BUDGETARY CONTROL

BYANIMESH KALITA

2K10MKT37

PRODUCTION COST BUDGET

THE PRODUCTION BUDGET SHOWS BOTH UNIT PRODUCTION DATA AND UNIT COST DETAILS.

THIS BUDGET SHOWS ESTIMATED COST OF PRODUCTION.

IT SHOWS OF PRODUCTION WHICH ARE IN RESPECT OF MATERIAL COST, LABOR COST AND FACTORY OVERHEAD.

NUMERICAL The following information has been made

available from the records of Precision Tools Ltd. for the six months of 1998(and the sales of January 1999) in respect of product X;

(i) The units to be sold in different months: July 1998 1,100 November 1998 2,500 August 1,100 December

2,300 September 1,700 January 1999 2,000 October 1,900

(ii) There will be no work-in-progress at the end of any month.

(iii) Finished units equal to half the sales of the next month will be in stock at the end of evry month (including June, 1998).

(iv) Budgeted production and production cost for the year ending 31st Dec, 1998 are:

Production (units) 22,000 Direct materials per unit Rs. 10 Direct wages per unit Rs. 4 Total factory o/h apportioned Rs. 88,000 to production

You are required to prepare:(a) Production Budget for the six months of

1998.

(b) Summarized Production Cost Budget for the same period.

PRODUCTION BUDGETfor the six months ending Dec, 1998

July Aug Sep Oct Nov Dec TotalEstimated sales

1100

1100

1700 1900 2500 2300

Add: Closing stock

550 850 950 1250 1150 1000

1650

1950

2650 3150 3650 3300

Less: Opening stock

550 550 850 950 1250 1150

Prodct.

1100

1400

1800 2200 2400 2150 11050

PRODUCTION COST BUDGETfor the six months ending Dec, 1998

Direct Materials @ Rs. 10 for 11050 units Rs. 1,10,500Direct Wages @ Rs. 4 for 11050 units Rs. 44,200*Factory O/H @ Rs. 4 for 11050 units Rs. 44,200Total Production Cost Rs. 1,98,900

*Factory O/H per unit = Rs. 88,000 / 22,000 units = Rs. 4

FLEXIBLE BUDGET FLEXIBLE BUDGETING HAS BEEN DEVELOPED

WITH THE OBJECTIVE OF CHANGING ATHE BUDGET FIGURES TO CORRESPOND WITH THE ACTUAL OUTPUT ACHIEVED.

THESE BUDGETS NECESSITATES THE ANALYSIS OF ALL COSTS INTO FIXED AND VARIABLE COMPONENTS.

IN THIS BUDGET, A SERIES OF BUDGETS ARE PREPARED FOR EVERY MAJOR LEVEL OF ACTIVITY.

NUMERICAL The expenses budgeted for production of 10,000 units in a

factory are furnished below: Rs. Per unit Materials 70 Labour 25 Variable overheads 20 Fixed overheads(Rs. 1,00,000) 10 Variable expenses(direct) 5 Selling expenses(10% fixed) 13 Distribution expenses(20% fixed) 7 Administration expenses(Rs. 50,000) 5 ― Total 155 Prepare a budget for the prod. Of (a) 8,000 units and (b) 6,000

units. Assume that administration expenses are rigid for all levels of

production.

FLEXIBLE BUDGET6000 units 8000 units 10,000 units

Per Unit Rs.

TotalRs.

PerUnit Rs.

TotalRs.

PerUnitRs.

TotalRs.

materials 70 420000 70 560000 70 700000Labour 25 150000 25 200000 25 250000Direct exp(var)

5 30000 5 40000 5 50000

Var o/h 20 120000 20 160000 20 200000Fixed o/h 16.6

7100000 12.50 100000 10 100000

Selling exp: fixed VarDistributionExp : Fixed VarAdm exp: FixTotal Cost

2.17

11.70

2.335.608.33

166.8

13000

70,200

140003360050000

1000800

1.63

11.70

1.755.606.25

159.42

13000

93600

140004480050000

1275400

1.30

11.70

1.405.605.00

155.00

13000

117000

140005600050000

1550000

REVISION OF BUDGETS Sometimes the original budget prepared may have to

be revised due to one or more of the following factors: Changes in mgmt policies and other internal factors

like change in the capacity utilisation or addition to the production capacity, etc.

Unforeseen changes in uncontrollable or external factors like change in market prices of materials and other inputs, changes in fashion and consumer tastes, etc.

Errors committed in the preparation of original budget.

NUMERICAL A Company produces two products and budgets at 60% level of activity for

the year 2,000. It gives the following information : Product A Product B Raw materials cost Rs. 7.50 Rs. 3.50 per unit Direct wages per unit Rs. 4.00 Rs. 3.00 Var o/h per unit Rs. 2.00 Rs. 1.50 Fixed o/h per unit Rs. 6.00 Rs. 4.50 Selling price per unit Rs. 20.00 Rs. 15.00 Production and sales(units) 4000 6000 The managing director is not satisfied with the budgeted results as stated

above and wants to improve the performance. The managing director proposed that the sales quantities of products A and B could be increased by 50% provided the SP was reduced by 5% in the case of product A and 10% in product B. The price reduction should be made applicable to the entire quantity of sales of each of the two products.

You are required to present the overall profitability under the original budget and revised budget after taking the increased sales into consideration.

Original budget Revised budget

A B Total A B TotalSales (units)

4000

6000 6000 9000

Sales(value)Costs:

Rs.80000

Rs.90000

Rs.170000

Rs.114000

Rs.121500

Rs.235500

Raw Material

30000

21000

51000 45000 31000 76500

Labour 16000

18000

34000 24000 27000 51000

Var. O/h

8000

9000 17000 12000 13500 25500

Fix O/h 24000

27000

51000 24000 27000 51000

Total CostProfit

78000

2000

75000

15000

153000

17000

105000

9000

99000

22500

204000

31500

Working Note : Revised Sales figures are computed as follows:

A B Selling Price per unit Rs. 20 15 Less : 5% and 10% Re. 1 1.50 Rs. 19

13.50 Sales Value = 6000 units × Rs. 19 =

114000 = 9000 units × Rs.13.50=

121500

THANK YOU