Budgeting

Functional Budgets
• A functional budget is a budget of income and/or expenditure
applicable to a particular function.

• A function may refer to a department or a process.

• Functional budgets include :

a. Sales budget
b. Selling and distribution cost budget
c. Production budget
d. Production cost budget
e. Personnel budget
f. Purchasing budget
g. Plant utilization budget
 Functional Budgets
h. Capital expenditure budget
i. Administrative cost budget
j. Research & development cost budget

• If the above-mentioned budgets are prepared, it is possible to

summarize them to produce :
a. Budgeted Profit & Loss Account
b. Budgeted Profit & loss appropriation account

• The next step is to prepare the cash budget and the budgeted
balance sheet.
 Problem - 1
• XYZ Co. manufactures two products, X and Y, and operates three
sales divisions for selling them in the market. From the following
information, prepare a sales budget for the 6 months ended 30th
Jun 202x to be presented to the budget committee
• Budgeted sales for the 6 months ended 31st Dec 201x were as
follows :
Division 1 Division 2 Division 3
Product : X 1,600 @ Rs. 10 2,400 @ Rs. 10 2,400 @ Rs. 10
Product : Y 800 @ Rs. 9 4,800 @ Rs. 9 2,000 @ Rs. 9

• Actual sales for the same period were :

Division 1 Division 2 Division 3
Product : X 2,000 @ Rs. 10 3,200 @ Rs. 10 2,800 @ Rs. 10
Product : Y 400 @ Rs. 9 4,000 @ Rs. 9 1,600 @ Rs. 9
 Problem - 1
• At a meeting of the divisional sales managers, the following
decisions have been taken :
a. The price of Product X should be increased by Rs. 1. The sales
managers contend that there is high potential demand for Product
X and that Product X has been underpriced.
b. Product Y is not selling at the expected rate. This is due to the
fact that this product has been overpriced. However, if the selling
price is reduced by Rs. 1, it is expected that the market would
absorb more.
• On the basis of these price changes and reports from salesmen,
the Divisional sales managers have made the following estimates.
Percentage increase over previous budget
Division 1 Division 2 Division 3
Product : X 20 30 10
Product : Y 5 10 8
 Solution - 1
Divisio Period : 6 months ended 30th June 202x
n/Prod Budget 30th Jun 202x Budget 31st Dec 201x Actual 31st Dec 201x
uct
Qty Price Value Qty Price Value Qty Price Value
1-X 1,920 11 21,120 1,600 10 16,000 2,000 10 20,000
1–Y 840 8 6,720 800 9 7,200 400 9 3,600
1– 2,760 27,840 2,400 23,200 2,400 23,600
Total
2–X 3,120 11 34,320 2,400 10 24,000 3,200 10 32,000
2–Y 5,280 8 42,240 4,800 9 43,200 4,000 9 36,000
2– 8,400 76,560 7,200 67,200 7,200 68,000
Total
3–X 2,640 11 29,040 2,400 10 24,000 2,800 10 28,000
3–Y 2,160 8 17,280 2,000 9 18,000 1,600 9 14,400
3- 4,800 46,320 4,400 42,000 4,400 42,400
Total
GT 15,960 1,50,72 14,000 1,32,40 14,000 1,34,00
0 0 0
 Problem - 2
• From the following information, prepare a production budget for
XYZ Ltd assuming that :
a. There is no loss in production
b. Normal loss in production is 2% and 5% for Product X and Y
respectively.
• Sales budget (units)
Product X Product Y
Division 1 1,920 840
Division 2 3,120 5,280
Division 3 2,640 2,160
Total 7,680 8,280

• Stock at beginning
X – 1,200
Y – 2,200
• Stock at end is estimated to be 10% more in quantity
 Solution - 2
• Production budget
Product X Product Y Total
Units Units Units
Sales requirement as per sales 7,680 8,280 15,960
budget
Add : Estimated increase in 120 220 340
stock (10% of 1,200 and 2,200
units respectively)
a. Production requirements 7,800 8,500 16,300
b. Production requirements 7,960 8,948 16,908
 Problem - 3
• From the following information, prepare a monthly cash budget for the
three month ended 31st Dec 201x
Month Overheads
Sales Materials Wages Production Admin, S & D
Rs Rs Rs Rs Rs
June 6,000 3,600 1,300 450 320
July 6,500 4,000 1,500 450 320
August 7,000 4,000 1,500 500 350
September 7,500 4,500 1,500 600 350
October 8,000 4,600 1,600 600 400
November 8,500 5,000 1,800 700 400
December 9,000 5,200 2,000 700 450
• Credit terms are :
Sales – 3 month to debtors
10% of sales are on cash. On an average, 50% credit sales are paid on the
due date while the remaining are paid in the following month.
 Problem - 3
• Creditors (materials) – 2months
• Lag in payment
Wages – ¼ month
OH – ½ month
• Cash and bank balance on 01st October is expected to be Rs. 3,000.
• Other relevant information
a. Plant and Machinery to be installed in August at a cost of Rs. 48,000
will be paid for by monthly instalments of Rs. 1,000 from 01st October.
b. Preference share dividends of 5% on capital of Rs. 1,00,000 are to be
paid on 01st December.
c. Calls on 500 equity shares at Rs. 2 per share are expected on 01st
November.
d. Dividends from investments amounting to Rs. 500 are expected on
31st December.
e. Income tax (advance) to be paid in December Rs. 1,000.
 Solution - 3
• Receipts from sales
Month Sales Credit sales October November December
Rs. Rs. Rs. Rs. Rs.
June 6,000 5,400 2,700
July 6,500 5,850 2,925 2,925
August 7,000 6,300 3,150 3,150
September 7,500 6,750 3,375
October 8,000 7,200 800
November 8,500 7,650 850
December 9,000 8,100 900
Total 6,425 6,925 7,425

• Wages calculation
Wages October November December
September 1,500 375
October 1,600 1,200 400
November 1,800 1,350 450
December 2,000 1,500
 Solution - 3
• Cash budget for the 3 months ended 31st Dec 201x
October November December
Rs. Rs. Rs.
Balance b/d 3,000 1,875 1,500
Receipts :
Sales 6,425 6,925 7,425
Capital 1,000
Dividends 500
Total (a) 9,425 9,800 9,425
Payment :
Creditors 4,000 4,500 4,600
Wages 1,575 1,750 1,950
OH – Production 600 650 700
OH – Admin, S & D 375 400 425
Preference dividends 5,000
Income Tax 1,000
Plant & Machinery 1,000 1,000 1,000
Total (b) 7,550 8,300 14,675
Balance c/d [(a) – (b)] 1,875 1,500 (5,250)
 Problem - 4
• ABC Ltd has recently completed its sales forecasts for the year to 31st
December 201x. It expects to sell two products – J and K – at prices of Rs.
135 and Rs. 145 respectively.
• Sales demand is expected to be :
J - 10,000 units
K - 6,000 units
• Both products use the same raw materials and skilled labour but in
different quantities per unit.
J K
Material X 10 kg 6 kg
Material Y 4 kg 8 kg
Skilled labour 6 hours 4 hours
• The prices expected during 2006 for the raw materials are :
Material X - Rs. 1.50 per kg
Material Y - Rs. 4.00 per kg
• The skilled labour rate is expected to be Rs. 6 per hour.
 Problem - 4
• Stocks of raw materials and finished goods on 01st Jan 201x are expected
to be :
Material X 400 kg @ Rs. 1.20 per kg
Material Y 200 kg @ Rs. 3.00 per kg
J 600 units @ Rs. 70 each
K 800 units @ Rs. 60 each

• All stocks are to be reduced by 15% from their opening levels and are
valued using the FIFO method.
• The company uses absorption costing and production OH costs are
expected to be :
Variable - Rs. 2 per skilled labour hour
Fixed - Rs. 3,15,900 p.a.
• You are required to prepare :
a. Production budget in units
b. RM purchase budget (in units and Rs.)
c. Production cost budget
d. Budgeted trading account
 Solution - 4
• Production budget
J K
Sales requirement 10,000 6,000
Closing stock (85% of opening stock) 510 680
Opening stock (600) (800)
Production required 9,910 5,880

• Raw material purchase budget

X Y
Kg. Rs. Kg Rs.
Required for production - J 99,100 39,640
-K 35,280 47,040
Closing stock 340 510 170 680
Opening stock (400) (480) (200) (600)
1,34,320 2,01,480 86,650 3,46,600
 Solution - 4
• Production cost budget
Rs. Rs.
Raw materials :
Opening stock 1,080
Purchases 5,48,080
5,49,160
Less : Closing stock 1,190 5,47,970
Direct labour
J (9,910 * 6 * 6) 3,56,760
K (5,880 * 4 * 6) 1,41,120 4,97,880
Variable OH
J (9,910 * 6 * 2) 1,18,920
K (5,880 * 4 * 2) 47,040 1,65,960
Fixed OH 3,15,900
Total 15,27,710
 Solution - 4
• Budgeted trading account
Rs. Rs.
Sales
J – 10,000 * 135 13,50,000
K – 6,000 * 145 8,70,000 22,20,000
Opening stock
J – 600 * 70 42,000
K – 800 * 60 48,000
90,000
Production cost 15,27,710
16,17,710
Less : Closing stock ; J – 510 * 101.86 51,949
K – 680 * 88.24 60,003
Cost of sales 15,05,758
Gross Profit 7,14,242
 Solution - 4
• Value of finished goods closing stock
J K
Rs. Rs.
Material X 10 * 1.50 15.00 6 * 1.50 9.00
Material Y 4* 4 16.00 8*4 32.00
Direct labour 6*6 36.00 4*6 24.00
Variable OH 6*2 12.00 4*2 8.00
Fixed OH 6 * 3.81 22.86 4 * 3.81 15.24
Value per unit 101.86 88.24
Fixed OH are absorbed on direct labour hours
Labour hours worked 9,910 * 6 59,460 5,880 * 4 23,520
Total labour hours worked = 59,460 + 23,520 = 82,980
Total fixed OH p.a = Rs. 3,15,900
Fixed OH rate/labour hour = 3,15,900 / 82,980 = 3.81
 Problem - 5
• XYZ Ltd has a business of supplying electrical goods to various government and non-
government companies. The controller, in collaboration with an economist, has
developed the following equation that, he says, will forecast sales quite well, based
on past pattern of behaviour :
Monthly sales amount = Rs. 1,00,000 + (Rs. 2,000 * orders received in prior month).
• The sales manager is confused and seeks your advice. He presents you with the
following data regarding actual and forecast number of orders. The forecasts have
generally been accurate.
August (actual) 200
September (forecast) 300
October 450
November 700
December 650

• It is the first week of September. The sales manager would like the forecasts of sales
and income for as many months as you can prepare. The cost accountant informs
you that costs of goods sold is 50% of sales while variable OH are 20% of sales.Fixed
costs, amount to Rs. 2,00,000 per month.
• You are required to prepare the budgeted income statement for as many months as
you can.
 Solution - 5
• Budgeted income statement of XYZ Ltd
Sept Oct Nov Dec Jan
Sales
- Fixed component 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
- Variable 4,00,000 6,00,000 9,00,000 14,00,000 13,00,00
component (orders
received in prior
month * Rs. 2,000)
Total sales 5,00,000 7,00,000 10,00,000 15,00,000 14,00,000
Less : Cost of 2,50,000 3,50,000 5,00,000 7,50,000 7,00,000
goods sold (0.50 *
sales)
Less : Variable 1,00,000 1,40,000 2,00,000 3,00,000 2,80,000
costs (0.20 * sales)
Contribution 1,50,000 2,10,000 3,00,000 4,50,000 4,20,000
Less : Fixed costs 2,00,000 2,00,000 2,00,000 2,00,000 2,00,000
Profit / (Loss) (50,000) 10,000 1,00,000 2,50,000 2,20,000
 Problem - 6
• The following are the budget estimates of a plant servicing department in a
manufacturing company.

Items of cost Planned at 6,000 Planned at 9,000

service hours service hours
Rs. Rs.
Salaries 28,000 28,000
Indirect materials 42,000 63,000
Miscellaneous costs 16,000 20,500

• Prepare a flexible budget for the department for 7,000, 8,000 and 9,500 hours
 Solution - 6
• Salaries are fixed as they are constant at both 6,000 service hours and
9,000 service hours.
• Indirect materials
Increase in cost = Rs. 63,000 – Rs. 42,000
= Rs. 21,000
Increase in service hours = 9,000 – 6,000
= 3,000 hours
Variable portion of indirect materials = Rs. 21,000 / 3,000 hours
= Rs. 7 per hour
Indirect material at 6,000 hours = 6,000 * Rs. 7 = Rs. 42,000
Indirect material at 9,000 hours = 9,000 * Rs. 7 = Rs. 63,000
Thus, indirect materials in total are variable cost.
 Solution - 6
• Miscellaneous Costs
Increase in cost = Rs. 20,500 – Rs. 16,000
= Rs. 4,500
Increase in hours = 9,000 – 6,000
= 3,000 hours
Variable portion = Rs. 4,500 / 3,000 hours
= Rs. 1.50 per hour
Miscellaneous cost at any level, say 6,000 hours
Variable portion = 6,000 * Rs. 1.50 = Rs. 9,000
Fixed portion = Rs. 16,000 – Rs. 9,000 = Rs. 7,000
 Solution - 6
• Flexible budget of the department
7,000 service 8,000 service 9,500 service
hours hours hours
Rs. Rs. Rs.
Salaries (fixed) 28,000 28,000 28,000
Indirect materials (Variable at Rs. 7 49,000 56,000 66,500
per hour)
Miscellaneous cost
- Variable at Rs. 1.50 per hour 10,500 12,000 14,250
- Fixed 7,000 7,000 7,000
Total costs 94,500 1,03,000 1,15,750
 Problem - 7
• ABC can produce 4,000 units of a product at 100% capacity. The following
information is available from its records.
April May
Units produced 2,800 3,600
Rs. Rs.
Power 1,800 2,000
Repair & maintenance 500 560
Indirect labour 700 900
Consumable stores 1,400 1,800
Inspection 200 240
Depreciation 1,400 1,400
Salaries 1,000 1,000
• Direct material cost per unit is Rs. 1 and direct wages per hour is Rs. 4. Rate of
production per hour is 10 units.
• Compute the cost of production at 100%, 80% and 60% capacity levels showing
variable, semi-variable and fixed items under the budget.
• Compute OH absorption rate at 80% capacity.
 Solution - 7
• Flexible budget
60% 80% 100%
Units of production 2,400 3,200 4,000
Rs. Rs. Rs.
Variable costs
-Materials 2,400 3,200 4,000
- Direct wages 960 1,280 1,600
- Indirect labour 600 800 1,000
- Consumable stores 1,200 1,600 2,000
Semi-variable costs
-Power 1,700 1,900 2,100
-Inspection 180 220 260
- Repairs & Maintenance 470 530 590
Fixed Costs
-Depreciation 1,400 1,400 1,400
-Salaries 1,000 1,000 1,000
Total cost 9,910 11,930 13,950
 Solution - 7
• OH absorption rate at 80% capacity

Rs.
Total cost at 80% 11,930
Less : Direct materials 3,200
Direct labour 1,280 4,480
Overhead cost 7,450
OH rate per unit = Rs. 7,450 / 3,200 units = Rs. 2.33
 Problem - 8
• The following budget of XYZ Ltd has been prepared at 100% capacity.
% of sales value
Raw materials 40
Direct wages 25
Factory overheads (variable) 10
Factory overheads (fixed) 5
Administration and selling expenses (variable) 6
Administration and selling expenses (fixed) 12
Profit 2
Sales value 100
• After considering the quarterly performance, it is felt that the budgeted volume
of sales would not be achieved. But the company expects to achieve 80% of the
budgeted sales (equal to a sales value of Rs. 1.60 lakhs).
• You are required to present the original budget and the revised budget based on
80% achievement of capacity sales, showing the contribution and profit for both
levels.
 Solution - 8
• Original and revised budget
Figures in Rs. ‘000
Original @ 100% Revised @ 80%
capacity capacity
Sales (A) 200 160
Raw materials 80 64
Direct wages 50 40
Factory OH (variable) 20 16
Administrative OH (variable) 12 9.60
Total variable cost (B) 162 129.60
Contribution (A) – (B) 38 30.40
Factory OH (fixed) 10 10
Administrative OH (fixed) 24 24
Total fixed OH 34 34
Profit / (Loss) 4 (3.60)
 Problem - 9
• A factory is running at 50% capacity and produces 5,000 units at a cost of Rs. 90
per unit as per details given below.
Materials 50
Labour 15
Factory OH 15 (Rs. 6 fixed)
Administrative OH 10 (Rs. 5 fixed)

• The current selling price is Rs. 100 per unit.

• At 60% working, material cost per unit increases by 2% and selling price per unit
falls by 2%.
• At 80% working, material cost increases by 5% and selling price per unit falls by
2.5%.
• Prepare a flexible budget showing profits of the factory at 60% and 80% working
and offer your comments.
 Solution - 9
• Flexible budget
50% capacity 5,000 60% capacity 6,000 80% capacity 8,000

Nature of
units units units

cost
Per unit Total (Rs. Per unit Total (Rs. Per unit Total (Rs.
Lakhs) Lakhs) Lakhs)
Materials V 50 2.50 51 3.06 52.50 4.20
Labour V 15 0.75 15 0.90 15 1.20
Fy OH (Rs. 9) V 9 0.45 9 0.54 9 0.72
Admn OH V 5 0.25 5 0.30 5 0.40
Total VC 79 3.95 80 4.80 81.50 6.52
Fy OH F 6 0.30 0.30 0.30
Admn OH F 5 0.25 0.25 0.25
Total FC 11 0.55 9 0.55 7 0.55
Total cost 90 4.50 89 5.35 88.50 7.07
Profit 10 0.50 9 0.53 9 0.73
Sales 100 5.00 98 5.88 97.50 7.80
 Problem - 10
• Figures regarding sales, cost and profit at 50% capacity are given below :
Rs.
Sales 20,00,000
Direct cost 8,00,000
Factory Overheads 4,00,000
Office Overheads 2,00,000
Selling Overheads 3,00,000
Profit 3,00,000

• Every 10% increase in sales beyond 50% capacity is possible only after reducing the price
by 1% on the base level of 50% capacity.
• Direct material cost is 25% of the total direct cost at 50% capacity. With every 10%
increase in capacity above this level, the price of direct material comes down by 2%.
• 50% of the factory overheads are fixed and the rest are fully variable.
• Office overheads are of step character. Every 10% increase in output results in 2%
increase in office overheads over 50% capacity.
• Selling overheads increase in proportion of sales value.
• Prepare a flexible budget at 80% capacity level.
 Solution - 10
• At 50% capacity, direct material is 25% of direct cost, ie., 8,00,000 *25% = Rs.
2,00,000
At 80% capacity it will be 2,00,000 * 80/50, ie., Rs. 3,20,000
Less 2% decrease with every 10%
Increase in capacity = 3,20,000 * 6/100
= Rs. 19,200
Direct material at 80% capacity = Rs. 3,20,000 – Rs. 19,200
= Rs. 3,00,800
• Remaining direct cost at 50% capacity
Rs. 8,00,000 – Rs. 2,00,000
Rs. 6,00,000
At 80% capacity = 6,00,000 * 80 /50
= Rs. 9,60,000
• Direct cost at 80% capacity = Rs. 3,00,800 + Rs. 9,60,000
= Rs. 12,60,800
 Solution - 10
• Factory OH.
50% is fixed, ie., Rs. 4,00,000 * 50% = Rs. 2,00,000 is fixed.
Variable factory OH at 80% capacity = Rs. 2,00,000 * 80/50
= Rs. 3,20,000
• Office OH
At 50% capacity = Rs. 2,00,000
At 60% capacity = 2,00,000 * 60/50
= Rs. 2,40,000
Increase of 2% = Rs. 4,800
Total at 60% capacity = Rs. 2,44,800
At 70% capacity= Rs. 2,44,800 * 70/60
= Rs. 2,85,600
Increase of 2% = Rs. 5,712
Total at 70% capacity = Rs. 2,91,312
At 80% capacity= Rs. 2,91,312 * 80/70
= Rs. 3,32,928
Increase of 2% = Rs. 6,659
Total at 80% capacity = Rs. 3,39,587
 Solution - 10
• Sales at 80% capacity
Rs. 20,00,000 * 80/50
= Rs. Rs. 32,00,000
Less 1% decrease with every 10% increase in sale, ie., 3% of Rs. 32,00,000
= Rs. 96,000
Sales at 80% capacity is Rs. 31,04,000
• Selling OH proportionate to sales value
It is Rs. 3,00,000 for Rs. 20,00,000 sales value
For sales value of Rs. 31,04,000 it is
31,04,000 * 3,00,000/20,00,000
= Rs. Rs. 4,65,600
 Solution - 10
• Flexible budget
At 50% capacity At 80% capacity
Rs. Rs.
Sales 20,00,000 31,04,000
Direct cost 8,00,000 12,60,800
Factory OH – Variable 2,00,000 3,20,000
- Fixed 2,00,000 2,00,000
Office OH 2,00,000 3,39,587
Selling OH 3,00,000 4,65,600
Total cost 17,00,000 25,85,987
Profit 3,00,000 5,18,013
 Problem - 11
• ABC Ltd has the following (summarised) balance sheet as at 30th Apr 2016.
Rs. ‘000 Rs. ‘000
Share capital 1,000
Revenue reserve (undistributed profits) 754
1,754
4% debenture stock (long-term loan) 300
Current liabilities :
Trade creditors 1,200
Inland revenue (for tax) 30
Bank overdraft 300 1,530
3,584
Freehold land & building at cost 320
Manufacturing equipment, tools, dies, etc 560
880
Current assets :
Stock of raw materials, WIP and FG 1,300
Trade debtors 1,404 2,704
3,584
 Problem - 11
• Estimates prepared by the accounting department for the following three months are as
follows :
Rs. ‘000
Sales on credit, spread equally over the three months (sales are on 576
deferred terms : the debtors will pay in 12 equal instalments, the first
falling in the month in which the debt is incurred)
Purchase of raw materials, spread equally over the three months 114
(purchases will all be for cash, as suppliers will not give any more
credit)
Manufacturing wages (payable in cash weekly) ; total for 3 months 228
Other expenses (non-manufacturing wages and salaries, insurance, 237
heating and lighting, rates, etc) (these will be payable in cash and
arise evenly over the three months)
It is estimated that it will be possible to collect in each month about
1/6 of the debts due to the company at 30th April
It is expected that 1/3 of the trade creditors at 30th April will have to
be paid in each of the three months
The tax is payable immediately.
 Problem - 11
Rs. ‘000
The expected sales will absorb finished goods at a book value (based 342
on manufacturing labour and materials only) of
The bank overdraft limit (ie., the maximum advance allowed) is 600
One quarter’s interest on the debenture must be paid in July.

• Prepare a statement for the directors of the company showing, month by month, the
estimated cash receipts and payments of the company for the next three months.
• Prepare an estimated income statement for the period and an end-period balance sheet.
(Write off Rs. 14,000 from equipment for depreciation).
• Comment on the situation revealed by these statements.
 Solution - 11
• Cash budgets May – Jul 2016 (Rs. ‘000)
May Jun Jul Total
Receipts :
Collection from old debtors (1/6 * 1,404) 234 234 234 702
Collection from new debtors
(1/12 * 1/3 * 576) 16
(1/12 * 1/3 * 576 * 2) 32
(1/12 * 1/3 * 576 * 3 48 96
250 266 282 798
Payments :
Suppliers for old debts (1/3 * 1,200) 400 400 400 1,200
Suppliers for new purchases (1/3 * 114) 38 38 38 114
Manufacturing wages (1/3 * 228) 76 76 76 228
Other expenses (1/3 * 237) 79 79 79 237
Inland revenue 30 30
Debenture interest (1/4 * 4% * 300) 3 3
623 593 596 1,812
Surplus / (Deficit) for the month (373) (327) (314) (1,014)
Balance at start of month (300) (673) (1,000) (300)
Surplus / (Deficit) at end of month (673) (1,000) (1,314) (1,314)
 Solution - 11
• Budgeted income statement May – Jul 2016 (Rs. ‘000)

Rs. ‘000 Rs. ‘000

Sales 576
Less : Raw materials 114
Manufacturing wages 228
Other expenses 237
Debenture interest 3
Depreciation 14 596
Loss for the period (20)
 Solution - 11
• Budgeted balance sheet at 31st July 2016 (Rs. ‘000)
Rs. ‘000 Rs. ‘000
Share capital 1,000
Revenue reserve (undistributed profit) 734
1,734
4% debenture stock 300
Current liabilities :
Bank overdraft 600
Additional finance reqd (1,314 – 600) 714 1,314
3,348
Freehold land and building at cost 320
Manufacturing equipment, tools, dies, etc (net of 546
depreciation)
776
Current assets : Stocks 1,300
Debtors (1,404 + 576 – 798) 1,182 2,482
3,348
 Solution - 11
• The budgeted loss for the period is Rs. 20,000
• However, the finance required increases from Rs. 3,00,000 to Rs.
13,14,000 due primarily to the harsh terms imposed by creditors
and the generous terms allowed to customers.
• The main short-term problem is to find the Rs. 7,14,000 funds
required over and above the current overdraft limit of Rs. 6,00,000.
• In the longer term, the company should realise that, despite
generous credit terms allowed to customers, a contribution
sufficient to cover costs is not being earned (particularly when
account is taken of the interest which will have to be paid on new
finance).
 Problem - 12
• The following data relate to XYZ Ltd.
Balance Sheet as at 31st March.

Liabilities Rs. Assets Rs.

Accounts payable (all for 40,000 Cash 3,00,000
March purchases)
Taxes payable (all for 25,000 Accounts receivable (all 2,50,000
March income) from March sales)
Share capital 11,00,000 Inventories
Retained earnings 10,26,800 Raw materials (9,600 kgs 28,800
at Rs. 3)
Finished goods (1,800 63,000
units at Rs. 35)
Fixed Assets :
Cost : 20,00,000
Less : 15,50,000
Acc. Depr. 4,50,000
21,91,800 21,91,800
 Problem - 12
• Sales forecasts
Assume the marketing department has developed the following sales forecast for the
first quarter of the next year and the selling price is Rs. 50 per unit.
Month Unit sales
April 9,000
May 12,000
June 16,000
• The management desires closing inventory to equal 20% of the following month’s sales.
• The manufacturing costs are as follows :
Direct materials (5 kgs * Rs.3) (per unit) Rs. 15
Direct labour Rs. 5
Variable overheads Rs. 9
Total fixed overheads (per annum) Rs. 7,20,000
• Normal capacity is 1,20,000 units per annum. Assume absorption costing basis.
• Each unit of the final product requires 5 kgs of raw materials. Assume management
desires closing raw material inventory to equal 20% of the following month’s
requirements of production.
 Problem - 12
• Assume fixed selling and administrative expenses are Rs. 20,000 per month and variable
selling and administrative expenses are Rs. 5 per unit sold.
• All sales are on account. Payment received within 10 days from date of sale are subject to
a 2% cash discount. In the past, 60% of the sales were collected during the month of sale
and 40% are collected during the following month. Of collections during the month of
sale, 50% are collected during the discount period. Accounts receivable are recorded at
the gross amount and cash discounts are treated as a reduction in arriving at net sales
during the month they are taken.
• Tax rate is 35%.
• Additional information :
- all purchases are on account. Two-thirds are paid for in the month of purchase and one-
third, in the following month.
- fixed manufacturing costs include depreciation of Rs. 20,000 per month.
- taxes are paid in the following month.
- all other costs and/or expenses are paid during the month in which they are incurred.
• From the foregoing information prepare a master budget for the month of April only.
 Solution - 12
• Production budget
Particulars April May
Sales (units) 9,000 12,000
Add : Desired closing stock (20% of next month’s 2,400 3,200
sales)
Total finished goods requirement 11,400 15,200
Less : Opening inventory 1,800 2,400
Required production (units) 9,600 12,800
• Purchase budget
Particulars April May
Production budget (units) 9,600 12,800
Raw material required for production (5 kgs per unit) 48,000 64,000
Add : Desired closing inventory (20% of next month’s 12,800
requirements)
Total requirements 60,800
Less : Opening inventory 9,600
Purchase requirement 51,200
Purchase requirement (amount at Rs. 3 per kg) Rs. 1,53,600
 Solution - 12
• Manufacturing cost budget
Particulars April
Required production (units) 9,600
Direct material cost (5kgs at Rs. 3 per kg) Rs. 15
Total direct material cost Rs. 1,44,000
Total direct labour cost (Rs. 5 per unit) Rs. 48,000
Total variable OH cost (Rs. 9 per unit) Rs. 86,400
Total variable manufacturing costs Rs. 2,78,400
All fixed manufacturing OH (Rs. 7,20,000 / 12) Rs. 60,000
Total manufacturing cost Rs. 3,38,400

• Selling and administrative expenses budget

Particulars April
Unit sales 9,000
Variable costs at Rs. 5 per unit Rs. 45,000
Fixed costs Rs. 20,000
Total selling and administrative expenses Rs. 65,000
 Solution - 12
• Cost of goods sold budget
Particulars April
Units sold 9,000
Cost per unit :
Variable – Rs. 29 Rs. 2,61,000
Fixed – Rs. 6 Rs. 54,000
Total cost Rs. 3,15,000
• Budgeted income statement (Rs.)
Gross sales (9,000 * Rs. 50) 4,50,000
Less : Cash discount (4,50,000 * 0.60 * 0.50 * 0.02) 2,700
Net sales 4,47,300
Less : Cost of goods sold 3,15,000
Gross margin unadjusted 1,32,300
Less : Capacity variance (400 units at Rs. 6) 2,400
Gross margin adjusted 1,29,900
Less : Selling and administrative expenses 65,000
Profit before taxes 64,900
Taxes 22,715
Profit after taxes 42,185
 Solution - 12
• Cash budget (Rs.)
Opening balance 3,00,000
Collection from debtors : Mar sales 2,50,000
Apr sales (4,50,000 * 0.60) Rs. 2,70,000
- Cash discount (2,70,000 * 0.5 * 0.02) Rs. 2,700 2,67,300 5,17,300
8,17,300
Cash outflows
Payment to creditors – for March purchases 40,000
- for Apr purchases (Rs. 1,53,600 * 2/3) 1,02,400 1,42,400
Direct labour 48,000
Variable manufacturing OH 86,400
Fixed manufacturing OH 60,000
- Depreciation 20,000 40,000
Variable selling and administrative overheads 45,000
Fixed selling and administrative overheads 20,000
Taxes 25,000
4,06,800
Closing balance 4,10,500
 Solution - 12
• Statement of retained earnings (Rs.)
Opening balance 10,26,800
Add : Profit after taxes 42,185
Closing balance 10,68,985
• Balance sheet as at 30th April

Liabilities Rs. Assets Rs.

Accounts payable (40,000 + 51,200 Cash 4,10,500
1,53,600 – 1,42,400)
Taxes payable 22,175 Accounts receivable (Rs. 1,80,000
4,50,000 * 0.40)
Share capital 11,00,000 Inventories :
Retained earnings 10,68,985 RM (12,800 * Rs. 3) 38,400
FG (2,400 * Rs. 35) 84,000
Fixed Assets :
Cost : 20,00,000
- Acc. Depr 4,70,000 15,30,000
22,42,900 22,42,900