Module No.

5: BUDGETING & BUDGETARY CONTROL

A budget is an accounting plan. It is a formal plan of action expressed in monetary terms. It

could be seen as a statement of expected income and expenses under certain anticipated
operating conditions. It is a quantified plan for future activities – quantitative blue print for
action.

Budget: According to CIMA (Chartered Institute of Management Accountants) UK, a budget

is “A plan quantified in monetary terms prepared and approved prior to a defined period of
time, usually showing planned income to be generated and, expenditure to be incurred
during the period and the capital to be employed to attain a given objective.”

In a view of Keller & Ferrara, “a budget is a plan of action to achieve stated objectives based
on predetermined series of related assumptions.”

G.A.Welsh states, “A budget is a written plan covering projected activities of a firm for a
definite time period.”

Characteristics
• It is mainly a forecasting and controlling device.
• It is prepared in advance before the actual operation of the company or project.
• It is in connection with definite future period.
• Before implementation, it is to be approved by the management.
• It also shows capital to be employed during the period.

Budgetary Control
Budgetary Control is a method of managing costs through preparation of budgets. Budgeting is
thus only a part of the budgetary control. According to CIMA, “Budgetary control is the
establishment of budgets relating to the responsibilities of executives of a policy and the
continuous comparison of the actual with the budgeted results, either to secure by individual
action, the objective of the policy or to provide a basis for its revision.”

The main features of budgetary control are:

• Establishment of budgets for each purpose of the business.
• Revision of budget in view of changes in conditions.
• Comparison of actual performances with the budget on a continuous basis.
• Taking suitable remedial action, wherever necessary.
• Analysis of variations of actual performance from that of the budgeted performance to
know the reasons thereof.

Objectives of Budgetary Control:

1. Planning: Planning involves designing a desired future state for an organization and creating
detailed plans for various operational aspects like production, sales, and labor needs. It
allows problems to be anticipated and solutions to be developed in advance. Planning is a
continuous process, requiring regular updates to adapt to changing conditions.
2. Co-ordination: Budgeting aids in coordinating efforts across the organization, ensuring that
different departments work harmoniously towards common goals. Effective coordination
prevents conflicts between departments and aligns their activities with the overall objectives
of the organization.
3. Measurement of Success: Budgets provide a benchmark for measuring performance,
informing managers how well they are meeting targets. Organizations often link employee
 rewards and promotions to budget achievements, fostering a culture of accountability and
continuous improvement.
4. Motivation: Budgeting motivates managers by involving them in the goal-setting process.
This participation enhances their commitment to achieving the set targets, driving them to
perform better and align their efforts with business objectives.
5. Communication: Budgets serve as a communication tool, providing managers with essential
information about programs, guidelines, and restrictions. This ensures all management
personnel are informed and aligned with the organizational goals.
6. Control: Control mechanisms in budgeting ensure that the plans and objectives are being
met. Regular monitoring and evaluation of actual performance against the budget allow for
timely corrective actions, helping the organization stay on track to achieve its goals.

Advantages of Budgetary control:

• This system provides basic policies for initiatives.
• It enables the management to perform business in the most professional manner
because budgets are prepared to get the optimum use of resources and the objectives
framed.
• It ensures team work and thus encourages the spirit of support and mutual
understanding among the staff.
• It increases production efficiency, eliminates waste and controls the costs.
• It shows to the management where action is needed to remedy a position.
• Budgeting also aids in obtaining bank credit.
• It reviews the present situation and pinpoints the changes which are necessary.
• With its help, tasks such as like planning, coordination and control happen effectively
and efficiently.
• It involves an advance planning which is looked upon with support by many credit
agencies as a marker of sound management.

Limitations of Budgetary control:

• It tends to bring about rigidity in operation, which is harmful. As budget estimates are
quantitative expression of all relevant data, there is a tendency to attach some sort of
rigidity or finality to them.
• It being expensive is beyond the capacity of small undertakings. The mechanism of
budgeting system is a detailed process involving too much time and costs.
• Budgeting cannot take the position of management but it is only an instrument of
management. ‘The budget should be considered not as a master, but as a servant.’ It is
totally misconception to think that the introduction of budgeting alone is enough to
ensure success and to security of future profits.
• It sometimes leads to produce conflicts among the managers as each of them tries to
take credit to achieve the budget targets.
• Simple preparation of budget will not ensure its proper implementation. If it is not
implemented properly, it may lower morale.
• The installation and function of a budgetary control system is a costly affair as it
requires employing the specialized staff and involves other expenditure which small
companies may find difficult to incur.

Essentials of Effective Budgeting:

1. Support of Top Management: Top management must fully support and drive the budget
structure, as no control system can be effective without their commitment.
2. Team Work: Budgets should be created from the bottom up with enthusiastic support and
participation from all levels of management. Educating everyone on the benefits is crucial.
3. Realistic Objectives: Budget goals must be realistic and agreed upon by responsible
executives to ensure they are achievable.
4. Excellent Reporting System: Prompt reports comparing budgeted and actual results are
essential, with special focus on significant deviations and a proper feedback system.
5. Structure of Budget Team: This team finalizes the Master Budget, approves departmental
budgets, and handles forecasts and periodic reports.
6. Well-defined Business Policies: Budgets should align with clearly defined business policies
set by higher management to avoid ambiguity.
7. Integration with Standard Costing System: The budgeting system should be integrated
with standard costing for both preparation and variance analysis.
8. Inspirational Approach: Employees should be inspired and motivated towards the
budgeting system, avoiding any sense of pressure or enforcement.

Classification of Budget:

(a)Based on Function
1. Sales Budget: This budget estimates the expected revenue from sales for a specific period.
It is based on sales forecasts and sets targets for the sales team, helping to guide marketing
efforts and inventory management.
2. Production Budget: This budget outlines the number of units that need to be produced to
meet sales goals and maintain desired inventory levels. It ensures that production is aligned
with sales demand.
3. Raw Materials Budget: This budget forecasts the quantity and cost of raw materials required
for production. It ensures that sufficient materials are available to meet production needs
without overstocking.
4. Purchase Budget: This budget details the planned purchases of raw materials and other
goods. It aligns with the raw materials budget and ensures that procurement is timely and
cost-effective.
5. Labour Budget: This budget estimates the direct labor costs associated with the planned
production levels. It includes wages, benefits, and other related costs, ensuring that labor
resources are efficiently allocated.
6. Zero Base Budgeting: Zero-Based Budgeting (ZBB) is a method of budgeting in which all
expenses must be justified for each new period, starting from a "zero base." Unlike traditional
budgeting, which typically adjusts previous budgets by incremental amounts, ZBB requires
that each function within an organization be analyzed for its needs and costs. Every budget
cycle starts from zero, and every expense must be justified and approved, regardless of
previous spending levels.
7. Production Overhead Budget: This budget estimates all indirect production costs, such as
utilities, maintenance, and factory supplies. It ensures that overhead costs are planned for
and controlled.
8. Selling and Distribution Budget: This budget outlines the expected costs of selling and
distributing products, including advertising, sales commissions, shipping, and logistics. It
helps manage and control marketing and distribution expenses.
9. Administration Cost Budget: This budget estimates the costs associated with the general
administration of the company, including salaries of administrative staff, office supplies, and
other overheads. It helps in managing administrative expenses.
10. Capital Expenditure Budget: This budget plans for long-term investments in assets such as
machinery, buildings, and equipment. It ensures that capital projects are properly financed
and aligned with strategic goals.
11. Cash Budget: This budget projects the company's cash inflows and outflows over a specific
period. It helps manage liquidity, ensuring that the company has enough cash to meet its
obligations and avoid liquidity crises.

(b) Based on Flexibility

1. Fixed Budget
A fixed budget, also known as a static budget, is a financial plan that remains unchanged
regardless of the actual levels of activity or volume. It is established for a set period and
is based on the anticipated levels of income and expenditure at a specific level of output
or sales.
A fixed budget, also known as a static budget, remains unchanged regardless of variations
in actual activity levels or volume.

Characteristics:
• It is established for a specific level of activity and does not adjust for changes in
production or sales volume.
• Suitable for organizations or departments with stable and predictable operations.
• Often used for administrative or overhead costs that do not fluctuate with changes
in business activity.
• Based on a single level of activity.
• Costs and revenues are projected for this fixed level, without adjustments for actual
performance.
• Typically established before the start of the fiscal period.
• Often used in stable environments with predictable operations.

Advantages:
• Simplicity: Easy to prepare and understand.
• Control: Provides a stable financial framework, making it easier to control costs.
• Consistency: Useful for fixed cost departments like administration and overheads.
• Benchmarking: Offers a clear benchmark for evaluating performance.

Disadvantages:
• Inflexibility: Cannot adapt to changes in activity levels, making it less useful in
dynamic environments.
• Relevance: May become quickly outdated if actual activity levels differ from
projections.
• Inefficiency: Can lead to misallocation of resources if actual conditions change.
• Motivation: May demotivate staff if the budget is seen as unrealistic or unachievable
under changing conditions.
2. Flexible Budget
A flexible budget is a financial plan that adjusts according to changes in activity levels or
volume. It is designed to provide a more adaptable and realistic financial framework by
varying costs and revenues in response to actual performance.
A flexible budget adjusts according to changes in activity levels or volume, providing a
more adaptable financial plan.

Characteristics:
• Adjusts according to different levels of activity.
• Separates fixed and variable costs to provide a dynamic financial framework.
• Typically reviewed and updated regularly based on actual performance data.
• Used in dynamic environments where activity levels can vary significantly.

Advantages:
• Adaptability: More responsive to changes in activity levels, providing a realistic
financial plan.
• Accuracy: Offers a better comparison between actual and budgeted performance
at varying levels of activity.
• Resource Allocation: Facilitates more efficient allocation of resources as it aligns
with actual activity.
• Performance Evaluation: Enhances performance evaluation by comparing actual
results with budgeted figures for the same activity level.
• Decision Making: Supports better decision-making by providing relevant data
under varying conditions.

Disadvantages:
• Complexity: More complex to prepare and manage compared to a fixed budget.
• Time-Consuming: Requires regular updates and adjustments, which can be time-
consuming.
• System Requirements: May need sophisticated systems to accurately track and
adjust for changes in activity levels.
• Training: Staff may require additional training to understand and implement
flexible budgeting effectively.
• Data Dependency: Relies heavily on accurate and timely data for adjustments,
making it challenging in environments with poor data quality.

Difference between Fixed budget and flexible budget

Feature Fixed Budget Flexible Budget
Does not change with Adjusts according to
Adaptability
activity levels activity levels
Simple to prepare and More complex and
Complexity
manage requires regular updates
Can become outdated Provides a more accurate
Accuracy
quickly and relevant financial plan
Stable and predictable Dynamic and variable
Usage Environment
operations operations
May lead to inefficiency if Facilitates efficient
Resource Allocation
conditions change resource allocation
Less effective if actual Enhances performance
Performance Evaluation activity levels differ from evaluation by aligning with
projections actual activity
 (c) Based on Time
1. Long-Term Budget: A long-term budget is a financial plan that outlines the
projected income and expenses over an extended period, typically spanning more
than one year. It serves as a strategic planning tool, guiding the organization's
financial decisions and investments over the long term.
2. Short-Term Budget: A short-term budget is a financial plan that covers a brief
period, usually one year or less. It focuses on the day-to-day operations of the
organization and helps in managing immediate financial needs and obligations.
3. Rolling Budget: A rolling budget is a continuously updated financial plan that
extends over a fixed period, such as twelve months. As each month or quarter
elapses, a new month or quarter is added to the budget, keeping the planning
horizon constant.

1. From the following information, prepare a cash budget for 3 months ending 31.09.2021.
Months Sales Rs. Purchases Rs. Wages Rs. Expenses Rs.
June 2,00,000 1,30,000 20,000 10,000
July 1,50,000 1,40,000 30,000 10,000
August 2,50,000 1,60,000 20,000 15,000
September 2,20,000 1,80,000 15,000 15,000
Additional information
• Opening cash balance on 1st July is Rs. 60,000
• Debtors pays in the month of following the month of sales
• Creditors are paid in the month, following the month of purchases
• Expenses are paid in the same month, assume that wages are paid on monthly basis on the
first of very next month.

2. Archita co., wishes to arrange overdraft facilities with its bankers during the period April to
June 2021, when it will be manufacturing mostly for stock. Prepare a cash budget for the
above period from the following data, indicating the extent of the bank facilities the
company will require at the end of each month.
Months Sales Rs. Purchases Rs. Wages Rs.
February 1,80,000 1,24,800 12,000
March 1,92,000 1,44,000 14,000
April 1,08,000 2,43,000 11,000
May 1,74,000 2,46,000 10,000
June 1,26,000 2,68,000 15,000
Additional information:
• 50% of credit sales are realised in the month following sales and the remaining 50% in
the second month following.
• Creditors are paid in the month following the month of purchase.
• Estimated cash at bank on 1st April 2021 Rs. 50,000.

3. Aditri ltd wants you to prepare the cash budget of the company for 3 months from April
to June 2021. You are given the following information.
Purchases Expenses Overheads
Months Sales Rs. Wages Rs.
Rs. Rs. Rs.
January 1,60,000 85,000 32,000 8,000 10,000
February 1,85,000 92,000 37,000 9,500 11,500
March 2,10,000 1,00,000 42,000 10,500 13,000
April 2,45,000 1,20,000 49,000 12,500 14,500
May 1,78,000 90,000 35,000 8,900 10,500
June 1,82,000 98,000 36,000 9,000 11,000
Additional information:
 • Periods of credit allowed to debtors 2 months
• Period allowed by creditors 1 month
• Lag in payment of wages, selling expenses and overhead one month
• Expected cash sales Rs. 15,000P.M.
• Expenditure on machinery is payable in April Rs. 50,000
• Expected cash balance in April Rs. 10,500

4. The following particulars extracted from the books of a company for the quarter ending
31.3.2021. Opening balance of cash on 01/02/2021 is Rs. 54,000.
Months Sales Rs. Purchases Rs.
November 80,000 ---
December 90,000 60,000
January 75,000 55,000
February 75,000 45,000
March 80,000 55,000
Analysis of records shows that the debtors settle according to the following pattern 60%
with in the month of sale, 25% the following month, 15% the month following.
All the purchases are on credit and the past experience show that 90% are settled in the
month of sales and the balance in the month following. Calculate sales revenue and
payment to suppliers.

5. A newly formed company desires to prepare a cash budget for 4 months from March to
June 2021. The following information is available.
Months Sales Rs. Purchases Rs. Wages Rs. Overhead Rs.
Jan 20,000 20,000 4,000 4,000
Feb 22,000 14,000 4,400 4,200
Mar 28,000 14,000 4,600 4,300
Apr 36,000 22,000 4,600 4,500
May 30,000 20,000 4,000 4,100
Jun 40,000 25,000 5,000 4,800
Additional information:
• Cash balance on 1st Mar 2021 Rs . 10,000
• New machinery is to be installed at a cost at Rs. 10,000 in the month of February
which is to be paid in two equal instalments in March and April.
• Rs. 12,000 is to be collected in March as 2nd call money.
• Period of credit allowed by creditors is 2 months and allowed to customers 1 month.
• 50% of sales and purchases are for cash.
• Delay in payment of wages 1/2 month, overheads are paid in the same month.
• The company pays dividends to shareholders and bonus to workers of Rs. 2,000 and
Rs. 3,000 respectively in the month of March.
• Income tax Rs. 5,000 is payable in May.

6. From the following budgeted figures prepare a cash budget in respect of three months
to June 30th 2021.
Months Sales Rs. Purchases Rs. Wages Rs. Overhead Rs.
Jan 30,000 20,000 5,500 3,100
Feb 28,000 24,000 5,800 3,300
Mar 32,000 25,000 6,000 3,400
Apr 40,000 28,000 6,200 3,600
May 42,000 31,000 6,500 4,300
Jun 38,000 25,000 7,000 4,000
Other information:
• Estimated cash balance on April 1st 2021 Rs. 10,000
 • Materials and overheads are paid during the month following the month of supply.
Wages are paid during the month.
• Credit items of sales are paid by the end of the month following the month of sales. It
is estimated that one half of sales are paid when due, the other half being paid
during the next month.
• A sales commission of 5% on sales is to be paid within the month following actual
sales.
• Preference shares dividend of 10% on capital of Rs. 3,00,000 is to be paid on May 1,
2021.
• Plant and machinery to be installed in May at a cost of Rs. 10,000 will be payable on
1st June 2021.
• 10% calls on equity share capital of Rs. 2,50,000 are due on April 1st and June 1st
2021.

7. Mahindra co., ltd working at 50% capacity manufacture 10,000 units of a product cost is
Rs. 180 and sale price is Rs. 200. The break up of the cost is as follows:
Materials Rs. 10,000 cost per unit; Wages Rs. 3,000 cost per unit; Factory overheads Rs.
3,000 (40% Fixed) cost per unit; Administration overhead Rs. 2,000 (50% Fixed).

At 60% working, raw material cost goes up by 2% and sales price falls by 2%. At 80%
working, the material cost increase by 5% and sales prices decrease by the same
percentage i.e., 5%.
Prepare a statement to show profitability at 60% and 80% capacity.

8. Draw up a flexible budget for overhead expenses on the basis of the following data and
determine the overhead rate at 70%, 80% and 90% plant capacity.
At 80% Capacity
Variable overheads:
Indirect labour 12,000
Stores including spares 4,000
Semi variable overheads:
Power (30% fixed, 70% variable) 20,000
Repairs and maintenance (69% Fixed, 40% Variable) 2,000
Fixed Overheads:
Depreciation 11,000
Insurance 3,000
Salaries 10,000
Total Overheads 62,000
Estimated direct labour hours 1,24,000 hrs.

9. Prepare a flexible budget for production at 80% and 100% activity on the basis of the
following information:
Production at 50% capacity 5,000 units
Raw materials Rs. 80 per unit.
Direct labour Rs. 50 per unit
Direct expenses Rs. 15 per unit
Factory expenses Rs. 50,000 (50% fixed)
Administration expenses Rs. 60,000 (60% variable).

10. The following data are available in a manufacturing company for a yearly period:
Fixed expenses:
Wages and salaries Rs. 9,50,000; Rent, rates and taxes Rs. 6,60,000, Depreciation Rs.
7,40,000, Sundry administration expenses Rs. 6,50,000
Semi-variable expenses (At 50% of capacity):
 Maintenance and repairs Rs. 3,50,000, Indirect labour Rs. 7,90,000, Sales department
salaries etc., Rs. 3,80,000, Sundry administration salaries Rs. 2,80,000.
Variable expenses (At 50% of capacity):
Materials Rs. 21,70,000, Labour 20,40,000, Other expenses Rs. 7,90,000

Assume that the fixed expenses remain constant for all levels of production; semi
variable expenses remain constant between 45 per cent and 65 per cent of capacity,
increasing by 10 percent between 65 per cent and 80 per cent capacity and by 20 per
cent between 80 per cent and 100 per cent capacity.

Sales at various levels are:

50% capacity Rs. 1,00,00,000; 60% capacity Rs. 1,20,00,000
75% capacity Rs. 1,50,00,000; 90% capacity Rs. 1,80,00,000
100% capacity Rs. 2,00,00,000
Prepare a flexible budget for the year and forecast the profit at 60%, 75%, 90% and
100% of capacity.

11. The expenses budgeted for production of 10,000 units in a factory are furnished below:
Materials Rs. 70 per unit; Labour Rs. 25 per unit; Variable overheads Rs. 20 per unit;
Fixed overheads (Rs. 1,00,000) Rs. 10 per unit; Variable expenses (Direct) Rs. 5 per unit;
Selling expenses (10% fixed) Rs. 13 per unit; Distribution expenses (20% fixed) Rs. 7
per unit; Administration expenses (Rs. 50,000) Rs. 5 per unit.
Prepare a budget for the production of (a) 8,000 units (b) 6,000 units.
Assume that administration expenses are rigid for all levels of production.

12. A department of Alstom India Company attains sales of Rs. 6,00,000 at 80% of its normal
capacity. Its expenses are given below:
Office salaries Rs. 90,000; General expenses Rs. 2% of sales; Depreciation Rs. 7,500;
Rent and rates Rs. 8,750.
Selling cost: Salaries 8% of sales; Travelling expenses Rs. 2% of sales; Sales office Rs.
1% of sales; General expenses 1% of sales.
Distribution cost: Wages Rs. 15,000; Rent 1% of sales; Other expenses 4% of sales
Draw up flexible administration, selling and distribution costs budget, operating at
90%, 100% and 110% of normal capacity.

13. The budget manager of Jupiter electrical limited is preparing flexible budget for the
accounting year starting from 1st July 2022.
The company produce one product - DETX II. Direct material costs Rs. 7 per unit.
Direct labour averages Rs. 2.50 per hour and requires 1.6 hours to produce one unit of
DETX II. Salesmen are paid a commission of Rs. 1 per unit sold. Fixed selling and
administrative expenses amount to Rs. 85,000 per year.
Manufacturing overhead is estimated in the following amounts under specified volumes:
Volume of Production (in units) 1,20,000 1,50,000
Expenses: Rs. Rs.
Indirect material 2,64,000 3,30,000
Indirect labour 1,50,000 1,87,500
Inspection 90,000 1,12,500
Maintenance 84,000 1,02,000
Supervision 1,98,000 2,34,000
Depreciation of plant and equipment 90,000 90,000
Engineering services 94,000 94,000
Total manufacturing overhead 9,70,000 11,50,000
Prepare a total cost budget for 1,40,000 units of production.
 14. The manager of repairs and maintenance department in response to a request,
submitted the following budget estimates for his department that are to be used to
construct a flexible budget to be used during the coming budget year:
Details of Cost 6,000 Direct Repair Hours 9,000 Direct Repair Hours
Employee salaries 30,000 30,000
Indirect repair materials 40,200 60,300
Miscellaneous cost etc., 13,200 16,800
(a) Prepare a flexible budget for the department up to activity level of 10,000 repair
hours (use increments of 1,000 hours).
(b) What would be the budget allowance at 8,500 direct repair hours?

15. Excellent manufacturers can produce 4,000 units of a certain product at 100% capacity.
The following information is obtained from the books of account:
Aug 2023 Sep 2023
Units produced 2,800 units 3,600 units
Rs. Rs.
Repairs and maintenance 500 560
Power 1,800 2,000
Shop labour 700 900
Consumable stores 1,400 1,800
Salaries 1,000 1,000
Inspection 200 240
Depreciation 1,400 1,400
Rate of production per hour is 10 units. Direct material cost per unit is Rs. 1 and direct
wages per hour is Rs. 4.
You are required to:
(1) Compute the cost of production at 100%, 80% and 60% capacity showing the
variable, fixed and semi variable items under the flexible budget.
(2) Find out the overhead absorption rate per unit at 80% capacity.

16. For the production department of HYL ltd you are required to:
(a) Prepare a fixed budget of overheads
(b) Prepare a flexible budget of overheads at 70% and 110% of budgeted volume
(c) Calculate a departmental hourly rates of overhead absorption as per (a) and (b)
above the budgeted level of activity of the department is 5,000 hours per period and
s study of the various items of expenditure reveals the following:
Rs. Rs. Per Hr.
Indirect wages 0.40
Upto 2,000 hours 100
For each additional 500 hrs up to a total of 4,000 hrs. 35
Repairs
Additional from 4,001to 5,000 hrs. 60
Additional above 5,000 hrs 70
Rent and rates 350
Up to 3,600 hrs 0.25
Power
For hours above 3,600 0.20
Consumable supplies 0.24
Up to 2,500 hrs 400
Additional for each extra 600 hrs above 2,500 and
Supervision 100
up to 4,900 hrs
Additional above 4,900 hrs 150
Up to 5,000 hrs 650
Depreciation
Above 5,000 hrs and up to 6,500 hrs 820
Up to 4,000 hrs 60
Cleaning
Above 4,000 hrs 80
Heat and lighting From 2,100 hrs to 3,500 hrs 120
 From above 3,500 hrs to 5,000 hrs 150
Above 5,000 hrs 175

17. The following data relate to Boost ltd.,

The financial manager has made the following sales forecasts for the first five months of
the coming year, commencing from 1st April 2021 is Rs. 40,000, May 45,000, June Rs.
55,000, July Rs. 60,000, August Rs. 50,000
Other data:
(i) Debtors’ and creditors’ balance at the beginning of the year are Rs. 30,000 and
Rs. 14,000 respectively. The balance of other relevant assets and liabilities are:
cash balance Rs. 7,500; stock Rs. 51,000 and Accrued sales commission Rs. 3,500.
(ii) 40% sales are on cash basis. Credit sales are collected in the month following the
sale.
(iii) Cost of sales in 60 per cent on sales.
(iv) The only other variable cost is a 5% commission to sales agents. The sales
commission is paid in a month after it is earned.
(v) Inventory (stock) is kept equal to sales requirements for the next two month
budgeted sales.
(vi) Trade creditors are paid in the following month after purchases
(vii) Fixed cost are Rs. 5,000 per month including Rs. 2,000 depreciation.
You are required to prepare a cash budget for the month of April, May and June
2021 respectively.

18. Prepare a cash budget for the three months ending 30th June, 2021 from the information
given below:
Months Sales Rs. Materials Rs. Wages Rs. Overhead Rs.
Feb 14,000 9,600 3,000 1,700
Mar 15,000 9,000 3,000 1,900
Apr 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
Jun 18,000 10,400 4,000 2,300
• Credit terms are:
Sales and debtors 10 % of sales are on cash, 50% of the credit sales are collected next
month and the balance in the following month.
• Creditors: Materials 2 months, wages ¼ month, overheads ½ month
• Cash and bank balance on 1st April 2021 is expected to be Rs. 6,000
• Other relevant informations are:
(i) Plant and machinery will be installed in Feb 2021 at a cost of Rs. 96,000.
The monthly instalment of Rs. 2,000 is payable from April onwards.
(ii) Dividend @ 5% on preference share capital of Rs. 2,00,000 will be paid on
1st June.
(iii) Advance to be received for sale of vehicles Rs. 9,000 in June.
(iv) Dividends from investments amounting to Rs. 1,000 are expected to be
received in June.
(v) Income tax (advance) to be paid in June is Rs. 2,000.