Concept based notes

Business Budgeting
(B.Com. Part-III)

Shalini Agarwal
Deptt. of Commerce
Biyani Girls College, Jaipur

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Published by :
Think Tanks
Biyani Group of Colleges

Concept & Copyright :

©Biyani Shikshan Samiti
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ISBN : 978-93-81254-54-7

First Edition : 2009

Second Edition: 2010
Price:

While every effort is taken to avoid errors or omissions in this Publication, any mistake or omission
that may have crept in is not intentional. It may be taken note of that neither the publisher nor the
author will be responsible for any damage or loss of any kind arising to anyone in any manner on
account of such errors and omissions.

Leaser Type Setted by :

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Preface

I am glad to present this book, especially designed to serve the needs of the students. The book has been
written keeping in mind the general weakness in understanding the fundamental concepts of the topics. The
book is self-explanatory and adopts the “Teach Yourself” style. It is based on question-answer pattern. The
language of book is quite easy and understandable based on scientific approach.

This book covers basic concepts related to the microbial understandings about diversity, structure,
economic aspects, bacterial and viral reproduction etc.

Any further improvement in the contents of the book by making corrections, omission and inclusion is
keen to be achieved based on suggestions from the readers for which the author shall be obliged.

I acknowledge special thanks to Mr. Rajeev Biyani, Chairman & Dr. Sanjay Biyani, Director (Acad.) Biyani
Group of Colleges, who are the backbones and main concept provider and also have been constant source of
motivation throughout this Endeavour. They played an active role in coordinating the various stages of this
Endeavour and spearheaded the publishing work.

I look forward to receiving valuable suggestions from professors of various educational institutions,
other faculty members and students for improvement of the quality of the book. The reader may feel free to
send in their comments and suggestions to the under mentioned address.

Author

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 Syllabus
Business Budgeting
SECTION-A
Business Budgets and Budgeting : Meaning, Nature, Objectives, Advantages
and Limitations of Budgets and Budgeting, Budget Terminology. Preparation
of Budgets, Budget Co-ordination. Essientials of an Effective Budgeting.
Types of Budgets : Fixed and Flexible Budget, Financial Budget, Master
Budget, Sales Budget, Production Budget, Cost of Production Budget, Direct
Material Budget, Direct Labour Budget and Overhead Budget. Performance
Budgeting. Zero Base Budgeting.
Business Forecasting : Meaning, Theories, Techniques of Business Forecasting.
Essentials of Business Forecasting.

SECTION-B
Cash Budgeting : Meaning, Importance and Forms of Cash Budget.
Preparation of Cash Budget. Methods of (preparing) Cash Budget.
Budgetary Control : Meaning, Characteristics, Objects and Benefits of
Budgerary Control. Budgetary Control Vs. Standard Costing, Sales Variances,
Material Variances, Labour Variances.
Project Planning and Feasibility Study : Types of Projects, Appraisal of
Projects, Profitability Estimates of Projects, Feasibility : Economic, Financial and
Technical.

SECTION-C
Product and Production Decisions : Meaning, Product, Product Decision Areas
: Use of Alternative Production Facilities. Determination of profitable level of
production, Utilisation of full production capacity. Starting a new product in
place of old. Determination of product mix on the basis of key factor.
Cost of Capital : Computation of Cost of Debt Fund, Preference Share Capital,
Equity Share Capital, Retained Earnings and Weighted Average Cost of
Capital.
Analysis of Risk and Uncertainty : Introduction, Description of basic risk
concept, Risk evaluation approaches.
Value Analysis : Meaning of Value Analysis, Objectives of Value Analysis: A
Fresh look.
N.B. : The question paper will be evenly divided between theoritical and
numerical questions.

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 Chapter-1
Budget
Q.1. What is Business Budget
Ans. It is a detailed plan of various business activities based on future forecasts and are to
be carried on in a budget period for the attainment of certain predetermined busi
objective. Busi budget are prepared to eliminate the future risks of business and to
ensure successful completion of various tasks.

Q.2. What are characteristics of budget.

Ans. (a) Definite future period of time.
(b) Detailed Plan
(c) Attainment of Pre-determined objectives of Busi
(d) Co-operate
(e) In monetary units
(f) Integral part of Business
(g) It is standard
(h) It is conclusion of Budgeting
(I) Instrument of achieving Busi objective.
(j) Written Document
Q.3. What is Nature of Budget
Ans. (a) It is continuous managerial Process.
(b) It is a tool of mgmt.
(c) It is a technique.
(d) It is a standard.
(e) It is a specific proforma.
(f) It is a integrated plan.
(g) Financial Budget are more important.
(h) It is a means of communication.

Q.4. What are the objective of Budget

Ans. (1) Max. the Busi profit
(2) Optimal Utilization of Resources
(3) Help to fix the responsibilities

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 (4) Increase Busi efficiency
(5) Co-operate in managerial skills.
(6) To protect the Busi from future risks & uncertainty.
(7) To use as a source of Busi communication.
(8) To use as a standard for measuring performance.
(9) To establish co-ordination between various deptt.
(10) To increase the competitive strength of a Busi.

Q.5. What are the limitation of Budget.

Ans. (1) Personal Bias
(2) Success depend on the efficiency of employee.
(3) It is instrument, not an end.
(4) Create hurdle in place of guidance.
(5) Freedom of work restricted by it.
(6) Govt. policy affect it.
Q.6. What is Budgeting
Ans. Budgeting is a managerial process. It is a technique to formulate a budget and to
implement and evaluate it.
Characteristics:
(1) Continuous managerial process.
(2) Related to definite period of future time.
(3) Based on certain objectives.
(4) Future forecasting
(5) Standard for measuring performance.
(6) Technique for formulating plan.
(7) Means to prepare Budget.
(8) Success of Budget depend on it.
Objectives: (1) Helpful in planning.
(2) Helpful in co-ordination.
(3) Helpful in controlling.
(4) Helpful in communication.
(5) Helpful in performance evaluation.
(6) Helpful in comparison.

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 (7) Helpful in fixing standard.
(8) Helpful in cost control.
(9) Helpful in removing complexities.
(10) Helpful in raising competitive strength.

Q.7. Explain the process of Budgeting.

Ans. Budgeting process having following steps –
(1) Formulation of Busi Policies:
Busi policy for various activities such as sale policy, purchase policy, production
policy, cash & inventory policy are determined in advance.
(2) Preparation of Budget Forecasts:
All the heads of different deptt prepare budget estimate for certain period of time, e.g.
Sales forecast, purchase forecast, etc.
(3) Comparison of alternative, co-ordination and Review:
Budget committee studied different Department Budget & alternative analyse it &
suggest the deptt head to best one & they can suggest the change in budget by their
own.
(4) Formation of master budget, final approval & budget execution
After the co-ordination all deptt. budget prepare the master budget and send to
approval of Board of directors. After approval sent it to different deptt for execution.

Q.8. What are the limitation and advantages of Budget.

Ans.
Advantages Limitation
1. Helpful in managerial function. 1. Budget are only estimates.
2. Profitability analysis. 2. Lack of full knowledge.
3. Cost analysis. 3. Personal Bias
4. Helpful in comparison. 4. Ineffective
5. Participation 5. Non-cooperation
6. Determination of functions. 6. Highly Burden
7. Determination of responsibilities. 7. Budget Decision taken by Higher
authority.
8. Regular accounting. 8. Only tool for management.
9. Optimum use of Busi resources
10. Motivation

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 11. Accountability & efficiency
12. Development of co-operative spirits.

Q.9. Budget Co-ordination as a tool of mgmt.

Ans.

Master Budget

Sales Budget Production Budget

Administrative
Material Labour Production
S & D overhead
Budget Budget overhead
budget
Budget

Cash Budget Capital Budget

Q.10. How can we make the Budget effective.

Ans. When we process following qualities we can be called Budget is effective:-
1. Fixed period of time.
2. Sound forecasts.
3. Planned accounting system.
4. Planned cost accounting system.
5. Efficient organisation.
6. Authority & responsibility.
7. Well-defined business policies.
8. Budget organisation/committee
9. Flexible
10. Economical
11. Formulation of master budget.

Q.11. Explain facts regarding Budget Committee.

Ans. Usually one member is appointed as Budget officer and others as member of the
budget committee. Budget officer has his own authority and responsibilities. All other
member work under his supervision and leadership.

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Function of Budget Officer
1. Get guidance & advice from top management.

2. Studies policies formulated by top management.

3. Decision on the basis of past present and future business condition.

4. Issue instruction to various department regarding budget.

5. Prepares master budget.

6. Taking approval of Budget.

7. Esta. Co-ordinator between various department

8. Prepare performance report and interpretation.

Rights of Budget officers

1. Right to get information

2. Co-operation form various heads.

3. Fixing responsibility of member of Budget committee.

4. To get necessary finance for budget.

5. Get salary for his services.

Budget Organisation Chart
Managing Dr./General Manager

Budget Org./Budget Committee

Budget Officer

Mem. of Bd. Committee A/c officer Other employee

Ass. A/c officer computer

Deptt. Heads

Sales Pdt. Finance Adm & Labour Purchase R&D Other

Deptt. Deptt. Deptt. Personal Deptt. Deptt. Deptt. Deptt.
Deptt.

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Q.12. What is Budget Manual
Ans. It is a book which contain all those rules, sub-rules, procedures, principles, which are
essential for Budget implementation and appraisal.
Following things are incorporated in budget –
1. Techniques, method, process of budget formulation.
2. Objective of budgeting
3. Name of Important Budget to be prepared.
4. Formate of various Budget.
5. Budget schedules
6. Bd. Org. for formulation of a budget
7. Right & Responsibility of Bd. Committee
8. Pay & allowances of Bd. Officer
9. Information about co-operation

Advantages Disadvantages
1. Provide proper guidance. 1. Restrict the freedom of members.
2. Describe function & responsi- 2. Create hurdle in the spot decision.
bilities.
3. Help in Bd. Formation 3. Undue delay in Bd. Formulation.
4. Co-ord. the budget committee 4. Hurdle in utilization of specialised
activities. officers.
5. Useful in Budget formation
implementation & appraisal.

Q.13. Importance of Budget Period.

Ans. Bd. Period is the period for which bd is prepared. It varies from Busi to Busi and from
firm to firm. Usually bd period is one year but for proper implementation these are
divided in quarterly or monthly bd. Long term bd are prepared for five or more yr.
Generally it depend on –
(1) Nature of the Busi
(2) Size of Busi
(3) Time taken in production
(4) Budget of competitors.
(5) Internal & external factor

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 (6) Busi Risks
(7) Availability of money
(8) Govt. policies

Q.14. What is Budget Format ?

Ans. Budget format in which important point of Bd should be arranged in a systematic
manner so that bd can be prepared easily and quickly.
Advantage:
1. Preparation of Bd become easy.
2. Time saving
3. Useful at all level of mgmt.

Q.15. Importance of Key Budget Factors?

Ans. Key Bd. Factor are those factor which are fixed in advance for business. They can be
stable or instable.

Key Bd. Factor

In the Area of production In the area of sales In the area of finance

1. Raw material supply 1. Shortage of Demand 1. Money & capital mkt

2. Specific Techn. 2. Lack of efficient seller 2. Investors
3. Govt. policy 3. Advtg. 3. ROI
4. Plant size 4. Consumer specific
5. Labour supply 5. Price cycle
6. Pd. Quality
7. Packaging
8. Competition

Effect of these factor can be minimised by

(1) Improving managerial efficiency
(2) Selecting efficient seller
(3) Effective advertising

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 (4) Specific packaging
(5) Improve quality of the product, etc.

Q.16. What is Responsibility centre.

Ans. Responsibility centre is a deptt. or sub-deptt of an org. who work under the mgmt to
the controlling point whose responsible to the higher mgmt. For all operational
activities. eg. mktg, Finance, pdt,

Q.17. Explain the time Based Budgets

Ans.
On the Basis of Time

Long term Budget Short term Budget Very short term Budget

(1) Long term Budget: Generally it is prepared for more than 5 yr. It is related to fixed
investment like extension, development, re-org & research for the enlargement of
economic activities, who make enables the mgmt to arrange the required capital well
in time reducing cost of capital and to maintain the speed of operation activities in
busi without any obstacles.
(2) Short Term Budget: It is generally prepared for the period of 1 yr. Main obj of this
bd is to maintain the existing speed of operating cycle continuously and regularly. The
capital required for a yr. is known as working capital, find the sources of it and
arrange them.
(3) Very short term (Current Bd): It is prepared for very short period, like monthly,
quarterly or half-yearly object it to achieve the goal of short-term Bd. It is detail list of
work related to production & supply which are to be carried out during the year. It is
useful only for big busi houses not for small busi.

Q.18. What is the classification of type of Budget?

Ans.

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 Budget Classification Chart

On the Basis On the Basis On the basis On the basis

Other
of time of Limitation of Flexibility of activity

Long Short Very Full Partial Fixed Flexible HR

term term short Budget Budget Budget Budget
term
Budget

Sales Budget Production Budget Cost Budget Finance Budget

Pdt. Cost Adm Cost S&D R&D Financial Cash Capital

Budget Budget Budget Budget Expenditure Budget Expenditure
Budget Budget

Direct Material Direct Labour Direct Exp. Production Plant

Budget Budget Budget Overhead Budget
Budget

Q.19. Explain the Budgets on the Basis of limitation?

Ans.

Perfect
Limitation Basis
Partial
(1) Perfect (Full) Budget : (Master Budget) : It includes all the activities of the Busi
related to the production, marketing, dist., & other economic activities. It is summary
of all theeconomic activities of the Busi.

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 (2) Partial Budget : When the budget is prepared only for a part/area/deptt of the
busi. It is prepared at the time when the capacity of some deptt. of the busi is not
definite or certain.

Q.20. Explain the Budgets on the basis of Flexibility.

Ans.
Fixed
Flexibility Basis
Flexible
(1) Fixed Bd (Static): In this objective and target are fixed. It is feasible to prepare only
when estimation regarding production and sales can be made accurately and there is
perfect certainty in the busi activities and envt. In following condition this is suitable:-
(1) Busi is not seasonal.
(2) No impact of external factors.
(3) Product demand is certain.
(4) No Need of special labour or material.
Merits Demerits
1. Simple to prepare 1. Other factors do not constant.
2. Less time consuming 2. Impact of other on production
3. Advantage of economy. 3. Very difficult to change.
4. Easy to control 4. Accurate estimate not possible.
5. Easy to follow-up 5. Not feasible.
6. Easy to forecast.
(2) Flexible Budget: It is prepared for various capacity. It shows the volume of sales,
cost and profit or loss which is possible at various level of production capacity. It also
adjust the change which is essential due to change in busi condition international
external factors or busi circumstances main object to know the impact on profit at
actual level of production capacity.
Characteristics:
1. Adjustable
2. Prepared in advance for any level.
3. Dynamic
4. Unfavourable impact can be control
5. Cost classified in fixed, semi-variable and variable.

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 6. Related to particular period.
Change on the following ground
1. Seasonal nature
2. Instability in input mkt.
3. Adjustable acc to habit interest of consumers.
4. Demonstration effect.
5. Competition with substitute
6. Govt. policies varies
7. Natural circumstances varies
8. Limitation of infra-structure.
Generally flexible Bd more useful coz of all dynamic factor can be adjustable.
Advantages Disadvantages
1. Easy calculation. 1. Possible only when proper A/cg. System.
2. Easy adjustment of change. 2. Requires standard costing system.
3. Knowledge about the impact 3. Depend on cost experts.
of cost.
4. Comparable 4. Depend on perfect knowledge of envt.
5. Cost control 5. Very expensive & labour oriented.
6. Determine production level.

Steps of Formulation of Flexible Budget

1. Specified the time.
2. Classify all the cost into fixed, variable & semi-variable.
3. Determine type of standard.
4. Analyse cost Behaviour pattern in past.
5. Select the proper method.
6. Build-up the appropriate Bd.

Q.21. Classify all type of cost? How

Ans. (1) Fixed cost (Period Cost) (Capacity Cost) (Supplementary Cost)

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 It includes all cost that are not affected by the increase or decrease in the volume of
production. It is constant up to installed capacity but avg. fixed cost per unit decrease
acc to increase in the volume of production.
(2) Variable Cost (Marginal Cost)
It include those cost which are affected by the volume of pdt means increase or
decrease acc to output. Total variable cost up to the volume of output but avg.
Variable cost is constant per unit.
(3) Semi-variable cost (Semi-Fixed Cost)
It remain constant upto a certain level of pdt and change after the specified level with
uneven proportion. It include both fixed & variable components.
Method of Segregation of semi variable cost
(A) Comparison by level of activity method.
(B) Degrees of variability method.
(C) Method of least square.
(D) Graphic method
Most commonly used method is as follows –
(A) Comparison by level of activity method - (Range method)
Steps as follows-
(I) Per unit V.C. = Change in variable cost/Changes in output level
(II) Total V.C. = Per Unit V.C. x Total pdt units
(III) Total F.C. = Total semi variable cost – Total variable cost
e.g.
Output 500 600 700 940 740
Semi V. Cost 2000 2200 2400 2880 2480
(I) 2880 – 2000/940-500 = 2 Rs
(II) T.V.C. = 2 x 500 = 1000
(III) T.F.V. = 2000 – 1000 = 1000

Q.22. Explain the different method of preparing flexible Budget?

Ans.
Multi-Activity Method
Methods Formula Method
Graphic Method

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(1) Multi Activity Method:
(A) Cost divided into fixed, variable, semi-variable.
(B) Each production activity level shown in separate column.
(c) Enable the mgmt to select the level of activity that provide max. profit.
Flexible Budget
(Normal Level of Activity : 80%)
Period ending............
Capacity
Particulars 50% 80% 100%
1. Prime Cost :
Direct Material ..... ..... .....
Direct Labour ..... ..... .....
Direct Expenses (if any) ..... ..... .....

2. Variable Overheads :
Maintenance and Repairs ..... ..... .....
Indirect Labour ..... ..... .....
Indirect Material ..... ..... .....

3. Marginal Cost (1+2) ..... ..... .....

4. Sales ..... ..... .....
5. Contribution (4-3) ..... ..... .....
6. Fixed Cost :
Production ..... ..... .....
Administration ..... ..... .....
Selling & Distribution ..... ..... .....

7. Profit/Loss (5-6) ..... ..... .....

(2) Formula Method: (Bd. Cost allowance method)

(I) Fixed and variable cost at normal level is used.
(II) Determine per unit v.c. by dividing v.c. by output volume.

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(III) Multiply any level of output quantity with per unit v.c. & adding fixed cost to find total
cost.
Profit margin can also find when sales is given.
(3) Graphic Method:
(I) Fixed, Variable, Total cost at OY-axis pdt unit at OX-axis.
(II) Classify the pdt cost
(III) Plot all cost on graph.

Q.23. Difference Fixed & Flexible Budget

Ans. Fixed Budget Flexible Budget
1. Nature : This budget remains This budget is changed in the light
unchanged and is the same of changed level of activity.
without considering any change
in business activity.
2. Assumption : This budget is This budget is prepared at various
prepared with the assumption levels of activity.
that level of activity will remain
unchanged.
3. Cost Classification : Costs are not Costs are classified according to their
classified according to their nature their nature i.e. fixed, variable and
or behaviour. semi-variable.
4. Comparison : When actual output Comparison is made as actual figures
is different, the comparison are compared with the same
between actual and budgeted budgeted level.
performance is not possible.
5. Forecast : Forecast of the results Forecast is easy as budget is pre-
is difficult. pared for various levels of activity.
6. Determination of Costs : It is Costs at various levels of activity can
difficult to determine the cost easily be determined.
when actual level of performance
differs from bugeted level.

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Q.24. Explain the activity Based Budget –
Ans.
On the Basis of Activity

Master Functional

Sales Pdt Cost Finance

Pdt. Adm. S&D. R&D. Financial Cash Capital

Expenditure Budget Expenditure
Budget Budget
D.M. D.L. D.E. Pdt oh. Plant Budget

(1) Master Budget

Acc to C.I.M.A. – The Master Budget is the summary budget incorporating its
component functional budget.
Acc to Traditional Approach: P&L A/c and Balance Sheet both are known as Master
Budget that is prepared on the basis of financial statement of the previous year and
future estimates.
Acc to Modern Approach: Master Budget all the functional bd in a summarised form.
It include all the key figure related to org.

Advantages Disadvantages
1. Detailed knowledge about the Busi 1. Not useful for small org.
2. Co-ordination among the deptt. 2. More expensive & time consuming.
3. Ease to execute & control. 3. Impartiality is not possible.
4. Basis of valuation. 4. Very technical & difficult.
5. Co-operation of all deptt. 5. Responsible for unnecessary delay.
6. Contivulation in pdt process
7. Knowledge about Busi profit
8. Helpful in Decision making
9. Helpful for mgmt.
10. Useful for large org.

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 Master Budget
Period Normal Capacity Budgeted Capacity
Product A Product B Total
Rs. Rs. Rs.
Sales
Less : Cost of Sales
Direct Materials
Direct Labour
Factory Overheads
Add : Opening Stock
Less : Closing Stock
Gross Profit

Administrative Cost
Selling & Distribution Cost
Net Profit
Assets :
Fixed
Currect (Net)
Total Capital Employed
Ratios :
Profit/Capital Employed
Sales/Capital Employed
Profit/Turnover
Current Ratio
Liquidity Ratio
Appropriations from Profit
Dividends
Reserves
Taxes
Balance of Profit or Loss

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Q.25. Explain Functional Budget and its different type?
Ans. Acc to ICMA: It is a budget of income or expenditure appropriate to, or the
responsibility of a particular function.

1. Programme Bd.
Form of functional Budget
2. Responsibility Bd.

(1) Programme Budget: This programme focuses much on functional activities to

completed by a deptt in bd period.
(2) Responsibility Bd: It is a complete scheme of duties and responsibilities regarding
the bd formulation, execution and controls of each person of the concerned deptt.
Advantage of Functional Bd. Disadvantages of Functional Bd.
1. Helpful in preparing master 1. Not possible to get complete
budget. knowledge about Busi.
2. Determine deptt activities. 2. Not useful for small busi.
3. Determine of duties of each 3. Expensive, time & labour
person decide. consuming.
4. Helpful in measuring
performance & efficiency.

Q.26. Give brief explanation about Sales Budget

Ans. Sales Budget- Bd which shows the volume and value of sales of a busi during the bd
period.
Sales Budged include following factors:-
(1) Data, information, trend of past years sales.
(2) Production capacity
(3) Forecast target for salesmen.
(4) Determine order of G&S produced.
(5) Study regarding busi cycle.
(6) Study seasonal change and its impact.
(7) Available factor of pdt & infrastructure.
(8) Pdt tech.
(9) Study about mkt.
(10) Mktg process
(11) Impact of different govt & International policies.
(12) Area of sales

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Objectives
(1) Earn desired profit.
(2) Increase in mkt share
(3) Sell whole lot of pdt.
(4) Satisfying customers.
(5) Generate sufficient revenue.
(6) Conduct mkt research.
Process of preparing sales Budget
(1) Sales Forecasts of grass root level.
(2) Study of sales forecasts by branch manager.
(3) Preparation of consolidated sales forecast by the regional manager.
(4) Preparation of sales budget by the sales manager.
(5) Final approval.
Merit Demerit
1. Permanent & regular source of 1. Difficult to prepare
revenue.
2. Basis of master budget. 2. Expensive
3. Basis for other functional bd. 3. Labourious
4. Enlargement of possible mkt. 4. Time-consuming
5. Desired profit can be earned. 5. Impact of external & internal factor
can’t ascertained.
6. Basis of managerial success. 6. Not useful for small busi
7. Optimum use of resources. 7. All other functional Bd depend on
it so if it not properly prepare it
affects adversely.
8. Safety from busi fluctuation.

Sales Budget-Proforma
Year ending : Area :
Budget Actual Budget Expected Budget
Current Year Current Year Next Year
Analysis Units Price Value Units Price Value Units Price Value
Rs. Rs. Rs. Rs. Rs. Rs.
By Outlets :
1. Wholesalers

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 2. Jobbers
3. Retailers
4. Salesmen
Total Sales
By Products :
1. Cinthol
2. Marvell
3. Hamam
4. Palmolive
5. Lux
Total Sales
By Customers :
1. Men
2. Women
3. Boys
4. Girls
5. Children
Total Sales

Q.27. What is Production Budget

Ans. In this mgmt decide, when and how much units of various pd are to be produced to
fulfill the requirement of sales budget means it present no. of units of various
products are to be produced periodically.
Objectives:
(1) Fulfill requirement of sales Budget.
(2) Reduce pdt cost
(3) Optimum utilization of factors.
(4) Maintain continuity of pdt process.
(5) Timely & regularly supply.
(6) Maintain sufficient stock.
Merits
(1) Basis of master budget
(2) Basis of other functional budget

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 (3) Timely supply of order possible.
(4) Decrease in production cost.
(5) Optimum utilization of factors.
(6) Earning of desired profit.
Formula = Sales + Closing stock – Opening Stock

Q.28. Explain different Cost Budgets.

Ans. Production budget is a physical budget only where as cost budget is a financial
budget regarding production.
It specifies all the costs which are to be incurred from the pdt to sales processes during
the budget period.
Production Cost Budget :
It specifies all those costs to be incurred on the production of various pd during the bd
period.
Firstly cost is classified according to various costs than mgmt prepare a separate budget in
detail and then summarised in pdt. budget.
Hence it is a summary of material budget, labour budget, factory overhead Bd and
plant budget. In large companies, it may also be further classified acc to pd, process
and time.
Particular Amt.
Direct Material xxx
Direct Labour xxx
Direct Expenses xxx
Factory Expenses – Variable Fixed xxx
xxx

(A) Direct Material Budget (Material Budget)

It specifies the budgeted qualities and cost of all kinds of raw-material required for the
production. It provide basis for fixing optimum level of inventory stocks,
establishment of control over material usage. Indirect material is not be included in it
because it is a part of factory overheads and not co-related directly with production.
It is of two type-
(A) Material Physical Budget
(B) Material Financial Budget

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(I) Material Physical Budget
It includes only the quantities of all type of materials which are essential to the
production point of view during the plan period.
Formula = Required material as per volume of pdt + Cl. Stock of R.M.– Op. Stock of
R.M.
(II) Material Financial Budget
It specifies the expenditure incurred on the purchase of required material quantities
for production during the plan period.
Formula
Cost of material required = Units of material required x Standard price of R.M. per
unit
Objectives:
(1) Determine the quantities of Raw material.
(2) Determine cost of material
(3) Helpful in preparing functional budget
(4) Helpful in control over wastages.
(5) Minimise cost of pdt.
(6) To continue pdt process
Merits
(1) Pre-determine require material.
(2) Pre-determine require cost of material.
(3) Helpful in preparing other secondary budget
(4) Timely order for requisite.
(5) Control on carrying cost.
(6) Continuation in production process.
(7) Advantage of cost min.
Factor to be look after while preparing material
(1) Budget period
(2) Determine nature and kind of material.
(3) Seasonal nature of pdt and R.M.
(4) Available material mkt and prices.
(5) Cr. Period allowed by supplier.
(6) Store mgmt and cl. Stock.

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(7) Nature of Business cycle.
(8) Time-lag between order placed.
Format for material Budget :
Units of R.M. Required as per pdt Budget xx
Add = Desired cl stock of R.M. xx
Less = Available op. stock of R.M. xx
mat req in units
Multiply Standard price of R.M. per unit (Rs) xx
mat financial requisite
(B) Direct Labour Budget :
It signifies the req of various kinds of labour for budgeted pdt of desired pd and the
total cost incurred on them.
After the labour requirements relating to different kind are finalised, estimated rate
per hr and labour cost per unit is arrived at.
Direct Labour hr required = Labour hr required for one unit of output x Quantity of
output.
Direct Labour Cost = Direct labour hr required x Std. labour rate per unit.
Objectives
1. Determine labour hr require.
2. Determine kind of labour hr require.
3. Determine standard labour hr rate.
4. To increase in profitability, efficiency and performance of the company minimising
labour cost.
Importance
1. Determine labour hr.
2. Determine labour cost.
3. Cost minimisation.
4. Minimise Idle hr.
5. Determine labour trug and incentives.
6. Increase in performance of co.
7. Continue pdt process.
8. Co-ordination among various deptt.
9. Format fore Direct Labour Budget

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10. Labour budget is usually prepared in the following format :
Direct Labour Budget
Budget Centre Period..........................
Output .............Units A Standard Hours........
.............Units B
.............Units C
Workers Number Hours Standard Rate Total Labour Cost
Rs. Rs.
Male :
Skilled
Semi-skilled
Unskilled
Female :
Skilled
Semi-skilled
Unskilled
Factor to be considered
(1) No. of quality of Labour.
(2) Labour Rate
(3) Availability of different kind of labour
(4) Desired labour hr.
(5) Est total labour cost
(6) Labour training
(7) Labour Incentives
(8) Govt. Labour policies.
(c) Direct Expenses Budget
It includes all direct expenses with pdt and change as per proportionate change in the
output, e.g. carriage inward, octori, power etc.
(D) Production overhead Budget:
It includes those expenses which are essential for manufacturing good and in directly
related with production. These expenses do not increase proportionally as per
proportionate change in output. Fixed part these expenses will not vary with the
change in the level of activity. Basically there are two elements of factory-

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 (A) Fixed production overhead
(B) Variable production overhead
It is essential to prepare to control over production overheads and to increase the
performance of the company.

Q.29. What is Plant Utilization Budget.

Ans. It prepared for the estimation of plant capacity to meet the budgeted pdt during the
plan period. If plant utilization > plant capacity mgmt think for new extra shift and
machinery.
If plant utilization < plant capacity mgmt consider the plans for increase in sales.
Factor Consider
1. No. of machine available.
2. Plant capacity
3. Production quantity
4. Economic life of machine.
5. Available funds.
Importance
(1) Detail knowledge about plant capacity.
(2) Knowledge about unused machine.
(3) Best utilization of plant.
(4) Helpful in preparing product.
(5) Timely financial arrangement.
(I) Plant Requisition Budget
= Per unit machine hr. required x Budgeted Production
(II) Plant Cost Budget
= Per unit operating cost of plant x Budgeted output
Plant utilisation budget is prepared in the format as given below :
Plant Utilization Budget
Period..........
Deptt. Machine No. of Normal Standard Output Standard
Number Hours lost Capacity per Quantity
available time in hours Std. hour
A 1 ............. ............. ............. ............. .............
2 ............. ............. ............. ............. .............

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 3 ............. ............. ............. ............. .............
B 4 ............. ............. ............. ............. .............
5 ............. ............. ............. ............. .............
6 ............. ............. ............. ............. .............

Total

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