Budgets & Budgetary

Control
Practical Problems
(with solutions)
 Flexible Budget
(1) Prepare a Flexible budget for overheads on the basis of the following data. Ascertain the
overhead rates at 50% and 60% capacity.

Variable overheads: At 60% capacity (Rs)

Indirect Material 6,000

Labour 18,000

Semi‐variable overheads:

Electricity: (40% Fixed & 60% variable) 30,000

Repairs: (80% fixed & 20% Variable) 3,000

Fixed overheads:

Depreciation 16,500

Insurance 4,500

Salaries 15,000

Total overheads 93,000

Estimated direct labour hours 1,86,000

Solution:
Flexible Budget

Items Capacity

50% 60%

Variable overheads: Rs. Rs.

Material 5,000 6,000

Labour 15,000 18,000

Semi‐variable

Electricity 27,000 30,000

Repairs 2,900 3,000

Fixed overheads:

Deprecation 16,500 16,500

Insurance 4500 4500

Salaries 15,000 15,000

Total Overheads 85,900 93,000

Estimated direct labour hours 1,55,000 1,86,000

Overhead Rate 0.55 0.50

Working Note:

Electricity

At 50% capacity = 18,000 * 50

60

= Rs. 15,000

Rs. 12,000 + Rs. 15,000 = Rs. 27,000

60% capacity = Rs 18,000 + Rs. 12,000 = Rs. 30,000

Repairs

For 60% capacity = Rs.600

=Rs. 2400 + Rs.600 =Rs.3,000

At 50% capacity : = 600/60 * 50

= RS. 500

=Rs.2400 + 500

=Rs.2,900
 (2) Prepare a flexible budget for overheads on the basis of the following data. Ascertain the
overhead rates at 60% and 70% capacity.

Variable overheads: At 60% capacity(Rs)

Material 6,000

Labour 18,000

Semi‐variable overheads:

Electricity: 30,000

40% Fixed

60% variable

Repairs:

80% fixed 3,000

20% Variable 3,000

Fixed overheads:

Depreciation 16,500

Insurance 4,500

Salaries 15,000

Total overheads 93,000

Estimated direct labour hours 1,86,000

Solution:

Working:
Repairs

For 60% capacity Fixed 80/100 * 3,000 = Rs.2400

Variable = 20/100 * 3,000 = Rs. 600

=Rs. 2400 + Rs.600 =Rs.3,000

Electricity Exp.:

At 60% capacity Fixed= 40/100 *30,000 = 12,000

Variable = 60/100 * 30,000= 18,000

At 70% capacity: Fixed = 40/100 * 30,000 = Rs. 12,000

Variable = 18,000/60 *70 = Rs. 21,000

Total Rs. =33,000

Flexible Budget

Items Capacity

60% 70%

Variable overheads: Rs. Rs.

Material 6,000 7,000

Labour 18,000 21,000

Semi‐variable

Electricity 30,000 33,000

Repairs 3,000 3,100

Fixed overheads:

Deprecation 16,500 16,500

Insurance 4,500 4,500

Salaries 15,000 15,000

Total Overheads 93,000 1,00,100

Estimated direct labour hours 1,86,000 2,17,000

Overhead Rate 0.50 0.46

 (3) The expenses budgeted for production of 1,000 units in a factory are furnished below:
Particulars Per Unit Rs.

Material Cost 700

Labour Cost 250

Variable overheads 200

Selling expenses (20% fixed) 130

Administrative expenses (Rs. 2,00,000) 200

Total Cost 1,480

Prepare a budget for production of 600 units and 800 units assuming administrative expenses
are rigid for all level of production.

Solution: Flexible Budget

Particulars For 600 units For 800 units

Per unit Rs. Total Rs. Per unit Rs. Total Rs.

Variable Cost:

Materials 700 4,20,000 700 5,60,000

Labour 250 1,50,000 250 2,00,000

Variable overheads 200 1,20,000 200 1,60,000

(A) 1,150 6,90,000 1,150 9,20,000

Semi variable cost:

Variable selling expenses 104 62,400 104 83,200

Fixed selling expenses 43.33 26,000 32.50 26,000

(B) 147.33 88,400 136.50 1,09,200

Fixed cost:

Administrative expenses 333.33 2,00,000 250.00 2,00,000

Total Cost(A+B+C) 1,630.66 9,78,400 1,536.50 12,29,200

(4) The budgeted output of a industry specializing in the production of a one product at the
optimum capacity of 6,400 units per annum amounts to Rs. 1,76,048 as detailed below:

Particulars Rs. Rs.

Fixed costs 20,688

Variable costs:

Power 1,440

Repairs etc. 1,700

Miscellaneous 540

Direct material 49,280

Direct Labour 1,02,400 1,55,360

Total cost 1,76,048

The company decides to have a flexible budget with a production target of 3,200 and 4,800 units
(the actual quantity proposed to be produced being left to a later date before commencement
of the budget period)

Prepare a flexible budget for production levels of 50% and 75%. Assuming, selling price per unit
is maintained at Rs. 40 as at present, indicate the effect on net profit.

Administrative , selling and distribution expenses continue at Rs.3,600.

Solution:
The production at 100% capacity is 6400 units, so it will be 3,200 units at 50% and 4,800 units at
75% capacity. The variable expenses will change in that proportion.

Flexible Budget

Particulars 100% 75% 50%

(i)Sales (per unit 2,56,000 1,92,000 1,28,000

Rs.40)

Cost of Sales:
 (a) variable costs:

Direct material 49,280 36,960 24,640

Direct Labour 1,02,400 76,800 51,200
Power 1,440 1,080 720
Repairs 1,700 1,275 850
Miscellaneous 540 405 270

Total variable costs 1,55,360 1,16,520 77,680

(b) Fixed Costs: 20,688 20,688 20,688

(ii) Total Costs 1,76,048 1,37,208 98,368

Gross Profit(i)‐ (ii) 79,952 54,792 29,632

Less: Adm., selling and 3,600 3,600 3,600

Dist. Costs

Net Profit 76,352 51,192 26,032

(5) A factory engaged in manufacturing plastic buckets is working at 40% capacity and produces
10,000 buckets per month.

The present cost break up for one bucket is as under:

Materials Rs.10

Labour Rs.3

Overheads Rs.5 (60% fixed)

The selling price is Rs.20 per bucket. If it is desired to work the factory at 50% capacity the
selling price falls by 3%. At 90% capacity the selling price falls by 5% accompanied by a similar
fall in the price of material.

You are required to prepare a statement the profit at 50% and 90% capacities and also calculate
the break‐ even points at this capacity production.
Solution

Flexible Budget

Particulars Capacity

40% 50% 90%

Production and sales 10,000 12,500 22,500

units

Sales price per unit 20 19.40 19.00

Sales Amount 2,00,000 2,42,500 4,27,500

Marginal Cost:

Material: Rs.10 per 1,00,000 1,25,000 2,13,750

unit(at 90% ‐ Rs.9.50
per unit)

Labour 30,000 37,500 67,500

Variable overhead 20,000 25,000 45,000

Total 1,50,000 1,87,500 3,26,250

Contribution 50,000 55,000 1,01,250

Less: Fixed Cost 30,000 30,000 30,000

Profit 20,000 25,000 71,250

Contribution per unit 5 4.40 4.50

BEP (units) (F /C) 6,000 6,818 6,667

 CASH BUDGET
(1) Saurashtra Co. Ltd. wishes to arrange overdraft facilities with its bankers from the period August
to October 2010 when it will be manufacturing mostly for stock. Prepare a cash budget for the
above period from the following data given below:

Month Sales Purchases Wages Mfg. Exp. Office Exp. Selling

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) Exp. (Rs.)

June 1,80,000 1,24,800 12,000 3,000 2,000 2,000

July 1,92,000 1,44,000 14,000 4,000 1,000 4,000

August 1,08,000 2,43,000 11,000 3,000 1,500 2,000

September 1,74,000 2,46,000 12,000 4,500 2,000 5,000

October 1,26,000 2,68,000 15,000 5,000 2,500 4,000

November 1,40,000 2,80,000 17,000 5,500 3,000 4,500

December 1,60,000 3,00,000 18,000 6,000 3,000 5,000

Additional Information:

(a) Cash on hand 1‐08‐2010 Rs.25,000.

(b) 50% of credit sales are realized in the month following the sale and the remaining 50% in
the second month following. Creditors are paid in the month following the month of
purchase.

(c) Lag in payment of manufacturing expenses half month.

(d) Lag in payment of other expenses one month.

Solution:

CASH BUDGET

For 3 months from August to October 2010

Particulars August (Rs.) September (Rs.) October (Rs.)

Receipts:

Opening balance 25,000 44,500 (66,750)

Sales 1,86,000 1,50,000 1,41,000

Total Receipts(A) 2,11,000 1,94,500 74,250

Payments:

Purchases 1,44,000 2,43,000 2,46,000

Wages 14,000 11,000 12,000

Mfg. Exp. 3,500 3,750 4,750

Office Exp. 1,000 1,500 2,000

Selling Exp. 4,000 2,000 5,000

Total payments(B) 1,66,500 2,61,250 2,69,750

Closing Balance(A‐B) 44,500 (66,750) (1,95,500)

Working Note:

1. Manufacturing Expense:

Particular August September October

July (4000/2) 2000 ‐‐‐ ‐‐‐

August (3000/2) 1500 1500 ‐‐‐

September (4500/2) ‐‐‐ 2250 2250

October (5000/2) ‐‐‐ ‐‐‐‐ 2500

Total 3500 3750 4750

 2. Sales

Particular August September October

June (180000/2) 90000 ‐‐‐ ‐‐‐

July (192000/2) 96000 96000 ‐‐‐

August (108000/2) ‐‐‐ 54000 54000

September (174000/2) ‐‐‐ ‐‐‐‐ 87000

Total 186000 150000 141000

(2) S. K. Brothers wish to approach the bankers for temporary overdraft facility for the period from
October 2010 to December 2010. During the period of this period of these three months, the firm
will be manufacturing mostly for stock. You are required to prepare a cash budget for the above
period.

Month Sales (Rs.) Purchases (Rs.) Wages (Rs.)

August 3,60,000 2,49,600 24,000

September 3,84,000 2,88,000 28,000

October 2,16,000 4,86,000 22,000

November 3,48,000 4,92,000 20,000

December 2,52,000 5,36,000 30,000

(a) 50% of credit sales are realized in the month following the sales and remaining 50% in the
second following.

(b) Creditors are paid in the month following the month of purchase

(c) Estimated cash as on 1‐10‐2010 is Rs.50,000.

 CASH BUDGET

For 3 months from October to December 2010

Particulars October (Rs.) November(Rs.) December(Rs.)

Receipts:

Opening balance 50,000 1,12,000 (94,000)

Collection from 3,72,000 3,00,000 2,82,000

Debtors

Total Receipts(A) 4,22,000 4,12,000 1,88,000

Payments:

Payments to 2,88,000 4,86,000 4,92,000

Creditors

Wages 22,000 20,000 30,000

Total payments(B) 3,10,000 5,06000 5,22,000

Closing Balance(A‐B) 1,12,000 (94,000) ‐3,34,000

Working Note : Collection from debtors

Particulars October (Rs.) November(Rs.) December(Rs.)

Sales

August 1,80,000 ‐

September 1,92,000 1,92,000 ‐

October ‐ 1,08,000 1,08,000

November ‐ 1,74,000

3,72,000 3,00,000 2,82,000

(3) TATA Co. Ltd. is to start production on 1st January 2011. The prime cost of a unit is expected to
be Rs. 40 (Rs. 16 per materials and Rs. 24 for labour). In addition, variable expenses per unit are
expected to be Rs. 8 and fixed expenses per month Rs. 30,000. Payment for materials is to be
made in the month following the purchase. One‐third of sales will be for cash and the rest on
credit for settlement in the following month. Expenses are payable in the month in which they
are incurred. The selling price is fixed at Rs. 80 per unit. The number of units to be produced and
sold is expected to be:
January 900; February 1200; March 1800; April 2000; May 2,100 June 2400

Draw a Cash Budget indicating cash requirements from month to month.

CASH BUDGET of TATA LTD.

For 6 months from January to June 2011
Month Jan. Feb. March April May June

Receipts

Opening Balance (34,800) (37,600) (32,400) (5,867) (27,600)

Cash sales 24,000 32,000 48,000 53,333 56,000 64,000

Collection from 48,000 64,000 96,000 1,06,667 1,12,000

Debtors

Total receipts(A) 24,000 45,200 74,400 1,16,933 1,56,800 1,48,400

Payments

Creditors 14,400 19,200 288,00 32,000 33,600

Wages 21,600 28,800 43,200 48,000 50,400 57,600

Variable Exp. 7,200 9,600 14,400 16,000 16,800 19,200

Fixed Exp. 30,000 30,000 30,000 30,000 30,000 30,000

Total Payment(B) 58,800 82,800 1,06,800 1,22,800 1,29,200 1,40,400

Closing Balance ‐34,800 ‐37600 ‐32400 ‐5867 ‐27,600 8,000

(4) Prepare a Cash Budget from the data given below for a period of six months (July to December)
(1) Month Sales Raw Materials

May 75,000 37,500

June 75,000 37,500

July 1,50,000 52,500

August 2,25,000 3,67,500

September 3,00,000 1,27,500

October 1,50,000 97,500

November 1,50,000 67,500

December 1,37,500

(2) Collection estimates:

 Within the month of sale: 5%

 During the month following the sale: 80%

 During the second month following the sale: 15%

(3) Payment for raw materials is made in the next month.

(4)Salary Rs. 11,250, Lease payment Rs. 3750, Misc. Exp. Rs. 1150, are paid each month

(5) Monthly Depreciation Rs. 15,000

(6)Income tax Rs. 26,250 each in September and December.

(7)Payment for research in October Rs.75,000

(8) Opening Balance on 1st July Rs.55,000.

 CASH BUDGET
For the six months from July to December
Particulars July Aug. Sep. October Nov. December

Receipts

Opening Balance 55,000 80,100 1,53,950 ‐38450 24150 83000

Collection from 78,750 1,42,500 2,17,500 2,81,250 1,725,00 1,49,375

Debtors

Total receipts(A) 1,33,750 2,22,600 3,71,450 2,42,800 1,96,650 2,32,375

Payments

Payment to 37,500 52,500 3,67,500 1,27,500 97,500 67,500

suppliers

Salary 11,250 11,250 11,250 11,250 11,250 11,250

Lease payment 3750 3750 3750 3750 3750 3750

Misc. expense 1,150 1,150 1,150 1,150 1,150 1,150

Income tax 26,250 26,250

Payment for 75,000

Research

Total Payment(B) 53,650 68,650 4,09,900 2,18,650 1,13,650 1,09,900

Closing Balance 80,100 1,53,950 ‐38,450 24,150 83,000 1,22,475

Note: Depreciation is a non‐cash item. It does not involve cash flow. Hence, depreciation will not be
considered as payment through cash.
(5) Prepare a cash Budget of R.M.C. LTD. for April, May and June 2012:
Months Sales(Rs.) Purchases(Rs.) Wages(Rs.) Expenses(Rs.)

Jan.(Actual) 80,000 45,000 20,000 5,000

Feb.(Actual) 80,000 40,000 18,000 6,000

March (Actual) 75,000 42,000 22,000 6,000

April (Budget) 90,000 50,000 24,000 7,000

May(Budget) 85,000 45,000 20,000 6,000

June(Budget) 80,000 35,000 18,000 5,000

Additional Information:

(i) 10% of the purchases and 20% of sales are for cash.

(ii) The average collection period of the company is ½ month and the credit purchases are paid
regularly after one month.

(iii) Wages are paid half monthly and the rent of Rs. 500 included in expenses is paid monthly and
other expenses are paid after one month lag.

(iv) Cash balance on April 1,2012 may be assumed to be Rs.15,000

 CASH BUDGET

(For the months ending April, May & June 2012)

Particulars April (Rs.) May (Rs.) June (Rs.)

Receipts

Opening Balance 15,000 27,200 35,700

Cash Sales 18,000 17,000 16,000

Collection from 66,000 70,000 66,000

Debtors

Total Receipts(A) 99,000 1,14,200 1,17,700

Payments

Cash Purchases 5,000 4,500 3,500

Payment to creditors 37,800 45,000 40,500

Wages 23,000 22,000 19,000

Rent 500 500 500

Other Exp. 5,500 6,500 5,500

Total Payments(B) 71,800 78,500 69,000

Closing balance 27,200 35,700 48,700