Cost Accounting Budgeting Analysis - Accounting Basics

A powerful tool that helps the management in performing its functions of planning, coordinating, controlling and operations efficiently is Budget.

What are Budget, Budgeting and Budgetary Control?

Budget

The objective of the organization which is based on the forecast implications and is related to planned activities is represented by Budget. Budget is considered as neither a forecast nor estimation.

The planned policy and the organization program under the planned conditions is related as Budget. The action in accordance with a situation which may or may not happen is represented by budget.

Budgeting

The formation of the budget with the coordination of various departments of the firm is represented by Budgeting.

Budgetary Control

A management tool for allocating responsibility and authority for future planning and developing a basis of development for evaluating the operations efficiency is known as budgetary control.

A budget is a plan of the policy to be pursued during a defined time period. On the basis of budget plan, all the actions are based after studying the related activities of the company. A communication ground is provided to the top management with the help of the firm staff who implement the top management policies.

The economic trends, financial position, policies, plans and actions of the organization are coordinated by budgetary control.

Budgetary control also helps the management to ensure and control the plan and activities of the organization. This is done by continuous comparison of actual performance with that of the budgets.

What are the different types of Budgets in Cost Accounting?

Budgets are categorized into many ways such as:

Functional Budgets

Functional budgets relate to the different functions of the firm such as sales. Production, cash etc. The budgets prepared under functional budgets are as follows:

  • Sales Budget
  • Production Budget
  • Material Budget
  • Manufacturing Budget
  • Administrative Cost Budget
  • Plant Utilization Budget
  • Capital Expenditure Budget
  • Research and Development Cost Budget
  • Cash Budget

Master Budget or Summarized Budget or Finalized Profit plan

Master budget is essential for top management of the company as it provides the information in a summarized manner.

Fixed Budget

A rigid budget that is drawn on the assumption that there are no changes in the budget level is Fixed Budget.

Flexible Budget

Flexible budget is also known as sliding scale budget and is used for:

  • the new organizations where it is difficult to foresee,
  • the firms where activity level changes due to seasonal nature or change in demand,
  • the industries based on change of fashion,
  • the units which keep on introducing new products, and
  • the firms which are engaged in ship-building business.

Zero Base Budgeting

The budgeting that is not based on the incremental approach, previous year figures are known as Zero Base Budgeting.

Control Ratios

The deviations of the actual performance are evaluated from the budgeted performance by using some of the ratios as follows. The results are favourable if the ratio is 100% and vice-versa.

Capacity Ratio =
Actual hours workedBudgeted hours
Activity Ratio
=
Standard hours for actual productionBudgeted hours
× 100
Efficiency Ratio
=
Standard hours for actual productionActual hours worked
× 100
Calendar Ratio
=
Number of actual working days in a periodNumber of working days in the budgeted period
× 100

What is the different between Flexible Budget and Fixed Budget?

Fixed budget can be differentiated with flexible budget on the following aspects:

Points
Flexible Budget
Fixed Budget
Flexibility
According to the level of production, flexible budget can be quickly re-organized.
Once the period commences, fixed budget cannot be changed in accordance with the actual production.
Condition
As the conditions change, flexible budget changes accordingly.
Based on the assumption that the conditions remain unchanged, fixed budget is prepared.
Cost Classification
Classification of costs is done according to the nature of their variability.
It is suitable for fixed costs only; no classification is done in fixed budget.
Comparison
In accordance with the change in the level of production, actual figures are compared with the revised standard figures.
A correct comparison is not possible in case of changes in the production levels.
Ascertainment of cost
At different levels of activity, costs can be ascertained.
Costs cannot be ascertained in case of changes in the production levels.
Cost Control
Flexible budget is used as an effective tool to control costs.
Due to its limitations, fixed budget is not used as cost control tool.

What is Flexible Budget?

Logical comparisons are provided by flexible budget. Flexible budget is prepared by comparing the actual cost at the actual activity with that of the budgeted cost. The concept of variability is recognized by flexibility.

The performance of the departments is assessed in relation to the level of the activity achieved. At different levels of activities, cost is ascertained. Flexible budget is used for fixing the price and preparing the quotations.

Example

For instance, with the given expense, a budget for the production of 10,000 units is prepared and flexible budget for 5,000 and 8,000 units is also prepared.

Costs
Price per Unit(Rs.)
Material
75
Labor
20
Variable Factory Overheads
15
Fixed Factory Overheads (Rs 50,000)
5
Variable Expenses (Direct)
6
Selling Expenses (20% Fixed)
20
Distribution Expenses (10% fixed)
10
Administrative Expenses ( Rs 70,000)
7
Total cost of Sale per unit
158

Solution

Particulars Output 5000 units Output 5000 units
Rate(Rs) Amount Rate(Rs) Amount
Variable or Product Expenses:
Material 75.00 3,75,000 75.00 6,00,000
Labour 20.00 1,00,000 20.00 1,60,000
Direct Variable Overheads 6.00 30,000 6.00 48,000
Prime Cost 101.00 5,05,000 101.00 8,08,000
Factory Overheads
Variable Overheads 15.00 75,000 15.00 1,20,000
Fixed Overheads 10.00 50,000 6.25 50,000
Work Cost 126.00 6,30,000 122.25 9,78,000
Fixed Administrative Expenses 14.00 70,000 8.75 70,000
Cost of Production 140.00 7,00,000 131.00 10,48,000
Selling Expenses
Fixed 20% of Rs.20/- 8.00 40,000 5.00 40,000
Variable Cost 80% of Rs.20/- 16.00 80,000 16.00 1,28,000
Distributed Expenses
Fixed 10% of Rs.10/- 2.00 10,000 1.25 10,000
Variable 90% of Rs.10/- 9.00 10,000 1.25 10,000
Total Cost of Sale 175.00 8,75,000 165.25 12,98,000

What is a Cash Budget?

Cash budget is considered as one of the financial budgets. Cash budgets are prepared for calculating the budgeted cash flows during a specific period of time. The optimum level of cash required is determined by the cash budget avoiding excessive or shortage of cash.

In the case of shortage, cash budget facilitates in arranging cash through borrowing funds and in case of excess cash, cash budget facilitates in arranging for investments.

The tasks included in the cash budget are:

  • Collection of Cash
  • Cash Payments
  • Selling Expenses and administrative expensive budget

Example

If a firm wants to maintain cash balance of Rs 50,000 and in case of shortage the firm borrows funds from Bank, following cash budget is prepared:

Particulars Q-1 Q-2 Q-3 Q-4 Total
(Yearly)
Opening Cash Balance 40,000 50,000 50,000 50,500 40,000
Add; Cash receipts 80,000 1,00,000 90,000 1,25,000 3,95,000
Total available Cash (A) 1,20,000 1,50,000 1,40,000 1,75,500 4,35,000
Less: Cash Payments:
Direct Material 30,000 40,000 38,000 42,000 1,50,000
Direct Labour 12,000 15,000 14,000 16,000 57,000
Factory Overheads 18,000 19,000 17,000 20,000 74,000
Administrative Expenses 16,000 16,000 16,000 16,000 64,000
Selling & Distribution Exp. 9,000 10,000 11,000 12,000 42,000
Purchase of Fixed Assets - - 40,000 - 40,000
Total Cash Payments (B) 85,000 1,00,000 1,36,000 1,06,000 4,27,000
Cash in hand C (A-B) 35,000 50,000 4,000 69,500 8,000
Financing Activities: 15,000 - 50,000 - 65,000
Borrowings - -3,000 -18,000 -21,000
Repayments of Borrowings - -500 -1,500 -2,000
Interest paid
Net Cash Flows from financing 23,000 0 46,500 -19,500 50,000
Activities ( D)
Closing Cash Balance E (C+D) 58,000 50,000 50,500 50,000 50,000

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