BUDGETING

Budgeting control can be defined as establishments of budgets, relating to

the responsibilities of the executives of the requirement of a policy and a
continuous comparison of the actual with the budgeted results.
In short budgeting, control means laying down the monetary & quantitative
terms i.e. what actually has to be done and how exactly it has to be done
over coming period and then to ensure that the actual results do not diverge
from the planned course more than the necessary.

OBJECTIVES OF BUDGETING:

1. To forecast the future and plan to avoid the losses, but more positively
to maximize the profit.
2. To bring out the co-ordination between different departments of an
enterprise, which is essential for success of an enterprise.
3. To create a definite idea in terms of the number i.e. the quantity about
the long term and short term, desired aims and objectives of the
enterprise.
4. To motivate the related departments and persons for attaining the
desired goals.
5. To ensure the action in tune with the target (to take a suitable
corrective action to meet the targets)

ADVANTAGES OF BUDGETING:

1. Budgeting leads to maximization of utilization of resources with a view

to ensure maximum returns.
2. It creates a sense of awareness of all levels of management in the
process of fulfillment of the target.
3. Budgeting leads to co-ordination and clear understanding between the
different functions in an organization.
4. It is a process of self examination and self criticism which is essential
for the success of an enterprise.
5. Budgeting enlist the support and active participation of the top
management without which budgeting program cannot succeed.

DISADVANTAGES OF BUDGETING:

1. The installation of budgeting system is an elaborate process and takes

time.
2. The budgeting should be filled up by an effective control action. This is
often lacking in many organizations which they very purpose of
budgeting.

3. The basic requirement for the success of budgeting is an absolute

support and the enthusiasm provided by the top management. If it is
lacking at any time, the whole system will collapse.
4. The budgeting is not an exact science and it is only a certain amount of
judgment.

CLASSIFICATION OF THE BUDGET

Master budget
Based on Nature
Fixed budget

Based on the functional

aspect
Flexible Budget

Sales budget
Cash budget
Purchase budget
Admin budget
Production cost budget
Selling & distribution
budget
Labor budget
Material budget
Factory OH budget
Plant Utilization budget

PRODUCTION BUDGET
This budget is prepared after the preparation of sales budget to determine
the quality (quantity) of goods which should be produced to meet the
budgeted sales. It is expressed in physical quantities like,
Units of output
Labor hours

Material requirement

The production budget is prepared by production managers and submitted to

budget committee for its approval. The following points are to be noted at
the time of its preparation,
a) To determine the quantity of each product which will be produced
during the budgeted period
b) To prepare the production plan on the basis of sales budget.
c) To consider the production plant capacity and production planning.
d) To consider volume of production.
e) To consider also the availability of material, labor, power, etc,

Problem 1:
Prepare a purchase budget from the following particulars when the estimated
price per kg of material is x: Rs.2/- , y: Rs.3/-, z: Rs.4/Stock in
Estimat
the
Mate
ed
beginning
rial
consum
(opening
ption of
materiastock)
l in kgs
X
1 00
000
Y
2 00
000
Z
2 50
000
Material
X
30 000

Estimate
stock at
the end
(closing
stock)

15 000

40 000

20 000

45 000

50 000

Solution:
Particulars
Estimated
consumption
material
(+)stock at the end
TOTAL
(-) Opening stock
Quantity to be purchased
Price per kg

of

X
1 00
000
15
000
1 15
000
30
000
85 000
2

Y
2 00
000
20
000
2 20
000
40
000
1 80
000
3

Z
2 50
000
50
000
3 00
000
45 000
2 55
000
4

TOTAL COST

1 70
000

5 40
000

10 20
000

Problem 2:
From the following particulars presented by Lucky ltd co., prepare a
production budget for yr 1995
Produ
Sales as per
Estimated units at Estimated units
ct
budgeted units
the beginning
at the end
x
4 00 000
20 000
30 000
y
3 00 000
25 000
40 000
z
8 00 000
60 000
45 000
Solution:
Particulars
Product x
Product y
Product z
Sales with budget
4 00 000
3 00 000
8 00 000
(+) stock at the end
30 000
40 000
45 000
Total
4 30 000
3 40 000
8 45 000
(-) stock at beginning
20 000
25 000
60 000
4 10 000
3 15 000
7 85 000
Problem 3:
Little field Co. manufacture product C and G. during January it expects to sell
5000 kg of C and 20,000 kg of G at Rs.20/- and Rs.10/- respectively. Direct
materials A, B & E are mixed equal proportion to produce product C. Material
D, B & E are mixed in the proportion of 5:3:2 to produce product G. There is
no loss in weight in production. Actual and budgeted inventory in the
quantities & the cost for the month are as follow:
Materi Opening inventory
Desired closing
Anticipated cost in
al
in kgs
inventory in kgs
Rs/kg
A
1,500
1,000
5.5
B
1,000
2,000
5
D
10,000
3,000
1
E
5,000
6,000
3.5
Product
Opening inventory in kgs
Closing inventory in kgs
C
1,000
500
G
5,000
6,000
a) You are required to prepare a production budget
b) The material purchased budget indicating the expenditure of material
for the month of January
Solution:
Production budget for January
Particulars
Product C in kgs
Product G in kgs

Sales budget
(+) closing stock inventory
Total
(-) opening stock inventory
Production quantity

5,000
500
5,500
1,000
4,500

20,000
6,000
26,000
5,000
21,000

Materials purchased budget for jan

Particulars
Material Material Material Material
A
B
D
E
Materials required for budget
1,500
1,500
1,500
production:
Product C (1:1:1)
Product D (5:3:2)
6,300
10,500
4,200
(+) closing stock of inventory
1,000
2,000
3,000
6,000
Total
2,500
9,800
13,500
11,700
(-) opening stock of inventory
1,500
1,000
10,000
5,000
Actual material required
1,000
8,800
3,500
6,700
Cost/kg
5.5
5
1
3.5
Total cost
5,500
44,000
35,000
23,450
Problem 4:
A fine product ltd has daily capacity to produce the following
Product
No. of units
Std o/p per hr
A
10,000
100
B
12,000
120
C
9,000
150
For a budgeted period the production target per day are as follows:
8000 units of A, 9000 units of B & C. determine the idle capacity.
Solution:
Std hrs required for std o/p
Std hrs required for actual o/p
A
100
80
B
100
75
C
60
60
TOTAL
260
215
Idle capacity = (260 215)/260*100 = 17.3%
Problem 5:
Form the given particulars presented by ABC co. ltd, you are required to
prepare a material budget.
Estimated sales= 50,000 units (each unit of product requires 2 units of x & 4
units of y)
Finished goods Material X
Material Y

Estimated opening balance

Estimated closing balance
Estimated opening order
Estimated closing order

10,000 units
6,000 units

15,000 units
16,000 units

Material X
8,000
6,000

25,000 units
30,000 units

Material Y
12,000
8,000

Solution:
Estimated production = estimated sales + estimated c/s stock of finished
goods
estimated o/p stock of finished goods
= 50,000+6,000-10,000
= 46,000 units
Material budget
Particulars
Materials required for 46,000 units
(+) estimated c/s balance
(+) material on c/s order
Total
(-) estimated o/p balance
(-) material o/p order
TOTAL

Material X
92,000
16,000
6,000
1,14,000
15,000
8,000
91,000

Material Y
1,84,000
30,000
8,000
2,22,000
25,000
12,000
1,85,000

ADMINISTRATIVE COST BUDGET

SELLING & DISTRIBUTION BUDGET

AND

The administrative budget represents the estimated expenditure of the

administration i.e expenditure in framing the policies, controlling the
business operations, etc.
Since most of the expenses on administration are fixed in nature this
budget is therefore easy to prepare in comparison with other functional
budgets
Selling & distribution budget is the forecast of the cost relating to the
S&D of the product for the budgeted period. It is related to the sales budget
and is prepared by the sales manager with the help of advt. manager,
distribution manager, sales office man and account. Therefore Selling &
Distribution cost budget may be prepared on the basis of the elements of
cost which are:
a) Direct selling expense, i.e salaries, commission, expenses of sales man
etc.
b) Distribution expenses i.e rent, rates, wages, insurance, etc of the
warehouse.
c) Cost of sales office expenses & salaries, rent, light, heat etc of the
sales office.
d) Publicity expenditure, ex: posters, radios, TVs etc

Problem 1:
You are required to prepare a sales OH budget from the estimates given
below
Particulars
Amount in Rs
Advertisement
2,500
Salesman salaries (sales dept)
5,000
Expenditure of sales dept
1,500
Counter salesman salary & dept. allowance
6,000
Commission to salesman @ 1% on their sales
Travelling salesman commission @ 10% on their sales, expenses @ 5% on
their sales
Sales during the period were estimated as follows
Area
Counter sales (Rs)
Travelling salesman (Rs)
1
80,000
10,000
2
1,20,000
15,000
3
1,40,000
20,000
Solution:
Sales OH budget
Particulars
Variable OH:
Commission to counter salesman @1%
Commission to travel salesman @ 10%
Expenditure @ 5% of sales
Total variable OH
Fixed OH:
Advt
Sales man salaries
Expenditure
Counter salesman salaries
Total fixed OH
Total selling OH

Area 1

Area 2

Area 3

800
1,000
500
2,300

1,200
1,500
750
3,450

1,400
2,000
1,000
4,400

2,500
5,000
1,500
6,000
15,000
17,300

2,500
5,000
1,500
6,000
15,000
18,450

2,500
5,000
1,500
6,000
15,000
19,400

Problem 2:
From the following expenses regarding S&D of ABC co ltd in last budgeted
period you are required to prepare a S&D exp budget for the period.
Expenses are as follows:
Particulars
West Bengal
Bihar
Assam
Total
Counter sales
8000
12000
16000
36000
Salaries
6000
8000
10000
24000
selling expenses
3000
2000
1000
6000
Advertisement
4000
5000
6000
15000
Rent & taxes
2000
4000
3000
9000
Warehouse expenses
5000
5000
6000
16000
During the budgeted period the following changes are to be made
a) Counter sales will be increased by 5% in all states
b) Salaries will increase by Rs.2000 , Rs.3000, Rs.4000 for W.B , bihar,
assam respectively
c) Rent will be increased by 5% in all states
d) Warehouse exp will increase by 1% in W.B 7 bihar
e) In assam advt exp will increase by Rs2000
f) Selling exp will increase by 10% in WB and bihar
Solution:
Selling & distribution expenses budget
Particulars
West Bengal
Bihar
Assam
Total
Counter sales
8400
12600
16800
37800
Salaries
8000
11000
14000
33000
selling expenses
3300
2200
1000
6500
Advertisement
4000
5000
8000
17000
Rent & taxes
2100
4200
3150
9450
Warehouse expenses
5050
5050
6000
16000
30850
40050
48950
119850

MASTER BUDGET
It is also called as a summary budget, incorporating its component functional
budget which is finally approved, adapted and employed. This summarizing
is done in the form of
a) Budgeted Profit/Loss account
b) Budgeted balance sheet
Budgeted profit/loss account shows the principal items of revenues,
expenses, loss as well as profit, whereas the budgeted balance sheet reveals
the principal items of balance sheet. This budget is prepared by budget
officers after its preparation; it is submitted to the budget committee for its
approval. If the budget committee does not find it satisfactory, it makes
suitable changes on this budget and puts it into action when the final
approval is given. However once it is approved, the company seeks to
achieve the target during the budgeted period.
Advantages of master budget:
i. A summary of all functional budgets will be available in one report
ii.
It gives an overall estimated profit position of the organization for the
budgeted period
iii.
Information relating to the forecast balance sheet is available in the
master budget.
Problem 1:
From the following particulars presented by Pradeep & co ltd you are
required to prepare a master budget for the year ended 31st march 1985
Product
Budgeted production
Budgeted selling price/unit (Rs.)
X
200000
5
Y
100000
3
Z
300000
4
Cost/unit
Raw material
Labor cost
Expenses(direct)
Factory expenses
Office expenses
S&D expenses

X in Rs
1
0.8
0.4
0.5
0.4
0.4

Y in Rs
0.6
0.4
0.2
0.25
0.2
0.4

Z in Rs
0.8
0.6
0.3
0.4
0.3
0.4

Solution:
Particular Product Produc Product
s
X
tY
Z
To
raw 2,00,00
60,00 2,40,00
material
0
0
0
To labor
To
expenses
(direct)
To
factory
expenses
(manf
exp)
(trade
exp)
To gross
profit
To office
exp
To S&D
To
Net
profit

1,60,00
0
80,000

40,00
0
20,00
0

1,80,00
0
90,000

1,00,00
0

25,00
0

1,20,00
0

4,60,00
0
10,00,0
00
80,000

1,45,0
00
3,00,0
00
50,00
0

80,000

40,00
0
1,55,0
00

4,60,00
0

Particul
ars
By
budget
sales

5,70,00
0
12,00,0
00
90,000 By
gross
profit
1,20,00
0
5,70,00
0

Product Produc Product

X
tY
Z
10,00,0 3,00,0 12,00,0
00
00
00

10,00,0
00
4,60,00
0

3,00,0
00
1,55,0
00

12,00,0
00
5,70,00
0

4,60,00
0

1,55,0
00

5,70,00
0

Problem 2:
A glass manufacturing company requires you to calculate and present the
budget for the year 1977 from the following information
sales
Toughened glass
3,00,000
Bent toughened glass
5,00,000
Direct material cost
60% of sales
Direct wages
20 workers @ Rs.150 per month
Factory OH:
Indirect labor: working manager
1,500 per month
Foreman
400 per month
Stores and spares
2.5% on sales

Depreciation on m/c
Light and power
Repairs & maintenance
Other sundries
Admin, S&D expenses

12,600
5,000
8,000
10% on direct wages
14,000 per year

Solution:
Master budget for the period ending 1977
Particulars
Amount
Amount (Rs)
(Rs)
Sales as per budget:
Toughened glass
Bent toughened glass
total
Less cost of production:
Direct material( 60% of
4,80,000
sales)
36,000 per
Direct wages
annum
Prime cost
5,16,000
Factory OH: (variable)
Stores & spares
20,000
Light & power
5,000
Repairs & maintenance
8,000
Other sundry expenses
3,600
_______________
36,600
Fixed factory OH:
work manager salary
6,000
foreman
4,800
depreciation
12,600
admin, S&D
14,000
______________
37,400
Net profit

Amount
(Rs)
3,00,000
5,00,000
8,00,000

5,90,000
2,20,000