cost accounting project vi
TRANSCRIPT
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INTRODUCTION
Cost accounting has developed primarily to provide information to the
management for planning and control. Two important techniques applied for
these purposes are budgetary control and standard costing. They help in
forecasting the future activities and compare the actual results with the plans.
It is universal truth that without planning nothing can be done . The
same fundamental is applicable for successfully running of any organization.
Every organization has to get its goal and for that it has to plan various activities
which may include following:
How much to produce?
How much raw material will be required for production and how to
arrange for it?
How much labour will be required for production and how to arrange for
it?
How much funds will be required and from where to procure?
How much to sell and how to sell?
The list of items may be very long but one thing is clear that if we do not
plan then it is obvious that we are planning to fail.
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DEFINITION
BUDGET
CIMA London defines a budget as follows: “A financial and/or
quanti tative statement prepared and approved prior to a defi ned time of the
policy to be pursued dur ing the period for the purpose of attaining a given
objective. It may include income, expenditure and employment of capital.”
An analysis of the above definition reveals the following features of a
budget.
1. Budget is a statement prepared in terms of money or equivalent of
money.
2.
It is prepared prior to a future period of time
3. The future period for which it is prepared as definite and defined
4. The objectives to be attained and the policies to be adopted are laid
down in advance.
BUDGETARY CONTROL
CIMA London defines budgetary control as “the establishment of
budgets relating to responsibil i ties of executives to the requir ement of a poli cy
and continuous comparison of actuals with budgeted resul ts either to secure
by individual action the objectives of that policy or to provide a basis for its
revision.”
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MEANING
Budget Budgeting Budgetary control
Simply speaking budget isnothing but a “plan” .
Technically speaking, budget
is a plan of f utur e activity
(covering specif ic per iod), it
is a layout of f utur e activi ties
of an organization. A budget
is generally expressed in
monetary terms (e.g. Material
Consumption budget invalue), however, a budget
may be for non-financial
terms also (e.g. Material budget in quantity, labour
budget in hours etc.).
In simple words budget is a
future plan of any particular
item, it is prepared in
advance and it may be in
financial terms or quantitative
terms.
It is the process ofpreparing,
implementing and
operating the budget
(i .e. plan).
In other words,
budgeting involves
the process of
preparing the budgets
and thenimplementing and
operating them.
In short, budget is a plan and the process
of preparing;
implementing etc. of
the budget is called
budgeting.
Without planningeverything fails, in the same
way without proper control
also everything fails. Thus,
to get success there should
be proper planning with
proper system of control.
Budgetary control is
nothing but the activi ty of
exercising control with thehelp of budgets . Budgetary
control may include:
a) Establishing budgetsto set the targets of
the executives of
organization.
b) To compare the
actual results with the
desired results (i.e.
budgets).
c)
Analyze the deviation
from planning
activity if any and to
make requiredchanges in budgets.
I n brief, budgets are organizational plan of future activity, budgetingis the activi ty of preparing these budgets and budgetary control means
the system of achieving the desired target wi th the help of budgets.
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ESSENTIAL FEATURES OF BUDGETARY
CONTROL
1.
Budgetary control is the establishment of budgets,
2. Relating the responsibil i ties of executi ves to the requi rements of a
policy,
3. And the continuous compari son of actual wi th budgeted resul ts,
4. Ei ther to secure by individual action the objective of that policy, or
5. To provide a basis for its revision.
These aspects are explained in detail below.
1. Executive Responsibil i ty:
Budgets lay down targets and also fix the responsibility on each
executive for achievement of the targets. All executives in an
organization have a specific job to perform. But everyone must work in a
co-ordinated manner to achieve the overall objective of the organization.
Budgetary control aims to co-ordinate the actions of all executives so as
to achieve the overall targets. Thus budget is an excellent example of
Management By Objectives (MBO).
2. Requi rements of a poli cy:
Budgets must contain the policies directed towards achieving the
targets. The top management must clearly spell out the steps to be taken
by each executive for achieving the targets. The responsibilities of
executives must be related to the requirements of a policy. Thus
budgetary control is an important tool of long term planning. Budgets
specify the objectives of the organization and the policies designed to
achieve those objectives.
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3. Comparison of actuals with budgets:
Budgets can be a tool of control only when the actual results are
compared with the targets. Thus the actual results must be continuously
compared with the budgets, to ascertain the deviations from the target set.
4. Corr ective action:
Management must take immediate corrective action if the actual
results are unsatisfactory when compared with targets set in the budgets.
The remedial action may be of two types-
i . The concerned executive is given detailed information regarding
the budget variances to enable him to take action and make efforts
to attain his objective. The deviations from budgets act as a signal
to management. When the actual results differ from the budget, the
concerned executive has to study where and why the difference has
occurred. Thus budget is also an excellent example of
management by exception. The executive concentrates on the
problem areas indicated by the deviations from budget so asachieve his targets.
i i . Management may study the budgets to ascertain if the targets set
were unrealistic, and if so, revise the targets themselves.
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OBJECTIVES OF BUDGETORY CONTROL
1. Planning the poli cies
A budget is a plan of the policies to be pursued during a given
period of time for achieving the given objectives. Budgetary control
compels effective planning of all operations well in time.
2. Define targets
Establish the overall aims of the business and determining the
targets of performance for each section or department of the business.
3.
Define Responsibil i ties
Laying down the responsibilities of each of the executives and
other personnel so that everyone knows what is expected of him and how
he will be judged.
4. Co-ordinating activi ties
Various departments and sections of the firm are involved in the
task of preparing budgets. It develops team spirit and secures co-
operation from all departments to achieve the common objective of the
firm.
5. Control li ng costs
Budgets are prepared for every important function and department.
Actual performances are compared with that of budgets. This facilitates
control over different activities and costs.
6.
Optimi ze Resources and M aximize profi ts
Ensuring the best use of all available resources to maximize profit
or production, subject to the limiting (key) factors.
7. I ncreases efficiency
Well thought plans, carefully selected course of action and a
system of continuous evaluation of performances help to increase the
overall efficiency of the firm.
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STEPS IN BUDGETARY CONTROL
One type of budgetary control cannot be adopted for all firms. The
following steps are necessary to prepare suitable budgets and effective
implementation of the budgetary control system.
1. Preparation of organization chart:
Authority and responsibility of all executives should be clearly
defined. This will enable the identification of accountability of each
executive.
ORGANISATION CHART
TOP MANAGEMENT
SALES
MANAGER
ACCOUNTS
MANAGER
PRODUCTION
MANAGER
PERSONNEL
MANAGER
PURCHASE
MANAGER
PURCHASE/
MATERIAL
BUDGETLABOUR
BUDGET PRODUCTION/
MATERIAL/
PLANT
UTILISATIONBUDGET
SALES
BUDGET
OVERHEADS/
CASH/
CAPITAL
EXPENDITURE
BUDGET
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2. Establi sh Budget Centres:
CIMA has defined a budget centre as –“a section of the
organization of an undertaking defined for the purpose of budgetary
control.” Thus a sales manager may have different sections reporting – to
him, such as selling, advertisement and so on. Each such section may be
defined as a budget centre for the purpose of budgetary control. This
helps in fixing the responsibility for control of costs and achievement of
targets on each section of the department.
3. Appoin tment of budget committee:
In the small organization, the budget officer will formulate
the budget, co-ordinate with heads of various departments, compare the
actual results with the budgets and report the differences to management.
In a large organization this task of „administration‟ of budget may be
performed by a budget committee consisting of the chief executive, the
budget officer and the heads of the departments. The budget committee is
an advisory committee. The final decisions are taken by the chief
executive. The budget officer acts as the secretary of the budget
committee. The main functions of a budget committee are-
a. Establish budget centres
b.
Fix the budget period
c.
Determine the principal/key budget factor
d. Receive and study all functional budgets
e. Approve the functional budgets and master budget
f. Lay down the policies to be pursued to achieve targets
g.
Fix responsibility of each executive to achieve the targets
h.
Obtain the reports of comparison between actual results budgets andi. Recommend action to be taken.
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4. Preparation of Budget Manual:
CIMA has defined Budget Manual as-“a document which
sets out the responsibilities of the persons engaged in, the routine of, and
the forms and records required for, budgetary control.” Budget manual is a
document which contains a detailed procedure about the operation of
budgetary control system in an organization. It contains routine forms and
documents to be used and responsibilities of various persons for the
preparation and implementation of budgets. It indicates the dates by which
necessary data, information, budgets and reports are to be prepared and
supplied. All of the above stated facts and forms constitute the contents of
a budget manual.
The budget manual serves as a rule book for the
implementation of a budget programme in an organization. It in fact lies
down, what is to be done, how it is to be done, when it is to be done, and by
whom. It is always preferable to devote adequate time in the preparation of
the budget, to avoid any confusion in carrying out various jobs for theeffective and successful operation of the budgetary control system. The
budget manual should be circulated to all the departmental managers to
facilitate the work of budgeting.
A budgetary control system will operate smoothly only if
there is a written document which sets out-
a.
Objectives of budgetary control b.
Principles of budgetary control
c.
Definitions of terms used in budget manual
d.
Types of budget to be prepared e.g. basic, current etc.
e. Organisation chart
f. Budget centres
g.
Budget period
h. Budget key factor
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i.
Responsibility, duties, authority of each functional manager, and
the budget committee.
j.
Routine to be followed, i.e. procedure for formulation, revisions,
approval, comparison and follow up of budget.
k.
Forms required in above routine for formulation, comparison ,
follow up etc. of budgets.
l. Records required for budgetary control i.e. the accounting records,
accounting codes, budget codes etc.
5. Determination of budgeted period:
CIMA has defined budget period as- “the period for which
a budget is prepared and employed”. A budget may be prepared for any
length of period – from a month to several years. The length of period of
budget depends upon the-
a. Nature of I ndustry- The length of period of which budget is prepared
and employed basically depends upon the nature of industry, the nature
of demand and supply of products, the rate of changes in business
conditions in that industry, the length of the manufacturing cycle from
raw material to finished product and soon. Thus capital intensive
industries like power generation, shipping, transport etc. use a long term
budget covering a period of 7-10 years. Consumer goods industries may
prepare budget for a shorter period say 1-3 years. Seasonal industries
may prepare budget for still shorter periods say every quarter. Normally
however, a budget is prepared for one year to facilitate comparison with
the actual results of one financial year.
b. Need for control - Each function such as sales, production, research is
needed to be controlled in different ways. Production may require to be
controlled daily or weekly, sales may require to be controlled weekly or
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monthly, research may require to be controlled quarterly; capital
expenditure may require to be controlled yearly and so on. Hence the
functional budgets may be prepared for different periods while the
master budget is prepared annually.
6. Determination of key factor or budget factor:
When budgetary control is being established, there will
normally be a factor which determines the maximum quantity that can be
produced or sold. Such factor is called the principal, key or governing
factor. CIMA has defined a principal factor as- “the factor the extent of
whose influence must first be assessed in order to ensure that the functional
budgets are reasonably capable of fulfillment.” Generally, sales is the
principal factor. When sale is the key budget factor, the maximum quantity
that can be sold is ascertained first. On the basis of the maximum sales
quantity the sales budget is prepared first and all other functional budgetssuch as production, purchase etc. are derived there from. In some cases,
machinery, labour, raw materials, finance etc. may be the key factor. If there
are two or more key factors, the relative influence of each factor has to be
judged carefully. This is done by mathematical techniques such as
operational research, linear programming etc. Key factors are not
permanent; they can change in the long run. Thus, new machinery can be purchased to increase plant capacity; advertising can increase demand and
sales and so on.
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TYPES OF BUDGETS
Classif ication based on f lexibi li tyFixed or static budget Flexible budget
It is a budget which is prepared for a
particular level of activity, if an
activity level changes, and then
revised budget for actual activity is
not prepared.
It is a budget designed to change in
accordance with the level of activity.
In other words, budgets for different
level of activities are prepared, if the
activity level changes then the
revised budget for revised level of
activity will be adopted.
Classif ication based on period
Long- term budget Short-term budget
A long term budget generally covers
a period exceeding one year.
e.g. Research and Development
budget, Capital expenditure budgetetc.
Short term budget are budgets other
than long term budget. Generally
they cover a period of less than one
year.e.g. sales budget, purchase budget
etc.
Practically the period of classification may slightly differ from organization
to organization. Further, sometimes budgets (on the basis of period) are
classified as long term, short term and current budgets.
Classif ication based on content
Financial budget Quantitative budget
It is a budget which is expressed in
monetary terms.
e.g. sales budget (in value), material
cost budget, labour cost budget etc.
It is a budget which is expressed in
non-monetary terms.
E.g. sales budget (in quantity),
material consumption budget (in
units), labour hours budget etc.
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Classif ication based on coverage
Functional budget Master budget
As name indicates, these budgets are
prepared for various functions of an
organization like sales (sales
budget), purchase (purchase budget),
production (production budget),
material/labour (material cost
budget, labour cost budget), etc.
Functional budgets are also known
as subsidiary budgets or
departmental budgets.
As name indicates, it is a summary
of different functional budgets.
Generally this budget is prepared by
adopting total figures of different
functional budgets. Budgeted profit
and loss A/c or budgeted balance
sheet is an example of master
budget.
Various functional budgets:
Functional budgets can be broadly classified as budgets relating to
operation of an enterprise and budgets relating to financial activities of the
enterprise.
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FUNCTIONAL BUDGETS
FUNCTIONAL BUDGETS
Relating to fi nancial activi ties
of an enterpri se
Relating to operation of an
enterprise
1. Sales Budget (can be in quantity
or in value)2. Production budget (can be in
quantity or in value)
3. Cost budget/overheads budget
(can be in fixed, variable and/or
semi-variable capacity)
a. Cost of production budget, it
can include,
i.
Direct material budgetii. Direct labour budget
iii. Production overhead
budget
b. Administration cost budget
c. Cost of goods sold budget
d. Selli ng and distri bution cost
Budget
4.
Di rect materi al i n quantity5. Plant util ization budget (can be
in time/load machine wise)
6. Closing inventory budget
1. Cash budget
(Receipts/Payments/balance)
2. Capital expendi tur e
budget
3. Long term Research
and Development cost
budget
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UNDERSTANDING OF MAJOR FUNCTIONAL
BUDGETS
Sales budget Sales are the ultimate objective of any organization. All other
major budgets are based on sales budget; hence, an inaccurate sales
budget may scrap the entire budgeting process.
Sales budget can be expressed in quantitative terms as well as in
terms of value.
Production budget
After preparation of sales budget, the next step will be to prepare
the production budget to produce the required units. Production
will be based on the budgeted sales and desired closing inventory.
One of the important factor to be considered while preparing
production budget is the production capacity of the firm. If the
firm is unable to meet the desired production, it may think of
different options like overtime, sub-contracting etc.
On the other hand, if the capacity is surplus, the firm may think of
suitable action to dispose of the surplus capacity.
Particulars Units
SalesAdd: Closing Stock
Gross quanti ty acquired
Less: Opening Stock
Production
XXXX
XXX
XX
XXX
Direct mater ial budget/mater ials consumption budget
Direct material budget can be prepared after preparation of
production budget.
Direct material budget can be prepared in quantitative terms or invalue.
Direct materials budget shows the details of raw materialsrequirements of the organization.
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Pur chase budgetAfter ascertainment of the quantity of raw materials
required, the next step is to design a proper budget determining the
quantity/value of raw materials to be purchased. Purchase budget
discloses the quantity/value of raw materials to be purchased.Particulars Raw materials (quantity/value)
Consumption (units)
Add: Closing stock (units)
Less: opening stock (units)
Purchase (units)
*Rate per unit (Rs.)
Purchase value(Rs.)
XX
XXXXX
XX
XXX
X
XXX
Di rect labour budgetOn the basis of budgeted production, labour budget
is designed. Labour budget discloses the budgeted direct labour time
(hours, days etc.) and labour cost involved in production.
Production overhead budgetProduction overhead budget is nothing but a simple
schedule showing various elements of total production overheads. Main
objective of preparing production overheads budget is to determine the budgeted recovery rate.
Cost of production budgetCost of production budget is nothing but a schedule
showing various elements of cost of production. It is similar to “Cost
Sheet”.
Admini strative overheads budget
Administrative overheads budget is nothing but asimple schedule showing various elements of total administrative
overheads.
Cost of goods sold budgetCost of goods sold budget is nothing but a schedule
showing various elements of cost of goods sold.
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Sell ing and distribution overheads/cost budgetSelling and distribution cost budget is nothing but a
simple schedule showing various elements of total selling and distribution
cost/overheads.
Master budgetMaster budget is nothing but a budgeted income
statement and balance sheet. In other words, master budget consists of
two elements viz. budgeted income statement and budgeted balance
sheet.
Budgeted income statement for the year ending on ……..
Particulars Rs.
Budgeted sales X
Less: Budgeted cost of goods sold (X)Budgeted gross margin XX
Less: budgeted selling and distribution expenses (X)
Budgeted operating profit XX
Add: non operating income X
Less: non operating expenses (X)
Budgeted profit before tax XX
Less: income tax @-----% (X)
Budgeted profit after tax XXX
Ending/closing inventory budgetEnding inventory budget is nothing but a schedule
showing details of ending inventory of various items i.e. raw materials,
WIP and finished goods. Information derived from ending inventory
budget is used to prepare cost of goods sold budget and master budget
(i.e. income statement and balance sheet).
Plant uti li zation budget
Plant utilization budget is prepared to ascertain the
required capacity to produce the budgeted output. This budget is
generally in terms of machine hours or number of plants or in terms of
both (i.e. machine hours as well as number of machines).
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ZERO BASED BUDGETING
Meaning:
It is a technique which was originally devised tohelp the management in the difficult task of allocating the resources more
efficiently between the projects and other cost items in the “support
areas”. (The support areas include production planning, repairs and
maintenance, research and development, engineering design, data
processing, quality control, finance, marketing, etc.
It starts from the basic premises that the budget for the next year is zero
(nil) and every process or expenditure has then to be justified thoroughly
in order to be included in the next year‟s budget. The burden of proof
thus, shifts to each manager to justify why the money should be spent onall activities and to indicate what would happen, if the proposed activity
is not carried out and no money is spent.
Requirements:
1.
There must be budgeting system within the organization.
2. It requires managers to develop quantitative measures for use in
performance evaluation.
Merits:
1.
It provides a basis for evaluating decision package on the basis
of cost benefit considerations.
2. It reduces inefficiency and achieves high level of
effectiveness.3.
It can be applied to cost reduction programmes.
4.
It ensures thorough examination of every function of activity.
5.
It facilitates rational analysis, decision making and discard the
low priority activities.
Demerits:
1.
Zero based budgeting may emphasize on short term benefits to the
detriment of the long term benefits.
2.
It may encourage the false idea that all the decisions have to be made in
the budget. Management must be able to meet unforeseen opportunities
and threats at all the times, and must not feel restricted from carrying out
the new ideas simply because they were not approved by a decision package cost benefit and ranking analysis.
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PERFORMANCE BUDGETING
Performance budgeting involves evaluation of the
performance of the organization in the context of both specific as well asoverall objectives of the organization. It provides a definite direction to
each employee and also controls mechanism to higher management. The
basic objective of “performance budgeting” is to provide output oriented
budget information with a long range prospective to allocate the resources
more effectively. A performance budget is one which presents-
1.
The purposes and objectives for which funds are needed;
2. The costs of activities proposed for achieving these objectives;
3.
Quantitative data measuring the accomplishments;4.
Work performance under each activity.
Features of per formance budgeting-
a.
Performance budgeting has drawn inspiration and much of its form from
cost accounting and scientific management.
b.
In performance budgeting, decision making is primarily downward.
c.
Performance budgeting requires that budgetary decisions should made by
emphasizing output categories such as goals, purposes, objectives and
products or services
d.
Performance budgeting makes prospective approach with its focus on
future impacts of current major decisions or choices.
Departmental heads of the respective department is
responsible for preparing the performance budget in respect of his
department. Performance budgeting requires preparation of periodical
performance reports.
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ADVANTAGES OF BUDGETARY CONTROL
1. Effective use of resources: Budgets are prepared after a careful study of
alternative course of actions. The most profitable alternative is selected in
conducting the business. Thus, budgetary control ensures optimum
utilisation of resources in achieving overall organisational goals.
2. Maximum output: budgets direct capital into the most profitable business
activities. It keeps capital investment at the minimum level and ensures
maximum output by the optimum utilisation of capital.
3.
Lays down objectives: budget lays down an objective for the business asa whole. It sets a goal to achieve and thereby directs the activities of
various departmets towards that common goal.
4. Defines responsibilities and accountability: it clearly defines the
responsibilities and accountability of every person in the organisation. It
creates awareness among the employees of their rights, duties and
responsibilities.
5. Ensures teamwork: budgets are prepared by different functional heads.
Budget committee consists of people from different levels of an
organisation. Thus, budgetary control motivates people to work together
and march towards a common goal.
6. Ef f icient planning and decision making: budgetary control encourages
an early and exhaustive study of different problems of management. It
makes planning and adequate study of alternatives a basic act among
managers.
7. Control expenditure: budgets provide detailed plans for spending. They
regulate expenditure by clearly showing losses, wastes and inefficiencies.
8. Evaluates performances: budgets provide a valuable tool of evaluating
managerial policies and goals periodically. Such evaluations help to
establish guidelines for the entire organisation.
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9. Co-ordinates business activities: budgetary control co-ordinates and
corelates all business activities and directs them towards the achievement
of a desired goal.
10.
Develops cost consciousness: budgets clearly communicate the policies
and objectives of the firm and the total resources to be spent to achieve the
goals. They stimulate the effective use of resource and discourage waste.
11. Provides basis for measur ing performaces : it provides budget as a
yardstick for measuring performaces of each department and sectionof the
organisation.
12.
I ncreases employee productivity: well defined rights and responsibilities
of individual employees, efficient communication of policies and
objectives of the firm to the employees, incentives to perform efficiently
and periodic review of performances lead to higher productivity of
employees.
13. Encourages productive competition: it incourages productive
competition among employees through incentive schemes.14. Management by exception: evaluation of performances points out weak
spots, which are not in accordance with the budgeted performances.
Remedial measures are taken only against such spots.
15. Sets up standard costing: it creates conditions necessary for the adoption
of a system of standard costing.
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LIMITATIONS OF BUDGETARY CONTROL
1.
Planning and budgeting is not an exact science. The future is
unpredictable . Planning and budgeting use approximations and
estimates, which may not be cent percent accurate.
2.
Budgets are to be revised from time to time. Changing condition of
business may require rapid revision of budgets, which may be very costly
affair.
3. Co-ordination and co-operations of all members of management is
difficult to achieve. The success of the system depends on the co-
operation and intensive participation of all members of management. But
it is not easy to achieve these.
4.
Budgets may kil l managerial i nitiative . Executives will concentrate only
on achieving the target set by budgets. This limits the innovative ability
of the executives.
5.
Budgets are only the tools of management. Budgets do not eliminate or
substitute management. It is dangerous to overweigh the role of budgets
in achieving desired goals.
6. Budgeting is costly and time consuming . Therefore small organisations
can not afford to adopt the system of budgetary control.
7.
Excessive emphasis on budgetary control may lead to unhealthy
competition and dishonest behaviour among functional executives. They may submit inaccurate estimate of future costs and revenues.
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CASE STUDY
F irm Name: Ganesh Engineer ing Works
Address: E-1, Mandal I ndl. Compound, Road no. 21/34, Adiwasi pada,
Wagle estate, Thane 400604.
M r. K.B.Pandey and M r. R.M .Singh are the
partners in the firm. They started the firm in 1996 at small scale and with
production of one product i.e. fusible plugs.
At present, the firm manufactures 3 products,
namely fusible plugs, nozzles and gears. The current pattern of sales is in the
ratio of 8:2:1 respectively. The relevant data are as under:
Products Fusible plugs Nozzles Gears
Selling price per unit Rs. 130 230 417
Raw materials per unit Kg. 0.50 1.2 2.5
Direct materials per unit Kg. 0.25 - -
Skilled labour hours/unit Hrs. 4 6 8
Semi-skilled labour hours per unit
Hrs. 2 2 3
Variable overheads per unit Rs. 20 40 80
The prices of raw materials and direct materials
respectively are Rs.100 and Rs.40 per kg. The wage rates of skilled and semi-
skilled labour respectively are Rs.6 and Rs.5. Each operator works 8 hours a
day for 25 days in a month.
The positions of inventories are as under:
Raw
materials(kgs.)
Direct
materials(kgs.)
Fusible
plugs(units)
Nozzles(units)
Gears(units)
Opening 600 400 400 100 50
Closing 650 260 200 300 50
The fixed overheads amount to Rs. 2, 00,000 per month and the firm desires a
profit of Rs. 1, 20,000 per month.
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1. Sales budget in quantity and value:
Sales budget
Particulars Fusibleplugs
Nozzles Gears Total
Units to be sold
(note 1)12800 3200 1600 17600
*selling price
per unit (Rs.)130 230 417 -
Sales in value
(Rs.)1664000 736000 667200 3067200
2.
Production budget in quantity:Production budget
Particulars Fusible plugs nozzles Gears
Sales (units)
(note 1)12800 3200 1600
Add: closing
stock (units)200 300 50
Less: openingstock (units)
(400) (100) (50)
Production
(units)12600 3400 1600
3. Purchase budget in quantity:
Pur chase budget
Particulars Raw materials Direct
materials
Raw material required in production:
Fusible plugs @ 0.50 kg. for 12600 kg. Nozzles @ 1.20 kg. for 3400 kg.
Gears @ 2.50 kg. for 1600 kg.
6300 kg.4080 kg.
4000 kg.
Direct material required in production of
fusible plugs @ 0.25 kg for 12600 kg.
-
3150 kg.
Total quantity required in production 14380 kg. 3150 kg.
Add: closing stock 650 kg. 260 kg.
Less: opening stock 600 kg. 400 kg.
Quantity to be purchased 14430 kg. 3010 kg.
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4.
Direct labour budget for wages and for number of workers:
Di rect labour budget in respect of wages
Particulars Fusible
plugsNozzles Gears Total
Skilled labour hours
required in
production (note 2)
50400 20400 12800 83600
*wage rate per hour Rs. 6 Rs. 6 Rs. 6 Rs. 6
Total wages for
skilled workers (A)302400 122400 76800 501600
Semi skilled labour
hours required in
production (note 2)
25200 6800 4800 36800
*wage rate per hour Rs. 5 Rs. 5 Rs. 5 Rs. 5
Total wages for
semi-skilled
workers (B)
126000 34000 24000 184000
Total labour cost
(A+B)428400 156400 100800 685600
Di rect labour budget in respect of no. of workers
Particulars Skilled labour Semi-skilled
labour
Total hours required in
production83600 36800
(÷) labour hours per worker per
month(*)200 hours 200 hours
Total no. of workers required 418 workers 184 workers
(*) Each worker works for 8 hours a day and for 25 days a month, hence
total working hours per month will come to 200 hours (8 hours * 25 days
per month).
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Note 1: computation of units to be sold
Company desired a profit of Rs. 120000 per month.
Fixed overheads are Rs. 200000 per month.
At total sales, total contribution will be equal to total fixed cost plus profit, thus at total sales, contribution will be Rs. 320000 (Rs.
200000 + Rs. 120000).
Thus, we can say the total consumption from all the products
should be Rs. 320000. This contribution will be derived from saleof product fusible plugs, nozzles and gears.
To derive sales of each product, we have to divide the desired
contribution of Rs. 320000 in the combined ratio as computed
below:
Particulars Fusible plugs(Rs.)
Nozzles(Rs.)
Gears(Rs.)
Raw materials required per unit (kg.) 0.50 1.20 2.50
*cost per kg. 100 100 100
Raw materials cost per unit (A) 50 120 250
Direct materials required per unit (kg.) 0.25 - -
*cost per kg. 40 - -
Direct materials cost per unit (B) 10 - -
Skilled labour hour per unit 4 6 8
*cost per labour hour 6 6 6
Skilled labour cost per unit (C) 24 36 48
Semi- skilled labour hour per unit 2 2 3
*cost per labour hour 5 5 5
Semi-skilled labour cost per unit (D) 10 10 15
Variable overheads per unit (E) 20 40 80
Total variable overheads
(F)=(A+B+C+D+E)114 206 393
Selling price per unit (G) 130 230 417Contribution per unit (G-F) 16 24 24
*sales ratio 8 2 1
Combined ratio to distribute
contribution128 48 24
By distributing the contribution of Rs.
320000 in above ratio we will get
contribution from each product
204800 76800 38400
(÷) contribution per unit 16 24 24
Sales (units) 12800 3200 1600
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Note 2: computation of hours required in production of each product.
Particulars Hours
Skilled labour required in production:
Fusible plugs @ 4 hours for 12600 kg. Nozzles @ 6 hours for 3400 kg.
Gears @ 8 hours for 1600 kg.
5040020400
12800
Semi-skilled labour required in production:Fusible plugs @ 2 hours for 12600 kg.
Nozzles @ 2 hours for 3400 kg.
Gears @ 3 hours for 1600 kg.
25200
6800
4800
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CONCLUSION
We conclude that Budgetary control is a technique of managerialcontrol in which all operations are planned in advance in the form of budgets
and actual results are compared with budgetary standards. An effective system
of budgetary control manages to plan and control the use of resource in a
systematic and logical manner. Financial objectives and constraints should be
communicated to managers of budget centres and regular monitoring keeps
management informed of progress towards objectives.
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