Cost Accounting Project Vi

8/10/2019 Cost Accounting Project Vi

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1

INTRODUCTION

Cost accounting has developed primarily to provide information to the

management for planning and control. Two important techniques applied for

these purposes are budgetary control and standard costing. They help in

forecasting the future activities and compare the actual results with the plans.

It is universal truth that without planning nothing can be done . The

same fundamental is applicable for successfully running of any organization.

Every organization has to get its goal and for that it has to plan various activities

which may include following:

How much to produce?

How much raw material will be required for production and how to

arrange for it?

How much labour will be required for production and how to arrange for

it?

How much funds will be required and from where to procure?

How much to sell and how to sell?

The list of items may be very long but one thing is clear that if we do not

plan then it is obvious that we are planning to fail.



2

DEFINITION

BUDGET

CIMA London defines a budget as follows: “A financial and/or

quanti tative statement prepared and approved prior to a defi ned time of the

policy to be pursued dur ing the period for the purpose of attaining a given

objective. It may include income, expenditure and employment of capital.”

An analysis of the above definition reveals the following features of a

budget.

1. Budget is a statement prepared in terms of money or equivalent of

money.

2.

It is prepared prior to a future period of time

3. The future period for which it is prepared as definite and defined

4. The objectives to be attained and the policies to be adopted are laid

down in advance.

BUDGETARY CONTROL

CIMA London defines budgetary control as “the establishment of

budgets relating to responsibil i ties of executives to the requir ement of a poli cy

and continuous comparison of actuals with budgeted resul ts either to secure

by individual action the objectives of that policy or to provide a basis for its

revision.”



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MEANING

Budget Budgeting Budgetary control

Simply speaking budget isnothing but a “plan” .

Technically speaking, budget

is a plan of f utur e activity

(covering specif ic per iod), it

is a layout of f utur e activi ties

of an organization. A budget

is generally expressed in

monetary terms (e.g. Material

Consumption budget invalue), however, a budget

may be for non-financial

terms also (e.g. Material budget in quantity, labour

budget in hours etc.).

In simple words budget is a

future plan of any particular

item, it is prepared in

advance and it may be in

financial terms or quantitative

terms.

It is the process ofpreparing,

implementing and

operating the budget

(i .e. plan).

In other words,

budgeting involves

the process of

preparing the budgets

and thenimplementing and

operating them.

In short, budget is a plan and the process

of preparing;

implementing etc. of

the budget is called

budgeting.

Without planningeverything fails, in the same

way without proper control

also everything fails. Thus,

to get success there should

be proper planning with

proper system of control.

Budgetary control is

nothing but the activi ty of

exercising control with thehelp of budgets . Budgetary

control may include:

a) Establishing budgetsto set the targets of

the executives of

organization.

b) To compare the

actual results with the

desired results (i.e.

budgets).

c)

Analyze the deviation

from planning

activity if any and to

make requiredchanges in budgets.

I n brief, budgets are organizational plan of future activity, budgetingis the activi ty of preparing these budgets and budgetary control means

the system of achieving the desired target wi th the help of budgets.



4

ESSENTIAL FEATURES OF BUDGETARY

CONTROL

1.

Budgetary control is the establishment of budgets,

2. Relating the responsibil i ties of executi ves to the requi rements of a

policy,

3. And the continuous compari son of actual wi th budgeted resul ts,

4. Ei ther to secure by individual action the objective of that policy, or

5. To provide a basis for its revision.

These aspects are explained in detail below.

1. Executive Responsibil i ty:

Budgets lay down targets and also fix the responsibility on each

executive for achievement of the targets. All executives in an

organization have a specific job to perform. But everyone must work in a

co-ordinated manner to achieve the overall objective of the organization.

Budgetary control aims to co-ordinate the actions of all executives so as

to achieve the overall targets. Thus budget is an excellent example of

Management By Objectives (MBO).

2. Requi rements of a poli cy:

Budgets must contain the policies directed towards achieving the

targets. The top management must clearly spell out the steps to be taken

by each executive for achieving the targets. The responsibilities of

executives must be related to the requirements of a policy. Thus

budgetary control is an important tool of long term planning. Budgets

specify the objectives of the organization and the policies designed to

achieve those objectives.



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3. Comparison of actuals with budgets:

Budgets can be a tool of control only when the actual results are

compared with the targets. Thus the actual results must be continuously

compared with the budgets, to ascertain the deviations from the target set.

4. Corr ective action:

Management must take immediate corrective action if the actual

results are unsatisfactory when compared with targets set in the budgets.

The remedial action may be of two types-

i . The concerned executive is given detailed information regarding

the budget variances to enable him to take action and make efforts

to attain his objective. The deviations from budgets act as a signal

to management. When the actual results differ from the budget, the

concerned executive has to study where and why the difference has

occurred. Thus budget is also an excellent example of

management by exception. The executive concentrates on the

problem areas indicated by the deviations from budget so asachieve his targets.

i i . Management may study the budgets to ascertain if the targets set

were unrealistic, and if so, revise the targets themselves.



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OBJECTIVES OF BUDGETORY CONTROL

1. Planning the poli cies

A budget is a plan of the policies to be pursued during a given

period of time for achieving the given objectives. Budgetary control

compels effective planning of all operations well in time.

2. Define targets

Establish the overall aims of the business and determining the

targets of performance for each section or department of the business.

3.

Define Responsibil i ties

Laying down the responsibilities of each of the executives and

other personnel so that everyone knows what is expected of him and how

he will be judged.

4. Co-ordinating activi ties

Various departments and sections of the firm are involved in the

task of preparing budgets. It develops team spirit and secures co-

operation from all departments to achieve the common objective of the

firm.

5. Control li ng costs

Budgets are prepared for every important function and department.

Actual performances are compared with that of budgets. This facilitates

control over different activities and costs.

6.

Optimi ze Resources and M aximize profi ts

Ensuring the best use of all available resources to maximize profit

or production, subject to the limiting (key) factors.

7. I ncreases efficiency

Well thought plans, carefully selected course of action and a

system of continuous evaluation of performances help to increase the

overall efficiency of the firm.



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STEPS IN BUDGETARY CONTROL

One type of budgetary control cannot be adopted for all firms. The

following steps are necessary to prepare suitable budgets and effective

implementation of the budgetary control system.

1. Preparation of organization chart:

Authority and responsibility of all executives should be clearly

defined. This will enable the identification of accountability of each

executive.

ORGANISATION CHART

TOP MANAGEMENT

SALES

MANAGER

ACCOUNTS

MANAGER

PRODUCTION

MANAGER

PERSONNEL

MANAGER

PURCHASE

MANAGER

PURCHASE/

MATERIAL

BUDGETLABOUR

BUDGET PRODUCTION/

MATERIAL/

PLANT

UTILISATIONBUDGET

SALES

BUDGET

OVERHEADS/

CASH/

CAPITAL

EXPENDITURE

BUDGET



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2. Establi sh Budget Centres:

CIMA has defined a budget centre as –“a section of the

organization of an undertaking defined for the purpose of budgetary

control.” Thus a sales manager may have different sections reporting – to

him, such as selling, advertisement and so on. Each such section may be

defined as a budget centre for the purpose of budgetary control. This

helps in fixing the responsibility for control of costs and achievement of

targets on each section of the department.

3. Appoin tment of budget committee:

In the small organization, the budget officer will formulate

the budget, co-ordinate with heads of various departments, compare the

actual results with the budgets and report the differences to management.

In a large organization this task of „administration‟ of budget may be

performed by a budget committee consisting of the chief executive, the

budget officer and the heads of the departments. The budget committee is

an advisory committee. The final decisions are taken by the chief

executive. The budget officer acts as the secretary of the budget

committee. The main functions of a budget committee are-

a. Establish budget centres

b.

Fix the budget period

c.

Determine the principal/key budget factor

d. Receive and study all functional budgets

e. Approve the functional budgets and master budget

f. Lay down the policies to be pursued to achieve targets

g.

Fix responsibility of each executive to achieve the targets

h.

Obtain the reports of comparison between actual results budgets andi. Recommend action to be taken.



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4. Preparation of Budget Manual:

CIMA has defined Budget Manual as-“a document which

sets out the responsibilities of the persons engaged in, the routine of, and

the forms and records required for, budgetary control.” Budget manual is a

document which contains a detailed procedure about the operation of

budgetary control system in an organization. It contains routine forms and

documents to be used and responsibilities of various persons for the

preparation and implementation of budgets. It indicates the dates by which

necessary data, information, budgets and reports are to be prepared and

supplied. All of the above stated facts and forms constitute the contents of

a budget manual.

The budget manual serves as a rule book for the

implementation of a budget programme in an organization. It in fact lies

down, what is to be done, how it is to be done, when it is to be done, and by

whom. It is always preferable to devote adequate time in the preparation of

the budget, to avoid any confusion in carrying out various jobs for theeffective and successful operation of the budgetary control system. The

budget manual should be circulated to all the departmental managers to

facilitate the work of budgeting.

A budgetary control system will operate smoothly only if

there is a written document which sets out-

a.

Objectives of budgetary control b.

Principles of budgetary control

c.

Definitions of terms used in budget manual

d.

Types of budget to be prepared e.g. basic, current etc.

e. Organisation chart

f. Budget centres

g.

Budget period

h. Budget key factor



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i.

Responsibility, duties, authority of each functional manager, and

the budget committee.

j.

Routine to be followed, i.e. procedure for formulation, revisions,

approval, comparison and follow up of budget.

k.

Forms required in above routine for formulation, comparison ,

follow up etc. of budgets.

l. Records required for budgetary control i.e. the accounting records,

accounting codes, budget codes etc.

5. Determination of budgeted period:

CIMA has defined budget period as- “the period for which

a budget is prepared and employed”. A budget may be prepared for any

length of period – from a month to several years. The length of period of

budget depends upon the-

a. Nature of I ndustry- The length of period of which budget is prepared

and employed basically depends upon the nature of industry, the nature

of demand and supply of products, the rate of changes in business

conditions in that industry, the length of the manufacturing cycle from

raw material to finished product and soon. Thus capital intensive

industries like power generation, shipping, transport etc. use a long term

budget covering a period of 7-10 years. Consumer goods industries may

prepare budget for a shorter period say 1-3 years. Seasonal industries

may prepare budget for still shorter periods say every quarter. Normally

however, a budget is prepared for one year to facilitate comparison with

the actual results of one financial year.

b. Need for control - Each function such as sales, production, research is

needed to be controlled in different ways. Production may require to be

controlled daily or weekly, sales may require to be controlled weekly or



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monthly, research may require to be controlled quarterly; capital

expenditure may require to be controlled yearly and so on. Hence the

functional budgets may be prepared for different periods while the

master budget is prepared annually.

6. Determination of key factor or budget factor:

When budgetary control is being established, there will

normally be a factor which determines the maximum quantity that can be

produced or sold. Such factor is called the principal, key or governing

factor. CIMA has defined a principal factor as- “the factor the extent of

whose influence must first be assessed in order to ensure that the functional

budgets are reasonably capable of fulfillment.” Generally, sales is the

principal factor. When sale is the key budget factor, the maximum quantity

that can be sold is ascertained first. On the basis of the maximum sales

quantity the sales budget is prepared first and all other functional budgetssuch as production, purchase etc. are derived there from. In some cases,

machinery, labour, raw materials, finance etc. may be the key factor. If there

are two or more key factors, the relative influence of each factor has to be

judged carefully. This is done by mathematical techniques such as

operational research, linear programming etc. Key factors are not

permanent; they can change in the long run. Thus, new machinery can be purchased to increase plant capacity; advertising can increase demand and

sales and so on.



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TYPES OF BUDGETS

Classif ication based on f lexibi li tyFixed or static budget Flexible budget

It is a budget which is prepared for a

particular level of activity, if an

activity level changes, and then

revised budget for actual activity is

not prepared.

It is a budget designed to change in

accordance with the level of activity.

In other words, budgets for different

level of activities are prepared, if the

activity level changes then the

revised budget for revised level of

activity will be adopted.

Classif ication based on period

Long- term budget Short-term budget

A long term budget generally covers

a period exceeding one year.

e.g. Research and Development

budget, Capital expenditure budgetetc.

Short term budget are budgets other

than long term budget. Generally

they cover a period of less than one

year.e.g. sales budget, purchase budget

etc.

Practically the period of classification may slightly differ from organization

to organization. Further, sometimes budgets (on the basis of period) are

classified as long term, short term and current budgets.

Classif ication based on content

Financial budget Quantitative budget

It is a budget which is expressed in

monetary terms.

e.g. sales budget (in value), material

cost budget, labour cost budget etc.

It is a budget which is expressed in

non-monetary terms.

E.g. sales budget (in quantity),

material consumption budget (in

units), labour hours budget etc.



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Classif ication based on coverage

Functional budget Master budget

As name indicates, these budgets are

prepared for various functions of an

organization like sales (sales

budget), purchase (purchase budget),

production (production budget),

material/labour (material cost

budget, labour cost budget), etc.

Functional budgets are also known

as subsidiary budgets or

departmental budgets.

As name indicates, it is a summary

of different functional budgets.

Generally this budget is prepared by

adopting total figures of different

functional budgets. Budgeted profit

and loss A/c or budgeted balance

sheet is an example of master

budget.

Various functional budgets:

Functional budgets can be broadly classified as budgets relating to

operation of an enterprise and budgets relating to financial activities of the

enterprise.



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FUNCTIONAL BUDGETS

FUNCTIONAL BUDGETS

Relating to fi nancial activi ties

of an enterpri se

Relating to operation of an

enterprise

1. Sales Budget (can be in quantity

or in value)2. Production budget (can be in

quantity or in value)

3. Cost budget/overheads budget

(can be in fixed, variable and/or

semi-variable capacity)

a. Cost of production budget, it

can include,

i.

Direct material budgetii. Direct labour budget

iii. Production overhead

budget

b. Administration cost budget

c. Cost of goods sold budget

d. Selli ng and distri bution cost

Budget

4.

Di rect materi al i n quantity5. Plant util ization budget (can be

in time/load machine wise)

6. Closing inventory budget

1. Cash budget

(Receipts/Payments/balance)

2. Capital expendi tur e

budget

3. Long term Research

and Development cost

budget



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UNDERSTANDING OF MAJOR FUNCTIONAL

BUDGETS

Sales budget Sales are the ultimate objective of any organization. All other

major budgets are based on sales budget; hence, an inaccurate sales

budget may scrap the entire budgeting process.

Sales budget can be expressed in quantitative terms as well as in

terms of value.

Production budget

After preparation of sales budget, the next step will be to prepare

the production budget to produce the required units. Production

will be based on the budgeted sales and desired closing inventory.

One of the important factor to be considered while preparing

production budget is the production capacity of the firm. If the

firm is unable to meet the desired production, it may think of

different options like overtime, sub-contracting etc.

On the other hand, if the capacity is surplus, the firm may think of

suitable action to dispose of the surplus capacity.

Particulars Units

SalesAdd: Closing Stock

Gross quanti ty acquired

Less: Opening Stock

Production

XXXX

XXX

XX

XXX

Direct mater ial budget/mater ials consumption budget

Direct material budget can be prepared after preparation of

production budget.

Direct material budget can be prepared in quantitative terms or invalue.

Direct materials budget shows the details of raw materialsrequirements of the organization.



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Pur chase budgetAfter ascertainment of the quantity of raw materials

required, the next step is to design a proper budget determining the

quantity/value of raw materials to be purchased. Purchase budget

discloses the quantity/value of raw materials to be purchased.Particulars Raw materials (quantity/value)

Consumption (units)

Add: Closing stock (units)

Less: opening stock (units)

Purchase (units)

*Rate per unit (Rs.)

Purchase value(Rs.)

XX

XXXXX

XX

XXX

X

XXX

Di rect labour budgetOn the basis of budgeted production, labour budget

is designed. Labour budget discloses the budgeted direct labour time

(hours, days etc.) and labour cost involved in production.

Production overhead budgetProduction overhead budget is nothing but a simple

schedule showing various elements of total production overheads. Main

objective of preparing production overheads budget is to determine the budgeted recovery rate.

Cost of production budgetCost of production budget is nothing but a schedule

showing various elements of cost of production. It is similar to “Cost

Sheet”.

Admini strative overheads budget

Administrative overheads budget is nothing but asimple schedule showing various elements of total administrative

overheads.

Cost of goods sold budgetCost of goods sold budget is nothing but a schedule

showing various elements of cost of goods sold.



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Sell ing and distribution overheads/cost budgetSelling and distribution cost budget is nothing but a

simple schedule showing various elements of total selling and distribution

cost/overheads.

Master budgetMaster budget is nothing but a budgeted income

statement and balance sheet. In other words, master budget consists of

two elements viz. budgeted income statement and budgeted balance

sheet.

Budgeted income statement for the year ending on ……..

Particulars Rs.

Budgeted sales X

Less: Budgeted cost of goods sold (X)Budgeted gross margin XX

Less: budgeted selling and distribution expenses (X)

Budgeted operating profit XX

Add: non operating income X

Less: non operating expenses (X)

Budgeted profit before tax XX

Less: income tax @-----% (X)

Budgeted profit after tax XXX

Ending/closing inventory budgetEnding inventory budget is nothing but a schedule

showing details of ending inventory of various items i.e. raw materials,

WIP and finished goods. Information derived from ending inventory

budget is used to prepare cost of goods sold budget and master budget

(i.e. income statement and balance sheet).

Plant uti li zation budget

Plant utilization budget is prepared to ascertain the

required capacity to produce the budgeted output. This budget is

generally in terms of machine hours or number of plants or in terms of

both (i.e. machine hours as well as number of machines).



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ZERO BASED BUDGETING

Meaning:

It is a technique which was originally devised tohelp the management in the difficult task of allocating the resources more

efficiently between the projects and other cost items in the “support

areas”. (The support areas include production planning, repairs and

maintenance, research and development, engineering design, data

processing, quality control, finance, marketing, etc.

It starts from the basic premises that the budget for the next year is zero

(nil) and every process or expenditure has then to be justified thoroughly

in order to be included in the next year‟s budget. The burden of proof

thus, shifts to each manager to justify why the money should be spent onall activities and to indicate what would happen, if the proposed activity

is not carried out and no money is spent.

Requirements:

1.

There must be budgeting system within the organization.

2. It requires managers to develop quantitative measures for use in

performance evaluation.

Merits:

1.

It provides a basis for evaluating decision package on the basis

of cost benefit considerations.

2. It reduces inefficiency and achieves high level of

effectiveness.3.

It can be applied to cost reduction programmes.

4.

It ensures thorough examination of every function of activity.

5.

It facilitates rational analysis, decision making and discard the

low priority activities.

Demerits:

1.

Zero based budgeting may emphasize on short term benefits to the

detriment of the long term benefits.

2.

It may encourage the false idea that all the decisions have to be made in

the budget. Management must be able to meet unforeseen opportunities

and threats at all the times, and must not feel restricted from carrying out

the new ideas simply because they were not approved by a decision package cost benefit and ranking analysis.



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PERFORMANCE BUDGETING

Performance budgeting involves evaluation of the

performance of the organization in the context of both specific as well asoverall objectives of the organization. It provides a definite direction to

each employee and also controls mechanism to higher management. The

basic objective of “performance budgeting” is to provide output oriented

budget information with a long range prospective to allocate the resources

more effectively. A performance budget is one which presents-

1.

The purposes and objectives for which funds are needed;

2. The costs of activities proposed for achieving these objectives;

3.

Quantitative data measuring the accomplishments;4.

Work performance under each activity.

Features of per formance budgeting-

a.

Performance budgeting has drawn inspiration and much of its form from

cost accounting and scientific management.

b.

In performance budgeting, decision making is primarily downward.

c.

Performance budgeting requires that budgetary decisions should made by

emphasizing output categories such as goals, purposes, objectives and

products or services

d.

Performance budgeting makes prospective approach with its focus on

future impacts of current major decisions or choices.

Departmental heads of the respective department is

responsible for preparing the performance budget in respect of his

department. Performance budgeting requires preparation of periodical

performance reports.



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ADVANTAGES OF BUDGETARY CONTROL

1. Effective use of resources: Budgets are prepared after a careful study of

alternative course of actions. The most profitable alternative is selected in

conducting the business. Thus, budgetary control ensures optimum

utilisation of resources in achieving overall organisational goals.

2. Maximum output: budgets direct capital into the most profitable business

activities. It keeps capital investment at the minimum level and ensures

maximum output by the optimum utilisation of capital.

3.

Lays down objectives: budget lays down an objective for the business asa whole. It sets a goal to achieve and thereby directs the activities of

various departmets towards that common goal.

4. Defines responsibilities and accountability: it clearly defines the

responsibilities and accountability of every person in the organisation. It

creates awareness among the employees of their rights, duties and

responsibilities.

5. Ensures teamwork: budgets are prepared by different functional heads.

Budget committee consists of people from different levels of an

organisation. Thus, budgetary control motivates people to work together

and march towards a common goal.

6. Ef f icient planning and decision making: budgetary control encourages

an early and exhaustive study of different problems of management. It

makes planning and adequate study of alternatives a basic act among

managers.

7. Control expenditure: budgets provide detailed plans for spending. They

regulate expenditure by clearly showing losses, wastes and inefficiencies.

8. Evaluates performances: budgets provide a valuable tool of evaluating

managerial policies and goals periodically. Such evaluations help to

establish guidelines for the entire organisation.



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9. Co-ordinates business activities: budgetary control co-ordinates and

corelates all business activities and directs them towards the achievement

of a desired goal.

10.

Develops cost consciousness: budgets clearly communicate the policies

and objectives of the firm and the total resources to be spent to achieve the

goals. They stimulate the effective use of resource and discourage waste.

11. Provides basis for measur ing performaces : it provides budget as a

yardstick for measuring performaces of each department and sectionof the

organisation.

12.

I ncreases employee productivity: well defined rights and responsibilities

of individual employees, efficient communication of policies and

objectives of the firm to the employees, incentives to perform efficiently

and periodic review of performances lead to higher productivity of

employees.

13. Encourages productive competition: it incourages productive

competition among employees through incentive schemes.14. Management by exception: evaluation of performances points out weak

spots, which are not in accordance with the budgeted performances.

Remedial measures are taken only against such spots.

15. Sets up standard costing: it creates conditions necessary for the adoption

of a system of standard costing.



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LIMITATIONS OF BUDGETARY CONTROL

1.

Planning and budgeting is not an exact science. The future is

unpredictable . Planning and budgeting use approximations and

estimates, which may not be cent percent accurate.

2.

Budgets are to be revised from time to time. Changing condition of

business may require rapid revision of budgets, which may be very costly

affair.

3. Co-ordination and co-operations of all members of management is

difficult to achieve. The success of the system depends on the co-

operation and intensive participation of all members of management. But

it is not easy to achieve these.

4.

Budgets may kil l managerial i nitiative . Executives will concentrate only

on achieving the target set by budgets. This limits the innovative ability

of the executives.

5.

Budgets are only the tools of management. Budgets do not eliminate or

substitute management. It is dangerous to overweigh the role of budgets

in achieving desired goals.

6. Budgeting is costly and time consuming . Therefore small organisations

can not afford to adopt the system of budgetary control.

7.

Excessive emphasis on budgetary control may lead to unhealthy

competition and dishonest behaviour among functional executives. They may submit inaccurate estimate of future costs and revenues.



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CASE STUDY

F irm Name: Ganesh Engineer ing Works

Address: E-1, Mandal I ndl. Compound, Road no. 21/34, Adiwasi pada,

Wagle estate, Thane 400604.

M r. K.B.Pandey and M r. R.M .Singh are the

partners in the firm. They started the firm in 1996 at small scale and with

production of one product i.e. fusible plugs.

At present, the firm manufactures 3 products,

namely fusible plugs, nozzles and gears. The current pattern of sales is in the

ratio of 8:2:1 respectively. The relevant data are as under:

Products Fusible plugs Nozzles Gears

Selling price per unit Rs. 130 230 417

Raw materials per unit Kg. 0.50 1.2 2.5

Direct materials per unit Kg. 0.25 - -

Skilled labour hours/unit Hrs. 4 6 8

Semi-skilled labour hours per unit

Hrs. 2 2 3

Variable overheads per unit Rs. 20 40 80

The prices of raw materials and direct materials

respectively are Rs.100 and Rs.40 per kg. The wage rates of skilled and semi-

skilled labour respectively are Rs.6 and Rs.5. Each operator works 8 hours a

day for 25 days in a month.

The positions of inventories are as under:

Raw

materials(kgs.)

Direct

materials(kgs.)

Fusible

plugs(units)

Nozzles(units)

Gears(units)

Opening 600 400 400 100 50

Closing 650 260 200 300 50

The fixed overheads amount to Rs. 2, 00,000 per month and the firm desires a

profit of Rs. 1, 20,000 per month.



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1. Sales budget in quantity and value:

Sales budget

Particulars Fusibleplugs

Nozzles Gears Total

Units to be sold

(note 1)12800 3200 1600 17600

*selling price

per unit (Rs.)130 230 417 -

Sales in value

(Rs.)1664000 736000 667200 3067200

2.

Production budget in quantity:Production budget

Particulars Fusible plugs nozzles Gears

Sales (units)

(note 1)12800 3200 1600

Add: closing

stock (units)200 300 50

Less: openingstock (units)

(400) (100) (50)

Production

(units)12600 3400 1600

3. Purchase budget in quantity:

Pur chase budget

Particulars Raw materials Direct

materials

Raw material required in production:

Fusible plugs @ 0.50 kg. for 12600 kg. Nozzles @ 1.20 kg. for 3400 kg.

Gears @ 2.50 kg. for 1600 kg.

6300 kg.4080 kg.

4000 kg.

Direct material required in production of

fusible plugs @ 0.25 kg for 12600 kg.

-

3150 kg.

Total quantity required in production 14380 kg. 3150 kg.

Add: closing stock 650 kg. 260 kg.

Less: opening stock 600 kg. 400 kg.

Quantity to be purchased 14430 kg. 3010 kg.



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4.

Direct labour budget for wages and for number of workers:

Di rect labour budget in respect of wages

Particulars Fusible

plugsNozzles Gears Total

Skilled labour hours

required in

production (note 2)

50400 20400 12800 83600

*wage rate per hour Rs. 6 Rs. 6 Rs. 6 Rs. 6

Total wages for

skilled workers (A)302400 122400 76800 501600

Semi skilled labour

hours required in

production (note 2)

25200 6800 4800 36800

*wage rate per hour Rs. 5 Rs. 5 Rs. 5 Rs. 5

Total wages for

semi-skilled

workers (B)

126000 34000 24000 184000

Total labour cost

(A+B)428400 156400 100800 685600

Di rect labour budget in respect of no. of workers

Particulars Skilled labour Semi-skilled

labour

Total hours required in

production83600 36800

(÷) labour hours per worker per

month(*)200 hours 200 hours

Total no. of workers required 418 workers 184 workers

(*) Each worker works for 8 hours a day and for 25 days a month, hence

total working hours per month will come to 200 hours (8 hours * 25 days

per month).



26

Note 1: computation of units to be sold

Company desired a profit of Rs. 120000 per month.

Fixed overheads are Rs. 200000 per month.

At total sales, total contribution will be equal to total fixed cost plus profit, thus at total sales, contribution will be Rs. 320000 (Rs.

200000 + Rs. 120000).

Thus, we can say the total consumption from all the products

should be Rs. 320000. This contribution will be derived from saleof product fusible plugs, nozzles and gears.

To derive sales of each product, we have to divide the desired

contribution of Rs. 320000 in the combined ratio as computed

below:

Particulars Fusible plugs(Rs.)

Nozzles(Rs.)

Gears(Rs.)

Raw materials required per unit (kg.) 0.50 1.20 2.50

*cost per kg. 100 100 100

Raw materials cost per unit (A) 50 120 250

Direct materials required per unit (kg.) 0.25 - -

*cost per kg. 40 - -

Direct materials cost per unit (B) 10 - -

Skilled labour hour per unit 4 6 8

*cost per labour hour 6 6 6

Skilled labour cost per unit (C) 24 36 48

Semi- skilled labour hour per unit 2 2 3

*cost per labour hour 5 5 5

Semi-skilled labour cost per unit (D) 10 10 15

Variable overheads per unit (E) 20 40 80

Total variable overheads

(F)=(A+B+C+D+E)114 206 393

Selling price per unit (G) 130 230 417Contribution per unit (G-F) 16 24 24

*sales ratio 8 2 1

Combined ratio to distribute

contribution128 48 24

By distributing the contribution of Rs.

320000 in above ratio we will get

contribution from each product

204800 76800 38400

(÷) contribution per unit 16 24 24

Sales (units) 12800 3200 1600



27

Note 2: computation of hours required in production of each product.

Particulars Hours

Skilled labour required in production:

Fusible plugs @ 4 hours for 12600 kg. Nozzles @ 6 hours for 3400 kg.

Gears @ 8 hours for 1600 kg.

5040020400

12800

Semi-skilled labour required in production:Fusible plugs @ 2 hours for 12600 kg.

Nozzles @ 2 hours for 3400 kg.

Gears @ 3 hours for 1600 kg.

25200

6800

4800



28

CONCLUSION

We conclude that Budgetary control is a technique of managerialcontrol in which all operations are planned in advance in the form of budgets

and actual results are compared with budgetary standards. An effective system

of budgetary control manages to plan and control the use of resource in a

systematic and logical manner. Financial objectives and constraints should be

communicated to managers of budget centres and regular monitoring keeps

management informed of progress towards objectives.



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