CLASSIFICATION OF

BUDGETS

1 BBA 207 Management Accounting 04-Sep-20

Learning Outcome
S.No Learning Outcome PI

1 Able to Identify types of budgets and 1.3.1 , 2.1.2,

preparation of Budgets.

2 To apply apply Budgeting techniques to 4.1.2

solve management problems

2 BBA 207 Management Accounting 04-Sep-20

 Types of Budget
Budgets can be classified into different categories on the basis of Time,
Function, or Flexibility. The different budgets covered under each category
are shown in the following chart:

Time Function Flexibility

1. Long Term 1. Sales 1. Fixed Budget

2. Short Term 2. Production 2. Flexible Budget
3. Current Rolling 3. Purchase
4. Personnel
5. Research
6. Master
7. Cash
8. Cost of Production
9. Capital Expenditure

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Management Accounting by S K Singh
 PREPARATION OF SOME IMPORTANT
BUDGETS
(i) Sales Budget:
A sales budget is an estimate of expected total sales revenue and
selling expenses of the firm. It is known as a nerve center or backbone
of the enterprise. The responsibility for preparing sales budget lies
with the sales manager who takes into account several factors for
making the sales budget. Some Factors are:
 Past sales figures and trend
 Estimates and reports by salesmen
 General economic conditions
 Orders in hand
 Seasonal fluctuations
 Competition

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Management Accounting by S K Singh
 ii) Production budget:
Production budget is prepared on the basis of the sales
budget. But it also takes into account the stock levels
required to be maintained. It contains the manufacturing
programmes of the enterprise. It is helpful in anticipating
the cost of production. It is the responsibility of production
department to adjust its production according to sales
forecast.
 The sales budget
 Plant capacity
 Inventory policy
 Availability of raw-materials, labour, power, etc.

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Management Accounting by S K Singh
 (iii) Financial budget:
This budget shows the requirement of capital for both long-
term and short-term needs of the enterprise at various
points of time in future. Its objective is to ensure regular
supply of adequate funds at the right time. An important
part of the financial budget is the cash budget. It Contains;
• Estimated receipts and payments of cash over the
specified future period
• It serves as an effective device for control and
co-ordination of activities
• Estimates of the firm’s profits and expenditure
• Detect possible shortage or excess of cash in business

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Management Accounting by S K Singh
(iv) Personnel budget:
It lays down manpower requirements of all departments for
the budget period. It shows labour requirements in terms of
labour hours, cost and grade of workers. It facilitates the
personnel managers in providing required number of
workers to the departments either by transfers or by new
appointments.

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Management Accounting by S K Singh
 v) Master budget:
 The Institute of Cost and Management Accountants, England
defines master budget as the summary budget incorporating all
the functional budgets, which is finally approved, adopted and
applied. Thus, master budget is prepared by consolidating
departmental or functional budgets.
 Though practices differ, a master budget generally includes,
sales, production, costs-materials, labour, factory overhead,
profit, appropriation of profit and major financial ratios.

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Management Accounting by S K Singh
vi) Cash Budget
The cash budget helps the management to makes an arrangement
of cash if sufficient amount of cash is not available at the end of
each month. A cash budget is prepared with the help of
following information.

 The amount of budgeted cash sales and credit sales.

 The time lag between credit sales and collection period.
 The amount of selling and distribution expenses.
 The amount of income tax, property tax and sales tax.
 The amount of budgeted cash purchase and credit purchases.
 The period of credit allowed by the suppliers.
 The amount of salaries and wages to be paid.

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Management Accounting by S K Singh
Fixed Budget
 This budget is drawn for one level of activity and one set of
conditions. It has been defined as a budget which is designed to
remain unchanged irrespective of the volume of output or
turnover attained. It is rigid budget and is drawn on the
assumption that there will be no change in the budgeted level
of activity. It does not take into consideration any change in
expenditure arising out of changes in the level of activity.
 Thus, it does not provide for changes in expenditure arising out
of change in the anticipated conditions and activity. A fixed
budget will, therefore, be useful only when the actual level of
activity corresponds to the budgeted level of activity

10 Source: https://theintactone.com/2019/06/08/ma-u3-topic-5-fixed-and-flexible-
04-Sep-20
budgeting/
Flexible Budget
 The Chartered Institute of Management Accountants, England, defines a
flexible budget (also called sliding scale budget) as a budget which, by
recognizing the difference in behavior between fixed and variable costs in
relation to fluctuations in output, turnover, or other variable factors such as
number of employees, is designed to change appropriately with such
fluctuations. Thus, a flexible budget gives different budgeted costs for
different levels of activity.
 A flexible budget is prepared after making an intelligent classification of all
expenses between fixed, semi-variable and variable because the usefulness
of such a budget depends upon the accuracy with which the expenses can
be classified.

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budgeting/
Difference between Fixed and Flexible budget

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flexible-budgeting/
Practical Exercise

13207
BBA Source: Principles of mgt accountingby S N Maheshwari Vol04-Sep-20
II
Q1. Sagyan steel ltd.Manufactures a single product for which market demand exists for
additional quantity. Present sales of Rs. 60,000 per months utilises 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:
1 selling price Rs.10 per unit
2 Variable cost Rs.3 per unit
3 semi variable cost Rs.6,000 Fixed+ 50 paise per
unit

4 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:

1. the operating profits at 60%, 70% and 80% levels at current selling price,
and

2. the operating profits at proposed selling price at the above levels.

BBA 207 Source: Principles of mgt accountingby S N Maheshwari Vol II
Q2. Draw up a flexible budget for overhead expenses on the basis of the
following data and determine the overhead rates at 70%, 80% and 90% plant
capacity
Capacity Level
70% 80% 90%
Variable overheads Rs. Rs. Rs.
Indirect labour _ 12,000 _
stores including spares _ 4,000 _
Semi Variable overheads _ _
Power (30% fixed, 70% variable) _ 20,000 _
Repair and maintenance (60% fixed
40% variable) _ 2,000 _
Fixed overheads _ _
Depreciation _ 11,000 _
Insurance _ 3,000 _
Slaries _ 10,000 _
total Overheads _ 62,000 _
1,24,000
Estimated direct labour hours _ hrs _
BBA 207 Source: Principles of mgt accounting by S N Maheshwari Vol II
Q3. For production of 10,000 Amar Automatic Irons the
following are budgeted Expenses:

Per unit(Rs.)
Direct Material 60
Direct labour 30
Variable overheads 25
Fixed overheads(Rs. 1,50,000) 15
variable expenses( Direct) 5
Selling Expenses(10% Fixed) 15
Administrative Expenses( Rs. 50,000 rigid for all the
level of production) 5
Distribution expenses(20% fixed) 5
Total cost of sale per unit 160

Prepare a budget for production of 6,000, 7,000 and 8,000 Irons showing
distinctly Marginal cost and Total Cost.

BBA 207 Source: Principles of mgt accounting by S N Maheshwari Vol II

Q4.Prepare a Cash Budget for three months ended
30th September, 2004 based on the following
information:
Rs.
Cash at bank on Ist July,2004 25,000
Monthly salaries and wages (estimated) 10,000
Interest payable in August,2004 5,000

Estimated June July August September

Cash sales 1,20,000 1,40,000 1,52,000 1,21,000

Credit sales 1,00,000 80,0001,40,000 1,20,000

Purchases 1,60,000 1,70,000 2,40,000 1,80,000

Other expenses 18,000 20,000 22,000 21,000
Credit sales are collected 50% in the month of sale and 50% in the month following
collections from credit sales are subject to 10% discount if received in the month of
sale and to 5% if received in the month following. 10% of the purchases are in cash
and balance is paid in next month.

BBA 207 Source: Principles of mgt accountingby S N Maheshwari Vol II

Q5. Prepare Cash Budget of Madhu Fabrics for the months
April,2004 to July 2004(four months)from the details given below:
(i) Estimated sales: Rs.
February,2004 12,00,000
March,2004 12,00,000
April,2004 16,00,000
May,2004 20,00,000
June,2004 18,00,000
July,2004 16,00,000
August,2004 14,00,000
(ii) on an average 20% of sales are cash sales .The credit sales are realised in the third month (January sales in
March)

(iii) Purchases amount to 60% of sales.

(iv)Variable expenses( other than sales comission) constitute 10% of sales and there is a time lag of half a month in
these payments.
(V) Commission on sales is paid at 5% of sales value and payment is made in the third month.
(Vi) Fixed expenses per month amount to Rs. 75,000 approximately.
(Vii) other items anticipated :
ue
Interest payable on deposits Rs.1,60,000 ( April,2004)
Sales of old assets 1,25,000( May,2004)
payments of tax 80,000(June, 2004)
Purchase of fixed assets 6,50,000( July,2004)
Rs.
(Viii) opening Cash Balance 1,50,000
BBA 207 Source: Principles of mgt accountingby S N Maheshwari Vol II
 Q6. The Royal Industries has prepared its annual sales forecast,
expecting to achieve sales of Rs. 30,00,000 next year. The
controller is uncertain about the pattern of sales to be expected
by month and ask you to prepare a monthly budget of sales.
The following sales data pertain to the year, which is considered
to be representative of a normal year:
Month Sales (Rs.) Month Sales (Rs.)
January 1,10,000 July 2,60,000
February 1,15,000 August 3,30,000
March 1,00,000 September 3,40,000
April 1,140,000 October 3,50,000
May 1,80,000 November 2,00,000
June 2,25,000 December 1,50,000
Prepare a monthly sales budget for the coming year on the basis of the
above data.
BBA 207 Source: Principles of mgt accountingby S N Maheshwari Vol II
 Q7. From the following particulars prepare Production cost
budget for the month of December 2015.

Particulars Opening Closing Stock

Stock

Finished Goods 1200 Units 1600 Units

Raw Material A 5,000 kg 4,800 kg
Raw Material B 2,000 kg 3,100 kg

(a)Budgeted sales for the month= 7,000 units

(b) Raw materials required to produce one unit
For A, 4 kg at Rs. 8 per kg
For B, 2 kg at Rs. 25 per kg
BBA 207 Source: Principles of mgt accountingby S N Maheshwari Vol II
 Thank You

21 BBA 207 Management Accounting 04-Sep-20