CA INTER · COST AND MANAGEMENT ACCOUNTINGBudgets and Budgetary Control
Original descriptive practice: 30 cases
Each case is worth 10 marks. These are independently written practice questions and worked answers, not ICAI past-paper questions or official suggested answers. This Budget original pack contains 30 descriptive / 30 practice MCQ / 30 test MCQ questions. Official question coverage is separate.
BUD-D001 · 10 marksSeasonal sales and a finished-stock production policy
Arohi Kitchenware makes one standard container. The sales team has approved the following unit forecasts for a four-month planning window:
Prepare budgets for January through March only. Opening finished stock on 1 January is 1,500 units. Desired month-end finished stock is 20% of the following month's sales. April sales are supplied solely to determine March closing stock. Production has no normal loss or work in progress. Each completed unit needs 0.5 direct labour hour and the labour rate is ₹120/hour. The plant has 5,500 paid productive hours each month, with no overtime in the approved plan.
The production manager proposes producing exactly the month's sales because she says stock policy is only a finance matter. The controller wants the sales, production and labour budgets reconciled before accepting any schedule. There is no variable labour idle time allowance in the budget: all required labour hours are productive. Ignore tax and selling expenses. If a month's labour need exceeds the available hours, identify the shortfall but do not silently add overtime or change the inventory policy.
Required:
(a) Prepare monthly sales value and finished-stock/production budgets. (5 marks)
(b) Prepare direct labour hours and cost budgets, checking capacity. (3 marks)
(c) Reconcile quarter production with sales and stock movements, and assess the manager's proposal. (2 marks)
Worked answer
Quarter sales 30,000 units; production 30,300 = sales 30,000 + final stock 1,800 - opening 1,500. Quarter labour 15,150 hours, cost ₹18,18,000. March is not feasible within the stated monthly hours. Obtain an approved capacity or stock-policy change; producing sales alone would miss planned stock movements.
Material usage and purchases must be budgeted separately
Bina Components has already approved production of 6,000 units in May, 8,000 in June and 7,000 in July. Prepare material budgets for May and June. Each finished unit requires 3 kg net material M. Normal material loss is 10% of gross input, so usable material is 90% of input. No work in progress exists and the production quantities are acceptable finished units.
Opening raw material on 1 May is 5,000 kg. Desired month-end raw stock is 25% of the following month's gross production requirement. The purchase price is ₹45/kg, with no freight, discount or tax. July production is included only to calculate June closing raw stock. Use exact fractional quantities in working and round displayed kilograms and rupees to two decimals. Purchasing can receive fractional kilograms; do not force rounding to whole kg or create an unexplained loss.
The stores supervisor adds 10% to the net requirement and purchases that amount, ignoring opening and closing stock. Finance requests a corrected gross-input calculation and a stock reconciliation. Assume the purchase price applies to all receipts and there is no abnormal loss, delivery lag or stock write-down. The material-usage budget values consumption at the stated purchase price for planning purposes.
Required:
(a) Calculate monthly gross material usage for May, June and July. (3 marks)
(b) Prepare May and June raw-stock and purchase quantity/value budgets. (5 marks)
(c) Explain both errors in the supervisor's proposed method. (2 marks)
Worked answer
Gross input/unit = 3/90% = 3⅓ kg, not 3.3. Usage May 20,000 kg, June 26,666.6667 kg, July 23,333.3333 kg. May/June usage values ₹9,00,000 and ₹12,00,000.
Purchases = usage + closing - opening. Combined purchases 47,500 kg = combined usage 46,666⅔ + final stock 5,833⅓ - initial 5,000. Loss is 10% of gross, not net; adding 10% to net understates input. Usage is not purchases when raw-stock balances change. Display rounding must not be used to recalculate subsequent exact balances.
Credit collection lags and cash sales
Charu Office Products sells a single line and is preparing cash receipts for April, May and June. Confirmed sales values are February ₹8,00,000, March ₹10,00,000, April ₹12,00,000, May ₹15,00,000 and June ₹14,00,000. In every month 20% of sales are cash sales, collected immediately. The remaining 80% are credit sales: 60% of each credit-sale cohort is collected in the next month and 35% in the second month after sale. The final 5% is uncollectible and has no later recovery.
There are no opening receivables from months earlier than February that produce receipts in this quarter, no discounts or sales returns, and no tax. The February and March figures are supplied only for lagged collections. Cash and credit percentages apply consistently to every listed month. Budget receipts rather than accrual revenue. Do not apply the 60% and 35% directly to total sales without first taking the credit share.
The marketing team reports quarter sales ₹41,00,000 and says the same figure should appear as customer cash receipts. Finance asks for a cohort table and the quarter's bad-debt provision on new credit sales. Cash receipt shortfalls caused by timing must be distinguished from confirmed write-offs; outstanding June cohorts will partly collect after the quarter.
Required:
(a) Prepare monthly cash sales and collections from each prior credit cohort. (6 marks)
(b) Calculate total quarter receipts and bad debt on April-June sales. (2 marks)
(c) Explain why receipts do not equal sales and why all outstanding balances are not bad debts. (2 marks)
Worked answer
Quarter receipts ₹34,36,000. Bad debt on new quarter sales = ₹41,00,000 × 80% × 5% = ₹1,64,000. This provision is not an additional cash payment.
Receipts combine current cash sales and older credit cohorts, while some quarter credit sales collect later. Only the specified 5% of credit sales is written off; uncollected timing balances cannot all be classified as bad debt. The collection percentages operate on credit sales, not all revenue.
Cash budget with a minimum balance and permitted borrowing
Diya Services forecasts the following two-month cash movements. Amounts are cash receipts/payments, not accrual income or costs:
Opening cash on 1 August is ₹1,00,000. Management requires at least ₹80,000 cash at each month end. Borrowing is allowed at month end in multiples of ₹10,000, only as much as needed to reach the minimum. The company begins August with no loan. In September, it must repay the largest ₹10,000 multiple permitted while retaining the minimum closing cash, up to the outstanding principal.
For this question the loan has no interest or fee during these two months. No other financing, dividend or cash flow occurs. Depreciation ₹40,000/month is already excluded from the stated cash wages/overhead; do not insert it again. Suppliers and employees are paid on the timings stated. There is no intramonth minimum-balance test, only month-end. Treat financing separately from operating cash movements.
Required:
(a) Prepare the two-month cash budget before financing. (4 marks)
(b) Calculate borrowing, repayment, final cash and closing loan principal. (4 marks)
(c) Explain treatment of equipment, depreciation and the liquidity rule. (2 marks)
Worked answer
August payments ₹9,50,000; before financing cash = opening ₹1,00,000 + receipts ₹8,00,000 - payments ₹9,50,000 = -₹50,000. Borrow ₹1,30,000; closing cash ₹80,000 and loan ₹1,30,000.
September opening cash ₹80,000; receipts ₹9,00,000; payments ₹8,70,000. Before financing cash ₹1,10,000. Repay ₹30,000, leaving cash ₹80,000 and principal ₹1,00,000.
Equipment is a cash capital payment despite not being a whole operating expense. Depreciation is non-cash and already excluded. Borrow/repay decisions must preserve the ₹80,000 minimum at each month end; a positive September cash balance does not permit repayment of the full loan.
Supplier credit and a cash-payment forecast
Eira Electronics is preparing July-September payments for materials. Budget purchases are June ₹6,00,000, July ₹8,00,000, August ₹10,00,000 and September ₹9,00,000. Suppliers require 30% of the purchase value in the purchase month and 70% in the next month. No cash discount, tax, interest or returns apply. June is given only to calculate July payments. There is no earlier payable remaining after June.
The production budget separately shows material consumption July ₹7,00,000, August ₹8,50,000 and September ₹9,50,000. These consumption amounts are not purchase invoices and must not replace the stated purchases in the creditor schedule. Opening payables on 1 July represent 70% of June purchases. Closing September payables represent the unpaid 70% of September purchases, with no overdue balances.
The factory head sums consumption costs and calls the result quarterly material cash payments. The controller asks for a month-by-month purchase-cohort schedule and a payable bridge that explains the difference. All payments take place exactly on the stated lag. There is no raw-material price change within the listed purchase amounts, and physical stock is handled in another budget.
Required:
(a) Prepare monthly cash payments split between current and preceding purchases. (5 marks)
(b) Calculate opening and closing payables and reconcile quarter payments to purchases. (3 marks)
(c) Explain why consumption, purchases and cash payment are different budget measures. (2 marks)
Worked answer
Quarter payments ₹24,90,000. Purchases ₹27,00,000. Opening payable ₹4,20,000; closing ₹6,30,000. Payments = opening + purchases - closing = ₹24,90,000.
Consumption measures materials used in production; purchases include raw-stock changes; supplier payments follow credit terms and payable movement. Quarter consumption ₹25,00,000 is neither the stated ₹27,00,000 purchase total nor ₹24,90,000 cash payment.
Flexible factory budget at the actual activity level
Falguni Lighting has monthly maximum capacity of 10,000 completed lamps. Its approved budget at 80% capacity is:
The coming month may operate at 60% or 100%. All costs follow the stated behaviour within 6,000-10,000 units, there is no overtime, stock movement or change in input prices. Prepare flexible expense budgets for those two activity levels. Fixed components remain unchanged; variable unit rates from the 8,000-unit budget apply at both levels.
Actual output later turns out to be 6,000 lamps and actual total factory expense is ₹14,50,000. The factory head compares that with the original 8,000-lamp total and calls the entire saving favourable cost control. Finance asks for a comparison at actual output instead. The question does not supply actual expense by line, so identify only the overall spending difference after flexing, not unsupported material or labour efficiency variances.
Required:
(a) Derive variable cost per lamp and total fixed cost. (3 marks)
(b) Prepare 60% and 100% budgets, totals and cost per unit. (5 marks)
(c) Compare actual expense with a fair activity-adjusted budget and assess the factory head's claim. (2 marks)
Worked answer
Material ₹100/unit, labour ₹60, power ₹10 and maintenance ₹5: total variable ₹175/unit. Fixed ₹60,000 + ₹80,000 + ₹2,00,000 = ₹3,40,000.
Original 8,000 budget ₹17,40,000. Actual ₹14,50,000 is ₹2,90,000 below that, but output is lower. Flexible allowance at actual 6,000 is ₹13,90,000, so actual is ₹60,000 adverse. Activity explains ₹3,50,000 lower budget; it is not automatically better spending control. Further line-level investigation needs actual expense detail.
A maintenance formula estimated from two comparable periods
Gauri Fabrics is estimating a monthly flexible maintenance budget. Two comparable records show ₹1,50,000 maintenance at 5,000 machine hours and ₹2,10,000 at 8,000 hours. Management confirms that activity is the only cause of the difference: there were no price changes, exceptional repairs, shutdowns or accounting reclassifications. Assume a linear fixed-plus-variable relation within 4,000-9,000 hours.
The next month's plan is 7,000 hours. Actual later turns out to be 6,500 hours with maintenance expense ₹1,85,000. A trainee divides each record's total expense by hours and chooses the lower per-hour figure as the variable rate. Finance asks for high-low separation, a budget at planned activity and a flexible allowance at actual activity. The difference between those two budgets should not be labelled spending inefficiency.
No additional machine lease, overtime or cost step arises in the stated range. The inferred formula is a planning estimate, not proof that every fixed rupee is avoidable. The board also wants the cost at 4,000 and 9,000 hours so it can see why average cost per hour changes despite an unchanged variable rate. Ignore tax.
Required:
(a) Derive variable maintenance per hour and monthly fixed component. (4 marks)
(b) Calculate budgets at 4,000, 7,000 and 9,000 hours, and the flexible allowance at actual activity. (4 marks)
(c) Evaluate actual spending and explain one limitation of the estimate. (2 marks)
Worked answer
Variable rate = (₹2,10,000 - ₹1,50,000)/(8,000 - 5,000) = ₹20/hour. Fixed component = ₹1,50,000 - 5,000 × ₹20 = ₹50,000, confirmed by the high record.
Formula cost = ₹50,000 + ₹20H. At 4,000 hours ₹1,30,000; 7,000 ₹1,90,000; 9,000 ₹2,30,000. At actual 6,500 hours allowance ₹1,80,000.
Actual ₹1,85,000 exceeds actual-activity allowance by ₹5,000 adverse. It is ₹5,000 below the planned-activity budget, but lower activity allows ₹10,000 less cost. High-low relies on the comparable linear relation; validate with more observations and investigate any step or exceptional repair before extrapolation.
Paid hours, productive time and the wage budget
Hema Assemblies has budgeted acceptable output of 9,000 modules in October and 10,500 in November. Standard productive time is 0.4 hour per acceptable module. Normal paid idle time is 10% of paid hours, so only 90% of paid time is productive. The payroll rate is ₹150 for every paid hour. No overtime premium, bonus, holiday adjustment or output loss is additional to these assumptions.
The personnel plan offers 25 employees, each available for 160 paid hours per month. The production manager simply multiplies output by 0.4 and uses those productive hours as paid payroll hours. Finance wants productive and paid hours separated before valuing wages and checking staff availability. For the capacity test, do not assume the current employees can work overtime or silently recruit fractional employees.
If more full-time employees are required, calculate the minimum whole number at the same 160-hour availability; do not include a recruitment cost because none is provided. All required output is completed and sold in the planning month, there is no work in progress and normal idle percentage remains the same as staffing changes. Carry exact paid hours in working and display two decimals where needed.
Required:
(a) Calculate productive hours, paid hours and payroll cost for each month. (5 marks)
(b) Compare the 25-employee capacity and calculate minimum headcount for each month. (3 marks)
(c) Explain the idle-time denominator and the effect of the trainee's method. (2 marks)
Worked answer
Available paid hours 25 × 160 = 4,000, equivalent to 3,600 productive hours or 9,000 modules. October fits exactly. November shortfall 666⅔ paid hours (600 productive); it needs at least 30 employees at this availability.
Idle time is 10% of paid, not productive, hours. Adding 10% to productive time understates paid hours. Using productive hours directly understates October payroll by ₹60,000 and November by ₹70,000. The 30-employee plan offers 4,800 paid hours, so it meets the requirement without assuming fractional people.
A sales budget constrained by a scarce raw material
Isha Woodcraft makes premium stools P and economy stools E. The sales forecast is 3,000 P and 4,000 E, but only 8,000 kg of a specialist timber can be obtained during the budget period. There is no opening or closing stock, no minimum customer commitment, and each finished unit is made and sold. Other resources are unrestricted. Relevant unit data are:
Fixed period expense is ₹5,00,000 and is the same for every feasible mix. The stated variable costs include timber and all other variable expenses. Ignore tax. Demand limits cannot be exceeded. The sales manager wants to make premium stools first because their contribution per unit is larger. Finance identifies raw material as the principal budget factor and asks for a feasible sales and production plan, ranked by return from that scarce material.
The procurement team might obtain 1,000 additional kg at a cash premium of ₹20 per kg above the timber cost already included in variable cost. This extra batch may be used after the base plan, with unchanged product demand limits. The premium is an additional cost, not a replacement for the included ordinary timber cost.
Required:
(a) Identify the budget factor and contribution per kg, then prepare the base mix. (4 marks)
(b) Calculate base sales revenue, contribution and profit. (3 marks)
(c) Evaluate the extra timber and explain the sales manager's error. (3 marks)
Worked answer
P contribution ₹300/unit or ₹150/kg; E ₹180/unit or ₹180/kg. Timber is the limiting budget factor. Make/sell 4,000 E using 4,000 kg, then 2,000 P using 4,000 kg.
Revenue = 4,000 × ₹500 + 2,000 × ₹800 = ₹36,00,000. Contribution = ₹7,20,000 + ₹6,00,000 = ₹13,20,000. Profit ₹8,20,000 after fixed expense.
Extra 1,000 kg makes 500 P within remaining demand of 1,000. Extra contribution ₹1,50,000 less premium ₹20,000 gives ₹1,30,000 improvement; revised profit ₹9,50,000. Rank return per scarce kg, not per unit. The budget is constrained by attainable inputs as well as sales forecasts.
Budgeted-capacity usage, efficiency and activity ratios in one report
Jaya Components sets its monthly standard labour-hours budget at 12,000. Its approved output mix requires 2 standard hours per completed unit; the mix remains unchanged. Actual output is 5,400 acceptable units and actual hours worked are 11,250. All reported actual hours are productive working hours, with no separately paid idle time in this question.
The normal calendar has 25 working days but the month has 24 actual working days. Compute actual usage of budgeted capacity (actual hours / budget hours), efficiency and activity ratios using the conventional denominator of the 12,000 budget hours. Compute calendar ratio separately as actual working days divided by normal budget working days. Do not replace the budget-hours denominator with a day-adjusted value unless explicitly requested; the question requires the conventional separate ratios.
A manager says budgeted-capacity usage and efficiency are the same measure because both involve actual hours. Finance asks for a four-ratio dashboard and a numerical reconciliation showing the relationship between efficiency, capacity and activity. The dashboard should state what each measure compares, rather than assigning blame from a single percentage. There is no wage-rate or variable-price information, so do not invent cost variances.
Required:
(a) Calculate standard hours for actual output and the four ratios. (6 marks)
(b) Reconcile activity with capacity and efficiency. (2 marks)
(c) Explain the difference between resource usage and output efficiency, including why cost responsibility needs more evidence. (2 marks)
Worked answer
Standard hours for output = 5,400 × 2 = 10,800. Actual usage of budgeted capacity = actual hours/budget hours = 11,250/12,000 × 100 = 93.75%. Efficiency = standard output hours/actual hours = 10,800/11,250 × 100 = 96%. Activity = standard output hours/budget hours = 10,800/12,000 × 100 = 90%. Calendar = 24/25 × 100 = 96%.
Budgeted-capacity usage × efficiency/100 = 93.75 × 96/100 = 90% activity. Calendar is reported separately here; it does not alter that identity under the stated denominators.
Actual usage of budgeted capacity shows actual working hours relative to planned hours; efficiency shows standard output earned from the hours worked. Neither alone identifies the cause or responsibility. Investigate available days, input quality, work methods, downtime and output measurement, using the relevant source records before attributing the shortfall.
From functional budgets to a budgeted income statement
Kaveri Appliances expects to sell 5,500 units at ₹300 each next year. Opening finished stock is 500 units and desired closing finished stock is 1,000 units. There is no work in progress. Variable manufacturing cost is ₹200 per unit; annual fixed manufacturing overhead is ₹2,40,000. The fixed overhead is absorbed over planned production, which is also normal capacity here. Opening finished goods carry the same full manufacturing cost per unit as the coming year's output.
Variable selling expense is ₹20 per unit sold. Fixed administration is ₹80,000 and interest ₹20,000. These period expenses are excluded from finished-stock value. There is no tax, dividend, abnormal loss, price change or under/over-absorption. All scheduled production takes place. Use full manufacturing cost for both opening and closing finished goods in the budgeted income statement.
The sales head deducts the whole year's manufacturing expenditure directly from revenue and ignores stock changes. Finance instead asks for linked sales, production, production-cost and stock schedules before drafting the master statement. Explain why unsold closing goods are carried forward rather than treated as this year's cost of goods sold. Do not prepare a cash budget, since collection and payment dates are not provided.
Required:
(a) Prepare production and manufacturing-cost budgets, including full cost per unit. (4 marks)
(b) Prepare a budgeted income statement from sales to profit before tax. (4 marks)
(c) Explain the stock treatment and two checks before approving the master budget. (2 marks)
Worked answer
Production =5,500+1,000-500 =6,000 units. Variable manufacturing ₹12,00,000; fixed ₹2,40,000; total ₹14,40,000. Fixed absorption ₹40/unit, so full manufacturing cost ₹240/unit.
The stock bridge matches manufacturing cost with units sold. Check capacity/input feasibility and agreement between sales, production, stock and expense schedules. The valuation follows the stated normal-capacity absorption assumption; selling and interest do not enter finished stock.
Two products sharing two raw materials
Lalita Furnishings plans quarterly sales of 2,400 desks D and 3,000 shelves S. Opening finished goods are 200 D and 300 S; closing targets are 300 D and 400 S. Each desk needs 3 kg of alloy M and 2 kg of sheet N; each shelf needs 2 kg M and 4 kg N. These standards describe good input for completed output: no extra process loss, wastage or work in progress arises.
Opening raw stock is 1,500 kg M and 2,000 kg N. Desired closing raw stock is 1,200 kg M and 1,800 kg N. Purchase prices are ₹80/kg M and ₹50/kg N. The prices also apply to material consumption and stock valuation. Assume full planned production, no discounts or transport charges, and no material substitution. Separate usage from purchases; buying less than consumption can be valid when raw stock is reduced.
The purchasing head proposes one combined quantity equal to total forecast sales multiplied by an average material content. Finance rejects that shortcut because the products have different bills of materials and each stock category has its own opening and closing balance. Capacity is sufficient; labour and overhead budgets are outside the question. No supplier credit dates are given, so purchase value is not to be presented as a monthly cash-payment forecast.
Required:
(a) Calculate production of both products. (2 marks)
(b) Prepare material usage by product and material, with total consumption value. (4 marks)
(c) Prepare the raw-material purchase budget and reconcile purchase value to consumption value through stock movements. (4 marks)
Worked answer
D production=2,400+300-200=2,500. S=3,000+400-300=3,100.
Usage ₹19,66,000; purchases ₹19,32,000. Opening raw stock ₹2,20,000; closing ₹1,86,000. ₹2,20,000+₹19,32,000-₹1,86,000=₹19,66,000 usage. The ₹34,000 difference is stock reduction, not purchasing savings or input efficiency.
A cash budget with interest on opening debt
Meera Packaging begins April with cash ₹50,000 and a short-term loan ₹2,00,000. Cash operating schedules before interest and loan movements are:
The bank charges 1% monthly on principal outstanding at the beginning of that month. Interest is paid at month-end before borrowing or repayment. New loans are taken only at month-end and bear interest from the following month. Repayments occur after interest and cannot exceed outstanding debt. Minimum closing cash is ₹40,000. Every rupee above that minimum repays debt while any loan remains. There are no borrowing multiples or fees.
The operating schedules already include all customer collections, supplier settlements and operating expenses except loan interest. Do not add income-statement expenses again. Ignore tax and capital expenditure. The treasury assistant schedules debt repayment before interest, which can leave cash below policy. Prepare a sequential budget instead; carry each closing debt into the next month's opening interest calculation. All figures may be calculated to paise, so do not round interest to whole rupees before computing finance requirements.
Required:
(a) Prepare interest, cash before financing, borrowing/repayment, closing cash and closing debt for each month. (7 marks)
(b) Calculate quarter interest and peak month-end debt. (2 marks)
(c) Explain why closing principal is not the interest base under this contract. (1 mark)
Worked answer
Quarter interest ₹2,000+₹2,720+₹747.20=₹5,467.20. Peak month-end debt ₹2,72,000. Residual debt is ₹5,467.20 after June because the minimum-cash policy takes priority over complete repayment.
The agreement charges opening principal. Closing debt depends on interest and finance movements, so using it changes the contract and creates an unnecessary circular calculation.
Capital outlay is not the same as monthly expense
Nandini Printworks budgets a new machine costing ₹6,00,000. It pays a 20% non-refundable deposit in April and 80% on delivery in May. The machine is ready for use on 1 June. Useful life is five years, residual value zero; straight-line depreciation starts in June with a full month once ready for use. There is no borrowing, tax, recoverable indirect tax or disposal of an old machine.
Opening April cash is ₹3,00,000. Net operating cash before this acquisition is ₹1,00,000 in April, ₹2,00,000 in May and ₹1,20,000 in June. Operating profit before depreciation on this new machine is ₹80,000, ₹90,000 and ₹1,00,000 respectively. These figures already include all other expenses and existing-asset depreciation. The machine changes neither operating receipts nor other expenses during the quarter. No dividend or financing occurs.
Treat the deposit as a capital advance until delivery, then transfer the full price to machine gross cost. Depreciation changes profit and carrying amount, not the purchase payments. The owner asks whether May has an operating loss of ₹3,90,000 by deducting the ₹4,80,000 delivery payment from its stated profit. Explain the cash/accounting distinction and identify liquidity risk without inventing a minimum-cash rule or automatic bank facility.
Required:
(a) Prepare capital payments and closing cash month by month. (4 marks)
(b) Calculate monthly depreciation, quarter profit and June-end machine carrying amount. (4 marks)
(c) Explain the owner's mistake and the April deposit presentation. (2 marks)
Worked answer
Annual depreciation ₹6,00,000/5=₹1,20,000; monthly ₹10,000 from June. Quarter profit ₹2,60,000. June gross cost ₹6,00,000 less depreciation ₹10,000 =carrying amount ₹5,90,000.
The purchase acquires an asset, not immediate operating expense. May profit remains ₹90,000 but closing cash is zero, a liquidity concern. April ₹1,20,000 is a capital advance, not a ready-for-use depreciable machine.
A flexible budget with a supervisor cost step
Ojas Components budgets factory support in a relevant monthly output range of 4,000-9,000 units. Material is ₹90/unit, direct labour ₹50/unit and variable support ₹15/unit. Base fixed factory expense is ₹1,80,000 monthly. An extra supervisor costs ₹40,000 monthly only when output exceeds 6,000 units. Exactly 6,000 requires no extra supervisor. The cost arises in full above the boundary, not gradually per additional unit. No further step occurs in the stated range.
Prepare budgets at 4,000, 6,000 and 8,000 units. Later actual output is 6,500 units and total factory cost ₹12,60,000. The approved static budget was at 6,000 units. The production head labels the entire actual excess over that budget waste and proposes applying the static average unit cost to actual output. Finance asks for behaviour-based flexing.
There is no inventory movement, normal loss, overtime premium or price change. Only total actual expense is given, so do not assign the spending difference to individual lines or assume the extra supervisor was optional. Round only displayed average unit costs, retaining exact totals for reconciliation. Distinguish the cost of additional activity and the required supervisor from spending above the fair allowance.
Required:
(a) Prepare the three budgets, total cost and average unit cost. (5 marks)
(b) Flex at actual output and split the static-budget excess into activity and spending effects. (4 marks)
(c) Explain why a static average unit rate is unsuitable. (1 mark)
Worked answer
Variable ₹155/unit. At6,500 budget=6,500×₹155+₹1,80,000+₹40,000=₹12,27,500. Actual spending ₹32,500 adverse. Static excess ₹1,50,000=activity₹1,17,500 (₹77,500 variable+₹40,000 step) +spending₹32,500.
Static average blends variable and fixed allocations and misses the supervisor step. ₹185×6,500=₹12,02,500 understates the proper allowance by₹25,000. Investigate actual line detail before assigning responsibility.
Decision packages under a constrained zero-based budget
Prerna Skills Trust has ₹9,00,000 for next year's discretionary programmes. Its board requires every programme, including continuing ones, to justify funding from zero. Mandatory legal-compliance package C costs ₹2,00,000 and must be funded first. Optional independent, indivisible packages are:
Benefit scores are board-approved planning scores, not rupees of profit. After C, select the feasible combination with the highest total score within remaining funds. There is no requirement to spend the whole budget, no part-funding, no benefit overlap and no dependency between A, B and D. A score/cost ranking alone need not find the optimum for indivisible packages; show feasible combinations.
Last year's spending was A ₹4,50,000, B ₹2,80,000 and D ₹5,50,000. A proposal adds 5% mechanically without justifying activities or including C. Trustees want a practical zero-based process and recognition that scores do not prove benefits will occur. Compliance priority is stipulated, not inferred from the package's financial return.
Required:
(a) Evaluate feasible optional combinations and allocate the ceiling. (4 marks)
(b) Describe the stages from package identification to resource allocation. (4 marks)
(c) Explain two weaknesses of the incremental proposal or score model. (2 marks)
Worked answer
Reserve C ₹2,00,000; optional ceiling ₹7,00,000. Feasible: none; A ₹4,00,000/80; B ₹3,00,000/75; D ₹5,00,000/90; A+B ₹7,00,000/155. A+D ₹9,00,000 and B+D ₹8,00,000 exceed the optional ceiling; all three cost₹12,00,000. Select C+A+B, cost₹9,00,000, optional score155.
Identify and describe packages with objectives, alternatives, costs and expected results. Evaluate relevance, evidence, compliance and delivery feasibility. Rank/prioritise under the board policy, checking feasible combinations. Allocate limited resources and set review measures. Re-justify continuing activities rather than giving automatic historical entitlement.
A 5% uplift of optional historical spending totals₹13,44,000 before C, already unaffordable. Scores are assumed comparable estimates, not verified returns. Review beneficiary outcomes, scoring bias and uncertainty; automatic percentage changes neither justify current needs nor reflect mandatory priorities.
A performance budget that distinguishes output from outcome
Rhea Community Clinic proposes 12,000 consultations next quarter, each costing ₹150 in variable clinical supplies and contracted services, plus ₹6,00,000 fixed operating cost. No patient charge or capital expenditure arises. The target is at least90% of consultations receiving a completed follow-up within seven days, measured by dated patient records. Funding supports responsible service delivery, not simply exhaustion of the expenditure ceiling.
Actual consultations are10,000, expenditure₹22,00,000 and recorded timely follow-ups8,200. Variable standards and fixed cost remain valid at actual volume. No evidence is given about case severity, medical-treatment quality, improved patient health or causes of delay. Flex cost for actual consultations; report output and follow-up separately.
A manager claims the lower total spending proves performance exceeded plan. Another proposes counting undocumented follow-ups as timely. Finance must reject unsupported claims while distinguishing economy, output and outcome evidence. Consultation counts measure work performed; the follow-up measure is a service-quality proxy, not a proven health outcome. Assume no price changes or omitted expenses. There is no basis for attributing the spending difference to supplies versus contracted staff.
Required:
(a) Calculate planned cost, planned average cost and actual-activity allowance. (4 marks)
(b) Calculate actual average cost, spending difference and follow-up percentage, with shortfalls. (3 marks)
(c) Explain a performance-budget review and two safeguards against misleading measures. (3 marks)
Worked answer
Planned cost12,000×₹150+₹6,00,000=₹24,00,000, average₹200. Actual-activity allowance10,000×₹150+₹6,00,000=₹21,00,000.
Actual average₹220; spend₹1,00,000 adverse to flexible allowance, despite₹2,00,000 below static total. Output2,000 below plan. Timely follow-up8,200/10,000=82%, eight percentage points below90%; target at actual volume9,000, gap800.
Connect resources to service activities and measurable results; review cost, volume and quality together. Investigate case mix, record quality and delays before assigning blame. Preserve dated definitions and independent verification; never relabel missing dates. Consultations are output and follow-up is a service measure; add reliable patient-outcome evidence where possible rather than claiming health improvement from counts alone.
Budget participation without concealing slack
Saanvi Devices invites its production team to set a monthly labour budget for5,000 identical units. Engineering's independently tested standard is0.6 productive hour per unit. No paid idle time, overtime, learning effect or mix change is expected. Every productive hour costs₹200. The supervisor proposes0.7 hour per unit to protect the team from losing its bonus. No evidence supports the extra allowance.
The approved budget mistakenly adopts0.7 hour. Actual output is5,000 units and actual paid/productive hours3,200 at₹200. The pay rate equals budget and all output passes quality checks. Finance must show comparisons with the approved allowance and the tested technical benchmark without silently rewriting the approved budget after the month. Exclude bonuses numerically since no formula is supplied.
The supervisor says employee participation requires acceptance of proposed figures without challenge. A junior analyst suggests reporting only the favourable result because the board likes good news. The committee wants constructive participation, evidenced targets and honest review. The technical standard need not be permanently infallible: discuss how new evidence of genuine changed conditions should be handled. Do not invent a wage-rate variance or claim that unsupported slack is actual cash saved.
Required:
(a) Calculate approved and technical allowances and monetary slack. (4 marks)
(b) Compare actual hours and cost with both benchmarks. (3 marks)
(c) Recommend a participative process addressing incentives and evidence. (3 marks)
Worked answer
Approved5,000×0.7=3,500 hours/₹7,00,000. Technical5,000×0.6=3,000 hours/₹6,00,000. Unsupported cushion500 hours or₹1,00,000.
Actual3,200 hours/₹6,40,000. Against approved:300 hours/₹60,000 favourable. Against technical:200 hours/₹40,000 adverse. These are separately labelled benchmarks, not simultaneous variances from one standard. Rate unchanged.
Invite operational input, require evidence of constraints and challenge unsupported cushions fairly. Show both approved-budget performance and the technical concern. Review incentives to reward credible planning, quality and controllable results rather than easy targets. Document and approve genuine prospective revisions while preserving original comparisons; participation does not require uncritical acceptance or concealed results.
A rolling forecast and a revised stock policy
Tara Instruments originally forecast July-September sales of4,000,5,000 and6,000 units. Closing finished stock was planned at20% of next month's forecast. June-end actual stock was1,000 units. There is no work in progress or process loss. July actual sales are3,600 and actual production4,000, so the August review must start with actual July-end stock rather than copied budget figures.
The revised demand forecast is4,200 in August,5,400 in September and5,000 in October. The board reduces its forward stock policy to a minimum closing balance of15% of next month's revised sales, effective for August and September. Carrying more than that minimum temporarily is allowed if needed for capacity smoothing. Monthly production cannot exceed5,200. No overtime, bought-in finished goods or subcontracting is available. Quantities are whole units; all target balances here are integers.
Finance wants a rolling forecast and a feasible August-September plan. Keep the original approved budget for comparison; forecast updates do not erase it. No prices or costs are supplied, so prepare physical budgets and interpretation rather than profit estimates. Sales occur at revised forecasts if production and stock permit them. Distinguish the initial minimum-stock calculation from any deliberate advance production needed to meet the September constraint.
Required:
(a) Calculate actual July stock and revised minimum closing balances. (3 marks)
(b) Prepare initial production budgets, check capacity and give a feasible smoothed plan. (4 marks)
(c) Explain the forecast/budget distinction and a lower-stock risk. (3 marks)
Worked answer
July closing1,000+4,000-3,600=1,400. August minimum15%×5,400=810; September minimum15%×5,000=750.
September needs140 more than capacity. Advance140 units into August: production3,750; closing950. September opening950+production5,200-sales5,400=closing750. August has1,450 capacity headroom and carries140 above its minimum, as allowed. Both months are feasible.
A rolling forecast updates expected future activity and extends visibility, here to October. Preserve the original approved budget and separately document any authorised revision. Lower minimum stocks can release resources but increase stockout risk when demand or lead times change; test policy against uncertainty and capacity.
A budgeted balance sheet that must actually balance
Uma Trading begins a budget year with cash₹1,00,000, receivables₹2,00,000, inventory₹3,00,000 and plant gross cost₹8,00,000 less accumulated depreciation₹2,00,000. Payables are₹1,50,000, bank loan₹2,50,000 and owners' equity₹8,00,000. No other balances exist. Inventory is at cost with no manufacturing allocation.
Forecast flows are credit sales₹9,00,000; customer collections₹8,50,000; credit inventory purchases₹5,00,000; cash supplier payments₹4,80,000; cost of goods sold₹5,50,000; operating expenses paid₹1,80,000; loan interest paid₹20,000; depreciation₹40,000; and new plant purchased for cash₹1,00,000. Additional cash borrowing is₹50,000. No loan repayment, dividend, tax, bad debt, disposal, prepayment or expense accrual arises. Depreciation covers all assets for the year.
Collections, purchases and supplier payments are separate flows; do not equate them with income or expense. The assistant records new borrowing as revenue and new plant as a current expense. Finance wants linked income, cash and balance-sheet schedules to expose those errors. Retain all profit in equity. Independently calculate both balance-sheet sides rather than inserting unexplained equity to force agreement. There is no cash minimum or financing policy beyond the specified borrowing.
Required:
(a) Calculate profit and closing cash. (4 marks)
(b) Roll forward receivables, inventory, plant, payables and debt. (4 marks)
(c) Check closing assets against liabilities/equity and explain borrowing and capital-payment treatment. (2 marks)
Worked answer
Profit₹9,00,000-₹5,50,000-₹1,80,000-₹20,000-₹40,000=₹1,10,000. Closing cash₹1,00,000+₹8,50,000+₹50,000-₹4,80,000-₹1,80,000-₹20,000-₹1,00,000=₹2,20,000.
Both sides agree without a plug. Borrowing increases cash and liabilities, not income. Plant acquisition exchanges cash for a long-lived asset; depreciation is non-cash expense. Receivables, stock, credit, depreciation, capital spending and finance movements explain why profit differs from cash.
Plant utilisation with planned downtime and product commitments
Veda Engineering has two products, precision part P and general part G. The monthly sales commitments are 1,200 P and 1,500 G. Each P needs 3 machine hours and each G 2 hours. Opening finished stock is 100 P and 200 G; desired closing stock is 150 P and 100 G. There is no work in progress, rejects or material constraint. No subcontracting or overtime is available.
The machine department offers 8,000 scheduled hours, but preventive maintenance uses 800 and setup uses 200. These are unavailable for productive work and should not be included twice. The productive standards above exclude setup and maintenance. All required units must be completed in the month and existing opening stock can satisfy sales. Calculate output from each finished-stock bridge before checking machine hours.
A sales campaign proposes 500 additional G sales beyond the committed forecast, with the closing-stock targets unchanged. Campaign selling price is ₹500 per G and variable production cost ₹320 per G. The campaign can be reduced to a whole number of units if productive capacity is insufficient. Fixed expenses are unchanged and campaign selling costs are zero. Use scarce-hour availability rather than the nominal 8,000-hour schedule; do not assume that maintenance can be cancelled safely to meet a sales promise.
Required:
(a) Prepare base production quantities and productive machine hours. (4 marks)
(b) Calculate available productive capacity, headroom and utilisation against that capacity. (3 marks)
(c) Assess the campaign, its maximum feasible extra sales and extra contribution. (3 marks)
Worked answer
P production 1,200 + 150 - 100 = 1,250, using 3,750 hours. G 1,500 + 100 - 200 = 1,400, using 2,800 hours. Total productive requirement 6,550.
Available productive hours 8,000 - 800 - 200 = 7,000. Headroom 450; planned productive utilisation 6,550 / 7,000 = 93.5714%. This denominator is expressly available productive capacity, not the conventional budgetary-control capacity ratio.
Campaign 500 G would need 1,000 hours and exceeds headroom by 550. Maximum extra G 450 / 2 = 225 units, giving 225 × (₹500-₹320) = ₹40,500 additional contribution. Revised total productive usage 7,000; revise sales promises before accepting the campaign.
A sales budget with regional prices and planned returns
Wren Sports sells a standard racket through North and South regions. Gross dispatch forecasts are 2,000 North units at ₹1,200 each and 3,000 South units at ₹1,000 each. Expected returns are 5% of North dispatches and 4% of South dispatches. Returned units are credited at their original selling prices within the month; all returns are resaleable and come back before month-end. There is no opening or target closing stock, process loss or work in progress. Every accepted sale therefore requires one unit of net production during the period after resaleable returns are accounted for.
The costing team values production at ₹600 per unit. For this planning question, gross shipments can be supported by normal within-month production and resaleable return circulation, with no peak dispatch-capacity restriction. The question asks for net quantities and budgeted margin, not a daily dispatch timetable. Variable distribution expense is ₹40 per accepted unit sold, not per gross dispatch. Fixed selling expense is ₹1,00,000. Ignore tax and all other costs.
The regional manager budgets gross invoice value as revenue and insists that returns should affect only the cash budget. Finance asks for a regional net-sales schedule and a linked physical production/margin plan. Customer collection timings are not given, so do not present net revenue as immediate cash receipts or create a receivables budget.
Required:
(a) Calculate regional returns, accepted sales and net revenue. (4 marks)
(b) Calculate net production, production cost and budgeted operating profit. (4 marks)
(c) Explain the gross/net distinction and a practical forecast check. (2 marks)
Worked answer
Net production 4,780 units, cost ₹28,68,000. Distribution 4,780 × ₹40 = ₹1,91,200. Operating profit ₹51,60,000-₹28,68,000-₹1,91,200-₹1,00,000 = ₹20,00,800.
Return credits reduce revenue as well as collections; resaleable returns affect physical net needs. Check return-rate evidence and timing/condition of goods, including peak dispatch needs in a real operating plan. Net revenue is not automatically cash receipts.
Seasonal wages with overtime and temporary staff
Xena Converters plans 9,000 acceptable units next month, each requiring 0.5 productive labour hour. There is no idle time, learning effect, rework or work in progress. Thirty permanent employees each provide 140 regular paid/productive hours at ₹180 per hour. All permanent regular hours are paid whether used or not, and capacity is pooled across employees.
If required, permanent staff can provide a total of at most 200 overtime hours at 150% of the basic hourly rate. Temporary staff can provide up to 300 productive hours at ₹240 per hour with no hiring fee, minimum shift or training loss. Temporary and permanent work have identical productivity and quality under the assumptions. The board requires meeting all output at minimum total wage cost. No dismissal or reduction of permanent regular pay is permitted.
The supervisor fills the shortfall with overtime first because existing workers know the job, while the payroll clerk applies the 150% premium to the whole month's regular hours. Finance asks for a capacity and cash-wage budget that tests the stated rates and limits rather than intuition. There is no separate fixed salary, holiday payment or statutory employer charge; all payroll items to include are stated here. Any concern about temporary quality would need new evidence, not an unsupported adjustment to this problem.
Required:
(a) Calculate required hours, permanent regular capacity and the shortfall. (3 marks)
(b) Select the least-cost feasible staffing mix and total wage budget. (4 marks)
(c) Evaluate the overtime-first alternative and correct the payroll clerk's method. (3 marks)
Worked answer
Required 9,000 × 0.5 = 4,500 hours. Permanent 30 × 140 = 4,200 hours; shortfall 300.
Overtime ₹180 × 150% = ₹270 / hour; temporary ₹240. Use 300 temporary hours, no overtime. Permanent wages 4,200 × ₹180 = ₹7,56,000; temporary ₹72,000; total ₹8,28,000.
Overtime-first uses 200 overtime ₹54,000 and 100 temporary ₹24,000, plus permanent ₹7,56,000: total ₹8,34,000, ₹6,000 dearer. The premium applies only to overtime, not all regular hours. If real quality or recruitment constraints change, revisit the budget with verified evidence.
Working-capital targets from a budgeted operating cycle
Yamini Traders forecasts next year's sales at ₹36,00,000 and cost of goods sold at ₹24,00,000. Use a 360-day planning year and even daily activity. All sales and inventory purchases are on credit. Stock levels remain stable over the year, so annual purchases equal cost of goods sold. Ignore taxes, bad debts, seasonality and changes in selling prices.
The treasury plan targets receivables equal to 30 days' sales, inventory equal to 45 days' cost of goods sold and trade payables equal to 20 days' purchases. In addition, maintain ₹50,000 cash. No other current assets or liabilities exist. Opening actual balances are receivables ₹2,50,000, inventory ₹2,40,000, payables ₹1,60,000 and cash ₹50,000. Define net operating working capital for this question as inventory plus receivables less trade payables; show required cash separately before arriving at total net current funding.
A sales manager multiplies every day target by daily revenue, including inventory and payables. Finance says asset and liability targets need their relevant valuation/flow bases. The board also asks how a five-day shortening of collections changes the steady-state receivables funding target, holding every other assumption fixed. Do not call that target reduction guaranteed cash collection on a particular date.
Required:
(a) Calculate closing target receivables, inventory and payables. (4 marks)
(b) Calculate net operating working capital and incremental net current funding including cash. (4 marks)
(c) Evaluate the five-day collection improvement and explain the different bases. (2 marks)
Worked answer
Daily sales ₹10,000; daily cost/purchases ₹6,666.6667. Receivables 30 × ₹10,000 = ₹3,00,000. Inventory 45 × ₹6,666.6667 = ₹3,00,000. Payables 20 × ₹6,666.6667 = ₹1,33,333.33; retain exact fractions in working.
Target operating working capital ₹3,00,000 + ₹3,00,000-₹1,33,333.33 = ₹4,66,666.67. With cash ₹50,000: total net current funding ₹5,16,666.67. Opening operating working capital ₹3,30,000 and total with cash ₹3,80,000; incremental need ₹1,36,666.67.
Five fewer receivable days reduce the target by 5 × ₹10,000 = ₹50,000. This is a steady-state planning release, contingent on collections actually improving. Receivables reflect selling-price claims, inventory cost and payables purchase cost; using revenue for all three distorts funding.
Research spending with staged approvals and a cash ceiling
Zara Instruments approves a ₹7,00,000 cash ceiling for research and development next quarter. Project A requires an exploratory stage costing ₹2,00,000 in April. If its documented technical milestone is met, a development stage costing ₹3,00,000 is paid in June; otherwise that stage is not undertaken. Project B is a separate continuing research programme costing ₹1,50,000 in May. These are the only project cash costs.
The committee wants both success and failure cash scenarios for A, and an expected-cash planning estimate using an explicitly supplied 60% probability of meeting the milestone. The probability is a planning assumption, not evidence that success is certain. Development commitment may be made only after the milestone review. No refunds, asset sales, grants, revenues, tax effects or financing occur. This question deals with expenditure authorisation and cash timing, not the accounting test for capitalising development.
The project manager argues that expected spending below the ceiling permits an unconditional purchase order for every stage today. Finance rejects that inference: the worst permitted cash scenario must fit resources, and approval conditions remain binding even if an expected value looks comfortable. The board needs an R&D schedule, headroom and reporting process appropriate to uncertain technical work. No financial benefit values are supplied, so do not claim a project net present value or an assured return.
Required:
(a) Prepare monthly and total cash schedules for success and failure scenarios. (4 marks)
(b) Calculate expected quarter expenditure and ceiling headroom for all three views. (3 marks)
(c) Recommend staged budget control and explain why expected spending does not authorise unconditional commitment. (3 marks)
Worked answer
Expected ₹3,50,000 + 60% × ₹3,00,000 = ₹5,30,000. Headroom against ₹7,00,000: success ₹50,000; failure ₹3,50,000; expected ₹1,70,000. Expected June is not a bill of ₹1,80,000: the actual authorised stage is ₹3,00,000 or zero.
Keep separate stage packages, technical evidence, approval owners and cash forecasts. Review the milestone before authorising development, report scenario changes and preserve the ceiling. Expected value describes a weighted planning view; it neither removes conditions nor proves benefits or accounting capitalisation.
The budget committee reconciles incompatible functional plans
Aster Components' sales team forecasts 8,000 units next month and promises delivery without consulting operations. Production proposes 9,000 units to build stocks, but the plant's verified practical capacity is 7,500. Opening finished goods are 1,000 and the board's minimum closing target is 500. Procurement budgets material for 9,000 units, while cash planning assumes suppliers will finance every purchase for 90 days despite signed terms of 30 days. There is no subcontracting, overtime, stock loss or work in progress. One completed unit satisfies one sale.
A separate data extract shows that sales receipts are currently forecast from invoices without collection lags. The departments have each submitted spreadsheets with different version dates. The managing director asks finance to add them together and call the result a master budget because departmental heads already signed their own files. No purchase prices or collection history are provided, so exact profit and finance requirements cannot yet be calculated.
You are assisting the budget officer. Identify a feasible physical sales/production/stock plan for the given minimum-stock policy, then explain a practical committee process to settle mismatched assumptions, ownership, dates and cash schedules. Departmental participation remains useful, but no local signature can make impossible capacity or unsupported credit terms true. Do not invent a bank loan to force the draft to work.
Required:
(a) Calculate the maximum feasible sales and production plan, retaining minimum stock. (3 marks)
(b) Identify three coordination failures and how each should be corrected. (3 marks)
(c) Explain the committee/budget officer's approval, communication and follow-up process. (4 marks)
Worked answer
Maximum sales=opening 1,000 + capacity 7,500-minimum closing 500 = 8,000. The 8,000 forecast can be met with 7,500 production and 500 closing;9,000 production is impossible. No extra sales beyond 8,000 are supported by this plan.
Production/procurement must use the feasible 7,500-unit schedule and its bill of materials, not 9,000. Supplier cash dates must use verified 30-day terms unless a changed agreement is actually obtained. Receipts must reflect evidenced collection lags rather than equating invoices with immediate cash. Reconcile version dates and shared assumptions before aggregation.
The budget officer coordinates functional heads, records common assumptions and resolves conflicts through the committee. Verify resources, collection/payment terms and ownership; compile a reconciled master draft and obtain overall management approval. Communicate the approved versions to responsible heads, circulate periodic actual-versus-budget reports, investigate causes and track corrective actions. Send unresolved financing or policy choices to the authorised decision-maker rather than hiding plugs.
A budget manual that makes reports comparable
Bluebird Services operates three branches. North reports travel costs when invoices arrive; South records cash payments; West includes reimbursement claims when trips are completed, even if invoices are missing. Head office sets an annual travel ceiling but publishes no account definitions, cut-off instructions or responsibility map. One employee can approve their own claims. Reports arrive on different dates with no shared version number.
The board wants monthly control reports and asks the accounts team to compare the three branches directly and reward whichever reports the smallest total. There are no reconciled figures or travel-volume records. A branch manager proposes making head office's budget spreadsheet read-only and treating that as a complete budget manual. The finance director instead wants a usable set of written procedures, responsibilities and measurement rules. Do not infer fraud from inconsistent practices, but explain why the current data cannot support a fair performance award.
Assume the business has ordinary accounting records and can adopt consistent reporting rules prospectively. The board must approve any changes to the recognition policy and delegated approval limits. The question asks for procedure design, not legal advice or an invented rupee threshold. Preserve source records and explain how unresolved historical differences would be reconciled before comparison.
Required:
(a) Explain what a budget manual should contain, with four case-specific items. (4 marks)
(b) Recommend a responsibility and reporting timetable, including approval controls. (3 marks)
(c) Explain why the proposed award and read-only spreadsheet are inadequate. (3 marks)
Worked answer
The manual documents how budgets are prepared, approved, used and reviewed. Include consistent travel account/recognition and cut-off definitions; cost-centre owners and approval responsibilities; common forms, assumptions and version control; and preparation/submission/review dates with escalation and revision procedures. Specify supporting evidence and treatment of incomplete claims.
Assign a budget coordinator, branch cost owners and independent claim approvers. Use one approved monthly cut-off, a dated submission timetable, reconciliation by accounts and committee review with recorded follow-up. Separate claim initiation from approval, prohibit self-approval and have management set suitable delegated limits. Preserve records and approved versions; document authorised changes.
Awarding the smallest unadjusted total compares different recognition bases and unknown activity. Reconcile historic records and compare like-for-like cost and service volume before incentives. A protected spreadsheet prevents casual editing but does not define duties, evidence, measurement, approvals or follow-up. Inconsistency is a control gap to investigate, not proof of misconduct.
Feedback reports and preventive budget control
Coral Distribution budgets monthly freight for 10,000 shipments at ₹30 per shipment. The valid variable rate remains ₹30 throughout the month and there is no fixed freight component. At the end of week two, the system records 6,000 shipments and freight ₹2,04,000. The latest physical forecast is 12,000 total shipments for the month. If the observed spend per shipment continues, forecast freight using that rate; no special event explains the increase in the available records.
The accounts team normally issues the budget report 20 days after month-end. Management then investigates costs already incurred. A new operations dashboard would compare current spending with the allowance for current actual activity, forecast the month-end requirement and flag deviations in time to consider corrective action. The board asks whether that dashboard guarantees savings and whether the old static ₹3,00,000 ceiling should simply be copied into the expected-cost forecast.
You have no rate contract, carrier breakdown or service-quality evidence beyond the facts above. Do not assume that costs can be cut immediately or that customers' shipments should be stopped without approval. Distinguish observation, forecast and authorised budget revision. The original approved budget must remain visible even if management later changes targets because shipment volumes change.
Required:
(a) Calculate the week-two flexible allowance and spending deviation. (3 marks)
(b) Forecast month-end freight and split its difference from the original budget into activity and rate/spending effects. (4 marks)
(c) Explain feedback versus preventive control and one safeguard. (3 marks)
Worked answer
Week-two allowance 6,000 × ₹30 = ₹1,80,000; actual ₹2,04,000 is ₹24,000 adverse. Observed rate ₹2,04,000 / 6,000 = ₹34.
Forecast 12,000 × ₹34 = ₹4,08,000. Original static 10,000 × ₹30 = ₹3,00,000; excess ₹1,08,000. Activity effect 2,000 × ₹30 = ₹60,000; forecast rate/spending effect 12,000 × ₹4 = ₹48,000. These reconcile. Actual year-end outcome may differ; this is a stated continuation estimate.
Late feedback compares completed results and supports investigation. Timely preventive control uses current records and forecasts to identify a likely problem before the period closes and consider action. It does not guarantee savings. Check carrier rates, shipment mix and records before changing operations; retain original budget and separately record approved revisions and corrective decisions.
A responsibility report without unsupported blame
Dahlia Electronics has an approved administrative budget of ₹5,00,000 for the month. It consists of controllable branch-office supplies ₹80,000, branch travel ₹1,20,000, head-office allocated rent ₹2,00,000 and centrally mandated system licence ₹1,00,000. Actual figures are supplies ₹90,000, travel ₹1,10,000, allocated rent ₹2,30,000 and system licence ₹1,00,000. The branch manager controls supplies and travel authorisation but has no authority over rent allocation or the licence contract.
Activity and service volume match budget; there is no reason to flex these stated allowances. The head office changes rent allocation mid-period because another branch closes, not because Dahlia uses more floor space. All entries are validly recorded. The board compares the total overrun with the branch manager's target and proposes charging the entire amount against that manager's incentive. No bonus formula or employment agreement is supplied, so do not calculate or advise an actual deduction.
The manager asks to remove head-office expenses entirely from the accounts. Finance instead wants complete cost reporting plus a clearly labelled controllability view. Classifying an expense as outside a manager's authority does not make it disappear from the business. An apparently favourable controllable total also does not prove that supplies and travel individually met every service requirement.
Required:
(a) Prepare a total actual-versus-budget report with individual differences. (4 marks)
(b) Calculate the controllable subtotal and compare it with total performance. (3 marks)
(c) Explain responsibility, investigation and fair escalation. (3 marks)
Worked answer
Controllable budget ₹2,00,000; actual ₹2,00,000, net nil. Other costs budget ₹3,00,000 versus actual ₹3,30,000,₹30,000 adverse. The whole total overrun comes from rent allocation, but offsetting supplies/travel differences still deserve review.
Retain all costs in full reporting; add a labelled authority-based subtotal for performance discussion. Verify causes, service quality and allocation changes. Escalate central costs to their responsible owners and avoid treating a total deviation as proof of individual fault. Any incentive decision needs approved terms and suitable review, not an unsupported automatic deduction.
A budget revision after a verified external change
Elder Foods approved a monthly production budget of 8,000 units with material cost ₹100 per unit, labour ₹60 per unit and fixed overhead ₹2,00,000. There is no inventory movement or process loss. Before the month begins, a verified supplier contract raises the material rate to ₹110. Sales demand is now forecast at 7,000 units, and the board formally approves a revised activity and price budget before operations start. Labour rate and fixed overhead remain unchanged.
Actual output is 7,000 units. Actual material expense is ₹7,84,000, labour ₹4,34,000 and fixed overhead ₹2,05,000. Input quantities or productive labour hours are not separately supplied. Therefore report cost differences by expense line rather than pretending to distinguish material price and usage or labour rate and efficiency. No tax, overtime, working-capital or financing effect is required.
The budget coordinator overwrites the original spreadsheet with the revision, leaving no old approved file or change log. The plant manager compares actual total with the original static total and claims savings, but ignores the reduced output and new material price. Finance wants a transparent bridge from original static budget to original assumptions at actual activity, then to the approved revision, then to actual expenditure. The pre-period formal approval is part of the case facts, not retrospective permission to make performance look better.
Required:
(a) Calculate original static, original-price flexible and revised budgets. (4 marks)
(b) Calculate actual expense and its difference from the revised allowance by line, then reconcile the overall bridge. (4 marks)
(c) Explain version control and the limits of the available cost evidence. (2 marks)
Worked answer
Original static 8,000 × (₹100 + ₹60) + ₹2,00,000 = ₹14,80,000. Original-price flexible 7,000 × ₹160 + ₹2,00,000 = ₹13,20,000. Approved revision 7,000 × (₹110 + ₹60) + ₹2,00,000 = ₹13,90,000.
Bridge ₹14,80,000 -activity ₹1,60,000 +approved material-price change ₹70,000 +actual spending difference ₹33,000 = ₹14,23,000. Actual appears ₹57,000 below original static, but is ₹33,000 adverse to the approved revised allowance.
Retain dated original and revised approved versions, the supplier evidence and approval/change log. Publish both the planning bridge and performance comparison. Without input quantities or hours, line expense differences cannot support a detailed price/usage or rate/efficiency split or automatic blame.