Prof : Ankita Rohtagi Management Account for Engineers

BUDGETORY CONTROL
Budget: Budget is a financial and or quantitative statement prepared and approved prior to a
defined period of time, of the policy to be pursued during that period for the purpose of
attaining a given objective.
It is a plan quantified in monetary terms, prepared and approved prior to a defined period of
time showing planned income to be generated and or expenditure to be incurred during that
period and capital to be employed to attain a given objective. It is a plan of future activities
for an organisation. It is expressed mainly in financial terms, but also usually incorporates
many non- financial measures as well.
Budgeting:
Budgeting is the whole process of designing, implementing and operating the budgets. The
main emphasis in this short term budgeting process involving the provision of resources to
support plans which are being implemented.
Budgetary Control:
Budgetary control is the establishment of budgets relating the responsibilities and the
continuous comparison of actual with budgeted results for the purpose.
OBJECTIVES
• Define Targets.

• Define Responsibilities.

• Investigate and Correct Deviation from Targets.

• Optimise Resources and Maximise Profits.

• Create Dynamic Team-Spirit.

Advantages of Budgeting :
 Budgetary control establishes a basis of internal for internal audit by regularly
evaluating departmental results.

 Only reporting information which has not gone according to plan, it economises on
managerial time and maximizes efficiency. This is called “Management by exception
by reporting “.

 Scares resources should be allocated in an optimal way, thus controlling expenditure.

 It forces management to plan ahead so that long term goals are achieved.

• An effective budgetary control system will allow the people to participate in setting
budgets and thereby have motivational impact on work force. Individual and
corporate goals are aligned.

• Areas of efficiency and inefficiency are identified. Variance analysis will prompt

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Prof : Ankita Rohtagi Management Account for Engineers

remedial action where necessary.

• People are made responsible for items of cost and revenue i.e. areas responsibility are
clearly delineated.

Limitations of Budget:
• Budgets are Estimate: Budgets are based on estimates of quantities and values. It is
not possible to be 100% accurate while making estimates. The estimates in respect of
cost are subject to many external factors beyond the control of management e.g.
change in prices, market conditions, inflation. If the budgeted period is long the
estimates are bound to be widely different from actual.

• Unrealistic Target: If the targets set by the Budget are too high, employees will be
discouraged and demoralized. If the targets are low, management will be at a
disadvantage due to lower level of performance.

• Budgets Should not become Mere Forecasts: Budget is an exercise in planning and
not a forecast or guesswork. Budget should not make passive estimates but must
actively lay down policies to guide future action.

• Fixed Budget Ignores Variable Costs: Fixed Budget is made for a specific level of
activity.

• Elaborate and Costly System and Administration: The Budgetary Control system
is costly to establish and organise. A small organization cannot afford the cost of
having an elaborate budgeted department.

Functional Budget: A budget of income and expenditure appropriate to, or the

responsibilities of a particular function. Thus functional budgets pertain to different
functions or department in an organization such as sales, purchase, production etc.
Examples of functional budgets are sales budget, purchase budget, cash budget and etc.
Types of functional Budgets:
• Sales Budget.

• Production Budget.

• Purchase Budget

• Research and development Budget.

• Cash Budget

• Personnel Budget.

Expenses Budget: Such

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Prof : Ankita Rohtagi Management Account for Engineers

FIXED BUDGET
A Budget which is designed to remain unchanged irrespective of the level of capacity or
volume. All the calculations of sales, production, expenses are related to this specific level
or volume. Fixed Budget is used as an effective tool of cost control. Such a budget is quite
suitable for fixed expenses. But, in case the level of activity usually attained is different
from the level of activity budgeted, the fixed budget becomes ineffective. It ignores the
effect of change in volume on sales, production, expenses etc. It does not take into account
the classification of cost into fixed and variable costs.
FLEXIBLE BUDGET
as - "A budget which, by recognizing the difference between fixed, semi-fixed and
variable costs, is designed to change in relation to the level of activity attained. Flexible
Budget does not assume a fixed level of capacity or volume. It is prepared for the level of
activity usually attained. It is more elastic, useful and practical as compared to a fixed
budget it takes into account effect of change in volume on sales, production expenses etc.
It may be adjusted for current conditions arising out of seasonal changes or change in the
length of working period etc. It is thus an effective tool for control. It is based on the
classification of costs into fixed costs and variable costs.
Flexible budgets are necessary and useful in the following circumstances –
• Seasonal fluctuations in sales or production .i.e. cold drink industry.

• A company which keeps introducing a new product or changing product design

frequently.

• Job-order industries e.g. Ship- building

• Fashion industry.

• General changes in sales.

Zero Based Budgeting: It is a method of Budeting where by all the activities are
revaluated each time a budget is formulated and it requires each manager to justify his
entire budget request in detail from starch and shifts the burden of proof to each manager
to justify why he should spend any money at all. ZBB is a planning tool for management
which helps in identification of wasteful and obsolescent items of expenditure.

CASH BUDGET
Q1. JAB Company making for a stock in the first quarter of the year is assisted by its bankers
with overdraft accommodation. The following are the relevant budget figure.
Months Sales ₹ Purchases ₹ Wages ₹
November 1,20,000 83,000 9,800
December 1,28,000 96,000 10,000
January 72,000 1,62,000 8,000
February 1,16,000 1,64,000 4,000

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 Prof : Ankita Rohtagi Management Account for Engineers

March 84,000 1,79,000 10,400

st
Budgeted cash at Bank, 1 January 2014 = ₹ 17,200. Credit terms of sales on payment by the
end of the month following the month of supply. On an average, one-half of sales are paid on
the due date while the other half are paid during the next month. Creditors are paid during the
month following the month of supply.
You are required to prepare a cash budget for the quarter, 1st January – 31st March 2014
showing the budgeted amount to bank facilities required at each month.
Q2. From the following information and the assumption that the balance in hand on 1st
January is ₹ 72,500, prepare Cash-Budget.
Month Sales Materials Wages Selling, Production Administration
Distribution Cost Cost
January 72,000 25,000 10,000 4,000 6,000 1,500
February 97,000 31,000 12,100 5,000 6,300 1,700
March 86,000 25,500 10,600 5,500 6,000 2,000
April 88,600 30,600 25,000 6,700 6,500 2,200
May 1,02,500 37,000 22,000 8,500 8,000 2,500
June 1,08,700 38,800 23,000 9,000 8,200 2,500
Assume that 50% are Cash Sales. Assets are to be acquired in the month of February and
April. Therefore provision should be made for the payment of ₹ 40,000 and ₹ 25,000 for the
same. An application has been made to the Bank for the grant of loan of ₹ 30,000 and it is
hoped that it will be received in the month of May/
It is anticipated that a dividend of ₹ 35,000 will be paid in June. Debtors are allowed 1
months credit. Sales Commission @ 2% on Cash Sales and 5% on cash collection from
Debtors is to be paid. Creditors (for Goods or Overheads) grant one month credit.
Q3. Prepare a Cash Budget for the three months ending 30th June from the following
information.
(a) Months Sales Materials Wages Overheads
February 1,40,000 96,000 30,000 17,000
March 1,50,000 90,000 30,000 19,000
April 1,60,000 92,000 32,000 20,000
May 1,70,000 1,00,000 36,000 22,000
June 1,80,000 1,04,000 40,000 23,000

(b) Credit terms are -Sales/Debtors – 10% sales are on cash, 50% of the credit sales are
collected next month and the balance in the following month.
(c) Creditors – Materials 2 months
Wages 1/4 month
Overheads 1/2 month
(d) Cash and Bank Balance on 1st April is expected to be ₹ 60,000.
(e) Other relevant information are:

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Prof : Ankita Rohtagi Management Account for Engineers

i. Plant and Machinery will be installed in February at a cost of ₹ 9,60,000. The monthly
instalments of ₹ 12,000 are payable from April onwards.
ii. Dividend @ 5% on preference share capital of ₹ 12,00,000 will be paid on 1st June.
iii. Advance to be received for sale of vehicles ₹ 90,000 in June.
iv. Dividends from investments amounting to ₹ 10,000 are expected to be received in
June.
v. Income tax (advance) to be paid in June is ₹ 20,000.
Q4) Prepare cash budget for the quarter ended June 2015

Month
Sales Materials Wages Overheads
(Rs.) (Rs.) (Rs.) (Rs)

February 14,000 9,600 3,000 1,700

March 15,000 9,000 3,000 1,900

April 16,000 9,200 3,200 2,000

May 17,000 10,000 3,600 2,200

June 18,000 10,400 4,000 2,300
Additional Information:
(a) 10% sales are on cash.
(b) 50% of the credit sales are collected next month and the balance in the following month.
(c) Period of credit allowed by suppliers 2 months.
(d) Delay in payment of wages 1/4th month.
(e) Delay in payment of overheads 1/2 month.
(f) Cash and Bank Balance on 1.04.2015 is expected to be 6,000.
(g) Plant and Machinery will be installed in February 2015 at a cost of Rs. 96,000. The
monthly installment of Rs. 2,000 are payable from April 2015 onwards.
(h) Advance to be received for sale of vehicle Rs. 9,000 in June 2015
(i) Dividend from investments Rs. 1,000 is expected to be received in June 2015.
(j) Advance Income Tax to be paid in June 2015 Rs. 2,000.
(k) Depreciation is Rs 20,000

Q5) Prepare cash budget for the quarter ending March 31, 2014 of Prospect from the
following data:
Particulars Nov 13 Dec 13 Jan 14 Feb 14 March 14
Sales 9,00,000 10,00,000 10,00,000 9,00,000 10,00,000

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Prof : Ankita Rohtagi Management Account for Engineers

Raw material 5,00,000 6,50,000 6,00,000 5,50,000 6,50,000

Wages 1,00,000 1,00,000 1,00,000 1,00,000 1,10,000
Overheads 1,50,000 1,30,000 1,60,000 1,60,000 1,50,000
Other information is given below:
1. Cash balance on December 31, 2013 was Rs 50,000.

2. 10% of sales and 20% of purchases are of cash.

3. 60% of credit sales are collected in the month after sales and balance in the
subsequent month

4. Suppliers give credit of one month

5. Interim Dividend Rs 4,00,000 is payable in January 2014

6. Advance income tax of Rs 3,00,000 is payable on 15-01-2014

7. Wages are paid fortnightly on 1st and 15th of each month

8. Arrangement with bank is made to borrow temporarily in multiple of Rs 25,000 and

Repayment should be in multiple Rs 25,000, on which 12% p.a would be charged on
first day of the next month of borrowings

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