Budgetary Control

Overview
Budgetary control
Budget cycle
Operating budget Steps involved
Flexible budget
Cash budget
Budget Vs Variances
 Budgetary Control
Budget is a plan expressed in monetary terms
Control Performance evaluation through
comparison of actual results with plan
Budgetary control system System of
establishing a budget, evaluating
performance, and reporting variances for
appropriate action
Budget / BCS Cant eliminate uncertainties;
help managers to shape future by present
action
Budget Cycle
 A few aspects of budgeting
Short term Usually for a period of 1 year (Align with long term)
Long term Varies between 5 to 10 years (Eg: Profit growth @
10% p.a.)
Advantages of Budgeting:
Encourage forward planning: Throughout the organization, develops profit
mindedness, cost consciousness etc
Motivates managers- as they know performance measured against budget
targets
Objective evaluation criteria for managers Not maximum profit but
targeted profit
Disadvantages of Budgeting:
Cost of operating the system is high
May create bad feelings unless employees are educated properly
 Operating Vs Financial Budget
Operating budget:
Sales, Ending inventory, Production, Direct
Materials, Direct Labor, Factory Overhead,
Cost of Goods Sold, Selling expense, Admin
expense
Financial budget:
Capital, Cash, Budgeted Balance Sheet,
Budgeted statement of changes in financial
position
 Operating Budget- Steps
Start with sales forecast
Production budget quantities to be produced
Direct materials budget Materials to be
consumed
 Operating Budget- Steps
1. Start with sales forecast
2. Production budget quantities to be produced
a) Direct materials budget Materials to be consumed
b) Direct labor budget Labor hours per unit of Finished Product
c) Factory overhead budget Depends on production level (Eg:
Technical supervisor, security at factory, Canteen, Factory
insurance, Amortized cost of jigs/tools)
d) Ending-inventory budget
3. Total of a to d = Cost of goods sold budget
4. Selling and Admin overhead budget
5. 1+3+4 culminates into Budget income statement
Production Budget
Raw Material Purchase Budget
Sales Overhead Budget
Sales OH Budget (Soln)
Flexible Budget (Problem 1)
Flexible Budget (Soln)
 Flexible Budget (Problem 2)
The following data are culled from ABC Ltd for the year ended
31/3/15:
(Rs Lacs)
Fixed Expenses
Wages & Salaries 9.5
Rent, rates / taxes 6.6
Depreciation 7.4
Sundry Admin Exp 6.5
Semi-variable Expenses(@50% of capacity)
Maintenance and Repairs 3.5
Indirect labor 7.9
Sales Dept salaries etc 3.8
Sundy Admin Exp 2.8
Variable Expenses (@ 50% of capacity
Materials 21.7
Labor 20.4
 Flexible Budget (P2)
Assume that the fixed expenses remain constant for all
levels of production, semi-variable expenses remain
constant between 45% and 65% capacity, increasing by
10% between 65% and 80% capacity and by 20%
between 80% and 100% capacity
Prepare flexible budget for the year and forecast profit at
60%, 75%, 90% and 100% of capacity, if the following
are the sales at each of the capacity level:
Capacity Level Sales (Rs Lacs)
50% 100
60% 120
75% 150
90% 180
100% 200
 Capacity Level 50% 60% 75% 90% 100%

(1) Sales 100 120 150 180 200

(2) Variable expenses

Material 21.7 26.04 32.55 39.06 43.4

Labor 20.4 24.48 30.60 36.72 40.8
Other expenses 7.90 9.48 11.85 14.22 15.80
Total 50.00 60.00 75.00 90.00 100.00
(3) Semi-variable Exp

Maintenance repair 3.50 3.50 3.85 4.20 4.20

Indirect Labor 7.90 7.90 8.69 9.48 9.48
Sales Dept Salaries etc 3.80 3.80 4.18 4.56 4.56
Sundry Admin Exp 2.80 2.80 3.08 3.36 3.36
Total 18.00 18.00 19.80 21.60 21.60
(4) Fixed Expenses

Wages / Salaries 9.50 9.50 9.50 9.50 9.50

Rent, Rates, Taxes 6.60 6.60 6.60 6.60 6.60
Depreciation 7.40 7.40 7.40 7.40 7.40
Sundry Admin Exp 6.50 6.50 6.50 6.50 6.50
Total 30.00 30.00 30.00 30.00 30.00
(5) Total Cost of Sales (2+3+4) 98.00 108.00 124.80 141.60 151.6
(6) Operating Income (1-5) 2.00 12.00 25.00 38.40 48.40
Profit as % of sales 2.00 10.00 16.80 21.33 24.20
 Notes (Problem 2)
At 60% level, semi-variable expenses will remain the
same as those at 50% level. At 75% level, semi-
variable expenses will be 1.10 times of the expenses
at 50% level. At 90% and100% levels, semi-variable
expenses will be 1.20 time of those at 50% level
Variable expenses will increase proportionately with
increase in sales, while fixed expenses will be
constant at all levels
Though sales have increased in tune with increase in
capacity levels, profits to sales ratio is not same at all
the levels, because of the cost behavior pattern of
various cost items
Cash Budget
Cash Budget (Solution)