Budgetary Control

Q1. Distinguish between fixed and flexible budget.

Ans. According to CIMA official terminology, a fixed budget is a budget designed to remain
unchanged irrespective of the level of activity actually attained

Flexible budget is a budget which by recognizing the difference between fixed, semi-variable
and variable cost is designed in relation to level of activity attained. In flexible budget, series of
budget are prepared one for each of a number of alternative production levels or volumes. The
allowances given under flexibility budgetary control system serve as standards of what costs
should be at each level of output.

Fixed Budget Flexible Budget

It does not change with actual volume of

It can be re-casted on the basis of activitylevel to be
activity achieved. Thus it is rigid
achieved. Thus it is not rigid

It operates on one level of activity and under

one set of conditions It consists of various budgets for different
level of activity

If the actual and budgeted activity levels differ

It facilitates the cost ascertainment and price
significantly, then cost ascertainment and fixation at different levels of activity
price fixation do not give a correct picture

Comparison of actual and budgeted targets

It provided meaningful basis of comparison
are meaningless particularly when there is of actual and budgeted targets
difference between two levels

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 Q2. Discuss the steps involved in budgetary control technique

Ans. There are certain steps involved in budgetary control technique, they are as follows

1. Definition of objectives: A budget being a plan for achievement of certain

operational objectives, it is desirable that the same are defined precisely.

(a) Location of budget factor: There is usually on factor which sets a limit to the
total activity, for proper budgeting, it must be located and estimated properly.

(b) Appointment of controller: Formulation of a budget usually required whole time

services of senior executive known as budget controller; he must be assisted in this
work by a budget committee, consisting of all the heads of departments.

(c) Budget manual: A budget manual is a collection of documents that contains

key information for those involved in planning process

(d) Budget period: The budget committee determines the length of the budget period
suitable for the business. It may ne months or quarte₹

(e) Standard of activity or output: Results of past should be studied but these should
only be applied when there is a likelihood of similar conditions repeating in the
future.

Q3. Explain the term budget and its essential

Ans. Budget: CIMA official terminology has defined the term budget as “quantitative
expression of a plan for a defined period of time. It may include planned sales volumes and
revenue resource quantities, cost and expenses, assets, liabilities and cash flow”

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Essentials:

(c) It is prepared in advance and is based on a future plan of actions

(d) It relates to a future period and is based on objectives to be attained

Q4. State the consideration on which capital expenditure budget is prepared

Ans. The preparation of capital expenditure budget is based on the following

considerations:

(i) Overhead on production facilities of certain department as indicated by the

plant utilization budget

(ii) Future development plans to increase output by expansion of plant facilities

(iii) Replacement request from concerned departments

(i) Factors like sales potential to absorb the increased output, possibility of price
reductions, increased costs of advertising and sales promotion to absorb increased
output etc.

Q5. Discuss the components of budgetary control system

Ans. The policy of a business for a defined period is represented by the master budget the
details of which are given in a number of individual budgets called functional budget. The
functional budget broadly are grouped under following heads

(i) Physical budget: Sales quantity, product quantity, inventory, manpower budget

(ii) Cost budget: Manufacturing cost, administration cost, sales and distribution cost,
R&D cost

(iii) Profit budget

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Q6. Write difference between functional and master budget

Ans: Functional budget: Budget which relates to the individual functions in an organisation
are known as functional budget like sales budget, production budget, plant utilization
budget and cash budget

Master Budget: It is a consolidated summary of the various functional budgets. It serves as a

basis upon which budgeted P&L A/c and forecasted balance sheet are built up.

Q7. Write difference between long term and short term budget

Ans: Long term budget: Prepared for a period longer than a year, helpful in business
forecasting and forward planning. Capital expenditure budget and R & D budget are
examples of long term budget.

Short term budget: prepared for period for less than a year, cash budget is an example of
short term budget; such types of budgets are prepared in cases where a specific action has
to be immediately taken to bring any variation under control
Q8 Define Zero based budgeting

Ans. Advantages:
1. The area of wasteful expenditure can be easily identified and eliminated

(a) It provides an opportunity to the management to allocate resources for

various activities only after having through cost benefit analysis

(b) Departmental budgets are closely linked with corporate objectives

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 Limitations:

(i) It is time consuming and costly

(ii) The full support of top management is required

(iii) It require proper trained managerial staff

Steps:

(i) Determination of a set of objectives is the pre requisite and essential step in the
direction of ZBB technique

(ii) Deciding about extent to which the technique of ZBB is to be applied whether in
all areas of organisation activities or only in few selected areas on trial basis

(iii) Identify the areas where decisions are required to be taken

(iv) Developing decision packages and ranking them in order of preferences

(v) Preparation of budget that is translating decision packages into practicable units /
items and allocation financial resources

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Practical Problems
Flexible Budget
Per unit Cost is given
Question 1:

Manya Ltd. Has prepared its expenses budget for 20000 units in its factory as givenbelow

₹ Per Unit

Direct Material 50
Direct Labour 20
Variable overheads 15
Direct expenses 6
Selling expenses (20% Fixed) 15
Factory expenses (100% Fixed) 7
Administration expenses (100% Fixed) 4
Distribution expenses (85% Variable) 12
Total 129

Prepare an expense budget for the production of 15,000 units and 18,000 units.
(Ans. ₹ 20,14,000; 23,53,600)

Question 2: Practical Problem 2; SM

During the FY 2020-21, P Limited has produced 60,000 units operating at 50% capacity
level. The cost structure at the 50% level of activity is as under:
(`)
Direct Material 300 per unit
Direct Wages 100 per unit
Variable Overheads 100 per unit
Direct Expenses 60 per unit
Factory Expenses (25% fixed) 80 per unit
Selling and Distribution Exp. (80% variable) 40 per unit
Office and Administrative Exp. (100% fixed) 20 per unit

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The company anticipates that in FY 2021-22, the variable costs will go upby 20% and
fixed costs will go up by 15%.
The selling price per unit will increase by 10% to ` 880

Required:
I. Calculate the budgeted profit/ loss for the FY 2020-21.
II. Prepare an Expense budget on marginal cost basis for the FY 2021-22 for the
company at 50% and 60% level of activity and FIND OUT the profits at respective
levels.

Question 3: ICAI NOV 2020, 5 Marks

G Ltd. manufactures a single product for which market demand exists for additional quantity.
Present sales of ` 6,00,000 utilises only 60% capacity of the plant. The following data are
available:

(1) Selling price : ` 100 per unit

(2) Variable cost : ` 30 per unit
(3) Semi-variable expenses : ` 60,000 fixed + ` 5 per unit
(4) Fixed expenses : ` 1,00,000 at present level,
estimated to increase by 25% at
and above 80% capacity.

You are required to prepare a flexible budget so as to arrive at the operating profit at 60%,
80% and 100% levels.

Question 4:

A factory is currently running at 50% capacity and produces 5000 units at a cost of ₹90 per
unit as per detail given below

Material 50

Labour 15

Factory overheads 15 (₹ 6 Fixed)

Administrative overheads 10 (₹ 5 Fixed)

The current selling price is ₹ 100 per unit. At 60% working material cost per unit increasesby
2% and selling price falls by 2%
At 80% working, material cost per unit increases by 5% and selling price per unit falls by 2.5%

Prepare flexible budget showing profits of factory at 60% and 80% working.
(Ans. 53,000; 73,000)

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Total Cost is Given
Question 5:

A factory which expects to operate 7,000 hours, i.e., at 70% level of activity, Furnishes details
of expenses as under:

Variable expenses `1,260

Semi-variable expenses `1,200
Fixed expenses `1,800

The semi-variable expenses go up by 10% between 85% and 95% activity and by 20% above
95% activity. Prepare a flexible budget for 80, 90 and 100 per cent activities

Question 6:

The cost of an electric component at a capacity level of 5000 units is given under.

Material cost ₹ 25,000 100% Variable

Labour cost 15,000 100% Variable
Power 1250 80% Variable
Repair and maintenance 2000 75% variable

Stores 1000 100% Variable

Inspection 500 20% Variable
Depreciation 10,000 100% Fixed

Administration overhead 5000 25% Variable

Selling overhead 3000 50% Variable

Total 62,750

Find the cost per unit of the product at production levels of 4000 units and 6000 units.
(Ans. 13.37 per unit; 12 per unit)

Question 7:

The following data are available in a manufacturing company for a half yearly period

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 ₹ in lakhs ₹ in Lakhs
Fixed expenses:
Wages and salaries 8.4

Rent, rates and taxes 5.6

Depreciation 7.0
Sundry administration expenses 8.91

29.9

Semi-Variable expenses (At 50% capacity)

Maintenance and repairs 2.5

Indirect labour 9.9
Sales department salaries 2.9
Sundry Administration expenses 2.6

17.9
Variable expenses (at 50% capacity)
Material 24.0
Labour 25.6
Other expenses 3.8
53.4

Assume that the fixed expenses remain constant for all levels of production, semi-variable
expenses remain constant between 45% and 65% capacity, increasing by 10% between 65%
and 80% capacity and 20% between 80% and 100% capacity

Prepare flexible Budget at 60% 70%, 90% and 100% capacity

Cost at Two Levels are Given

Question 8:

The budget manager of progressive Electricals Ltd. is preparing a Flexible Budget for
accounting year commencing from 1st April 2022. The company produced one product a
component Kaypee. Direct material costs ₹ 7 per unit. Direct labour averages ₹ 7.00 per hour
and required 1.60 hours to produce one unit of Kaypee. Salesman are paid a commission of ₹
1 per unit sold. Fixed selling and distribution expenses amount to ₹ 85,000 per year

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Manufacturing overheads under specified conditions of volume have been estimated as
follows:

Volume of production 1,20,000 1,50,000

₹ ₹
Indirect material 2,64,000 3,30,000

Indirect Labour 1,50,000 1,87,500

Inspection 90,000 1,12,500
Maintenance 84,000 1,02,000
Supervision 1,98,000 2,34,000
Depreciation – plant & machinery 90,000 90,000

Engineering services 94,000 94,000

Total manufacturing overheads 9,70,000 11,50,000

Normal capacity of production is 1,25,000 units. Prepare of budget of total cost at 1,40,000
units of output.
(Ans. Total cost ₹ 38,63,000)

Question 9: Practical Problem 4; SM

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 2022-23. The cost details are as follows:

55% 65% 75%

(`) (`) (`)
Direct Materials 11,00,000 13,00,000 15,00,000
Direct Labour 5,50,000 6,50,000 7,50,000
Factory Overheads 3,10,000 3,30,000 3,50,000
Selling Overheads 3,20,000 3,60,000 4,00,000
Administrative Overheads 1,60,000 1,60,000 1,60,000
24,40,000 28,00,000 31,60,000

Profit is estimated @ 20% on sales.

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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 2022-23 at 85% level of capacity. Also ascertain
profit and contribution

Question 10: Illustration 3; SM

Action Plan Manufacturers normally produce 8,000 units of their product in a month,in their
Machine Shop. For the month of January, they had planned for a productionof 10,000 units.
Owing to a sudden cancellation of a contract in the middle of January, they could only
produce 6,000 units in January.

Indirect manufacturing costs are carefully planned and monitored in the Machine Shop and
the Foreman of the shop is paid a 10% of the savings as bonus when inany month the
indirect manufacturing cost incurred is less than the budgeted provision.

The Foreman has put in a claim that he should be paid a bonus of ` 88.50 for the month of
January. The Works Manager wonders how anyone can claim a bonus when the Company has
lost a sizeable contract. The relevant figures are as under:

Indirect manufacturing Expenses for a Planned for Actual in costs

normal month January January
(`) (`) (`)
Salary of foreman 1,000 1,000 1,000
Indirect labour 720 900 600
Indirect material 800 1,000 700
Repairs and maintenance 600 650 600
Power 800 875 740
Tools consumed 320 400 300
Rates and taxes 150 150 150
Depreciation 800 800 800
Insurance 100 100 100
5,290 5,875 4,990

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Do you agree with the Works Manager? Is the Foreman entitled to any bonus for the
performance in January? Substantiate your answer with facts and figures. Explain.

Question 11: Illustration 2; SM

A department of Company X attains sale of ` 6,00,000 at 80 per cent of its normal capacity
and its expenses are given below:

Administration costs: (`)

Office salaries 90,000
General expenses 2 per cent of sales
Depreciation 7,500
Rates and taxes 8,750

Selling costs:
Salaries 8 per cent of sales
Travelling expenses 2 per cent of sales
Sales office expenses 1 per cent of sales
General expenses 1 per cent of sales

Distribution costs:
Wages 15,000
Rent 1 per cent of sales
Other expenses 4 per cent of sales

Prepare flexible administration, selling and distribution costs budget, operating at 90 per
cent, 100 per cent and 110 per cent of normal capacity

Question 12: Illustration 1; SM

B Ltd manufactures two products viz., X and Y and sells them through two divisions, East and
West. For the purpose of Sales Budget to the Budget Committee, following information has
been made available for the year 2022-23:

Budgeted Sales Actual Sales

Product
East Division West Division East Division West Division
800 units at 1,200 units at 1,000 units at 1,400 units at
X
` 18 ` 18 ` 18 ` 18
600 units at 1,000 units at 400 units at 800 units at
Y
` 42 ` 42 ` 42 ` 42

Adequate market studies reveal that product X is popular but underpriced.It is expected
that if the price of X is increased by ` 2, it will, find a ready market. On the other hand, Y is
overpriced and if the price of Y is reduced by ` 2 it will have more demand in the market.
The company managementhas agreed for the aforesaid price changes. On the basis of these

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price changes and the reports of salesmen, following estimates have been prepared by the
Divisional Managers:

Percentage increase in sales over budgeted sales

Product East Division West Division
X + 12.5% + 7.5%
Y + 22.5% + 12.5%

With the help of intensive advertisement campaign, following additional sales (over and
above the above-mentioned estimated sales by Divisional Mangers) are possible:
Product East Division West Division
X 120 units 140 units
Y 80 units 100 units

You are required to PREPARE Sales Budget for 2023-24 after incorporating above estimates
and also SHOW the Budgeted Sales and Actual Sales of 2022-23

Question 13: Practical Question 5; SM

The accountant of manufacturing company provides you the followingdetails for year 2020-
21:
(`) (`)
Direct materials 1,75,000 Other variable costs 80,000
Direct Wages 1,00,000 Other fixed costs 80,000
Fixed factory overheads 1,00,000 Profit 1,15,000
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 B
Output (units) 2,00,000 1,00,000
Selling price per unit ` 2.00 ` 3.50
Direct materials per unit ` 0.50 ` 0.75
Direct wages per unit ` 0.25 ` 0.50

Variable factory overhead is absorbed as a percentage of direct wages. Other variable costs
have been computed as: Product A ` 0.25 per unit; and B ` 0.30 per unit.

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During 2021-22, it is expected that the demand for product A will fall by25 % and for
B by 50%. It is decided to manufacture a further product C,the cost for which is estimated
as follows:
Product C
Output (units) 2,00,000
Selling price per unit ` 1.75
Direct materials per unit ` 0.40
Direct wages per unit ` 0.25

It is anticipated that the other variable costs per unit will be the same asfor product
A.
Prepare a budget to present to the management, showing the current position and the
position for 2021-22. Comment on the comparative results

Question 14: Illustration 6; SM

Float glass Manufacturing Company requires you to Prepare the Master budget forthe
next year from the following information:

Sales:
Toughened Glass ` 6,00,000
Bent Glass ` 2,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ ` 150 per month
Factory overheads:
Indirect labour –
Works manager ` 500 per month
Foreman ` 400 per month
Stores and spares 2.5% on sales
Depreciation on machinery ` 12,600
Light and power ` 3,000
Repairs and maintenance ` 8,000
Others sundries 10% on direct wages
Administration, selling and ` 36,000 per year
distributionexpenses

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 Question 15:

The following are the details of the budget and actual cost of Quick production Ltd. for the
six months from January to June 2022. From the figures given below,

You are required to prepare the production cost budget for the period January to June 2023

January – June 2022

Budget Actual
Material cost ₹ 40,00,000 39,90,000
(2000MT @ ₹ 2000) (@ ₹ 2100)
Labour cost ₹ 8,00,000 ₹ 7,99,920
( @20 per hour) (@ ₹ 22 per hour)
Variable overheads ₹ 2,40,000 ₹ 2,16,000
Fixed overhead ₹ 4,00,000 ₹ 4,20,000

The budget production for the first half of 2020 was 20,000 units, whereas the company
produced only 18,000 units during the period.

In the first half of 2023, production is budgeted for 25,000 units. Material cost per tonne will
increase from last year’s actual by ₹ 100 but it is proposed to maintain the consumption
efficiency of 2022 as budgeted. Labour efficiency will be lower by another by 1% and labour
rate will be ₹ 22 per hour. Variable and fixed overheads will go up by 20% over 2022 actual.
(₹ 74,86,000)

Question 16:

A manufacturing company having a capacity of 6,00,000 units has prepared thefollowing cost
sheet

Per Unit (In ₹)

Direct material 2.50
Direct Wages 1.00
Factory overheads 2.00 (50% fixed)
Selling and administration Overhead 1.50 (One third Variable)
Selling price 9.00

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During 2020, the sales volume achieved by company was 5,00,000 units. The company has
launched an expansion programme.

The details of which are as under:

The capacity will be increased to 10,00,000 units

The additional fixed overheads will amount to 4,00,000 upto 8,00,000 units and will increase
by ₹ 2,00,000 more beyond 8,00,000 units.

The cost of investment on expansion is ₹ 8,00,000, which is proposed to befinanced through

bank borrowing carrying interest at 15% p.a.

The average depreciation rate on the new investment is 10% based on SLM. Assume that
company profits are taxed at 50%

After expansion is put through, the company has two alternatives for operating the
expanded plant as under:

1. Sales can be increased to 8,00,000 units by spending ₹ 1,00,000 on special

advertisement campaign.

2. Sales can be increased to 10,00,000 units subject to following

a. By an overall price reduction of ₹ 1 per unit on all units sold

b. By increasing the variable selling and administration expenses by 5%
c. The direct material cost would go down by 1% due to discount on bulk buying.

Required:
a. Construct a flexible budget at the level of 5 Lakhs, 8 Lakhs and 10 Lakhs, advise which
level of output should be chosen for operation
b. Calculate BEP before and after expansion
c. Find Payback period for investment made on expansion at the level of activitychosen
by you for operation

(Ans. Profit 8,00,000/ 13,00,000/ 10,00,000 BEP 27,00,000/ 42,75,000/53,33,333, Payback

Period 3.2Yrs)

Question 17: ICAI DEC 2021; 5 Marks

The Accountant of KPMR Ltd. has prepared the following budget for the coming year 2022 for its two
products ‘AYE’ and ‘ZYE’:

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 Particulars Product ‘AYE’ Product ‘ZYE’
Production and Sales (in Units) 4,000 3,000
Amount (in `) Amount (in `)
Selling Price per unit 200 180
Direct Material per unit 80 70
Direct Labour per unit 40 35
Variable Overhead per unit 20 25
Fixed Overhead per unit 10 10

After reviewing the above budget, the management has called the marketing team for suggesting some
measures for increasing the sales. The marketing team has suggested that by promoting the products on social
media, the sales quantity of both the products can be increased by 5%. Also, the selling price per unit will go
up by 10%. But this will result in increase in expenditure on variable overhead and fixed overhead by 20%
and5% respectively for both the products.

You are required to prepare flexible budget for both the products:
1. Before promotion on social media,
2. After promotion on social media.

Question 18: ICAI RTP NOV 2021

The accountant of manufacturing company provides you the following details for year 2019-20:

Particulars (`)
Direct materials 28,00,000
Direct Wages 16,00,000
Fixed factory overheads 16,00,000
Variable factory overheads 16,00,000
Other variable costs 12,80,000
Other fixed costs 12,80,000
Profit 18,40,000
Sales 1,20,00,000

During the year, the company manufactured two products A and B and the output and costs were:

Particulars A B
Output (units) 2,00,000 1,00,000
Selling price per unit ` 32.00 ` 56.00
Direct materials per unit ` 8.00 ` 12.00
Direct wages per unit ` 4.00 ` 8.00

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Variable factory overhead is absorbed as a percentage of direct wages. Other variable costs have been
computed as: Product A ` 4.00 per unit; and B ` 4.80 per unit.

During 2020-21, it is expected that the demand for product A will fall by 25% and for B by 50%. It is decided to
manufacture a new product C, the cost for which is estimated as follows:
Particulars Product C
Output (units) 2,00,000
Selling price per unit ` 28.00
Direct material per unit ` 6.40
Direct wages per unit ` 4.00

It is anticipated that the other variable costs per unit of Product C will be same as forproduct A.

Prepare a budget to present to the management, showing the current position and theposition for 2020-
21. Comment on the comparative results.

Question 19: ICAI RTP MAY 2022

Maharatna Ltd., a public sector undertaking (PSU), produces product A. The company is in process of
preparing its revenue budget for the year 2022. The company has the following information which can be
useful in preparing the budget:

(i) It has anticipated 12% growth in sales volume from the year 2021 of 4,20,000 tonnes.

(ii) The sales price of ` 23,000 per tonne will be increased by 10% provided Wholesale Price
Index (WPI) increases by 5%.

(iii) To produce one tonne of product A, 2.3 tonnes of raw material are required. The raw material
cost is `4,500 per tonne. The price of raw material will also increase by 10% if WPI increase
by 5%.

(iv) The projected increase in WPI for 2022 is 4%

(v) A total of 6,000 employees works for the company. The company works 26 days in a month.

(vi) 85% of employees of the company are permanent and getting salary as per 5- year wage
agreement. The earnings per manshift (means an employee cost for a shift of 8 hours) is ``3,000
(excluding terminal benefits). The new wage agreement will be implemented from 1st July
2022 and it is expected that a 15% increase in pay will be given.

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 (vii) The casual employees are getting a daily wage of ` 850. The wages in linked to Consumer Price
Index (CPI). The present CPI is 165.17 points and it is expected to be 173.59 points in year
2022.

(viii) Power cost for the year 2021 is ` 42,00,000 for 7,00,000 units (1 unit = 1 Kwh). 60%of power
is used for production purpose (directly related to production volume) and remaining are
for employee quarters and administrative offices.

(ix) During the year 2021, the company has paid ` 60,00,000 for safety and maintenance works. The
amount will increase in proportion to the volume of production.

(x) During the year 2021, the company has paid ` 1,20,000 for the purchase of diesel to be used
in car hired for administrative purposes. The cost of diesel will increase by 15% in year 2022.

(xi) During the year 2021, the company has paid ` 6,00,000 for car hire charges (excluding fuel
cost). In year 2022, the company has decided to reimburse the diesel cost to the car rental
company. Doing this will attract 5% GST on Reverse Charge Mechanism (RCM) basis on
which the company will not get GST input credit.

(xii) Depreciation on fixed assets for the year 2021 is ` 80,40,00,000 and it will be 15% lower in
2022.
Required:
From the above information PREPARE Revenue (Flexible) budget for the year 2022 and also show the
budgeted profit/ loss for the year.

Functional Budget
Question 20:

Prepare a production budget for 3 months ending March 31, for a factory producing four
products on the basis of following information:
Type of Product Estimated stock Estimated sales Desired closing
in 1 Jan during Jan -March stock on 31 March
A 2000 10,000 3000
B 3000 15,000 5000
C 4000 13,000 3000
D 3000 12,000 2000

(Ans. 11,000; 17,000; 12,000; 11,000)

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 Question 21

The following are the estimates sales of a company for eight months ending on 30 November

Months Estimated Sales (units)

April 12000
May 13000

June 9000
July 8000
August 10000
September 12000
October 14000
November 12000
As a matter of policy, the company maintains the closing balance of finished goods and raw
material as follows:
Stock Item Closing Balance

Finished Goods 50% of estimated sales of next month

Raw Material Estimated Consumption for next month

Every unit of production requires 2 kg of raw material costing ₹ 5 per kg.

Prepare production budget in units and Raw material purchase budget for the half year
ending 30th September

Question 22: Practical Problem 7; SM

Jigyasa Ltd. is drawing a production plan for its two products Minimax (MM) and
Heavyhigh (HH) for the year 2021-22. The company’s policy isto hold closing stock of
finished goods at 25% of the anticipated volumeof sales of the succeeding month. The
following are the estimated data fortwo products:
Minimax (MM) Heavyhigh (HH)
Budgeted Production units 1,80,000 1,20,000
(`) (`)
Direct material cost per unit 220 280
Direct labour cost per unit 130 120
Manufacturing overhead 4,00,000 5,00,000

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The estimated units to be sold in the first four months of the year 2021-22 are as
under
April May June July
Minimax 8,000 10,000 12,000 16,000
Heavy high 6,000 8,000 9,000 14,000

Prepare production budget for the first quarter in month-wise.

Question 23:

The following details are available in respect of an annual budget of ABC & Co. for the year

st nd rd th
Particulars 1 Quarter 2 Quarter 3 Quarter 4 Quarter
Working days 65 60 55 60
Production units per day 100 110 120 105
Raw material purchase
(% by weight of annual total) 30% 50% 20% -
Budget purchase price per kg. ₹1 ₹ 1.05 ₹ 1.25

Quantity of raw material per unit of production is 2 kg.

Budgeted opening stock of raw material 4000 kg. (₹ 4000)
Budgeted closing stock of raw material 2000kg.
Raw material issues are priced on first cum first basis.

You are required to find out (a) Quarterly and annual purchase of raw material, by weight
and value (b) Closing quarterly stock by weight and value.

Question 24: Illustration 4; SM

A single product company estimated its quarter-wise sales for the next year as under:
Quarter Sales (Units)
I 30,000
II 37,500
III 41,250
IV 45,000
The opening stock of finished goods is 6,000 units and the company expects to maintain the
closing stock of finished goods at 12,250 units at the end of the year. The production pattern
in each quarter is based on 80% of the sales of the current quarter and 20% of the sales of

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the next quarter. The company maintains this 20% of sales of next quarter as closing stock
of current quarter.

The opening stock of raw materials in the beginning of the year is 10,000 kg.and the
closing stock at the end of the year is required to be maintained at 5,000 kg. Each unit
of finished output requires 2 kg. of raw materials.

The company proposes to purchase the entire annual requirement of raw materials in the first
three quarters in the proportion and at the prices given below:

Quarter Purchase of raw materials % to total annual Price perkg.

requirement in quantity (`)
I 30% 2
II 50% 3
III 20% 4

The value of the opening stock of raw materials in the beginning of the year is ` 20,000.

You are required to Prepare the following for the next year, quarterwise:
I. Production budget (in units).
II. Raw material consumption budget (in quantity).
III. Raw material purchase budget (in quantity and value).
Priced stores ledger card of the raw material using First in First out method

Question 25:

The direct labour Minute requirement of three of the products manufactured by a factory,
each involving more than one labour operation, are estimated as follows:

Direct labour Minute per unit

Products
1 2 3
Operation 1 18 42 30
2 - 12 24
3 9 6 -

The factory works 8 hours per day, 6 days in a week. The budget quarter is taken as 13 weeks
and during a quarter, lost hours due to leave and holidays and other casual are estimated to
be 124 hour

The budget hourly rates for the worker manning the operation I, II and III are ₹ 2.00; ₹ 2.50;

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₹ 3.00 respectively.
The budget sales of the product during the quarter are:

Product 1 9000 units

2 15,000 Units
3 12,000 Units

There is carryover of 5000 units of product 2 and 4000 units of product 3 and it is proposed to
build up stock at the end of Quarter as follows

Product 1 1000 units

Product 3 2000 Units

Prepare a man power budget for the quarter show for each operation
I. Direct labour hours
II. Direct labour cost
III. Number of Workers
(Ans. no of workers 30, 12, 5 )

Question 26:

ACE Ltd. manufactures three products A,C and E in two production department F and G. In
each of department two grades of labour are employed. The Cost accountant is preparing the
annual budgets for the next year and he has asked you to prepare, using the data given below:

1. The production budget in units for Products A,B and C

2. The direct wages budget for departments F and G with labour costs of products A, B
and C

Product A Product B Product C

(₹ 000) (₹ 000) (₹ 000)

Finished Stock
Ist Jan 720 540 1800
31 Dec 600 570 1000
All stock are valued at standard cost
per unit 24 15 20
Standard profit
Calculated as % of selling price 20% 25% 16-2/3%

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 Total Product A Product B Product C
(₹000) (₹ 000) (₹000) (₹ 000)
Budgeted sales are
South 6600 1200 1800 3600
West 5100 1500 1200 2400
North 6380 1500 800 4080

Total 18080 4200 3800 10080

Normal loss in production 10% 20% 5%
Standard labour times per unit and standard rates per hour

Rate Product A ProductB Product C

(₹) Hours P.U. Hours P.U. Hours P.U

Department F
Grade 1 1.80 2.0 3.0 1.0
Grade 2 1.60 1.5 2.0 1.5

Department G
Grade 1 2.00 3.0 1.0 1.0
Grade 2 1.80 2.0 1.5 2.5

Question 27:

P Ltd. manufactures two products using one type of material and one grade of labour.Shown
below is an extract from the company’s working papers for the next period budgets

Particulars Product A Product B

Budgeted sales 3600 Units 4800 Units

Budgeted material consumption per product 5 Kg 3 Kg

(Standard Cost @ ₹ 12 per kg)
Standard hours allowed per product 5 Hours 4 Hours
(Standard rate @ ₹ 8 per hour)

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Overtime premium is 50% and is payable if a worker works for more than 40 hours a week.
There are 90 direct worker The target productivity ratio (efficiency Ratio) forthe productive
hours worked by the direct workers in actually manufacturing the product is 80%; in addition
the non- productive downtime is budgeted at 20% of the productive hours worked.

There twelve 5 days weeks in the budget 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 – 1020 units;
Product B – 2400 units; Raw Material – 4300 units. Also the target closing stock,expressed in
terms of anticipated activity during the budget period are:

Product A – 15 days sales

Product B – 20 days sales
Raw material – 10 days Consumption

Calculate the material purchases budget and wages budget for the direct workers, showing
the quantities and values for the next period budget.
(Ans. Material purchased ₹ 3,60,000; Labour budget ₹ 4,28,400)

Question 28: Illustration No. 8; SM

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 -B
Budgeted sales (in units) 2,400 3,600
Budgeted material consumption per unit (in kg):
Material-X 5 3
Material-Y 4 6
Standard labour hours allowed per unit of product 3 5

Material-X and Material-Y cost ` 4 and ` 6 per kg and labours are paid ` 25 per hour.
Overtime premium is 50% and is payable, if a worker worksfor 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 5-days weeks in the budgeted period and it is anticipatedthat sales and
production will occur evenly throughout the whole period.

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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

Question 29: Illustration No. 3; SM

K Ltd. produces and markets a very popular product called ‘X’. The company is interested
in presenting its budget for the second quarter of 2020-21.

The following information are made available for this purpose:

1. It expects to sell 1,50,000 bags of ‘X’ during the second quarter of 2020-21 at the
selling price of ` 1,200 per bag.

2. Each bag of ‘X’ requires 2.5 mtr. of raw – material ‘Y’ and 7.5 mtr. of raw – material
‘Z’.

3. Stock levels are planned as follows:

Particulars Beginning of End of Quarter
Quarter
Finished Bags of ‘X’ (Nos.) 45,000 33,000
Raw – Material ‘Y’ (mtr) 96,000 78,000
Raw – Material ‘Z’ (mtr) 1,71,000 1,41,000
Empty Bag (Nos.) 1,11,000 84,000

4. ‘Y’ cost `160 per mtr., ‘Z’ costs `30 per mtr. and ‘Empty Bag’ costs `110each.

5. It requires 9 minutes of direct labour to produce and fill one bag of ‘X’.Labour cost
is ` 70 per hour.

6. Variable manufacturing costs are `60 per bag. Fixed manufacturing costs `
40,00,000 per quarter.

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 7. Variable selling and administration expenses are 5% of sales and fixed
administration and selling expenses are ` 3,75,000 per quarter.

Required
I. Prepare a production budget for the said quarter in quantity.
II. Prepare a raw – material purchase budget for ‘Y’, ‘Z’ and ‘Empty Bags’for the said
quarter in quantity as well as in rupees.
III. Compute the budgeted variable cost to produce one bag of ‘X’.

Question 30:

ZED Ltd. Manufactures three products A,B and C and markets them at ₹ 450, ₹ 550 and 650
per unit respectively. The current ratio of sales in quantity of A, B and C is 1:2:4

Relevant Data of A, B and C per unit

Product Quantity of parts required there in Labour hours Variable

Overhead

Frame E F G Skill Unskilled `

A 1 10 2 8 6 8 9
B 1 2 14 10 4 6 11
C 1 6 10 2 3 6 7

The present purchase price per part is ₹ 45, ₹ 15, ₹ 15 and ₹ 5 for frame, E, F, and G
respectively. The wage rate per hour for skilled and unskilled workers is ₹ 6 and ₹ 5
respectively.

The opening stock are as on 1.11.2016 stood at 500, 1000, 3000, 1500, 1000, 20,000 and
10,000 respectively for A, B, C and FRAME, E, F, G . The company maintains closingstock of
products and parts at 90% of the opening stock.

The workers work for 8 hours a day from 25 days in a month

The share of fixed overheads per month comes to ₹ 15,75,000; ₹ 5,80,000; ₹ 8,45,000 for
production, administration and selling respectively.

The yearly profit as projected up to Octber2021 is ₹ 120 Lakhs

You are required to present the following for November 2020

I. Sales budget in quantity and in value
II. Production budget

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 III. Parts usage budget
IV. Purchase budget in quantity as well in value
V. Manpower budget showing labour hours and wages payable.

(Ans. Sales budget 2500 / 5000 / 10000; Production budget 2450 / 4900 / 9700; Parts
usage 92500 / 170500 / 88000; Purchase budget 760500 / 1386000 / 2527500 /
435000; Labour budget 380400 / 536000)

Question 31: Illustration No. 5; SM

A company is engaged in the manufacture of specialised sub-assemblies required for certain

electronic equipment. The company envisages that in the forthcoming month, December,
the sales will be in the ratio of 3 : 4 : 2 respectively of sub-assemblies, ACB, MCB and DP.

The following is the schedule of components required for manufacture:

Component requirements
Sub-assembly Selling Price Base board IC08 IC12 IC26
ACB 520 1 8 4 2
MCB 500 1 2 10 6
DP 350 1 2 4 8
Purchase price(`) 60 20 12 8

The direct labour time and variable overheads required for each of the sub- assemblies are:

Labour hours Variable overheads

(`)
Grade A Grade B

ACB 8 16 36
MCB 6 12 24
DP 4 8 24
Direct wage rate per hour (`) 5 4 —
The labourers work 8 hours a day for 25 days a month.
The opening stocks of sub-assemblies and components for December are as under:

Sub-assemblies Component
ACB 800 Base Board 1,600
MCB 1,200 IC08 1,200
DP 2,800 IC12 6,000
IC26 4,000

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Fixed overheads amount to ` 7,57,200 for the month and a monthly profit target of ` 12
lacs has been set

The company is eager for a reduction of closing inventories for the month of December
of sub-assemblies and components by 10% of quantity as compared to the opening stock.

Prepare the following budgets for the month of December:

I. Sales budget in quantity and value.

II. Production budget in quantity
III. Component usage budget in quantity.
IV. Component purchase budget in quantity and value.
V. Manpower budget showing the number of workers and the amount of wages
payable.

Question 32: Practical Problem 5; SM

TQM Ltd. has furnished the following information for the month ending 30th June:
Master Actual Variance
Budget
Units produced and sold 80,000 72,000
Sales (`) 3,20,000 2,80,000 40,000 (A)
Direct material (`) 80,000 73,600 6,400 (F)
Direct wages (`) 1,20,000 1,04,800 15,200 (F)
Variable overheads (`) 40,000 37,600 2,400 (F)
Fixed overhead (`) 40,000 39,200 800 (F)
Total Cost 2,80,000 2,55,200

The Standard costs of the products are as follows:

Per unit (`)

Direct materials (1 kg. at the rate of `1 per kg.) 1.00
Direct wages (1 hour at the rate of ` 1.50) 1.50
Variable overheads (1 hour at the rate of ` 0.50) 0.50

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

Required:
I. Prepare Flexible budget for the month and compare with actual results.
II. Calculate Material, Labour, Sales Price, Variable Overhead and Fixed Overhead
Expenditure variances and Sales Volume (Profit) variance

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 Question 33: ICAI JULY 2021; 10 Marks

PSV Ltd. manufactures and sells a single product and estimated the following relatedinformation for the
period November, 2020 to March, 2021.

Particulars November, December, January, February, March,

2020 2020 2021 2021 2021
Opening Stock of 7,500 3,000 9,000 8,000 6,000
Finished Goods (in
Units)
Sales (in Units) 30,000 35,000 38,000 25,000 40,000
Selling Price per unit 10 12 15 15 20
(in `)

Additional Information:

 Closing stock of finished goods at the end of March, 2021 is 10,000 units.
 Each unit of finished output requires 2 kg of Raw Material 'A' and 3 kg of Raw Material 'B'.

You are required to prepare the following budgets for the period November, 2020 to March, 2021 on monthly
basis:
I. Sales Budget (in `)
II. Production budget (in units) and
III. Raw material Budget for Raw material 'A' and 'B' separately (in units)

Question 34: ICAI, MAY 2022, 10 Marks

SR Ltd. is a manufacturer of Garments. For the first three months of financial year2022-23 commencing on
1st April 2022, production will be constrained by direct labour. Itis estimated that only 12,000 hours of direct
labour hours will be available in each month.

For market reasons, production of either of the two garments must be at least 25% of the production of the
other. Estimated cost and revenue per garment are as follows:

Shirt (`) Short (`)

Sales price 60 44
Raw Materials
Fabric @12 per metre 24 12
Dyes and cotton 6 4
Direct labour @ 8 per hour 8 4
Fixed Overhead @ 4 per hour 4 2
Profit 18 22

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From the month of July 2022 direct labour will no longer be a constraint. The company expects to be able to
sell 15,000 shirts and 20,000 shorts in July, 2022. There will be no opening stock at the beginning of July
2022.

Sales volumes are expected to grow at 10% per month cumulatively thereafter throughout the year. Following
additional information is available:

 The company intends to carry stock of finished garments sufficient to meet 40% of the next month's
sale from July 2022 onwards.

 The estimated selling price will be same as above.

Required:

I. Calculate the number of shirts and shorts to be produced per month in the first quarter of financial
year 2022-2023 to maximize company's profit.

II. Prepare the following budgets on a monthly basis for July, August and September 2022:

III. Sales budget showing sales units and sales revenue for each product.

IV. Production budget (in units) for each product

Question 35: ICAI RTP MAY 2021

RS Ltd manufactures and sells a single product and has estimated sales revenue of ` 302.4
lakh during the year based on 20% profit on selling price. Each unit of product requires 6 kg of
material A and 3 kg of material B and processing time of 4 hours in machine shop and 2 hours in
assembly shop. Factory overheads are absorbed at a blanket rate of 20% of direct labour.
Variable selling & distribution overheads are ` 60 per unit sold and fixed selling & distribution
overheads are estimated to be ` 69,12,000.
The other relevant details are as under:
Purchase Price: Material A ` 160 per kg
Materials B ` 100 per kg
Labour Rate: Machine Shop ` 140 per
hour
Assembly Shop ``70 per hour

Finished Stock Material A Material B

Opening Stock 2,500 units 7,500 kg 4,000 kg
Closing Stock 3,000 units 8,000 kg 5,500 kg

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 Required:
(i) Calculate number of units of product proposed to be sold and
selling price per unit,
(ii) Prepare Production Budget in units, and
(iii) Prepare Material Purchase Budget in units.

Control Ratio
Question 36:
Following data is available for DKG and Co:

Standard working hours 8 hours per day of 5 days per week

Maximum capacity 50 employees

Actual working 40 employees

Actual hours expected to be worked per four week 6,400 hours

Std. hours expected to be earned per four weeks 8,000 hours
Actual hours worked in the four- week period 6,000 hours
Standard hours earned in the four- week period 7,000 hours.

The related period is of 4 weeks. In this period there was a one special day holiday due
to national event. Calculate the following ratios:

(1) Efficiency Ratio, (2) Activity Ratio, (3) Calendar Ratio, (4) Standard Capacity
Usage Ratio, (5) Actual Capacity Usage Ratio. (6) Actual Usage of Budgeted
Capacity Ratio.

Question 37: ICAI RTP NOV 2022

Following information is available for DK and Co.:

Standard working hours 9 hours per day of 5 days per week
Maximum capacity 50 employees
Actual working 40 employees

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Actual hours expected to be worked per four week 7,200 hours
Std. hours expected to be earned per four weeks 9,000 hours
Actual hours worked in the four- week period 6,750 hours
Standard hours earned in the four- week period 7,875 hours.

The related period is of 4 weeks. In this period there was a one special day holiday due to
national event.

You are required to Calculate the following ratios:

I. Efficiency Ratio
II. Activity Ratio
III. Calendar Ratio
IV. Standard Capacity Usage Ratio
V. Actual Capacity Usage Ratio
VI. Actual Usage of Budgeted Capacity Ratio

Question 38:

Following data is available for ABC Ltd.:

Standard working hours 8 hours per day of 5 days per

week
Maximum Capacity 60 employees
Actual working 50 employees
Actual hours expected to be worked per four week 8,000 hours
Standard hours expected to be earned per four
week 9,600·hours
Actual hours worked in the four week period 7,500 hours
Standard hours earned in the four week period 8,800 hours

The related period is of four weeks. Calculate the following Ratios :

I. Efficiency Ratio

II. Activity Ratio

III. Standard Capacity Usage Ratio

IV. Actual Capacity Usage Ratio

V. Actual Usage of Budgeted Capacity Ratio

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MCQ
1. 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:
a) Master budget
b) Cash budget
c) Flexible budget
d) Fixed budget

2. The classification of fixed and variable cost is useful for the preparation of:
a) Master budget
b) Flexible budget
c) Cash budget
d) Capital budget

3. Budget manual is a document:

a) Which contains different type of budgets to be formulated only.
b) Which contains the details about standard cost of the products to bemade.
c) Setting out the budget organization and procedures for preparing abudget including
fixation of responsibilities, formats and recordsrequired for the purpose of preparing
a budget and for exercising budgetary control system.
d) None of the above

4. The budget control organization is usually headed by a top executive whois

known as:
a) General manager
b) Budget director/budget controller
c) Accountant of the organization
d) None of the above

5. “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.
c) A favourable variance does not necessarily indicate efficient performance, because
such a variance might have been arrived at bynot carrying out the expenses
mentioned in the budget.
d) None of the above.

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6. A budget report is prepared on the principle of exception and thus-
a) Only unfavourable variances should be shown
b) Only favourable variance should be shown
c) Both favourable and unfavourable variances should be shown
d) None of the above

7. 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 onlypurchases of
materials but also other item’s as well
c) Purchases budget is different from materials budget; it includespurchases of other
items only
d) None of the above

8. Efficiency ratio is:

a) The extent of actual working days avoided during the budget period
b) Activity ratio/ capacity ratio
c) Whether the actual activity is more or less than budgeted activity
d) None of the above

9. Activity Ratio depicts:

a) Whether actual capacity utilized exceeds or falls short of the budgetedcapacity

b) Whether the actual hours used for actual production were more or lessthan the
standard hours
c) Whether actual activity was more or less than the budgeted capacity
d) None of the above

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

a) Capital expenditure budget
b) Research and development budget
c) Cash budget
d) Sales budget

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