UNIT – II

BUDGETARY
CONTROL
Meaning of Budgetary Control
Budgetary Control is the process which covers making of a business budget, comparison of the
actual performance with the budgeted one and detecting the errors and mistakes so that an
attempt may be made to rectify them in future. Budgetary control is the establishment of
departmental budgets relating to the responsibilities of the executives to the requirements of a
policy, and continuous comparison of the actual with the budgeted results either to secure by
an individual action objective of that policy or to provide a basis for its revision.
The main elements of budgetary control are as follows:

1. To prepare departmental budgets

2. To coordinate all departmental budgets so that all activities of the enterprise may be
integrated
3. To compare actual results with the budgeted estimates so that variances may be detected
and removed

Significance of Budgetary Control

Budgetary control is an important instrument of control with the management. It plays an
important role in the effective use of resources and achieving the overall organizational goals.
It helps management in the allocation of responsibility and authority and analysis of variances
between budgets and actual results so that corrective action may be taken. It helps them
evaluate the working of different departments and performance if employees as well. The
importance of budgetary control may be summarized as under:
1. Planning: Budget is a short tem plan of future activities. It involves making estimates
of future plans and actions and visualize the possible contingencies, hence it enhances
the efficiency of management.
2. Co-ordination: Co-ordination is established among different departments and
individuals through planning, policies and control. A comprehensive budget ensures
co-ordination and makes all departments ot co-operate in attaining the targets fixed by
the budget.
3. Control: The top management can exercise control over the various activities of the
business since each and every aspect of the business is reviewed. Budgeted targets are
evaluated against the actual performance. This reflects the degree of success in the
direction of targets and also facilitates the control by taking corrective actions in case
targets are not achieved.
4. Decentralization: Budget facilitates decentralization of business activity and
distribution of responsibilities among the different departmental heads. The business
unit gets divided into different departments. Each of these departments shoulders the
responsibility to prepare and implement the budget of its own. For this purpose,
authority and powers to do so are delegated to the heads of the departments.
5. Efficiency: Before the budget is prepared, all factors affecting the business operation
are studied in detail. As a result, the management can know in advance the possible
deficiencies on one hand and the scope of their removal on the other. This knowledge
enhances the efficiency of the business unit.
 6. Co-operation: The departmental heads and the employees interact with each other to
discuss the provisions of the budget. This helps them to understand each other in respect
of various problems faced. As a result, the scope of conflict is reduced and that of
mutual co=operation is increased.
7. Efficient Communication: It is necessary in an efficient organisation that all people
be informed about the objectives, policies, programmes and performances. They should
have clear understanding of the aims and objectives and the part that they are to play in
goal attainment. This is made p[possible through their participation in the budgeting
process. Budgets inform each manager of what others have agreed to do. They also
inform managers of the resources available to achieve the objectives and targets.
8. Efficient Use of Resources: It ensures effective and efficient usage or resources. All
employees work towards the attainment of the common goal/ objective. This leads to
optimum utilization of human and physical resources so as to achieve maximum profits.
9. Higher Output and Employee Productivity: Since all the employees participate in
framing the budgets, it encourages productive competition, provides inventive to
perform efficiently and gives a sense of purpose to each individual in the organisation.
All these positive factors lead to higher output and increase employee productivity.
10. Fosters attitude of cost consciousness: The use of budgeting in an organisation
develops an attitude of cost consciousness, stimulates the effective use of resources and
creates an environment of profit mindedness throughout the organisation. It emphasis
how much should be spent to achieve goal. The budgeting system does much to make
clear to lower levels in organisation the basic policies of top management and the
objectives of the firm.

Zero Base Budgeting (ZBB)

ZBB is a method of budgeting whereby all activities are revaluated each time a budget is
formulated and every item of expenditure in the budget is fully justified. That is, ZBB involves
starting from scratch or zero. Under this, number of alternatives of activities are identified and
evaluated in terms of benefits to be obtained.

Features of ZBB
1. Each separate activity of the organisation is identified and called a decision package.
2. Each decision package must be justified, i.e., it should be enquired into whether a
decision package promotes the goals of an enterprise
3. If justified, then the cost of minimum efforts needed to sustain each decision is
determined
4. Alternatives for each decision package are considered in order to select better and
cheaper options for the package
5. Managers rank their decision package in order of priority for resource allocation
6. Resources are allocated to the packages.
Advantages of ZBB
1. It facilitates more effective and efficient allocation of resources
2. It identifies and eliminates wastages, inefficient and loss making operations
 3. It ensures that the best possible methods of performing jobs are used and that new ideas
emerge
4. It creates a questioning attitude rather than one which accepts that current practices
represent value for money.
5. It leads to increased staff involvement which may lead to improved motivation and
greater interest in the job.
6. It increases communication and co-ordination within the organisation
7. Managers become more aware of the costs of inputs which helps them to identify
priorities.
8. The documentation of decision packages provides management with a deep coordinated
knowledge of all organization’s activities
9. It is useful specially for service departments where it can be difficult to identify output

Disadvantages of ZBB
1. The costs involved in preparing a vast number of decision packages in a large firm are
very high
2. It is very time consuming and a large amount of additional paper work is involved
3. Managers develop fear and feel threatened by ZBB and therefore may oppose new ideas
and changes
4. The ranking of decision packages and allocation of resources is subjective to a certain
degree which can result in departmental conflict.
5. Administration and communication of ZBB process may become critical problems
because more managers are involved in this process than in most budgeting and
planning procedures and these problems are further compounded in large organisations.
 Functional Budgets
Sum: 1
ABC Ltd. sells two products J & K in four areas, East, West, North and South. The following sales are budgeted
for the month of Jan. 2015
North = Product J = 5,000 units at Rs. 30 each
Product K= 3,000 units at Rs. 15 each
South = Product K= 6,000 units at Rs. 15 each
East = Product J = 7,500units at Rs. 30
West = Product J = 4,000 units at Rs. 30 each
Product K = 2,500 units at Rs. 15 each
The actual sales for the same period is as follows
North = Product J = 5750 units at Rs.30 each
Product K = 3,500 units at Rs. 15 each
South = Product K = 6,250 units at Rs. 15 each
East = Product J = 8250 units at Rs. 30 each
West = Product J = 4750 units at Rs. 30 each
Product K = 2625 units at Rs. 15 each
On the basis of relevant factors following sales are budgeted for Feb. 2015
North = Product J = 6000 units at Rs. 30 each
Product K = 3250 units at Rs. 15 each
South = Product K = 6500 units at Rs. 15 each
East = Product J = 8500 units at Rs. 30 each
West = Product J = 4500 units at Rs. 30 each
Product K = 2750 units at Rs. 15 each
It was decided that additional advertising campaign will be undertaken in South and East which will result in
additional sales of 1500 units of Product J in South and 2500 units of Product K in East.
You are required to prepare sales budget for Feb. 2005 for presentation to management also
showing the budgeted and actual sales of Jan.
Sum 2

A company manufactures watches and calculators. The company engages two market channels – Direct and
Indirect to sell its products. The following is available to the budget committee in respect of company’s sale.
The budgeted sales for the current period:

Channel Watches Calculators

Direct 3000 at Rs. 500 each 2500 at Rs. 150 each

Indirect 2600 at Rs. 500 each 1800 at Rs. 150 ach

The actual sales for the current period:

Channel Watches Calculators

Direct 2800 at Rs. 500 each 2700 at Rs. 150 each

Indirect 3000 at Rs. 500 each 2000 at Rs. 150 each

The marketing research department of the company submits the following recommendations for the
preparation of the sales budget for the next year

1. The current budgeted sales of watches will increase by 5% if price is reduced by 2%.
2. The current budgeted sales of calculators will increase by 2% and 4% in direct and indirect channels
respectively with the help of sales promotion.
3. There will be 5% increase in current budgeted sales of watches only in case of direct channel if 5
more outlets are opened.
4. An increase of 2% in dealers’ discount is expected to increase sales of indirect channel by 4%.
The management has accepted all above recommendations. You are required to prepare Sales budget.
Sum 3

A company wants to prepare its production budget. It manufactures three products A, B and C. The sales budget
for all the three products discloses sales of 83,200, 72,840 and 88,400 units respectively. The details of opening
and closing stock for the year for all the three products are as follows:

Product A B C
 1-04-2017 16000 12000 20000

31-3-2018 20800 11160 27600

From the above information prepare production budget for the year 2017-18

A company produces two products –A and B. The raw material l requirement for both the products is
as under :
Product A requires 2units of Material X and 1 units of Material Y
Product B requires 4 units of Material X and 2 units of Material Y
The estimated production of products – A - 10000 units
B - 4000 units
Material X Material Y

Opening Stock 12000 units 2000 units

Estimated Closing Stock 16000 units 4000 units

Prepare Material requirement budget

Sum 4

The sales director of a manufacturing company reports that next year he expects to sell 54, 000 units of a certain
product. The production manager consults the store keeper and gives the following figures: Two kinds of raw
material A and B are required for manufacturing the product. Each unit of product requires 2 units of A and 3
units of B. The estimated opening balances are:
Finished product = 10,000 units
Raw material A = 12,000 units
Raw material B = 15,000 units
The desired closing balances at the end of next year are:
Finished product = 14,000 units
Raw material A = 13,000 units
Raw material B = 16,000 units
Prepare the production budget and raw materials purchase budget for the next year.
Sum 5

The following are the estimated sales for a company for eight months ending 30th November:
Months Estimated sales (in units)

April 12,000

May 13,000

June 9000

July 8000

August 10,000

September 12,000

October 14,000

November 12,000

As a matter of policy, the company maintains the closing balance of finished goods and raw material as
follows:
Finished goods – 50% of the estimated sales for the next month
Raw material – Estimated consumption for the next month
Every unit of production requires 2 kg of raw material costing Rs.5/kg. Prepare production budget (in units)
and raw material’s purchase budget (in units and cost) for the half year ending 30th September.
(Production Cost Budget)
Sum 6

The following information is available from the records of a company for six months of the year 2017.and sales
of Jan 2018 in respect of product X

1. No of units to be sold in different months :

Month July August Sep. October Nov. Dec. Jan

Units 1100 1100 1700 1900 2500 2300 2000

2. There will be no work-in-progress at the end of each month.

3. Finished goods equal to half of the sales of next month will in stock at the end of every month including
June 2017.

4. Budgeted production and production cost for the year ending on 31-12-2007 are :
 Production 22000 units

Direct Material Rs. 10 per unit

Direct labour Rs. 4 per unit

Total fixed overheads apportioned to production Rs. 88000.

Prepare production budget for 6 months and also production cost budget.

Sum 7

PQR Ltd. Manufactures products X and Y. Prepare production budget and materials budget from the
information given below:

The sales forecast for products X and Y are

Budgeted Period Product X Product Y

Quarter- 1 12000 20000

Quarter-2 10000 23000

Quarter-3 13000 10000

Quarter-4 15000 12000

Total 50000 65000

1. The production department submitted the following details of raw materials and its estimated cost

A) Product X requires 2 unit and 3 units of material A and B respectively.

B) Product Y requires 3 units and 1 unit of material A and B respectively.

C) The estimated cost of material A and B is Rs. 6 per unit and Rs. 3 per unit respectively.

D) The desirable balance of stock at the commencement of the quarter are:

 Finished Goods

Quarter Opening Balance Closing Balance

X Y X Y
1 2000 1200 1300 2200
2 1100 1800 1500 1700
3 3200 2200 1000 2000
4 1800 1700 800 1400

Raw materials:

Quarter Opening Balance Closing Balance

A B A B
1 6000 12000 5000 3000
2 5400 8000 7000 6000
3 7000 11000 6500 5000
4 3500 7000 4000 4000

Sum 8

The production cost of a factory for the year is as follows:

Direct Labour Rs. 1, 00,000
Direct Material Rs. 1, 50,000
Production Overhead: Fixed Rs. 50,000
Variable Rs. 80,000
Total Rs. 3, 80,000
The production manager anticipate following changes in the coming year
1. Average rate of direct labour will fall from Rs. 1.25 to Re. 1 per labour hour.
2. Production efficiency will decrease by 10 %.
3. Direct labour hours will increase by 40 %
4. The purchase price per unit of direct materials and other services including overheads will remain
unchanged.
Prepare a production cost budget.
 Sums of Flexible Budget

Sum: 1 With the following data for 60 per cent activity, prepare flexible budget and find out the unit cost
of the product under each individual expense and total cost for production at 80 per cent and 100
per cent capacity.
Production at 60 per cent activity, 600 units
Material per unit Rs. 100
Labour per unit Rs. 40
Variable expenses per unit Rs. 10
Factory expenses Rs. 40,000 (40% fixed)
Administration expenses Rs. 30,000 (60% fixed)
Sum: 2 The expenses budgeted for production of 1,000 units in a factory is furnished below:
Particulars Per unit (Rs.)
Material cost 700
Labour cost 250
Variable overheads 200
Selling expenses (20% fixed) 130
Administrative expenses (Rs. 2,00,000) 200
Total cost 1,480
Prepare flexible budget for production of 600 units and 800 units assuming administrative
expenses are rigid (fixed) for all level of production. Calculate total cost and unit cost of the
product under each individual expense
Sum: 3 ABC Ltd. has prepared a budget for the production of 50,000 units of the only commodity
manufactured by them for the year 2018.
Particulars Per unit (Rs.)
Raw material 2.52
Direct labour 0.75
Direct expenses 0.10
Works overheads (60% fixed) 2.50
Adm. overheads (80% fixed) 0.40
Selling overheads (50% fixed) 0.20
The actual production during the period was only 60,000 units. Prepare flexible budget for 60,000
units. Calculate total cost and cost per unit.
Sum: 4 A company produces wrist watches. During the year 2018, its production was 5,000 units. The
details regarding cost are given below:
Particulars Rs.
Direct materials 2,50,000 (100% Variable)
Direct labour 2,00,000 (100% Variable)
Power and fuel 15,000 (75% Variable)
Repair and maintenance 25,000 (80% Variable)
Quality control expenses 20,000 (25% Variable)
Depreciation 1,00,000 (100% Fixed)
Administrative expenses 80,000 (25% Variable)
Selling and distribution expenses 60,000 (50% Variable)
Total Cost 7,50,000
Selling price per unit is Rs. 200.
 Prepare flexible budget showing the total cost, cost per unit and total profit and profit per unit if
production is expected:
(1) 4,000 units
(2) 6,000 units
The selling price is expected to remain unchanged.
Sum: 5 Prepare a flexible budget at 60%, 80% and 100% production capacity from the following
information. The Indian Plastics Limited for the three months ended on 31st March, 2018:
Fixed Expenses: Rs.
Office Salaries 42,000
Rent and Taxes 28,000
Depreciation on Machinery 35,000
Sunday Office Expenses 44,500
1,49,500
Semi-variable Expenses at 50% Capacity:
Plant Maintenance 12,500
Indirect Labour 49,500
Salesmen’s salaries and expenses 14,500
Sundry Expenses 13,000
89,500

Variable Expenses at 50% Capacity:

Materials 1,20,000
Labour 1,28,000
Salesmen’s Commission 19,000
2,67,000
Semi-variable expenses remain constant between 40% and 70% capacity, increased by 10% of
the above figures between 70% and 85% capacity and increase by 15% of the above figures
between 85% and 100% capacity. Fixed expenses remain constant whatever the level of activity.
Sales at 60% capacity are Rs.5,10,000, at 80% capacity Rs. 6,80,000 and at 100% capacity Rs.
8,50,000. It is to be assured that all items produced are sold.

Sum: 6 The figure of production of a company for six months ended 30th June, 2018 is as follows:
Fixed Expenses: Rs.
Wages and Salaries 8,40,000
Rent, rates and taxes 5,60,000
Depreciation 7,00,000
Adm. expenses 8,90,000
29,90,000
Semi-Variable Expenses (at 50% capacity):
Repairs and maintenance 2,50,000
Indirect labour 9,90,000
Sales office salaries 2,90,000
Adm. expenses 2,60,000
17,90,000
Variable Expenses (at 50% capacity):
Material 24,00,000
Labour 25,60,000
Other expenses 3,80,000
 53,40,000
It can be assumed that fixed expenses remain constant whatever the level of activity. Semi-
variable expenses remain constant between 45% and 65% capacity. Increase by 10% of the above
figures between 65% and 80% capacity and increase by 20% between 80% and 100% capacity.
Sales at various level of activity are:
At 60% Rs. 1 crore
At 75% Rs. 1.20 crore
At 90% Rs. 1.50 crore
At 100% Rs. 1.70 crore
Prepare a flexible budget for the period and give an estimate of profit.
Sum: 7 From the following data, prepare flexible budget for 60%, 75% and 100% activity level, when
sales are Rs. 2.40 lakhs, Rs. 3.00 lakhs and Rs. 4.00 lakhs respectively. Fixed expenses remain
constant up to 100% level, while semi-variable expenses vary by 10% in amount between 70% to
80% activity and by 20% between 80% and 100%.
The expenses and sales at 50% activity are as follows:
(A) Variable Expenses: Material Rs. 50,000
Labour Rs. 40,000
Other expenses Rs. 10,000
Rs. 1,00,000
(B) Semi-Variable Expenses: Repairs and Maintenance Rs. 10,000
Indirect labour Rs. 25,000
Selling expenses Rs. 12,000
Other Rs. 8,000
Rs. 55,000
(C) Fixed Expenses: Wages and Salaries Rs. 30,000
Rent, rates and taxes Rs. 5,000
Depreciation Rs. 10,000
Sundry expenses Rs. 5,000
Rs. 50,000
(D) Sales: 2,00,000
Calculate total cost and profit or loss at each level of activity.
Sum: 8 The following particulars are available from the records of a manufacturing company for
levels of activity.
Level of Activity 60% 100%
Rs. Rs.
Cost of direct material 9,000 15,000
Direct wages 6,000 10,000
Indirect wages 3,000 5,000
Repairs & Maintenance 6,500 9,500
Power & Fuel 3,750 5,750
Rent 12,000 12,000
Depreciation 10,000 10,000
Insurance 6,000 6,000
Administrative overheads 10,000 14,000
Selling overheads 6,000 8,000
 Total production at 100% capacity is 5,000 units. Prepare a Flexible Budget at 70% and 90%
capacity.
Sum: 9 A factory is producing product “X”. Its installed production capacity 40,000 units per annum.
Estimate cost of production at 40% and 60% of installed capacity as follows:
Particulars 40% 60%
Rs. Rs.
Materials 2,00,000 3,00,000
Wages 1,20,000 1,80,000
Direct expenses 80,000 1,20,000
Factory overheads 3,50,000 4,00,000
Administrative overheads 2,50,000 2,90,000
Selling expenses 1,40,000 1,60,000
Total Cost 11,50,000 14,50,000
Profit or loss (1,10,000) (1,10,000)
Prepare a flexible budget at 50%, 75% and 90% of its production capacity.