Вы находитесь на странице: 1из 11


Budgetary Control is a technique of managerial control

through budgets. Elaborate.

Modern business world is full of competition, uncertainty and

exposed to different types of risks. The complexity of managerial
problems has led to development of various managerial tools,
techniques and procedures useful for the management in
managing the business successfully. In this direction, planning
and control plays an important role. Budgeting is the most
common and powerful standard device of palling and control.

Budgetary control is a technique of managerial control

through budgets. A budget is a quantitative expression of plan
of action. . It is a pre-determined detailed plan of action
developed as a guide for future operation. According to Wheldon
“Budgetary control is the planning in advance of the various
functions of business so that the business as a whole can be
controlled”. Budgetary controls deals with planning, coordination,
recording appraisal and follow-up of actions.

The procedure for preparing plan in respect of future financial and

physical requirements is generally called “Budgeting”. It is a
forward planning exercise. It involves the preparation in advance
of the quantitative as well as the financial statements to indicate
the intention of the management in respect of the various aspects
of the business.

Budgetary control is applied to a system of management

accounting control by which all operations and output are
forecasted far ahead as possible and actual results when known
are compared with the budget estimates.

Budgeting is a forward planning. It basically serves as a tool for

management control. The objectives of budgeting may be taken

• To forecast and plan for future to avoid losses and to maximize

• To help the concern in planning the activities both physical and

• To bring about coordination between different functions of the


• To control; actual actions by ensuring that actual are in tune

with targets

Budgetary control: When one relates control function to

budget, we find a system what is generally termed as budgetary
control. Control signifies such systematic efforts which help the
management to know whether actual performance is in line with
predetermined goal, policy and plans. It is basically a
measurement tool. Yardsticks should be laid down. Standards
must be set up.

Therefore, the objectives can be summarized as follows:

• To conform with good business practice by planning for the


• To coordinate the various divisions of a business.

• To establish divisional and departmental responsibilities.

• To forecast operating activities and financial position.

• To operate most efficiently the divisions, departments and cost


• To avoid waste, to reduce expenses and to obtain the income


• To obtain more economical use of capital available for the

efficient operation.

• To provide more definite assurance of earning the proper

return on capital employed.
• To centralize management control.

• To show the management where action is needed to remedy a


• To help in controlling cash.

• To help in obtaining better inventory control and turnover.

Steps In Budgetary Control

The procedure to be followed in the preparation and control of

budget may differ from business to business. But, a general
pattern of outline of budget preparation and control may go a
long way to achieve the end results. The steps are as follows:

Formulation of policies: The business policies are the foundation

stone of budget construction. Function policies should be
formulated in advance. Long-range policies with short term
projections should be made for the functional areas such as sales,
production, inventory, cash management, capital expenditure.

Preparation of forecasts:

Based on the formulated policies, forecast should be made in

respect of each function. Activity based concepts should be
introduced at the micro level for each function Forecasts should
not be considered as a mere estimates. Scientific methods should
be adopted for forecasting. Analysis of various factors based on
past, and present, future forecast should be made.

Preparation of budgets:

Forecasts are converted into written codified document. Such

written documents can be used for coordination purposes.
Function budgets will act as guidelines for implementation.

Forecast combinations:
While developing the budgets, through a Master Budget various
permutations and combination processes are considered and
developed. Based on this, establishment of the most preferred
one which will yield optimum benefits should be considered. All
the factor components should be identified which are likely to
cause disturbances while implementing the budgets

2. a. Given: Current ratio = 2.6

Liquid ratio = 1.4

Working Capital = Rs.1,10,000

Calculate (1) Current assets (2) current liabilities

(3) Liquid Asset (4) Stock

Given data is working capital, hence:

Working capital = Current assets - current liabilities ----- [1]

Current Ratio = CA / CL = 2.6

In the absence of any value, the current liability is always taken

as 1 unit

2.6 = CA / 1 and cross multiplying , CA is 2.6

Substituting CA in [1],

Working capital = 2.6 - 1 = 1.6

For 1.6 WCR = Working capital value is Rs1,10,000

For 2.6 CAR, the current asset is Rs.1,10,000 x 2.6 / 1.6 =


For 1 CLR, the current liability is 1,10,000 x 1 / 1.6 =


Liquid Ratio =Liquid asset / current liabilities

1.4 = Liquid asset / 2,86,000

Liquid asset = 1.4 X 68,750

= 96,250

Liquid asset = Current asset – Stock


Stock = Current Asset – Liquid Asset

= 1,78,750 – 96250

= Rs. 82,500

b. Calculate Gross Profit Ratio from the following


Sales Rs.5,00,000

Sales return Rs.50,000

Closing stock Rs.35,000

Opening stock Rs.70,000

Purchases Rs.3,50,000

Gross profit ratio (GP ratio) is the ratio of gross profit to net
sales expressed as a percentage. It expresses the relationship
between gross profit and sales.

[Gross Profit Ratio = (Gross profit / Net sales) × 100]

Cost Of Goods Sold [COGS] = Opening stock + Purchases –

closing stock

= 70000 + 350000-35000
COGS = 385000 Rs.

Gross Profit = (Sales – Sales returns) - COGS

= (500000 – 50000) – 385000

= 450000 – 385000

Gross Profit = 65000 Rs.

Net Sales = Sales – Sales returns

= 500000 – 50000

= 450000 Rs.

Gross Profit Ratio = (Gross profit / Net sales) × 100]

= (65000/450000) X 100

= 14.4%

3. From the following Balance Sheet of William & Co Ltd.,

you are required to prepare a Schedule of Changes in
Working capital & Statement of Sources and Application
of funds.

Balance Sheet

Liabilities 2002 2003 Assets 2002 2003

Rs. Rs. Rs. Rs.
Capital 80,00 85,00 Cash in 4,000 9,000
0 0 Hand
P&L a/c 14,50 24,50 Sundry 16,50 19,50
0 0 Debtors 0 0
Sundry 9,00 5,00 Stock 9,00 7,00
Creditors 0 0 0 0
Long-term - 5,00 Machinery 24,00 34,00
Loans 0 0 0
Building 50,00 50,00
0 0

Total 1,03,5 1,19,5 Total 1,03,5 1,19,5

00 00 00 00

Schedule of changes in working capital

Effect on Working
Details Balance as on Capital
2002 2003 Increase Decrease
Sundry Creditors 9,000 5,000 - 4,000
Long term loans 0 5,000 5000
P&La/c 14500 24500 10000
23,50 34,50
Total liabilities [B] 0 0 10,000 9,000
Cash in Hand 4000 9000 5000
Sundry Debtors 16500 19500 3000
Stock 9000 7000 2000
Machinery 24000 34000 10000
Total Assets (A) 53500 69500 10000 2000

Working Capital A-B 30,000 35,000

Net increase in Working
capital 5000 9000

35,000 35,000 20,000 20,000

4. Bring out the difference between cash flow and funds
flow statement.

Difference Between Cash Flow And Funds Flow Statement

The major differences between the two are :

1. FFS is related with accrual basis whereas CFS is on cash

basis. For this the, it is necessary to convert the accrual to
cash basis.
2. In FFS, a Schedule of changes in working capital de-linking
the current assets and current liabilities are made. But in
CFS, no schedule is prepared.
3. FFS shows the causes of the changes in net working capital.
CFS shows the causes for the change in cash
4. In FFS, no opening or closing balances are recorded. But in
CFS both are incorporated
5. FFS is not based on the Ledger mode. But CFS is prepared on
the basis of Ledger principles.
6. In FFS, “To” and “By” are indicated. In CFS, these are not
7. In FFS, net effect of receipts and disbursements are
recorded. In CFS only cash receipts and payments are
8. FFS is concerned with the total provision of funds. CFS is
concerned with only cash.
9. FFS is flexible but CFS is rigid
10. FFS is more relevant for long range financial strategy. CFS
concentrates on short term aspects mostly affecting the
liquidity of the business.

5a. DELL computers sell 100 PCs at Rs.42,000. The

variable expenses amount to Rs.28,000 per PC. The
total fixed expenses is Rs.14,00,000. Prepare an
income statement.

Income Statement
No. Of computers produced 100
No. Of computers sold 100
Unit selling price per
unit variable cost per
Sales revenue =No. Of
computers sold X unit 4200000
selling price
Less variable cost (100 X
Less Fixed expenses -1400000
Profit or loss 0

b. Calculate BEP and MOS

Sales at present are 55,000 units per annum. Selling

price is Rs.6 per unit. Prime cost Rs.3 per unit.
Variable overheads is Re.1 per unit. Fixed cost
Rs.80,000 per annum.

Sales at present 50,000 units per annum. Selling price Rs.6 per
unit, Prime cost Rs.3 per unit. Variable overheads Re.1 per unit.
Fixed cost Rs.75, 000 per annum.


BEP = Fixed cost / (SP – VC) per unit

= 80,000 / (6 – 4)

= 80,000 / 2

BEP = 40,000 units.

BEP in rupees = BEP in units x selling price per unit

= 40,000 x Rs.6

= Rs.2, 40,000

MOS = Actual Sales – BEP Sales

= (55,000 x 6) – 2,40,000

MOS = Rs.90,000

6.What is cost variable analysis?

A variable cost changes in total in direct proportion to a change in

the level of activity or cost driver. If activity increases, say by
20%, total variable cost also increases by 20 %. The total variable
cost increases proportionately with activity. Variable cost fixed
per unit but varies in total.

Cost Variable Analysis:

Break Even Chart is used in Cost variable analysis.

It is a graphic or visual presentation of the relationship between

costs, volume and profit. It indicates the point of production at
which there is neither profit nor loss. It also indicates the
estimated profit or loss at different levels of production. While
constructing the chart, the following assumption is normally

a) Costs are classified into fixed and variable costs

b) Fixed costs shall remain fixed during the relevant volume

range of graph.

c) Variable cost per unit will remain constant during the relevant
volume range of graph

d) Selling price per unit will remain constant

e) Sales mix remains constant.

f) Production and sales volume are equal

g) There exists a linear relationship between costs and revenue.

h) Linear relationship is indicated by way of straight line.

Break Even Analysis

It is an extension of or even part of marginal costing. It is a

technique of studying cost volume profit relationship. Basically,
the break even analysis is aimed at measuring the
variations of cost with volume. It is a simple method of
presenting the effect of changes in volume on profits. It is also
known as CVP analysis. The various assumptions are:

a) All costs can be classified into fixed and variable

b) Sales mix will remain constant.

c) There will be no change in general price level

d) The state of technology, Methods of production and efficiency

remain unchanged.

e) Costs and revenues are influenced only by volume

f) Cost and revenues are linear.

g) Stocks are valued at marginal cost

h) Unit produced and sold are same.