TY BAF SEMESTER-VI

1- BUDGETING AND BUDGETARY CONTROL

Budget
Definition
CIMA has defined Budget as - “A Financial and /or quantitative statement, Prepared and approved
prior to a defined period of time, of the policy to be pursued during that period for the purpose of
attaining a given objective. It may include income, expenditure and the employment of capital”.
Types of Budgets Types of Budgets
↓ ↓

Coverage Capacity Condition

1) Functional 1) Fixed 1) Basic
2) Master 2) Flexible 2) Current
Fixed Budget V/s Flexible Budget
Fixed Budget Flexible Budget
1. It is designed to remain unchanged irrespective It is designed to change in relation to the level
of level of capacity or volume. of activity attained, by recognising the difference
between fixed, semi fixed and variable costs.
2. It is inflexible or rigid and cannot be adjusted to It is not rigid. It can be recast on the basis of volume
actual volume of activity. of activity.
3. All costs are related to one level of activity only Costs are analysed by behaviour and variable costs
are allowed to be adjusted as per activity level
attained.
4. Cost ascertainment, price fixation etc. do not give a If facilitates ascertainment of cost, price fixation,
correct picture if the actual and the budgeted level tendering quotations, etc. at different level of
of activity differ. activity
5. Comparison of the actual performance with It provides a meaningful basis for comparison
budgeted targets will not be meaningful if there of the actual performance with the budgeted
has been change in the activity level targets.
Budgetary Control
CIMA has defined Budgetary Control as “the establishment of budgets relating the responsibilities
of executive to the requirements of a policy and the continuous comparison of actual with budgeted
results, either to secure by individual action the objective of that policy or to provide a basis for his
revision”.
Budgetary control is a system of planning and controlling costs. The purpose of budgetary control is
planning, co-ordination and control budgetary control is a technique of cost control.
Steps in Budgetary Control System (April 2017)
1. Organisational Objectives : Budget is a source of information about organisational objective and
policies. it is a technique of achievement of organisational objective.
2. Determination of Key Factors : Performance of any organisation is subject to certain critical
success factors. Such factors limit the volume of output .
3. Determination of Organisational chart: An organisationl chart showing the lines of authority
and responsibility of managers should be decided.
4. Establishment of Budget Centres: The entire organisations is divided into different segments
which are called as budget centres.
5. Determination of Budget Period : Budget period is a period for which budgets are prepared . It
may be decided as per the policies of the organisation.
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6. Establishment of Budget Committee: A Budget Committee Consisting of functional heads is
formed for the purpose of preparation of budgets. A budget Committee is necessary for effective co-
ordination and review of the budget programme.
7. Appointment of Budget Controller: A Budget controller is appointed for the purpose of
administration and co-ordination of different departmental budgets.
8. Preparation of Budget Manual : Budget Manual is the documentation of policies and
procedures, involved in implementation of budgetary control.
9. Preparation of Budgets
Objectives of Setting A Budget (Oct. 2000,April 2003)
1. Goal Setting: A budget is set in order to achieve the desired goal within limited time period.
2. Planning : A budget helps to plan for the overall organisation.
3. Wastage : A budget helps in cutting lown the unwanted activities, reducing the idle time of
machines, labourers and thus reduce wastage which thereby helps in profit improvement.
4. Co- ordination : A budget brining in more co- ordination amongst the people and department to
achieve their overall goals.
5. Efficiency : A budget helps to elevate an organisation from a lower level to its higher level of
performance and there by achieve more efficiency in its day - to day workings.
6. Communication: A budget communicates the goals of the organisation as set by the top level
management.
Advantages of Budgets and Budget ary Control (Oct. 2005, April 2015)
1. Budgetary control aims at maximization of profits through effective utilization of resources.
2. It provides information about the objectives and policies of the organisation.
3. It results into co-ordination and co-operation between the various members of the organization in
their activities.
4. It reveals the weak points and deficiencies and helps management in taking corrective action.
5. It provides an incentive to executives when the standards are set at reasonable level .
6. It ensures availability of working capital whenever it is required.
7. It develops the habit of thinking and analysis among the executives.
8. It acts as a powerful tool of accounting responsibility.
9. It provides a basis for internal check.
10. It helps management in establishing effective systems of incentives for good performance.
11. It facilitates bank credit.
12. It facilitates effective delegation of authority.
13. It creates cost consciousness among the executives.
Disadvantages of Budgetary Control (April 2017)
1. Sticks only to budgeted figures: Employees at times stick only to numerical budgeted figures and
do not perform more even if situation permits them to achieve more higher targets.
2. Problems of Over-targetting or undertargetting: There are problem of over-targetting and under
targetting in budgeting.
3. Ignores the human aspects: A budget at times sticks only to the numerical figures and it does not
consider the human aspects.
4. Rigid : A budget if unadjustable to the situation serves no purpose.
5. Unwanted Spending : At times organisations would spend more even if it not required because if
they don’t do so their next years budget allocations would be cut down.
6. Lack of Budget education and motivation: Lack of education by the staff and lack of motivation
to achieve the targets would result in failure in achieving the budgeted targets.

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7. Non- Participatory approach: An organization adopting a non-Participatory approach and not
involving lower level staff in the process of preparation of the budget would fail in its
implementation process.
Budget Manual (April 2019)
Budget manual is a document which contains a detailed procedure about the operation of a
budgetary control system in an organisation It contains routine forms and documents to be used and
responsibilities of various person for the preparation and implementation of budgets It indicates the
dates by which necessary data, information, budgets and reports are to be prepared and supplied. All
of the above stated facts and forms constitute the contents of a budget manual. The budget manual
serves as a rule book for the implementation of a budget programme in an organisation . A
Budgetary control system will operate smoothly only if there is a written document which sets out-
(i) the responsibilites of the person engaged in Budgetary Control, (2) the routine of Budgetary
Control, and (3) the forms and records required for Budgetary Control. A Budget Manual may
contain the following items-
1. Objective of Budgetary Control,
2. Principles of Budgetary Control,
3. Definitions of terms used in Budget Manual,
4. Types of Budget to be prepared e.g. Basic, Current etc.
5. Organisation Chart,
6. Budget Centres,
7. Budget Period,
8. Budget Key Factor,
9. Responsibility, duties, authority of each functional manager, and of the Budget Committee.
10. Routine to be followed, i.e. procedure for formulation, revisions, approval, comparison and follow
up of Budget
Master Budget (April 2016, April 2018)
Master budget is also known as summary budget or finalised profit plan. It combines all the budgets
for a period into one unit and thus, it shows the overall budget plan . Master Budget is the basis for
preparation of the Budgeted Profit and Loss Account and the Budgeted Balance Sheet.
The master budget is the primary financial planning mechanism for an organization and also
provides the foundation for a traditional financial control system.
Aspects
1. Organisational Structure : All revenues and expenditures must be attributed to the budget centre
and managers responsible for them.
2. Product or Programmes: In this aspect, the budget information is organised to show the revenue,
costs, Contributions, Profit and level of Production/Sales activity for each product or programme
produced by the organisation.
Assumptions
The following simplifying assumption are made when preparing a master budget:
1. Sale prices are constant during the budget period.
2. Variable cost per unit of output are constant during the budget period.
3. Fixed costs are constant in total and
4. Sales mix is Constant when the Company sells more than one product.
Purposes and Benefits
1. Integrates and Co- ordinates
2. Communicates and Motivates
3. Promotes Continuous Improvement
4. Guides Performance
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EXHIBIT 1: Flexible Budgets
Capacity(%)
Units
Per Unit ₹ Per Unit ₹ Per Unit ₹
A) Sales
B) Variable Costs
1. Direct Materials
2. Direct Labour
3. Direct Expenses
4. Variable Overheads
Total Variable Cost (1+4)
C) Contribution (A-B)
D) Fixed Costs
E) Special Costs
F) Total Cost (B+D+E)
G) Profit (A - F)

EXHIBIT 2: Semi - Variable (sv) Costs

Elements of Cost Material Labour Overheads
A) Units (Period 2)
B) Units (Period 1)
C) Differential Units (A-B)
D) Expenses (Period 2)
E) Expenses (Period1)
F) Differential Expenses (D-E)
G)Variable Portion Per Units (F C)¸
H) Variable Portion (Period1) (B X G)
I) Fixed Portion (E-H)
J) Type of Cost (V/F/SV)
EXHIBIT 3: Sales Budget
ABC Co. Ltd.
Sales Budget (For the Period Ending)
[Product - wise]
Month /Details Product A Product B
Quantity Value Quantity Value
Jan
Dec

EXHIBIT 4: Production Volume Budget

ABC Co. Ltd.

Production Volume Budget (For the Period Ending ...)

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Item /Month J F M A M J J A S O N D
Product A:
1. Unit required for Sale
2. Add: Cl. Stock of Finished Goods (Units)
3. Total Required (Units) [1+2]
4. Less: Opening Stock of Finished Goods (Units)
5. Production Units to be Completed (3-4)
6. Add: Equivalent Units in Closing W.I.P
7. Less : Equivalent Units in Opening W.I.P.
8. Total Equivalent Units to be Completed (5+6-7)
EXHIBIT 5: Purchase Budget
ABC Co. Ltd.
Purchase Budget (For the Period Ending)
Products A B Total
Direct Materials (kg)
a) Direct Material Usage
b) Budgeted Closing Direct Materials Inventory
c) Total Requirement [ (a) + (b)]
d) Opening Direct Materials Inventory
e) Purchase of Direct Materials [(c) - (d)]
f) Cost Per kg (₹)
g) Cost of Purchases (₹) [(e) x (f)]

EXHIBIT 6: Labour Budget

ABC Co. Ltd.
Labour (Direct ) Budget (for the period ending )
Products A B Total
a) Budgeted Production Requirement (Units)
b) Direct Labour Hours per units
c) Total Direct Labour Hours [(a) x (b)
d) Direct Labour Cost Per Hour (₹)
e) Total Director Labour Cost (₹) [(cc) x (d)]

EXHIBIT 7: Production Cost Budget

Particular
A) Budgeted Sales (₹)
B) Budgeted Sales (Units) (A/selling price)
C) Closing Stock (Units)
D) Opening Stock (Units )
E) Production (Units) [B+C-D]
F) Material 1

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 2. Payment to Suppliers
3. B/P Payment
4. Expenses and Taxes
5. Payment of Dividend
6. Interest on Loans
7. Purchase of Fixed Assets
8. Re- Payment of Loans
Total Payments (C)
Closing Cash Balance
[(A) + (B)- (C)]

Zero Based Budgeting (April 17,18,19)

It is a technique which was originally devised to help the management in the difficult task of
allocating the resources more efficiently between the projects and cost items in the “Support
Area”.(The Support areas include production, Planning, repairs and maintenance, research and
development, engineering design, data processing, quality control, finance, marketing etc.)
Merits
1. It provides a basis for evaluating decision package on the basis of cost benefit consideration.
2. It reduces inefficiency and achieves high level of effectiveness.
3. In Government sector, it is helpful in identifying and improving the services.
4. It can be applied to cost reduction programmes.
5. It ensures thorough examination of every function of activity.
6. It integrate planning, budgeting and control into a single process.
7. It examines all the activities (whether old or new ) for the purpose of funding.
8. It gives thrust to Management By Objective”(MBO) approach.
9. It is a top - to - bottom - to top approach
10. It improves “Management Information System”(MIS)Significantly.
11. It helps to develop human skill and inter personal relationship.
Demerits
1. It involves extra paper work created by the decision packages. The assumptions about the costs and
benefits in each package must be continuously updated and new packages developed as soon as new
activities energy.
2. Zen - Base Budgeting may emphasise on short -term benefits to the detriment of the long term
benefits .
3. It may encourage the false idea, that all the decision have to be made in the budget.
4. Where objectives are very difficult to quantify, as in research and development or general
administration, ZBB does not offer any significant central advantage.
CLASS- WORK PROBLEMS
Flexible Budget
Q.1. A Factory is currently working at 50% Capacity and produces 10,000 units. Prepare Flexible
Budget and estimate the profit of the Company when it works at 60% and 80% capacity and advise
the Company At 60% working Raw Material Cost increases by 2% and selling price fall by 2% At
80% Raw Maternal cost increases by 5% and selling price fall by 5% At 50% Capacity working the
product costs ₹ 180 per unit and is sold at ₹ 200 per unit.
The unit cost of ₹ 180 is made up as following: (May 2015 , Oct.2007,2008, March 96 ,06,)

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1. Material Required Per Unit
2. Material Consumed (E X F1)
3. Rate (₹)
4. Material Consumed (₹) (F2 X F3)
G) Material 2
1. Material Required Per Unit
2. Material Consumed (E X G1)
3. Rate (₹)
4. Material Consumed (₹) (G2 X G3)
H) Material (1+2) Cost
I) Material 3
J) Skilled Labour
1. Time Required Per Unit
2. Time (Hrs. )(EX J1)
3. Wages Per Hour (₹)
4. Total Wages (₹) (J2 X J3)
K) Semi - Skilled Labour
1. Time Required Per Unit
2. Time (Hrs. )(E X k1)
3. Wages Per Hour (₹)
4. Total Wages (₹)
L. Total Variable Production Costs
Variable Production Costs P.U
EXHIBIT 8: Cash Budget
ABC Co. Ltd.
Cash Budget (For the Period Ending ...)
Particulars Jan Feb Mar. Apr. May June July Aug. Sept Oct. Nov. Dec.
₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹
A) Opening Cash Balance
B) Cash Receipts
1. Cash Sales
2. Collection from Debtors
3. Sale of Fixed Assets
4. Collection from B/R
5. Loan from Bank
6. Interest on Investment
7. Issue of shares
8. Issue of Drbentures
[Receipts (A) + (B) ]
C) Cash Payments
1. Cash Purchases

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 Material ₹ 100
Labour ₹ 30
Factory overheads ₹ 30 (40% Fixed)
Administrative overheads ₹ 20 (50% Fixed)
Also find out Break Even Point at the above stated capacity utilisation.
(Ans. 50%: BEP (Value )₹ 10,47,619; BEP (Units 5,238; 60% BEP (Value ) ₹ 11,97,778; BEP
(Units ) 6,111 ;80% : BEP (Value) ₹ 15,48,148; BEP (Units) 8,148)
Q.2. The Expenses budgets for production of 100% capacity in a factory are give below: (May 2018)
At 100% Capacity (₹)
Materials 6,00,000
Labour 2,00,000
Variable Expenses (Direct) 40,000
Variable Overheads 2,00,000
Fixed Overheads 80,000
Administrative Expenses (Fixed) 40,000
Selling Expenses ( 10% Fixed) 1,20,000
Distribution Expenses (20% Fixed) 60,000
Prepare a budget for the production of : (a) 60% capacity (b) 80% capacity (Ans. 100%-
₹13,40,000; 8% - ₹ 11, 00,800; 60% ₹ 8,61,600)
Q.3. A department Company ROMA stores attains a Sale of ₹ 12,00,000 at 80% of its normal capacity
and its expenses are gives below:
Administration cost ₹ 180,000
Office Salaries 2% of sales
Depreciation ₹15,000
Rates and Taxes ₹17,500
Selling Cost
Salaries 8% of Sales
Travelling expenses 2% of Sales
Sales office expenses 1% of Sales
General expenses 1 % of Sales
Distribution Cost
Wages ₹ 30,000
Rent 1% of Sales
Other expenses 4% of Sales
Draw up flexible administration, selling and distribution costs budget , operating at 90% , 100% and
110% of the capacity.
(Ans. 90% ₹13,50,000; 100% ₹ 15,00,000; 110% : ₹ 16, 50,000)
Cash Budget
Q.4. JAB Company making for a stock in the first quarter of the year is assisted by its bankers with
overdraft accommodation The following are the relevant budget figures. (Oct.1999)

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 Month Sales (₹) Purchases (₹) Wages (₹)
November 1,20,000 83,000 9,800
December 1,28,000 96,000 10,000
January 72,000 1,62,000 8,000
February 1, 16,000 1, 64,000 4,000
March 84,000 1,79,000 10,400
Budged cash at bank. 1st january 2014 = ₹ 17,200. (Credit terms of sales on payment by the end of
the month following the month of supply On an average, one- half of sales are paid on the due date
while the other half are paid during the next month. Creditors are paid during the month following
the month of supply.
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You are require to prepare a cash budget for the quarter, 1 January - 31 March 2014 showing the
budgeted amount of bank facilities required at each month. (Ans. Closing Balance ₹ 1,09,200)
Q.5. Prepare a cash Budget of Hypothetical Ltd. from ( March 2019 to August, 2019)
Sales Selling Purchases Wager Factory Administrative
₹ Expenses ₹ ₹ ₹ Expenses₹ Expenses ₹
January 1,70,000 7,000 80,000 15,000 10,000 5,000
February 1,60,000 7,500 84, 000 16,000 11, 000 5,500
March 1, 82,000 6,500 83,000 16,800 8,000 4,500
April 1,55,000 6,800 83,000 12,000 10,500 4,750
May 1,65,000 7, 400 76,000 18,000 12,000 5,400
June 2,00,000 7,000 68,000 160,00 9,600 5,700
July 1, 80,000 6,000 70,000 17,000 8,000 5,000
August 2,20,000 5,500 58,000 16,500 9,600 5,500
Other Information
1. Opening Cash Balance on 1st March 2019 ₹ 20,000.
2. Period of credit allowed to customers and by supplier one month.
3. Lag in the payment of Factory Expenses, Administrative Expenses and Selling Expenses- One
month.
4. Machinery Purchased for ₹ 30,000 in March payable on delivery.
5. Building purchased in April for ₹ 150,000 payable in two equal instalments in May and July.
6. 5% Commission of sales payable two month after sales.
7. Delay in the Payment of Wages- One month. (Ans. Closing Balance ₹ 1,39,450)
Q.6. BJK Ltd. is Preparing its budget for the year 2005-06 An extract from its budget for the same year
shows the following values (Oct. 2008)
Month Sales (₹) Purchase of Material (₹) Wage (₹)
April2005 150,000 50,000 10,000
May2005 1,80,000 60,000 12,000
June 2005 1,40,000 65,000 13,000
July 2005 1,50,000 70,000 14,000
1. 40% of its sales are expected to be for cash. Of its Credit Sales, 50% are expected to pay in the
Month of Sales and 50% are expected to pay in the Month os Second month after the month of
sales.
2. The company has estimated to pay 50% of total material in cash and rest amount will be paid in the
following month.

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3. Wages are paid in the 2nd day of the following month.
4. The opening balance of cash as on 1st May is ₹ 30,000 prepare the Cash Budget for the period May
to July 2005. (Ans. Closing Balance ₹ 2,38,000)
Production Budget :
Q.7. Jeet India Ltd. made a forecast of selling 1,08,000 units of their products. Two different types of
Raw material X and Y are required to make each unit of finished product. 4 kg of Raw material ‘X’
@ ₹ 4 per kg and 6 kg raw Material ‘Y’ @ ₹ 3 per kg are required to make one unit of finished
product. (May 2018)
The Estimated opening balance at the beginning of next year
Finished Product 20,000 Units
Raw Material - X 24,000 kg.
Raw Material - Y 24,000 kg.
The desirable closing stock at the end of the next year
Finished Product 28000 units
Raw Material - X 26,000 kg.
Raw Material - Y 32,000 kg.
Prepare Production Budget , Raw Material Consumption Budget and Purchase Budget (Quantity
and Value) (Ans Budget Production ₹ 1,16,000; Raw Material Consumption Budget X- kg-
4,64,000; Y- kg - 6, 96,000; Budgeted Purchases X ₹. 18,64,000; Y ₹20,94,000)
Q.8. Fun Toys Ltd. manufactures a toy monkey with moving parts and a built - in voice box . projected
sales for 5 months are as follows. (Oct. 2006)
Month Projected Sales in Unit
July, 2004 4,200
August , 2004 4,500
September, 2004 4,800
October, 2004 4,600
November, 2004 4,700
Each toy requires direct material from a supplier at RS. 35 for moving parts. voice boxes are
purchased from another supplier at RS. 10 per toy. Labour cost is Rs. 20 per toy and variable
overhead cost is RS. 5 per toy. Fixed manufacturing overhead applicable to production is ₹ 45,000
per month. It is the practice of the company to manufacture an output in a month which is
equivalent to 1.2 times of the following month’s sales Prepare the Production budget and the
production cost budget for July 2004 to October. 2004.
(Ans July ₹ 4,23, 000; August ₹ 4,48,200; September ₹ 4,31, 400; October ₹ 4,39,800)
Q.9. The Sales Director of a manufacturing company reports that next year he expects to sell 50, 000
units of a particular product. (May 2018)
The production Manager consult the storekeeper and caste his figures as follows:
Two kinds of raw materials , A and B, are required for manufacturing the product. Each unit of the
product requires 2 units and A (costing ₹ 5 each) and 3 units of the B (costing ₹ 3 each ) The
estimated opening balances at the commencement of the next year are :
Finished Product : 10,000 Units
Raw Material : A - 12, 000 Units, B - 15000 units The desirable closing balance at the end of the next
year are :
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 Finished products 14,000 units
Material A 13,000 units
Material B 16,000 units
Draw up a quantitative chart showing Material Purchase Budget for the next year.
(Ans. A ₹ 5,45,000 ; B ₹ 4, 89, 000)
HOME - WORK PROBLEMS
Q.10. A newly started Star - War co Ltd, wishes to prepare Cash Budget from January for the first six
month the following estimated revenue and expenses.
Month Total Sales Materials Wages Overheads
₹ ₹ ₹ Production ₹ Selling and distribution ₹
January 20,000 20,000 4,000 3,200 800
February 22,000 14,000 4,400 3,300 900
March 24,000 14,000 4,600 3,300 800
April 26,000 12,000 4,600 3,400 900
May 28,000 12,000 4,800 3,500 900
June 30,000 16,000 4,800 3,600 1,000
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Cash balance on 1 January was ₹ 10,000 A new machine is to be installed at ₹30,000 on credit to be
repaid by two equal installments in March and April. Sales commission @5% on total sales is be
paid within the month following actual sales.₹ 10, 000 being the amount of second call is received
in March. Share Premium of ₹ 2,000 is also obtainable with second call.
Period of credit allowed by suppliers: 2 month Period of credit allowed to customer : 1 month
Delay in Payment of Overheads : 1 month Delay in payment of wages 1 2 month Actual Cash Sale to
be 50% of total sales . (Ans closing Balance ₹ 15,200)
Q.11. The expenses budgeted for production of 10,000 units in a factory are furnished as follows
(April 2012, May 2009, 2015, Oct 2013)
Particulars Per unit (₹)
Material 70
Labour 25
Variable Overheads 20
Fixed Overheads (₹100,000) 10
Variable Overheads (Direct) 5
Selling Expenses (10% Fixed) 13
Distribution Expenses (20% Fixed) 7
Administrative Expenses (₹50,000) ( 100% Fixed) 5
Total 155
Prepare a budget for production of : 6,000 units, 8,000 units and 10,000 units showing variable cost
fixed cost in amount and cost per unit at each level of production (Ans. 6,000 unit ₹ 10,00 800; 8,000
unit : ₹ 12,75,400; 10,000 unit : ₹ 15,50,000)
Q.12. From the following prepare Cash Budget for the period from 1st March to 31st August when the
Opening Cash Balance was ₹ 40,000.

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Q.14. Prepare Cash budget for Three month ended in December 2006, from the following information:
(May 2007)
1. The estimated sales & expenses are as following
Particulars Sept.2006 Oct.2006 Nov.2006 Dec.2006
Gross Sales 25,000 25,000 30,000 32,500
Purchases 10,000 10,000 12,500 14,000
Wages and Salaries 9,000 9,000 10,000 11,000
Miscellaneous Expenses 3,000 3,500 3,500 3,500
Interest Received - 1,000 - 1000
Sale of shares - - 10,000 -
2. 20% of the sales in on cash.
3. 1% the credit sales are returned by customers and Bad Debts for October, November are December
2006 are ₹ 800, ₹ 760 and ₹ 740 respectively.
4. 50% of the Good accounts are collected in the month of sale and the rest in the next month.
5. Time lag in the payment of miscellaneous Expenses and Purchases in one month.
6. Wages and Salaries are paid 50% in the same month and balance in next month.
7. The opening Cash Balance is ₹ 25,000.
(Ans. Closing Balance ₹ 47,400)
Q.15. Sony Ltd. , a newly started company wishes to prepare cash budget from January . Prepare a cash
budget for the first six months from the following revenue and expenses. (May2007)
Months Total Material Wages Overheads
Sales (₹) (₹) (₹) Production Selling and Dist
(₹) ribution (₹)
January 20,000 20,000 4,000 3,200 800
February 22,000 14,000 4,400 3,300 900
March 28,000 14,000 4,600 3,400 900
April 36,000 22,000 4,600 3,500 1,000
May 30,000 20,000 4,000 3,200 900
June 40,000 25,000 5,000 3,600 1,200
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Cash balance on 1 January was ₹ 10,000. A new machinery is to be installed for ₹ 20,000 on credit
to be repaid by two equal installment in March and April.
Sales commission @ 5% on total sales is to be paid within a month following actual sales.₹10,000,
being the amount of II nd call, may be received in March. Share Premium amounting to ₹ 2,000 is
also obtainable with the II nd call . Period of credit allowed by suppliers 2 month.
Period of credit allowed to customers 1 month
Delay in Payment of overheads 1 month
Delay in Payment of wages 1/2 month
Assume cash sales to be 50% of Total sales. (Ans. Closing Balance ₹36,000)
Q.16. Prepare Cash Budget of SALMAN Ltd. for 3 months commencing from April with the help of
following information (Oct. 2006)
1. Cash Sales are 25% of total sales.
2. 60% of credit sales are collected in the same month and balance 40 % in the following month

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Q.19. A Factory is currently working at 50% capacity and produces 30,000 units and also sold each
at ₹ 225 per unit Prepare a Flexible Budget and Estimate the Profit of the Company when it works
to 75% and 90% capacity Assume that all unit produced are sold at the same selling price per unit
as shown above . (Oct. 2012)
1. Variable Expenses
Material ₹ 60 per unit
Labours ₹ 40 per unit
Other Expenses ₹ 15 per unit

2. Semi - Variable Expenses: (at 50% capacity )

Indirect Labour ₹ 1,50,000
Indirect Materials ₹ 2,10,000
General Administrative Expenses ₹ 2,70,000
Repairs and Maintenance ₹ 1,20,000
Salesmen Salaries ₹ 1,80,000
3. Fixed Expenses
Office and Management Salaries ₹ 5,40,000
Office and Factory Rent and Taxes ₹ 6,00,000
Sundry Administrative Expenses ₹ 7,20,000
Depreciation On Machinery and Furniture ₹ 4,50,000
4. Semi - variable expenses remain constant up to 60% of capacity , increasing by 10% between 60%
and 80% capacity and by 20% between 80% and 100% capacity.
5. Rate per unit of variable expenses remains Same. (Ans 50% ₹ 60,000; 75% ₹16,17,000; 90% ₹
25,14,000)
Q.20.AB Ltd. has furnished the following estimation Pertaining to Product “A” at 80% of its normal
capacity level for the quarter ending March 31,2005. (Oct.2007)
Sales ₹ 600,000
Administrative Costs
Office Salaries ₹ 90,000
General Expenses 2% of sales
Depreciation ₹7,500
Rates and Taxes ₹8,750
Selling Costs
Salaries 8% of Sales
Travelling Expenses 2% of Sales
Sales Office Expenses 1% of Sales
General Expenses 1% of Sales
Distribution Costs
Wages ₹ 15,000
Rent 1% of Sales
Other Expenses 4% of Sales

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 Month Sales Selling Purchases Wages Factory Administration
Expenses Expenses Expenses
January 3,40,000 14,000 1,60,000 30,000 20,000 10,000
February 3,20,000 15,000 1,68,000 32,000 22,000 11,000
March 5,64,000 13,000 1,66,000 3,36,000 16,000 9,000
April 3,10,000 13,600 1,66,000 24,000 21,000 9,400
May 3,30,000 14,800 1,52,000 36,000 24,000 10,800
June 4,00,000 14,000 1,36,000 32,000 19,200 11,400
July 3, 60,000 12,000 34,000 34,000 16,000 10,000
August 4,40,000 11,000 1,16,000 33,000 19,200 10,000
1. Period of credit allowed by suppliers and to customers 1 month
2. Lag in Payment of :
i) Wages : 1 month
ii) Factory Expenses : 1 month
iii) Administration Expenses : 1 month
iv) Selling Expenses : 1 month
3. Machinery purchased for ₹ 1,00,000 in March payable on delivery in April .
4. Building purchased in April ₹ 30,00,000 payable in two equal instalments in May and July .
5. Commission of 3 % on sales payable two month after sales. (Ans . Closing Balance ₹ 2,77,880)
Q.13. Prepare Cash Budget for January - June from the following information: (March 1998)
Month Sales Wages and Salaries Misc. Expenses
Nov. 2,00,000 30,000 27,000
Dec. 2,20,000 30,000 27,000
Jan. 1,20,000 24,000 21,000
Feb. 1,00,000 24,000 30,000
Mar 1,50,000 24,000 24,000
Apr. 2,40,000 30,000 27,000
May 2,00,000 27,000 27,000
June 2,00,000 27,000 27,000
1. 20% of the sales are on cash and balance on credit.
2. The firm has a gross margin 20% on sales.
3. 50% of the credit sales are collected in the month following the sales 30% in the Second month and
20% in the Third month.
4. Material for the sales of each month is purchased one month in Advance on a credit for two months.
1
5. Wages and salary are paid after 3 month. Expenses are paid 1 month.
6. Debentures worth ₹ 40,000 were sold in January .
7. The firm maintains a minimum cash balance of ₹ 40,000. Funds can be borrowed at 12% p.a. in the
multiples of ₹ 1,000, the interest being payable on monthly basis.
8. Cash balance at the end of December is ₹ 60,000. (Ans Closing Balance ₹ 40,740)
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 Prepare the budget for the total administration, selling and distribution expenses at 70% and 90%
capacity level. (Ans 70% ₹ 3,04000; 80% ₹ 3,64,750; 90% ₹ 425,500)
Q.21. The cost of an article at capacity level of 5000 units is given under A below for a variation of 20%
in capacity above or below this level, the individual expenses vary as indicated under B below :
(Oct.2007, Dec.2004)
A(₹) B
Material Cost 25,000 (100% varying )
Labour Cost 15,000 (100%varying )
Power 1,250 (80%varying )
Repairs and Maintenance 2,000 (75% varying )
Stores 1,000 (100% varying )
Inspection 500 (20% varying )
Depreciation 10,000 (100% Fixed)
Administration overheads 5,000 (25% varying)
Selling overheads 3,000 (50% varying )
62,750
Cost per unit 12.55
Find the unit cost of the product under each individual expenses at production level of 4,000, units
and 6,000 units (Ans. 4000 unit ₹ 53,480;5000 unit ₹62,750; 6000 unit ₹72,020)
Q.22. Janta Ltd. manufactures 10,000 units of product Jv at a cost ₹90 per unit. Presently, the company
is utilizing 50% of the total capacity . The information pertaining to cost per unit of the product is as
follows. (Oct.2007)
Material ₹ 50
Labour ₹ 10
Factory overheads ₹ 20(40% fixed)
Administrative overheads. ₹ 10(50% fixed )
Other information
1. The current selling price of the product is ₹ 100 per unit.
2. At 60% capacity level - Material cost per unit will decrease by 2% and current selling price per unit
will reduce by 2%.
3. At 90% capacity level - Material cost per unit will decrease by 60% and current selling price per unit
will reduce by 6%.
Prepare the budget for 60% and 90% capacity. (Ans 50% ₹ 10,00,000; 60% ₹11,76,000;
90 % ₹ 16,92,000)
Q.23. The following are the estimated sales of a company for eight months ending 30th October, 2018.
Months Estimated sales (units)
April, 2018 12,000
May, 2018 13,000
June, 2018 9,000
July, 2018 8,000
August,2018 10,000
September, 2018 12,000
October, 2018 14,000
November, 2018 12,000
As a matter of policy, the company maintains the closing balance of finished goods and raw -
material as follows.
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 Stock Items Closing Balance of a month
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 ₹ 5 per kg. Prepare production Budget (in
th
units) and Raw Material Purchases Budget ( in units and cost ) of the Company for the half year ending 30
September, 2018. [Ans Production Budget (in unit ) 13,000; Raw Material Purchase Budget (in units)
26000, ₹ 1,30,000)
Q.24. JCL Corporation Manufactures and sells two products RB and RD. Three types of Material A, B and C are
required for producing theses products. Projected Information for 2015-2016 is given below.
Product Projected Sales for Inventory (In units) Direct Labour
2015-16 (units) on 1-4-15 on 31-3-16 Requirement Hour/Unit
RB 75,000 25,000 31,250 4
RD 50,000 10,000 11,250 6
Raw Material Stock and Usage are as follows.
Direct Material Required per unit Inventory on 1-4-15 Inventory on 31-3-16
RB RD
A 5 kg 5kg 40,000 kg 45,000 kg
B 2.50kg 3 kg 36,250 kg 40,000kg
C O 1 kg 7,500kg 8,750kg
You are required to prepare the following for 2015-16.
1. Production Budget (In units)
2. Direct Material Purchase Budget in quantities for A, B and C. [Ans 1. Production Budget (in unit)
A=81,250; B=51,250; 2. Material Purchases Budget (in kgs) A = 6,67,500; B = 3,60,625; C = 52,500)
Q.25. ABC Manufacturing Company Produces 7,500 units by utilising its 75% capacity , supplies you the
following cost information (Nov. 2017, May 2008)
Cost Information at 75% Capacity ulitisation on (for 7500 units)
Particulars ₹
Direct Materials 7,50,000
Direct Labour 6,00,000
Direct Expenses 3,00,000
Factory Overheads 4,50,000
Office Overheads 300,000
Selling Overheads 1,50,000
Additional Information
1. Direct material, direct labour and direct Expenses are variable cost.
2. Factory overheads per units increases by 10% if capacity utilisation goes down below the 75% and
decreases by 15% if capacity utilisation goes up above the 75% .
3. Office overheads are fixed overheads.
4. Selling overheads per unit increase by 20% if capacity goes down below 75% and decrease by 25%
if capacity utilisation goes up above the 75%.
5) It is the policy of the company to charge profit at 20% on selling price.
You are required to prepare a flexible budget at 50% 75% and 100% capacity utilisation.
(Ans 50% ₹ 4,62,500; 75% 6,37,500; 100% ₹ 7,90,000).
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2
 Month Sale Purchases Wages
March 16,00,000 5,00,000 -
April 6,00,000 6,40,000 1,60,000
May 8,00,000 6,40,000 1,60,000
June 8,00,000 9,60,000 2,00,000
July 12,00,000 8,00,000 2,00,000
3. Payment for purchases is made is made 40% in the same month and 60% in the following month.
4. Interest @ 6% on debentures of ₹ 2,00,000 is paid in the month of June.
5. Rent of ₹ 8,000 paid per month.
6. Dividend received in May ₹ 22,000.
7. Cash Balance as on 31st March is ₹ 2,00,000. (Ans. Closing Balance ₹ 1,42,000)
Q.17. Following details are available from the records of a firm. Prepare a cash budget for the 3 month
ending 30.06.2006. (April 2006)
Month Sales(₹) Materials (₹) Wages (₹) Over heads (₹)
February 14,000 9,600 3,000 1,700
March 15,000 9,000 3,000 1, 900
April 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
June 18,000 10,400 4,000 2,300
Additional Information
1. 10% sales are on cash.
2. 50% of Credit sales are collected next month and the balance in the following month.
3. Period of Credit allowed by suppliers 2 month.
4. Delay in Payment of wages1 th month.
4
5. Delay in Payment of overheads 1 2 month.
6. Cash and Bank Balance on 1.04.2006 is expected to be ₹ 6000.
7. Plant and Machinery will be installed in February 2006 at a cost of ₹ 96,000. The monthly
installment of ₹ 2,000 are payable from April 2006 onwards.
8. Advance to be received for sale of vehicle ₹ 9000 in June .
9. Dividend from investment ₹ 1,000 is expected to be received in June 2006.
10. Advance Income Tax to be paid in June 2006₹ 2,000.(Ans Closing Balance ₹ 10,300)
Q.18. From the following information given prepare the budget for 80% level of activity. (April 2017)
Level of Activity 50% 60%
No. Of Units 25,000 30,000
Direct Material ₹ 2,00,000 2,40,000
Direct Wages ₹ 75,000 90,000
Factory Overheads ₹ 2,00,000 2,05,000
Office and Administration ₹ 3,00,000 3,00,000
Selling and Distribution ₹ 2,50,000 2,70,000
Profit is 20% on Sales. (Ans. 50% = ₹ 12,81,250; 60% = ₹ 13,81,250; 80% = ₹ 15,81,250)
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Q.26 You are given the following data of a manufacturing concern. (May 2017, Nov. 2006)
Particulars ₹
Variable Expenses (at 50% capacity)
Materials 48,00,000
Labour 51,20,000
Others 7,60,000
Semi- Variable Expenses (at 50% capacity)
Maintenance and Repairs 500,000
Indirect Labour 19,80,000
Sales Department Salaries 5,80,000
Sundry Administrative Expenses 5,20,000
Fixed Expenses
Wages and Salaries 16,80,000
Rent, Rates and Taxes 11,20,000
Depreciation 14,00,000
Sundry Administrative Expenses 17,80,000
The fixed expenses remain constant for all level of production. Semi variable expenses remain
constant between 45% and 65% of capacity where as it increases by 10% between 65% and 80%
capacity by 20% between 80% and 100% capacity .
Sales at various level are as under
Capacity Sales (₹)
75% 2,40,00.000
100% 3,20,00,000
Prepare flexible budget at 75% and 100% Capacity (Ans. 75% Loss (19,38,000); 100% ₹3,64,000)
Q.27 A Factory Produces 20,000 units . The budget expenses are given below (April 2015)
Particulars ₹ Per Unit
Direct Materials Cost 75
Direct Labour Cost 20
Direct Excesses 25
Variable Production Overheads 15
Fixed Production Overheads (₹ 4,00,000) 20
Administrative Expenses (Fixed) 10
Selling Expenses (20% Fixed) 15
Distribution Expenses (40% Fixed) 20
Total Cost of Sales Per Unit 200
Prepare a flexible budget for production of (a) 15, 000 units (b) 10,000 units (Ans 10,000 unit ₹
24,10,000, 15,000 units ₹ 32,25,000; 20,000 unit ₹ 40,00,000)
Q.28 Ms Jayshree Enterprises is Currently working at 50% capacity and Produces 10,000 units At 60%
working raw material cost increases by 2% and selling price fall by 2% At 80% working raw
material cost in creases by 5% and selling price by 5% At 50% capacity working the product costs
₹18 per unit and is sold at ₹ 20 per unit (April 2016)
The unit cost of ₹ 18 is made up as following
Material ₹ 10
Wages ₹ 03
Factory Overheads ₹ 03 (40% Fixed)
Administration Overheads ₹ 02 (50% Fixed )
Prepare a statement showing the estimated profit of the business when it is operated at 60% and 80%
capacity It May be noted the fixed overhead remain constant up to 100% capacity. Increase in raw
material cost and decrease in selling price are to be calculated with reference to the figure given for
50% capacity usage. (Ans. 50% ₹ 20, 000; 60% ₹ 21,200; 80% ₹ 53,200)
******
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 T.Y. B.A.F SEMESTER-VI
2- ABSORPTION COSTING, MARGINAL COSTING AND CVP ANALYSIS
Absorption Costing
Absorption costing is a principle whereby fixed as well as variable costs are allocated to cost units
and total overheads are absorbed according to activity level.
It is a simple method of ascertaining the cost of a product or service. It is the oldest system of cost
accounting in operation. It is widely used in business decisions.
Marginal Costing
Marginal costing has been defined as “the ascertainment of marginal cost and the effect on profit of
changes in volume or type of output, by differentiating between fixed and variable costs”.
Cost– Volume Profit Analysis (CVP) Analysis
It is a managerial tool showing the relationship between various ingredients of profit planning viz.,
cost, selling price and volume of activity. As the name suggests , cost volume profit (CVP) analysis
is the analysis of three variables - cost , volume and profit.
Features of Marginal Costing (Oct. 95, April 2001)
1. The elements of costs are differentiated between fixed costs and variable costs.
2. Only the variable or marginal cost is considered while calculating product costs.
3. Stock of finished products and work in progress are value at variable cost.
4. Contribution is the difference between sales and marginal cost.
5. Fixed costs do not find place in the product cost.
6. Price are based on marginal cost plus contribution.
7. It is a technique of cost recording and cost reporting.
8. Profitability of various products is determined in terms of marginal contribution.
Advantages of Marginal Costing (March 2008)
1. Constant in nature: Marginal cost remains the same per unit of output whether there is increase or
decrease in production
2. Realistic : It is realistic as fixed cost is eliminated . Inventory is valued at marginal cost. Therefore it
is more realistic and uniform.
3. Simplified overhead treatment : There is no complication of over-absorption and under-
absorption of overheads.
4. Facilitates control: Classification of costs as fixed and variable helps to have greater control over
costs.
5. Meaningful reporting : The reporting made to management is more meaningful as the reports are
based on sales figures rathan than production.
6. Relative profitability: In case a number of products are manufactured. marginal costing helps
management in the determination of relative profitability of each product.
7. Aid to profit planing : The technique of marginal costing helps management in profit planing. The
management can plan the volume of sales for earning a required Profit.
8. Break -even point : It can be determined only on the basis of marginal costing.
Limitations of Marginal Costing (March 2008)
1. Analysis of overheads : In marginal costing costs are to be classified into fixed and variable costs
considerable difficulties are experienced in analysing overheads into fixed and variable categories.
2. Greater emphasis on sales : Marginal costing technique lays greater emphasis on sales rathan than
production.
3. Difficulty in application: Marginal costing is not applicable in those concerns where large stock
have to be carried by way of work in progress.
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2
Break -even chart (Nov. 2017, April 2017)
The break-even chart is a graphical representation of marginal costing . It indicates the graphic
relationship between costs, volume and profit . It shows not only the BEP but also the effects of costs
and revenue at varying levels of sales. Therefore, it can be more appropriately called as the cost-
volume profit graph (CVP graph). Thus the Break-even chart indicates the following information:
1) Fixed Cost, 2) Variable Cost, 3) Total Cost, 4) Sales Value,
5) Profit or Loss, 6) Break-Even Point, 7) Margin of Safety,
Assumptions:
However, the construction of Break- Even Chart is based on certain important assumptions.
These assumptions are as listed below:
1. Fixed cost will remain constant.
2. Prices of variable cost is factors will remain unchanged.
3. Semi-variable cost is segregated into variable and fixed costs.
4. Method of production will not change.
5. Operating efficiency will remain unchanged.
6. There will be no changes in pricing policy.
7. Sales equal production .
8. Product-mix will remain constant.
A Specimen of Break-Even Chart is as given below.
y

Sales Line
rea
E.P
.
fi tA
B. o
) Pr Total Cost Line

Variable Cost Fixed Cost Line

ea
Ar
ss
Lo
Fixed Cost
x
Production (Volume)
Advantages of Break-Even Chart
1. It is simple to construct and understand. Facts represented graphically are understood well.
2. It helps management in studying the relationship between cost, volume and profits. This enables the
management in taking decisions on sales.
3. It helps management in understanding the strength and profit earning capacity of a business
concern. Many important decisions can be taken on the basis of margin of safety, break-even point
etc.
4. It indicates the impact of different product mixes on profits. This helps management in selecting the
most profitable product-mix.
Limitations of Break -Even Chart
1. Break -even chart indicates a static picture. It becomes out of date if there is a change in the
assumptions or conditions.
2. A company manufacturing variety of products cannot represent the fact of each product in the chart.
3. Break-even chart does not consider the amount of capital employed which is very vital in many
decisions.
2
21
Angle of Incidence
It is formed by the intersection of sales line and total cost line at the B.E.P, It shows the rate at which
the organisation is earning profit once the B.E.P is reached. The wider the angle, the greater is the
rate of earning profits with increase in sales. A large angle of incidence with greater margin of safety
(MOS) Shows an extremely favourable situation. Break even charts and PV Ratio also help the
management in controlling cost and maximizing profits.
Worksheet 1 : Marginal Cost Equations
1. Sales - Variable Cost = Contribution
2. Contribution- Fixed Cost = Profit
3. Sales - Variable Cost = Fixed Cost + Profit
4. Contribution = Sales X PV Ratio
Contribution
5. Profit Volume Ratio =
Sales
Contribution
6. Sales =
PV Ratio
Fixed Cost
7. BEP (in Units) =
Contribution Per unit
Fixed Cost
8. BEP (₹ ) = X Sales
Contribution
Fixed Cost
9. BEP ( ₹) =
PV Ratio
Fixed Cost + Desired Profit
10. Required Sales (₹) =
PV Ratio
Fixed Cost + Desired Profit
11. Required Sales (Units) =
Contribution Per Unit
Fixed Cost + Desired Profit
12. Actual Sales =
PV Ratio
13. Margin of Safety (₹ ) = Actual Sales - BEP Sales
14. Profit = Margin of Safety X PV Ratio
15. Margin of Safety (Units ) = Actual Sales (in Units)- BEP (in Units)
Worksheet 2: Ascertaining Missing figures
1. Contribution
= Sales - Variable Cost
or = Fixed Cost + Profit
or = Sales X PV Ratio
or = ( BE Sales in Unit X Contribution Per Unit )+ Profit
or = (BE Sales in Value X PVR ) + Profit
or = Fixed Cost + (Ms in Units X Contribution per Unit )
or = Fixed Cost + (Ms in Value X PVR )
Profit Fixed Cost
or = or =
Ms in % BE Sales in %

2
22
4. Improper basis for fixation of selling price : In marginal costing, selling price is fixed on the basis
of contribution alone which is not proper.
5. Less effective in capital intensive industry: Marginal costing technique is less effective in capital
intensive industry where fixed cost is more.
6. Lack of standard for Control : Marginal Costing does not provide any standard for control
purpose. In fact, budgetary control and standard costing are more effective tools in controlling
costs.
7. Elimination of fixed cost: In marginal costing techniques fixed costs are not included in the value
of finished goods and work- in progress since fixed costs are incurred, these should also form part of
the costs of the product.
8. Incomplete information: Marginal cost does not give complete information. For example,
increase in production and sales may be due to so many factors such as extensive use of machinery,
expansion of resources and by automation.
9. Useful only for short-term assessment : Marginal costing is useful for short-term assessment of
profitability.
Absorption vs. Marginal costing (May 2018, April 2017)
Absorption Costing Marginal Costing
1. All costs - fixed and variable are charged to 1. Only variable costs are charged to the product.
the product. fixed cost are recovered from contribution
2. Profit is equal to sales less cost of goods sold. 2. Profit is equal to contribution less fixed cost.
3.It does not disclose cost volume profit 3. Cost volume profit relationship is an integral
relationship. part of marginal costing.
4. Closing stock is valued at total cost 4. Closing stock is valued at variable cost.
5. It is very helpful in taking managerial 5) It is very helpful in taking managerial
decisions. decisions.
6. It reveals more profit as fixed cost is included 6. It reveals less profit as fixed cost is eliminated
in closing stock. from closing stock.
7. It may lead to over or under absorption of 7. It will not lead to the problem of under or over
costs. absorption of cost.
8. In Absorption costing overheads are 8. In marginal costing overheads are classified
classified into works/Production, into variable and fixed.
Administration and selling and
9. Absorption costing is used to calculate profit. 9. Marginal costing is used to calculate
contribution
Break-even point (May 2018)
Break-even point is the point at which total revenue is equal to total cost. It is that level of output (or
sale) where there is no profit or no loss. At this stage contribution is just sufficient to absorb fixed
cost. The organisation starts earning profit when the output or sales activity crosses this point.
Output or Sales below this point results in a loss. B.E. point can be calculated by the following
formula.
Fixed Cost
1. In terms of Output =
Contribution Per unit
Fixed Cost
2. In terms of Sales Value =
P/V Ratio
An enterprise must operate beyond the break even point. otherwise it will suffer loss. Break -even
point is a level of production and sales,
where,
1. There is no profit or no loss,
2. Total sales and total cost is the same,
3. Contribution equal fixed cost.
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2. Profit Volume Ratio (PVR)
Sales - Variable Cost
= X 100
Sales
Contribution
or = X 100
Sales
Fixed Cost + +Profit
or =
Sales
Fixed Cost 100
or = X
BE Sales in Value Selling Price Per Unit
Profit
or = X 100
Margin of Safety in Value
Profit 100
or =
Margin of Safety in Units Selling Price Per Unit
Change in Profit
or = X 100
Change in Sales
or = 100- Variable Cost to Sales Ratio

3. Be Sales in Units
Fixed Cost
=
Contribution Per Unit
BE Sales
=
Selling Price
Fixed Cost
=
S.P Per Unit - Variable Cost P.U
or = Actual Sales in Units - Margin of Safety in Units
4. Be Sales in Value
Fixed Cost
=
PVR
or = Actual Sales in Value - Margin of Safety in Value
Fixed Cost
or = X Selling Price Per Unit
Contribution Per Unit
or = BE Sales in Units X Selling Price Per Unit

Fixed Cost
or =
% of Contribution to Sales

5. Be Sales in % of Sales
Fixed Cost
= X 100
Contribution
BE Sales
or = X 100
Actual Sales

or = 100- Margin of Safety (in % )

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b) Additional Sales Required (Value ) = Proposed Expenditure
P/V Ratio
CLASS WORK PROBLEMS
Q.1 A company produces and sells 1,000 units of a product per month at the rate of ₹ 20. If the variable
cost is ₹ 12 per unit and fixed costs are ₹ 3,000 per month.
Calculate
i) Break Even Point in units. F
ii) If selling price is reduced by 20% calculate new Break even point in units.
iii) Calculate number of units to be sold at the reduced selling price to earn a profit of ₹ 4,000.
(Ans. i) 375 units ; ii) 750 units; iii) ₹ 28,000)
Q.2 From the following data, calculate break- even point (BEP).
Particulars ₹
Selling Price Per Unit 20
Variable Cost Per Unit 15
Fixed Overheads 20,000
If Sales are 20 % above BEP, determine the net profit
(Ans. BEP ₹ 80, 000; Profit ₹ 4,000)
Q.3 From the following . Calculate P/V Ratio , B.E.P. and M/S.
Particulars ₹
Sales 100,000
Fixed Cost 20,000
Variable Cost 60,000
(Ans. P/V Ratio 40% ; B.E.P ₹ 50,000; M/S ₹ 50,000)
Q.4 From the following information find out :
i) P/V Ratio.
ii) Break Even Point.
iii) Profit When Sales are ₹ 1,20,000.
iv) Sales required to earn the Profit of ₹ 60,000.
Fixed Cost ₹ 40,000; Variable Costs ₹ 2 per unit; Estimated Sales ₹ 2,00,000; Selling price per unit
₹10. (Ans. i) 80 % ; ii) ₹ 50,000; iii) ₹ 56,000; iv) ₹ 1,25,000)
Q.5 You are furnished with the following information.
Fixed Cost for a Period - ₹ 5,000
Variable Cost Per Unit - ₹ 10
Selling Price Per Unit - ₹ 20
Actual Unit Sold - 750 Units
Determine
I) P/V Ratio.
ii) Break-Even Point.
iii) Margin Safety in units and in rupees.
iv) Profit , if the Sales are 1,000 units.
v) Sales if Profit is ₹ 15,000.
vi) New BEP if Selling price increases by 25 %.
vii) New BEP if Variable cost decreases by 20 %
(Ans. i) 50% ; ii) ₹ 10,000 ; iii) ₹ 5,000; 250 units; iv) ₹ 5,000; v) ₹ 40,000;
vi) ₹ 8,333; 333 units ; vii) ₹ 8,333; 417 units)
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Q.6 Ltd. furnishes you the following information relating to the half year ending 30th Sept. 2003.
(Nov. 2006)
Particulars ₹
Fixed Expenses 50,000
Sales Value 2,00,000
Profit 50,000
During the second half of the same year the company has projected a loss of ₹ 10,000. Calculate.
i) The P/V Ratio Break-Even point and Margin of safety for six months ending 30th Sept. 2003.
ii) Expected Sales Volume for second half of the year assuming that selling price and fixed expenses
remain unchanged in the second half year also.
iii) The Break -even point and Margin of safety for the whole year 2003-2004.
(Ans. i) 50 % ; ₹ 1,00,000; ₹ 1,00,000; ii) ₹ 80,000, iii) ₹ 200,000 ; ₹ 80, 000)
Q.7.Following information is available in respect of G Ltd. and D Ltd. (Oct. 2010)
Particulars G. Ltd. (₹) D.Ltd. (₹)
Sales 11,00,000 14,00,000
Variable Cost 8,80,000 10,50,000
Profit 1,20,000 2,00,000
Calculate :
i) P/V Ratio of both companies
ii) Fixed Cost of both companies
iii) Break Even Point of both companies
iv) Sales to earn profit of ₹ 2,10,000 by each company
v) Margin of Safety of ‘D’ Ltd.
(Ans. G. Ltd i) 20 % ; ii) ₹ 1,00,000; iii) ₹ 5, 00,000; iv) ₹ 15, 50,000; D Ltd i) 25 % ; ii) ₹ 1,50,000;
iii) ₹ 6,0,0,000; iv) ₹ 14,40,000; v) ₹ 8,00,000)
Q.8.The following data have been extracted from the books of Alfa Ltd. (March 2004, April 2017)
Year Sales (₹) Profit (₹)
2012 5,00,000 50,000
2013 7,50,000 1,00,000
You are required to Calculate:
i) P/V Ratio ii) Fixed Cost iii) Break Even Sales iv) Profit on Sales of ₹ 4,00,000
v) Sales to earn a Profit of ₹ 1,25,000.
(Ans. i) 20 %; ii) ₹ 50,000; iii) ₹ 2,50,000; iv) ₹ 30,000; v) ₹ 8,75,000)
Q.9.From the following particulars , you are required to calculate. (March 2011, April 2018)

Particulars 2012 (₹) 2018 (₹)

Total Cost 12,96,000 18,72,000
Sales 14,40,000 21,60,000

i) Fixed Cost ii) Profit Volume Ratio iii) Break Even Sales
iv) Sales to earn profit of ₹ 6,00,000.
v) Margin of safety of the year 2012.
(Ans. i) ₹ 1,44,000 ; ii) 20 % ; iii) ₹ 7,20,000; iv) ₹ 37,20,000; v) ₹ 7,20,000)
Q.10. The Reliable Battery Co. furnishes you the following income information. (April 2014)
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6. Margin of Safety in Units
Profit
=
Contribution Per Unit
or = Actual Sales in Units - BE Sales in Units

7. Margin of Safety in value

Profit
= F
PV Ratio
or = Actual Sales in Value - BE Sales in Value
Profit
or = X Selling Price Per Unit
Contribution Per Unit
or = Margin of Safety in Units X Selling Price Per Unit

8. Profit
= Sales - Total Cost
or = Sales - (Variable Cost + Fixed Cost)
or = Contribution - Fixed Cost
or = Margin of Safety in Value X PVR
or = Margin of Safety (% of Sales ) X Total Contribution
or = (Margin of Safety in % of Sales X Actual Sales ) X PVR
9. Sales
Total Cost + Profit
or = Variable Cost + Fixed Cost + Profit
or = Variable Cost + Contribution
Contribution
or =
P/V Ratio
or = BE Sales + Margin of Safety

Worksheet 3 : Equations Useful for Decision- Making

1. Required Sales for Desired Profit
Fixed Cost + Desired Profit
a) Sales Required (Units)=
SP -VC (Per Unit)
Fixed Cost + Desired Profit
=
Contribution (Per Units)
Fixed Cost + Desired Profit
b) Sales Required (Value) = X Sales
Sales - Variable Costs
Fixed Cost + Desired Profit
= X Sales
Total Contribution

Fixed Cost + Desired Profit

=
PV Ratio
2. Additional Sales Required to Maintain Present Profit
Proposed Expenditure
a) Additional Sales Required (Units ) =
Contribution Per Unit
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Q.15 Draw a Break Even Chart from the following information M/s Z.Ltd produces and sells a single
article at ₹ 10 each . The marginal cost of production is ₹ 6 each and fixed cost is ₹ 400 per annum.
Indicate i) Break Even Point ii) Margin of Safety iii) Angle of incidence iv) Fixed Cost Line
v) Area of Profit / Area of Loss. (Ans i) 100 units, ₹ 1,000 ii) 100 units , ₹ 1,000)
HOME - WORK PROBLEMS
Q.16. The Sales turnover and profit of M/s Amit Ltd. during the two year 2011 and 2012 were as follows.
(April 2103, May 2014)
Year Sales (₹) Profit (₹)
2011 9,00,000 1,20.000
2012 10,20,000 1,50,000
You are required to calculate.
i) P/V Ratio ii) BEP Sales. iii)Sales required to earn a profit ₹ 2,40,000.
iv) The Profit made when sales are ₹ 15,00,000.
(Ans. i) 25 % ; ii) ₹ 4,20,000; iii) ₹ 13,80,000 iv) ₹ 2,70,000)
Q.17. The XL Ltd. furnish the following information (Oct. 2006)
st nd
Particulars I Period (₹) Ii Period (₹)
Sales 20,00,000 30,00,000
Profit 2,00,000 4,00,000
From the above, calculate the following .
i) P/V Ratio
ii)Fixed Expenses .
iii)
BEP. iv) Sales to Earn Profit ₹ 5,00,000.
v) Profit When Sales are ₹ 15,00,000.
(Ans. i) 20 % ; ii) ₹ 2,00,000; iii) ₹ 10,00,000; iv) ₹ 35,00, 000 ; v) ₹ 1,00,000)
Q.18. Information of Alfa and Co. is given below
Particulars Per Unit Variable Cost (₹) Fixed Cost (₹)
Direct Material 3.00 -
Direct Labour 3.00 -
Factory Overheads 2.00 50,000
Selling Expenses 2.00 20,000
Administrative Overhead 2.00 10,000
Budgeted Sales are 12,500 Units @ ₹ 20.00 Per Unit
Find
i) P/V Ratio
ii) Break - Even point Sales
iii) Profit Budget Sales
iv) Margin of Safety at Budget sales
v) Profit, if Actual sales.
a) Decrease by 20 % from budget sales
b) Increase by 5 % from budget sales
(Ans. i) 40 % ; ii) 10,000 Units; iii) ₹ 2,00,000 iv) ₹ 50,000, 2,500 units; v) - (a) zero b) ₹ 25,000
Q.19. Assuming that the cost structure and selling prices remain the same in period I and II.
Find out i) P/V Ratio ii) B.E. Sales iii) Profit, when sales are ₹ 1,00,000. iv) Sales required to
earn a profit of ₹ 20,000. v) Margin of Safety in second II) Period .
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 Year 2018
First half year (₹) Second half year (₹)
Sales 8,10,000 10,26,000
Profit Earned 21,600 64,800
From the above , you are asked to compute the following assuming that the fixed cost remains the
same in both the periods.
i) Profit Volume Ratio
ii) Fixed Cost.
iii) Amount of Profit or Loss when Sales or ₹ 6,48,000.
iv) Amount of Sales required to earn a Profit of ₹ 1,08,000.
(Ans. i) 20% ii) ₹ 1,40,400; iii) ₹ 1,29,600; iv) ₹ 12,42,000)
Q.11. Flame Ltd. has the following data for the coming year.
Particulars (₹)
Sales ( 10,000 Units) 1,00,000
Variable Costs 40,000
Fixed Costs 50,000
a) Find out P/V Ratio , BEP and Margin of Safety Sales.
b) Evaluate the effect of the following on the above.
i) 20 % increase in physical sales volume;ii)15 % decrease in physical sales volume;
iii)
5 % increase in variable costs; iv)10 % decrease in fixed costs;
(Ans. 60 % ; ₹ 83,333 ; ₹ 16,667; i) 60 % ; ₹ 83,333 ;₹ 36,667 ; ii) 60 % ; ₹ 83,333; ₹ 1,667; iii) 58 % ;
₹ 86,207; ₹ 13,793; iv) 60 % ; ₹ 75,000; ₹ 25,000)
Q.12 Following figure have been extracted from the book of M/s RST Private Limited. (May 2018)
Financial Year Sales (₹) Profit/Loss (₹)
2016-17 4,00,000 15,000 (Loss
2017-18 5,00,000 15,000 (Profit)
You are required to calculate
i) Profit Volume Ratio.
ii) Fixed Cost.
iii) Break Even Point .
iv) Sales Required to earn a Profit of ₹ 45,000.
v) Margin of Safety in financial year 2017-2018.
(Ans. i) 30 % ; ii) ₹1,35,000; iii) ₹ 4,50,000; iv) ₹ 6,00,000, v) ₹ 50, 000)
Q.13 If Margin of Safety is ₹ 4,80,000 (40 % of Sales ) and PV Ratio is 30 % of AB Ltd.
Calculate i) Break Even Sales ii) Amount of Profit on Sales of ₹ 18,00,000
(Ans. i) ₹ 7,20,000; ii) ₹ 3,24,000)
Q.14 From the following data calculate the Break Even Point expressed in terms of sales in Repee also
ascertain number of units that must be sold to earn a profit of ₹ 60,000 per year.
Sales Price ₹ 20 per unit
Variable Manufacturing Expenses ₹ 11 Per Unit
Variable Selling Expenses ₹ 3 Per Unit
Fixed Factory Overheads ₹ 5,40,000 Per Year
Fixed Selling Expenses ₹ 2,52,000 Per Year
(Ans. P/V Ratio 30 %; BEP ₹ 26,40,000; Sales 1,42,000 units)
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 Period Sales (₹) Profit (₹)
I 1,20,000 9,000
II 1,40,000 13,000
Q.20 A Company Produces and sells a single article at ₹ 10 each. The marginal cost of production is ₹ 6
each and fixed cost is ₹ 400 per annum.
Calculate:
i) P/V Ratio ii) Break - Even Sales. (In ₹ and Nos.) iii) Sales to earn a Profit of ₹ 500. iv) New
Break- Even Point if sales price is reduced by 10 %. v) Profit at Sales of ₹ 3,000. vi) Margin of Safety
at sales ₹ 1,500 and vii) Selling price per unit if the Break- even point is reduced to 80 units.
(Ans. i) 40 %; ii) ₹ 1,000; 100 unit; iii) ₹ 2,250; iv) 133.33 unit ; ₹ 1,200; v) ₹ 800; vi) ₹ 500;
vii) ₹ 11 per unit)
Q.21 The Turnover and Profit during the two period were as follows (May 2018)
Sales (₹) Profit (₹)
Period I 40 Lakhs 4 Lakhs
Period II 60 Lakhs 8 Lakhs
Assuming that the cost structure and selling price remain the same in the two period, calculate.
I) Profit Volume Ratio.
ii) Break Even Point Sales.
iii) The Sales Required to earn Profit of ₹ 10 lakhs.
iv) Margin of Safety in period II.
v) Profit when Sales are ₹ 50 Lakh (P.V modified);
(Ans. i) 20 % , ii) ₹ 20,00,000; iii) ₹ 70,00,000 iv) ₹ 40, 00,000; v) ₹ 6,00,000
Q.22 You are given the following information for the next year
Particulars ₹
Sales 20,000 units 2,40,000
Variable Cost 96,000
Fixed Cost 1,20,000
1. Find out the PV Ratio, Break Even Point and Margin of Safety.
2. Evaluate the effect of the following on PV ratio, Break Even Point and Margin of Safety.
i) 10 % decrase in variable cost .
ii) 10 % increase in variable cost.
iii) 10 % increase in fixed cost.
iv) 10 % decrease in fixed cost.
v) 10 % increase in sales volume.
vi) 10 % decrease in sales volume.
vii) 5 % increase in selling price.
viii) 5 % increase in selling price
(Ans. i) PV Ratio 60 % ; BEP ₹ 2,00,000; MoS ₹ 40,000; 2) i) 56 % ; ₹ 2,14,286 ; ₹ 25,714; ii) 64 % ;
₹ 1,87,500; ₹ 52,500; iii) 60 %; ₹ 2,20,000; ₹ 20,000; iv) 60 %; ₹ 1,80,000; ₹ 60,000; v) 60 % ;
₹2,00,000; ₹ 64,000; vi) 60 % ; ₹ 2,00,000; ₹ 16,000; vii) 61.91 % ; ₹ 1,93,839.8; ₹ 58,160.23;
viii) 58 % ; ₹ 2,07,289.7; ₹ 20,710.31)
Q.23 A, B and C are three similar plants under same management who want them to be merged for the
better operations. The details are as under : (April 2015)
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 Plant A B C
Capacity Operated 100 % 70 % 60 %
Turnover in Lakhs 300 280 180
Variable Cost in Lakhs 200 210 90
Fixed Cost in Lakhs 70 50 62

You are required to find out:

i) The Capacity of Marged plant for break even.
ii) The Profit at 85 % Capacity of Merged plant.
(Ans. i) 35 % ; BEP ₹ 520 lakhs; ₹ 520 lakhs ; ii) ₹ 115.5 Lakhs )
Q.24 Company X and Company Y, both under the same management, makes and sells the same type of
product. The budgeted Profit and Loss Account for January - June , 2005 are as under.
Particulars Company ‘X’ Company ‘Y’
₹ ₹ ₹ ₹
Sales 6,00,000 6,00,000
(-) Variable Cost 4,80,000 4,00,000
Fixed Cost 60,000 5,40,000 1,40,000 5,40,000
60,000 60,000
You are required to:
i) Calculate the Break- Even Point for each company.
ii) Calculate the sales volume at which each of the two companies with profit of ₹ 20,000.
iii) Calculate margin of safety for both the companies. (Ans. X Company i) ₹ 3,00,000; ii) ₹ 4,00,000;
iii) ₹ 3,00,000; Y Company i) ₹ 4,20,000; ii) ₹ 4,80,000; iii) ₹ 1,80,000)
Q.25 The following figures relate to a company manufacturing a varied range of products.
Calculate: i) The profit / volume ratio ii) Fixed cost iii) Break-even point iv) Margin of safety for the
years 2004 and 2005.
Particulars Total Sales (₹) Total Cost (₹)
st
Years ended 31 December, 2004 22,23,000 19,83,600
st
Years ended 31 December, 2005 24,51,000 21,43,200
(Ans. i) 30 % ; ii) ₹ 4,27,500; iii) ₹ 14,25,000 iv) 2004 ₹ 7,98,000; 2005 ₹ 10,26,000)
Q.26 The Sales Turnover and Profit during two period are as under.
Particulars Sales (₹) Profit (₹)
Period I 80,000 10,000
Period II 90,000 14,000
Calculate the following
i) P/V Ratio ii) Fixed Cost iii) Break - Even iv) Margin of Safety in both periods v) Profit when
sales are ₹1,00,000 and ₹ 20,000 respectively.
(Ans. i) 40 % ; ii) ₹ 22,000; iii) ₹ 55,000; iv) Period I ₹ 25,000; Period II ₹ 35,000; v) ₹ 18,000 ;
₹(14,000)
Q.27 The following information is obtained from Essar co. for January.
Particulars ₹
Sales 20,000
Variable Costs 10,000
Fixed Costs 6,000
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i) Find P/V Ratio, B.E.P and Margin of Safety at this level and the effect of :
ii) a) 20 % decrease in fixed costs.
b)10 % increase in fixed costs.
c)10 % decrease in variable costs
d)10 % increase in selling price.
(Ans. i) P/V Ratio 50 % ; B.E.P ₹ 12,000; MOS ₹ 8,000; ii) a) 50 % ; ₹ 9,600; ₹ 10,400;
b) 55 % ; ₹ 10,910; ₹ 9,091; iii) 55 % ; ₹ 11,000; ₹ 11,000)
Q.28 From the following information of Ram Ltd. For two period Calculate . (April 2018)
i) Profit volume Ratio.
ii) Break Even Point in value.
iii) Sales Required to earn the Profit of ₹ 10 lakhs.
iv) Margin of Safety for IInd Period
v) Profit When the Sales are so lakhs.
Particulars Sales (₹) Profit (₹)
Period I 40 Lakhs 36, Lakhs
Period II 60 Lakhs 52 Lakhs

(Ans. i) 20 % ; ii) 20,00,000; iii) ₹ 70,00,000; iv) ₹40,00,000; v) ₹ 6,00,000)

Q.29 ABC Ltd. furnishes you the following in come information for the year 2018 (April 2019)
Particulars First Hals (₹) Second Half (₹)
Total Cost 8,00,000 14,00,000
Profit 2,00,000 6,00,000
From the above you are asked to campsite the following assuming that the fixed cost remains the
same in both the periods.
i) Profit / Volume Ratio.
ii) Fixed Cost Annual.
iii) Sales, Required to earn, the Profit of ₹ 7,50,000.
iv) Profit Required to earn, at Sales of ₹ 45,00,000.
v) BEP for the whole year.
(Ans. i) 40 % ; ii) ₹ 4,00,000; iii) ₹ 23,75,000 iv) ₹ 16, 00,000; v) ₹ 10,00,000)
******

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