A

Project report
On
“STUDY OF MASTER BUDGET”
At
“ Soma textile & industries limited ”
MIDC, Baramati .

Submitted to,
University of Pune.
In the partial fulfillment of
Master in Business Administration
2009-20 11

Submitted by,
Mrs.Chavan Nita Baban

Under guidance of
Prof.

From
SAIKRUPA INSTITUTE OF MANAGEMENT SCIENCE,
GHARGAON.

1
 The project

Entitled

“STUDY OF MASTER BUDGET”

At
“ Soma textile & industries limited ”
MIDC, Baramati .

Submitted
For the award of the degree of
Master of business administration
Under the faculty of management

Submitted by,
Mrs.Chavan Nita Baban

Under guidance of
Prof.

Submitted to,

SAIKRUPA INSTITUTE OF MANAGEMENT SCIENCE,

GHARGAON.

University of Pune
2009-2011

2
 ACKNOWLEDGEMENT

I take this opportunity of submitting this report to express our regards towards
who offered their invaluable guidance in the hour of need.
I sincerely acknowledge with deep sense of gratitude and indebtness to my
Director Prof.Kulkarni as well as my internal guide who was guided me with
valuable inputs throughout the project. He gave acknowledgeable insights about the
topic, which helped me throughout the project.
I also would like to thanks to Mr. Balsaraf (factory manager) for giving me
this really wonderful and challenging opportunity to work on this project. I would also
thanks to
Mr. Sharma (Finance manager) for helping me to understand the master budgets as
well. This project surely gives me insights into areas I was not much familiar with
earlier. I have tried to share those insights with you in this report.
I am grateful for the inspiration, encouragement and wisdom of many
resources people who helped me to bring this report into life. Thus the project has
been a learning experience and has helped me to understand practical aspect of
subject.

Place: - (Signature)

Date: - Chavan Nita B.

DECLARATION

3
 I hereby declare that the project report entitled STUDY OF MASTER
BUDGET IN SOMA TEXTILE & INDUSTIES LTD is an independent analysis
work carried out by me as a part of MBA curriculum, university of Pune, under the
guidance of Prof.
This project was undertaken as a part of academic curriculum according to the
university rules and norms and had no commercial interest and motive. It is my
original work. It is not submitted to any other organization for any other purpose.

Place:- (Signature)

Date:- Chavan Nita.B

INDEX

Sr. Topic Name Page No.

No.
1. Introduction 1-5

4
 1.1 Introduction
1.2 Objective of Study
1.3 Research methodology
1.4 Scope of Study
1.5
1.5 Limitation of Study
2. Company Profile 6 -25

2.1 Name and Address.

2.2 History.
2.3 Vision and Mission.
2.4 Product Profile.
2.5 Environmental Policy.
3. Data analysis & interpretation 26- 8 3

3.1 Meaning & Definition of Budgets

3.2 Characteristic of Budgets
3.3 Conceptual view of financial performance
3.4 Types of Budgets
3.5 Preparation of Master Budgets
3.6 Purpose & Benefits of Master budgets
3.7 Limitation of Master budgets
3.8 Graphical Presentation & Analysis of Master Budgets
of Soma Textile & Industries Limited
4. Findings , Conclusion & Suggestion s 84-85

4.1 Findings.
4.2 Conclusion
4.3 Suggestions
Bibliography

List of tables and graphs

5
 1.2 Objectives of Study

1) To study Importance & various types of Master Budgets.

2) To study & analyze preparation of Master Budget in Soma Textile &
Industries Limited.

6
 1.3 Research Methodology

Research is a systematic investigation undertaken in order to discover new

facts. Research is an inseparable part of human knowledge. Methodology provides a
way & guiding principles of research.
Data refers to information or facts. Facts information or premises systematically
collected & formally presented for the purpose of drawing inferences may be called
data.
Data could be broadly classified into two i.e.:-
A) Primary Data
B) Secondary Data
A) Primary Data:-
The first hand information bearing on any research, which has been collected
by the researcher, may be called primary data.
In this project I have collected first hand information through personal interview &
observation.

B) Secondary Data:-
The Secondary data are those which are already collected by someone for
specific purpose. This data may be published or unpublished. It involves less cost,
time & effort.

The Source of Secondary data can be classified into two i.e. internal source & external
source.

I have collected following internal sources of data for my project.

1) Industry handbook
2) Annual report of the company
3) Report on budget committee
4) Cash book & reference book
5) Website of the company
6) Books mentioned in bibliography

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 1.4 Scope of Study

1) The study is limited for two years only that is 2010-11 & 2011-12 for Soma
textile & industries Limited.

2) This project is limited only Baramati unit of Soma textile & industries
Limited.

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 1.5 Limitation of Study

1) This study is limited to time.

2) Sufficient information not provide to us due to the secrecy of topic.

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 Chapter No:-2

Company Profile
2.1 Name & Address of the company
History of Soma textile & industries Limited.
2.3 Vision & mission of the company
2.4 Product Information

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Head Office & Unit no. 1:-
Address: Soma Textiles & Industries Ltd,
Rakhial Road,
Ahmadabad- 380023. Gujarat (India)

Phone: +91-79-22743285-88
Fax: +91-79-22745653

Unit no. 2

Address: Soma Textiles & Industries Ltd,

D-49, MIDC, Baramati-413133
Dist: - Pune
Maharashtra (India)
Phone: +91-2112-243716, 243856
Fax: +91-2112-243717

Corporate Office:
Address: Vaswani Mansion, Dinshaw, Wachha Road,
Back by Reclamation, Mumbai, 40020. (India).
Phone: +91-22-22836519/20, 2826076/77
Fax: +91-22-22851173
Investors Redressal E-mail ID:- investors@somatextiles.com

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Location:-
The company was started in 1994. Owner of the company is R. K. Somany.
The organization has three branches main branch in Ahmadabad & other branch is
Sholapur & Baramati . Company are produced the product of Yarn. It include
different type of yarns- carded, combed warp, knitting ,single, doubled & also
included 40, 30, 26, count
Located in Baramati near Pune in Maharashtra State, India. Soma textiles the
quality standards followed are indeed world-class. The total production of 40%
product is export in Germany, Australia, America, and Hongkong.
Currently the overall management of company is with Soma Textiles & Industries
Ltd ensured the quality standards followed are indeed world class. The technology is
absolutely state of the art with most of the equipment served from the best in the
world. The company have good place in Indian market but company have also target
to getting top place in world market .by maintaining following things.
1. Increase production
2. Waste control
3. Safety at work place
4. Fulfill the promises given to the customer.

2.2 History
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Company established in the year 1945. The company entered the textile business with
the purchase of unit no.2 of New Commercial Mill Company Ltd, Ahmadabad, and
renamed as Soma Textiles & Industries Ltd, in 1969 and further commissioned new
cotton spinning textiles unit at Baramati in 1994.
The company owes its existence to Shri. S.K .Somany (chairman-promoter) and is
being managed by Shri A. K. Somany (Managing chairman-promoter). The process
of economic liberalization begun in the last decade has made the industry globally
competitive not only in term of price, but also quality. Modernization has not been
restricted to the installation of sophisticated machinery but also to innovations,
Value additions, new product developments as well as adaptation of quality system
and culture.
Right from its inception, the company's emphasis has been on quality and technology
up gradation. It is hence, worth mentioning that SOMA was one of the first to initiate
and introduce Denim manufacturing in India. Our corporate philosophy is "Produce
the best; Give the Right Material to the customer at the Right Price". Our success in
business is mainly dedicated to our values, our vision, commitment and trust which
we share with our colleagues, customers, suppliers, shareholders and society.
. Our endeavor is to excel in Quality, improve productivity, conserve energy and
reduce wastes thus sustaining market challenges on an ongoing basis.
We, Soma Textiles & Industries Limited, are a US40 Million Textile company with
integrated manufacturing facilities for all our product groups.
We are 36 years old company head-quarter in Ahmadabad, India having factories in
Ahmadabad, Baramati, & Sholapur.
Soma Textiles & Industries Ltd are manufacturing & marketing of following product:
➢ 100% Cotton Yarn- exclusively for export ( from our Baramati plant)
➢ High value shirting fabrics- 100% cotton & pc blended
➢ Bottom wear fabric – 100% cotton & poly-cotton
➢ Denim fabric.
➢ Hosiery Yarn

2.3 Vision & Mission of the company

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Vision:-
Soma textiles & industries ltd the vision is to become India’s leading sustainable
textiles company by producing quality product and observing highest social,
economic and environmental standards. Our aim is to deliver the highest quality
product and prompt services to our customers. Our objective is to provide good value
through a competitive atmosphere of defined system and processes.

Our vision of three-fold-

➢ Lead the textiles industries in India.
➢ Observe highest social, economic and environmental standards.
➢ Maintain a committed and satisfied clientele.

Mission:-
STIL’S mission is to create conditions and infrastructure for sustainable procurement
and production of textiles product.
We wish to-
➢ We will meet and exceed our customers' expectations of service through
timely communications and quality information.
➢ To achieve tangible benefits by promoting efficiencies, productivity and
professionalism.
➢ Provide competitive prices and genuine products to our clients.
➢ Creating a climate for voluntary compliance by providing guidance and
building mutual trust.
➢ Manufacture high quality yarn to withstand high levels of competitiveness.
➢ Serving and supporting the society in which we work.

2.4 Product Information

Company is engaged in producing a qualitative range of cotton yarns, which

are widely acknowledged, by clients. Owing it’s our manufacturing facility that is
fully equipped with the latest 4th generation machines such as Crosrol chute feed

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cards imported from England, auto leveled draw frames from Reiter, to name a few.
This aids us in producing 100% Ring Spun Cotton Yarn the mill is specialized in the
count range of NE 20s to 36s with a capacity of 2,000 MT of Warp / Hosiery yarn per
annum. Further, it has 100% Doubling capacity with an array of Ring Doubling
machines and two-for-one (TFO) twisters for producing multi-ply yarns. The Major
Counts are as follows:• NE 16s to 24s Carded Yarn on Ring Spinning• NE 16s to
36s Combed Yarn made with Indian / US Cottons
1. Compact Single Twist Yarn:
Its range of Compact Single Twist Yarn but
Yarn is precisely twisted and suitable for
various knitting and weaving applications.
These are manufactured with 100% cotton
material that ensures optimum tenacity and
high strength.

2. Compact Double Twist Yarn

Company offer cotton yarn in carded or combed

in double play, multified, bleached, mercerized,
gassed, dyed, yarn, as per specific requirement.
Blended yarn, double play, blended with cotton,
as per specific requirement.

3. Cotton Yarn
Catering to the requirements of
domestic and international
customers, we export 40%
cotton yarn.

4. Hosiery Yarn

We are a leading supplier of hosiery yarns

that are perfect for knitting and procured.

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5. Cotton Blended Yarn

Company have associates who have

facilities to make high class cotton
blended yarn made up of quality cotton
and blended yarn of various counts.

QUALITY POLICY:-

“We at soma textiles & industries limited, A spinning unit, pledge for
customer satisfaction by supplying superior quality yarn as per customer requirement.
All of us are committed to put our sincere effort for continual improvement &
effectiveness of our quality management system to retain leadership in international &
domestic market.”

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 2.5 Environmental Policy of the Company

Soma textiles & industries ltd. Unit II, Baramati ( Mah) manufacturing yarn is
committed to –
 Compliance with applicable environmental legal & other requirement.
 Prevention of pollution & protection of environment by-
- Conservation of natural resource i.e. Water, Energy & Oil.
- Management of waste such as used oil, cotton dust sludge & filter
containing oil.
 Sound management practices.
 Developing greenery.
 Continual improvement in our environmental performance by setting &
reviewing objective & targets.

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 3.1 Introduction

Budgeting involves planning for the various revenue producing and cost
generating activities of an organization. The importance of budgeting is emphasized
by an old saying, "Failing to plan is like planning to fail." Budgeting is essentially
financial planning, or planning for financial performance. Financial performance
depends on revenue and cost. Revenue is provided from sales of merchandise by
retailers, sales of products, harvested, mined, constructed, formed, processed or
assembled by farms, mining companies, construction companies and manufacturers
and from sales of various services by firms involved in activities such as banking,

Chapter No:-3

Conceptual Study

3.1 Introduction
3.2 Definition & meaning
3.3 Characteristic of budget
3.4 Conceptual view of financial performance
3.5 Types of budgets
3.6 Preparation on master budget
3.7 The purposes & benefits of master budget
3.8 Limitations & problems of master budget

insurance, accounting, law, medical care, food distribution, repair and entertainment.
In addition to producing revenue, all of these companies generate three types of costs
including discretionary, engineered and committed costs. Various costs fall into one
of these three categories based on the cause and effect relationships involved.
Although there are a variety of ways to define costs, categorizing costs in terms of the
cause and effect relationships is a prerequisite for understanding the different types of
budget

3.2: Definition & Meaning

Definition:-

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1) The Institute of Cost and Management Accountants, London:-
“A financial and/ or quantitative statement prepared prior to a defined period of time,
of the policy to be pursued during that period for the purpose of attaining a given
objective.”
2) In The Word of Terry:-
“It is an estimate of future needs, arranged according to an orderly basis, covering
some or all of the activities of an enterprise for a definite period of time. Budgets are
made up of statistical data which establish measurements of reasonable operating
expectation.”

Meaning:

3.3Characteristics of Budget

• A period of time to be fixed to achieve the objective.

• Forecast preparation.
• Determination of the policies – say, sale to be achieve or profit to be made,
production, product range, product mix, distribution methods, inventory to be
carried, investment to be made etc.
• Computation of requirements in terms of quantities and values, to achieve the
objectives and fulfill the policies of the management i.e. material required for
the forecast, men required, equipment required, etc. in quantity & value for the
preliminary budget.
• Review of the forecast, policies & the preliminary budget: amend or modify
the forecasts and policies, if necessary and consequently the preliminary
budget, until the acceptable budget emerges.

19
• Acceptance of the budget which becomes the approved budget – “Master
budget” to work with & attain. It becomes an executive order and sanction for
the activities.

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 3.4: CONCEPTUAL VIEW OF FINANCIAL
PERFORMANCE

Exhibit: 3.1
Conceptual view of financial performance

Financial performance

Revenues Costs

Sales & Merchandise Purchase Discretionary Costs

Sales Of Product Created By Seller Engineered Costs

Sales Of Services Provided By Seller Committed Costs

Financial Performance Measurements

1) Discretionary Costs:
21
Discretionary costs are usually generated by service or support activities. Examples
include employee training, advertising, sales promotion, legal advice, preventive
maintenance, and research and development. The value added by each of these
activities is intangible and difficult, if not impossible to measure, where value added
refers to the benefits obtained by either internal or external customers. In terms of cost
behavior, discretionary costs may be fixed, variable or mixed.

2) Engineered Costs:
Engineered costs result from activities with reasonably well defined cause and effect
relationships between inputs and outputs and costs and benefits. Direct material costs
provide a good example. Engineers can specify precisely how many parts (inputs) are
required to generate a specific output such as a microcomputer, a coffee maker, an
automobile, or a television set. Direct labor also falls into the engineered cost
category as well as indirect resources that vary with product specifications and
production volume.

3) Committed Costs:
A committed cost refers to the costs associated with establishing and maintaining the
readiness to conduct business. The benefits obtained from these expenditures are
represented by the company's infrastructure. For example, the costs associated with
the purchase of a franchise, a patent, drilling rights and plant and equipment create
long term obligations that fall into the committed cost category. These costs are
mainly fixed in terms of cost behavior and expire to become expenses in the form of
amortization and depreciation.

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 Exhibit 3.2 Cost Defined in Terms of Cause and Effect

Type Of Cause & Effect Cost Examples

Cost Or Cost Behavior
Benefit
Relationship
Discretionary Relationships are Fixed, variable Cost of administrative and
difficult or and mixed in the support services such as
impossible to short run. employee training,
define. advertising, sales
promotion, legal advice,
preventive maintenance,
and research and
development.
Engineered Relationships are Variable in the Direct resources used in
relatively easy to short run. production activities such
define. as direct materials and
direct labor and many
indirect resources such as
electric power.
Committed Relationships can Fixed in the Cost of establishing and
be estimated, but short run. maintaining the readiness to
not defined conduct business, such as
precisely. the cost associated with
plant and equipment.

3.5: Types of Budgets

Four types of budgets are used for planning and controlling the various types of costs
discussed above. These four techniques are summarized in Exhibit – 3.1

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 Budget Types and Characteristics

Type Of Characteristics Of Type Of Cost Examples

Budget The Technique or Expenditure

Appropri A maximum amount is Discretionary Employee training,

ation established for certain costs. advertising, sales

expenditures based on promotion and research
Budget
management and development.
judgment.
Flexible A static amount (a) is The static amount The static part: salaries,

Budget established for fixed (a) includes both depreciation, property

costs and a variable discretionary and taxes and planned
rate (b) is determined committed costs maintenance. The flexible
per activity measure while the flexible part: direct material, direct
for variable costs, i.e., part (b) includes labor and variable
Y = a + bX engineered costs overhead. Also, some costs
per X value. related to sales reps such as
sales commissions and
travel.
Decisions concerning
potential investments
Capital
are made using Committed costs. New plant and equipment.
Budget
discounted cash flow
techniques.
A comprehensive plan Discretionary, All revenue and
Master
is developed for all engineered and expenditures for any
Budget
revenue and expences. committed costs. company.

1. Appropriation Budgets:-

24
The oldest type of budget is referred to as an appropriation budget. Appropriation
budgets place a maximum limit on certain discretionary expenditures and may be
either incremental, priority incremental, or zero based. Incremental budgets are
essentially last year's budget amount plus an increment, i.e., small increase. Priority
incremental budgets also involve an increase, but require managers to prioritize, or
rank discretionary activities in terms of their importance to the organization. The idea
is for the manager to indicate which activities would be changed if the budget were
increased or decreased.
2. Flexible Budgets:-
Flexible budgets are based on a cost function such as Y = a + bX, where Y represents
the budgeted cost, or dependent variable. The constant "a" represents a static amount
for fixed costs and the constant "b" represents the rate of change in Y expected for a
unit change in the independent variable X. The expression " bX" is the flexible part of
the budget cost function. The flexible budget technique is used for planning and
monitoring all types of costs. The static amount "a" includes both discretionary and
committed costs, while the flexible part "bX" includes various types of engineered
costs. The flexible characteristic of the technique enables the flexible budget to play a
key role in both financial planning and performance evaluation.

3. Capital Budgets:-
Capital budgets represent the major planning device for new investments. Discounted
cash flow techniques such as net present value and the internal rate of return are used
to evaluate potential investments. Capital budgets are part of a somewhat more
encapsulating concept referred to as investment management. Investment
management involves the planning and decision process for the acquisition and
utilization of all of the organization's resources, including human resources as well as
technology, equipment and facilities. The concept of investment management
includes the discounted cash flow methods, but is more comprehensive in that the
organization's portfolio of interrelated investments is considered as well as the
projected effects of not investing.

4. Master Budgets:-

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The fourth type of budget is referred to as the master budget or financial plan. The
master budget is the primary financial planning mechanism for an organization and
also provides the foundation for a traditional financial control system. More
specifically, it is a comprehensive integrated financial plan developed for a specific
period of time, e.g., for a month, quarter, or year. This is a much broader concept than
the first three types of budgeting. The master budget includes many appropriation
budgets as well as flexible budgets, a capital budget and much more.
The master budget has two major parts including the operating budget and the
financial budget .The operating budget begins with the sales budget and ends with the
budgeted income statement. The financial budget includes the capital budget as well
as a cash budget, and a budgeted balance sheet. The main focus of this chapter is on
the various parts of the operating budget and the cash budget. The budgeted balance
sheet is covered briefly, but not emphasized.

Diagram of master budget

Master budget.

Operating budget Financial budget

26
 Sales
Collection
Cash budget

Selling & adm.

Payment
Production

Capital budget

DM DL FO

Ending Inventory.
Payments

Balance Sheet
COGS Income Statement

3.6 Preparation of Master Budget

The Operating Budget:

Preparing an Operating Budget is a sequential process of developing nine sub-
budgets. Except for one or two exceptions the sub-budgets must be prepared in the
following order: sales, production, direct materials, direct labor, and factory overhead,
ending inventory, cost of goods sold, selling & administrative and income statement.
Each part is described below.

1. Sales Budget:
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 Developing a sales budget involves the following calculations:
Budgeted Sales $ = (Budgeted Unit Sales)(Budgeted Sales Prices)
Current Period Cash Collections = Current Period Cash Sales
+ Current Period Credit Sales Collected in Current Period
+ Prior Period Credit Sales Collected in Current Period
These calculations are relatively simple, but where does the budget director
obtain this information? Well, sales forecasting is a marketing function. Sales
estimates are frequently generated by the company's sales representatives who discuss
future needs with customers. Statistical forecasting techniques can also be used to
make estimates of expected future sales, considering the company's previous sales
performance and various assumptions about the future economic climate, and the
actions of competitors and consumers. Pricing is also a marketing function, but many
prices are based on costs plus a markup and consideration of what consumers are
willing and able to pay for the product. Thus, the budgeted sales price is usually
determined after the budgeted unit cost has been calculated.

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2. Production Budget:
Preparing a production budget includes consideration of the desired inventory
change as follows:
Units To Be Produced = Budgeted Unit Sales (from 1)
+ Desired Ending Finished Goods - Beginning Finished Goods
The desired ending inventory is usually based on the next period’s sales
budget. Considerations involve the time required to produce the product as well as
setup costs and carrying costs. In a just-in-time environment the desired ending
inventory is relatively small, or theoretically zeros in a perfect situation. In the
examples and problems in this chapter, the ending finished goods inventory is stated
as a percentage of the next period's unit sales.

3. Direct Material Budget:

The direct materials budget includes five separate calculations.
a. Quantity of Material Needed for Production
= (Units to be Produced) (Quantity of Material Budgeted per Unit)
The quantity of material required per unit of product is determined by the
industrial engineers who designed the product. Materials requirements are frequently
described in an engineering document referred to as a "bill of materials".
b. Quantity of Material to be Purchased
= Quantity of Material Needed for Production
+ Desired Ending Material - Beginning Material
This calculation is more involved than equation 3b appears to indicate because
it includes information for two future periods. The desired ending materials quantity
is normally based on the next period's materials needed for production and this
amount depends on the third period's budgeted unit sales. Of course inventories of
raw materials are kept to a minimum in a JIT environment. Factors that influence the
desired inventory levels include the reliability of the company's suppliers, as well as
ordering and carrying costs.

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c. Budgeted Cost of Material Purchases
= (Quantity of Material to be Purchased)(Budgeted Material Prices)
This amount is needed to determine cash payments. Once the quantity to be purchased
has been determined, the cost of purchases is easily calculated. Budgeted material
prices are provided by the purchasing department.
d. Cost of Material Used
= (Quantity needed for Production)(Budgeted Material Prices)
The cost of materials used is needed in the cost of goods sold budget below.
e. Cash Payments for Direct Material Purchases
= Current Period Purchases Paid in Current Period
+ Prior Period Purchases Paid in Current Period
The information needed to determine budgeted cash payments is provided by
accounting, and is usually based on past experience. Normally the budget should
reflect a situation where the company pays promptly to take advantage of all cash
discounts allowed, thus 3e may be equal to 3c.

4. Direct Labor Budget:

Fewer calculations are needed for direct labor than for direct materials because labor
hours cannot be stored in the inventory for future use. Time can be wasted, but not
postponed.
A. Direct Labor Hours Needed for Production
= (Units to be Produced) (D.L. Hours Budgeted per Unit)
The amount of direct labor time needed per unit of product is determined by industrial
engineers. Estimates are frequently made using a technique referred to as motion and
time study. This involves measuring each movement required to perform a task and
then assigning a precise amount of time allowed for these movements. The
cumulative time measurements for the various tasks required to produce a product
provide the estimate of a standard time per unit. There are alternative techniques that
are less expensive, but motion and time study provides estimates that are very precise.
Learning curves provide another quantitative technique that is helpful in establishing
labor standards.

30
b. Budgeted Direct Labor Cost
= (D.L. Hours needed for Production) (Budgeted Rates Per Hour)
The budgeted rates per hour for direct labor are provided by the human resource
department. Frequently the labor contract provides the source for this information.
Many different types of labor may be required with different levels of expertise and
experience. Thus, Equations 4a and 4b may include several calculations.

5. Factory Overhead Budget:

The factory overhead budget is based on a flexible budget calculation as described in
Exhibit 3.3. More specifically, the calculation is as follows:
a. Budgeted Factory Overhead Costs
= Budgeted Fixed Overhead
+ (Budgeted Variable Overhead Rate)(D.L. Hours needed for Production from 4a)
This is a cumulative equation that combines the equations for the company's various
types of indirect resources.
A plant wide rate based on direct labor hours is used as the overhead allocation basis
in this chapter and subsequent chapters mainly to simplify the illustrations. Keep in
mind however, that although many companies are still using a single production
volume based measurement for overhead allocations, most companies use
departmental rates and many companies are now using activity based rates.
The calculation for cash payments reflects one of the differences between cash flows
and accrual accounting. Since some costs, like depreciation, do not involve cash
payments in the current period, these costs must be subtracted from the total overhead
costs to determine the appropriate amount.
b. Cash Payments for Overhead
= Budgeted Factory Overhead Cost
- Depreciation and other costs that do not require cash payments

6. Ending Inventory Budget:

31
The dollar amount for the ending inventory of finished goods is needed below to
determine cost of goods sold. The dollar amounts for ending direct materials and
finished goods are needed for the balance sheet.
a. Ending Direct Materials = (Desired Ending Materials from 3b)(Budgeted Prices)
b. Budgeted or Standard Unit Cost
= (Quantity of D.M. required per Unit)(Budgeted Prices)
+ (D.L. Hours required per Unit)(Budgeted Rate)
+ (Total Overhead Rate)(D.L. Hours required per Unit)
The budgeted or standard unit cost can be calculated at any time after the budgeted
quantities per unit and input prices are obtained. The calculation is placed here
because it is needed for 6c.
c. Ending Finished Goods
= (Desired Ending Finished Goods from 2)(Budgeted Unit Cost)

7. Cost Of Goods Sold Budget:

Cost of goods sold is needed for the income statement. One method of
determining budgeted COGS involves accumulating the amounts from the previous
sub-budgets as follows.
a. Budgeted Total Manufacturing Cost
= Cost of Direct Material Used (from 3d.)
+ Cost of Direct Labor Used (from 4b.)
+ Total Factory Overhead Costs (from 5a.)
b. Budgeted Cost of Goods Sold
= Budgeted Total Manufacturing Cost (from 7a.)
+ Beginning Finished Goods (from previous ending or calculate from 2 and 6b)
- Ending Finished Goods (from 6c or calculate from 2 and 6b)
This is determining cost of goods sold, but when developing a budget we typically
assume no change in Work in Process. Therefore, budgeted cost of goods
manufactured is equal to budgeted cost of goods sold.
.
8. Selling & Administrative Expense Budget:

32
 The preparation of the selling and administrative expense budgets is very
similar to the approach used for factory overhead.
a. Budgeted Selling and Administrative Expenses
= Budgeted Fixed Selling & Administrative Expenses
+ (Bud Variable Rate as a Proportion of Sales $)(Budgeted Sales $)
b. Cash Payments for Selling & Administrative Expenses
= Budgeted Selling & Administrative Expenses
- Depreciation and other cost which do not require cash payments
As pointed out earlier in the text, a more precise traceable costing approach
might be used for management purposes where some selling and administrative costs
are allocated in determining a more precise product cost

9. Budgeted Income Statement:

Preparing the budgeted income statement involves combining the relevant
amounts from the sales, cost of goods sold and selling & administrative expense
budgets and then subtracting interest, bad debts and income taxes to obtain budgeted
net income. These amounts are provided by the finance department. In a
comprehensive practice problem, the applicable amount for interest expense may need
to be calculated from information associated with the cash budget. Bad debt expense
is based on the expected proportion of uncollectible stated in the information related
to cash collections.
a. Budgeted Sales $ - Budgeted Cost of Goods Sold
= Budgeted Gross Profit
b. Budgeted Gross Profit - Budgeted Selling & Administrative Expenses
= Operating Income
c. Operating Income - Interest Expense - Bad Debts Expense
= Net Income before Taxes
d. Net Income before Taxes - Income Taxes
= Net Income after Taxes

The Financial Budget:

33
 The financial budget includes the cash budget, the capital budget and the
budgeted balance sheet. The cash budget and budgeted balance sheet are discussed
below.
10. Cash Budget:
a. Budgeted Cash Available
= Beginning Cash Balance + Budgeted Cash Collections from 1
b. Budgeted Cash Excess or Deficiency
= Budgeted Cash Available - Budgeted Cash Payments from 3e, 4b, 5b and 8b
c. Ending Cash Balance
= Cash Excess or Deficiency + Borrowings - Repayments including Interest

11. Budgeted Balance Sheet:

Preparing the budgeted balance sheet involves accumulating information from
the previous period’s balance sheet, the various operating sub-budgets, the cash
budget and other accounting records.
Assets:
a. Current Assets:
Cash (from the cash budget 10c)
Accounts Receivable (from the sales budget and previous balance sheet)
Direct materials (from the ending inventory budget 6a)
Finished goods (from the ending inventory budget 6c)
b. Long Term Assets:
Land (from previous balance sheet and budgeted activity)
Buildings (from previous balance sheet and budgeted activity)
Equipment (from previous balance sheet and budgeted activity)
Accumulated depreciation (from the accounting records)
Total Assets
Liabilities:
c. Current Liabilities:
Accounts Payable (from various operating sub-budgets)
Taxes Payable (from income statement)
d. Long term Liabilities

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 Total Liabilities
Shareholders Equity
e. Common Stock (from previous balance sheet and budgeted activity)
f. Retained Earnings (from previous balance sheet and income statement)
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity

3.7 The Purposes and Benefits of the

Master Budgets

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There are a variety of purposes and benefits obtained from budgeting. Consider the
following:

1. Integrates and Coordinates:

The master budget is the major planning device for an organization. Thus, it is used to
integrate and coordinate the activities of the various functional areas within the
organization. For example, a comprehensive plan helps ensure that all the needed
inputs i.e.an equipment, materials, labor, supplies, etc. will be at the right place at the
right time when needed, just-in-time if possible.

2. Communicates and Motivates:

Another purpose and benefit of the master budget is to provide a communication
device through which the company’s employees in each functional area can see how
their efforts contribute to the overall goals of the organization. This communication
tends to be good for morale and enhance jobs satisfaction.

3. Promotes Continuous Improvement:

The planning process encourages management to consider alternatives that might
improve customer value and reduce costs. Recall that "Plan" is the first step in the
Shewhart -Deming plan- do-check-action continuous improvement cycle. The PDCA
cycle supports specific improvements in the company’s processes.

4. Guides Performance:
The master budget also provides a guide for accomplishing the objectives included in
the plan. In a JIT environment, the budget can also serve as a guide to vendors. For
example, suppliers to General Motors Saturn plant in Tennessee have access to
Saturn’s production schedule through an on-line database.

5. Facilitates Evaluation and Control:

36
The master budget provides a method for evaluating and subsequently controlling
performance. Performance evaluation and control is a very powerful and very
controversial aspect of budgeting.

3.8 LIMITATION & PROBLEMS OF

MASTER BUDGETS

There are several limitations and problems associated with the master budget that
need to be considered by management. These problems involve uncertainty,
behavioral bias and costs.
1. Uncertainty:
Budgeting includes a considerable amount of forecasting and this activity involves a
considerable amount of uncertainty. Uncertainty affects both sides of the financial
performance dichotomy, but uncertainty on the revenue side presents a more serious
limitation for planning..

2. Behavioral Bias:
A second problem involves a variety of behavioral conflicts that are created when the
budget is used as a control device. To be effective, the budget must be used by the
managers it is designed to help. Thus, it must be acceptable to all levels of
management. The behavioral literature on budgeting supports the view that the budget
should reflect what is most likely to occur under efficient operating conditions.

3. Costs:
A third problem or limitation is that budgeting requires a considerable amount of time
and effort. Many companies maintain a twelve month budget on a continuous basis by
adding a future month as the current month expires. While this does not create a major
expenditure for large or medium sized organizations, smaller companies may find it
difficult to justify the costs involved.

Data No:-1

37
 Sales Budget :
(Amount in rupees)

Particulars 2010-2011 (Yarn) 2010-11 (waste) Total

Budgeted Sales in Kgs. 4267144 1914462 6181606
Selling price per kgs. 163 37 0
Estimated Sales 695544472 70835109 766379581

Particulars 2011-2012 (Yarn) 2011-12 (Waste) Total

Budgeted Sales in Kgs. 4766913 2070254 6837167
Selling price per kgs. 163 37 0
Estimated Sales 777006754 76599390 853606144

Graphical Presentation:-

Interpretation:-
From the above Scheduled & graphical presentation Shown as Budgeted sales for the
Budgeted financial year 2010-11 & 1011-12.
This detailed explanation of sales budgets is stated as follows:-
1) The company plan to sell yarn Rs.163/- per unit& waste sell Rs.37/-per unit
for both Budgeted financial year. & sales price is constant during the budget
period.

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 2) The company assumed yarn sale 4267144Kgs. & Waste sale 1914462Kgs.for
the budget period 2010-11 & 2011.And also assumed for 2011-12 yarn sale
4766913kgs. & waste sale 2070254kgs.
3) the company plan to sell Rs.69554472/-& Rs.777006754/- for yarn sales of the
budgeted period 2010-11 & 2011-12 respectively. And plan to sell
Rs.70835109/- & Rs.76599390/-for waste sales of the both budgeted period.
4) The company assumed sales Rs.766379581/- & Rs.853606144/- for the year
2010-11 & 2011-12 respectively.
It shows that company tries to increase its sales in budgeted period compare the last
year sale.

Data No:-2

SCHEDULE OF EXPECTED CASH COLLECTION:-

(Amount in rupees)

39
 Particulars 2010-2011 2011-12
Account Receivable ( opening Balance) 13415725 0
First year Sales 702514616 63864965
Second year sales 0 782472299
Total cash collection 715930341 846337264

Graphical Presentation:

Interpretation:-
After preparing sales budget a schedule of expected cash collection is also prepared.
From the above schedule & graphical presentation shows that one month credit period
allowed to customers.
• Uncollected last year sales appear as account receivable on the company’s end
of the year balance sheet i.e. Rs.13415725/- for the financial year 2009-10 &
Rs.63864965/- for the financial year 2010-11, collected in next financial year.
• Total expected cash collection for the budgeted financial year 2010-11 Rs.
715930341/-& Rs.846337264/- for the year 2011-12.

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 Data No:-3
PRODUCTION
(Figures in KGS)

Particulars 2010-11(Yarn) 2010-11(waste) Total

Budgeted Sales 4267144 1914462 6181606
(+)Desired ending inventory of
finished goods. 120537 162458 282995
total needed production 4387681 2076920 6464601
(-) Beginning inventory 48363 127420 175783
Budgeted / Required
Production 4339318 1949500 6288818

Particulars 2011-12(Yarn) 2011-12(Waste) Total

Budgeted Sales 4766913 2070254 6837167
(+)Desired ending inventory of
finished goods. 132754 178925 311679
total needed production 4899667 2249179 7148846
(-) Beginning inventory of
finished goods 120537 162458 282995
Budgeted / Required
Production 4779130 2086721 6865851

41
Graphical Presentation :-

42
Interpretation:-
From the above scheduled & graphical presentation of Production Budget for two
years shown as requirement of production in the particular period. The production
budget contains the budgeted sales, which has been taken directly from sales budget.
(i.e.4267144 kgs.yarn sale & 1914462kgs.waste sale for the year 2010-11 &
4766913kgs.yarn sale & 2070254kgs.waste sale for the year 2011-12.). The company
assumed the following prediction about the requirement of production for budgeted
period.
• The company assumed that an ending inventory of finished goods equal to 10
days stock of yarn production & one month stock of waste production for two
budgeted period
• Beginning inventory of the particular year carry forward from the last year
ending inventory of finished goods.
• Targeted required production of the budgeted periods are yarn 4339318kgs.&
waste 1949500kgs for the year 2010-11 And yarn 4779130kgs.& waste
2086721kgs.for the year 2011-12.
• Budgeted requirement of production for 2010-11 is 12% increase on the last
year production & the production for 2011-12 is 10% increase on the
production of last year i.e.2010-11.

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 Data No:-4

DIRECT MATERIAL BUDGET

(Amount in rupees)

Particulars 2010-11 2011-12

Raw material needed (cotton
consumption for production ) 516889302 569278673
(+) Desired ending inventory of
raw material 14358036 15813296
Total cost of material needed 531247338 585091969
(-) Beginning inventory of raw
material 65520756 14358036
Cost of raw material
purchase 465726582 570733933

Graphical Presentation:-

Interpretation:-
From the above scheduled & graphical presentation show the required cost of raw
material purchase (i.e. raw cotton) in the two budgeted period. Cost of raw material
purchase considers the following assumptions.
• Raw material needed in the particular budgeted period given as per the
purchase Dept. required.i.e.Rs.516889302 for the year 2010-11 &
Rs.569278673 for the year 2011-12.

44
• The company already has Rs.65520756/- in beginning inventory of raw
material for the year 2010-11 & ending inventory of raw material
Rs. 14358036/- assume as per the purchase Dept. required for the same year.
• The company carry forward ending inventory of raw material of the year
2010-11 to beginning inventory for the year 2011-12. & purchase Dept.
assume as per his working Rs.15813296/- as a ending inventory of raw
material for the year 2011-12.
• The company calculates the budgeted total cost of material needed & cast of
material purchase as per the above assumptions which are totally work out as
per the purchase Dept.

Data No:-5
SCHEDULE CASHOF DISBURSEMENT FOR MATERIAL
(Amount in rupees)

45
 Pariculars 2010-11 2011-12
Accounts payable (opening
balance) 175035859 0
Purchase of 2010-11 426916034 38810548
Purchase of 2010-12 0 523172772
Total Expected cash
disbursement for material 601951893 561983320

Graphical Presentation:-

Interpretation:-
A schedule of expected cash disbursement prepare with help of following information
& assumptions for the year 2010-11 & 2011-12.
• Opening balance of accounts payable for the year 2010-11 given as per the
previous year (i.e.2009-10) balance sheet.
• The suppliers allow one month credit by the company. The company pays 11
months payment in the particular year & one month payment payable on the
next month.

Data No:-6

DIRECT LABOUR COST BUDGET

(Amount in rupees)

Particulars 2010-11 2011-12

Direct labour cost:
Wages 18992873 20322374
Contractor ages 3101150 318230
Total direct labour cost: 22094023 20640604

Graphical Presentation:-

46
Interpretation:-
From the above schedule & graphical presentation show direct labour cost for two
budgeted period with help of following assumptions.
• Wages & contract wages cost is increase in 7% on the previous year wages for
the budgeted period 2010-11.
• Company assume 7% wages & contract wages cost increment on the cost of
previous year for the budgeted period 2011-1

Data No:-7
MANUFACTURING OVERHEAD
(Amount in rupees)

Pariculars 2010-11 2011-12

Stores & Spares 26924054 29216917
Power & Fuel 107123669 125692201
Repaires of plant & machinary 1369874 1506862
repaires of Building 96648 127213
Total Manufacturig
overheads 135514245 156543193

Graphical presentation:-

Interpretation:-
The company increases his manufacturing overheads according to increase the
production and all calculations are depend on previous year balances. From the above
schedule & graphical presentation show increase manufacturing overheads in the
budgeted period i.e.2010-11 & 2011-12.
• Srores & Spares and Power & Fuel increase according to the production this
figures are given as per the working of budgeted committee provided.
• Cost of repairs of Plant & Machinery & Building is increase 10% on previous
year balances.
• Companies budgeted amount of total manufacturing overheads are
Rs.135514245/- for the year 2010-11 & Rs.156543193/-

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 Data No:-8
ADMINISTRATIVE EXPENSES
(Amount in rupees)

PARTICULARS 2010-11 2011-12

Fixed Overhead:
Rent 106843 106843
Rates &Taxes 86000 83000
Variable Overhead:
Salary 11174718 11956949
Insurance 1505361 1655897
Misc.expences 6983375 7681713
Repaires of Other Asset 57607 63368
Payment to Auditor 205091 225600
Total Administrative
Overheads: 20118995 21773370

Graphical Presentation:-

Interpretation:
From the above schedule & graphical presentation show the budged administrative
overheads for the budgeted period. Administrative overhead budget divided in to
variable & fixed cost.
• Rents & rates & taxes these are fixed overheads given as it if as per the
balance sheet 2009-10.
• All the variable overhead costs are increase 10% on previous yeas balances

Data No:-9
SELLING & DISTRIBUTION EXPENSES
(Amount in rupees)

48
 PARTICULARS 2010-11 2011-12
Commission to selling Agents 15475865 17871155
Forwarding & delivery expenses 3578879 4428687
Travelling expenses 188756 207631
Total Selling & Distribution
expenses 19243500 22507473

Graphical presentation:-

Interpretation:-
The above schedule & graphical presentation we can understand how much selling &
distribution expenses will be want in budgeted period.
• Commission to selling agent & travelling expenses increase 10% on
previous year balances.
• Forwarding & delivery expenses increase as sales of the particular
budgeted period & it is given as per provide information.

Data No:-10
ENDING INVENTORY
(Amount in rupees)

Particulars 2010-11 2011-12

Ending inventory for:
Yarn 19647466 21638837
Waste 6010961 6620217
Cotton in Preocess 8497830 9359129
Yarn in Process 1928586 2124058
Total ending inventory: 36084843 39742241

Graphical Presentation:-

49
Interpretation:-
Ending inventory of finished goods is explained with the help of above schedule &
graphical presentation for two budged period.
• Ending inventory of the yarn is considering 10days stock of yarn production
for budgeted period.
• One month waste production is considered ending inventory of the particular
period.
• Five days stock consider as a ending inventory of cotton in process for the
budgeted year.
• One day stock consider as a ending inventory of yarn in process for the
budgeted period.

Data No:-11

COST OF GOODS SOLD

(Amount in rupees)

Purticulars 2010-11 2011-12

Direct material cost 516889302 569278673
Direct Labour cost 22094023 23640604
Manufacturing overheads 135514245 156543193
Administrative overheads 20118995 21776370
Total cost of production 694616565 771238840
(+) Beginning finished goods 26672732 36084843
721289297 807323683
(-) Ending finished goods 36084843 39742241
Budgeted Cost of Goods
Sold 685204454 767581442

Graphical Presentation:-

50
Interpretation:-

51
 Data No:-12

CASH BUDGET

(Amount in rupees)

Pariculars 2010-11 2011-12

Receipts:
Cash collection from debtors 715930341 846337264
other income 6037615 6610781
Total cash receipt: 721967956 852948045
Payments:
Direct material cost 601951893 561983320
Direct labour cost 22094023 23640604
Manufacturig overheads 135514245 15653193
Administrative overheads 20118995 21776370
Selling & Distribution expenses 19243500 22507473
Total cash Payments:- 798922656 645560960
Excess / Deficincy of cash Available: -76954700 207387085
Financing:-
Fund from head office 78454700 0
Opening cash balance 0 1500000
Cashbalanceending:- 1500000 207387085
Graphical Presentation:-

Interpretation:-

52
 Data No:-13
INCOME STATEMENT
(Amount in rupees)

53
 Particulars 2010-11 2011-12
Sales 766379581 853606144
(-) Cost of goods sold 685204454 767581442
Gross margin 81175127 86024702
(+) Other income 6037615 6610781
(-) Selling & Distribution
expenses 19243500 22507473
Net Income / Loss 67969242 70128010

Graphical Presentation:-

Interpretation:-
From the above schedule & graphical presentation are show the budgeted income
statement .company assume to increase his sale & income in the budgeted
Period. This statement prepare with the help of another budget.i.e. Sales budget, cost
of goods sold budget & selling & distribution budget.

Data No:- 14

BALANCE SHEET
(Amount in rupees)

54
Particulars 2010-11 2011-12
Current Assets:-
Cash 1500000 208887085
Account Receivable 63864965 7268880
Raw Material 14358036 15813286
Finished Goods 36084843 39742241
Total Current Assets:- 115807844 271711492
Fixed Assets:-
Land 2944103 2944103
Building 59209027 59209027
Plant & Machinary 394049548 394049548
Furniture, Fixture & other Equipments 2109431 2109431
Vehicle 1883454 1883454
Total Fixed Assets:- 460195563 460195563
Total Assets:- 576003407 731907055

Liabilities:-
Accounts payable 38810548 47561161
Total LaibilitiesL:- 38810548 47561161
Equity:-
Capital Stock 310166499 537192859
Retained earning 159057118 68698335
(+) Net Income 67969242 78454700
Total Equity:- 537192859 684345894
Total Laibilities & Capital:- 576003407 731907055

Graphical Presentation:-

55
5.1 Conclusion

56
5.2 Suggestions

57
Bibliography

58
Reference Books:-
• N.P.Srinivasan & M.Sakthivel Murugan(2008), Financial Management,
Published by Vrinda Publications (P) limited., Delhi-110091
•

Websites:-
• www.somatextiles.com
• http://accontingformanagement.com
•

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