BUDGET AND BUDGETARY CONTROL - MBA

CA. ASIM K. BISWAS

E-mail:ca.asimbiswas@gmail.com

QUESTION # 1.
From the following information supplied by Bright Ltd. prepare a cash budget for the period from 1 st September 2000 to
December 2000.
Months Credit purchase(Rs.) Credit sales(Rs.) Wages(Rs.) Selling expenses (Rs.) Overheads(Rs.)
July 85,000 1,60,000 32,000 8,000 10,000
August 92,000 1,85,000 37,000 9,500 11,500
September 1,00,000 2,10,000 42,000 10,500 13,000
October 1,20,000 2,45,000 49,000 12,500 14,500
November 90,000 1,78,000 35,500 8,900 10,500
December 98,000 1,82,000 36,000 9,000 11,000
Additional information:
a) Expected cash balance on 1st September Rs. 10,500.
b) Period of credit allowed to Debtors – 2 Months.
c) Period of credit allowed by Creditors – 1 Month.
d) Lag in payment of wages, selling expenses and overheads – 1 month.
e) Selling commission @ 2% on sales is payable one month after sales.
f) Expenditure on Machinery worth Rs. 50,000 is payable in October.
g) Expected cash sales per month Rs. 15,000. No commission is payable on cash sales.

QUESTION # 2.
From the following information of Moon Ltd. prepare a cash budget for the three months commencing from 1 st June 2000,
when bank balance is expected to be Rs. 10,000.
Month Sales Purchases Wages Selling expenses Overhead
( Rs. ) ( Rs.) (Rs.) ( Rs. ) ( Rs. )
April 1,00,000 70,000 8,500 3,500 4,000
May 1,20,000 80,000 9,500 3,500 4,500
June 1,40,000 90,000 9,500 3,500 6,000
July 1,60,000 1,00,000 12,000 3,500 6,500
August 1,80,000 1,10,000 14,000 3,500 7,000
A sales commission of 5% on sales due 2 months after sales is payable in addition to the above selling expenses. Credit terms
of sales are – payment by the end of the month following the month of supply. On average one-half of sales is paid on the due
date, while the other half is paid during the next month. Creditors are paid during the month following the month of supply.
Plant purchased in June Rs. 78,000 - payable on delivery Rs. 48,000 and the balance in two equal installment, in July and in
August. A dividend of Rs. 30,000 will be paid in September. Wages are paid 3/4th on due date while 1/4th during the next
month. Lag in payment of selling expenses and overhead is one month.

QUESTION # 3.
From the following particulars prepare monthly cash budget of the Sunclear Ltd. for October, November and December of
2000.
Month Purchases ( Rs. ) Sales ( Rs. ) Wages ( Rs. ) Expenses ( Rs. )
July 40,000 60,000 8,000 10,000
August 60,000 80,000 10,500 12,000
September 50,000 70,000 17,500 12,500
October 70,000 90,000 17,100 11,600
November 80,000 1,00,000 12,000 11,800
December 60,000 1,20,000 12,000 12,300
It is expected that 50% of sales will be in cash and 25% of the purchases can be made on credit. Debtors are allowed 2 months
credit but will receive 5% cash discount if they will pay off their dues within the month next of the month of sale. 80% of the
debtors normally clear their dues at the end of that period to avail the cash discount rest 20% of the debtors pay on the due
date. 4/5th of the credit purchase is paid after 1 month of that purchase and next to that month the balance 1/5th is paid. Wages
are paid within 5th of the following month. Expenses include selling and distribution expenses which are 10% of the sales.
Any deficiency in cash at the end of a month will be met by taking short-term loan for two months from bank.
At the end of September 2000 the Sunclear Ltd. has Rs. 40,000 cash in hand.
QUESTION # 4.
The Director of your company has the following plans for six months period commencing from July 2000:
Sales – Rs. 4,50,000 at a gross profit of 25%. Sales during the period July to September will be on an even basis each month.
In each of the last three months, sales will be twice as much as in each of the earlier months. 10% of sales will be for cash.
Inventory at the end of June, 2000 will be Rs. 45,000 thereafter the same will be adequate to supply the expected sale of the
following months. Purchases – as necessary to pursue sale and inventory policy.
Expenses:
(a) Wages and salaries at the rate of Rs. 4,000 each monthly payable on the first day of the following month.
(b) General expenses at the rate of Rs. 3,000 per month payable on the last date of each month.
(c) Rates Rs. 4,000 per annum payable quarterly, in the 2nd month of each quarter.
Terms of credit – Debtors to settle their accounts in the 2nd month following the month of sales. Creditors to be paid at the end
of the month, following the month of purchase.
Debtors as at 30th June 2000 amount to Rs.90,000 representing credit sales for: April - 25,000: May -30,000,June - 35,000.
Creditors as at 30th June 2000 amount to Rs. 40,000 representing purchase in May and June @ Rs. 20,000 each month.
Dividend of Rs. 25,000 is to be paid in July and advance income tax amounting to Rs. 30,000 will be paid on 15 th September
2000. Capital expenditure amounting to Rs. 40,000 will be incurred in September to be paid in the following month. Bonus to
staff at the rate of two months gross wages will be paid to the staff in August. Cash in hand as on 1st July will be Rs. 50,000.
Draw cash forecast and ascertain the deficit in cash if any, the company is expected to face.

QUESTION # 5.
Based on the following information prepare a cash budget for ABC Ltd.:
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Opening cash Balance 10,000 ---- ---- ----
Collection from customer 1,25,000 1,50,000 1,60,000 2,21,000
Payments
Purchase of materials 20,000 35,000 35,000 54,200
Other expenses 25,000 20,000 20,000 17,000
Salary and wages 90,000 95,000 95,000 1,09,200
Income Tax 5,000 ---- ---- ----
Purchase of machinery ---- ---- ---- 20,000
The company desires to maintain a cash balance of Rs. 15,000 at the end of each quarter. Cash can be borrowed or repaid in
multiples of Rs. 500 at an interest of 10% per annum. Management does not want to borrow cash more than what is necessary
and wants to repay as early as possible. In any event, loans can not be extended beyond four quarters. Interest is computed and
paid when the principal is repaid. Assume that borrowing takes place at the beginning and payments are made at the end of the
quarters.

QUESTION # 6.
Prepare Cash budget for July – December from the following information:
(i) The estimated sales, expenses etc. are as follows: ( Rs. in Lacs )
June July August September October November December
Sales 35 40 40 50 50 60 65
Purchases 14 16 17 20 20 25 28
Wages & Salaries 12 14 14 18 18 20 22
Miscellaneous Exp. 5 6 6 6 7 7 7
Interest received 2 -- -- 2 -- -- 2
Sale of Shares -- -- 20 -- -- -- --
(ii) 20% of sales are on cash and the balance on credit.
(iii) 1% of the credit sales are returned by the customers. 2% of the total accounts receivable constituted bad debt losses. 50%
of the good accounts receivable are collected in the month of the sales and the rest in the next month.
(iv) The time lag in the payment of Misc. expenses and purchases is one month. Wages and salaries are paid fortnightly with a
time lag of 15 days.
(v) The company keeps minimum cash balance of Rs. 5.00 lakhs. Cash in excess of Rs. 7 lakhs is invested in Govt. securities
in the multiple of Rs. 1 lakh. Shortfalls in the minimum cash balance are made good by borrowings from banks. Ignore
interest received and paid.

QUESTION # 7.

Prepare a Cash Budget for three months ending on 30th September, 2000 from the following information:
A. Month Sales Materials Wages Overhead
Rs. Rs. Rs. Rs.
May 56,000 19,200 6,000 3,400
June 60,000 18,000 6,000 3,800
July 64,000 18,400 6,400 4,000
 August 68,000 20,000 7,200 4,400
September 72,000 20,800 8,000 4,600
B. Credit terms are:
Sales/ Debtors – 10% sales are on cash, 50% of the credit sales are collected in the next month and the balance in the
following month.
Creditors – Raw materials 1 month, wages ½ month, overhead ¼ month.
C. Other relevant information:
(a) Rent from a godown let out on 1.1.1999 at yearly contract of Rs. 2,25,000 with a condition of 12% increase in each year is
receivable in equal installments in each month.
(b) Interest @ 15% p.a. on an amount of Rs. 2,00,000 borrowed on 1.1.1998 is to be paid in each month starting from
1.3.2000. Interest for the period from 1.1.1998 to 29.2.2000 is to be paid in 10 equal monthly installments starting from
1.7.2000. Interest for the month of April 2000 remaining unpaid. This unpaid amount is to be paid in the month of
September 2000 with a penal interest of Rs. 100.
(c) An advance of Rs. 50,000 will be paid to a contractor for the construction of a building in September 2000.
(d) Adequate overdraft facility may be arranged for, if needed.
(e) Cash balance as on 1st July may be taken at Rs. 25,000.

QUESTION # 8.
The following details apply to an annual budget for a manufacturing company:
Quarter 1st 2nd 3rd 4th
Working days 65 60 55 60
Production ( units per working day ) 100 110 120 105
Raw material purchases ( % by weight of annual total ) 30% 50% 20% --
Budgeted purchase price ( per kg ) Rs.1.00 Rs.1.50 Rs.1.125 --
Quantity of raw material per unit of production : 2 kg.
Budgeted opening stock of raw material – 4,000 kg ( cost Rs. 4,000 )
Budgeted closing stock of raw material – 2,000 kg. Issues are priced on FIFO basis.
Calculate the following budgeted figures:
(a) Quarterly and annual purchases of raw material by weight and value.
(b) Closing Quarterly stocks by weight and value.

QUESTION # 9.
P & Q Ltd. manufactures two products A and B. An estimate of the number of units expected to be sold in the first seven
months of 2000 is given below :

Months Product A Product B

January 3,200 8,800
February 4,000 8,000
March 4,800 7,200
April 6,400 5,600
May 7,200 4,800
June 7,200 4,800
July 6,400 5,600
Additional information :
(1) There will be no work-in-progress at the end of any month.
(2) Finished units equal to 25% of the anticipated sales for the next month will be in stock at the end of each month including
December 1999.
You are required to prepare a Production Budget for six months ending in June, 2000 showing the number of units to be
manufactured each month.

QUESTION # 10.
A single product company estimated its sales for the next year quarter wise as under :
Quarter Sales units
I 30,000
II 37,500
III 41,250
IV 45,000
The opening stock of finished goods is 10,000 units and the company expects to maintain the closing stock of finished goods
at 16,250 units at the end of the year. The production pattern in each quarter is based on 80% of the sales of the current quarter
and 20% of the sales of the next quarter.
The opening stock of raw material in the beginning of the year is 10,000 kg. and the closing stock at the end of the year is
required to be maintained at 5,000 kg. Each unit of finished output requires 2 kg of raw materials.
The company proposes to purchase the annual requirement of raw material in the first three quarters in the proportion and at
the prices given below :
Quarter Purchase of raw material in units ( % ) Price per kg.
I 30% Rs. 2.00
II 50% Rs. 3.00
III 20% Rs. 4.00
The value of the opening stock of raw materials in the beginning of the year is Rs. 20,000. You are required to present the
following for the next year , quarter wise :
(i) Production budget in units.
(ii) Raw material consumption budget in quantity.
(iii) Raw material purchase budget in quantity and value.

QUESTION # 11.
A company is engaged in manufacturing two products ‘X’ and ‘Y’. Product X uses one unit of component P and two units of
component Q. Product Y uses two units of component P, one unit of component Q and two units of component R. Component
R which is assembled in the factory uses one unit of component Q.
Component P and Q are purchased from the market. The company has prepared the following forecast of sales and inventory
for the next year:
Product X Product Y
Sales ( in units ) 80,000 1,50,000
At the end of the year 10,000 20,000
At the beginning of the year 30,000 50,000
The production of both the products and the assembling of the component R will be spread out uniformly throughout the year.
The company at present orders its inventory of P and Q in quantities equivalent to 3 months production. The company has
complied the following data related to two components:
P Q
Price per unit ( Rs. ) 20 8
Order placing cost per order ( Rs. ) 1,500 1,500
Carrying cost per annum 20% 20%
Required:
a. Prepare a Budget of production and requirements of components during next year.
b. Suggest the optimal order quantity of components P and Q.

QUESTION # 12.
Manufacturers Ltd. produce three products from three basic raw materials in three departments. The company operates
budgetary control system and makes its stock to finished goods on a total cost basis. From the following data, you are required
to produce for the month of July 2000 the following budgets:(a) production, (b) Material usage (c) Purchases (d) Profit and
loss account for each product and in total.
Budgeted data for July 2000.
Product A Product B Product C
Sales Rs. 15,00,000 Rs. 10,80,000 Rs. 16,80,000
Stock of finished products at July 1, 2000 3,000 2,000 2,500
Dept. I Dept. II Dept. III
Production Overhead Rs. 2,39,000 Rs. 2,01,300 Rs. 3,91,200
Direct labour hour 47,800 67,100 65,200
Direct Material M1 M2 M3
Stock at July 1, 2000 in units 24,500 20,500 17,500
The company is introducing a new system of inventory control, which should reduce stock. The forecast is that stocks as at
31st July 2000 will be reduced as follows : Raw materials by 10% and finished product by 20%.fixed production overhead is
absorbed on a direct labour hour basis. It is expected that there will be no work-in-progress at the beginning or end of the
month. Administration cost is absorbed by products at a rate of 20% of production cost and selling and distribution cost is
absorbed by products at a rate of 40% of production cost.
Profit is budgeted as a percentage of total cost as follows: Product A 25%, Product B 12.5 % and Product C 16.67 %.
Standard cost data per unit of product:
Price per unit ( Rs. ) Product A ( Units ) Product B( Units ) Product C ( Units )
Direct Material - M1 2.00 5 -- 12
- M2 4.00 -- 10 9
- M3 1.00 5 5 --
Rate per hour ( Rs. ) Hrs. Hrs. Hrs.
Direct wages: Dept.I 2.50 4 2 2
Dept.II 2.00 6 2 3
Dept III 1.50 2 4 6
Other variable cost Rs. 10 Rs. 20 Rs. 15

QUESTION # 13.
The direct labour hour requirements of three of the products manufactured in a factory, each involving more than one labour
operation are estimated as follows:
Direct labour hour per unit ( in minutes )
Product 1 Product 2 Product 3
Operation – I 18 42 30
Operation – II -- 12 24
Operation – III 9 6 --
The factory works 8 hours per day, 6 days in a week. The budget quarter is taken as 13 weeks and during a quarter, lost hours
due to leave and holidays and other causes are estimated to be 124.
The budgeted hourly rates for the workers manning the operations I, II and III are Rs. 2.00, Rs. 2.50 and Rs. 3.00 respectively.
The budgeted sales of the products during the quarter are:
Product – 1. 9,000 units
Product – 2. 15,000 units
Product – 3. 12,000 units
There is a carry-over of 5,000 units of product 2 and 4,000 units of product 3 and it is proposed to build up a stock at the end
of the budget quarter as follows:
Product – 1. 1,000 units
Product – 3. 2,000 units
Prepare a man-power budget for the quarter showing for each operation :
(i) direct labour hours, (ii) direct labour cost, and (iii) the number of workers.

QUESTION # 14.
A factory is currently running at 50% capacity and produces 5,000 units at a cost of Rs. 90 per unit as per details below :
Materials Rs. 50.00
Labour 15.00
Factory Overheads 15.00 ( Rs. 6.00 fixed )
Administration Overhead 10.00 ( Rs. 5.00 fixed )
The current selling price is Rs. 100 per unit. At 60% working material cost per unit increases by 2% and selling price per unit
falls by 2%. Estimate profits of the factory at 60% working.

QUESTION # 15.
A company incurs the following expenses to produce 1,000 units of an article:-
Direct Materials Rs. 30,000
Direct Labour 15,000
Power ( 20% fixed ) 10,000
Repairs and Maintenance ( 15% fixed ) 8,000
Depreciation ( 40% variable expenses ) 6,000
Administrative expenses ( 100% fixed ) 12,000
Prepare a Flexible Budget showing individual expenses of production levels at 1,500 units and 2,000 units.

QUESTION # 16.
X Ltd. produces a standard product. The estimated costs per unit are given below :
Raw-material Rs. 20
Direct wages 16
Direct expenses 4
Variable overhead 8
Semi-variable overheads at 100% activity level ( 10,000 units ) are expected to be Rs. 75,000 and these overheads vary in
steps of Rs. 5,000 for each changes in output of 1,000 units. Fixed overheads are estimated at Rs. 60,000. Selling price per
unit is expected to be Rs. 80.
Prepare a flexible budget at 60%, 80% and 100% level of activity.

QUESTION # 17.
The manager of a repairs and maintenance department in response to request submitted the following budget estimates for his
department that are to be used to construct a flexible budget to be used during the comment budget year :
Planned at 6000 direct repair hours Planned at 9000 direct repair hours
Employees’ salaries Rs. 30,000 Rs. 30,000
Indirect repair materials 40,200 60,300
Miscellaneous 13,200 16,800
(a) Prepare a flexible budget for the department up to activity level of 10,000 repair hours ( use increments of 1000 )
(b) What would be the budget allowance at 8500 direct repair hours ?

QUESTION # 18.
(i) Prepare a flexible budget for 2000 for the overhead expenses of a production department at the activity levels of 80%, 90%
and 100% using the information listed below :
(1) The direct labour hour rate is expected to be Rs. 3.75.
(2) 100% activity represents 60,000 direct labour hours.
(3) Variable costs :
Indirect labour Rs. 0.75 per direct labour hour
Consumable supplies Rs. 0.375 per direct labour hour
Canteen and other welfare service 6% of direct and indirect labour costs.
(4) Semi-variable costs are expected to correlate with the direct labour hours in the same manner as for the last five years
which was :
Year Direct labour hours Semi-variable costs ( Rs. )
1995 64,000 20,800
1996 59,000 19,800
1997 53,000 18,600
1998 49,000 17,800
1999 40,000 16,000
(5) Fixed costs :
Depreciation Rs. 18,000
Maintenance 10,000
Insurance 4,000
Rates 15,000
Management salaries 25,000
(ii) Calculate the budget cost allowance for 2000 assuming that 57,000 direct labour hours are worked.

QUESTION # 19.
A company is at present working at 90% of its capacity and producing 13,500 units per annum. It operates a flexible
budgetary control system. The following figures ( excluding material and labour cost ) are obtained from its budget :
90% capacity 100% capacity

Sales Rs. 15,00,000 Rs. 16,00,000

Fixed Expenses 3,00,500 3,00,500

Semi-fixed expenses 97,500 1,00,500

Variable expenses 1,42,000 1,49,500

Material and Labour cost per unit are constant under present conditions. Profit margin is 10% at 90% capacity.

(a) you are required to determine the cost of producing an additional 1,500 units.
(b) What would you recommend for an export price for these 1,500 units taking into account that overseas prices are much
lower than indigenous prices ?

QUESTION # 20.
A manufacturing company having a capacity of 6 lakh units has prepared the following cost sheet:
Per Unit
Direct Materials Rs. 2.50
Direct Wages 1.00
Factory Overheads 2.00 ( 50% fixed )
Selling and Admn. Overheads 1.50 ( one-third variable )
Selling Price 9.00
During the year 1999 the sales volume achieved by the company was 5 lakh units.
The company has launched an expansion program. The details of which are as under :
(a) The capacity will be increased to 10 lakhs units.
(b) The additional fixed overheads will amount to Rs. 4 lakhs up to 8 lakhs units and will increase by Rs. 2 lakhs more
beyond 8 lakhs units.
(c) The cost of investment on expansion is Rs. 8 lakhs which is proposed to be financed through bank borrowings carrying
interest at 15% per annum.
(d) The average depreciation rate on the new investment is 10% based on straight line method.
Assume that the company’s profits are taxed at the rate of 50%.
After the expansion is put through, the company has two alternatives for operating the expanded plant as under :
(i) Sales can be increased upto 8 lakhs units by spending Rs. 1,00,000 on special advertisement campaign to explore new
market or;
(ii) Sales can be increased to 10 lakhs units subject to the following ;
(a) By an overall price reduction of Rs. 1 per unit on all the units sold.
(b) By increasing the variable selling and administration expenses by 5%.
(c) The direct material costs would go down by 1% due to discounts on bulk buying.
Required:
A. Construct a flexible budget at the level of 5 lakhs, 8 lakhs & 10 lakhs units of production and advise which level of output
should be chosen for operation.
B. Calculate the break even point both before and after expansion.

QUESTION # 21.
Vivek Elementary School has a total of 150 students consisting of 5 sections with 30 students per section. The school plans for
a picnic around the city during the week-end to places such as the zoo, the amusement park, the planetarium etc. A private
transport operator has come forward to lease out the buses for taking the students. Each bus will have a maximum capacity of
50 ( excluding 2 seats reserved for teachers accompanying the students ). The school will employ two teachers for each bus,
paying them an allowance of Rs. 50 per teacher. It will also lease out the required number of buses. The following are the
other cost estimates:
Cost per student
Breakfast Rs. 5
Lunch 10
Tea 3
Entrance fee at zoo 2
Rent Rs. 650 per bus. Special permit fee Rs. 50 per bus. Block entrance fees at the planetarium Rs. 250.
Prizes to students for games Rs. 250.
No costs are incurred in respect of the accompanying teachers ( except the allowance of Rs. 50 per teacher ).
You are required to prepare:
(a) A flexible budget estimating the total cost for the levels of 30 ,60, 90, 120 and 150 students. Each item of cost is to be
indicated separately.
(b) Compare the average cost per student at these levels.
(c) What will be your conclusions regarding the break-even level of students if the school proposes to collect Rs. 45 per
student ?

QUESTION # 22.
A company manufactures two products X and Y. Product X requires 8 hours to produce while Y requires 12 hours. In April,
2011, of 22 effective working days of 8 hours a day, 1,200 units of X and 800 units of Y were produced. The company
employs 100 workers in production department to produce X and Y. The budgeted hours are 1,86,000 for the year.
Calculate: Capacity, Activity and Efficiency ratio and establish their inter-relationship.

QUESTION # 23.
The activity ratio of a concern is 95.6% whereas the capacity ratio is 105%. What is the efficiency ratio?

CA. ASIM K. BISWAS