SYDENHAM COLLEGE OF COMMERCE & ECONOMICS

2015-16

Program under faculty of commerce

MASTER OF COMMERCE (EVENING)

Project Title:

BUDGETARY CONTROL IN PARTIAL FULLFILMENT OF THE REQUIRNMENT UNDER SEMESTER

BASED ON CREDIT & GRADING SYSTEM FOR POST GRADJUATION SEMESTER – I

SUBMITTED BY:

CHINTAN CHIMANBHAI KANABAR

Roll no. 27 (Div – A)

PROJECT GUIDE:

Dr. Uttam Kattermal

1

DECLARATION

I, CHINTAN CHIMANBHAI KANABARof Sydenham College of commerce &

economics ‘B’ Road, Church gate, Mumbai – 400020 currently studying in M.com –I

(Evening), Hereby declare that I have completed this project on BUDGETARY

CONTROL for semester –I of the academic year 2015-16. The information given under

the project is true and fair to the best of my knowledge.

Signature of Student:

.

CHINTAN CHIMANBHAI KANABAR

Roll No. 27 (DIV-A)

2

CERTIFICATE

This is to certify that MR. CHINTAN CHIMANBHAI KANABARof the M.COM – I

(Evening) Semester-I has successfully completed project on BUDGETARY CONTROL

under the Guidance of Mr.Uttam Kattermal

1. Project Guide. : Uttam Kattermal

2. Internal Examiner :

3. External Examiner :

Date :

Time :

3

INDEX

4

AKNOWLEDGMENT

I would firstly like to thank “UNIVECITY OF MUMBAI” For giving us the liberty to select

the topic which will benefit to us in the future. I would like to thanks to the principle of

Sydenham College of commerce & economics Dr. Annasaheb khemnar for giving me an op-

portunity to study in the

Esteemed college and doing the course of accounting. I would like to express my sincere grati-

tude and thanks to professor Dr. Uttam Kattermal who is my project guide , as he has

been guiding light on this project and also provided me with the best of his knowledge, advice

and encouragement which helps in the successful completion of my project.

My colleague and specially my parent who has also supported and encourages me the success

of this project to the large extant is also dedicated to them.

I would like to thanks all those who helped me but I forgotten to mention in this space

Signature of Student:

.

CHINTAN C KANABAR

Roll No. 27 (DIV-A)

5

Budgetary Control

Why should organizations use budgets?

Running a business often requires owners to carefully plan and review their finances. Most

companies use some form of accounting for identifying, measuring, analyzing and reporting

their financial information. Accounting tools may include budgeting, financial statements, fore-

casts and other tools for managing financial information. Business budgets for maybe one of

the most important accounting tools of company may use in their business.

Every organization survives by receiving some money from members, donors, fund-raising or

selling of services this is called income. Organizations also spend money to run its program-

mers and these are called expenses. The budget is a table which shows the actual amounts that

the organization expects its expenses and income to be for a fixed period of time, such as one

year. The budget tells you how much the organization thinks it will need to do its work, where

it hopes it will come from and how much money it still needs to find.

The budget is an essential to tool help you run a more effective organization. In the same way

that the government needs to draw up an annual budget, to make sure that all plans and pro-

grammers are properly funded, an organization needs to prepare a budget in careful detail.

Budgeting is part of planning - you start with setting your objectives, then you draw up action

plans and budgets. [See Guide on Planning]

Unless you know how much money you will need to carry out your plans, and where you ex-

pect to get that money from, you may end up halfway through the year with no money to go

any further. Preparing a budget forces you to plan your spending and your fund-raising and to

be realistic about what you can afford to do. Without a budget there can be no effective imple-

mentation.

6

A budget also serves a lot of other purposes:

It is a simple way to make financial information accessible to all people in the organiza-

tion who need to use it. Each member or staff member should know how much money is

available for what part of your work.

It helps you to understand exactly what your work will cost and what limitations you

have so that your plans can be made more realistic.

It clarifies where you have gaps and need to do more fund-raising. It also helps to write

fund-raising proposals based on realistic costing.

All financial statements should be written in terms of the budget so that it is easier to be

transparent and accountable and to ensure that no money is spent on costs that you have

not budgeted for.

It helps members or executive members or management to monitor expenditure through-

out the year and to make sure that it is in line with the budget amounts - monitoring

should happen every month or two and should be in terms of the budget categories.

It makes reporting to members or funders much easier since the expenditure can be com-

pared to the amounts that you actually budgeted.

A good budget can also help to avoid waste. When every amount is carefully calculated,

it is easy to see how your money is being spent and to decide whether you are making

any unnecessary expenditure.

7

Important things to know about budgets

A budget should be drawn up on the basis of three main factors:

A budget should always be based on proper plans, drawn up to make sure that you reach your goals for that year. A budget should be the summary of all the costs and income that you will receive that will make sure that your plans are implemented.

The costs in the budget should be based on your financial statements of the previous year and the budget items should compare the expenditure of the previous year to this year. This will show that your budget is based on fact and experience.

The budget should be realistic and should also show what income you expect and what income you would still need to raise.

Every budget should contain a number of categories. The two main categories are "Ex-pected Expenditure" and "Expected Income".

Under the Expected Expenditure the categories could be:

Capital costs  

Things that you have to buy like computers, cars etc.

Running costs  

Expenditure that will help your organization to run an office and administration to do its work:

items like rent, electricity, telephone, hiring of equipment.

Staff costs  

Salaries, staff benefits, staff training etc.

Project costs or operational costs  

Costs that are linked to the specific projects or campaigns that you plan to run that year. This

would include things like buying materials, printing costs, transport costs, workshop costs,

catering, media production, venues, sound systems etc.

8

Under the Expected Income of the organization you should include

Categories like:

Donor funds  

List each funder and the amount you expect from them,

Membership fees  

If your members pay fees list the amount you expect to get this year,

Donations  

List the amount you expect to get from small public donations,

Fund-raising events  

If you plan to organize events, list what profit you expect to make and

Sales  

If you sell your services or any products.

The budget should clearly show whether there is a difference between your Expected Expendi-

ture and your Expected Income. If you will get more money than you will spend, this is called

an expected surplus; if you will get less money it is called a deficit. When your budget shows a

deficit you will obviously need to either cut the budget or do some serious fund-raising to

make up the amount.

It is very important to write a budget in such a way that all amounts are justified and explained.

For example if you want to spend R100 000 on salaries, you should explain how many people

will be employed for how much money. For example:

SALARIES 100,000

1 coordinator @ R60 000 per year

1 administrator @ R40 000 per year.

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The budget can be drawn up by anyone in the organization who is clear about the plans of

the organization as well as the possible income and expenditure. It is usually done by the

treasurer, the co-ordinator or director or by a budget or finance committee. Whoever pre-

pares the budget must work together with others, especially people in charge of the pro-

grammers of the organization and people responsible for bookkeeping. Once the budget

has been prepared, it needs to be checked and discussed by other members of your organi-

zation such as executive or staff who will be using the money.

Budgets are usually drawn up for one year but you can also draw it up for a few years at a

time, or have a budget that is just for a specific project that may only last a month or two.

A budget should be used as the basis for any audits that are done of your organization. Au-

dits are usually done by independent accountants who go through all your financial

records to check that the money was spent for what it was intended. A budget is used as

the main tool for judging this.

The budget is not simply a document for funders and executives to see whether you have

used the money properly. It should be a living tool for financial management. The budget

is never set in stone. Circumstances and the needs of your organization may change during

the year and a budget can also be changed if necessary. The overall budget of your organi-

zation is an internal one, and can be amended.

A budget for a specific project that you send to a funder is not so easy to change, since

you have promised to do the work that is reflected in the budget and you only have a set

amount of money available to do this work. If you want to change a budget that has been

approved by a funder, you should only do that in consultation with, and with the permis-

sion of the funder.

Sometimes it is necessary to have two different budgets for your organization. One as the

ideal budget that you would like to have and a second one as a minimum budget of the

money that is absolutely necessary for your organization to survive. Often when your

draw up the ideal budget, you are not yet sure that your will get all the money your need

and a minimum budget will help you to decide which costs can be cut, if you don't manage

to raise the necessary funds.

10

Budgetary control

Definition :

“Budget is a financial & / quantitative statements, prepared & approved prior to a defined pe-riod of time of the policy to be pursued during that period for the purpose of attaining a given objective. They may include income, expenditure & the employment of capital”.

Budgetary Control

“It is the process of utilizing the various budgets like production budget, sales budget, etc,. for the purpose of internal control”. This is done with intention of minimizing the wastage & max-imizing the efficiency of various departments.

According to ICMA terminology budgetary control as “the establishment of budgets relating the responsibilities of executives to the requirements of the policy & the continuous compari-son of actual with the budgeted results either to secure by individual actions the objective of that policy to provide basis for its revision”.

Steps involved in the Budgetary Control Techniques:

a) Fise the objectives clearly.

b) Formulating the necessary plans to ensure that the desired objectives are achieved.

c) Translating the plans into budgets.

d) Relating the responsibilities of executives to the budgets.

e) Continuous comparison of the actual results with that of the budget & the ascertainment of deviations (Positive/negative).

f) Investigating into the deviations & establishing the causes.

g) Presentation of information to the management relating the variances to individual respon-sibilities.

h) Corrective action of the management to present recurrence of variance

11

TYPES OF BUDGET

LONG -TERM BUDGETS:

The long-term budgets prepared for a long period of five to ten years. They are concerned with planning the operations of a firm over a considerably long period of time. The financial “con-troller” exclusively for the top management usually prepares long-term budgets. These budgets are very useful in terms of physical units (i.e. quantities) or percentages, since accrued values may be difficult to forecast over such long-period. Capital expenditure, research and develop-ment budgets, etc, are examples of long-term budgets.

SHORT TERM BUDGETS:

Short-term budgets are budgets prepared for a short period of one to two year. They are pre-pared for those activities the trend in which cannot be for seen easily over long periods. These budgets are very useful in case of consumer goods industries such as sugar, cotton, textiles, etc. they are generally prepared in terms of physical units (i.e... quantities) as well as monetary units (i.e. values) materials budget. Each budget etc, are example of short-term budget. They are useful to lower level of management for control purpose.

CURRENT BUDGETS:

Current budget is a budget, which is established for use over a short period of time and is re-lated to current conditions. Thus current budgets are essentially short term budgets adjusted to current (i.e., present or prevailing) condition or circumstances. They are prepared for a very short period. Say, a quarter or a month. They related to current activities of the budgets.

INTERIM BUDGETS:

Interim budgets are budgets, which are prepared in between two budget periods. These budgets may get integrated with the budget of the following period.

12

Types of Budget

Based on Functions Based on Rigidity

13

a) Production Budgetb) Production Cost Bud-

get c) Materials Budgetd) Materials Cost Budgete) Cash Budgetf) Capital Budgetg) Sales Budgeth) Selling Cost Budgeti) Plant Utilisation Budgetj) Labour Budget

a) Fixed Budgetb) Flexible Bud-

get

Master Budget:- It is a budget which summarizes all the functional budgets.

According to ICMA, “A master budget is the summary budget incorporating its components functional budgets & which is finally approved, adapted & employed”.

According to ICMA, “A budget which is designed to remain unchanged irrespective of the vol-ume of output/turnover attained”. – Fixed Budget.

According to ICMA, “A budget which, by recognising the difference in behaviour between fixed & variable cost in relation to fluctuations in output/turnover, is designed to change appro-priately with such fluctuations”.

14

BUDGETARY CONTROL

Meaning of Budget:

According to Brown and Howard, “A budget is a pre-determined statement of management

policy during a given period which provides a standard for comparison with the results actually

achieved.”

Budgeting:

The act of preparing budgets is called budgeting. In the words of Batty, “the entire process of

preparing the budgets is known as budgeting.

Meaning of Budgetary Control:

Budgetary control is a system of controlling costs through preparation of budgets. Budgeting is

thus only a part of budgetary control. According to CIMA, “Budgetary control is the establish-

ment of budgets relating the responsibilities of executives of a policy & the continuous com-

parison of the actual with the budgeted results, either to secure by individual actions the objec-

tive of that policy to provide basis for its revision”.

Forecast & Budget:

It is important to note carefully the distinction between a forecast and a budget.

A forecast is a prediction of what may happen as a result of a given set of circumstances. It is

an assessment of probable future events. A budget, on other hand, is a planned exercise to

achieve a target. It is based on the pros and Cons of a forecast. Forecasting thus precedes the

preparation of a budget.

15

Thus the main point of distinction between the two is that forecast is concerned with ‘probable

events’ while budget relates to ‘planned events’. Furthermore, forecast can be made by any-

body, whereas a budget, being an enterprise objective, can be set only by the authorized man-

agement.

Objectives of Budgetary Control

The following are the objectives of a budgetary control system:

Planning:

A budget provides a detailed plan of action for a business over definite period of time. De-

tailed plans relating to production, sales, raw material requirements, labour needs, advertising

and sales promotion performance, research and development activities, capital additions etc.,

are drawn up. By planning many problems are anticipated long before they arise and solutions

can be sought through careful study. Thus most business emergencies can be avoided by plan-

ning. In brief, budgeting forces the management to think ahead, to anticipate and prepare for

the anticipated conditions.

Co-ordination:

Budgeting aids managers in co-ordinating their efforts so that objectives of the organization as

a whole harmonise with the objectives of its divisions. Effective planning and organization

contributes a lot in achieving coordination. There should be coordination in the budgets of vari-

ous departments. For example, the budget of sales should be in coordination with the budget of

production. Similarly, production budget should be prepared in co-ordination with the purchase

budget, and so on.

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Communication:

A budget is a communication device. The approved budget copies are distributed to all man-

agement personnel which provides not only adequate understanding and knowledge of the

Programmers and policies to be followed but also gives knowledge about the restrictions to be

adhered to. It is not the budget itself that facilitates communication, but the vital information is

communicated in the act of preparing budgets and participation of all responsible individuals in

this act.

Motivation:

A budget is a useful device for motivating managers to perform in line with the company

objectives. If individuals have actively participated in the preparation of budgets, it act as a

strong motivating force to achieve the targets.

Control:

Control is necessary to ensure that plans and objectives as laid down in the budgets are being

achieved. Control, as applied to budgeting, is a systematized effort to keep the management

informed of whether planned performance is being achieved or not. For this purpose, a com-

parison is made between plans and actual performance. The difference between the two is re-

ported to the management for taking corrective action.

Performance Evaluation:

A budget provides a useful means of informing managers how well they are performing in

meeting targets they have previously helped to set. In many companies, there is a practice of

rewarding employees on the basis of their achieving the budget targets or promotion of a

manager may be linked to his budget achievement record.

17

Advantages of Budgetary Control:

Budgetary control provides the following advantages:

Budgeting compels managers to think ahead i.e. to anticipate and prepare for changing

conditions.

Budgeting co-ordinates the activities of various departments and functions of the

business.

It increase production efficiency, eliminates waste and controls the costs.

It pinpoints efficiency or lack of it.

Budgetary control aims at maximization of profits through careful planning and control.

It provides a yardstick against which actual results can be compared.

It shows management where action is needed to remedy a situation.

It ensures that working capital is available for the efficient operation of the business.

It directs capital expenditure in the most profitable direction.

It instills into all levels of management a timely, careful and adequate consideration of

all factors before reaching important decisions.

A budget motivates executives to attain the given goals.

Budgetary also aids in obtaining bank credit.

Budgeting also aids in obtaining bank credit.

A budgetary control system assists in delegation of authority and assignment of

responsibility.

Budgeting creates cost consciousness and introduces an attitude of mind in which waste

and efficiency cannot thrive.

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Limitations of Budgetary Control

The list of advantages given above is impressive, but a budget is not a cure all for organiza-

tional ills. Budgetary control system suffers from certain limitations and those using the system

should be fully aware of them.

The budget plan is based on estimates:

Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is

not possible in forecasting and budgeting. The strength or weakness of the budgetary control

system depends to a large extent, on the accuracy with which estimates are made. Thus, while

using the system, the fact that budget is based on estimates must be kept in view.

Danger of rigidity:

A budget program must be dynamic and continuously deal with the changing business

conditions. Budgets will lose much of their usefulness if they acquire rigidity and are not re-

vised with the changing circumstances.

Budgeting is only a tool of management:

Budgeting cannot take the place of management but is only a tool of management. ‘The budget

should be regarded not as a master, but as a servant.’ Sometimes it is believed that introduction

of a budget program alone is sufficient to ensure its success. Execution of a budget will not

occur automatically. It is necessary that the entire organization must participate enthusiastically

in the program for the realization of the budgetary goals.

Expensive Technique:

The installation and operation of a budgetary control system is a costly affair as it requires the

employment of specialized staff and involves other expenditure which small concerns may find

difficult to incur. However, it is essential that the cost of introducing and operating a budgetary

control system should not exceed the benefits derived therefrom.

19

Essentials of Effective Budgeting:

A budgetary control system can prove successful only when certain conditions and attitudes

exist, absence of which will negate to a large extent the value of a budget system in any busi -

ness. Such conditions and attitudes which are essential for effective budgeting are as follows:

Support of Top Management:

If the budget system is to be successful, it must be fully supported by every member of the

management and the impetus and direction must come from the very top management. No

control system can be effective unless the organization is convinced that the top management

considers the system to be import.

Participation by Responsible Executives:

Those entrusted with the performance of the budgets should participate in the process of setting

the budget figures. This will ensure proper implementation of budget program.

Reasonable Goals:

The budget figures should be realistic and represent reasonably attainable goals. The

responsible executives should agree that the budget goals are reasonable and attainable.

Clearly Defined Organization:

In order to derive maximum benefits from the budget system, well defined responsibility

centers should be built up within the organization. The controllable costs for each responsibil-

ity centers should be separately shown.

Continuous Budget Education:

The best way to ensure the active interest of the responsible supervisors is continuous budget

education in respect of objectives, potentials & techniques of budgeting. This may be

accomplished through written manuals, meetings etc., whereby preparation of budgets, actual

results achieved etc., may be discussed.

20

Adequate Accounting System:

There is close relationship between budgeting and accounting. For the preparation of budgets,

one has to depend on the accounting department for reliable historical data which primarily

forms the basis for many estimates. The accounting system should be so designed so as to set

up accounts in terms of areas of managerial responsibility. In other words, responsibility

accounting is essential for successful budgetary control.

Constant Vigilance:

Reports comparing budget and actual results should be promptly prepared and special attention

focused on significant exceptions i.e. figures that are significantly different from those ex-

pected.

Maximum Profit:

The ultimate object of realizing the maximum profit should always be kept uppermost.

Cost of the System:

The budget system should not cost more than it is worth. Since it is not practicable to calculate

exactly what a budget system is worth, it only implies a caution against adding expensive

refinements unless their value clearly justifies them.

Integration with Standard Costing System:

Where standard costing system is also used, it should be completely integrated with the budget

programmer, in respect of both budget preparation and variance analysis.

21

Standard Costing VS. Budgetary Control

Standard costing and budgetary control have the common objective of cost control by

establishing pre-determined targets. The actual performances are measured and compared with

the pre-determined targets for control purposes. Both the techniques are of importance in their

respective fields and are complementary to each other.

Points of Similarity:

There are certain basic principles which are common to both standard costing and budgetary

control. These are:

1. The establishment of pre-determined targets of performance

2. The measurement of actual performance

3. The comparison of actual performance with the pre-determined targets.

4. The analysis of variances between the actual and the standard performance

5. To take corrective measures, where necessary.

Points of Difference:

In spite of so much similarity between standard costing and budgetary control, there are some

important differences between the two, which are as follows:

22

Standard Costing Budgetary Cotrol

ScopeStandard costs are developed mainly for the manufacturing function and sometimes also for making and administra-tion functions

Budgets are compiled func-tions of the business such as sales, purchase, production, cash, capital expenditure, re-search & development, etc.,

IntensityStandard costing is intensive in application as it calls for detailed analysis of variances

Budgetary control is exten-sive in nature and the inten-sity of analysis tends to be much less than that in stan-dard costing.

Relation to

accountsIn standard costing, variances are usually revealed through accounts

In budgetary control, vari-ances are normally not re-vealed through accounts and control is exercised by statis-tically putting budgets and actuals side by side.

UsefulnessStandard costs represent real-istic yardsticks and, are there-fore, more useful for control-ling and reducing costs.

Budgets usually represent an upper limit on spending with-out considering the effective-ness of the expenditure in terms for output.

BasisStandard cost are usually es-tablished after considering such vital matters as produc-tion capacity, methods em-ployed and other factors which require attention when determining an acceptable level of efficiency.

Budgets may be based on previous year’s costs without any attention being paid to efficiency.

1.

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Summarized below are the Income and Expenditure forecast for the month March to August 2011.

Month Credit

Sales

Credit

Purchases

Wages

Rs.Mfg.

Expenses

Office

Expenses

Selling

ExpensesMarch 60,000 36,000 9,000 4,000 2,000 4,000

April 62,000 38,000 8,000 3,000 1,500 5,000

May 64,000 33,000 10,000 4,500 2,500 4,500

June 58,000 35,000 8,500 3,500 2,000 3,500

July 56,000 39,000 9,000 4,000 1,000 4,500

August 60,000 34,000 8,000 3,000 1,500 4,500

You are given following further informationi. Plant Costing Rs. 16,000 due for delivery in June. 10% on delivery and balance after three months.

ii. Advance Tax Rs. 8,000 is payable in March and June.

iii. Period of credit allowed, Suppliers 2 months and Customers 1 month.

iv. Lag in payment of manufacturing expenses half month.

v. Lag in payment of all others expenses one month.

vi. Cash balance on 1st May 2008 is Rs. 8,000

Prepare Cash Budget for three months starting from 1st May 2010

24

Solution:

Cash Budget

May-August 2010

Particulars May June July

I Opening Cash Balance 8,000 15,750 12,750

II Expected Cash Receipts:

A Collections from Debtors [Credit 1 month] 62,000 64,000 58,000

III Total Expected Receipts 62,000 64,000 58,000

IV Total Cash Available [I+III] 70,000 79,750 70,750

Expected Payment

A Purchases [2 months credit] 36,000 38,000 33,000

Manufacturing Expenses[Half month credit]

3,750 4,000 3,750

C Wages [Half month credit] 8,000 10,000 8,500

D Office Expenses[one month credit] 1,500 2,500 2,000

E Selling Expenses[one month credit] 5,000 4,500 3,500

F Purchase of Machine 1,600

G Advance Tax 8,000

VI Total Payment [A+B+C+D+E+F+G] 54,250 67,000 52,350

VII Closing Balance 15,750 12,750 18,400

There is delay of half a month for payment of Manufacturing Expenses and wages and hence

current month’s 50% and previous month’s 50% are paid in the current month.

A manufacturing company is currently working at 50% capacity and produces 10,000 units at a

cost of Rs. 180 per unit as per the following details.

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Materials: Rs.100

Labor: Rs.30

Factory Overheads: Rs.30 [ 40% fixed ]

Administrative Overheads: Rs.20 [50% fixed]

Total Cost Per Unit: Rs.180

The selling price per unit at present is Rs.200. At 60% working, material cost per unit increases

by 2% and selling price per unit falls by 2%. At 80% working, material cost per unit increases

by 5% and selling price per unit falls by 5%.

Prepare a Flexible Budget to show the profits/ losses at 50%, 60% and 80% capacity

utilization.

Solution:

Flexible Budget

ParticularsCapacity

UtilizationCapacity

UtilizationCapacity

Utilization50% 60% 80%

A Number of Units 10,000 12,000 16,000B Selling Price Per Unit Rs.200 Rs.196 Rs.190

C Variable Cost Per Unit

• Direct Material Rs.100 Rs.102 Rs.105

• Direct Labor Rs.30 Rs.30 Rs.30

• Factory Overheads[60%] Rs.18 Rs.18 Rs.18

• Administrative Rs.10 Rs.10 Rs.10

Overheads[50%]D Total Variable Cost Per Unit Rs.158 Rs.160 Rs.163

E Total Variable Cost [A X D] Rs.15,80,000 Rs.19,20,000 Rs.26,08,000

F Fixed Costs Rs.2,20,000 Rs.2,20,000 Rs.2,20,000 [Rs.12 + Rs.10 = Rs.22 per unit at exist-ing level 10,000 units.]

G Total Cost[E + F] Rs.18,00,000 Rs.21,40,000 Rs.28,28,000

H Sales Revenue [A X V] Rs.20,00,000 Rs.23,52,000 Rs.30,40,000I Profits/ Losses [H - G ] Rs.2,00,000 Rs.2,12,000 Rs.2,12,000

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Following is the sales budget for the first six months of the year 2009 in respect of PQR Ltd.:

Month : Jan Feb March April May June

Sales (units) : 10,000 12,000 14,000 15,000 15,000 16,000

Finished goods inventory at the end of each month is expected to be 20% of budgeted sales

quantity for the following month. Finished goods inventory was 2,700 units on January 1,

2009. There would be no work-in-progress at the end of any month.

Each unit of finished product requires two types of materials as detailed below:

Material X: 4 kgs @ Rs. 10/kg

Material Y: 6 kgs @ Rs.15/kg

Material on hand on January 1, 2009 was 19,000 kgs of material X and 29,000 kgs of material

Y. Monthly closing stock of material is budgeted to be equal to half of the requirements of next

month’s production.

Budgeted direct labour hour per unit of finished product is 4 hour.

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

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

Actual production quantity: 40,000

units Direct material cost

(Purchase cost based on materials actually issued to production)

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

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

Actual direct labour hours worked: 32,000 hours

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

(a) Prepare the following budgets:

Monthly production quantity for the quarter one.

Monthly raw material consumption quantity budget from January, 2009 to April, 2009.

Materials purchase quantity budget for the quarter one.

27

(b) Compute the following variances:

Material cost variance

Material price variance

Material usage variance

Direct labour cost variance

Direct labour rate variance

Direct labour efficiency variance

Answer:

(a) (I) Production Budget for January to March 2009 (in quantity)

Jan Feb Mar April

Budgeted Sales 10,000 12,000 14,000 15,000Add: Budgeted Closing Stock 2,400 2,800 3,000 3,000(20% of sales of next month) 12,400 14,800 17,000 18,000

Less: Opening Stock 2,700 2,400 2,800 3,000Budgeted Output 9,700 12,400 14,200 15,000

Total Budgeted Output for the Quarter ended March 31, 2009

(9,700 + 12,400 + 14,200) = 36,300 Units

(b) (II) Raw Material Consumption Budget(in quantity)

Month Budgeted Output

Material ‘X' @ 4

Material ‘Y' @ 6

Jan 9,700 38,800 58,200Feb 12,400 49,600 74,400Mar 14,200 56,800 85,200Apr 15,000 60,000 90,000

Total 2,05,200 3,07,800

(c) (III) Raw Material Purchases Budget (In quntity)

X YRaw material required for produc-tion

1,45,200 2,17,800

Add: Closing Stock of raw material 30,000 45,0001,75,200 2,62,800

Less: Opening Stock of raw material 19,000 29,000Material to be purchased 1,56,200 2,33,800

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Alternative Solution

Raw Material Purchases Budget (In quntity)

Jan Feb Mar Total

Raw material required for production(x) 38800 49600 56800 145200

Add: Closing stock of raw material 24800 28400 30000 8320063600 78000 86800 228400

Less: Opening stock of raw material X 19000 24800 28400 72200Materials to be purchased X 44600 53200 58400 156200

Jan Feb Mar Total

Raw material required for production(Y) 58200 74400 85200 217800

Add: Closing stock of raw material 37200 42600 45000 12480095400 117000 130200 342600

Less: Opening stock of raw material Y 29000 37200 42600 108800

Materials to be purchased Y 66400 79800 87600 233800

B) Calculation of Variances :

Calculation of Material cost variance

X- 10 x 4 x 40,000 16,00,000 4X- 10 x— x 4, 03,000 16,12,000

Y- 15 x 6 x 40,0003,60,000 £

Y- 15 x — x 4,03,000 = 10

36,27,000

Std Price x Actual Mix x Actual Qty

Actual Price x Actual Mix x Actual Qty.

X- 10 x 1,65,000 = 16,50,000

X- 10.20 x 1,65,000 =

16,83,000Y- 15 x 2,38,000 = 35,70,000

Y- 15.10 x 2,38,000

35,93,80052,20,000 52,76,800

Direct Material Cost Variance = Direct Material Usage Variance + Direct Material Price

= 20,000 (A) + 56,800 (A)

= 76,800 (A)

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Calculation of Material price variance

Direct Material Price Variance = (c - d) X- 16,50,000 -

16,83,000 = 33,000 (A)

Y - 35,70,000 - 35,93,800 = 23,800 (A)

52,20,000 - 52,76,800 = 56,800 (A)

Direct Material Cost Variance = (a - d) X- 16,00,000 - 16,83,000 = 83,000 (A)

Y - 36,00,000 - 35,93,800 = 6,200 (F) 52,00,000 - 52,76,800 = 76,800 (A)

Calculation of Material usage variance

Direct Material Usage Variance = (a - c) X- 16,00,000 -

16,50,000 = 50,000 (A)

Y- 36,00,000 - 35,70,000 = 30,000 (F)

52,00,000 - 52,20,000 = 20,000 (A)

Calculation of Direct labour cost variance

Budgeted output for the quarter = 36,300 units

Budgeted direct labour hours = 36,300 x % hrs

= 27,225 hours

Standard or Budgeted labour rate per hour

= Budgeted direct labour hours = Rs. 10,89,000 / 27,225 hours

= Rs.4

Calculation of Direct labour rate variance

Direct Labour Rate Variance = Actual hrs. x (Std. Rate - Actual Rate)

= 32,000 x (40 - 41)

= Rs.32,000 (A)

Calculation of Direct labour efficiency variance

Direct Labour Efficiency Variance = Standard Rate x (Std. hrs - Actual hrs.)

= Rs.40 x (30,000 - 32,000)

= Rs.80,000(A).

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