coordination
‘among different units are required, The success of
the budgetary control depends upon willing co:
operation and teamwor!

Its implementation is quite expensive For
successful implementation of the budgetary
control, proper organisation structure with
responsibility is prerequisite. Budgeting proc
start from the collection of requirements to
budget and performance analysis. It consume
valuable resources for these purpose, hence, it is
an expensive process.

Budget is only a managerial tool and must be
applied correctly for management to get
benefited Budgets are not a substitute for
management.

Budgets are considered as rigid document. But in
an organisation is exposed to various
tain internal and external factors. Bu
should be flexible enough to incorporate ongoing
developments in the internal and external factors
affecting the very purpose of the budget,

11. Muse eran

13. BUDGETS AND BUDGETARY CONTROL 15.13

14. It is misleading. A poor performance
reia may remain undetected and a good
performance may go unrealised.
Its not suitable for long period,

It is also found unsuitable particularly
en the business conditions are
anging constantly.

\ccurate estimates are not possible.

15. With the help of flexible budget, the | 1. The formulation of flexible

costs and profit may be| budget is possible only when
calculated easily by the business at proper accounting
various levels of production capacit maintained, perfect
In flexible budget, adjustment is very | knowledge about the factors of

simple according to change in| production and various
business conditions, business circumstances
It also helps in determination of | available
Production level as it shows |2. Flexible Budget also requires
budgeted costs with classification at | the system of standard costing
els of activity along with | in business.
the management can very expensive and labour

16. select the level of production] oriented
shows the profit

predetermined by the owners of the

business.

It also shows the quantity of product

to be produced to earn determined

profit

It does not change with
actual volume of activity | activity level to be achieved. Thus it is
achieved. Thus it is known as | not rigid.

rigid or inflexible budget

It operates on one le It consists of various budgets for
activity and under one s els of activity

conditions. It assumes that

there will be no change in the

prevailing conditions, which

is unrealistic.

Here as all costs like - fixed, | Here analysis of variance provides
variable and semi-variable are | useful information as each cost is
related to only one level of d according to its behaviour.
so variance analysis
not give useful
information

17. If the budgeted and actual | Flexible budgeti
activity levels differ activity facilitates the
significantly, then the asp sertainment of cost, fixation of
like cost ascertainment and | selling price and tendering of
price fixation do not give a | quotations,

correct picture.

Comparison of actual les a meaningful basis of
performance with budgeted of the actual
targets will be meaningless | performance with the budgeted
peciall there is a| targets.

difference between the

activity levels

ILLUSTRATION 1

Head of Account Control basis 70:
Budgeted hours

Variable expenses
Semi-variable expenses SV 1200 1200
Fixed expenses F 1800 18
Total expenses

Recovery rate per hour

18. Administration Costs:
Office Salaries (fixed) 90,000 | 90,000] 90,000| 90,000

General expenses (2% of Sales 12,000 o| 16,500

Depreciation (fixed) 500

19. BUDGETS AND BUDGETARY CONTROL 1

Rent and rates (ned)

(a) Total Adm. Costs
selling Costs:

of sles) 48000 | 54,000 66,000

12,000 13,500 16500

7500| 8250

General expanses {1% of 6 2500 | 8250

(6) Total Seling Costs 90000 | 99,000
Distribution Costs:

Wages fixed) 15,000 15000 15000] 15000

Rent (1% of sales) 6000 7500| 8250

Other expenses (4% of sales) | 24000 30000 | 33000

(G Toul Disrbution costs | 45000 52300 | 56250

Total Costs (A + 8 + ©) 26750 | 278,000

LUSTRATION 3

20. 15.20 COST AND MANAGEMENT ACCOUNTING

Indirect manufacturing | Expenses for a | Planned for | Actual in costs
normal month | January January.

Salary of foreman
Indirect labour
Repairs and mainten
Power

tes and taxes

SOLUTION

indirect | Nature | Expenses | Planned | Expenses

manufacturing | of cost | fora [expenses | as per
cost normal flexible
month budget

© | © ©
2 | 6) @

1000| 1,000] 1,000!
720 540|

Semi 600]

21. 150

Fixed
Fed 809)

Fixed

24. Product x

mm Qu.
Qu.
34 Qtr

25. Product A 5,000 375,000

Product B 10,000 800,000

11,75,000

26. Budgeted sales

Add : Desited closing stock

Total quantity required

Less : Opening stock

Units to be produced

5,000
500
1,500

10,000
1,000
11,000

28. 15.28 COST AND MANAGEMENT ACCOUNTING

XYZ COMPANY
Direct material usage in units and in amount
for the year ending March 31, 20...
Direct Materials
Type of material Product A Product Total direct Material Total cost
(4,000 units) (9,000 units) material cost per of material
usage (Units) unit) used (€)
X (12 units per
finished product) 48,000 108000 156000 150 234000
Y (4 units per
product A &2
units per product B) 16,000 85,000
319,000

XYZ Company
Direct material purchase budget
for the year ending March 31, 20....

Material X Material Y

Desired closing stock (units) 3,000 500

29. Units required for production 1,56,000

Ada:

Total needs 159,000
4,000

155,000

Less: Ope

ing stock (units)
Units to be pi
Unit price @)

ost ()

chased
150

XYZ COMPANY
Direct-labour cost budget
for the year ending March 31, 20...

Units to be
produced
4,000 7
9,000 10

Total

hours
28,000
90000

Direct labour
hour, per unit
Product A,
Product B
118,000

34,000

34,500
00
34,200

Total

15.29

3,18,000

budget cost (0)

@ 72 per hour

23600

30. XYZ COMPANY
Factory overhead budget for the year ending March 31, 20.

(Anticipated activity of 1,1 ct labour hours)

Supplies 12,000
Indirect labour 30,000

31. BUDGETS AND BUDGETARY CONTROL 15.31

Cost of fringe benefits 10,000

Power le portion) 22,000

Maintenance cost (variable portion) 15,000
Total variable overhead: 89,000

Depreciation 10,000

Property taxes 2,000

Prop 1,000

Supervision 12,000

Power (Fixed portion)

Maintenance (Fixed portion)
Total fixed overheads
Total factory overhead

Factory overhead recovery rate is:

21.18.00
EN — 2 27 per direct labour hour
1.18.000 labour hours

XYZ Company ending-inventory budget March 31, 20...
Units Unitcost Amount Total
(o (o

Direct material
Y 500

Finished goods
A 500 49.00°
8 1,000 53.00"
1

32. 15.32 COST AND MANAGEMENT ACCOUNTING

* Unit cost of finished goods have been computed as below.
Unit cost Product A Product B

of input Units Amount Units — Amount

(0 (o (o

Material X 150 180 120 18.00

Material Y 250 100 2.00 5.00

Direct labour 2.00 140 10. 20.00

Factory overhead 1.00 1.00 10.00

53.00

XYZ Company cost-of-goods-sold budget for the year ending
March 31, 20....

Amount

@
Direct materials used 3,19,000
Direct labour 236000
Factory overhead 118000
Total manufacturing costs 6:13000
Add Finished goods (opening) 4119.50"

Less: Finished goods (closing)
Total cost of goods sold

assumed figure
In the above budget if adjustments for opening and
gods are not shown. The budget will be called product

34. XYZ Company selling and distribution cost budget
for the year ending March 31, 20.

14,500
5 commission 7,000
Travelling expenses 19.000

35. BUDGETS AND BUDGETARY CONTROL 1

istribution
Warehouse wag}
Narehouse rent, rates, elect

Lorry expenses

Sales office expenses:
Salaries

Rent, rates, electricity
Depreciation

Stationery, postage and telephone
General expenses

Advertising:
Press

Radio and television
Shop window displays

Total

XYZ Company administrative expenses budget
for the year ending March 31, 20...

Salaries of clerical staff
Executives’ salari
Audit fee

36. Depreciation on office equipment

Insurance
Stationer

Postage and telegrams
Telephones
Miscellaneous

Total administrative expen:

39. Sale: 30,000 37,500 41,250 45,000 1,53,750
Production in current quarter 24,000 30,000 33,000 36,000
(80% of the sale of current

Production for next quarter 500 8250 9000 12,250"

(20% of the sale of next quarter)
Total production 42

40. 94,500
15,000 kg.
157,500
G:15000 kg,
63,000
(8.15,000 kg.

189,000

472,500

2,52,000

42. ‘COST AND MANAGEMENT ACC

ILLUSTRATION 5

Component requirements

Sub-assembly Selling Price Base board 1cos. Ic2 1026
ACB 3

Labour hours Variable overheads

Grade A Grade B

‘Sub-assemblies

44. Production 2

Sub-assemblies

15.44, COST AND MANAGEMENT ACCOUNTING

Sub-assemblies
Sales (quantity)

2.100 x 3:42)

DP
4,200

(Refer to working note 3)

selling price p.u. (2)

Sales value €)

Sub-assemblies
Sales

Add : Closing stock

(Opening stock less 10%)
Total quantity required

Less : Opening stock

DP
Production

3,920

Base board (1 each) 20 18420

45. BUDGETS AND BUDGETARY CONTROL 15.

‘Component IC08 0 16560 7840 74,160
(6220 x 8)

Component IC12 (4: 10: 4) 24,880 82,800
(6 220x 4)(8,280 x 10) (3

Component IC26 (2:6:8) 12440 49,680 31360
(6.220% 10 x 6) (3,920 x 8)

Sub-assemblies Base board 1C08 ICI2 IC26
Usage in production 18420 74,160 93,480

Add Closing stock 1.440 1,080 3,600
(Opening

75240 97,080

Less :Opening stock 1200 4,000

Purchase (Quantity) 18260 74,040 93,080
Purchase price (2) 60 20 2 8
Purchase value () 10,95,600 14,80,800 14,73,120 7.44,640 47,94.160

Direct labour
Grade À Grade 8
Sub- Budgeted Hours per Total Hours per Total Total
‘Assemblies Production Unit Hours Unit Hours
ACB 6220 49,160 16 99,520
ma 280 6 49680 12 99,360
bp 3920 4 15580 31,360
{A Total hours 115.120 230240
(6) Hours per man per month o
(© Number of workers per month :(A/B) 5; 1152
(D) Wage rate per month @) 1000 800
(8) Wages payable (2): (C x D) 576.000 921,600 1497.60

46. XYZ Company Budgeted Income Statement
For the Year Ending March 31, 20....

11,75,000
Less: Cost of goods sold

ross margin 4,00,000
Less: Selling and distribution expenses 136500

Less: Administrative expenses 46,000 182.500

47. BUDGETS AND BUDGETARY CONTROL 1

Profit before interest and taxes 217,
Interest expenses (assumed) 50.000
Profit before tax 1,67,500
Income-tax (50% assumed)

Net p

XYZ Company Budgeted Balance Sheet
March 31, 20.
o (o
Share capital 3,50,000
Retained income 129,000 479,000

Plant and machinery 3,40000

Less: Provision for depreciation 60.000 20000

Raw materials 5750
Finished goods 7,500
Debtors 110,000
Cash 31150 231000

Less: Creditors 32,000

Note: Information not available in respect pital, opening balance of retained
earnings, current assets and current labi as been assumed to complete the
bove balance shee

ILLUSTRATION 6

57. BUDGETS AND BUDGETARY CONTROL 15.57

Budget Ratios:

(D Efficiency Ratio =
‘Actual Hours

StandardHours , 99

i Activity Re
Available working days

fi) Calendar Ratio = Avallable working days,
\ Budgeted working days

(v) Standard Capacity Usage Ratio = —_____budgeted Hours_ 19
: ES 2 Max posible hour in the budgeted period

Actual Hours worked
(Y) Actual Capacity Usage Ratio = ___AclualHloursworked_. so)
pu Pi u Max possible working hours in a period

(vi) Actual Usage of Budgeted Capacity Ratio = Actual wo!

59. Budget It is statement of an estimated performance to be achieved in given
time, expressed in currency value or quantity or both.

Budget Centre: A section of an organization for which separate budget can be
prepared and control exercised.

Budgetary Controk Guiding and regulating activities with a view to attaining
predetermined objectives, effectively and efficiently.

Budget Manual: The Budget manual is a schedule, document or booklet which
shows, in written forms the budgeting organisation and procedures.

Budget Period: The period of time for which a budget is prepared and used. It
may be a year, quarter or a month.

Classification of Budgets:

Nature based Fixed and Flexible
Content based Monetary and Physical
Functional based Purchase, Sale, Production Cost, Administrative,

Selling & Distribution, Research & Development, Plant Capital Expenditure,
Cash, Plant Utilzation.

Fixed Budget: a fixed budget, is a budget designed to remain unchanged
irrespective of the level of activity actually attained

Flexible Budget: a flexible budget is defined as a budget which, by
recognizing the difference between fixed, semi-variable and variable costs is
designed to change in relation to the level of activity attained,

Zero-based Budgeting (ZBB): Zero- based Budgeting (ZBB) is defined as ‘a
method of budgeting which requires each cost element to be specifically

he Institute of Chartered Ace

60. COST AND MANAGEMENT ACCOUNTING

justified, although the activities to which the budget relates are being
undertaken for the first time, without approval, the budget allowance is zero
Performance Budgeting (PB): A performance budget is one which presents the
purposes and objectives for which funds are required, the costs of the
programmes proposed for achieving those objectives, and quantities data
measuring the accomplishments and work performed under each programme.
Thus PB is a technique of presenting budgets for costs and revenues in terms of
functions.

Budget Ratios: These ratios provide information about the performance level,
ie, the extent of deviation of actual performance from the budgeted
performance and whether the actual performance is favourable or
unfavorable

TEST YOUR KNOWLEDGE
MCQs based Questions

1

© The Institute of Chartered Accountants of

If a company wishes to establish a factory overhead budget system in
which estimated costs can be derived directly from estimates of activity
levels, it should prepare a

() Master budget

(b) Cash budget

(9 Flexible budget

(@) Fixed budget

The classification of fixed and variable cost is useful for the preparation’
of

(a) Master budget
(b) Flexible budget

(9 Cash budget

(6) Capital budget

Budget manual is a document

(2) Which contains different type of budgets to be formulated only.

(b) Which contains the details about standard cost of the products to be
made,

61. BUDGETS AND BUDGETARY CONTROL 15.61

Setting out the budget organization and procedures for preparing a

budget including fixation of responsibilities, formats and records

required for the purpose of preparing a budget and for exercising
budgetary control system.

(@) None of the above

‘The budget control organization is usually headed by a top executive

who is known as
(a) General manager

(b) Budget director/budget controller
(©) Accountant of the organization
(@ None of the above

“A favourable budget variance is always an indication of efficient
performance”. Do you agree, give reason?

(a) A favourable variance indicates, saving on the part of the organization
hence it indicates efficient performance of the organization.

(b) Under all situations, a favourable variance of an organization speaks
about its efficient performance.

(0 A favourable Variance does not necessarily indicate efficient
performance, because such a variance might have been arrived at by
not carrying out the expenses mentioned in the budget.

(©) None of the above,

A budget report is prepared on the principle of exception and thus:

(8) Only unfavourable variances should be shown

(b) Only favourable variance should be shown

(9 Both favourable and unfavourable variances should be shown

(@) None of the above

Purchases budget and materials budget are same

(a) Purchases budget is a budget which includes only the details of all
materials purchased

(b) Purchases budget is a wider concept and thus includes not only
purchases of materials but also other item's as well

62. 15.62, COST AND MANAGEMENT ACCOUNTING

10,

(© Purchases budget is different from materials budget; it includes
purchases of other items only

(a) None of the above

Efficiency ratio is

(a) The extent of actual working days avoided during the budget period
(b) Activity ratio/ capacity ratio.

(© Whether the actual activity is more or less than budgeted activity
(® None of the above

Activity Ratio depicts

(a) Whether actual capacity utilized exceeds or falls short of the budgeted.
capacity

(b) Whether the actual hours used for actual production were more or
less than the standard hours

(©) Whether actual activity was more or less than the budgeted capacity
(@) None of the above

Which of the following is usually a short-term budget.

(@) Capital expenditure budget

(b) Research and development budget

(0 Cash budget

(@ Sales budget

Theoretical Questions
1

2
3.
4
5
6
7
8

EXPLAIN briefly the concept of ‘flexible budget.
DISCUSS the components of budgetary control system.

LIST the eight functional budgets prepared by a business.

DISTINGUISH between Fixed and flexible budget.

EXPLAIN the Essentials of budget.

STATE the considerations on which capital expenditure budget is prepared.
DESCRIBE the steps involved in the budgetary control technique.

DESCRIBE the salient features of budget manual.

63. BUDGETS AND BUDGETARY CONTROL 15.63

Practical Questions

1, ABC Ltd. is currently operating at 75% of its capacity. In the past two
years, the levels of operations were 55% and 65% respectively. Presently,
‘the production is 75,000 units. The company is planning for 85% capacity
level during 20x3-20X4. The cost details are as follows:

55% 65% 75%
o o ©
| Direct Materials 1100000 1300000 15,00,000
| Direct Labour 550000 650000 750000
| Factory Overheads 310000 330000 350000
| seling Overheads 320,000 360000 400.000
Administrative 150000 180000 …1.60.000 |
| Overheads |

| 2440000 28,00,000 31,60,000 |
Profit is estimated @ 20% on sales.
The following increases in costs are expected during the year:

In percentage

Direct Materials 8
Direct Labour 5
Variable Factory Overheads 5
Variable Selling Overheads 8
Fixed Factory Overheads 10
Fixed Selling Overheads 15
‘Administrative Overheads 10

PREPARE flexible budget for the period 20X3-20X4 at 85% level of
capacity. Also ascertain profit and contribution.

2. The accountant of manufacturing company provides you the following
details for year 20X9:
® e
Direct materials 175000 Other variable costs 80,000,
Direct Wages 1,00,000 Other fixed costs 80,000

64. 15.64 COST AND MANAGEMENT ACCOUNTING

Fixed factory overheads 1,00,000 Profit 115,000
Variable factory overheads — 1,00,000 Sales 7,50,000
During the year, the company manufactured two products A and B and
‘the output and costs were:

A 8
Output (units) 2,00,000 1,00,000
Selling price per unit 2.00 23:50
Direct materials per unit 7050 2075
Direct wages per unit 7025 7050

Variable factory overhead is absorbed as a percentage of direct wages.
Other variable costs have been computed as: Product A 70.25 per unit;
and 8 2030 per unit.

During 20X0, 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 €
Output (units) 2,00,000
Selling price per unit 4175
Direct materials per unit 7040
Direct wages per unit 7025

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 20X0 . Comment on the comparative
results

TOM Ltd. has furnished the following information for the month ending
30th June, 20X9:

[ Master Budget | Actual | Variance
[uni produced and sold 80000| 72000

Sales () 3,20,000| 2,80,000| 40,000 (A)
| Direct material (3) 80,000 73,600 6,400 (F)
| Direct wages (2) 120,000 | 1,08,800| 15,200 (F)

is of

65. BUDGETS AND BUDGETARY CONTROL

| Variable overheads (2) 40,000 37,600 2,400 (F)
| Fixed overhead (2) 40000 | 39200 800 (A
[Total cost 280000| 255200

The Standard costs of the products are as follows:
[ Per unit (2)
| Direct materials (1 Kg. at the rate of €1 per kg) 7100

Direct wages (1 hour at the rate of € 1.50) 1.50

Variable overheads (1 hour at the rate of € 0.50) 050

Actual results for the month showed that 78,400 kg. of material were
used and 70,400 labour hours were recorded,

Required!

() PREPARE Flexible budget for the month and compare with actual
results,

(i) CALCULATE Material, Labour, Sales Price, Variable Overhead and Fixed!
Overhead Expenditure variances and Sales Volume (Profit) variance.

4, Jigyasa Ltd. is drawing. a production plan for its two products Minimax
(MM) and Heavyhigh (HH) for the year 20X9-X0. The company's policy is
to hold closing stock of finished goods at 25% of the anticipated volume
of sales of the succeeding month, The following are the estimated data
for two products:

[ Minimax (MM) | Heavyhigh (HH)
| Budgeted Production units 1.80.00 120.000
| ® ©
[Dire material cost per unit. 220 280
| Direct labour cost per unit 10 120
[Manufacturing overhead 200000 500,000

The estimated units to be sold in the first four months of the year 20X9
XO are as under

[ a a
[nara #000 | 10000 | 12000 | 16000

8000 | 9,000 | 14,000

66. 15.66, COST AND MANAGEMENT ACCOUNTING

PREPARE production budget for the first quarter in monthwise,

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:

Product- | Product-
= A 8
| Budgeted sales (in units) 2400 | 3600
Budgeted material consumption per unit (in kg)
Material-X 5
Material-Y 4
Standard labour hours allowed per unit of product | 3

Material-X and Material-Y cost ? 4 and 7 6 per kg and labours are paid
+ 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 workers in actually manufacturing the products is
80%. In addition the non-productive down-time is budgeted at 20% of
the productive hours worked.

‘There are four S-days weeks in the budgeted period and it is anticipated
that sales and production will occur evenly throughout the whole period,

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

Product-A 400 units
Product-B 200 units
Material-X 1,000 kg,
Material-Y 500 kg.

‘The anticipated closing stocks for budget period are as below:
Product-A 4 days sales
Product-B 5 days sales
Material-X 10 days consumption
Material-Y 6 days consumption

Required

CALCULATE the Material Purchase Budget and the Wages Budget for the
direct workers, showing the quantities and values, for the next month.

67. Answers to the Theoretical Questions
Please refer paragraph 15.7.1

Please refer paragraph 15.57

Please refer paragraph 15.7.2

Please refer paragraph 15.7.1

Please refer paragraph 15.2

Please refer paragraph 15.7.2

Please refer paragraph 15.5

Please refer paragraph 15.6

ex awe wn a

Answers to the Practical Questions
1. ABC Ltd.

ANSWERS/ SOLUTIONS
‘Answers to the MCQs based Questions
1 © 2 & 3% @ 4
Tb) 8 bb. om. «

Budget for 85% capacity level for the period 20X3-X4

Institute of Chartered Accoun

Budgeted production (units) 85,000 |
Per Unit (X) | Amount ()
Direct Material (note 1) 21.60) 1836000
Direct Labour (note 2) 1050| 892500
Variable factory overhead (note 3) 210| 178500
Variable selling overhead (note 4) 432| 367200
Variable cost 3852 | 3274200
Fixed factory overhead (note 3) 220000
Fixed selling overhead (note 4) 115,000
Administrative overhead 176000
Fixed cost 511000
Total cost 37,85200

68. Add: Profit 20% on sales or 25% on total cost 946300

Sales 47,31,500
Contribution (Sales - Variable cost) 14,57,300

15.68, COST AND MANAGEMENT ACCOUNTING

Working Notes:
1

Direct Materials

[75% Capacity * 15,00,000 65% Capacity 7 13,00,000
65% Capacity 13,00,000 55% Capacity + 11,00,000

10% change in _2,00,000 10% change in capacity _2,00,000
capacity

For 10% increase in capacity, ie, for increase by 10,000 units, the total
direct material cost regularly changes by 2,00,000

Direct material cost (variable) = 7 2,00,000 + 10,000 = ? 20

After 8% increase in price, direct material cost per unit
72150

20 x 108

Direct material cost for 85,000 budgeted units = 85,000 x 7 21.60
18,36,000

Direct Labour

75% Capacity Y 7,50,000 | 65% Capacity 7 650,000
| 65% Capacity + 650,000 | 55% Capacity Y 550,000
10% change in 1,00,000|10% change in 100000
capacity capacity

For 10% increase in capacity, direct labour cost regularly changes by
7 1,00,000.

Direct labour cost per unit = 7 1,00,000 + 10,000 = 2 10

After 5% increase in price, direct labour cost per unit = ? 10 x 1.05
10.50

Direct labour for 85,000 units = 85,000 units x ? 10.50 = X 8,92,500.
Factory overheads are semi-variable overheads:

75% Capacity — 7 3,50,000 | 65% Capacity € 330,000
65% Capacity ? 230,000 | 55% Capacity + 310.000
10% change in _20000 |10% change in 20,000
capacity capacity

69. BUDGETS AND BUDGETARY CONTROL 15.69

Variable factory overhead = Y 20,000 =

0,000 = +2
Variable factory overhead for 75,000 units = 75,000 x 12 = € 1,50,000
Fixed factory overhead = ? 3,50,000 - Y 150,000 = * 2,00,000.
Variable factory overhead after 5% increase = 12 x 1.05 = € 2.10

Fixed factory overhead after 10% increase = Y 2,00,000 x 1.10
€2,20,000.

4, Selling overhead is semi Variable overhead

75% Capacity — * 400,000 | 65% Capacity + 360,000

65% Capacity ? 3,60,000 | 55% Capacity y 320.000
10% change in — 40,000 | 10% change in capacity 40,000

capacity 11
Variable selling overhead = + 40,000 + 10,000 units =? 4

Variable selling overhead for 75,000 units = 75,000 x % 4
Fixed selling overhead = 7 4,00,000 —? 3,00,000 = ? 1,00,000

3,00,000.

Variable selling overhead after 8% increase = 24 x 1.08 = 7432
Fixed selling overhead after 15% increase = % 1,00,000 x 1.15
2115000,
5, Administrative overhead is fixed
After 10% increase = ? 1,60,000 x 1.10 =? 1,76,000
2, Budget Showing Current Position and Position for 20X0
Position for20x9 “Position for 20x0
a 8 | tow | A 8 © | rota
(Arm) (Arno)
[ates units) | 200000! 100700) 150.000] 50,000] 200000]
oa 0 oo 0 a © ol
| sates 400000 | 3,50,000| 7,50,000| 3,00,000| 1,75,000| 3,50,000| 825000]
[Direct material | 1,00,000| 7500| 1,75,000| 75,000) 37,500| 80,000) 122.00.
[Direct wages | 50,000| sopoo| 1,00,000| 37,500) 25,000| 50,000) 1,12500]
[tacto 50,00 | 5000| 1.00,000| 37,500) 25,00| 50,000) 12,00.
Joverhead
{variable
Jotner variable] 50000! 30,000] 20000! 37,500) 15000| 50,000) 102.500.
[costs

em

70. fe

Marginal] 250000] 205000] 455/00] 147500] ',02500] 220000] 520000]
{cost

[© Contbution] 150000) 145,000) 295,000) 1.12500] 72500| 120000| 05000
[o

[Fixed costs -

[Factory 1,00,000 1,00,000 |
others 20000 ao]
CEE: 120000 120000
Brot 115000 12500
lc-o

15.70 COST AND MANAGEMENT ACCOUNTING

Comments: Introduction of Product € is likely to increase profit by & 10,000 (Le.
from 7 1,15000 to ? 125,000) in 20X0 as compared to 20X93 Therefore,

introduction of product € is recommended.

(Statement showing Flexible Budget and its comparison with actual
Flexible Budget
Master | “(at standard | Actual
Euer for |_| variance
30,000 72,000
mate | Ber | 72.000 | nis
unit | units
A | Sales 320000 | 4.00 | 28000 | 280000 | 8,000 (A)
8. | Direct material | 60,000) 1.00| 72000| 73600| 1,600 (a)
©. | Direct wages |120000 | 150108000 | 1,04800| 3200 (F)
D. | Variable 40000 | 0.50) 3600| 37,600 1,600 (A)
overhead
E [Total variable | 240000 | 3.00 2,16/000 | 2,16,000 -
cost
Fr. [contribution | 80000 | 100| 72000 | 64000
6. | Fixed overhead | 40 050| 40000 | 39200 | soon
H. | Net profit 40000 | 0so| 32000 | 24800 | 7,200 (4)

71. BUDGETS AND BUDGETARY CONTROL 15.71

qi

Variances:

.

Sales Price Variance = Actual Quantity (Standard Rate - Actual Rate)
= 72,000 units (X 4.00 7 3.89)= 2 8,000 (A)

Direct Material Cost Variance = Standard Cost for Actual output ~
‘Actual cost

= € 72,000 -? 73,600 = 7 1,600 (A)

Direct Material Price Variance = Actual Quantity (Standard
rate — Actual Rate)

EN
9 7a aoounits)

= 24800 (F)

Direct Material Usage Variance = Standard Rate (Std: Qty. -
‘Actual Quantity)

= #1 (72,000 units-78400 units)
= & 6,400 (A)

Direct Labour Cost Variance Standard Cost for actual
output ~ Actual cost

=€1,08,000-%1,04,800=*3 200 (F)

Direct Labour Rate Variance = Actual Hour (Std Rate ~ Actual
Rate)

70,400hours| +15:

+ 800 (F)

Standard Rate (Standard Hour —
‘Actual Hour)

= 21.5 (72,000 -70,400) = + 2,400 (F)
Variable Overhead = Recovered variable overhead -
‘Actual variable overhead
= (72,000 units x X 0.50) - 37,600
= 7 1,600(A)

Direct Labour Efficiency

72. 15.72, COST AND MANAGEMENT ACCOUNTING

+ Fixed Overhead Expenditure = Budgeted fixed overhead -
‘Actual fixed overhead,

= Y 40,000 - ? 39,200 = + 800 (F)

td. Profit (Budgeted Quantity =
‘Actual Quantity)

= 1050 (80,000 - 72,000)= 74,000(4)
4, Production Budget of Product Minimax and Heavyhigh (in units)

April May June | Toul

+ Sales Volume (Profit) Variance

| TT mm] TN TN TT ET
Sales #000) 6.000|10,000] 8.000] 12000] 9.000]30.000| 23,000)
|Add: Closing Stock | 2,500) 2000! 3,000) 2,250] 4,000! 3,500) 9,5001

(25% of next | | |

months sale)

Less: Opening Stock | 2000°| 1500:| 2.500) 2.000] 3000| 2250| 7,500
Production units | 8500) 6500| 10,500] 8250] 13,00 10,250] 32.000

* Opening stock of April is the closing stock of March, which is as per company’s
policy 25% of next month” sale
Production Cost Budget

[Element of cost Rate (2) ‘Amount (2)
[wm] aH TT HH |
(82,000| (25,000|

| units) | units)

| Direct Material 220 | 280 | 7040,000| 7000000

| Direct Labour 130 | 120 | 41,60,000) 30,00,000

nan

|(4.00.000 + 1,80,000 x 32,000)

|
aaa |

|
(500.000 + 120,000 x 25,000) |

104,167
101,04,167

73. BUDGETS AND BUDGETARY CONTROL

5. Number of days in budget period = 4 weeks x 5 days = 20 days
Number of units to be produced

| Product-A
(units)

| Budgeted Sales 2400

|Add: Closing stock

| ESSE 40

|Less: Opening stock 400

|

2480

(Material Purchase Budget

[ Material-X (Kg) | Material-Y (Kg)

| Material required:

| Product-A 12400 9,920
(2480 units x 5 kg) | (2.480 units x 4 kg)

| Product-B 12,900 25,800

|

(4,300 unit x 349) | 4.300 units x 6 kg)
25200 35720
| ad: Closing stock
(25300kgs. )
10d
a) 12650 ns
(35720kgs. )
(232204 came)
[ess Opening stock 1000 | so
| quantity to be purchased 36950 | 45936
| Rate per kg. of Material 4 | 26
[Total cost z1a700 | 2275616

(il) Wages Budget

Product-A (Hours)| Product-B (Hours) _
Units to be produced 2480 units 4300 units

¡Standard hours allowed per| 3 5

74. 15.74, COST AND MANAGEMENT ACCOUNTING

unit

[Total Standard Hours
allowed

Productive hours required
[for production

Add: Non Productive down’
time

Hours to be paid
Total Hours to be paid
Hours to be paid at normal
rate
Hours to at
premium rate

be paid

Total wages to be paid

7440 aso |
2a E
1260 ours 527 ou |
190% 89200 our) BO ot 2875 ur
160 32250

43,410 hours (11,160 + 32,250)

4 weeks x 40 hours x 180 workers
28,800 hours

43,410 hours - 28,800 hours
hours

28,800 hours x ? 25 + 14610 hours x
7375

7.7,20,000 + ? 547875=

14610

21267875