Budgetary Control, Mar Cost c0st St,Res Ac

7/25/2019 Budgetary Control, Mar Cost c0st St,Res Ac

1/29

BUDGETARY CONTROL Meaning: Budgetary control is a system of planning and

controlling costs. It is a process of continuous comparision of

actual performances and costs with that of budgets.


2/29

Budgetary control is applied to a system of management and

accounting control by which all operations and output are

forecasted as far ahead as possible and actual results when

known are compared with budget estimates.


3/29

ICMA, London defines budgetary control as the establishment

of budgets relating to responsibilities of e!ecuti"es to the

re#uirement of a policy and continuous comparison of actualwith budgeted results either to secure by indi"idual action the

ob$ecti"es of that policy or to pro"ide a basis for its re"ision%.


4/29

Features of Budgetary control

&.'stablishment of budgets for each function and section of the

organi(ation.

).*i!ing the responsibility of e!ecuti"es in order to perform thespecific tasks so that ob$ecti"es of enterprise may be attained.

+.Continuous comparison of the actual performance with that of

the budget so as to know the "ariations from the budget.


5/29

.-aking suitable remedial action to achie"e the desired ob$ecti"e

if there is a "ariation of the actual performance from the

budgeted performance.. /e"ision of budgets in the light of changed circumstance.


6/29

0roblem &

1ou are re#uired to prepare sales budget for the #uarter ending +2th3eptember

)2&2. Ashok Ltd produces and sells three products, "i(, A,B and C in two

(ones called 4& and 4).

-he estimated sales for the #uarter ending +2 3eptember )2&2 shown that

&. *orecast shows that the sales of product A will go up by &25 in 4one 4)

). in 4one 4& ,the sales of product C will be increased by 22 units

+.-he sales of product B will be increased by )25 in both the (ones.

.-he prices of product A and C will be maintained. In case of product B, /e.&

will be reduced as per the forecast.

Below gi"en are the actual sales for the #uarter ending +2 6une )2&2.!roduct !rice "er unit #one #$ #one #%

&units' &units7

A /s.&2 222 222

B /s.& 222 8222

C /s.)2 +222 222


7/29

3ales budget

4one 4& 4one 4) -otal0roducts

9uantity /ate Amount 9uantity /ate Amount

units /s. /s. nits /s. /s.

A 222 &2 2222 22 &2 222 ;222

222&7

B ?22 & 8@)22 @)22 & &22?22 &8?222 222&7 8222&7

=Ad$>+7 =Ad$>7 =Ad$>+7 =Ad$>7

C +22 )2 @2222 222 )2 &22222 &@2222

=+222)7

-otal &?@)22 )?22 432000


8/29

*le!ible budget 0articulars nits -otal

/s.

0er unit

/s.

Material cost

Labour cost

irect e!penses

0/IM' C3-

Add Factory e("enses *i!ed

ariable

*actory cost

Add Ad)inistrati*e e("enses

*i!ed

ariable

Fle(i+le "roduction cost

DDDDDDDDD

DDDDDDDDDD

DDDDDDDDDD

DDDDDDDDDD

DDDDDDDDDD

DDDDDDDDDD

DDDDDDDDD

DDDDDDDDD

DDDDDDDDD

DDDDDDDDDD

DDDDDDDDD

DDDDDDDDDD

DDDDDDDDDD

DDDDDDDDD

DDDDDDDDD

DDDDDDDDD

DDDDDDDDDD

DDDDDDDDD

DDDDDDDDDD

DDDDDDDDDD

DDDDDDDDD

DDDDDDDDD

DDDDDDDDDD

DDDDDDDDD

DDDDDDDD

DDDDDDDD

DDDDDDDD

DDDDDDD

DDDDDDD

DDDDDDD


9/29

Eith the following data for 825 acti"ity, prepare a budget for

production at ?25 capacity

0roduction at 825 acti"ity 822 units

irect e!penses /s.&2 per unit

Material cost /s. &22 per unit

*actory e!penses /s.2222=25 fi!ed7Labour cost /s.2 per unit

Administrati"e e!penses /s.+2222=825 fi!ed7


10/29

,-. / ,-- units

0-. / 0-- units

Factory e("enses

*i!ed F 25 of 2222 F &8222= at 825 and ?25 capacity ie.,at 822 and?22units capacity7

ariable F 825 of 2222 F )222= at 825 ie., at 822 units capacity7

At ?25 ie., ?22 units capacity F for 822 units >G )222 "ariable e!penses

for ?22 units >G H =+)2227

ote: Informations are gi"en at 825 capacity for fi!ed and "ariable e!penses*i!ed e!penses are fi!ed at both the le"els. But "ariable e!penses are"ariable

Ad)inistrati*e e("enses

Fi(ed ,-.of 1---- / $0---2aria+le /3-. of 1---- /$%---&at ,-. ca"acity'

At 0-. ca"acity / for ,-- units 45 $%--- *aria+le e("enses

for 0-- units 45 6 &$,---'

Total a)ount in ru"ees 7 Nu)+er of units / 4444 Rs8 "er unit


11/29

*le!ible budget for production at ?25 capacity

0articulars nits -otal /s.

0er unit

/s.

Material cost

Labour cost

irect e!penses

0/IM' C3-

Add Factory e("enses *i!ed &8222

ariable +)222

*actory cost

Add Ad)inistrati*e e("enses

*i!ed &?222

ariable &8222

Fle(i+le "roduction cost

?22

?22

?22

?22

?22

?22

?22

?22

?2222

+)222

?222

&)2222

?222

&8?222

+222

)2)222

&22.22

2.22

&2.22

&2.22

82.22

)&2.22

).2

)).2


12/29

Master budget

It is a consolidated summary of "arious functional budgets. It is

also called finali(ed profit and loss account. -his budget

summari(es functional budgets to produce a budgeted profit andloss account


13/29

Master budget0articulars Amount Amount

Budgeted 3ales

Less cost of "roduction:

irect material cost JJ..

irect wages JJ..

Less Factory o*er9eads:

2aria+le factory o*er9eads:

stores and spares JJJ light and power JJJ

repairs and maintenance JJJ

Fi(ed factory o*er9eads

work managerKs salary JJJ

foremanKs salary JJ..

depreciation JJ.. sundries JJ..

Less ad)inistration: selling and distri+ution o*er9eads

Budgeted Net "rofit

JJJ

JJJ.

JJJ.

JJJJ.

JJJ..

JJJJ..

JJJJ

0 bl &


14/29

0roblem o.&

A glass manufacturing company re#uires you to calculate and present the budget for thene!t year from the following information:

a7 3ales /s. ?22222

b7 irect material cost 825 of salesc7 irect wages )2 workers at /s.&2 per month

d' Factory o*er9eads

2aria+le:

3tores and spares ).5 on sales

Light and power /s.222

/epairs and maintenance ?222

Fi(ed:

Eorks managerKs salary /s.22 per month

*oremanKs salary /s.22 per month

epreciation on machinery /s.&)8223undries&25 on direct wages

Administration, selling and distribution e!penses /s.&222 per year

!re"are a )aster +udget

M b d


15/29

Master budget0articulars Amount Amount

3ales

Less cost of "roduction:

irect material cost =825 of sales /s?,22,2227 ?2222

irect wages=)2 workers!/s.&2!&) months7 +8222

Less Factory o*er9eads:

2aria+le factory o*er9eads:

stores and spares=).5 on sales7 )2222

light and power 222

repairs and maintenance ?222 11---

Fi(ed factory o*er9eads

work managerKs salary=/s22!&)months7 8222

foremanKs salary=/s22!&)months7 ?22

depreciation &)822

sundries=&25of direct wages +82227 +822 %;---

?22222

&8222

)?222

82222

)&222

&222

)22222


16/29


17/29

-he de"iation of the actual cost or profit or sales from the standard cost or profit

or sales is known *ariance. Ehen actual cost is less than standard cost oractual profit is better than standard profit, it is known as fa"ourable "ariance

and such a "ariance is usually a sign of efficiency of the organi(ation.

0 bl &


18/29

0roblem o.&

-he standard material re#uired to manufacture one unit of product is &2 kg.

and the standard price per kg. of material is ).2. -he cost accounts records,

howe"er, re"eal that &&22 kg. of material costing /s.)@822 were used for

manufacturing &222 units of product . calculate :a7 Material cost "ariance

b7 Material price "ariance

c7 Material usage "ariance

3t d d i f t i l k / ) 2


19/29

3tandard price of material per kg. F /s.).2

3tandard usage per unit of product F &2 kg.

-herefore standard usage for an output of &222 units of product F

&222 units ! &2kg F &2222 kg.

Actual usage of material F &&22 kg.Actual cost of materials F /s.)@822

Actual price of material per kg. FActual cost of materials

Actual usage of materials

F /s.)@822

&&22kg

F /s.).2 per kg

l

a' Material cost *ariance:


20/29

a' Material cost*ariance:

F standard cost of materials actual cost of materials used OR

=3tandard usage or #uantity ! standard rate or unit price7 =actual usage !actual rate7

F&2222 kg.!/s.).2 &&22 kg. ! /s.).2F /s.)222 /s.)@822

F /s.)822 ad"erse or unfa"ourable

+' Material "rice*ariance: F actual usage =standard unit price actual unit price7

F &&22 kg.=/s.).2 /s.).27

F /s.&&2 fa"ourable

ote: In case of cost and price, if actual cost and price is less than standard,the situation will be fa"ourable

c7 Material usage or #uantity "ariance:


21/29

c7 Material usage or #uantity"ariance:

F standard unit price =standard usage > actual usage7

F /s. ).2=&2222 kg. &&22 kg.7

F /s.+@2 ad"erse

ote: In case of #uantity, if actual usage is more, the situation is ad"erse orunfa"ourable

0roblem o )


22/29

0roblem o.)

*rom the following particulars calculate:

a7 Material cost "ariance

b7 Material price "ariance

c7 Material usage "ariance

Materials standard cost -otal Actual cost -otal

nits price = /s.7 nits 0rice = /s.7

A &2&2 &.2 &2&2 &2?2 &.) &);8

B &2 &. 8& +?2 &.? 8?

C +2 ).2 @22 +?2 &.; @))

)+) )@2)



23/29


F standard cost of materials actual cost of materials usedOR

=3tandard usage or #uantity standard rate or unit price7

=actual usage ! actual /ate7

/s.)+) /s.)@2)

F /s.+@@ad"erse or unfa"ourable

+' Material "rice *ariance:

F actual usage =standard unit price actual unit price7

Material A F &2?2 units=/e.& /s.&.)27 F /s.)&8 ad"erseN

Material B F +?2 units=/s.&. /s.&.?27 F /s.&& ad"erseN

Material C F +?2 units=/s.).2 /s.&.;27 F /s. +? *a"ourable

-otal material price "ariance F /s.);) ad"erse=++2ad"erse +? fa"ourable7



24/29


F standard unit price =standard usage > actual usage7

Material A: /e.&=&2&2 units &2?2 units7 F /s.@2 ad"erseN

B: /s.&.=&2 units +?2 units7 F /s. fa"ourableN

C: /s.) =+2 units +?2 units7 F /s.82 ad"erse -otal material usage "ariance F /s.? ad"erse=&+2 ad"erse

fa"ourable7

Ad*antages of Marginal costing:


25/29

Ad*antages of Marginal costing:

$8Fi(ation of "rices: Marginal costing pro"ides information for fi!ation ofprices.

%8Cost control: Marginal costing pro"ides information about fi!ed costs and"ariable costs separately. Cost informations are reported periodically andregularly to the management for decision making and controlling the costs.

18Ma=e or +uy decision: -his decision can be taken by comparing thepurchase price with the marginal cost of producing it. If the marginal cost isless than the purchase price the component may be manufactured utilisingthe e!isting capacity.

38!rofit "lanning: It is easy to plan the future operations to earn ma!imumprofit through break e"en analysis techni#ue.

>8Utili?ation of scarce resources: -he best utili(ation of scarce resourcessuch as raw materials, labour etc is guided by marginal costing techni#ue.


26/29

Res"onsi+ility Accounting

/esponsibility of each manager of department to the management

regarding cost control, performance etc./esponsibility accounting is appropriate where top management has

delegated authority to make decisions. -he idea behind responsibility

accounting is that each managerOs performance should be $udged by

how well he or she manages those items under his or her control.


27/29

P /esponsibility accounting is a system of di"iding an organi(ation

into similar units, each of which is to be assigned particular

responsibilities. -hese units may be in the form of di"isions,

segments, departments, branches, product lines and so on. 'ach

department is comprised of indi"iduals who are responsible for

particular tasks or managerial functions. -he managers of "ariousdepartments should ensure that the people in their department are

doing well to achie"e the goal. /esponsibility accounting refers to

the "arious concepts and tools used by managerial accountants to

measure the performance of people and departments in order to

ensure that the achie"ement of the goals set by the topmanagement.


28/29

P /esponsibility accounting, therefore, represents a method of

measuring the performances of "arious di"isions of an organi(ation.

-he test to identify the di"ision is that the operating performance is

separately identifiable and measurable in some way that is of

practical significance to the management. /esponsibility accounting

collects and reports planned and actual accounting informationabout the inputs and outputs of responsibility centers.


29/29

Transfer !ricing

-he pricethat is assumed to ha"e been chargedby one part of a

company for products and ser"ices it pro"ides to another part of the

same company, in order to calculate each di"isionOs profit and loss

separately.

In todayOs international market, a large share of world trade consists

transfer of goods, intangibles and ser"ices within multinational

enterprises =M's7 > associated companies with business

establishments in ) or more countries. -o determine the internationalta! liability in each $urisdiction, the right transfer pricing principle has to

be applied.
http://www.investorwords.com/3807/price.htmlhttp://www.investorwords.com/7559/charged.htmlhttp://www.investorwords.com/7559/charged.htmlhttp://www.investorwords.com/3807/price.html

Budgetary Control, Mar Cost c0st St,Res Ac

Documents

Transcript of Budgetary Control, Mar Cost c0st St,Res Ac