cost accounting project vi.docx

8/11/2019 cost accounting project vi.docx

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INTRODUCTION

Cost accounting has developed primarily to provide information to the management

for planning and control. Two important techniques applied for these purposes are budgetary

control and standard costing. They help in forecasting the future activities and compare the

actual results with the plans.

It is universal truth that without planning nothing can be done. The same

fundamental is applicable for successfully running of any organization. Every organization

has to get its goal and for that it has to plan various activities which may include following:

How much to produce?

How much raw material will be required for production and how to arrange for it?

How much labour will be required for production and how to arrange for it?

How much funds will be required and from where to procure?

How much to sell and how to sell?

The list of items may be very long but one thing is clear that if we do not plan then it

is obvious that we are planning to fail.


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DEFINITION

BUDGET

CIMA London defines a budget as follows: A financial and/or quantitative

statement prepared and approved pri or to a defi ned time of the poli cy to be pursued during

the period for the purpose of attain ing a given objective. I t may include income,

expenditure and employment of capital.

An analysis of the above definition reveals the following features of a budget.

1. Budget is a statement prepared in terms of money or equivalent of money.

2. It is prepared prior to a future period of time

3. The future period for which it is prepared as definite and defined

4. The objectives to be attained and the policies to be adopted are laid down in

advance.

BUDGETARY CONTROL

CIMA London defines budgetary control as the establishment of budgets relati ng to

responsibi li ties of executives to the requir ement of a pol icy and continuous comparison of

actuals with budgeted resul ts either to secure by individual action the objectives of that

policy or to provide a basis for its revision.


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MEANING

Budget Budgeting Budgetary control

Simply speaking budget is nothing

but a plan. Technically

speaking, budget is a plan of

future activity (covering specific

period), it is a layout of future

activities of an organization. A

budget is generally expressed in

monetary terms (e.g. Material

Consumption budget in value),

however, a budget may be for non-

fi nancial terms also (e.g. Material

budget in quantity, labour budget

in hours etc.).

In simple words budget is a future

plan of any particular item, it is

prepared in advanceand it may be

in financial terms or quantitative

terms.

It is the process of

preparing, implementing

and operating the budget

(i .e. plan).

In other words,

budgeting involves the

process of preparing the

budgets and then

implementing and

operating them.

In short, budget is a plan

and the process of

preparing; implementing

etc. of the budget is

called budgeting.

Without planning everything

fails, in the same way without

proper control also everything

fails. Thus, to get success there

should be proper planning with

proper system of control.

Budgetary control is nothing but

the activity of exercising control

with the help of budgets.

Budgetary control may include:

a) Establishing budgets to

set the targets of the

executives of

organization.

b) To compare the actual

results with the desired

results (i.e. budgets).

c) Analyze the deviation

from planning activity if

any and to make required

changes in budgets.

I n brief, budgets are organizational plan of future activity, budgeting

is the activi ty of preparing these budgets and budgetary control means

the system of achieving the desired target wi th the help of budgets.


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ESSENTIAL FEATURES OF BUDGETARY CONTROL

1. Budgetary control is the establ ishment of budgets,

2. Relati ng the responsibi li ties of executi ves to the requir ements of a poli cy,

3. And the conti nuous comparison of actual with budgeted resul ts,

4. Ei ther to secure by individual action the objective of that pol icy, or

5. To provide a basis for i ts revision.

These aspects are explained in detail below.

1. Executive Responsibi li ty:

Budgets lay down targets and also fix the responsibility on each executive for

achievement of the targets. All executives in an organization have a specific job to

perform. But everyone must work in a co-ordinated manner to achieve the overall

objective of the organization. Budgetary control aims to co-ordinate the actions of all

executives so as to achieve the overall targets. Thus budget is an excellent example of

Management By Objectives (MBO).

2. Requirements of a poli cy:

Budgets must contain the policies directed towards achieving the targets. The

top management must clearly spell out the steps to be taken by each executive for

achieving the targets. The responsibilities of executives must be related to the

requirements of a policy. Thus budgetary control is an important tool of long term

planning. Budgets specify the objectives of the organization and the policies designed

to achieve those objectives.


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3. Comparison of actuals with budgets:

Budgets can be a tool of control only when the actual results are compared

with the targets. Thus the actual results must be continuously compared with the

budgets, to ascertain the deviations from the target set.

4. Corr ective action:

Management must take immediate corrective action if the actual results are

unsatisfactory when compared with targets set in the budgets. The remedial action

may be of two types-

i .

The concerned executive is given detailed information regarding the budget

variances to enable him to take action and make efforts to attain his objective.

The deviations from budgets act as a signal to management. When the actual

results differ from the budget, the concerned executive has to study where and

why the difference has occurred. Thus budget is also an excellent example of

management by exception. The executive concentrates on the problem areas

indicated by the deviations from budget so as achieve his targets.

i i . Management may study the budgets to ascertain if the targets set were

unrealistic, and if so, revise the targets themselves.


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OBJECTIVES OF BUDGETORY CONTROL

1. Planni ng the policies

A budget is a plan of the policies to be pursued during a given period of time

for achieving the given objectives. Budgetary control compels effective planning of

all operations well in time.

2. Define targets

Establish the overall aims of the business and determining the targets of

performance for each section or department of the business.

3. Define Responsibi li ties

Laying down the responsibilities of each of the executives and other personnel

so that everyone knows what is expected of him and how he will be judged.

4.

Co-ordinating activities

Various departments and sections of the firm are involved in the task of

preparing budgets. It develops team spirit and secures co-operation from all

departments to achieve the common objective of the firm.


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5. Controll ing costs

Budgets are prepared for every important function and department. Actual

performances are compared with that of budgets. This facilitates control over

different activities and costs.

6. Optimi ze Resources and Maximize profi ts

Ensuring the best use of all available resources to maximize profit or

production, subject to the limiting (key) factors.

7. I ncreases eff iciency

Well thought plans, carefully selected course of action and a system of

continuous evaluation of performances help to increase the overall efficiency of the

firm.


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STEPS IN BUDGETARY CONTROL

One type of budgetary control cannot be adopted for all firms. The following steps

are necessary to prepare suitable budgets and effective implementation of the budgetary

control system.

1. Preparation of organization chart:

Authority and responsibility of all executives should be clearly defined. This

will enable the identification of accountability of each executive.

ORGANISATION CHART

TOP MANAGEMENT

SALES

MANAGER

ACCOUNTS

MANAGER

PRODUCTION

MANAGER

PERSONNEL

MANAGER

PURCHASE

MANAGER

PURCHASE/

MATERIALBUDGET

LABOUR

BUDGET PRODUCTION/

MATERIAL/

PLANT

UTILISATION

BUDGET

SALES

BUDGET

OVERHEADS/

CASH/

CAPITAL

EXPENDITURE

BUDGET


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i. Recommend action to be taken.

4. Preparation of Budget Manual:

CIMA has defined Budget Manual as-a document which sets out the

responsibilities of the persons engaged in, the routine of, and the forms and records

required for, budgetary control. Budget manual is a document which contains a

detailed procedure about the operation of budgetary control system in an organization.

It contains routine forms and documents to be used and responsibilities of various

persons 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 organization. It in fact lies down, what is to be done, how it is

to be done, when it is to be done, and by whom. It is always preferable to devote

adequate time in the preparation of the budget, to avoid any confusion in carrying out

various jobs for the effective and successful operation of the budgetary control system.

The budget manual should be circulated to all the departmental managers to facilitate

the work of budgeting.

A budgetary control system will operate smoothly only if there is a

written document which sets out-

a. Objectives of budgetary control

b. Principles of budgetary control

c. Definitions of terms used in budget manual

d. Types of budget to be prepared e.g. basic, current etc.

e. Organisation chart

f. Budget centres


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g. Budget period

h. Budget key factor

i. Responsibility, duties, authority of each functional manager, and the budget

committee.

j. Routine to be followed, i.e. procedure for formulation, revisions, approval,

comparison and follow up of budget.

k.

Forms required in above routine for formulation, comparison , follow up etc.

of budgets.

l.

Records required for budgetary control i.e. the accounting records, accounting

codes, budget codes etc.

5. Determination of budgeted per iod:

CIMA has defined budget period as- the period for which a budget

is prepared and employed. A budget may be prepared for any lengthof periodfrom a

month to several years. The length of period of budget depends upon the-

a. Nature of I ndustry- The length of period of which budget is prepared and

employed basically depends upon the nature of industry, the nature of demand and

supply of products, the rate of changes in business conditions in that industry, the

length of the manufacturing cycle from raw material to finished product and soon.

Thus capital intensive industries like power generation, shipping, transport etc. use a

long term budget covering a period of 7-10 years. Consumer goods industries may

prepare budget for a shorter period say 1-3 years. Seasonal industries may prepare

budget for still shorter periods say every quarter. Normally however, a budget is


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prepared for one year to facilitate comparison with the actual results of one financial

year.

b. Need for control- Each function such as sales, production, research is needed to be

controlled in different ways. Production may require to be controlled daily or

weekly, sales may require to be controlled weekly or monthly, research may require

to be controlled quarterly; capital expenditure may require to be controlled yearly

and so on. Hence the functional budgets may be prepared for different periods while

the master budget is prepared annually.

c. Determination of key factor or budget factor:

When budgetary control is being established, there will normally be a

factor which determines the maximum quantity that can be produced or sold. Such factor

is called the principal, key or governing factor. CIMA has defined a principal factor as-

the factor the extent of whose influence must first be assessed in order to ensure that the

functional budgets are reasonably capable of fulfillment. Generally, sales is the

principal factor. When sale is the key budget factor, the maximum quantity that can be

sold is ascertained first. On the basis of the maximum sales quantity the sales budget is

prepared first and all other functional budgets such as production, purchase etc. are

derived there from. In some cases, machinery, labour, raw materials, finance etc. may be

the key factor. If there are two or more key factors, the relative influence of each factor

has to be judged carefully. This is done by mathematical techniques such as operational

research, linear programming etc. Key factors are not permanent; they can change in the

long run. Thus, new machinery can be purchased to increase plant capacity; advertising

can increase demand and sales and so on.


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TYPES OF BUDGETS

Classif ication based on fl exibil i ty

Fixed or static budget Flexible budget

It is a budget which is prepared for a

particular level of activity, if an activity

level changes, and then revised budget for

actual activity is not prepared.

It is a budget designed to change in

accordance with the level of activity. In

other words, budgets for different level of

activities are prepared, if the activity level

changes then the revised budget for

revised level of activity will be adopted.

Classif ication based on period

Long- term budget Short-term budget

A long term budget generally covers a

period exceeding one year.

e.g. Research and Development budget,

Capital expenditure budget etc.

Short term budget are budgets other than

long term budget. Generally they cover a

period of less than one year.

e.g. sales budget, purchase budget etc.

Practically the period of classification may slightly differ from organization to

organization. Further, sometimes budgets (on the basis of period) are classified as long

term, short term and current budgets.


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Classif ication based on content

Financial budget Quantitative budget

It is a budget which is expressed in

monetary terms.

e.g. sales budget (in value), material cost

budget, labour cost budget etc.

It is a budget which is expressed in non-

monetary terms.

E.g. sales budget (in quantity), material

consumption budget (in units), labour

hours budget etc.

Classif ication based on coverage

Functional budget Master budget

As name indicates, these budgets are

prepared for various functions of an

organization like sales (sales budget),

purchase (purchase budget), production

(production budget), material/labour

(material cost budget, labour cost budget),

etc.

Functional budgets are also known as

subsidiary budgets or departmental

budgets.

As name indicates, it is a summary of

different functional budgets. Generally

this budget is prepared by adopting total

figures of different functional budgets.

Budgeted profit and loss A/c or budgeted

balance sheet is an example of master

budget.

Various functional budgets:

Functional budgets can be broadly classified as budgets relating to operation of an

enterprise and budgets relating to financial activities of the enterprise.


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FUNCTIONAL BUDGETS

FUNCTIONAL BUDGETS

Relating to fi nancial activi ties

of an enterpri se

Relating to operation of an

enterprise

1.Sales Budget (can be in quantity

or in value)

2.Production budget (can be in

quantity or in value)

3.Cost budget/overheads budget

(can be in fixed, variable and/or

semi-variable capacity)

a.

Cost of production budget, itcan include,

i.

Direct material budget

ii.

Direct labour budget

iii.

Production overhead

budget

b.Administration cost budget

c.Cost of goods sold budget

d.

Selli ng and distri bution costBudget

4.Di rect materi al i n quantity

5.Plant util ization budget (can be

in time/load machine wise)

6.Closing inventory budget

1.Cash budget

(Receipts/Payments/ba

lance)

2.Capital expendi tur e

budget

3.Long term Research

and Development cost

budget


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UNDERSTANDING OF MAJOR FUNCTIONAL BUDGETS

Sales budget

Sales are the ultimate objective of any organization. All other major budgets

are based on sales budget; hence, an inaccurate sales budget may scrap the

entire budgeting process.

Sales budget can be expressed in quantitative terms as well as in terms of

value.

Production budget

After preparation of sales budget, the next step will be to prepare the

production budget to produce the required units. Production will be based on

the budgeted sales and desired closing inventory.

One of the important factor to be considered while preparing production

budget is the production capacity of the firm. If the firm is unable to meet the

desired production, it may think of different options like overtime, sub-

contracting etc.

On the other hand, if the capacity is surplus, the firm may think of suitable

action to dispose of the surplus capacity.


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Particulars Units

Sales

Add: Closing Stock

Gross quanti ty acqui red

Less: Opening Stock

Production

XX

XX

XXX

XX

XXX

Di rect mater ial budget/mater ials consumption budget

Direct material budget can be prepared after preparation of production budget.

Direct material budget can be prepared in quantitative terms or in value.

Direct materials budget shows the details of raw materials requirements of the

organization.

Pur chase budget

After ascertainment of the quantity of raw materials required,

the next step is to design a proper budget determining the quantity/value of raw

materials to be purchased. Purchase budget discloses the quantity/value of raw

materials to be purchased.

Particulars Raw materials (quantity/value)

Consumption (units)

Add: Closing stock (units)

Less: opening stock (units)

Purchase (units)

XX

XX

XXX

XX

XXX


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*Rate per unit (Rs.)

Purchase value(Rs.)

X

XXX

Di rect labour budget

On the basis of budgeted production, labour budget is

designed. Labour budget discloses the budgeted direct labour time (hours, days etc.)

and labour cost involved in production.

Production overhead budget

Production overhead budget is nothing but a simple schedule

showing various elements of total production overheads. Main objective of preparing

production overheads budget is to determine the budgeted recovery rate.

Cost of production budget

Cost of production budget is nothing but a schedule showing

various elements of cost of production. It is similar to Cost Sheet.

Admini strative overheads budget

Administrative overheads budget is nothing but a simple

schedule showing various elements of total administrative overheads.

Cost of goods sold budget

Cost of goods sold budget is nothing but a schedule showing

various elements of cost of goods sold.


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Sell ing and distr ibution overheads/cost budget

Selling and distribution cost budget is nothing but a simple

schedule showing various elements of total selling and distribution cost/overheads.

Master budget

Master budget is nothing but a budgeted income statement

and balance sheet. In other words, master budget consists of two elements viz.

budgeted income statement and budgeted balance sheet.

Budgeted income statement for the year ending on ..

Particulars Rs.

Budgeted sales X

Less: Budgeted cost of goods sold (X)

Budgeted gross margin XX

Less: budgeted selling and distribution expenses (X)

Budgeted operating profit XX

Add: non operating income X

Less: non operating expenses (X)

Budgeted profit before tax XX

Less: income tax @-----% (X)

Budgeted profit after tax XXX


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ZERO BASED BUDGETING

Meaning:

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 other cost items in the support areas. (The support areas include

production planning, repairs and maintenance, research and development, engineering

design, data processing, quality control, finance, marketing, etc.

It starts from the basic premises that the budget for the next year is zero (nil) and

every process or expenditure has then to be justified thoroughly in order to be

included in the next years budget. The burden of proof thus, shifts to each manager

to justify why the money should be spent on all activities and to indicate what would

happen, if the proposed activity is not carried out and no money is spent.

Requirements:

1. There must be budgeting system within the organization.

2. It requires managers to develop quantitative measures for use in performance

evaluation.


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Merits:

1.

It provides a basis for evaluating decision package on the basis of cost

benefit considerations.

2.

It reduces inefficiency and achieves high level of effectiveness.

3. It can be applied to cost reduction programmes.

4. It ensures thorough examination of every function of activity.

5. It facilitates rational analysis, decision making and discard the low

priority activities.

Demerits:

1. Zero based budgeting may emphasize on short term benefits to the detriment of the

long term benefits.

2.

It may encourage the false idea that all the decisions have to be made in the budget.

Management must be able to meet unforeseen opportunities and threats at all the

times, and must not feel restricted from carrying out the new ideas simply because

they were not approved by a decision package cost benefit and ranking analysis.


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PERFORMANCE BUDGETING

Performance budgeting involves evaluation of the performance of the

organization in the context of both specific as well as overall objectives of the organization.

It provides a definite direction to each employee and also controls mechanism to higher

management. The basic objective of performance budgeting is to provide output oriented

budget information with a long range prospective to allocate the resources more effectively.

A performance budget is one which presents-

1.

The purposes and objectives for which funds are needed;

2.

The costs of activities proposed for achieving these objectives;

3.

Quantitative data measuring the accomplishments;

4.

Work performance under each activity.

Features of performance budgeting-

a. Performance budgeting has drawn inspiration and much of its form from cost

accounting and scientific management.

b. In performance budgeting, decision making is primarily downward.

c. Performance budgeting requires that budgetary decisions should made by

emphasizing output categories such as goals, purposes, objectives and products or

services

d. Performance budgeting makes prospective approach with its focus on future impacts

of current major decisions or choices.

Departmental heads of the respective department is responsible

for preparing the performance budget in respect of his department. Performance budgeting

requires preparation of periodical performance reports.


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ADVANTAGES OF BUDGETARY CONTROL

1.

Ef fective use of resour ces: Budgets are prepared after a careful study of alternative

course of actions. The most profitable alternative is selected in conducting the

business. Thus, budgetary control ensures optimum utilisation of resources in

achieving overall organisational goals.

2. Maximum output: budgets direct capital into the most profitable business activities.

It keeps capital investment at the minimum level and ensures maximum output by the

optimum utilisation of capital.

3. Lays down objectives: budget lays down an objective for the business as a whole. It

sets a goal to achieve and thereby directs the activities of various departmets towards

that common goal.

4. Defines responsibi li ties and accountabil ity: it clearly defines the responsibilities and

accountability of every person in the organisation. It creates awareness among the

employees of their rights, duties and responsibilities.

5. Ensures teamwork: budgets are prepared by different functional heads. Budget

committee consists of people from different levels of an organisation. Thus, budgetary

control motivates people to work together and march towards a common goal.

6. Ef fi cient plann ing and decision making: budgetary control encourages an early and

exhaustive study of different problems of management. It makes planning and

adequate study of alternatives a basic act among managers.

7. Control expenditure: budgets provide detailed plans for spending. They regulate

expenditure by clearly showing losses, wastes and inefficiencies.


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8. Evaluates performances: budgets provide a valuable tool of evaluating managerial

policies and goals periodically. Such evaluations help to establish guidelines for the

entire organisation.

9. Co-ordinates business activities: budgetary control co-ordinates and corelates all

business activities and directs them towards the achievement of a desired goal.

10.Develops cost consciousness: budgets clearly communicate the policies and

objectives of the firm and the total resources to be spent to achieve the goals. They

stimulate the effective use of resource and discourage waste.

11.

Provides basis for measur ing performaces: it provides budget as a yardstick for

measuring performaces of each department and sectionof the organisation.

12.I ncreases employee producti vity: well defined rights and responsibilities of individual

employees, efficient communication of policies and objectives of the firm to the

employees, incentives to perform efficiently and periodic review of performances lead

to higher productivity of employees.

13.Encourages productive competi tion : it incourages productive competition among

employees through incentive schemes.

14.Management by exception : evaluation of performances points out weak spots, which

are not in accordance with the budgeted performances. Remedial measures are taken

only against such spots.

15.Sets up standard costing: it creates conditions necessary for the adoption of a system

of standard costing.


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LIMITATIONS OF BUDGETARY CONTROL

1. Planning and budgeting is not an exact science. The future is unpredictable.

Planning and budgeting use approximations and estimates, which may not be cent

percent accurate.

2.

Budgets are to be revised from time to time. Changing condition of business may

require rapid revision of budgets, which may be very costly aff air .

3.

Co-ordination and co-operations of all members of management is difficult to

achieve. The success of the system depends on the co-operation and intensive

participation of all members of management. But it is not easy to achieve these.

4. Budgets may kill managerial initiative. Executives will concentrate only on

achieving the target set by budgets. This limits the innovative ability of the

executives.

5.

Budgets are only the tools of management. Budgets do not eliminate or substitute

management. It is dangerous to overweigh the role of budgets in achieving desired

goals.

6. Budgeting is costly and time consuming. Therefore small organisations can not

afford to adopt the system of budgetary control.

7.

Excessive emphasis on budgetary control may lead to unhealthy competit ion and

dishonest behaviour among functional executi ves. They may submit inaccurate

estimate of future costs and revenues.


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BUDGETARY PLANNING

Many large businesses take a highly formal view of planning the budget and make use of:

a budget manual, which provides a set of guidelines as to who is involved with the

budgetary planning and control process, and how the process is to be conducted

a budget committee, which organises the process of budgetary planning and control; this

committee brings together representatives from the main functions of the business

Eg: production, sales, administration and is headed by a budget co-ordinator whose job is

to administer and oversee the activities of the committee

In smaller businesses, the process of planning the budget may be rather more informal, with

the owner or manager overseeing and budgeting for all the business functions.

Whatever the size of the business it is important, though, that the planning process begins

well before the start of the budget period; this then gives time for budgets to be prepared,

reviewed, redrafted, and reviewed again before being finally agreed and submitted to the

directors or owners for approval.

For example, the planning process for a budget which is to start on 1 January might

commence in the previous June, as follows:

June Budget committee meets to plan next years budgets

July First draft of budgets prepared

August Review of draft budgets

September Draft budgets amended in light of review

October Further review and redrafting to final version

November Budgets submitted to directors or owners for approval

December Budgets for next year circulated to managers

January Budget period commences


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ESSENTIALS OF AN EFFECTIVE BUDGETARY CONTROL SYSTEM

For the budgetary control to be effective, the following essentials has to be in

place;

A sound and clearly defined organization with managers responsibilities

should be clearly defined.

Effective accounting records and procedures that are clearly understood

are applied.

Support and commitment of top management for the system of budgetary

control is in place.

Education / training of managers in the development, interpretation and

use of budgets.

Revision of budgets where amendments are needed to make them

appropriate and useful.


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NEED FOR BUDGETARY CONTROL

According to a Ecoman- competency and training, (2011) gave a detailed need

for budgetary controls as analyzed thus, Budgetary control integrates the

organizations strategic planning with budgets and processes of cost control,

identifies the budgeting / financial skills required for better decision making,

whether for continuing business or project or a new business venture, identifies

sources of financial and business data that provide insights into business and

financial strategies when converted into budgets ,explore traditional versus

innovative budgetary techniques, get to know activity based budgeting and

costing , explore capital budgeting techniques and cash flows, identify key

financial indicators for the business and how and when monitor them, question

to the problems and limitations of budgetary control and look for alternative

tools, understand the importance of balancing financial and non financial

aspects of the business, interpret budgets and performance measurements as

communication tools and finally help to think pro actively beyond budgeting.

In addition to above, budgetary control is needed because of under stated

advantages.


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Responsibility accounting:- Information is provided to managers responsible

for revenue and expenditure and achievements of targets for operations under

their personal control.

Utilization of resources:- Capital and effort are used to achieve financial

objectives and kept at minimal level in any given organization.

It promotes coordination and communication of all functions and activities

among the various departments in an organization.

Motivation of manager through use of clearly defined objectives and

monitoring of achievements , through employees participating in the setting up

of budgets and acting as a guide to management in the field of research and

development in the future.

Planningahead gives time to take collective action which compels management

to think about the future, which is probably the most important feature for nay

business to succeed through increases in production efficiency.

Eliminationof the wastes and controlling the costs.

Budgetary control establishes the system of control if plans are reviewed

regularly against actual as well as transferring authority to individual managers

for decisions.


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It provides a basis of performance appraisal, that is, variance analysis where

actual performance is measured and assessed against the budget plan.

Departures from the budget can then be investigated and then the reason for

the difference determined.

Budgetary control also economizes management time by using the

management by exceptional principle.


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CASE STUDY

F irm Name: Ganesh Engineeri ng Works

Address: E-1, Mandal I ndl . Compound, Road no. 21/34, Adiwasi pada, Wagle estate,

Thane 400604.

M r. K.B.Pandey and Mr. R.M.Singh are the partnersin the

firm. They started the firm in 1996 at small scale and with production of one product i.e.

fusible plugs.

At present, the firm manufactures 3 products, namely fusible

plugs, nozzles and gears. The current pattern of sales is in the ratio of 8:2:1 respectively.

The relevant data are as under:

Products Fusibl e plugs Nozzles Gears

Selling price per unit Rs. 130 230 417

Raw materials per unit Kg. 0.50 1.2 2.5

Direct materials per unit Kg. 0.25 - -

Skilled labour hours/unit Hrs. 4 6 8

Semi-skilled labour hours per unit Hrs. 2 2 3

Variable overheads per unit Rs. 20 40 80

The prices of raw materials and direct materials respectively

are Rs.100 and Rs.40 per kg. The wage rates of skilled and semi-skilled labour respectively

are Rs.6 and Rs.5. Each operator works 8 hours a day for 25 days in a month.

The positions of inventories are as under:


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Raw

materials

(kgs.)

Direct

materials

(kgs.)

Fusible plugs

(units)

Nozzles

(units)

Gears (units)

Opening 600 400 400 100 50

Closing 650 260 200 300 50

The fixed overheads amount to Rs. 2, 00,000 per month and the firm desires a profit of Rs. 1,

20,000 per month.

1.

Sales budget in quantity and value:

Sales budget

Particulars Fusible plugs Nozzles Gears Total

Units to be sold

(note 1)

12800 3200 1600 17600

*selling price per

unit (Rs.)

130 230 417 -

Sales in value

(Rs.)

1664000 736000 667200 3067200


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2. Production budget in quantity:

Production budget

Particulars Fusible plugs nozzles Gears

Sales (units) (note

1)

12800 3200 1600

Add: closing stock

(units)

200 300 50

Less: opening

stock (units)

(400) (100) (50)

Production (units) 12600 3400 1600

3.

Purchase budget in quantity:

Pur chase budget

Particulars Raw materials Direct

materials

Raw material required in production:

Fusible plugs @ 0.50 kg. for 12600 kg.

Nozzles @ 1.20 kg. for 3400 kg.

Gears @ 2.50 kg. for 1600 kg.

6300 kg.

4080 kg.

4000 kg.

Direct material required in production of fusible

plugs @ 0.25 kg for 12600 kg.

-

3150 kg.

Total quantity required in production 14380 kg. 3150 kg.

Add: closing stock 650 kg. 260 kg.

Less: opening stock 600 kg. 400 kg.

Quantity to be purchased 14430 kg. 3010kg.


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4. Direct labour budget for wages and for number of workers:

Di rect labour budget in r espect of wages

Particulars Fusible plugs Nozzles Gears Total

Skilled labour hours

required in production

(note 2)

50400 20400 12800 83600

*wage rate per hour Rs. 6 Rs. 6 Rs. 6 Rs. 6

Total wages for skilled

workers (A)

302400 122400 76800 501600

Semi skilled labour

hours required in

production (note 2)

25200 6800 4800 36800

*wage rate per hour Rs. 5 Rs. 5 Rs. 5 Rs. 5

Total wages for semi-

skilled workers (B)

126000 34000 24000 184000

Total labour cost

(A+B)

428400 156400 100800 685600

Di rect labour budget in respect of no. of workers

Particulars Skilled labour Semi-skilled labour

Total hours required in production 83600 36800

() labour hours per worker per

month(*)

200 hours 200 hours

Total no. of workers required 418 workers 184 workers


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(*) Each worker works for 8 hours a day and for 25 days a month, hence total working

hours per month will come to 200 hours (8 hours * 25 days per month).

Note 1: computation of units to be sold

Company desired a profit of Rs. 120000 per month.

Fixed overheads are Rs. 200000 per month.

At total sales, total contribution will be equal to total fixed cost plus profit,

thus at total sales, contribution will be Rs. 320000 (Rs. 200000 + Rs. 120000).

Thus, we can say the total consumption from all the products should be Rs.

320000. This contribution will be derived from sale of product fusible plugs,

nozzles and gears.

To derive sales of each product, we have to divide the desired contribution of

Rs. 320000 in the combined ratio as computed below:

ParticularsFusible plugs

(Rs.)Nozzles (Rs.)

Gears

(Rs.)

Raw materials required per unit (kg.) 0.50 1.20 2.50

*cost per kg. 100 100 100

Raw materials cost per unit (A) 50 120 250

Direct materials required per unit (kg.) 0.25 - -

*cost per kg. 40 - -

Direct materials cost per unit (B) 10 - -

Skilled labour hour per unit 4 6 8

*cost per labour hour 6 6 6

Skilled labour cost per unit (C) 24 36 48

Semi- skilled labour hour per unit 2 2 3

*cost per labour hour 5 5 5

Semi-skilled labour cost per unit (D) 10 10 15

Variable overheads per unit (E) 20 40 80


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Total variable overheads

(F)=(A+B+C+D+E)114 206 393

Selling price per unit (G) 130 230 417

Contribution per unit (G-F) 16 24 24

*sales ratio 8 2 1

Combined ratio to distribute contribution 128 48 24

By distributing the contribution of Rs. 320000

in above ratio we will get contribution from

each product

204800 76800 38400

() contribution per unit 16 24 24

Sales (units) 12800 3200 1600

Note 2: computation of hours required in production of each product.

Particulars Hours

Skilled labour required in production:

Fusible plugs @ 4 hours for 12600 kg.

Nozzles @ 6 hours for 3400 kg.

Gears @ 8 hours for 1600 kg.

50400

20400

12800

Semi-skilled labour required in production:

Fusible plugs @ 2 hours for 12600 kg.

Nozzles @ 2 hours for 3400 kg.

Gears @ 3 hours for 1600 kg.

25200

6800

4800


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CONCLUSION

I conclude that Budgetary control is a technique of managerial control in which all

operations are planned in advance in the form of budgets and actual results are compared

with budgetary standards. An effective system of budgetary control manages to plan and

control the use of resource in a systematic and logical manner. Financial objectives and

constraints should be communicated to managers of budget centres and regular monitoring

keeps management informed of progress towards objectives.


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BIBLIOGRAPHY

BOOK

Taxmansstudents guide to Cost accounting and Financial management volume 2

-

By Chandrana, Bhavesh

cost accounting project vi.docx

Documents