Budget Answers

Question No.
3
i. Note: Monthly budgeted production at 60% capacity level is 600 units (7,200 units per
annum) and at 100% level is 1,000 units (12,000 units per annum).
Fixed cost
Depreciation since it remains constant at both the given levels.
Insurance cost also same as above.
Variable cost
Wages is Rs. 2 per unit at both the given levels.
Consumables stores are Rs. 1.5 per unit at both the given levels.
Semi-variable:
Maintenance cost is neither fixed nor is the quantum of increase proportionate to the
increase in volume.
Power and Fuel also same as above.
ii. Finding the variable portion of semi-variable overhead.

Maintenance:
Variable portion = change in overhead/ change in activities = Rs. 400/ 400
= Re. 1 per unit.
Fixed portion = Rs. 1,100 – (600 units × Re. 1) = Rs. 500.
At 80% capacity level = (800 units × Re. 1) + Rs. 500 = Rs. 1,300
Power and Fuel:

Variable portion = Rs. 400/ 400 = Rs. 1 per unit
Fixed portion = Rs. 1,600 – (600 units × Re. 1) = Rs. 1,000
At 80% capacity level = (800 units × Re. 1) + Rs. 1,000 = Rs. 1,800
Monthly budget for 80% capacity level:
Budgeted production (80% capacity) 800 Units

Wages @ Rs. 2 per unit 1,600
Consumable stores @ Rs. 1.5 per unit 1,200
Maintenance (as per above working) 1,300
Power and fuel (as per above working) 1,800
Depreciation 4,000
Insurance 1,000
Total 10,900
To sum up, the variable cost per unit works out to Rs. 5.50. It consists of wages Rs. 2,
consumable stores Rs. 1.50, maintenance Re. 1 and power and fuel Re. 1. The total fixed
cost comes to Rs. 6,500, i.e., maintenance Rs. 500 + power and fuel Rs. 1,000 +
depreciation Rs. 4,000 + insurance of Rs. 1,000.
iii. Total cost per unit:
Capacity 60% 80% 100%
Production Unit (per month) 600 800 1,000
Rs. per unit
Variable cost 5.5 5.5 5.5
Fixed cost (Rs. 6,500/ production unit) 10.83 8.13 6.5
Total 16.33 13.63 12.00
Question No. 4
Flexible Budget
Activity Level 50% 75% 100%
Production (Units) 4,000 6,000 8,000
Rs. Rs. Rs.
Sales @ Rs 400 per unit 1,600,000 2,400,000 3,200,000
Variable Cost:
Direct Materials 308,000 462,000 616,000
Direct Labour 640,000 960,000 1,280,000
Power 9,000 13,500 18,000
Repairs etc. 8,000 12,000 16,000
Other variable cost 3,200 4,800 6,400
Total Variable Cost 968,200 1,452,300 1,936,400
Fixed Cost:
Manufacturing 228,000 228,000 228,000
Administration, Selling & Distribution 72,000 72,000 72,000
Total Fixed Cost 300,000 300,000 300,000
Total Cost 1,268,200 17,52,300 2,236,400
Profit (Sales – VC – FC) 331,800 647,700 963,600
Question No. 6
Production Budget of Product Minimax and Heavyhigh (in units)

April May June July
MM HH MM HH MM HH MM HH
Sales 8,000 6,000 10,000 8,000 12,000 9,000 30,000 23,000
Add: Closing Stock 2,500 2,000 3,000 2,250 4,000 3,500 9,500 7,750
(25% of next month
sales)
Less: Opening Stock 2,000 1,500 2,500 2,000 3,000 2,250 7,500 5,750
Production Units 8,500 6,500 10,500 8,250 13,000 10,250 32,000 25,000
Note: Opening stock of April is the closing stock of March, which is as per company’s policy 25%
of next month’s sale.
Rate (Rs.) Amount (Rs.)

Elements of Cost MM HH
MM HH
(32,000 units) (25,000 units)
Direct Material 220 280 7,040,000 7,000,000
Direct Labour 130 120 4,160,000 3,000,000
Manufacturing Overhead
(400,000 / 180,000 x 32,000) 71,111
(500,000 / 120,000 x 25,000) 104,167
11,271,111 10,104,167
Question No. 7
(i) Material usage budget
Products A Products B Total Cost per Total cost of
(units) (units) material Unit Materials
usage units (Rs.) (Rs.)
Estimated sales 5,000 10,000
Material X : 10 units per 50,000 50,000 1,00,000 2 2,00,000
product A and 5 units per
product B
Material Y : 3 units per 15,000 20,000 35,000 3 1,05,000
product A and 3 units per
product B
Total 65,000 70,000 1,35,000 3,05,000
Material Purchase Budget

X Units Y Units Total
Required for sales 1,00,000 35,000 1,35,000
Add: desired closing stock
Product A:
1,000 units (A) × 10 units (X) = 10,000 units of X 25,000
3,000 units (B) × 5 units (X) = 15,000 units of X
Product B: 9,000
1,000 units (A). 3 units (Y) = 3,000 units of Y
3,000 units (B) . 2 units (Y) = 6,000 units of Y
Total 1,25,000 44,000
Less: Opening stock
Product A: 16,400
800 units (A) . 10 units (X) = 8,000 units of X
1,680 units (B) . 5 units (X) = 8,400 units of X
Product B 5,760
800 units (A) . 3 units (Y) = 2,400 units of X
1,680 units (B) . 2 units (Y) = 3,360 units of X
Units to be purchased 1,08,600 38,240 1,46,840
Cost per unit Rs.2 Rs. 3
Cost of purchase (Rs.) 2,17,200 1,14,720 3,31,920
(ii) Production Budget

Product A Product B
Units Units
Sales 5,000 10,000
Add: Closing stock** 1,000 3,000
6,000 13,000
Less: Opening stock 800 1,680
Production 5,200 11,320
Production
**Calculation of closing stock:
Budgeted period is 12 weeks of 5 days each = 60 days
5000×12
Product A = = 1,000 units
60
1000×18
Product B = = 3,000 units
60
(iii) Wages budget for direct workers

Product A (hrs) Product B (hrs) Total (hrs)
Standard hours (budgeted)
5,200 units (A) . 4 hours per unit and 11,320 20,800 33,960 54,760
units (B) . 3 hours per unit
Standard hours at 80% efficiency ratio 68,450
Add: non productive time (20% of 68,450) 13,690
82,140
Labour hours required (150 workers . 8 hours 72,000
per day . 60 days)
Overtime 10,140
Wages for normal hours (72,000 × 8) = Rs. 5,76,000
Wages for overtime (10,140 ×8 × 1.5) = Rs. 1,21,680
Total wages = Rs. 6,97,680
Note: It is advised to prepare Material Usage Budget based on Production units i.e. not on sales units.
Question No. 8
Solution
Standard hours produced
Product X Product Y Total
Output (units) 1,200 800
Hours per unit 8 12
Standard hours 9,600 9,600 19,200
Actual hours worked

100 workers × 8 hours × 22 days = 17,600
Budgeted hours per month

1,86,000/12= 15,500
actual hours 17600
Capacity Ratio = Budgeted hours ×100 = 15500 = 113.55%
Standard Hours Produced 19200
Efficiency Ratio = ×100 =
Actual hours 17600×100 = 109.09%
Standard Hours Produced 19200
Activity Ratio = ×100 =
Budget hours 15500×100 = 123.87
Relationship : Activity Ratio = Efficiency Ratio × Capacity Ratio
109.09×113.55
Or, 123.87 = 100
Question No. 10
(i) Statement showing Flexible Budget and its comparison with actual
Master Flexible Budget (at

Actual for
Budget standard cost) Variance
72000 units
80000 units Per Unit 72000 units
Sales 320,000 4.00 288,000 280,000 8,000 (A)
Direct Material 80,000 1.00 72,000 73,600 1,600 (A)
Direct Wages 120,000 1.50 108,000 104,800 3,200 (F)
Variable Overhead 40,000 0.50 36,000 37,600 1,600 (A)
Total Variable Cost 240,000 3.00 216,000 216,000 -
Contribution 80,000 1.00 72,000 64,000 -
Fixed Overhead 40,000 0.50 40,000 39,200 800 (F)
Net Profit 40,000 0.50 32,000 24,800 7,200 (A)
(ii) Variances:
Sales Price Variance = Actual Quantity (Standard Rate – Actual Rate)
= 72,000 units (Rs 4.00 – Rs 3.89) = Rs 8,000 (A)
Direct Material Cost Variance = Standard Cost for Actual output – Actual cost
= Rs 72,000 – Rs 73,600 = Rs 1,600 (A)
Direct Material Price Variance = Actual Quantity (Standard Rate – Actual Rate)
= 78,400units x (1 − 𝑅𝑠 73,600 / 78,400 𝑢𝑛𝑖𝑡𝑠)
= Rs 4,800 (F)
Direct Material Usage Variance = Standard Rate (Std. Qty. – Actual Quantity)
= Rs 1 (72,000 units – 78,400 units) = Rs 6,400 (A)
Direct Labour Cost Variance = Standard Cost for actual output – Actual cost
= Rs 1,08,000 – Rs 1,04,800 = Rs 3,200 (F)
Direct Labour Rate Variance = Actual Hour (Standard Rate – Actual Rate)
= 70400 hours (Rs 1.50 – Rs 104800 / 70400 hours)
= Rs 800 (F)
Direct Labour Efficiency = Standard Rate (Standard Hour – Actual Hour)
= Rs 1.5 (72,000 – 70,400) = Rs 2,400 (F)
Variable Overhead = Recovered variable overhead – Actual variable overhead
= (72,000 units x Rs 0.50) – Rs 37,600 = Rs 1,600 (A)
Fixed Overhead Expenditure = Budgeted fixed overhead – Actual fixed overhead
= Rs 40,000 – Rs 39,200 = Rs 800 (F)
Sales Volume (Profit) Variance = Std. Profit (Budgeted Quantity – Actual Quantity)
= Rs 0.50 (80,000 – 72,000) = Rs 4,000 (A)

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Question No.

ii. Finding the variable portion of semi-variable overhead.

Power and Fuel:

Monthly budget for 80% capacity level:

Budgeted production (80% capacity) 800 Units

Production Budget of Product Minimax and Heavyhigh (in units)

Rate (Rs.) Amount (Rs.)

Material Purchase Budget

(ii) Production Budget

(iii) Wages budget for direct workers

Actual hours worked

Budgeted hours per month

Master Flexible Budget (at

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