BUDGETING

1. The following data relate to the working of a factory at Wardha for the current year:
Capacity Worked: 50%
Fixed Costs: Rs
Salaries 84,000
Rent and rates 56,000
Depreciation 70,000
Other administrative expenses 80,000
2,90,000
Variable costs:
Materials 2,40,000
Labour 2,56,000
Other expenses 38,000
5,34,000
Possible sales at various levels of working are:
Capacity (percent) Sales (Rs)
60 9,50,000
75 11,50,000
90 13,75,000
100 15,25,000
Prepare a flexible budget and show the forecast of profit at 60, 75, 90 and 100 percent capacity operations.
2. G.S. Ltd. manufactures a single product for which market demand exists for additional quantity. Present
sales of Rs 60,000 per month utilize only 60% capacity of the plant. Marketing manager assures that with
the reduction of 10% in the price he would be in a position to increase the sale by about 25% to 30%.
The following data are available:
Particulars Rs
Selling price Rs 10 per unit
Variable cost Rs 3 per unit
Semi – variable cost Rs 6,000 fixed + 50 paise per unit
Fixed cost Rs 20,000 at present level estimated to be Rs 24,000 at 80%
output.
You are required to prepare the following statements:
i. The operating profits at 60%, 70% and 80% levels at current selling price; and
ii. The operating profits at proposed selling price at the above levels.
3. Figures regarding sales, cost and profit at 50% capacity are given below:
Particulars Rs
Sales 20,00,000
Direct cost 8,00,000
Factory Overheads 4,00,000
Office Overheads 2,00,000
Selling Overheads 3,00,000
Profit 3,00,000
Every 10% increase in sale beyond 50% capacity is possible only after reducing the price by 1% on the base
level of 50% capacity. Direct material cost is 25% of the total direct cost at 50% capacity. With every 10%
increase in capacity above this level, the price of direct material comes down by 2%. 50% of the factory
overheads are fixed and the rest are full variable. Office overheads are of step character. Every 10%
increase in output results in 2% increase in office overheads over 50% of the capacity. Selling overheads
increase in proportion of sales value.
Prepare a flexible budget at 80% capacity level.
4. From the following forecast of income and expenditure prepare a “Cash Budget” for the three months
ending on June 2020:
Month Sales (₹) Purchase (₹) Wages (₹) Miscellaneous (₹)
2020, February 1,20,000 84,000 10,000 7,000
March 1,30,000 1,00,000 12,000 8,000
April 80,000 1,04,000 8,000 6,000
May 1,16,000 1,06,000 10,000 12,000
June 88,000 80,000 8,000 6,000
 Additional Information:
a. Sales: 20% realized in the month of sales, discount allowed 2%, balance realized equally in two
subsequent months.
b. Purchases: These are paid in the month following the month of supply.
c. Wages: 25% paid in arrears following month.
d. Misc. Expenses: Paid a month in arrears.
e. Rent: ₹ 1,000 per month paid quarterly in advance due in April.
f. Income Tax: First instalment of advance tax ₹ 25,000 due on or before 15 th June to be paid within the
month.
g. Income from Investments: ₹ 5,000 received quarterly in April, July, etc.
h. Cash in hand ₹ 5,000 in April 1, 2020.
5. The January 1 cash balance of the Jay Company is Rs 5,000. Sales for the first four months of the year are
expected to be as follows: January, Rs 65,000; February, Rs 54,000; March, Rs 66,000; and April, Rs
63,000. On January 1, uncollected amounts for November and December of the previous year are Rs 13,500
and Rs 39,150, respectively. Collections from customers follow this pattern; 55% in the month of sale, 30%
in the month following the sale, 13% in the second month following the sale, and 2% uncollectable.
Materials purchases for December were Rs 10,000. Forecast purchases for the coming year are: Rs 12,500;
February, Rs 16,500; March, Rs 13,000; and April, Rs 14,000. Purchases are usually paid by the 10 th of the
month following the month of purchase. Other cash expenditures of Rs 41,000 are forecasted for each
month.
Calculate:
i. Expected cash collection during February
ii. Expected cash balance, February 1
iii. Expected cash balance, February 29
6. From the following particulars of a firm, prepare a cash budget for the next six months, January-June:
a. Balance Sheet as on December 31
Liabilities Rs Assets Rs Rs
Share Capital 10,000 Cash 16,000
Reserves 90,000 Accounts Receivable 10,000
Inventory 49,000
Fixed Assets 30,000
Less: Depreciation 5,000
25,000
1,00,000 1,00,000
b. Sales Forecast
January Rs 20,000 April 60,000
February 40,000 May 90,000
March 50,000 June 50,000
July 10,000
c. Sales Expenses
January Rs 3,000 April 9,000
February 5,000 May 11,000
March 7,000 June 6,000

d. Monthly selling and distribution expenses are expected to be 10% of sales. Depreciation charges are
1% per month.
e. The firm operates on the following terms:
i. Sales are on a 30-day basis. But payments are not received until the following month.
ii. All purchases of the firm are in cash.
iii. The firm purchases enough inventory each month to cover 125% of the following month’s sales. The
firm has a policy of maintaining 20% gross profit margin on sales.
iv. A minimum cash balance of Rs 10,000 is maintained.
Additional information: New equipment purchased for Rs 5,000 is scheduled for delivery on March 1,
against payment.
Solutions:
1. Flexible Budget
Capacity 60% (₹) 75% 90% 100%
Sales (A) 9,50,000 11,50,000 13,75,000 15,25,000
Less: Variable Cost
Materials 2,88,000 3,60,000 4,32,000 4,80,000
Labour 3,07,200 3,84,000 4,60,800 5,12,000
Other Expenses 45,600 57,000 68,400 76,000
Total Variable Cost (B) 6,40,800 8,01,000 9,61,200 10,68,000
Less: Fixed Cost
Salaries 84,000 84,000 84,000 84,000
Rent & Rates 56,000 56,000 56,000 56,000
Depreciation 70,000 70,000 70,000 70,000
Other Administrative Expenses 80,000 80,000 80,000 80,000
Total Fixed Costs (C) 2,90,000 2,90,000 2,90,000 2,90,000
Total Cost (B + C) 9,30,800 10,91,000 12,51,200 13,58,000
Profit [A – (B + C)] 19,200 59,000 1,23,800 1,67,000
2. Statement of Cost and Profit (at Current Prices)
60% Capacity 70% Capacity 80% Capacity
(6,000 units) (7,000 units) (8,000 units)
₹ ₹ ₹
Fixed Cost 20,000 20,000 24,000
Semi – variable cost: Fixed 6,000 6,000 6,000
Variable (Units x ₹ 0.50) 3,000 3,500 4,000
Variable Cost @ ₹ 3 per unit 18,000 21,000 24,000
Total Cost 47,000 50,500 58,000
Sales 60,000 70,000 80,000
Profit 13,000 19,500 22,000
Statement of Cost and Profit (at Proposed Prices)

60% Capacity 70% Capacity 80% Capacity

(6,000 units) (7,000 units) (8,000 units)
₹ ₹ ₹
Total Cost 47,000 50,500 58,000
Sales @ ₹ 9 per unit 54,000 63,000 72,000
Profit 7,000 12,500 14,000
4. Cash Budget for the Month of April, May and June 2020
April May June
(₹) (₹) (₹)
Opening Balance 5,000 5,680 (7,084)
Cash Receipts:
Collection for Debtors 1,15,680 1,06,736 95,648
Income from Investment 5,000 - -
1,25,680 1,12,416 88,564
Cash Payments:
Payment to Supplier 1,00,000 1,04,000 1,06,000
Wages 9,000 9,500 8,500
Rent 3,000 - -
Misc. Expenses 8,000 6,000 12,000
Advance Income Tax - - 25,000
1,20,000 1,19,500 1,51,500
Closing Balance 5,680 (7,084) (62,936)
1,25,680 1,12,416 88,564
 Working Notes
1. Collection from Debtors
April May June
(₹) (₹) (₹)
Collection in the month of sale (20% of total less 2% 15,680 22,736 17,248
discount)
Collection in the next month (50% of 80% of total 52,000 32,000 46,400
sales in the previous month)
Collection after two months (50% of 80% of total 48,000 52,000 32,000
sales in the previous month)
1,15,680 1,06,736 95,648
2. Payment of Wages
April May June
(₹) (₹) (₹)
75% of current month wages 6,000 7,500 6,000
25% of wages of the previous month 3,000 2,000 2,500
9,000 9,500 8,500

6. Cash Budget
Jan Feb March April May June
1. Cash Inflows
Collections - during the 10,000 20,000 40,000 50,000 60,000 90,000
month following sales
2. Cash Outflows:
- Purchases 40,000 50,000 60,000 90,000 50,000 10,000
- Selling and 2,000 4,000 5,000 6,000 9,000 5,000
Distribution
expenses (10% 0f
sales)
- Salary expenses 3,000 5,000 7,000 9,000 11,000 6,000
- Payment for new - - 5,000 - - -
equipment
Total Cash Payments 45,000 59,000 77,000 1,05,000 70,000 21,000
3. Net cash receipts or (35,000) (39,000) (37,000) (55,000) (10,000) 69,000
payments
Cash at the start of the month 10,000 10,000 10,000 10,000 10,000 10,000
Less: Desired level of cash (10,000) (10,000) (10,000) (10,000) (10,000) (10,000)
Borrowings (cumulative) 35,000 74,000 1,11,00 1,66,000 1,76,00 1,07,000
0 0
Workings
1. Calculation of Purchases
January = (₹ 40,000 – 20%) x 125% = ₹ 40,000
February = (₹ 50,000 – 20%) x 125% = ₹ 50,000
March = (₹ 60,000 – 20%) x 125% = ₹ 60,000
April = (₹ 90,000 – 20%) x 125% = ₹ 90,000
May = (₹ 50,000 – 20%) x 125% = ₹ 50,000
June = (₹ 10,000 – 20%) x 125% = ₹ 10,000