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Budgetary Control, Mar Cost c0st St,Res Ac
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Transcript of Budgetary Control, Mar Cost c0st St,Res Ac
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BUDGETARY CONTROL Meaning: Budgetary control is a system of planning and
controlling costs. It is a process of continuous comparision of
actual performances and costs with that of budgets.
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Budgetary control is applied to a system of management and
accounting control by which all operations and output are
forecasted as far ahead as possible and actual results when
known are compared with budget estimates.
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ICMA, London defines budgetary control as the establishment
of budgets relating to responsibilities of e!ecuti"es to the
re#uirement of a policy and continuous comparison of actualwith budgeted results either to secure by indi"idual action the
ob$ecti"es of that policy or to pro"ide a basis for its re"ision%.
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Features of Budgetary control
&.'stablishment of budgets for each function and section of the
organi(ation.
).*i!ing the responsibility of e!ecuti"es in order to perform thespecific tasks so that ob$ecti"es of enterprise may be attained.
+.Continuous comparison of the actual performance with that of
the budget so as to know the "ariations from the budget.
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.-aking suitable remedial action to achie"e the desired ob$ecti"e
if there is a "ariation of the actual performance from the
budgeted performance.. /e"ision of budgets in the light of changed circumstance.
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0roblem &
1ou are re#uired to prepare sales budget for the #uarter ending +2th3eptember
)2&2. Ashok Ltd produces and sells three products, "i(, A,B and C in two
(ones called 4& and 4).
-he estimated sales for the #uarter ending +2 3eptember )2&2 shown that
&. *orecast shows that the sales of product A will go up by &25 in 4one 4)
). in 4one 4& ,the sales of product C will be increased by 22 units
+.-he sales of product B will be increased by )25 in both the (ones.
.-he prices of product A and C will be maintained. In case of product B, /e.&
will be reduced as per the forecast.
Below gi"en are the actual sales for the #uarter ending +2 6une )2&2.!roduct !rice "er unit #one #$ #one #%
&units' &units7
A /s.&2 222 222
B /s.& 222 8222
C /s.)2 +222 222
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3ales budget
4one 4& 4one 4) -otal0roducts
9uantity /ate Amount 9uantity /ate Amount
units /s. /s. nits /s. /s.
A 222 &2 2222 22 &2 222 ;222
222&7
B ?22 & 8@)22 @)22 & &22?22 &8?222 222&7 8222&7
=Ad$>+7 =Ad$>7 =Ad$>+7 =Ad$>7
C +22 )2 @2222 222 )2 &22222 &@2222
=+222)7
-otal &?@)22 )?22 432000
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*le!ible budget 0articulars nits -otal
/s.
0er unit
/s.
Material cost
Labour cost
irect e!penses
0/IM' C3-
Add Factory e("enses *i!ed
ariable
*actory cost
Add Ad)inistrati*e e("enses
*i!ed
ariable
Fle(i+le "roduction cost
DDDDDDDDD
DDDDDDDDDD
DDDDDDDDDD
DDDDDDDDDD
DDDDDDDDDD
DDDDDDDDDD
DDDDDDDDD
DDDDDDDDD
DDDDDDDDD
DDDDDDDDDD
DDDDDDDDD
DDDDDDDDDD
DDDDDDDDDD
DDDDDDDDD
DDDDDDDDD
DDDDDDDDD
DDDDDDDDDD
DDDDDDDDD
DDDDDDDDDD
DDDDDDDDDD
DDDDDDDDD
DDDDDDDDD
DDDDDDDDDD
DDDDDDDDD
DDDDDDDD
DDDDDDDD
DDDDDDDD
DDDDDDD
DDDDDDD
DDDDDDD
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Eith the following data for 825 acti"ity, prepare a budget for
production at ?25 capacity
0roduction at 825 acti"ity 822 units
irect e!penses /s.&2 per unit
Material cost /s. &22 per unit
*actory e!penses /s.2222=25 fi!ed7Labour cost /s.2 per unit
Administrati"e e!penses /s.+2222=825 fi!ed7
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,-. / ,-- units
0-. / 0-- units
Factory e("enses
*i!ed F 25 of 2222 F &8222= at 825 and ?25 capacity ie.,at 822 and?22units capacity7
ariable F 825 of 2222 F )222= at 825 ie., at 822 units capacity7
At ?25 ie., ?22 units capacity F for 822 units >G )222 "ariable e!penses
for ?22 units >G H =+)2227
ote: Informations are gi"en at 825 capacity for fi!ed and "ariable e!penses*i!ed e!penses are fi!ed at both the le"els. But "ariable e!penses are"ariable
Ad)inistrati*e e("enses
Fi(ed ,-.of 1---- / $0---2aria+le /3-. of 1---- /$%---&at ,-. ca"acity'
At 0-. ca"acity / for ,-- units 45 $%--- *aria+le e("enses
for 0-- units 45 6 &$,---'
Total a)ount in ru"ees 7 Nu)+er of units / 4444 Rs8 "er unit
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*le!ible budget for production at ?25 capacity
0articulars nits -otal /s.
0er unit
/s.
Material cost
Labour cost
irect e!penses
0/IM' C3-
Add Factory e("enses *i!ed &8222
ariable +)222
*actory cost
Add Ad)inistrati*e e("enses
*i!ed &?222
ariable &8222
Fle(i+le "roduction cost
?22
?22
?22
?22
?22
?22
?22
?22
?2222
+)222
?222
&)2222
?222
&8?222
+222
)2)222
&22.22
2.22
&2.22
&2.22
82.22
)&2.22
).2
)).2
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Master budget
It is a consolidated summary of "arious functional budgets. It is
also called finali(ed profit and loss account. -his budget
summari(es functional budgets to produce a budgeted profit andloss account
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Master budget0articulars Amount Amount
Budgeted 3ales
Less cost of "roduction:
irect material cost JJ..
irect wages JJ..
Less Factory o*er9eads:
2aria+le factory o*er9eads:
stores and spares JJJ light and power JJJ
repairs and maintenance JJJ
Fi(ed factory o*er9eads
work managerKs salary JJJ
foremanKs salary JJ..
depreciation JJ.. sundries JJ..
Less ad)inistration: selling and distri+ution o*er9eads
Budgeted Net "rofit
JJJ
JJJ.
JJJ.
JJJJ.
JJJ..
JJJJ..
JJJJ
0 bl &
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0roblem o.&
A glass manufacturing company re#uires you to calculate and present the budget for thene!t year from the following information:
a7 3ales /s. ?22222
b7 irect material cost 825 of salesc7 irect wages )2 workers at /s.&2 per month
d' Factory o*er9eads
2aria+le:
3tores and spares ).5 on sales
Light and power /s.222
/epairs and maintenance ?222
Fi(ed:
Eorks managerKs salary /s.22 per month
*oremanKs salary /s.22 per month
epreciation on machinery /s.&)8223undries&25 on direct wages
Administration, selling and distribution e!penses /s.&222 per year
!re"are a )aster +udget
M b d
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Master budget0articulars Amount Amount
3ales
Less cost of "roduction:
irect material cost =825 of sales /s?,22,2227 ?2222
irect wages=)2 workers!/s.&2!&) months7 +8222
Less Factory o*er9eads:
2aria+le factory o*er9eads:
stores and spares=).5 on sales7 )2222
light and power 222
repairs and maintenance ?222 11---
Fi(ed factory o*er9eads
work managerKs salary=/s22!&)months7 8222
foremanKs salary=/s22!&)months7 ?22
depreciation &)822
sundries=&25of direct wages +82227 +822 %;---
?22222
&8222
)?222
82222
)&222
&222
)22222
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-he de"iation of the actual cost or profit or sales from the standard cost or profit
or sales is known *ariance. Ehen actual cost is less than standard cost oractual profit is better than standard profit, it is known as fa"ourable "ariance
and such a "ariance is usually a sign of efficiency of the organi(ation.
0 bl &
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0roblem o.&
-he standard material re#uired to manufacture one unit of product is &2 kg.
and the standard price per kg. of material is ).2. -he cost accounts records,
howe"er, re"eal that &&22 kg. of material costing /s.)@822 were used for
manufacturing &222 units of product . calculate :a7 Material cost "ariance
b7 Material price "ariance
c7 Material usage "ariance
3t d d i f t i l k / ) 2
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3tandard price of material per kg. F /s.).2
3tandard usage per unit of product F &2 kg.
-herefore standard usage for an output of &222 units of product F
&222 units ! &2kg F &2222 kg.
Actual usage of material F &&22 kg.Actual cost of materials F /s.)@822
Actual price of material per kg. FActual cost of materials
Actual usage of materials
F /s.)@822
&&22kg
F /s.).2 per kg
l
a' Material cost *ariance:
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a' Material cost*ariance:
F standard cost of materials actual cost of materials used OR
=3tandard usage or #uantity ! standard rate or unit price7 =actual usage !actual rate7
F&2222 kg.!/s.).2 &&22 kg. ! /s.).2F /s.)222 /s.)@822
F /s.)822 ad"erse or unfa"ourable
+' Material "rice*ariance: F actual usage =standard unit price actual unit price7
F &&22 kg.=/s.).2 /s.).27
F /s.&&2 fa"ourable
ote: In case of cost and price, if actual cost and price is less than standard,the situation will be fa"ourable
c7 Material usage or #uantity "ariance:
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c7 Material usage or #uantity"ariance:
F standard unit price =standard usage > actual usage7
F /s. ).2=&2222 kg. &&22 kg.7
F /s.+@2 ad"erse
ote: In case of #uantity, if actual usage is more, the situation is ad"erse orunfa"ourable
0roblem o )
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0roblem o.)
*rom the following particulars calculate:
a7 Material cost "ariance
b7 Material price "ariance
c7 Material usage "ariance
Materials standard cost -otal Actual cost -otal
nits price = /s.7 nits 0rice = /s.7
A &2&2 &.2 &2&2 &2?2 &.) &);8
B &2 &. 8& +?2 &.? 8?
C +2 ).2 @22 +?2 &.; @))
)+) )@2)
a' Material cost *ariance:
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a' Material cost *ariance:
F standard cost of materials actual cost of materials usedOR
=3tandard usage or #uantity standard rate or unit price7
=actual usage ! actual /ate7
/s.)+) /s.)@2)
F /s.+@@ad"erse or unfa"ourable
+' Material "rice *ariance:
F actual usage =standard unit price actual unit price7
Material A F &2?2 units=/e.& /s.&.)27 F /s.)&8 ad"erseN
Material B F +?2 units=/s.&. /s.&.?27 F /s.&& ad"erseN
Material C F +?2 units=/s.).2 /s.&.;27 F /s. +? *a"ourable
-otal material price "ariance F /s.);) ad"erse=++2ad"erse +? fa"ourable7
c7 Material usage or #uantity "ariance:
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c7 Material usage or #uantity "ariance:
F standard unit price =standard usage > actual usage7
Material A: /e.&=&2&2 units &2?2 units7 F /s.@2 ad"erseN
B: /s.&.=&2 units +?2 units7 F /s. fa"ourableN
C: /s.) =+2 units +?2 units7 F /s.82 ad"erse -otal material usage "ariance F /s.? ad"erse=&+2 ad"erse
fa"ourable7
Ad*antages of Marginal costing:
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Ad*antages of Marginal costing:
$8Fi(ation of "rices: Marginal costing pro"ides information for fi!ation ofprices.
%8Cost control: Marginal costing pro"ides information about fi!ed costs and"ariable costs separately. Cost informations are reported periodically andregularly to the management for decision making and controlling the costs.
18Ma=e or +uy decision: -his decision can be taken by comparing thepurchase price with the marginal cost of producing it. If the marginal cost isless than the purchase price the component may be manufactured utilisingthe e!isting capacity.
38!rofit "lanning: It is easy to plan the future operations to earn ma!imumprofit through break e"en analysis techni#ue.
>8Utili?ation of scarce resources: -he best utili(ation of scarce resourcessuch as raw materials, labour etc is guided by marginal costing techni#ue.
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Res"onsi+ility Accounting
/esponsibility of each manager of department to the management
regarding cost control, performance etc./esponsibility accounting is appropriate where top management has
delegated authority to make decisions. -he idea behind responsibility
accounting is that each managerOs performance should be $udged by
how well he or she manages those items under his or her control.
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P /esponsibility accounting is a system of di"iding an organi(ation
into similar units, each of which is to be assigned particular
responsibilities. -hese units may be in the form of di"isions,
segments, departments, branches, product lines and so on. 'ach
department is comprised of indi"iduals who are responsible for
particular tasks or managerial functions. -he managers of "ariousdepartments should ensure that the people in their department are
doing well to achie"e the goal. /esponsibility accounting refers to
the "arious concepts and tools used by managerial accountants to
measure the performance of people and departments in order to
ensure that the achie"ement of the goals set by the topmanagement.
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P /esponsibility accounting, therefore, represents a method of
measuring the performances of "arious di"isions of an organi(ation.
-he test to identify the di"ision is that the operating performance is
separately identifiable and measurable in some way that is of
practical significance to the management. /esponsibility accounting
collects and reports planned and actual accounting informationabout the inputs and outputs of responsibility centers.
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Transfer !ricing
-he pricethat is assumed to ha"e been chargedby one part of a
company for products and ser"ices it pro"ides to another part of the
same company, in order to calculate each di"isionOs profit and loss
separately.
In todayOs international market, a large share of world trade consists
transfer of goods, intangibles and ser"ices within multinational
enterprises =M's7 > associated companies with business
establishments in ) or more countries. -o determine the internationalta! liability in each $urisdiction, the right transfer pricing principle has to
be applied.
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