CA Intermediate · Cost and Management Accounting

Budgets and Budgetary Control: formula sheet

Full chapter guide

Key formulas

Budget: Budget = Quantified plan for a future period, approved in advance; Use the words 'plan', 'quantified' and 'future period' in your definition.
Budgetary control: Budgetary control = Budgets + Comparison with actuals + Corrective action; Comparison alone is not enough. Mention action on variances.
Variance: Income items: Variance = Actual − Budget (positive is favourable). Cost items: Variance = Budget − Actual (positive is favourable); The sign alone does not show favourable or adverse. Label each variance by its effect on profit: higher income or lower cost is favourable.
Key factor rule: Prepare the budget for the key factor first; fit all other budgets to it; If sales are limited, the sales budget comes first. If material is scarce, the material budget comes first.
Budget committee: Chairman (usually chief executive) + heads of main departments; budget officer as convenor; Decides policy, approves and coordinates departmental budgets, reviews performance.
Budget officer: Executes and coordinates; does not decide policy; Collects data, guides budget centres, reports variances to the committee.
Budget centre: Section of the organisation for which a budget is set and control is exercised; Each has a responsible manager. It may be wider than a cost centre.
Principal budget factor: Factor limiting activity; budgeting starts with it; Often sales, but can be material, labour, plant capacity or cash.
Budget manual: Written document of objectives, duties, procedures, forms and time table; Ensures one uniform procedure across the organisation.
Flexible budget cost at any activity level: Budgeted cost = Fixed cost + (Variable cost per unit × Activity level); Fixed cost stays constant in total within the relevant range. Variable cost changes in proportion to activity. Semi-variable costs must be split first.
Fixed vs flexible budget rule: Fixed budget: one activity level, no change. Flexible budget: many levels, or recast to actual activity; For performance evaluation, compare actual with the flexible budget at actual activity, not with the fixed budget.
Master budget: Master budget = Summary of all functional budgets (budgeted P&L account and balance sheet); It is the final consolidated plan. Functional budgets are its building blocks.
Basis of classification: Function | Time | Flexibility | Condition; Write the basis first in theory answers. It earns marks and organises your answer.
Production budget (units): Production = Budgeted sales + Closing stock of finished goods − Opening stock of finished goods; Use units, not rupees. Closing stock is often given as a percentage of next period's sales.
Material usage budget: Material required = Units to be produced × Standard material per unit; Include normal loss in the per-unit requirement if the question gives it.
Material purchase budget (quantity): Purchases = Material required for production + Closing stock of material − Opening stock of material; Multiply by price per unit of material to get the purchase cost.
Direct labour budget: Labour hours = Units produced × Standard hours per unit; Labour cost = Hours × Wage rate per hour; If idle time is given, add it to productive hours to get hours paid.
Overhead budget: Total overhead = Variable overhead rate × Activity + Fixed overhead; Treat fixed overhead as a lump sum for the period. Do not multiply it by output.
Sales budget (value): Sales value = Budgeted units × Selling price per unit; Do this product by product and by area if the question has more than one.
Closing cash balance: Closing balance = Opening balance + Total receipts − Total payments; Closing balance of one month is the opening balance of the next month.
Cash collected from credit sales: Collection in a month = Σ (Credit sales of each earlier month × % collected with that lag); Apply the percentage to the sales of the month that is lagging, not the current month's sales.
Cash paid to creditors: Payment in a month = Purchases of the month that is one credit period earlier; With a one-month credit period, January purchases are paid in February.
Cash discount adjustment: Cash received = Sales × (1 − discount %) for the portion collected within the discount period; Discount allowed reduces the receipt. Discount received reduces the payment.
Non-cash items: Depreciation, amortisation, provisions, bad debts written off = excluded; Never show them in the cash budget.
Borrowing need: Shortfall = Minimum cash balance required − Closing balance before financing; Use when the question asks for the amount to be borrowed to maintain a minimum balance.
Total cost at any level: Total cost = Fixed cost + (Variable cost per unit × Units); Fixed cost stays constant in total within the relevant range.
Variable cost per unit: Variable cost per unit = Total variable cost ÷ Units at that level; It stays constant per unit at all levels.
Splitting semi-variable cost (high-low): Variable rate = (Cost at high level − Cost at low level) ÷ (High activity − Low activity); Fixed part = Cost at high level − Variable rate × High activity; Use when two cost-activity points are given.
Flexed budget for a new level: Flexed variable cost = Budgeted variable cost × (Actual activity ÷ Budgeted activity); Fixed cost unchanged; Do not scale fixed cost, unless a step increase is stated.
Activity level in units: Units = Capacity % × Full capacity units; Convert percentage levels to units before computing.
Variance: Variance = Flexed budget − Actual (cost: actual higher is adverse; profit/sales: actual lower is adverse); State Favourable or Adverse.
ZBB funding rule: Fund packages in rank order until cumulative cost reaches the budget limit; Rank by benefit relative to cost. Essential (minimum) packages come before incremental ones for the same activity.
Benefit-cost ratio (ranking aid): Benefit-cost ratio = Estimated benefit ÷ Cost of package; Use only when benefits are given in money. A higher ratio means a higher rank. Check that an incremental package is not ranked above its own base package.
Cost per unit of output (performance budgeting): Cost per unit of output = Budgeted cost of activity ÷ Units of output; Compare actual with budgeted figures to judge performance.

Quick revision

A budget is a quantified plan for a future period; budgetary control compares actual with budget and acts on variances.
The limiting factor is the constraint that decides which budget is prepared first.
The budget committee is usually headed by the chief executive, and the budget officer coordinates the process.
Budget manual states the procedures, responsibilities and forms for budgeting.
Production units = sales units + closing stock − opening stock (finished goods).
Material purchase quantity = material needed for production + closing stock − opening stock.
Cash budget includes only cash items; leave out depreciation and other non-cash charges.
Flexible budget fixed cost stays constant in total within the relevant range; variable cost changes in total with activity.
A fixed budget does not change with the actual activity; a flexible budget does.
Zero based budgeting justifies every activity from zero, not from last year's figures.
Performance budgeting links inputs to outputs and results for each programme or responsibility centre.
A rolling budget is updated regularly by adding a new period as the current one ends.

Common mistakes

Treating a budget and a forecast as the same thing Fix: Say a forecast predicts what is likely, while a budget is a planned target set by management. A forecast feeds the budget.
Defining budgetary control as only preparing budgets Fix: Always add comparison of actual with budget, analysis of variances and corrective action.
Saying the budget officer approves the budgets. Fix: Approval and policy rest with the budget committee. The officer prepares, coordinates and reports.
Treating a budget centre and a cost centre as identical. Fix: A budget centre is where a budget is set and control exercised. A cost centre is where costs are collected. They often overlap, but a budget centre can cover several cost centres.
Treating the master budget as just another functional budget. Fix: Remember that functional budgets feed the master budget. The master budget is the consolidated plan, with a budgeted profit and loss account and balance sheet.
Saying a fixed budget has only fixed costs. Fix: A fixed budget is fixed in activity level. It may contain both fixed and variable costs, but it is not adjusted for actual activity.
Taking sales units as production units Fix: Always write the three lines: sales, plus closing stock, minus opening stock. Do it even if stock is nil, to build the habit.
Using the wrong closing stock base Fix: Read the stock policy twice. Mark which month's sales it refers to, and note that the last month needs the following period's sales given.
Including depreciation or bad debts as a cash payment Fix: Ask of each item: does cash leave this month? Depreciation, provisions and write-offs do not, so leave them out.
Applying collection percentages to the wrong month's sales Fix: Write a small table of sales months against collection months. Then read off each month's collection.

Exam tips

Learn the P-C-C-M structure for objectives and use it in every answer on purposes of budgeting.
In key factor questions, list all the limits in numbers and pick the lowest. Then state the factor in words.
For MCQs, watch for options that confuse a budget with a forecast or the budget manual with the budget.
When a question says 'explain', give a reason with each point. A bare list scores poorly.
Write limitations with balance. Say budgets support management but do not replace it.
Write committee and officer answers as two separate lists. Mixing their functions loses marks.
In setup questions, number the steps and keep the order logical. Each step is a mark.
For MCQs, watch words like approves, executes, convenor and responsibility. They point to the right body.